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As filed with the Securities and Exchange Commission on July 22, 2008

Registration No. 001-34108



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Amendment No. 1
to
FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934

DMRC Corporation
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  26-2828185
(I.R.S. Employer
Identification No.)

9405 SW Gemini Drive
Beaverton, Oregon
(Address of principal executive offices)

 

97008
(Zip Code)

Registrant's telephone number, including area code:
(503) 469-4800

Securities to be registered pursuant to Section 12(b) of the Act:

Title of Each Class
to be so Registered

  Name of Each Exchange on
Which Each Class is to be Registered

Common Stock, par value $0.001 per share   The Nasdaq Stock Market LLC

Securities to be registered pursuant to Section 12(g) of the Act:
None.

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company ý





Information Required in Registration Statement

Cross-Reference Sheet Between the Information Statement and Items of Form 10

        Our information statement is filed on Exhibit 99.1 to this Form 10. For your convenience, we have provided below a cross-reference sheet identifying where the items required by Form 10 can be found in the information statement.

Item 1.     Business

        The information required by this item is contained under the sections "Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business of DMRC Corporation" of the information statement, which sections are incorporated herein by reference.

Item 1A.     Risk Factors

        The information required by this item is contained under the section "Risk Factors" of the information statement, which section is incorporated herein by reference.

Item 2.     Financial Information

        The information required by this item is contained under the sections "Selected Historical Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the information statement, which sections are incorporated herein by reference.

Item 3.     Properties

        The information required by this item is contained under the section "Business of DMRC Corporation—Properties and Facilities" of the information statement, which section is incorporated herein by reference.

Item 4.     Security Ownership of Certain Beneficial Owners and Management

        The information required by this item is contained under the section "Security Ownership of Certain Beneficial Owners and Management" of the information statement, which section is incorporated herein by reference.

Item 5.     Directors and Executive Officers

        The information required by this item is contained under the section "Management" of the information statement, which section is incorporated herein by reference.

Item 6.     Executive Compensation

        The information required by this item is contained under the section "Executive Compensation" of the information statement, which section is incorporated herein by reference.

Item 7.     Certain Relationships and Related Transactions, and Director Independence

        The information required by this item is contained under the sections "Our Relationship with Digimarc Corporation after the Spin-Off" and "Management" of the information statement, which sections are incorporated herein by reference.

Item 8.     Legal Proceedings

        The information required by this item is contained under the section "Business of DMRC Corporation—Legal Proceedings" of the information statement, which section is incorporated herein by reference.



Item 9.     Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters

        The information required by this item is contained under the sections "Summary," "The Spin-Off," "Dividend Policy," "Capitalization," "Management" and "Description of Our Capital Stock" of the information statement, which sections are incorporated herein by reference.

Item 10.     Recent Sales of Unregistered Securities

        Not applicable.

Item 11.     Description of Registrant's Securities to be Registered

        The information required by this item is contained under the section "Description of Our Capital Stock" of the information statement, which section is incorporated herein by reference.

Item 12.     Indemnification of Officers and Directors

        The information required by this item is contained under the section "Limitation of Liability and Indemnification of Directors and Officers" of the information statement, which section is incorporated herein by reference.

Item 13.     Financial Statements and Supplementary Data

        The information required by this item is contained under the sections "Summary," "Pro Forma Financial Information," "Selected Historical Financial Information" and "Financial Statements" of the information statement, which sections are incorporated herein by reference.

Item 14.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

Item 15.     Financial Statements and Exhibits

        (a)     Financial Statements.     The information required by this item is contained under the section "Index to Financial Statements" beginning on page F-1 of the information statement, which section is incorporated herein by reference.

        (b)     Exhibits.     The following documents are filed as exhibits hereto:

Exhibit Number

  Exhibit Description
2.1   Form of Separation Agreement among DMRC Corporation, DMRC LLC, Digimarc Corporation and, with respect to certain sections, L-1 Identity Solutions, Inc.*

3.1

 

Certificate of Incorporation of DMRC Corporation**

3.2

 

Bylaws of DMRC Corporation*

4.1

 

Specimen common stock certificate of DMRC Corporation***

10.1

 

Form of Transition Services Agreement between DMRC Corporation and Digimarc Corporation*

10.2

 

Form of License Agreement between DMRC Corporation and L-1 Identity Solutions Operating Company*

99.1

 

Information Statement of DMRC Corporation*

*
Filed herewith.

**
Previously filed.

***
To be filed by amendment.


SIGNATURES

        Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: July 22, 2008

    DMRC CORPORATION

 

 

By:

/s/  
BRUCE DAVIS       
Bruce Davis
Chairman and Chief Executive Officer


EXHIBIT INDEX

Exhibit
Number

  Exhibit Description
2.1   Form of Separation Agreement among DMRC Corporation, DMRC LLC, Digimarc Corporation and, with respect to certain sections, L-1 Identity Solutions, Inc.*

3.1

 

Certificate of Incorporation of DMRC Corporation**

3.2

 

Bylaws of DMRC Corporation*

4.1

 

Specimen common stock certificate of DMRC Corporation***

10.1

 

Form of Transition Services Agreement between DMRC Corporation and Digimarc Corporation*

10.2

 

Form of License Agreement between DMRC Corporation and L-1 Identity Solutions Operating Company*

99.1

 

Information Statement of DMRC Corporation*

*
Filed herewith.

**
Previously filed.

***
To be filed by amendment.



QuickLinks

Information Required in Registration Statement Cross-Reference Sheet Between the Information Statement and Items of Form 10
SIGNATURES
EXHIBIT INDEX

Exhibit 2.1

 

SEPARATION AGREEMENT

by and among

DIGIMARC CORPORATION,

DMRC LLC,

 

DMRC CORPORATION

 

and

 


L-1 IDENTITY SOLUTIONS, INC

(solely for the purposes of Section 3.02, 4.09(b)(iii) and Section 4.13)

 

Dated as of July [    ], 2008

 



 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

ARTICLE I

DEFINED TERMS

2

 

 

 

 

 

Section 1.01.

General

2

 

 

 

 

ARTICLE II

THE RESTRUCTURING

15

 

 

 

 

 

Section 2.01.

Business Separation

15

 

 

 

 

 

Section 2.02.

Documents Relating to the Transfer of DMRC Assets and Assumption of DMRC Liabilities

18

 

 

 

 

 

Section 2.03.

Novation of DMRC Liabilities

18

 

 

 

 

 

Section 2.04.

Issuance of Units

19

 

 

 

 

 

Section 2.05.

Other Transaction Agreements

19

 

 

 

 

ARTICLE III

THE DISTRIBUTION

19

 

 

 

 

 

Section 3.01.

Record Date and Distribution Date

19

 

 

 

 

 

Section 3.02.

Distribution Agent

20

 

 

 

 

 

Section 3.03.

Deliveries to the Distribution Agent

20

 

 

 

 

 

Section 3.04.

Distribution

20

 

 

 

 

 

Section 3.05.

Fractional Interests; Unclaimed Units

21

 

 

 

 

 

Section 3.06.

Timing of the Distribution

21

 

 

 

 

 

Section 3.07.

DMRC Merger

21

 

 

 

 

ARTICLE IV

ADDITIONAL COVENANTS

22

 

 

 

 

 

Section 4.01.

Access to Information

22

 

 

 

 

 

Section 4.02.

Privileged Matters

23

 

 

 

 

 

Section 4.03.

Ownership of Information

24

 

 

 

 

 

Section 4.04.

Compensation for Providing Information

25

 

 

 

 

 

Section 4.05.

Record Retention

25

 

 

 

 

 

Section 4.06.

Limitation of Liability

26

 

 

 

 

 

Section 4.07.

Other Agreements Providing for Exchange of Information

26

 

 

 

 

 

Section 4.08.

Production of Witnesses

26

 

 

 

 

 

Section 4.09.

Employees and Employee Benefit Plans

26

 

 

 

 

 

Section 4.10.

Non-Competition and Non-Solicitation

29

 

 

 

 

 

Section 4.11.

Tax Matters

32

 

i



 

TABLE OF CONTENTS

(continued)

 

 

 

 

Page

 

 

 

 

 

Section 4.12.

No Representations or Warranties

35

 

 

 

 

 

Section 4.13.

Payment of Purchase Price Excess or Shortfall

35

 

 

 

 

ARTICLE V

MUTUAL RELEASES; INDEMNIFICATION

35

 

 

 

 

 

Section 5.01.

Mutual Release of Pre-Closing Claims

35

 

 

 

 

 

Section 5.02.

Indemnification by DMRC

37

 

 

 

 

 

Section 5.03.

Indemnification by Digimarc

37

 

 

 

 

 

Section 5.04.

Indemnification Procedures

38

 

 

 

 

 

Section 5.05.

Indemnification Obligations Net of Insurance Proceeds and Other Amounts

40

 

 

 

 

 

Section 5.06.

No Relief of Insurer Obligations

41

 

 

 

 

 

Section 5.07.

Subrogation

41

 

 

 

 

 

Section 5.08.

Joint Defense and Cooperation

41

 

 

 

 

 

Section 5.09.

Survival of Rights and Obligations

42

 

 

 

 

ARTICLE VI

INSURANCE

42

 

 

 

 

 

Section 6.01.

Insurance Coverage; Cooperation

42

 

 

 

 

 

Section 6.02.

Rights Under Insurance Policies

42

 

 

 

 

 

Section 6.03.

DMRC Insurance Coverage After the Distribution Date

43

 

 

 

 

 

Section 6.04.

Responsibilities for Self-Insured Obligations and Other Obligations

43

 

 

 

 

 

Section 6.05.

Claims Administration

43

 

 

 

 

 

Section 6.06.

Procedures Regarding Insufficient Limits of Liability

43

 

 

 

 

 

Section 6.07.

Cooperation

44

 

 

 

 

 

Section 6.08.

No Assignment or Waiver

44

 

 

 

 

 

Section 6.09.

No Liability

44

 

 

 

 

 

Section 6.10.

No Restrictions

44

 

 

 

 

 

Section 6.11.

Further Agreements

44

 

 

 

 

 

Section 6.12.

Insurance Proceeds

44

 

 

 

 

ARTICLE VII

CONDITIONS TO THE SEPARATION

45

 

 

 

 

 

Section 7.01.

Conditions to the Separation

45

 

ii



 

TABLE OF CONTENTS

(continued)

 

 

 

 

Page

 

 

 

 

ARTICLE VIII

FURTHER ASSURANCES AND ADDITIONAL COVENANTS

46

 

 

 

 

 

Section 8.01.

Further Assurances

46

 

 

 

 

 

Section 8.02.

Name Change

46

 

 

 

 

 

Section 8.03.

Use of Names

47

 

 

 

 

 

Section 8.04.

Licenses

47

 

 

 

 

 

Section 8.05.

Notices to Third Parties

47

 

 

 

 

ARTICLE IX

TERMINATION

48

 

 

 

 

 

Section 9.01.

Termination

48

 

 

 

 

 

Section 9.02.

Effect of Termination

48

 

 

 

 

ARTICLE X

LEGAL MATTERS

48

 

 

 

 

 

Section 10.01.

Control of Legal Matters

48

 

 

 

 

 

Section 10.02.

Claims Against Third Parties

50

 

 

 

 

 

Section 10.03.

Notice to Third Parties; Service of Process; Cooperation

50

 

 

 

 

 

Section 10.04.

IDMarc Software

50

 

 

 

 

ARTICLE XI

GENERAL PROVISIONS

50

 

 

 

 

 

Section 11.01.

Entire Agreement; No Third-Party Beneficiaries

50

 

 

 

 

 

Section 11.02.

Expenses

51

 

 

 

 

 

Section 11.03.

Governing Law; Jurisdiction; Waiver of Jury Trial

51

 

 

 

 

 

Section 11.04.

Notices

51

 

 

 

 

 

Section 11.05.

Counterparts

53

 

 

 

 

 

Section 11.06.

Assignment

53

 

 

 

 

 

Section 11.07.

Enforcement

53

 

 

 

 

 

Section 11.08.

Severability

54

 

 

 

 

 

Section 11.09.

Headings

54

 

 

 

 

 

Section 11.10.

Attorneys’ Fees

54

 

 

 

 

 

Section 11.11.

Amendment

54

 

 

 

 

 

Section 11.12.

Limited Liability

54

 

 

 

 

 

Section 11.13.

Interpretation

54

 

iii



 

SEPARATION AGREEMENT

 

This SEPARATION AGREEMENT, dated as of July [    ], 2008 (this “ Agreement ”), is entered into by and among DIGIMARC CORPORATION, a Delaware corporation (“ Digimarc ”), DMRC LLC, a Delaware limited liability company and a wholly owned subsidiary of Digimarc (“ DMRC ”), DMRC Corporation, a Delaware corporation and a wholly-owned subsidiary of DMRC (“ DMRC Sub ”), and, solely with respect to Section 3.02, Section 4.09(b)(iii) and Section 4.13, L-1 Identity Solutions, Inc., a Delaware corporation (“ L-1 ” and, together with DMRC, Digimarc and Digimarc Sub, the “ Parties ” and each, a “ Party ”).  Capitalized terms used but not defined in this Agreement have the meanings ascribed to them in the Merger Agreement (as defined below).

 

W I T N E S S E T H

 

WHEREAS, Digimarc is engaged in the (a) Secure ID Business (as defined below) and (b) Digital Watermarking Business (as defined below);

 

WHEREAS, Digimarc entered into an Agreement and Plan of Merger, dated as of March 23, 2008 (the “ Original Merger Agreement ”), by and among Digimarc, L-1, and Dolomite Acquisition Co., a Delaware corporation and wholly owned subsidiary of L-1 (“ Merger Sub ”), pursuant to which Digimarc would become a wholly owned subsidiary of L-1;

 

WHEREAS, Digimarc has entered into an Amended and Restated Agreement and Plan of Merger, dated as of June 29, 2008, as amended (the “ Merger Agreement ”), by and among Digimarc, L-1 and Merger Sub, which provides, among other things, for the Offer and the Merger;

 

WHEREAS, the parties to the Merger Agreement have agreed that the Separation (as defined below) is a condition to the closing of, and integral to, the Offer and the Distribution (as defined below) and shall occur prior to the Initial Expiration Date or the Extended Expiration Date, as applicable (as defined below);

 

WHEREAS, the Digimarc Board of Directors has determined that it is in the best interests of Digimarc and its stockholders to (a) to engage in the Restructuring (as defined below) and (b) distribute to holders of Digimarc Common Stock (as defined below) as provided for herein, all of the outstanding DMRC Units (as defined below) beneficially owned by Digimarc through a pro-rata distribution of DMRC Units (the “ Distribution ” and, together with the Restructuring, the “ Separation ”);

 

WHEREAS, for U.S. federal and applicable state and local Income Tax purposes, it is intended that the Distribution, the Offer and the Merger be treated as an integrated transaction in redemption and disposition of the shares of Digimarc Common Stock;

 



 

WHEREAS, to further effect the Separation, Digimarc intends to retain ownership and possession of all Assets (as defined below) other than the DMRC Assets (as defined below) and DMRC intends to assume ownership of the DMRC Assets;

 

WHEREAS, to further effect the Separation, Digimarc intends to remain solely liable for all Liabilities (as defined below) other than the DMRC Liabilities (as defined below) and DMRC intends to assume all DMRC Liabilities;

 

WHEREAS, following the Distribution, DMRC will merge with and into DMRC Sub (the “ DMRC Merger ”) pursuant to the DMRC Merger Agreement (as defined below); and

 

WHEREAS, the Parties intend this Agreement, including the exhibits and schedules hereto, to set forth the arrangements between them regarding the Separation.

 

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the Parties hereby agree as follows:

 

ARTICLE I

DEFINED TERMS

 

Section 1.01.          General .  When used in this Agreement, the following terms shall have the respective meanings specified below (such meanings to be equally applicable to both the singular and plural forms of the terms defined).

 

2008 Plan Year ” shall have the meaning set forth in Section 4.09(c)(ii) .

 

Action ” shall mean any action, claim, charge, grievance, complaint, arbitration, proceeding, review, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, investigative or informal) commenced, brought or heard by or before any Governmental Authority.

 

Affiliate ” shall have the meaning set forth in the Merger Agreement.

 

Agreement ” shall have the meaning set forth in the preamble hereof.

 

Assets ” shall mean assets, properties and rights (including goodwill), wherever located, whether personal, tangible, intangible or contingent, in each case whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person, excluding interests in real property,  Intellectual Property and Technology, but including the following:

 

(a)           all accounting and other books, records and files whether in paper, electronic or other form or medium;

 

2



 

(b)           all computers and other electronic data processing equipment, electrical devices, fixtures, equipment, furniture, office equipment, motor vehicles and other transportation equipment, special and general tools, and other tangible personal property;

 

(c)           all inventories of materials, parts, raw materials, supplies, work-in-process and finished goods and products;

 

(d)           all interests in any capital stock or other equity interests of any Subsidiary or any other Person, all bonds, notes, debentures or other securities issued by any Subsidiary or any other Person, all loans, advances or other extensions of credit or capital contributions to any Subsidiary or any other Person and all other investments in securities of any Person;

 

(e)           all deposits, letters of credit and performance and surety bonds;

 

(f)            all cost information, sales and pricing data, customer prospect lists, public inspection files, industry and advertising studies and analyses, marketing and demographic data, marketing and promotional materials, sales correspondence, credit and sales reports, logs, supplier records, customer and supplier lists, records pertaining to customer accounts, performance data, and other consumer data, business plans, strategies, marketing and promotional materials, share price performance, production data, artwork, design, vendor and customer drawings, including any of the foregoing created, developed or prepared by consultants and other third parties;

 

(g)           all prepaid expenses, trade accounts and other accounts and notes receivable;

 

(h)           all claims or similar rights against any Person arising from the ownership of any Asset, in each case, whether accrued or contingent;

 

(i)            all insurance proceeds and rights under Insurance Policies and all rights in the nature of insurance, indemnification or contribution;

 

(j)            all Licenses that have been issued by any Governmental Authority;

 

(k)           all right, title and interest in, to and under all Contracts; and

 

(l)            all Cash.

 

Benefit Plans ” shall mean all “employee benefit plans” (as defined in Section 3(3) of ERISA), and all other pension, profit-sharing, savings, deferred compensation, bonus, incentive, stock option (or other equity-based), employment, severance, change in control, welfare (including post-retirement medical and life insurance) plans, programs, arrangements and fringe benefits, whether or not subject to ERISA (a) sponsored, maintained or contributed to or required to be contributed to by

 

3



 

Digimarc or any of its Subsidiaries or (b) to which Digimarc or any of its Subsidiaries is a party immediately prior to the Distribution Date.

 

Business Day ” shall have the meaning set forth in the Merger Agreement.

 

Cash ” shall mean all of the cash of Digimarc immediately prior to the Distribution Date, including (a) all currency, checks, drafts and other equivalents in banks, in lock boxes, on Digimarc premises, as deposits in transit or in the banking system collection process, less any outstanding checks or payments in transit, (b) all cash equivalents (including money market funds, certificates of deposit, commercial paper and investments in government bonds), (c) all short term investments (including federal agency notes, company notes and commercial paper), (d) all restricted cash, (e) any cash paid to Digimarc for the exercise of stock options for Digimarc Common Stock on or prior to the Distribution Date, whether or not such cash is in the brokerage system collection process or received in a Digimarc account prior to the Distribution Date, (f) any reimbursements or refunds of directors and officers insurance premiums that are refunded on or after the Distribution Date for insurance policies purchased by Digimarc before the Distribution Date, (g) any other cash or cash equivalent held in any and all bank accounts and investment accounts by Digimarc and its Subsidiaries in any location around the world, and (h) any cash deposited by Digimarc with customers serving in place of performance bond requirements returned to Digimarc on or after the Distribution Date.

 

Code ” shall mean the U.S. Internal Revenue Code of 1986, as amended.

 

Competing Business ” shall have the meaning set forth in Section 4.10(a)  and 4.10(b) .

 

Consents ” shall mean any material consents, waivers or approvals from any third parties, other than Governmental Approvals, as listed on Schedule 1.01 (Consents).

 

Contract ” shall mean any written or oral agreement, arrangement, authorization, sale order, purchase order, open bid, commitment, contract, indenture, mortgage, note, instrument, evidence of Indebtedness, loan, license, obligation, restriction, memorandum of understanding, letter of intent, covenant, or undertaking of any kind or character, or other document to which any Person is a party or that is binding on any Person or its capital stock, assets or business, in each case, whether express or implied, including all amendments, modifications and supplements thereto and waivers and consents thereunder.

 

Corporate Level Liabilities ” shall mean any and all (a) Liabilities related primarily to the Secure ID Business, (b) Liabilities arising from corporate level activities of Digimarc (including SEC reporting, corporate finance, treasury and investor relations) that do not relate specifically to either the Digital Watermarking Business or the Secure ID Business, and (c) Income Taxes of Digimarc and its Subsidiaries and Affiliates

 

4



 

(including, any Income Taxes of DMRC and its Subsidiaries and Affiliates through the Distribution Date, which Taxes shall be determined on the basis of the closing of the books as of the end of the Distribution Date) and any Separation Tax Liabilities.

 

Delayed Transfer Assets ” shall mean any DMRC Assets that this Agreement or any other Transaction Agreement provides or contemplates are to be transferred to DMRC in connection with the Separation and that require the removal of a Legal Impediment or the receipt of a Consent or Governmental Approval to transfer, which Legal Impediment is not removed or Consent or Governmental Approval is not obtained on or prior to the Distribution Date.

 

Delayed Transfer Liabilities ” shall mean any DMRC Liabilities that this Agreement or any other Transaction Agreement provides or contemplates are to be assumed by DMRC in connection with the Separation and that require the removal of a Legal Impediment or the receipt of a Consent or Governmental Approval for the transfer and assumption of such DMRC Liabilities, which Legal Impediment is not removed or Consent or Governmental Approval is not obtained on or prior to the Distribution Date.

 

Digimarc ” shall have the meaning set forth in the preamble hereof.

 

Digimarc Board of Directors ” shall mean the Board of Directors of Digimarc.

 

Digimarc Cafeteria Plan ” shall have the meaning set forth in Section 4.09(c)(ii) .

 

Digimarc Claims ” shall mean all right, title and interest to, in or under any claim, demand or Action that relates primarily to the Secure ID Business, whether arising before, on or after the Distribution Date.

 

Digimarc Common Stock ” shall mean common stock of Digimarc, par value $0.001 per share.

 

Digimarc Entities ” shall mean Digimarc and its Subsidiaries, other than the DMRC Entities, following the Distribution Date.

 

Digimarc Group ” shall mean the Digimarc Entities and, after the Effective Time, each of their respective Affiliates and Subsidiaries, and any corporation or entity that may become part of such group from time to time, other than the DMRC Group.

 

Digimarc Indemnitee ” shall mean Digimarc, each Affiliate of Digimarc at any time immediately after the Acceptance Time, each of their respective present and former officers, directors and employees, each of the heirs, executors, successors and assigns of any of the foregoing and each Person, if any, who controls Digimarc within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act.

 

5



 

Digimarc Litigation Matters ” shall mean the existing Actions to be retained by Digimarc, as listed on Schedule 1.01 (Digimarc Litigation Matters).

 

Digimarc Retirement Plans ” shall have the meaning set forth in Section 4.09(b)(i) .

 

Digimarc Stockholders ” shall have the meaning set forth in Section 3.05(a) .

 

Digimarc Subsidiaries ” shall mean the Subsidiaries of Digimarc.

 

Digital Watermarking Business ” shall mean the portion of Digimarc’s business immediately prior to the Distribution Date engaged in the licensing or sale of products, services, Intellectual Property or Technology for digital watermarking, media fingerprinting (pattern recognition but not including biometric identifiers), digital rights management or other media management approaches.

 

Distributed Corporation ” shall have the meaning set forth in Section 4.11(g) .

 

Distribution ” shall have the meaning set forth in the recitals hereof.

 

Distribution Agent ” shall mean the distribution agent (which shall be a bank or trust company) to be appointed by Digimarc to receive, on behalf of the holders of Digimarc Common Stock as of the Record Date, the DMRC Units which such holders are entitled to receive pursuant to the Distribution.

 

Distribution Agent Agreement ” shall have the meaning set forth in Section 3.02 .

 

Distribution Date ” shall mean the date and time, which shall be prior to the Initial Expiration Date or the Extended Expiration Date, as applicable, as of which the Distribution shall be effected, to be determined by, or under the authority of, the Digimarc Board of Directors consistent with the terms and provisions of this Agreement and the other Transaction Agreements and in compliance with applicable Law.

 

Distribution-Related Proceeding ” shall mean any audit or other examination, or judicial or administrative proceeding relating to liability for, or refunds or adjustments with respect to, Income Taxes of Digimarc and its Subsidiaries or Affiliates, in which the Internal Revenue Service, another Tax authority or any other party asserts a position that could reasonably be expected to adversely affect the intended treatment of the Transactions set forth in Section 4.11(d) .

 

DMRC ” shall have the meaning set forth in the preamble hereof.

 

DMRC Assets ” shall mean:

 

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(a)            any Assets used primarily in the operation of the Digital Watermarking Business;

 

(b)            any DMRC Shared Assets;

 

(c)            the Intellectual Property and Technology set forth on Schedule 1.01 (DMRC Intellectual Property and Technology);

 

(d)            the DMRC Equity Investments;

 

(e)            the DMRC Real Property;

 

(f)             all Cash;

 

(g)            all accounts receivable accrued primarily in the operation of the Digital Watermarking Business;

 

(h)            the DMRC Claims; and

 

(i)             all of DMRC’s right, title and interest in, to and under all Contracts relating primarily to the operation of the Digital Watermarking Business, which Contracts are set forth on Schedule 1.01 (Digital Watermarking Business Contracts) to the extent such Contracts expressly provide for sum certain payments in excess of $250,000 over the term of the Contract.

 

Notwithstanding the foregoing or anything to the contrary herein, DMRC Assets do not include any Shared Assets other than the DMRC Shared Assets.

 

DMRC Claims ” shall mean all right, title and interest in any claim, demand or Action that relates primarily to the Digital Watermarking Business, whether arising before, on or after the Distribution Date.

 

DMRC Director/Officer ” shall mean any officer or director of DMRC who is or was an officer or director of Digimarc at any time prior to the Acceptance Time.

 

DMRC Employee ” shall mean those employees set forth on Schedule 1.01 (DMRC Employees), including any employees hired after the date of the Merger Agreement and any employees who the Parties agree to add to Schedule 1.01 (DMRC Employees) after the date hereof.

 

DMRC Entities ” shall mean DMRC, DMRC Sub and each of the DMRC Subsidiaries, if any.

 

DMRC Equity Investments ” shall mean equity investments made by Digimarc prior to the Acceptance Time in companies in the Digital Watermarking Business and listed on Schedule 1.01 (DMRC Equity Investments).

 

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DMRC Group ” shall mean the DMRC Entities, the DMRC Equity Investments and, after the Distribution Date, each of their respective Subsidiaries and Affiliates and any corporation or entity that may become part of such group from time to time, other than the Digimarc Group.

 

DMRC Indemnitee ” shall mean DMRC, DMRC Sub, the DMRC Subsidiaries, each Affiliate of DMRC immediately after the Distribution Date, each of their respective present and former officers, directors and employees, each of the heirs, executors, successors and assigns of any of the foregoing and each Person, if any, who, at any time after the Separation, controls DMRC within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act.

 

DMRC Liabilities ” shall mean, in each case, whether occurring, arising, existing or asserted before, on or after the Distribution Date, but expressly excluding Corporate Level Liabilities:

 

(a)            Liabilities primarily relating to, arising out of or resulting from the Digital Watermarking Business and the DMRC Assets, including any such Liability relating to, arising out of or resulting from any act or failure to act by any Representative (whether or not such act or failure to act is or was within such Person’s authority), excluding Liabilities relating to, arising out of or resulting from IDMarc Software or IDMarc Source Code exclusively licensed to L-1 Identity Solutions Operating Company and its Affiliates pursuant to the License Agreement;

 

(b)            Liabilities allocated to DMRC and set forth on Schedule 1.01 (DMRC Assumed Liabilities), each of which are Liabilities other than Corporate Level Liabilities that are not primarily related to either the Secure ID Business or the Digital Watermarking Business;

 

(c)            Liabilities, agreements and obligations of any DMRC Entity under this Agreement or any of the other Transaction Agreements;

 

(d)            Liabilities relating to, arising out of or resulting from the operation of any business conducted by any DMRC Entity (including any Liability relating to, arising out of or resulting from any act or failure to act by any Representative or any DMRC Entity (whether or not such act or failure to act is or was within such Person’s authority));

 

(e)            Liabilities arising out of or resulting from any Benefit Plan with any DMRC Employee after the Distribution Date or relating to, arising out of or resulting from any Contract with any DMRC Employee (other than claims incurred but not paid under Digimarc’s group welfare plans prior to the Distribution Date);

 

(f)             Liabilities triggered at the Acceptance Time or any termination of employment concurrently therewith or thereafter arising under any Contracts entered into between Digimarc (or any of its Subsidiaries) and any of Robert P. Chamness, Bruce

 

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Davis, Michael McConnell or Reed Stager and any other employee of Digimarc who becomes employed by DMRC;

 

(g)            Liabilities for severance costs relating to, arising out of, or resulting from the termination of employment of (i) any DMRC Employees, (ii) any employees not employed by Digimarc or its Subsidiaries immediately prior to the Acceptance Time (including employees performing general corporate functions for Digimarc prior to the Distribution) and (iii) all employees of Digimarc or its Subsidiaries terminated prior to the Acceptance Time in connection with the Separation;

 

(h)            all costs, expenses and fees (including attorneys’, financial advisory, accounting and fairness opinion fees) incurred in connection with the Transactions by or on behalf of Digimarc prior to the Acceptance Time or by or on behalf of DMRC, whether prior to, at or following the Acceptance Time;

 

(i)             Liabilities relating to, arising out of, or resulting from any indemnification or exculpation claims by any DMRC Employees or DMRC Director/Officer under any Contract, bylaw or other governing document or statutory provision; provided that such claim for indemnification or exculpation must relate to, arise out of, or result from the acts or omissions of such indemnified person with respect to the Digital Watermarking Business; and

 

(j)             Liabilities relating to, arising out of or resulting from the DMRC Litigation Matters.

 

DMRC Litigation Matters ” shall mean the existing Actions to be assumed by DMRC, as listed on Schedule 1.01 (DMRC Litigation Matters).

 

DMRC Merger ” shall have the meaning set forth in the recitals hereof.

 

DMRC Merger Agreement ” shall mean the Agreement and Plan of Merger to be entered into by and between DMRC and DMRC Sub prior to the Distribution Date.

 

DMRC Real Property ” shall mean all right, title and interest in the real property located at 9405 SW Gemini Drive, Beaverton, Oregon 97008, subject to that certain Full Service Lease, dated March 22, 2004, by and between PS Business Parks, L.P., as lessor, and Digimarc, as lessee.

 

DMRC Shared Assets ” shall mean the Shared Assets allocated to the Digital Watermarking Business and set forth on Schedule 1.01 (Shared Assets), with an asterisk or other marking indicating such allocation.

 

DMRC Sub ” shall have the meaning set forth in the preamble hereof.

 

DMRC Sub Common Stock ” shall mean common stock of DMRC Sub, par value $0.001 per share.

 

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DMRC Subsidiaries ” shall mean all direct and indirect Subsidiaries of DMRC, if any.

 

DMRC Units ” shall mean limited liability company interests of DMRC.

 

Effective Time ” shall have the meaning set forth in the Merger Agreement.

 

Election Statement ” shall have the meaning set forth in Section 4.11(g) .

 

Encumbrances ” shall mean all liens, security interests, pledges, mortgages, deeds of trusts, charges, options, encumbrances or other restrictions, including restrictions on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership, and all other similar rights of third parties, of any kind or nature.

 

Environmental Claims ” shall mean any claim, action, notice, letter, demand or request for information (in each case in writing) by any Person or entity alleging potential liability (including potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries or penalties) arising out of, based on or resulting from any violation of Environmental Law (as defined in the Merger Agreement) or the release, emission, discharge, presence or disposal of any Hazardous Material (as defined in the Merger Agreement) at any location.

 

Exchange Act ” shall have the meaning set forth in the Merger Agreement.

 

Final Determination ” shall mean the final resolution of liability for any Income Tax, which resolution may be for a specific issue or adjustment or for a taxable year or period, by (a) IRS Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the taxpayer, or by a comparable form under the Laws of a state or local taxing jurisdiction, except that a Form 870 or 870-AD or comparable form shall not constitute a Final Determination to the extent that it reserves (whether by its terms or by operation of Law) the right of the taxpayer to file a claim for refund or the right of the Tax authority to assert a further deficiency in respect of such issue or adjustment or for such taxable period (as the case may be); (b) a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (c) a closing agreement or accepted offer in compromise under Sections 7121 or 7122 of the Code, or a comparable agreement under the Laws of a state or local taxing jurisdiction; (d) any allowance of a refund or credit in respect of an overpayment of Income Tax, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) by the jurisdiction imposing such Income Tax; or (e) any other final disposition, including by reason of the expiration of the applicable statute of limitations or by mutual agreement of the parties.

 

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Form 10 ” shall mean the registration statement on Form 10 filed with the SEC by DMRC Sub to effect the registration of DMRC Sub Common Stock pursuant to the Exchange Act in connection with the Distribution, as such registration statement may be amended or supplemented from time to time.

 

FSAs ” shall have the meaning set forth in Section 4.09(c)(ii) .

 

Future DMRC Litigation Matters ” shall have the meaning set forth in Section 10.01(c)(i) .

 

 “ Future ID Litigation Matter ” shall have the meaning set forth in Section 10.01(c)(ii) .

 

Future Joint Litigation Matter ” shall have the meaning set forth in Section 10.01(c)(iii) .

 

 “ Governmental Approvals ” shall mean any material notices, reports or other filings to be made, or any consents, registrations, approvals, permits or authorizations to be obtained from, any Governmental Authority, as listed on Schedule 1.01 (Governmental Approvals).

 

Governmental Authority ” shall have the meaning set forth in the Merger Agreement.

 

Group ” shall mean the Digimarc Group or the DMRC Group, as the case may be.

 

IDMarc Software ” shall have the meaning set forth in the License Agreement.

 

IDMarc Source Code ” shall have the meaning set forth in the License Agreement.

 

Income Taxes ” shall mean any and all Taxes that are based upon, measured by, or calculated with respect to (a) net income or profits (including, but not limited to, any capital gains, gross receipts, or minimum Tax, and any Tax on items of Tax preference, but not including sales, use, value added, real property gains, real or personal property, transfer or similar Taxes), (b) multiple bases (including, but not limited to, corporate franchise, doing business, occupation and similar Taxes), if one or more of the bases upon which such tax may be based, by which it may be measured, or with respect to which it may be calculated is described in clause (a) of this definition, or (c) any net worth, franchise or similar tax.

 

Indebtedness ” shall mean, with respect to any Person, (a) any obligation of such Person (i) for borrowed money, (ii) evidenced by a note, debenture or similar instrument (including a purchase money obligation) given in connection with the acquisition of any property or assets, including securities, (iii) for the deferred purchase

 

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price of property or services, except trade accounts payable arising in the ordinary course of business, or (iv) under any lease or similar arrangement that would be required to be accounted for by the lessee as a capital lease in accordance with GAAP (as defined in the Merger Agreement); (b) any guarantee (or keepwell agreement) by such Person of any Indebtedness of others described in the preceding clause (a); and (c) all obligations to reimburse any bank or other Person for amounts paid under a letter of credit or similar instrument.

 

Indemnifying Party ” shall mean the Person having the obligations to indemnify pursuant to Article V .

 

Indemnitee ” shall mean a Person that has the right to indemnification pursuant to Article V .

 

Information ” shall mean all records, books, work papers, reports, plans, schedules and other documents, instruments, computer data and other data and information of a Person.

 

Insurance Policies ” shall mean the insurance policies written by insurance carriers under which, prior to the Distribution Date, Digimarc and/or DMRC or one or more of their respective Subsidiaries or Affiliates (or their respective officers or directors) are insured parties.

 

Intellectual Property ” shall have the meaning set forth in the Merger Agreement.

 

Inter-Group Indebtedness ” shall mean any intercompany receivables, payables, accounts, advances, loans, guarantees, commitments and Indebtedness for borrowed funds between a member of the Digimarc Group and a member of the DMRC Group; provided that “Inter-Group Indebtedness” shall not include any contingent Liabilities and accounts payable arising pursuant to the Transaction Agreements and any agreements with respect to continuing transactions between the Digimarc Group and the DMRC Group.

 

Joint Claims ” shall mean all right, title and interest to, in or under any claim, demand or Action that primarily relates to both the Secure ID Business and the Digital Watermarking Business, including those claims set forth on Schedule 1.01 (Joint Claims) , whether arising before, on or after the Distribution Date.

 

L-1 ” shall have the meaning set forth in the recitals hereof.

 

L-1 401(k) Plan ” shall have the meaning set forth in Section 4.09(b)(iii) .

 

Law ” shall have the meaning set forth in the Merger Agreement.

 

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Legal Impediment ” shall mean a legal impediment preventing or restricting the transfer of a DMRC Asset or the assumption of a DMRC Liability, as the case may be, in the Restructuring as listed on Schedule 1.01 (Legal Impediments).

 

Liabilities ” shall mean any and all losses, charges, debts, demands, Actions, damages, obligations, payments, costs and expenses, bonds, indemnities and similar obligations, covenants, controversies, promises, omissions, guarantees, make whole agreements and similar obligations, Taxes and other liabilities, including all contractual obligations, whether absolute or contingent, inchoate or otherwise, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, and including those arising under any Action, threatened or contemplated Action (including the costs and expenses of demands, assessments, judgments, settlements and compromises relating thereto and attorneys’ fees and any and all costs and expenses, whatsoever incurred in investigating, preparing or defending against any such Actions or threatened or contemplated Actions), order or consent decree of any Governmental Authority or any award of any arbitrator or mediator of any kind, and those arising under any Contract, including those arising under this Agreement or any other Transaction Agreement or incurred by a party hereto or thereto in connection with enforcing its rights to indemnification hereunder or thereunder, in each case, whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person.

 

License ” shall mean any license, ordinance, authorization, permit, certificate, right, easement, variance, exemption, consent, franchise or approval from any Governmental Authority.

 

License Agreement ” shall mean the License Agreement to be entered into by and among L-1 Identity Solutions Operating Company and DMRC Sub.

 

M&A Qualified Beneficiaries ” shall have the meaning set forth in Section 4.08(d) .

 

Merger Agreement ” shall have the meaning set forth in the recitals hereof.

 

Net Proceeds ” shall have the meaning set forth in Section 5.05(b) .

 

Notice of Claim ” shall have the meaning set forth in Section 5.04(a) .

 

Original Merger Agreement ” shall have the meaning set forth in the recitals hereof.

 

Party ” and “ Parties ” shall have the meaning set forth in the preamble hereof.

 

Person ” shall have the meaning set forth in the Merger Agreement.

 

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Proxy Statement ” shall have the meaning set forth in the Merger Agreement.

 

Purchase Price Excess” shall mean the amount, if any, by which the aggregate price paid to holders of Company Common Stock in the Offer and Merger exceeds $310,000,000.

 

 “ Purchase Price Shortfall ” shall mean the amount, if any, by which the aggregate price paid to holders of Company Common Stock in the Offer and Merger is less than $310,000,000.

 

 “ Record Date ” shall mean the close of business on the date to be determined by the Digimarc Board of Directors in accordance with applicable Law as the record date for determining stockholders of Digimarc entitled to receive the Distribution.

 

Representative ” shall have the meaning set forth in the Merger Agreement.

 

Restructuring ” shall mean the internal restructuring undertaken by Digimarc and its Subsidiaries in connection with the transfer of the DMRC Assets to, and the assumption of the DMRC Liabilities by, the DMRC Entities.

 

Restructuring Date ” shall mean a date prior to the Distribution Date on which the Restructuring shall occur, as designated by the Parties.

 

SEC ” shall mean the United States Securities and Exchange Commission.

 

Section 336(e) Election ” shall have the meaning set forth in Section 4.11(g) .

 

Secure ID Business ” shall mean the portion of Digimarc’s business immediately prior to the Distribution Date engaged in the licensing or sale of products, services, Intellectual Property or Technology related to driver licenses, passports, state or national identification cards, and government-issued credentials.

 

Secure ID Business Employees ” shall have the meaning set forth in Section 4.09(b)(iii) .

 

Securities Act ” shall have the meaning set forth in the Merger Agreement.

 

Separation ” shall have the meaning set forth in the recitals hereof.

 

Separation Tax Liabilities ” shall mean any and all Liabilities for Taxes of Digimarc, DMRC and each of their respective Subsidiaries and Affiliates relating to, arising out of or resulting from the Separation, including, any and all Income Taxes, withholding, sale, use, documentary, stamp, real estate transfer, stock transfer,

 

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registration, duty or similar fees or Taxes or governmental charges imposed as a result of the transactions contemplated by this Agreement.

 

Shared Assets ” shall mean any Assets shared, or to be shared, by Digimarc (as the owner of the Secure ID Business) and DMRC (as the owner of the Digital Watermarking Business) and set forth on Schedule 1.01 (Shared Assets).

 

Subsidiary ” shall have the meaning set forth in the Merger Agreement.

 

Taxes ” shall have the meaning set forth in the Merger Agreement.

 

Technology ” shall have the meaning set forth in the Merger Agreement.

 

Third Party Claims ” shall have the meaning set forth in Section 5.04(b) .

 

Transaction Agreements ” shall mean collectively this Agreement, the Merger Agreement, the Transition Services Agreement, the License Agreement, the Stock Purchase Agreement and all other documents related to the Transactions.

 

Transactions ” shall have the meaning set forth in the Merger Agreement.

 

Transition Services Agreement ” shall have the meaning set forth in the Merger Agreement.

 

ARTICLE II

THE RESTRUCTURING

 

Section 2.01.           Business Separation .

 

(a)            Transfer of Assets .  On the Restructuring Date and subject to the satisfaction or waiver of the conditions set forth in Section 7.01 , Digimarc shall assign, transfer, convey and deliver to DMRC or a DMRC Subsidiary, and cause the applicable Digimarc Subsidiaries to assign, transfer, convey and deliver to DMRC or a DMRC Subsidiary, and DMRC or a DMRC Subsidiary shall accept from Digimarc and the applicable Digimarc Subsidiaries, all of Digimarc’s and the applicable Digimarc Subsidiaries’ respective right, title and interest in and to all of the DMRC Assets, other than the Delayed Transfer Assets.

 

(b)            Assumption of Liabilities .  On the Restructuring Date and subject to the satisfaction or waiver of the conditions set forth in Section 7.01 , DMRC shall, and shall cause the DMRC Subsidiaries to, assume, pay and agree faithfully to perform and discharge when due all of the DMRC Liabilities (other than the Delayed Transfer Liabilities) in accordance with their respective terms.  DMRC or a DMRC Subsidiary shall be responsible for all DMRC Liabilities, regardless of (i) when or where or against whom such Liabilities are asserted or determined, (ii) whether asserted or determined prior to or after the Distribution Date and (iii) whether arising from or alleged to arise

 

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from the negligence, recklessness, strict liability or violation of Law by or of any DMRC Entity or Digimarc Entity or any of their respective Representatives or Affiliates.  The Digimarc Entities shall be responsible for all Liabilities of Digimarc and its Subsidiaries other than DMRC Liabilities, regardless of (i) when or where or against whom such Liabilities are asserted or determined, (ii) whether asserted or determined prior to or after the Distribution Date and (iii) whether arising from or alleged to arise from the negligence, recklessness, strict liability or violation of Law by or of any Digimarc Entity or any of their respective Representatives or Affiliates.

 

(c)            Delayed Transfer Assets and Liabilities.

 

(i)             Notwithstanding anything in this Agreement to the contrary, neither Digimarc nor any of the Digimarc Subsidiaries is obligated to assign, transfer, convey or deliver to DMRC or any DMRC Subsidiary, and neither DMRC nor any DMRC Subsidiary is obligated to assume, any of the rights and obligations under any Delayed Transfer Asset or Delayed Transfer Liability until such time as all Legal Impediments are removed and/or all Consents or Governmental Approvals necessary for the legal transfer and/or assumption thereof are obtained.  Each of the Parties agrees that the Delayed Transfer Assets shall be assigned, transferred, conveyed and delivered, and the Delayed Transfer Liabilities shall be assumed, in accordance with the provisions of Section 2.02 .

 

(ii)            On the Distribution Date, DMRC shall deliver to Digimarc a schedule setting forth all material Delayed Transfer Assets and Delayed Transfer Liabilities known to be existing as of the Distribution Date.  Digimarc shall thereafter, (A) with respect to any such Delayed Transfer Assets, use commercially reasonable efforts, with the costs of Digimarc related thereto to be promptly reimbursed by DMRC, to hold such DMRC Asset in trust for the use and benefit of DMRC and (B) with respect to any such Delayed Transfer Liability, use commercially reasonable efforts, with the costs of Digimarc related thereto to be promptly reimbursed by DMRC, to retain such DMRC Liability for the account of DMRC, in each case, in order to place each Party, insofar as is reasonably possible, in the same position as would have existed had such Delayed Transfer Asset or Delayed Transfer Liability been contributed, assigned, transferred, conveyed, delivered or assumed as contemplated hereby; provided that Digimarc shall not be required to take any action pursuant to this Section 2.01(c)(ii)  that would, or could reasonably be expected to, result in any unreimbursed financial obligation to it or any restriction on its business or operations.

 

(iii)           To the extent that DMRC is provided the use or benefit of any DMRC Asset or has any DMRC Liability held for its account pursuant to this Section 2.01(c) , DMRC shall perform, for the benefit of Digimarc and any third Person, the obligations of Digimarc thereunder or in connection therewith, or as may be directed by Digimarc and, if DMRC shall fail to perform to the extent required herein, DMRC shall hold Digimarc harmless and indemnify Digimarc therefor pursuant to Section 5.02(d) .

 

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(iv)          Each Party shall, and shall cause its Affiliates to, as and when any such Delayed Transfer Asset or Delayed Transfer Liability becomes contributable, assignable, transferable, conveyable, deliverable or assumable by such Party, effect such contribution, assignment, transfer, conveyance, delivery or assumption, as applicable, as promptly as practicable thereafter without payment of additional consideration.

 

(d)           Subsequent Transfers .  In the event that at any time or from time to time after the Distribution Date any Party (or any Subsidiary thereof) becomes aware that it possesses any Asset or Liability that is allocated to the other Party pursuant to this Agreement or any other Transaction Agreement, such Party shall promptly transfer, or cause to be transferred, such Asset or Liability to the Party so entitled thereto.  Prior to any such transfer, the Party possessing such Asset or Liability shall hold such Asset or Liability in trust for any such other Party.  As of the Distribution Date, each Party (or, as applicable, such Subsidiary of such Party) shall be deemed to have acquired (or, as applicable, retained) complete and sole beneficial ownership over all the Assets, together with all rights, powers and privileges incident thereto, and shall be deemed to have assumed in accordance with the terms of this Agreement all the Liabilities, and all duties, obligations and responsibilities incident thereto, which such Party (or, after giving effect to the Restructuring and the Distribution, any Subsidiary of such Party) is entitled to acquire or required to assume pursuant to the terms of this Agreement.  The costs and expenses of the Party who held such subsequently transferred Asset or Liability shall be promptly reimbursed by the Party who acquires such Asset or Liability, as the case may be, in order to place each Party, insofar as is reasonably possible, in the same position as it would have been in had such Asset or Liability been contributed, assigned, transferred, conveyed, delivered or assumed as contemplated by Section 2.01(c) .

 

(e)           Inter-Company Agreements and Indebtedness.

 

(i)            Subject to Section 2.01(e)(iii) , on or prior to the Distribution Date, the Digimarc Entities, on the one hand, and the DMRC Entities, on the other hand, shall terminate any and all Contracts between or among Digimarc and/or any Digimarc Entity, on the one hand, and DMRC and/or any DMRC Entity, on the other hand, effective as of the Distribution Date.  No such terminated Contract (including any provision thereof that purports to survive termination) shall be of any further force or effect after the Distribution Date and all parties shall be released from all obligations thereunder.  Each Party shall, at the reasonable request of the other Party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing.

 

(ii)           On or prior to the Distribution Date, all Inter-Group Indebtedness shall be paid in full and settled.

 

(iii)          The provisions of Section 2.01(e)(i)  shall not apply to terminate this Agreement, the other Transaction Agreements, any agreement contemplated by the Transaction Agreements or any agreement set forth on Schedule 2.01(e) .

 

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(f)            Certain Resignations . On or prior to the Distribution Date, Digimarc shall cause each employee and director of Digimarc and its Subsidiaries who will not be employed by DMRC or a DMRC Subsidiary after the Distribution Date to resign, effective not later than the Distribution Date, from all boards of directors or similar governing bodies of DMRC or any DMRC Subsidiary on which they serve, and from all positions as officers of DMRC or any DMRC Subsidiary in which they serve.   On or prior to the Distribution Date, DMRC will cause each employee and director of DMRC and its Subsidiaries who will not be employed by Digimarc or a Digimarc Subsidiary after the Distribution Date to resign, effective not later than the Distribution Date, from all boards of directors or similar governing bodies of any Digimarc Subsidiary on which they serve, and from all positions as officers of Digimarc or any Digimarc Subsidiary in which they serve.

 

Section 2.02.          Documents Relating to the Transfer of DMRC Assets and Assumption of DMRC Liabilities .  In furtherance of the assignment, transfer and conveyance of DMRC Assets and the assumption of DMRC Liabilities pursuant to this Agreement, on or prior to the Distribution Date and, with respect to Delayed Transfer Assets and Delayed Transfer Liabilities, at such time after the Distribution Date as such Delayed Transfer Asset or Delayed Transfer Liability can be transferred:

 

(a)           Digimarc shall execute and deliver and, if applicable, shall cause its Subsidiaries, to execute and deliver, such bills of sale, stock powers, certificates of title, assignments of Contracts and other instruments of transfer, conveyance and assignment as and to the extent necessary to evidence the transfer, conveyance and assignment of Digimarc’s right, title and interest in and to the DMRC Assets to DMRC; provided that the instruments executed and delivered pursuant to this Section 2.02(a)  shall be in a form reasonably satisfactory to the Parties and consistent with the terms of this Agreement; and

 

(b)           DMRC shall execute and deliver to Digimarc such instruments of assumption as and to the extent necessary to evidence the valid and effective assumption by DMRC of the DMRC Liabilities; provided that any instruments executed and delivered pursuant to this Section 2.02(b)  shall be in a form reasonably satisfactory to the Parties and consistent with the terms of this Agreement.

 

Section 2.03.          Novation of DMRC Liabilities .

 

(a)           Before and after the Distribution Date, DMRC shall use its commercially reasonable efforts to (i) obtain, or to cause to be obtained, any release, Consent, substitution, approval or amendment required to novate all Digimarc Entities from, and assign all obligations under, Contracts, Licenses, Benefit Plans and other obligations or Liabilities of any nature whatsoever that constitute DMRC Liabilities, or to obtain in writing the unconditional release of all Digimarc Entities from such obligations, so that, in any such case, the DMRC Entities shall be solely responsible for such DMRC Liabilities and (ii) terminate, or to cause DMRC Assets to be substituted in all respects for any Assets retained by Digimarc in respect of, any Encumbrances on Assets retained

 

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by Digimarc which are securing any DMRC Liabilities; provided , however , that neither Digimarc nor DMRC shall be obligated to pay any consideration therefor to any third party from whom such releases, Consents, substitutions, approvals, amendments or terminations are requested except as expressly set forth in the applicable Contract, License or Benefit Plan.

 

(b)           If DMRC is unable to obtain, or to cause to be obtained, any release, Consent, substitution, approval or amendment required pursuant to Section 2.03(a) , (i) the applicable Digimarc Entity shall continue to be bound by such Contracts, Licenses and other obligations, (ii) unless not permitted by Law or the terms thereof, DMRC shall, as agent or subcontractor for such Digimarc Entity, pay, perform and discharge fully all the obligations or other Liabilities of such Digimarc Entity thereunder from and after the Distribution Date and (iii) DMRC shall indemnify and hold harmless each Digimarc Indemnitee against any Liabilities arising in connection therewith.

 

(c)           Without the prior written consent of Digimarc, from and after the Distribution Date, DMRC shall not, and shall not permit any DMRC Entity to, renew or extend the term of or increase its obligations under any Contract, License or other obligation for which a Digimarc Entity is or may be liable, or for which any Digimarc Asset is or may be encumbered, unless all obligations of the Digimarc Entities and all Encumbrances on any Digimarc Asset with respect thereto are thereupon released and terminated by documentation reasonably satisfactory in form and substance to Digimarc.

 

Section 2.04.          Issuance of Units .  At or prior to the Distribution Date and subject to the satisfaction or waiver of the conditions set forth in Section 7.01 , the Parties shall take all steps necessary so that on the Distribution Date the number of DMRC Units outstanding and held by Digimarc shall be equal to the amount necessary to provide for the issuance of one DMRC Unit for every three and one-half shares of Digimarc Common Stock outstanding on the Record Date, subject to adjustment for fractional interests pursuant to Section 3.05 .

 

Section 2.05.          Other Transaction Agreements .  At or prior to the Distribution Date and subject to the satisfaction or waiver of the conditions set forth in Section 7.01 , each of Digimarc and DMRC shall execute and deliver the other Transaction Agreements that were not previously executed and delivered.

 

ARTICLE III

THE DISTRIBUTION

 

Section 3.01.          Record Date and Distribution Date .  Prior to the Distribution Date, the Digimarc Board of Directors, in accordance with applicable Law, shall establish the Record Date and the Distribution Date and any appropriate procedures in connection with the Distribution, including authorizing Digimarc to effect the Distribution prior to the Target Spin-Off Date.  Digimarc will provide notice to the National Association of

 

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Securities Dealers no later than ten (10) days prior to the Record Date in compliance with Rule 10b-17 under the Exchange Act.

 

Section 3.02.          Distribution Agent .  Prior to the Distribution Date, Digimarc shall enter into an agreement with the Distribution Agent (the “ Distribution Agent Agreement ”), which shall be on terms that are reasonably satisfactory to L-1, providing for the Distribution of DMRC Units in accordance with the terms of this Agreement.

 

Section 3.03.          Deliveries to the Distribution Agent .  Subject to the satisfaction or waiver of the conditions set forth in Section 7.01 (other than conditions that by their nature are to be satisfied at the time of the Restructuring or the Distribution and shall in fact be satisfied at such time), on or prior to the Distribution Date, Digimarc shall deliver to the Distribution Agent (a) for the benefit of holders of record of Digimarc Common Stock on the Record Date, book entry transfer authorizations for such number of DMRC Units equal to the number of DMRC Units to be distributed in connection with the Distribution, and (b) all Information required to complete the Distribution on the basis set forth herein and under the Distribution Agent Agreement.  Following the Distribution Date, upon request of the Distribution Agent, DMRC shall provide to the Distribution Agent all certificates (or book-entry transfer authorizations) for DMRC Units that the Distribution Agent shall require in order to further effect the Distribution.

 

Section 3.04.          Distribution .

 

(a)           Subject to the satisfaction or waiver of the conditions set forth in Section 7.01 , the Distribution shall be effective on the Distribution Date and Digimarc shall instruct the Distribution Agent at or prior to the Acceptance Time to distribute, on or as soon as practicable after the Distribution Date, to each holder of record of Digimarc Common Stock as of the Record Date, one (1) DMRC Unit for every three and one-half (3½) shares of Digimarc Common Stock held by such record holder on the Record Date; provided , however , that such ratio may be changed by Digimarc prior to the distribution date as reasonably determined by Digimarc as a result of market or other factors.  DMRC agrees to provide all book entry registration authorizations for DMRC Units that Digimarc shall require (after giving affect to Section 2.04 ) in order to effect the Distribution.  DMRC shall direct the Distribution Agent to distribute on the Distribution Date, or as soon as reasonably practicable thereafter, the appropriate number of DMRC Units (or shares of DMRC Sub Common Stock, if the DMRC Merger has already occurred) to each such holder or the designated transferee of such holder.

 

(b)           Notwithstanding subparagraph (a) of this Section 3.04 , (i) to the extent the condition set forth in Section 7.01(f)  is not satisfied immediately prior to the expiration of the Offer period or the Target Spin-Off Date, and (ii) Digimarc and DMRC are reasonably satisfied that no Governmental Authority with oversight of the Trust Transfer and the Spin-Off will object to such transaction, Digimarc will, in accordance with the terms and conditions of this

 

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Agreement (excepting the condition set forth in Section 7.01(f) ) and those of the other Transaction Agreements, immediately prior to the expiration of the Offer period or the Target Spin-Off Date, effect the Trust Transfer.  If the Trust Transfer is effected, the DMRC Units shall be held in trust on behalf of Digimarc’s stockholders as of the Record Date until such time as the condition set forth in Section 7.01(f)  is satisfied, immediately after which the trust shall effect the Distribution on the same terms and conditions contemplated by this Article III .

 

Section 3.05.          Fractional Interests; Unclaimed Units .

 

(a)           No Fractional Units .  Notwithstanding anything herein to the contrary, no certificate or scrip representing fractional DMRC Units shall be delivered to the Distribution Agent for the benefit of holders of record of Digimarc Common Stock on the Record Date (“ Digimarc Stockholders ”).  Holders of record shall receive cash equal to the fair market value of any fractional DMRC Units, which shall be paid using the Cash constituting part of the DMRC Assets.

 

(b)           Unclaimed Units .  Any DMRC Units made available to the Distribution Agent that remains undistributed one hundred eighty (180) days after the Distribution Date shall be delivered to DMRC.  DMRC shall hold such DMRC Units for the account of such Digimarc Stockholders and any such Digimarc Stockholder shall look only to DMRC for such DMRC Units, subject to applicable escheat or other abandoned property Laws.

 

Section 3.06.          Timing of the Distribution .  Digimarc shall consummate the Separation as promptly as practicable after satisfaction (or waiver to the extent permissible) of all of the conditions to the Restructuring and the Distribution specified in Section 7.01 (other than conditions that by their nature are to be satisfied at the time of the Restructuring or Distribution and shall in fact be satisfied at such time).  The Restructuring shall occur on the Distribution Date prior to the Distribution, which shall occur at a time to be mutually agreed by the Parties on the Distribution Date.

 

Section 3.07.          DMRC Merger .

 

(a)           The DMRC Merger shall occur as soon as practicable following the Distribution.  As a result of the DMRC Merger, each holder of DMRC Units will receive one (1) share of DMRC Sub Common Stock for each DMRC Unit allocated to the holder in the Distribution.  The DMRC Merger shall be effective as set forth in the certificate of merger filed with the Secretary of State of the State of Delaware to effect the DMRC Merger.

 

(b)           Prior to the Distribution Date, DMRC will deliver to the Distribution Agent for the benefit of the holders of Digimarc Common Stock on the Record Date, as holders of DMRC Units following the Distribution, stock certificates, endorsed by DMRC in blank, representing all of the outstanding shares of DMRC Sub

 

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Common Stock then owned by DMRC.  DMRC will cause the transfer agent for the DMRC Sub Common Stock to credit the appropriate class and number of such shares of DMRC Sub Common Stock to book entry accounts for each such holder or designated transferee of such holder. For stockholders of Digimarc who own Digimarc Common Stock through a broker or other nominee, their shares of DMRC Sub Common Stock will be credited to their respective accounts by such broker or nominee.

 

ARTICLE IV

ADDITIONAL COVENANTS

 

Section 4.01.          Access to Information .

 

(a)           Except in the case of an adversarial Action by or against any Digimarc Entity or Entities, on the one hand, and any DMRC Entity or Entities, on the other hand (which shall be governed by such discovery rules as may be applicable thereto), and subject to Section 4.02 , each of Digimarc and DMRC, on behalf of the Digimarc Entities and the DMRC Entities, respectively, agrees to provide, or cause to be provided, to each other as soon as reasonably practicable after written request therefor, subject to applicable Laws relating to the exchange of information, and only in such manner that does not cause unreasonable disruption of the business of such Person, any Information existing as of the Acceptance Time and in the possession or under the control of such Person that the requesting party reasonably needs (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities Laws) by a Governmental Authority having jurisdiction over the requesting party, (ii) for use in any other judicial, regulatory, administrative or other proceeding or in order to satisfy audit, accounting, claims, regulatory, litigation or other similar requirements or (iii) to comply with its obligations, or confirm compliance of the other Party’s obligations, under this Agreement or any other Transaction Agreement; provided , however , that (A) the requesting Person shall agree in writing to keep any Information that includes proprietary, confidential or privileged Information of the providing Person confidential, except to the extent that such records or documents are required to be disclosed by applicable Law or legal process, (B) each Party agrees to notify the providing Person of any Action whereby such requesting Person might be required to disclose proprietary, confidential or privileged Information, so that the providing Person may seek a protective order, (C) in the event that any Party determines that any such provision of Information could be commercially detrimental, violate any applicable Law or provision of any material Contract, or waive any attorney-client privilege, the Parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence and (D) if Information other than that pertaining to the Digital Watermarking Business or the Secure ID Business is contained in such records, Digimarc and DMRC shall either agree that such Information may be omitted or redacted by the providing Person, or shall enter into appropriate secrecy commitments to protect such Information.

 

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(b)           Following the Acceptance Time, each Party shall make its employees reasonably available to the other Party during normal business hours and on reasonable prior notice to provide an explanation of any Information provided hereunder.

 

Section 4.02.          Privileged Matters .

 

(a)           The Parties recognize that legal and other professional services that have been and will be provided prior to the Distribution Date have been and will be rendered for the collective benefit of each of the members of the Digimarc Group and the DMRC Group, and that each of the members of the Digimarc Group and the DMRC Group should be deemed to be the client for the purposes of asserting all privileges that may be asserted under applicable Law.

 

(b)           Digimarc and DMRC intend that any transfer of Information pursuant to this Agreement that would otherwise be within the attorney-client privilege shall not operate as a waiver of any potentially applicable privilege.  Accordingly, the Parties agree as follows:

 

(i)            The Digimarc Group shall be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the Secure ID Business, whether or not the privileged information is in the possession of or under the control of the Digimarc Group or the DMRC Group. The Digimarc Group shall also be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the subject matter of any claims constituting Liabilities of Digimarc or any of its Subsidiaries (other than DMRC Liabilities), now pending or which may be asserted in the future, in any Action initiated against or by the Digimarc Group, whether or not the privileged information is in the possession of or under the control of the Digimarc Group or the DMRC Group.

 

(ii)           The DMRC Group shall be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the Digital Watermarking Business, whether or not the privileged information is in the possession of or under the control of the Digimarc Group or The DMRC Group. The DMRC Group shall also be entitled, in perpetuity, to control the assertion or waiver of all privileges in connection with privileged information that relates solely to the subject matter of any claims constituting DMRC Liabilities, now pending or that may be asserted in the future, in any Action initiated against or by the DMRC Group, whether or not the privileged information is in the possession or under the control of the Digimarc Group or the DMRC Group.

 

(c)           The Parties hereto agree that they shall have a shared privilege, with equal right to assert or waive, subject to the restrictions in this Section 4.02 , with respect to all privileges not allocated pursuant to the terms of Section 4.02(b) . All privileges relating to any Action, dispute, or other matter that involves the Digimarc

 

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Group or the DMRC Group in respect of which such Parties retain any responsibility or liability under this Agreement, shall be subject to a shared privilege among them.

 

(d)           No Party may waive any privilege that could be asserted under any applicable Law, and in which any other Party has a shared privilege, without the consent of the other Party, which consent shall not be unreasonably withheld or delayed, except to the extent reasonably required in connection with any Action with third parties or as provided in subsection (e) below. Any such consent shall be in writing, or shall be deemed to be granted unless written objection is made within twenty (20) days after notice is provided by the Party requesting such consent in accordance with the terms of this Agreement.

 

(e)           In the event of any Action or dispute between one or more members of the Digimarc Group, on the one hand, and one or more members of the DMRC Group, on the other hand, then any such party, to the extent necessary in connection with such Action or dispute, may waive a privilege in which the other Party has a shared privilege, without obtaining the consent of the other Party, provided that such waiver of a shared privilege shall be effective only as to the use of information with respect to the Action or dispute between the relevant Parties and/or their Subsidiaries, and shall not operate as a waiver of the shared privilege with respect to third parties.

 

(f)            Upon receipt by any Party of any subpoena, discovery or other request that arguably calls for the production or disclosure of information subject to a shared privilege or as to which another Party has the sole right hereunder to assert a privilege, or if any Party obtains knowledge that any of its current or former Representatives has received any subpoena, discovery or other requests that arguably calls for the production or disclosure of such privileged information, such Party shall, to the extent practicable, promptly notify the other Party of the existence of the request and provide the other Party a reasonable opportunity to review the information (to the extent such information is available to such Party) and to assert any rights it or they may have under this Section 4.02 or otherwise to prevent the production or disclosure of such privileged information, unless such notice is prohibited by statute or court order.

 

(g)           The transfer of any Information pursuant to this Agreement is made in reliance on the agreement of Digimarc and DMRC, as set forth in Section 4.01 to maintain the confidentiality of privileged information and to assert and maintain all applicable privileges. The access to Information being granted pursuant to Section 4.01 , the agreement to provide witnesses and individuals pursuant to Sections 4.01 and 4.08 , the furnishing of notices and documents and other cooperative efforts contemplated by Section 4.01 , and the transfer of privileged information between and among the Parties pursuant to this Agreement shall not be deemed a waiver of any privilege that has been or may be asserted under this Agreement or otherwise.

 

Section 4.03.          Ownership of Information .  Any Information owned by either the DMRC Entities or the Digimarc Entities that is provided to a requesting Party pursuant to Section 4.01 shall be deemed to remain the confidential property of the providing Party. 

 

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Unless specifically set forth herein or in any Transaction Agreement, nothing contained in this Agreement shall be construed as granting or conferring rights of license or otherwise in any such Information.

 

Section 4.04.          Compensation for Providing Information .  Subject to the terms of the Merger Agreement and the Transition Services Agreement, the Party requesting such Information agrees to reimburse the Party providing such Information for the reasonable costs, if any, of creating, gathering and copying such Information, and making its employees available, to the extent that such costs are incurred for the benefit of the requesting Party.  Except as may be otherwise specifically provided elsewhere in this Agreement or in any other agreement between the Parties, such costs shall be computed in accordance with the providing Party’s standard methodology and procedures.

 

Section 4.05.          Record Retention .

 

(a)           Information Other Than Iron Mountain Archive Files .  On or prior to the Distribution Date, (i) Digimarc agrees to use commercially reasonable efforts to transfer all Information primarily related to the Secure ID Business to DMRC and (ii) DMRC agrees to use commercially reasonable efforts to transfer all Information primarily related to the Secure ID Business to Digimarc.  To facilitate the possible exchange of any Information pursuant to this Article IV and other provisions of this Agreement after the Distribution Date, subject to Section 4.05(b) , the Parties agree to use their commercially reasonable efforts to retain all Information existing as of the Effective Time and in their respective possession or control relating to the Digital Watermarking Business, the Secure ID Business, Assets or Liabilities on the Distribution Date in accordance with their respective record retention policies, as may be amended from time to time.  To the extent a Party discovers Information that is an Asset of the other Party, the discovering Party shall use its commercially reasonable efforts to notify the other Party of the proposed destruction and give the other Party the opportunity to take possession of such Information prior to destruction.

 

(b)           Iron Mountain Archive Files .  With respect to the Information existing as of the Acceptance Time that Digimarc has placed with Iron Mountain Storage Company (“ Iron Mountain ”, and such Information, the “ Iron Mountain Archive Files ”), the Parties agree to handle access, retention and destruction of such Information in accordance with a Joint Storage Agreement to be entered into in a form to be mutually agreed upon by the Parties.  The Joint Storage Agreement to be entered into among the Parties shall include the following provisions:

 

(i)            no ownership rights to the Iron Mountain Archive Files shall be transferred;

 

(ii)           the Parties shall enter into any agreements required by Iron Mountain to continue the current storage arrangements; provided , however , that all decisions regarding access or destruction of the Iron Mountain Archive Files made after the Distribution Date must be made jointly by Digimarc and DMRC;

 

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(iii)          no Party will have access to the Iron Mountain Archive Files without the permission of the other Party, which shall not be unreasonably withheld;

 

(iv)          the Parties will mutually instruct Iron Mountain to destroy all such Iron Mountain Archive Files (including the actual medium the Iron Mountain Archive Files reside on) on the later of (A) ninety (90) days after the Acceptance Time or (B) upon the settlement of the IPO related cases.

 

(v)           the Parties shall split the cost of the storage equally; provided , however , that any costs associated with storage for an additional time period requested by one Party shall be the sole responsibility of such party.

 

Section 4.06.          Limitation of Liability .  No Party shall have any liability to any other Party in respect of Information exchanged or provided pursuant to this Article IV .

 

Section 4.07.          Other Agreements Providing for Exchange of Information .  The rights and obligations granted under this Article IV are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange or confidential treatment of Information set forth in any Transaction Agreement.

 

Section 4.08.          Production of Witnesses .  Subject to Section 4.04 , after the Distribution Date, except in the case of an adversarial Action by or against any Digimarc Entity or Entities, on the one hand, and any DMRC Entity or Entities, on the other hand (which shall be governed by such discovery rules as may be applicable thereto), each of Digimarc and DMRC shall use its reasonable efforts, and shall use its reasonable efforts to cause each Digimarc Entity or DMRC Entity, as applicable, to make available to the other Party or any Affiliate or Subsidiary of the other Party, upon written request, such Party’s (and its Affiliates’ and Subsidiaries’) former (to the extent practicable) and current (to the extent practicable) directors, officers and employees as witnesses or otherwise to the extent that the requesting Party (giving consideration to business demands of such directors, officers and employees) reasonably determines that such Information relates to any such Action, administrative or other proceedings (including preparation for such matters or proceedings) relating to the Digital Watermarking Business or the Secure ID Business on or prior to the Distribution Date.  The costs and expenses incurred in the provision of such witnesses and Information shall be paid by the Party requesting the availability of such Persons.

 

Section 4.09.           Employees and Employee Benefit Plans .

 

(a)           Employees .  As of the Distribution Date, the DMRC Employees shall cease to be employees of Digimarc and its Subsidiaries, as applicable, and shall become employees of DMRC or its Subsidiaries, as applicable.  Any employment records maintained by Digimarc relating to any such DMRC Employees shall be transferred to DMRC.

 

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(b)            401(k) and Company Contribution Plans.

 

(i)             Effective as of the Distribution Date, Digimarc shall assign to, and DMRC shall assume sponsorship of, the Digimarc 401(k) Plan and the Digimarc Company Contribution Plan (the “ Digimarc Retirement Plans ”) and the trusts related thereto.  The Parties shall take all such commercially reasonable actions as may be necessary to accomplish such transfer and shall use commercially reasonable efforts to obtain any necessary consents or approvals to such transfer from the trustee, third party administrators, service providers and any other individuals and entities from whom such consent or approval is required to effectuate such transfer.  Effective upon such transfer of sponsorship (A) Digimarc shall resign and cease to be the plan sponsor, named fiduciary and plan administrator of the Digimarc Retirement Plans, and (B) Digimarc shall cease to have any other authority or obligation with respect to the Digimarc Retirement Plans (other than for contributions due, but not yet paid, with respect to periods ending prior to the Distribution Date).

 

(ii)            Effective as of the Distribution Date, all employees of Digimarc and its Subsidiaries (other than DMRC and its Subsidiaries) shall cease to be eligible to participate in the Digimarc Retirement Plans as active participants.

 

(iii)           At or as soon as practicable after the Effective Time, all employees of the Secure ID Business (“ Secure ID Business Employees ”) shall be eligible to participate in a 401(k) plan maintained by L-1 or one of its Affiliates (the “ L-1 401(k) Plan ”) and the account balances (and related assets, including any outstanding participant loans) of the Secure ID Business Employees under the Digimarc Retirement Plans shall be transferred from the Digimarc Retirement Plans to the L-1 401(k) Plan.  The Parties, L-1 and its Affiliates shall take all commercially reasonable actions as may be necessary to effectuate the transfer of account balances contemplated in the preceding sentence, including, without limitation, directing the trustees of the Digimarc Retirement Plans and the L-1 401(k) Plan to effectuate such transfer, and shall cooperate as necessary to provide all required notices and make all required filings attendant to such transfer (such as any required black out notices and any required Form 5310A filings).  In addition, L-1 shall amend, or cause to be amended, the L-1 401(k) Plan as may be necessary to ensure that such transfer does not violate Section 411(d)(6) or any other provision of the Code and shall implement, or cause to be implemented, payroll deduction procedures to facilitate continued repayment of any transferred participant loans.  Upon such transfer, DMRC and the Digimarc Retirement Plans shall cease to have any liability, authority or obligation with respect to such transferred accounts and such accounts shall be governed by the terms of the L-1 401(k) Plan.

 

(c)            Welfare Benefit Plans.

 

(i)             Effective as of the Distribution Date, DMRC Employees and their spouses and dependents shall cease to participate in those group welfare plans set forth on Schedule 4.09 ; provided , however , that DMRC Employees and their spouses and dependents participating in such plans prior to the Distribution Date shall remain

 

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entitled to benefits under (and in accordance with the terms of) such plans for claims incurred, but not paid, prior to the Distribution Date.  Effective as of the Distribution Date, DMRC shall establish such new group welfare plans for the benefit of DMRC Employees as it deems desirable; provided , however , that DMRC shall establish such welfare benefit plans as it reasonably believes to be necessary to satisfy its obligations under Section 4.09(d)  below.

 

(ii)            On or as soon as administratively practicable after the Distribution Date, Digimarc shall transfer to DMRC (or such other Person(s) as DMRC may designate) (A) the health care spending accounts and the dependent care spending accounts of all DMRC Employees under the Digimarc Corporation Health and Welfare Plan (also known as the Digimarc Corporation Health and Welfare Benefits Plan) (the “ Digimarc Cafeteria Plan ” and, collectively, the “ FSAs ”) and DMRC shall assume all liabilities related thereto, subject to Digimarc’s proper performance of its obligations under this Section 4.09(c)(ii), and (B) a cash payment equal to the amount by which the aggregate salary reductions (and other contributions) made for the plan year beginning May 1, 2008 (the “ 2008 Plan Year ”) by or on behalf of DMRC Employees under the FSAs on or before the Distribution Date exceed the aggregate claims for the 2008 Plan Year paid to DMRC Employees under the FSAs on or before the Distribution Date; provided , however , that if the aggregate salary reductions (and other contributions) made for the 2008 Plan Year by (or on behalf of) DMRC Employees under the FSAs on or before the Distribution Date are exceeded by the aggregate claims for 2008 Plan Year paid to DMRC Employees under the FSAs on or before the Distribution Date, DMRC shall transfer to Digimarc a cash payment equal to the amount of such deficit.  Within a reasonable period of time after the date of this Agreement (and, in any event, prior to the Distribution Date), Digimarc shall provide to DMRC copies of the 2008 Plan Year Digimarc Cafeteria Plan elections of all DMRC Employees.  On or before the Distribution Date, Digimarc shall provide DMRC with the calculation of the amount to be transferred pursuant to clause (B) above.

 

(d)            COBRA .  From and after the Distribution Date, (i) Digimarc and, following the Effective Time, the buying group (as defined in Treasury Regulation Section 54.4980B-9, Q&A-2(c)) of which it will be a part, shall be solely responsible for providing continuation coverage under COBRA to those individuals who are M&A qualified beneficiaries (as defined in Treasury Regulation Section 54.4980B-9, Q&A-4(b)) with respect to the transactions contemplated by this Agreement and the Merger Agreement (collectively, the “ M&A Qualified Beneficiaries ”), other than those M&A Qualified Beneficiaries who are DMRC Employees, and (ii) DMRC shall be solely responsible for providing continuation coverage under COBRA to those M&A Qualified Beneficiaries who are DMRC Employees.

 

(e)            No Third Party Beneficiaries .  Nothing in this Section 4.09 shall (i) limit the right of Digimarc or DMRC to terminate or suspend the employment of any employee, whether before, on or after the Distribution Date, (ii) be deemed to modify any rights or benefits of any participant or eligible employee under any Benefit Plan, (iii) prevent Digimarc or DMRC from amending or terminating any Benefit Plan,

 

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(iv) require Digimarc or DMRC to sponsor, maintain or contribute to any particular employee benefit plan, program or arrangement or to provide any particular benefit to employees, or (v) be construed as providing any rights to any employee or dependant (or any other Person) as a third party beneficiary with respect to the matters set forth in this Section 4.09 .

 

(f)             Cooperation .  Digimarc and DMRC shall cooperate and take any action reasonably requested by the other to document, confirm or facilitate the actions required by this Section 4.09 .

 

Section 4.10.          Non-Competition and Non-Solicitation .

 

(a)             Non-Competition by the DMRC Group.

 

(i)             Except as expressly contemplated by this Agreement or the Transaction Agreements, during the five (5)-year period immediately following the Distribution Date, the DMRC Group will not, directly or through another Person, in the United States or in any other geographical location in which Digimarc or the Digimarc Group is then doing business, own, manage, operate, control, participate in, invest in, lend money to, acquire or hold any investment in, or otherwise carry on, a business which is engaged in the licensing or sale of products, services, Intellectual Property or Technology related to driver licenses, passports, state or national identification cards, and government-issued credentials (for purposes of this Section 4.10(a) , a “ Competing Business ”).

 

(ii)            Notwithstanding the foregoing:

 

(A)           the ownership by any member of the DMRC Group of less than five percent (5%) of the outstanding shares of capital stock of any corporation engaged in a Competing Business listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a violation of Section 4.10(a)(i) ;

 

(B)            the DMRC Group may acquire control of an entity engaged in a Competing Business if such entity derived not more than ten percent (10%) of its revenues during its most recent fiscal year prior to acquisition by the DMRC Group from the Competing Business;

 

(C)            if any third party not a member of the DMRC Group as of the Distribution Date acquires, directly or indirectly, prior to the fifth (5th) anniversary of the Distribution Date, (1) beneficial ownership of fifty percent (50%) or more of the voting securities of DMRC, including by way of merger or any other business combination or (2) all or substantially all assets of DMRC, then, nothing in this Agreement shall: (x) be a limitation on any activities of such acquiring party or any entity directly or indirectly controlling, controlled by or under common control with such acquiring party (other than a DMRC Entity that is acquired and is subject to the

 

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provisions of this Agreement at the time of such acquisition) or (y) give rise to any obligation of DMRC with respect to the activities of such acquiring party or any entity directly or indirectly controlling, controlled by or under common control with such acquiring party (other than a DMRC Entity that is acquired and is subject to the provisions of this Agreement at the time of such acquisition); and

 

(D)           any Subsidiary or business sold or otherwise disposed of by any member of the DMRC Group shall no longer be subject to the provisions of this Agreement (and neither DMRC nor any other Person shall be subject to the provisions of this Agreement with respect to such Subsidiary or business); provided, that such Subsidiary or business (and DMRC with respect thereto) shall not be so released if any member of the DMRC Group retains a greater than twenty-five percent (25%) interest in such Subsidiary or business.

 

(b)            Non-Competition by the Digimarc Group.

 

(i)             Except as expressly contemplated by this Agreement or the Transaction Agreements, during the five (5)-year period immediately following the Distribution Date, the Digimarc Group will not, directly or through another Person, in the United States or in any other geographical location in which DMRC or the DMRC Group is then doing business, own, manage, operate, control, participate in, invest in, lend money to, acquire or hold any investment in, or otherwise carry on, a business which is engaged in the licensing or sale of products, services, Intellectual Property or Technology for digital watermarking, media fingerprinting (pattern recognition but not including biometric identifiers), digital rights management or other media management approaches (for purposes of this Section 4.10(b) , a “ Competing Business ”).

 

(ii)            Notwithstanding the foregoing:

 

(A)           the ownership by any member of the Digimarc Group of less than five percent (5%) of the outstanding shares of capital stock of any corporation engaged in a Competing Business listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a violation of Section 4.10(b)(i);

 

(B)            the Digimarc Group may acquire control of an entity engaged in a Competing Business if such derived not more than ten percent (10%) of its revenues during its most recent fiscal year prior to acquisition by the Digimarc Group from the Competing Business;

 

(C)            if any third party not a member of the Digimarc Group as of the Distribution Date acquires, directly or indirectly, prior to the fifth (5th) anniversary of the Distribution Date, (1) beneficial ownership of fifty percent (50%) or more of the voting securities of Digimarc, including by way of merger or any other business combination with Digimarc or (2) all or substantially all assets of Digimarc, then, nothing in this Agreement shall: (x) be a limitation on any activities of such

 

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acquiring party or any entity directly or indirectly controlling, controlled by or under common control with such acquiring party (other than a Digimarc Entity that is acquired and is subject to the provisions of this Agreement at the time of such acquisition) or (y) give rise to any obligation of Digimarc with respect to the activities of such acquiring party or any entity directly or indirectly controlling, controlled by or under common control with such acquiring party (other than a Digimarc Entity that is acquired and is subject to the provisions of this Agreement at the time of such acquisition); and

 

(D)           any Subsidiary or business sold or otherwise disposed of by any member of the Digimarc Group shall no longer be subject to the provisions of this Agreement (and neither Digimarc nor any other Person shall be subject to the provisions of this Agreement with respect to such Subsidiary or business); provided, that such Subsidiary or business (and Digimarc with respect thereto) shall not be so released if any member of the Digimarc Group retains a greater than twenty-five percent (25%) interest in such Subsidiary or business.

 

(c)            Non-Solicitation of Employees.

 

(i)             Except as expressly contemplated by this Agreement or the Transaction Agreements, during the five (5)-year period immediately following the Distribution Date, the DMRC Entities will not, on their own behalf or on behalf of any other Person, directly or indirectly, solicit or attempt to solicit for hire any person who is then an employee of the Digimarc Group; provided , however , that the prohibition against solicitation shall not apply to solicitations made to the general public (e.g., newspaper or similar advertisements) not specifically addressed to any such employee or solicitations by recruiting firms retained by the DMRC Group not specifically directed at the employees of the Digimarc Group.

 

(ii)            Except as expressly contemplated by this Agreement or the Transaction Agreements, during the five (5)-year period immediately following the Distribution Date, the Digimarc Group will not, on its own behalf or on behalf of any other Person, directly or indirectly, hire, engage, solicit or attempt to solicit for hire any person who is then an employee of the DMRC Group; provided , however , that the prohibition against solicitation shall not apply to solicitations made to the general public (e.g., newspaper or similar advertisements) not specifically addressed to any such employee or solicitations by recruiting firms retained by the Digimarc Group not specifically directed at the employees of the DMRC Group.

 

(d)            Non-Solicitation of Others.

 

(i)             Except as expressly contemplated by this Agreement or the Transaction Agreements, during the five (5)-year period immediately following the Distribution Date, the DMRC Entities will not, directly or through another Person, in any manner or capacity, (A) solicit or attempt to solicit any Person or entity who was a customer of the DMRC Group or the Digimarc Group during the eighteen (18) months immediately prior to the Distribution Date or who becomes a customer of the DMRC

 

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Group or the Digimarc Group during the term of the Transition Services Agreement, in each case, for the purposes of selling, marketing or engaging in any activity prohibited by Section 4.10(a) , or (B) solicit, request, advise or induce any supplier or other business contact of the Digimarc Group to cancel, curtail or otherwise adversely change its relationship with the Digimarc Group.

 

(ii)            Except as expressly contemplated by this Agreement or the Transaction Agreements, during the five (5)-year period immediately following the Distribution Date, the Digimarc Group will not, directly or through another Person, in any manner or capacity, (A) solicit or attempt to solicit any Person who was a customer of the DMRC Group or the Digimarc Group during the eighteen (18) months immediately prior to the Distribution Date or who becomes a customer of the DMRC Group or the Digimarc Group during the term of the Transition Services Agreement, in each case, for the purposes of selling, marketing or engaging in any activity prohibited by Section 4.10(b) , or (B) solicit, request, advise or induce any supplier or other business contact of the DMRC Group to cancel, curtail or otherwise adversely change its relationship with the DMRC Group.

 

Section 4.11.         Tax Matters .

 

(a)            Prorations .  Digimarc shall bear all property and ad valorem Tax liability and similar recurring Taxes payable with respect to the DMRC Assets for Tax years or periods ending on or prior to the Distribution Date.  All other property or ad valorem Tax obligations and similar recurring Taxes payable with respect to the DMRC Assets (including the Delayed Transfer Assets) for Tax years or periods beginning before, and ending after, the Distribution Date, shall be prorated between Digimarc and DMRC as of the Distribution Date based on the number of days in the Tax year or period.  Digimarc shall be responsible for the same proportion of such Taxes as the part of the year or period up to and including the Distribution Date bears to the whole of such Tax year or period.  DMRC shall be responsible for the same proportion of such Taxes as the part of the Tax year or period after the Distribution Date bears to the whole of such Tax year or period.  With respect to Taxes described in this Section 4.11(a) , Digimarc shall timely file all Tax Returns due before the Distribution Date with respect to such Taxes and DMRC shall prepare and timely file all Tax Returns due after the Distribution Date with respect to such Taxes.  If one Party remits to the appropriate taxing authority payment for Taxes, which are subject to proration under this Section 4.11(a)  and such payment includes the other Party’s share of such Taxes, such other party shall promptly reimburse the remitting Party for its share of such Taxes within ten (10) days by wire transfer of immediately available funds to an account designated by such remitting Party.

 

(b)            Income Tax Returns .  For U.S. federal and applicable state and local Income Tax purposes, Digimarc shall include on its Income Tax Returns for all Tax years or periods that include the Distribution all items of income, gain, loss, deduction, credit and other Income Tax items relating or attributable to DMRC and its Subsidiaries and Affiliates, the DMRC Assets and the Digital Watermarking Business through the Distribution Date.

 

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(c)            Cooperation on Tax Matters .  Digimarc and DMRC shall furnish or cause to be furnished to each other, as promptly as practicable, such information and assistance relating to the DMRC Assets and the DMRC Liabilities as is reasonably necessary for the preparation and filing of any Tax return, claim for refund or other filings relating to Tax matters, for the preparation for any Tax audit, for the preparation for any Tax protest, for the prosecution or defense of any suit or other proceeding relating to Tax matters.

 

(d)            Tax Treatment of the Transactions .  For U.S. federal and applicable state and local Income Tax purposes, the Parties intend that:

 

(i)             prior to the Distribution, each of DMRC and its Subsidiaries eligible to be disregarded as an entity separate from Digimarc for U.S. federal and applicable state and local Tax purposes under Treasury Regulations Section 301.7701-3 shall be so treated;

 

(ii)            the Distribution, the Offer and the Merger shall be treated as an integrated transaction in redemption and disposition of the shares of Digimarc Common Stock;

 

(iii)           the Distribution shall be treated as a distribution of all of the DMRC Assets, subject to the DMRC Liabilities, to holders of Digimarc Common Stock in redemption of a portion of their shares of Digimarc Common Stock, followed by a contribution by such holders of such DMRC Assets, subject to such DMRC Liabilities, to DMRC in exchange for a pro rata share of the DMRC Units (which DMRC intends to be classified as a partnership for U.S. and applicable state and local Income Tax purposes immediately after the exchange); and

 

(iv)           the DMRC Merger shall be treated as a contribution by DMRC of all of the DMRC Assets, subject to the DMRC Liabilities, to DMRC Sub in exchange for DMRC Sub Common Stock, followed by the distribution of such DMRC Sub Common Stock to the holders of Digimarc Common Stock in liquidation of DMRC.

 

Except as required as a result of a Final Determination, neither Digimarc, DMRC, nor their respective Subsidiaries or Affiliates, shall take any position inconsistent with the foregoing treatment.

 

(e)            Refunds .  Each of Digimarc and DMRC shall be entitled to any refund (and any interest thereon received from the applicable Tax authority) in respect of Taxes for which such party is responsible under this Agreement.  A party receiving a refund to which another party is entitled pursuant to this Section 4.11(e)  shall pay the amount, net of any Taxes or other costs incurred in connection with the receipt thereof, to which such other party is entitled promptly after receipt (whether in cash or as a credit or other offset against other current Taxes).  Any refunds in respect of Taxes pro-rated under Section 4.11(a)  shall be equitably apportioned between Digimarc and DMRC in a

 

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manner consistent with the principles underlying the allocation methodologies in Section 4.11(a) .

 

(f)             Distribution-Related Proceedings.

 

(i)             Digimarc shall notify DMRC in writing of any communication with respect to any pending or threatened Distribution-Related Proceeding no later than ten (10) Business Days after Digimarc or any of its Subsidiaries or Affiliates first receives written notice thereof.  Digimarc shall include with such notification a true, correct and complete copy of any written communication, and an accurate and complete written summary of any oral communication, received by Digimarc or any of its Subsidiaries or Affiliates.

 

(ii)            In the event of any Distribution-Related Proceeding (A) Digimarc shall consult with DMRC reasonably in advance of taking any significant action in connection with such proceeding, (B) Digimarc shall consult with DMRC and offer DMRC a reasonable opportunity to comment before submitting any written materials prepared or furnished in connection with such proceeding, (C) Digimarc shall defend such proceeding diligently and in good faith, (D) DMRC shall be entitled to participate in such proceeding with counsel of its own choosing and receive copies of any written materials relating to such proceeding received from the relevant Tax authority, and (E) Digimarc shall not settle, compromise or abandon any such proceeding without obtaining the prior written consent of DMRC, which consent shall not be unreasonably withheld or delayed.

 

(iii)           Notwithstanding anything to the contrary herein, in the event of a conflict between the procedures set forth in this Section 4.11(f)  and Section 5.04 , the provisions of this Section 4.11(f)  shall govern.

 

(g)            Section 336(e) Election .  Each of Digimarc and DMRC shall make a protective election pursuant to Section 336(e) of the Code (the “ Section 336(e) Election ”) with respect to the Distribution in the manner and form reasonably requested by DMRC and on any applicable Tax Return relating to the Distribution by attaching a statement (the “ Election Statement ”) to any such Tax Return explaining that in the event the Distribution is not treated for U.S. federal or applicable state and local Income Tax purposes as a distribution of the DMRC Assets (subject to the DMRC Liabilities) held by DMRC to the holders of Digimarc Common Stock, and instead is treated for U.S. federal or applicable state and local Income Tax purposes as a distribution of shares of stock in a corporation (the “ Distributed Corporation ”) to the holders of Digimarc Common Stock, such Party is making the Section 336(e) Election to treat the Distribution as a disposition of all of the assets held by the Distributed Corporation at the time of the Distribution.  The form of the Election Statement to be used by each Party in making the Section 336(e) Election on any applicable Tax Return shall be provided by DMRC; provided , however , such form shall reflect any reasonable comments made by Digimarc.

 

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Section 4.12.         No Representations or Warranties .  EXCEPT AS EXPRESSLY SET FORTH HEREIN: (A) NEITHER DIGIMARC NOR ANY OTHER PERSON MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE DMRC ASSETS OR THE DMRC LIABILITIES, ANY OF THE TRANSACTIONS (INCLUDING ANY CONSENTS OR APPROVALS REQUIRED IN CONNECTION THEREWITH) OR THE CONDITION OR PROSPECTS (FINANCIAL OR OTHERWISE) OF, OR ANY OTHER MATTER INVOLVING THE DMRC ASSETS OR DMRC LIABILITIES; (B) ALL OF THE DMRC ASSETS TO BE TRANSFERRED OR THE DMRC LIABILITIES TO BE ASSUMED OR TRANSFERRED IN ACCORDANCE WITH THIS AGREEMENT OR ANY OTHER TRANSACTION AGREEMENT SHALL BE TRANSFERRED OR ASSUMED ON AN “AS IS, WHERE IS” BASIS, AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE ARE HEREBY EXPRESSLY DISCLAIMED; AND (C) EXCEPT AS MAY BE EXPRESSLY SET FORTH IN ANY TRANSACTION AGREEMENT, NONE OF THE PARTIES HERETO OR ANY OTHER PERSON MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO ANY INFORMATION MADE AVAILABLE IN CONNECTION WITH THE RESTRUCTURING OR THE DISTRIBUTION.

 

Section 4.13.         Payment of Purchase Price Excess or Shortfall .  At the Closing, (a) if there is a Purchase Price Excess, DMRC Sub shall deliver to L-1 by wire transfer of immediately available funds an amount in cash equal to the Purchase Price Excess, and (b) if there is a Purchase Price Shortfall, Digimarc shall deliver to DMRC Sub by wire transfer of immediately available funds an amount in cash equal to the Purchase Price Shortfall.  For all relevant Tax purposes, the payment of the Purchase Price Excess or the Purchase Price Shortfall, as applicable, shall be deemed to be made immediately prior to the Distribution.

 

ARTICLE V

 

MUTUAL RELEASES; INDEMNIFICATION

 

Section 5.01.         Mutual Release of Pre-Closing Claims .

 

(a)            Except as provided in Section 5.01(c) , effective as of the Distribution Date, Digimarc shall, for itself and each other Digimarc Entity, release and forever discharge each DMRC Entity from any and all Liabilities whatsoever owing to any Digimarc Entity, whether at Law or in equity (including any right of contribution), whether arising under any Contract, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Distribution Date, whether or not known as of the Distribution Date, including in connection with the Transactions and all other activities to implement the Restructuring and the Distribution.

 

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(b)            Except as provided in Section 5.01(c) , effective as of the Distribution Date, DMRC shall, for itself and each DMRC Entity, release and forever discharge each Digimarc Entity from any and all Liabilities whatsoever owing to any DMRC Entity, whether at Law or in equity (including any right of contribution), whether arising under any Contract, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Distribution Date, whether or not known as of the Distribution Date, including in connection with the transactions and all other activities to implement the Restructuring and the Distribution.

 

(c)            Nothing contained in Sections 5.01(a)  or (b)  shall impair any right of any Person to enforce this Agreement, including, without limitation, the indemnification obligations set forth in Sections 5.02 and 5.03 , any other Transaction Agreement (including Section 6.13 of the Merger Agreement) or any Contract between any DMRC Entity and any Digimarc Entity that does not terminate as of the Distribution Date, in each case in accordance with its terms.  In addition, nothing contained in Sections 5.01(a)  or (b)  shall release any Person from:

 

(i)             any Liability provided in or resulting from any Contract between any DMRC Entity, on the one hand, and any Digimarc Entity, on the other hand, that does not terminate as of the Distribution Date;

 

(ii)            any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to any DMRC Entity or Digimarc Entity, as the case may be, in accordance with, or any other Liability of such Person under, this Agreement or any other Transaction Agreement;

 

(iii)           any Liability, the release of which would result in the release of any Person other than a Digimarc Entity or a DMRC Entity; provided that the Parties agree not to bring suit or permit any of their Subsidiaries to bring suit against any Person with respect to any Liability to the extent that such Person would be released with respect to such Liability by this Section 5.01 but for the provisions of this clause (iii);

 

(iv)           any Inter-Group Indebtedness due and owing to the Digimarc Group or the DMRC Group up to and through the Distribution Date; or

 

(v)            any Liability the Parties may have with respect to indemnification or contribution pursuant to any Transaction Agreement for Third Party Claims, which Liability shall be governed by the provisions of Article V and Article VI hereof and the applicable provisions of the Transaction Agreements, as applicable.

 

(d)            No Actions as to Released Claims .  DMRC agrees, for itself and as agent for each DMRC Entity, not to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against Digimarc or any Digimarc Entity, with respect to any Liabilities

 

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released pursuant to this Section 5.01 .  Digimarc agrees, for itself and as agent for each Digimarc Entity, not to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against DMRC or any other DMRC Entity, with respect to any Liabilities released pursuant to this Section 5.01 .

 

(e)            Further Instruments .  At any time, at the request of any other Party, each Party shall cause each other DMRC Entity or Digimarc Entity, as applicable, to execute and deliver releases reflecting the provisions of this Section 5.01 .

 

Section 5.02.         Indemnification by DMRC .  DMRC shall, and shall cause each other DMRC Entity to indemnify, defend (or, where applicable, pay the defense costs for) and hold harmless Digimarc Indemnitees from, against and in respect of:

 

(a)            the DMRC Liabilities;

 

(b)            Liabilities relating to, arising out of or resulting from the failure of any DMRC Entity or any other Person to pay, perform or otherwise promptly discharge any DMRC Liabilities in accordance with their terms;

 

(c)            Liabilities relating to, arising out of or resulting from any breach by DMRC or any DMRC Entity of this Agreement or any of the Transaction Agreements, except to the extent any Transaction Agreement contains an express provision with respect to the limitation of liability;

 

(d)            Liabilities relating to, arising out of or resulting from the failure by DMRC to perform in connection with any Delayed Transfer Asset or Delayed Transfer Liability held by Digimarc for DMRC’s benefit pursuant to Section 2.01(c) ; and

 

(e)            Liabilities relating to, arising out of or resulting from any breach of the covenants contained in Section 4.11 .

 

Section 5.03.          Indemnification by Digimarc .  Digimarc shall, and shall cause each other Digimarc Entity to indemnify, defend (or, where applicable, pay the defense costs for) and hold harmless the DMRC Indemnitees from, against and in respect of:

 

(a)            Liabilities relating to, arising out of or resulting from the operation of the Digimarc Group, other than the DMRC Liabilities;

 

(b)            Liabilities relating to, arising out of or resulting from the failure of any Digimarc Entity to pay, perform or otherwise promptly discharge all Liabilities of the Digimarc Group, other than the DMRC Liabilities, in accordance with their terms;

 

(c)            Liabilities relating to, arising out of or resulting from any breach by Digimarc or any Digimarc Entity of this Agreement or any of the Transaction Agreements, except to the extent any Transaction Agreement contains an express provision with respect to the limitation of liability;

 

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(d)            Liabilities relating to, arising out of or resulting from the failure by Digimarc to perform in connection with any Delayed Transfer Asset or Delayed Transfer Liability held by DMRC for Digimarc’s benefit pursuant to Section 2.01(c) ;

 

(e)            Liabilities relating to, arising out of or resulting from any breach of the covenants contained in Section 4.11 and

 

(f)             Liabilities relating to, arising out of or resulting from (i) Income Taxes of Digimarc and its Subsidiaries or Affiliates, and (ii) Separation Tax Liabilities.

 

Section 5.04.         Indemnification Procedures .

 

(a)            Notice of Claims .  An Indemnitee shall give written notice (a “ Notice of Claim ”) to the Indemnifying Party within twenty (20) Business Days after the Indemnitee has knowledge of any Third Party Claim which an Indemnitee has determined has given or could reasonably be expected to give rise to a right of indemnification under this Agreement.  No failure to give such Notice of Claim within the time period specified above shall affect the indemnification obligations of the Indemnifying Party hereunder, except to the extent the Indemnifying Party can demonstrate such failure actually prejudiced such Indemnifying Party’s ability to successfully defend the matter giving rise to the claim.  The Notice of Claim shall state the nature of the claim, the amount of the liability, if known, and the method of computation thereof, all with reasonable particularity and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises.

 

(b)            Third Party Claims .  The obligations and liabilities of an Indemnifying Party under this Article V with respect to Liabilities arising from claims of any third party that are subject to the indemnification provisions provided for in this Article V , but expressly excluding DMRC Litigation Matters and Digimarc Litigation Matters, which shall be governed by Article X (“ Third Party Claims ”) shall be governed by and contingent upon the following additional terms and conditions:

 

(i)             The Indemnitee at the time it gives a Notice of Claim to the Indemnifying Party of the Third Party Claim shall advise the Indemnifying Party that the Indemnifying Party shall be permitted, at its option, to assume and control the defense of such Third Party Claim at its expense and through counsel of its choice reasonably satisfactory to the Indemnitee if (A) it gives written notice of its intention to do so to the Indemnitee within twenty (20) days of its receipt of the Notice of Claim, (B) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief, (C) settlement of or an adverse judgment with respect to the Third Party Claim is not, in the good faith judgment of the Indemnitee, likely to establish a precedential custom or practice materially adverse to the continuing business interests or the reputation of the Indemnitee, and (D) the Indemnifying Party conducts the defense of the Third Party Claim actively and diligently.

 

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(ii)                                   In the event the Indemnifying Party exercises its right to undertake the defense against any such Third Party Claim in accordance with this Section 5.04 , the Indemnitee shall cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party all witnesses and Information in its possession or under its control relating thereto as is reasonably requested by the Indemnifying Party; provided , however , that if the defendants in any Action shall include both the Indemnitee and the Indemnifying Party and such Indemnitee shall have concluded in good faith that counsel selected by the Indemnifying Party has a conflict of interest because of the availability of different or additional defenses to such Indemnitee, such Indemnitee shall have the right to select separate counsel reasonably acceptable to the Indemnifying Party to participate in the defense of such Action on its behalf, at the expense of the Indemnifying Party; provided , further , that such Indemnifying Party shall not, in connection with any one such Action or separate but substantially similar or related Actions, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel).

 

(iii)                                Notwithstanding the foregoing, the Indemnitee, during the period the Indemnifying Party is determining whether to elect to assume the defense of a matter covered by this Section 5.04(b) , may take such reasonable actions, at the Indemnifying Party’s expense, as it deems necessary to preserve any and all rights with respect to the defense of such matter, without such actions being construed as a waiver of the Indemnitee’s rights to defense and indemnification pursuant to this Agreement.  In the event the Indemnitee is, directly or indirectly, conducting the defense against any such Third Party Claim, the Indemnifying Party (A) shall cooperate with the Indemnitee in such defense and make available to it all such witnesses and Information in its possession or under its control relating thereto as is reasonably requested by the Indemnitee and (B) may participate by its own counsel and at its own expense in the defense of such Third Party Claim.

 

(c)                                   Settlement Procedures .  Unless otherwise required by Law, in no event shall an Indemnitee admit any liability with respect to, or settle, compromise or discharge, any Third Party Claim without the Indemnifying Party’s prior written consent (such consent not to be unreasonably withheld or delayed); provided , however , that the Indemnitee shall have the right to settle, compromise or discharge such Third Party Claim without the consent of the Indemnifying Party if the Indemnitee releases the Indemnifying Party from its indemnification obligations hereunder with respect to such Third Party Claim and such settlement, compromise or discharge would not otherwise adversely affect the Indemnifying Party.  If the Indemnifying Party acknowledges in writing liability for a Third Party Claim (as between the Indemnifying Party and the Indemnitee), the Indemnifying Party shall be permitted to enter into, and the Indemnitee shall agree to, any settlement, compromise or discharge of such claim that the Indemnifying Party may recommend and that by its terms (i) obligates the Indemnifying Party to pay the full amount of the liability in connection with such claim and (ii) releases the Indemnitee completely in connection with such Third Party Claim and that would not otherwise adversely affect the Indemnitee; provided , further , that the Indemnifying Party

 

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shall not agree to any other settlement, compromise or discharge of a Third Party Claim not described above without the prior written consent of the Indemnitee (such consent not to be unreasonably withheld or delayed).

 

(d)                                  Direct Claims .  Any claim on account of a Liability that does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the Indemnifying Party.  Such Indemnifying Party shall have a period of thirty (30) days after the receipt of such notice within which to respond thereto.  If such Indemnifying Party does not respond within such thirty (30)-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment.  If such Indemnifying Party does not respond within such thirty (30)-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such party as contemplated by this Agreement and the other Transaction Agreements.

 

Section 5.05.                              Indemnification Obligations Net of Insurance Proceeds and Other Amounts .

 

(a)                                   The amount of any loss shall be:

 

(i)                                      increased (retroactively or prospectively) to take into account any cash net Tax cost actually incurred by an Indemnitee arising from any payments received from the Indemnifying Party (grossed up for such increase); and

 

(ii)                                   reduced (retroactively or prospectively) to take into account any cash net Tax benefit actually recognized by an Indemnitee arising from the incurrence or payment of any such loss.  In computing the amount of such Tax cost or Tax benefit, an Indemnitee shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt or accrual of any payment with respect to any such loss or the incurrence or payment of any such loss.  If an Indemnitee shall have received or accrued the payment required by this Agreement from an Indemnifying Party and shall subsequently actually recognize any cash net Tax benefit arising from the incurrence or payment of such loss, then such Indemnitee promptly shall pay to such Indemnifying Party a sum equal to the amount of such net Tax benefit, up to the aggregate amount of any payments received from such Indemnifying Party pursuant to this Agreement in respect of such loss.

 

(b)                                  To the extent that any Liability that is subject to indemnification under this Agreement is covered by insurance, the amount of any indemnity payment shall be reduced by the Net Proceeds of any insurance policy paid to the Indemnitee with respect to such Liability.  For purposes of this Section 5.05 , “ Net Proceeds ” shall mean the insurance proceeds actually received, less any actual, additional, or increased premium, deductibles, co-payments, other payment obligations (including attorneys’ fees and other costs of collection) or the present value of any future cost which is quantifiable with reasonable certainty, that relates to or arises from the making of the claim for indemnification.  If any Indemnitee recovers an amount from a third Person in respect of

 

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any Liability for which indemnification is provided in this Agreement after (i) the full amount of such indemnifiable Liability has been paid by an Indemnifying Party or (ii) after an Indemnifying Party has made a payment towards such indemnifiable Liability and the amount received from the third Person exceeds the remaining unpaid balance of such indemnifiable Liability, then the Indemnitee will promptly remit to the Indemnifying Party the excess (if any) of (i) the sum of the amount previously paid by such Indemnifying Party in respect of such indemnifiable Liability plus the amount received by such Indemnified Party from such third Person in respect of such indemnifiable Liability (after deducting any costs and expenses that have not yet been paid or reimbursed by the Indemnifying Party); minus (ii) the full amount of such indemnifiable Liability.

 

(c)                                   In no event shall an Indemnifying Party be liable for special, punitive, exemplary, incidental, consequential or indirect damages, or lost profits of an Indemnitee, whether based on contract, tort, strict liability, other Law or otherwise, provided such exclusion of damages shall not apply to claims for such damages made as part of a Third Party Claim.

 

(d)                                  An Indemnitee shall take all reasonable steps to mitigate a Liability upon becoming aware of any event, which could reasonably be expected to give rise to such Liabilities.  Liabilities shall be determined after taking into account any indemnity, contribution or other similar payment received by the Indemnitee from any third party with respect thereto.

 

Section 5.06.                              No Relief of Insurer Obligations .  An insurer or other third Person who would otherwise be obligated to defend or make payment for any Liability or in response to any claim shall not be relieved of the responsibility with respect thereto or, solely by virtue of the indemnification and contribution provisions hereof or have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a “windfall” (i.e., a benefit it would not be entitled to receive in the absence of the indemnification provisions hereof) by virtue of the indemnification provisions hereof.

 

Section 5.07.                              Subrogation .  In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third Party Claim.  Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right, defense or claim.

 

Section 5.08.                              Joint Defense and Cooperation .  With respect to any Third Party Claim in which both Digimarc and DMRC are, or reasonably may be expected to be, named as parties, or that otherwise implicates both Digimarc and DMRC in a material fashion, the Parties shall reasonably cooperate with respect to such Third Party Claim and

 

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if the Parties agree, maintain a joint defense in a manner that will preserve applicable privileges.

 

Section 5.09.                              Survival of Rights and Obligations .  The rights and obligations of each of Digimarc and DMRC and their respective Indemnitees under this Article V shall survive the distribution, sale or other transfer by any Party hereto of any Assets or businesses or the delegation or assignment by it of any Liabilities.

 

ARTICLE VI

INSURANCE

 

Section 6.01.                              Insurance Coverage; Cooperation .  All insurance policies of Digimarc shall constitute Assets of Digimarc and shall be retained by Digimarc and the other Digimarc Entities, together with all rights, benefits and privileges thereunder (including the right to receive any and all return premiums with respect thereto) to the extent coverage is continued by the insurers after the Distribution Date, except that DMRC will have the rights in respect of Insurance Policies to the extent described in Section 6.02 .  Each of Digimarc and DMRC shall use commercially reasonable efforts to share such Information as is reasonably necessary in order to permit the other to manage and conduct its insurance matters in an orderly fashion.  Each of Digimarc and DMRC, at the request of the other, shall use commercially reasonable efforts to cooperate with and assist the other in recoveries for claims made under any insurance policy for the benefit of any DMRC Entity or Digimarc Entity, as applicable, and neither Digimarc nor DMRC, nor any DMRC Entity or Digimarc Entity, as applicable, shall take any action which would be reasonably likely to jeopardize or otherwise interfere with the ability of any DMRC Entity or Digimarc Entity, as applicable, to collect any proceeds payable pursuant to any insurance policy.  Nothing in this Section 6.01 shall (a) preclude any DMRC Entity or Digimarc Entity from presenting any claim or exhausting any policy limit, (b) require any DMRC Entity or Digimarc Entity to pay any premium or other amount or to incur any Liability (except that Digimarc or the applicable Digimarc Entity shall be responsible for paying any additional insurance premiums arising from insurance company audits after the Effective Time) or (c) require any DMRC Entity or Digimarc Entity to renew, extend or continue any policy in force, other than as expressly set forth in any Transaction Agreement.

 

Section 6.02.                              Rights Under Insurance Policies .  Except as otherwise specified in this Article VI or any other Transaction Agreement, the DMRC Entities shall have no rights with respect to any insurance policies of Digimarc, except that DMRC will have the right to (i) assert claims and to resolve existing and pending claims under Insurance Policies for any loss, liability or damage arising out of insured incidents to the extent relating to the Digital Watermarking Business occurring from the date coverage thereunder first commenced until the Distribution Date and (ii) acquire all rights, privileges and proceeds of such Insurance Policies relating to the claims specified in clause (i); provided that, (A) all of Digimarc’s and each Digimarc Entity’s reasonable out-of-pocket costs and expenses, if any, incurred in connection with the foregoing shall

 

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be promptly paid by DMRC and (B) Digimarc and the Digimarc Entities may, at any time, without liability or obligation to any DMRC Entity, amend, commute, terminate, buy-out, extinguish liability under or otherwise modify any Insurance Policy (and such Insurance Policy shall be subject to any such amendments, commutations, terminations, buy-outs, extinguishments and modifications).  No Digimarc Entity shall bear any Liability for the failure of an insurer to pay any claim under any Insurance Policy.  Notwithstanding anything to the contrary herein, DMRC may at any time, and from time to time, inform Digimarc by written notice that it desires to terminate its rights to assert claims under any or all Insurance Policies, in which case DMRC’s rights to assert claims relating to DMRC Liabilities under such Insurance Policy or Insurance Policies shall terminate immediately.  In the case of any amendments, commutations, terminations, buy-outs, extinguishments and modifications of an Insurance Policy, Digimarc shall provide reasonable advance notice thereof to DMRC.

 

Section 6.03.                              DMRC Insurance Coverage After the Distribution Date .  From and after the Distribution Date, (a) DMRC, and DMRC alone, shall be responsible for obtaining and maintaining insurance programs for its risk of loss and (b) such insurance arrangements shall be separate and apart from Digimarc’s insurance programs.

 

Section 6.04.                              Responsibilities for Self-Insured Obligations and Other Obligations .

 

(a)                                      DMRC will reimburse Digimarc for DMRC’s pro rata share (based on the aggregate amount of proceeds received in respect of claims relating to DMRC Liabilities under such Insurance Policy by the DMRC Entities) of all amounts necessary to exhaust or otherwise satisfy all applicable self-insured retentions and DMRC’s pro rata share of all amounts for fronted policies, overages, deductibles and retrospective or prospective premium adjustments and similar amounts not covered by Insurance Policies.

 

(b)                                     Each of Digimarc and DMRC does hereby, for itself and each other Digimarc Entity and DMRC Entity, agree that all duties and obligations under any Insurance Policy, including the fulfillment of any conditions and the payment of any deductibles, retentions, co-insurance payment or retrospective premiums, that correspond in any way with or may be necessary to perfect, preserve or maintain an insured’s right to obtain benefits under that Insurance Policy, will be performed by the insured that is seeking the benefits under that Insurance Policy, subject to the indemnification provisions set forth herein.

 

Section 6.05.                              Claims Administration .  Digimarc or its designee shall be responsible for the claims administration with respect to claims of any Digimarc Entity under Insurance Policies.  DMRC or its designee shall be responsible for the claims administration with respect to claims of DMRC under Insurance Policies.

 

Section 6.06.                              Procedures Regarding Insufficient Limits of Liability .  In the event that there are insufficient limits of liability available under the Insurance Policies in effect prior to the Distribution Date to cover the Liabilities of the Digimarc Entities and/or the

 

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DMRC Entities that would otherwise be covered by such Insurance Policies, then no DMRC Entity shall be entitled to recovery for any claims under such Insurance Policies until the claims of all Digimarc Entities have been satisfied thereunder.  If any DMRC Entity has received proceeds under any such Insurance Policies, DMRC shall reimburse Digimarc all amounts to which any Digimarc Entity would have been entitled had its claim under such Insurance Policies arisen prior to any recovery thereunder by any DMRC Entity.

 

Section 6.07.                              Cooperation .  Digimarc and DMRC will use their commercially reasonable efforts to cooperate with each other and execute any additional documents which are reasonably necessary to effectuate the provisions of this Article VI .

 

Section 6.08.                              No Assignment or Waiver .  This Agreement shall not be considered as an attempted assignment of any rights or interest in violation of any policy of insurance or as a contract of insurance and shall not be construed to waive any right or remedy of any Digimarc Entity in respect of any Insurance Policy or any other Contract or policy of insurance.

 

Section 6.09.                              No Liability .  DMRC does hereby, for itself and as agent for each DMRC Entity, agree that no Digimarc Entity or any Digimarc Indemnitee shall have any Liability whatsoever as a result of the insurance policies and practices of Digimarc and its Subsidiaries as in effect at any time prior to the Distribution Date, including as a result of the level or scope of any such insurance, the creditworthiness of any insurance carrier, the terms and conditions of any policy or the adequacy or timeliness of any notice to any insurance carrier with respect to any claim or potential claim.

 

Section 6.10.                              No Restrictions .  Nothing in this Agreement shall be deemed to restrict any DMRC Entity from acquiring at its own expense any other insurance policy in respect of any Liabilities or covering any period.

 

Section 6.11.                              Further Agreements .  The Parties acknowledge that they intend to allocate financial obligations without violating any Laws regarding insurance, self-insurance or other financial responsibility.  If it is determined that any action undertaken pursuant to this Agreement or any other Transaction Agreement is violative of any insurance, self-insurance or related financial responsibility Law, the Parties agree to work together to do whatever is necessary to comply with such Law while trying to accomplish, to the greatest possible extent, the allocation of financial obligations as intended in this Agreement and any other Transaction Agreement.

 

Section 6.12.                              Insurance Proceeds .  Each of Digimarc and DMRC shall use its respective commercially reasonable efforts to collect any proceeds under its respective available and applicable third-party insurance policies to which it or any of its Subsidiaries is entitled prior to seeking indemnification or contribution under this Agreement, where allowed; provided , however , that any such actions by an Indemnitee will not relieve the Indemnifying Party of any of its obligations under this Agreement,

 

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including the Indemnifying Party’s obligation to pay directly or reimburse the Indemnitee for costs and expenses actually incurred by the Indemnitee.

 

ARTICLE VII

CONDITIONS TO THE SEPARATION

 

Section 7.01.                              Conditions to the Separation .  The obligations of Digimarc pursuant to this Agreement to effect the Separation shall be subject to the fulfillment (or waiver by Digimarc) at or prior to the Distribution Date of the following conditions.  In no event shall the Separation occur unless the following conditions shall have been satisfied or waived (to the extent permitted by applicable Law) by Digimarc:

 

(a)                                   each of the Transaction Agreements shall have been duly executed and delivered by the parties thereto;

 

(b)                                  each of the Transaction Agreements shall be in full force and effect and the parties thereto shall have performed or complied with all of their respective covenants, obligations and agreements contained herein and therein and as required to be performed or complied with prior to the Distribution Date;

 

(c)                                   all Consents or Governmental Approvals required to complete the Separation and set forth on Schedule 7.01(c)  shall have been received and be in full force and effect;

 

(d)                                  the Restructuring shall have been consummated in accordance with this Agreement;

 

(e)                                   all of the Offer Conditions shall have been satisfied or waived (other than those conditions to be satisfied on the Distribution Date);

 

(f)                                     the Form 10 shall have been filed with, and declared effective by, the SEC, and there shall be no stop-order in effect with respect thereto;

 

(g)                                  Digimarc shall have established the Record Date and shall have provided notice to the National Association of Securities Dealers no later than ten (10) days prior to the Record Date in compliance with Rule 10b-17 under the Exchange Act; and

 

(h)                                  all Inter-Group Indebtedness shall have been paid in full.

 

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ARTICLE VIII

FURTHER ASSURANCES AND ADDITIONAL COVENANTS

 

Section 8.01.           Further Assurances .

 

(a)                                   In addition to the actions specifically provided for elsewhere in this Agreement and the other Transaction Agreements but subject to the provisions hereof and thereof, each of the Parties shall use its reasonable efforts, prior to, on and after the Distribution Date, to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable Laws and Contracts to consummate and make effective the Transactions.

 

(b)                                  Without limiting the foregoing, prior to, on and after the Distribution Date, each Party shall cooperate with the other Party, and without any further consideration, to execute and deliver, or use its reasonable efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all consents, approvals or authorizations of, any Governmental Authority or any other Person under any License, Contract, indenture or other instrument (including any Consents or Governmental Approvals), and to take all such other actions as such Party may reasonably be requested to take by the other Party from time to time, consistent with the terms of this Agreement and the other Transaction Agreements, in order to effectuate the provisions and purposes of this Agreement, the other Transaction Agreements and the transfers of the DMRC Assets and the assignment and assumption of the DMRC Liabilities and the other transactions contemplated hereby and thereby.

 

(c)                                   On or prior to the Distribution Date, Digimarc and DMRC in their respective capacities as direct and indirect stockholders of their respective Subsidiaries, shall each ratify any actions that are reasonably necessary or desirable to be taken by Digimarc and DMRC or any of their respective Subsidiaries, to effectuate the transactions contemplated by this Agreement.

 

(d)                                  Following the Distribution Date, DMRC shall, and shall cause the DMRC Group to, deliver to the Digimarc Group, copies of any and all Information that is relevant to the operation of the Secure ID Business, to the extent such Information is stored in or part of any of the DMRC Assets.  In addition, following the Distribution Date, DMRC shall, and shall cause the DMRC Group to, deliver to the Digimarc Group, copies of any and all Information that is relevant to the historical operation of Digimarc as a holding company prior to the Distribution Date, to the extent such Information is stored in or part of any of the DMRC Assets.

 

Section 8.02.                              Name Change .

 

(a)                                   At or prior to the Effective Time, DMRC shall take such action necessary to change its corporate name to “Digimarc Corporation”.

 

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(b)                                  At or prior to the Effective Time, Digimarc shall take such action necessary to change its corporate name.

 

(c)                                   At or prior to the Effective Time, Digimarc shall take such action necessary to remove the term “Digimarc” from the names of each of its Subsidiaries.

 

Section 8.03.                              Use of Names .

 

(a)                                   Subject to the License Agreement, any material showing any affiliation or connection of Digimarc or any member of the Digimarc Group with DMRC or any member of the DMRC Group shall not be used by Digimarc or any member of the Digimarc Group after the Distribution Date, except that the restrictions contained in this Section 8.03(a)  shall not apply to filings, reports and other documents required by applicable Law or regulations of securities exchanges to be filed and/or made publicly available.  On and after the Distribution Date, neither Digimarc nor any of Digimarc’s Subsidiaries shall represent to third parties that any of them is affiliated or connected with DMRC or any member of the DMRC Group.

 

(b)                                  Any material showing any affiliation or connection of DMRC or any member of the DMRC Group with Digimarc or any member of the Digimarc Group shall not be used by DMRC or any member of the DMRC Group after the Distribution Date, except that the restrictions contained in this Section 8.03(b)  shall not apply to filings, reports and other documents required by applicable Law or regulations of securities exchanges to be filed and/or made publicly available.  On and after the Distribution Date, neither DMRC nor any other member of the DMRC Group shall represent to third parties that any of them is affiliated or connected with Digimarc or any member of the Digimarc Group.

 

Section 8.04.                              Licenses .  Each Party shall cause the appropriate members of its Group to prepare and file with the appropriate Governmental Authority applications for the transfer or issuance, as may be necessary or advisable in connection with the transactions contemplated by this Agreement and the other Transaction Agreements, to its Group of all material Licenses required for the members of its Group to operate its business after the Distribution Date. The members of the DMRC Group and the members of the Digimarc Group shall cooperate and use all commercially reasonable efforts to secure the transfer or issuance of such Licenses.

 

Section 8.05.                              Notices to Third Parties .  In addition to the actions described in Section 8.04 , the members of the Digimarc Group and the members of the DMRC Group shall use commercially reasonable efforts to make all other filings and give notice to and obtain consents from all third parties that may be required to consummate the transactions contemplated by this Agreement and the other Transaction Agreements.

 

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ARTICLE IX

TERMINATION

 

Section 9.01.                              Termination .  Notwithstanding any provision hereof, this Agreement may be terminated by Digimarc and the Separation may be abandoned prior to the Distribution Date at any time following termination of the Merger Agreement in accordance with its terms.

 

Section 9.02.                              Effect of Termination .  In the event of any termination of this Agreement prior to the Distribution Date pursuant to Section 9.01 , no Party to this Agreement (or any of its Representatives) shall have any Liability or further obligation to any other Party or third party with respect to this Agreement, except as provided in the Merger Agreement.

 

ARTICLE X

LEGAL MATTERS

 

Section 10.01.                        Control of Legal Matters .

 

(a)                                   On or prior to the Distribution Date, DMRC shall assume control of each of the DMRC Litigation Matters, and, to the extent any member of the Digimarc Group is a defendant in such DMRC Litigation Matter, DMRC shall use its commercially reasonable efforts to have DMRC or a member of the DMRC Group substituted for such member of the Digimarc Group named as a defendant in such DMRC Litigation Matter; provided , however , that DMRC shall not be required to make any such effort if the removal of any member of the Digimarc Group would jeopardize insurance coverage or rights to indemnification from third parties applicable to such DMRC Litigation Matters.

 

(b)                                  On or prior to the Distribution Date, Digimarc shall assume control of each of the Digimarc Litigation Matters, and, to the extent any member of the DMRC Group is a defendant in such Digimarc Litigation Matter, Digimarc shall use its commercially reasonable efforts to have Digimarc or a member of the Digimarc Group substituted for such member of the DMRC Group named as a defendant in such Digimarc Litigation Matter; provided , however , that Digimarc shall not be required to make any such effort if the removal of any member of the DMRC Group would jeopardize insurance coverage or rights to indemnification from third parties applicable to such Digimarc Litigation Matters.

 

(c)                                   Except (i) as provided in Sections 10.01(a)  and 10.01(b)  and (ii) for any claims for which a Notice of Claim has been delivered under Section 5.04(b) , after the Distribution Date, the Parties agree that with respect to all demands, claims or Actions commenced after the Distribution Date against any one or more of DMRC, Digimarc or any or their Affiliates relating to events that take place before, on or after the Distribution Date, such demands, claims or Actions shall be controlled by:

 

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(i)                                      DMRC, if such claim, demand or Action relates (A) solely to the DMRC Assets, the DMRC Liabilities or the Digital Watermarking Business (other than any such claim, demand or Action relating to IDMarc Software or IDMarc Source Code licensed to L-1 Identity Solutions Operating Company and its Affiliates pursuant to the License Agreement), (B) a claim, demand or Action arises from or relates to the Form 10, the Schedule 14D-9 or any other document filed with any Governmental Authority (including the SEC) by DMRC or Digimarc in connection with the Restructuring, the Separation or the Distribution or (C) a claim, demand or Action is brought by or on behalf of the current or former stockholders of DMRC or Digimarc and relates to the Restructuring, the Separation or the Distribution (the matters in clauses (A) through (C) being “ Future DMRC Litigation Matters ”), and DMRC shall use its commercially reasonable efforts to have a member of the DMRC Group substituted for any member of the Digimarc Group that may be named as a defendant in such Future DMRC Litigation Matter; provided , however , that DMRC shall not be required to make any such effort if the removal of any member of the Digimarc Group would jeopardize insurance coverage or rights to indemnification from third parties applicable to such Future DMRC Litigation Matter;

 

(ii)                                   Digimarc, if such claim, demand or Action relates solely to Assets retained by Digimarc, the Secure ID Business or IDMarc Software or IDMarc Source Code licensed to L-1 Identity Solutions Operating Company and its Affiliates pursuant to the License Agreement (a “ Future ID Litigation Matter ”), and Digimarc shall use its commercially reasonable efforts to have a member of the Digimarc Group substituted for any member of the DMRC Group that may be named as a defendant in such Future ID Litigation Matter; provided , however , that Digimarc shall not be required to make any such effort if the removal of any member of the DMRC Group would jeopardize insurance coverage or rights to indemnification from third parties applicable to such Future ID Litigation Matter; and

 

(iii)                                except as provided in subparagraphs (i) or (ii) above, or as may be otherwise agreed by Digimarc and DMRC, Digimarc and DMRC jointly if a claim, demand or Action is brought by any person against DMRC, Digimarc and/or any of their Affiliates with respect to both the DMRC Assets, the DMRC Liabilities or the Digital Watermarking Business, on the one hand, and the Assets retained by Digimarc or the Secure ID Business, on the other hand (a “ Future Joint Litigation Matter ”); provided , however , that neither Party may settle a Future Joint Litigation Matter without the prior written consent of the other Party or its Affiliates named or involved in such Future Joint Litigation Matter, which consent shall not be unreasonably withheld or delayed; provided, further, that either Party or its Affiliates may settle a Future Joint Litigation matter, at its sole discretion and expense, if such settlement is for money only and provides a full release from any Liability under such Future Joint Litigation Matter for the other Party and, as applicable, the other and its Affiliates.

 

(d)                                  To the extent the party named in an Action described in this Section 10.01 is not substituted for as described in Sections 10.01(a) , 10.01(b) , 10.01(c)(i)  or 10.01(c)(ii)  by a member of the Group which has assumed control of such

 

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Action pursuant to this Section 10.01 , the Parties agree to cooperate in defending against such Action and, subject to Section 4.01 , to provide each other with access to all Information relating to such Action except to the extent providing such access and such Information would prejudice an indemnification claim available to such Parties as contemplated in Article V .

 

Section 10.02.                        Claims Against Third Parties .  Claims, demands and Actions by DMRC or any of its Subsidiaries against third parties, and any proceeds or other benefits that may be received as a result of such claims, demands or Actions and any Liabilities arising out of or resulting from such claims, demands or Actions, that are (a) DMRC Claims shall be the property of DMRC, (b) Digimarc Claims shall be the property of Digimarc, and (c) Joint Claims shall be the property of, and shall be shared by, DMRC and Digimarc in proportion to their respective interests.

 

Section 10.03.                        Notice to Third Parties; Service of Process; Cooperation .

 

(a)                                     Each of DMRC and Digimarc shall, and shall cause their respective Affiliates to, promptly notify their respective agents for service of process and all other necessary parties, including plaintiffs and courts, of the Separation and shall provide instructions for proper service of legal process and other documents.

 

(b)                                    DMRC and Digimarc shall, and shall cause their respective Affiliates to, use their commercially reasonable efforts to deliver to each other any legal process or other documents incorrectly served upon them or their agents as soon as possible following receipt.

 

Section 10.04.                        IDMarc Software .  Digimarc hereby represents and warrants that: (a) except as set forth on Schedule 10.04 (Claims), none of Digimarc or its Subsidiaries has received any written notice of any claim or threatened claim that any of the IDMarc Software or IDMarc Source Code infringes or constitutes or results from the misappropriation of any Intellectual Property of any third Person and (b) none of Digimarc or its Subsidiaries has entered into any agreement granting any third Person any right to use, commercialize or otherwise exploit any of the IDMarc Software and IDMarc Source Code outside of the Secure ID Business.

 

ARTICLE XI

GENERAL PROVISIONS

 

Section 11.01.                        Entire Agreement; No Third-Party Beneficiaries .  This Agreement (together with the other Transaction Agreements, the exhibits and the schedules and the other documents delivered pursuant to this Agreement) constitutes the entire agreement, and supersedes all prior agreements and understandings, both written and oral, among the Parties with respect to the subject matter hereof and, except for the provisions of Sections 5.02 and 5.03 , is not intended to confer upon any Person other than the Parties any rights or remedies hereunder.  Notwithstanding the foregoing, in the event that the

 

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provisions of this Agreement conflict with the provisions of the Merger Agreement, the Merger Agreement shall prevail.

 

Section 11.02.                        Expenses .  Except as expressly set forth herein or in the Merger Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such cost and expense.

 

Section 11.03.                        Governing Law; Jurisdiction; Waiver of Jury Trial .

 

(a)                                   This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, applicable to contracts executed in and to be performed entirely within that State.

 

(b)                                  All actions and proceedings arising out of this Agreement shall be heard and determined in the Chancery Court of the State of Delaware or any federal court sitting in the State of Delaware, and the Parties hereby irrevocably submit to the exclusive jurisdiction of such courts (and, in the case of appeals, appropriate appellate courts therefrom) in any such action or proceeding and irrevocably waive the defense of an inconvenient forum to the maintenance of any such action or proceeding.  Each party hereby consents to process being served in any such action or proceeding by the mailing of a copy thereof to the address set forth in Section 11.04 hereof and agrees that such service upon receipt shall constitute good and sufficient service of process or notice thereof.  The consents to jurisdiction set forth in this paragraph shall not constitute general consents to service of process in the State of Delaware and shall have no effect for any purpose except as provided in this paragraph and shall not be deemed to confer rights on any Person other than the Parties.  The Parties agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by applicable Law.

 

(c)                                   EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION BETWEEN THE PARTIES HERETO DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY.

 

Section 11.04.                        Notices .  All notices, requests and other communications to any party hereunder shall be in writing and shall be deemed given if delivered personally, facsimiled (which is confirmed), sent by email (with a return receipt) or sent by overnight courier (providing proof of delivery) to the parties at the following addresses:

 

(a)

 

if to Digimarc or any Digimarc Entity prior to the Distribution Date, to:

 

 

 

 

 

9405 SW Gemini Drive

 

 

Beaverton, OR 97008

 

 

Attention: Robert Chamness

 

 

Facsimile:  (503) 469-4771

 

 

Email:   Robert.Chamness@digimarc.com

 

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with a copy (which shall not constitute notice) to:

 

 

 

 

 

Perkins Coie LLP

 

 

1120 N.W. Couch St.

 

 

Tenth Floor

 

 

Portland, OR 97209

 

 

Attention: Roy W. Tucker and John R. Thomas

 

 

Facsimile:  (503) 727-2222

 

 

Email:

rtucker@perkinscoie.com

 

 

 

jrthomas@perkinscoie.com

 

 

 

(b)

 

if to DMRC or any DMRC Entity, to:

 

 

 

 

 

9405 SW Gemini Drive

 

 

Beaverton, OR 97008

 

 

Attention: Robert Chamness

 

 

Facsimile:  (503) 469-4771

 

 

Email:   Robert.Chamness@digimarc.com

 

 

 

 

 

with a copy (which shall not constitute notice) to:

 

 

 

 

 

Perkins Coie LLP

 

 

1120 N.W. Couch St.

 

 

Tenth Floor

 

 

Portland, OR 97209

 

 

Attention: Roy W. Tucker and John R. Thomas

 

 

Facsimile:  (503) 727-2222

 

 

Email:

rtucker@perkinscoie.com

 

 

 

jrthomas@perkinscoie.com

 

 

 

(c)

 

if to L-1, Digimarc or any Digimarc Entity on or after the Distribution Date, to:

 

 

 

 

 

177 Broad Street

 

 

Stamford, CT 06901

 

 

Attention: Mark Molina

 

 

Facsimile: (203) 504-1104

 

 

Email: mmolina@L1ID.com

 

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with a copy (which shall not constitute notice) to:

 

 

 

 

 

Weil, Gotshal & Manges LLP

 

 

767 Fifth Avenue

 

 

New York, New York 10153

 

 

Facsimile:  (212) 310-8007

 

 

Attention:  Marita A. Makinen

 

 

 

 

 

and to:

 

 

 

 

 

Weil, Gotshal & Manges LLP

 

 

201 Redwood Shores Parkway

 

 

Redwood Shores, CA 94065

 

 

Facsimile:  (650) 802-3100

 

 

Attention:  Kyle Krpata

 

or such other addresses or facsimile number as such Party may hereafter specify by like notice to the other Parties.  All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a Business Day in the place of receipt.  Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt.

 

Section 11.05.                        Counterparts .  This Agreement may be executed in one or more counterparts, all of which will be considered one and the same agreement and will become effective when one or more counterparts have been signed by each Party and delivered to the other Party, it being understood that each Party need not sign the same counterpart.

 

Section 11.06.                        Assignment .  Except as set forth in any other Transaction Agreement, neither this Agreement nor any of the rights, interests or obligations under this Agreement will be assigned, in whole or in part, by operation of Law or otherwise, by either of the Parties without the prior written consent of the other Party, except (a) for assignments in connection with the acquisition of beneficial ownership of fifty percent (50%) or more of the voting securities of such Party, including by way of merger or any other business combination, or the sale of all or substantially all assets of such Party, and (b) that either Party may assign any or all of its rights, interests or obligations under this Agreement to any one or more of its direct or indirect wholly owned Subsidiaries or DMRC Subsidiaries; provided that no such assignment will relieve the assigning Party from any of its obligations under this Agreement.  Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by Digimarc and DMRC and their respective successors and assigns.

 

Section 11.07.                        Enforcement .  The Parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached.  It is accordingly agreed that the Parties will be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement.

 

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Section 11.08.                        Severability .  If any term or other provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other terms, provisions and conditions of this Agreement shall nevertheless remain in full force and effect.  Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable Law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.

 

Section 11.09.                        Headings .  Headings of the Articles and Sections of this Agreement and the Transaction Agreements are for convenience of the Parties only and will be given no substantive or interpretive effect whatsoever.

 

Section 11.10.                        Attorneys’ Fees .  If any Action at Law or equity, including an Action for declaratory relief, is brought to enforce or interpret any provision of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys’ fees and expenses from the other party, which fees and expenses shall be in addition to any other relief which may be awarded.

 

Section 11.11.                        Amendment .  This Agreement and the Transaction Agreements may not be waived, amended or modified in any respect unless such waiver, amendment or modification is in writing and signed on behalf of the Parties or thereto, and such waiver, amendment or modification is approved as provided in the Merger Agreement.

 

Section 11.12.                        Limited Liability .  Notwithstanding any other provision of this Agreement, no stockholder or Representative of DMRC or Digimarc, in its capacity as such, shall have any liability in respect of or relating to the covenants or obligations of such Party under this Agreement or in respect of any certificate delivered with respect hereto or thereto and, to the fullest extent legally permissible, each of DMRC and Digimarc, for itself and its stockholders, directors, officers and Affiliates, waives and agrees not to seek to assert or enforce any such liability that any such Person otherwise might have pursuant to applicable Law.

 

Section 11.13.                        Interpretation .  Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires.  The terms “hereof,” “herein,” and “herewith” and words of similar import herein (or in any Transaction Agreement) shall, unless otherwise stated, be construed to refer to this Agreement (or the applicable other Transaction Agreement) taken as a whole (including all of the schedules and exhibits hereto and thereto) and not to any particular provision of this Agreement (or such other Transaction Agreement).  Article, Section, Exhibit and Schedule references are to the Articles, Sections, Exhibits and Schedules to this Agreement (or the applicable other Transaction Agreement) unless otherwise specified.  The word “including” and words of similar import when used in this Agreement (or the applicable other Transaction Agreement) means “including, without limitation,” unless the context otherwise requires or unless otherwise specified.  Unless

 

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expressly stated to the contrary in this Agreement or in any other Transaction Agreement, all references to “the date hereof,” “the date of this Agreement,” “hereby” and “hereupon” and words of similar import shall all be references to July [    ], 2008 (or the date of which the relevant Transaction Agreement is first entered into, as the case may be) regardless of any amendment or restatement hereof (or thereof).  The Parties have participated jointly in the negotiation and drafting of this Agreement, and in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties, and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any provisions of this Agreement.

 

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

 

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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above.

 

 

 

DIGIMARC CORPORATION

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

 

 

 

 

DMRC LLC

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

 

 

 

 

DMRC CORPORATION

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

 

 

 

 

L-1 IDENTITY SOLUTIONS, INC, solely
for the purposes of Section 3.02. Section 
4.09(b)(iii) and Section 4.13

 

 

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

[SIGNATURE PAGE TO SEPARATION AGREEMENT]

 




Exhibit 3.2

 

BYLAWS

 

OF

 

DMRC CORPORATION

 

Incorporated under the Laws of the State of Delaware

 

As of June 18, 2008

 

ARTICLE I

OFFICES

 

SECTION 1.1 Principal Delaware Office . The registered office of the Corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle.

 

SECTION 1.2 Other Offices . The Corporation may also have offices in such other places, either within or without the State of Delaware, as the Board of Directors from time to time may designate or the business of the Corporation may from time to time require.

 

ARTICLE II

STOCKHOLDERS

 

SECTION 2.1 Meetings of Stockholders .

 

(a)  Annual Meetings . The annual meeting of the stockholders of the Corporation shall be held on such date and at such time as may be fixed by resolution of the Board of Directors. At the annual meeting stockholders shall elect directors and transact such other business as properly may be brought before the meeting.

 

(b)  Special Meetings . Special meetings of the stockholders may be called only by the Chairman of the Board, the Secretary or the Board of Directors pursuant to a resolution approved by a majority of the total number of directors which the Corporation would have if there were no vacancies or unfilled newly created directorships (the “Whole Board”).

 

(c)  Place of Meetings . Meetings of the stockholders shall be held at such place, if any, either within or without the State of Delaware, as the Board of Directors shall determine. The Board of Directors may, at its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as provided under the General Corporation Law of the State of Delaware (the “DGCL”).

 

(d)  Notice of Meeting . Written notice, stating the place, day and hour of the meeting, and the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, shall be delivered by the Corporation, unless otherwise required by the Certificate of Incorporation (the “Certificate of Incorporation”) or applicable law, not less than ten (10) days nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting. Notice of a special meeting shall also state the purpose or purposes for which the meeting has been called. Without limiting the manner by which notice may otherwise be given, notice may be given by a form of electronic transmission that satisfies the requirements of the DGCL and

 



 

has been consented to by the stockholder to whom notice is given. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at his or her address as it appears in the Corporation’s records. An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the Corporation that the notice has been given by personal delivery, by mail, or by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.  Meetings may be held without notice if all stockholders entitled to vote are present, except when a stockholder attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened, or if notice is waived by those not present in accordance with Article VIII of these Bylaws. Any previously scheduled meeting of the stockholders may be postponed, and any special meeting of the stockholders may be cancelled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting (or any supplement thereto).

 

(e)  Conduct of Business . The Chairman of the Board, or in the Chairman’s absence, the Chief Executive Officer, or in the absence of the Chief Executive Officer, the Secretary, or in the absence of the Secretary, the Executive Vice President, or in the absence of the Executive Vice President, a chairman chosen by a majority of the directors present, shall act as chairman of the meetings of the stockholders.  The Board of Directors shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting and matters which are to be voted on by ballot.

 

SECTION 2.2 Quorum of Stockholders; Adjournment; Required Vote .

 

(a)  Quorum of Stockholders; Adjournment . Except as otherwise provided by law, by the Certificate of Incorporation or by these Bylaws, the holders of a majority of the voting power of the outstanding shares of the Corporation entitled to vote generally in the election of directors (the “Voting Stock”), present in person or represented by proxy, shall constitute a quorum at a meeting of the stockholders, except that when specified business is to be voted on by a class or series of stock voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. The chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is such a quorum. No notice of the time and place of adjourned meetings need be given, except that notice of the adjourned meeting shall be required if the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

 

(b)  Required Vote . The affirmative vote of a majority of the voting power of the shares present in person or represented by proxy at the meeting and entitled to vote on the matter shall be the act of the stockholders, except as otherwise provided by express provision of law, the Certificate of Incorporation or these Bylaws requiring a larger or different vote, in which case such express provision shall govern and

 

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control the decision of such matter.

 

SECTION 2.3 Voting by Stockholders; Procedures for Election of Directors .  Each stockholder of record entitled to vote at any meeting may do so in person or by proxy appointed by instrument in writing or in such other manner prescribed by the DGCL, subscribed by such stockholder or his or her duly authorized attorney in fact.  The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of the stockholders, in such officer’s discretion, may require that any votes cast at such meeting shall be cast by written ballot.  Subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, a plurality of the votes cast shall elect directors.

 

SECTION 2.4 Notice of Stockholder Business and Nominations.

 

(a)  Annual Meetings of Stockholders . (1) Nominations of persons for election to the Board of Directors and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation’s notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who (i) was a stockholder of record at the time of giving of notice provided for in this Bylaw and at the time of the annual meeting, (ii) is entitled to vote at the meeting and (iii) complies with the notice procedures set forth in this Bylaw as to such business or nomination.  Clause (c) shall be the exclusive means for a stockholder to make nominations or submit other business (other than matters properly brought under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and included in the Corporation’s notice of meeting) before an annual meeting of stockholders.

 

(2) Without qualification, for any nominations or any other business to be properly brought before an annual meeting by a stockholder pursuant to Section 2.4(a)(1)(c) of this Bylaw, the stockholder must have given timely notice thereof in writing to the Secretary and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day and not later than the close of business on the 90th day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to the date of such annual meeting and not later than the close of business on the later of the 90th day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period for the giving of a stockholder’s notice as described above. To be in proper form, a stockholder’s notice (whether given pursuant to this Section 2.4(a)(2) or Section 2.4(b) to the Secretary must: (a) set forth, as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, if any, (ii) (A) the class or series and number of shares of the Corporation which are, directly or indirectly, owned beneficially and of record by such stockholder and such beneficial owner, (B) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of capital stock of the Corporation or otherwise (a “Derivative Instrument”) directly or indirectly owned beneficially by such stockholder and any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of shares of the Corporation, (C) any proxy, contract, arrangement, understanding, or relationship

 

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pursuant to which such stockholder has a right to vote any shares of any security of the Company, (D) any short interest in any security of the Company (for purposes of this Bylaw a person shall be deemed to have a short interest in a security if such person directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has the opportunity to profit or share in any profit derived from any decrease in the value of the subject security), (E) any rights to dividends on the shares of the Corporation owned beneficially by such stockholder that are separated or separable from the underlying shares of the Corporation, (F) any proportionate interest in shares of the Corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which such stockholder is a general partner or, directly or indirectly, beneficially owns an interest in a general partner and (G) any performance-related fees (other than an asset-based fee) that such stockholder is entitled to based on any increase or decrease in the value of shares of the Corporation or Derivative Instruments, if any, as of the date of such notice, including without limitation any such interests held by members of such stockholder’s immediate family sharing the same household (which information shall be supplemented by such stockholder and beneficial owner, if any, not later than 10 days after the record date for the meeting to disclose such ownership as of the record date), and (iii) any other information relating to such stockholder and beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder; (b) if the notice relates to any business other than a nomination of a director or directors that the stockholder proposes to bring before the meeting, set forth (i) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest of such stockholder and beneficial owner, if any, in such business and (ii) a description of all agreements, arrangements and understandings between such stockholder and beneficial owner, if any, and any other person or persons (including their names) in connection with the proposal of such business by such stockholder; (c) set forth, as to each person, if any, whom the stockholder proposes to nominate for election or reelection to the Board of Directors (i) all information relating to such person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected) and (ii) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among such stockholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand, including, without limitation all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any affiliate or associate thereof or person acting in concert therewith, were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such registrant; and (d) with respect to each nominee for election or reelection to the Board of Directors, include a completed and signed questionnaire, representation and agreement required by Section 2.5. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as an independent director of the Corporation or that could be material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such nominee.

 

(3) Notwithstanding anything in the second sentence of Section 2.4(a)(2) of this Bylaw to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the preceding

 

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year’s annual meeting, a stockholder’s notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation.

 

(b)  Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who (i) is a stockholder of record at the time of giving of notice provided for in this Bylaw and at the time of the special meeting, (ii) is entitled to vote at the meeting, and (iii) complies with the notice procedures set forth in this Bylaw as to such nomination. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by Section 2.4(a)(2) of this Bylaw with respect to any nomination (including the completed and signed questionnaire, representation and agreement required by Section 2.5) shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day prior to the date of such special meeting and not later than the close of business on the later of the 90th day prior to the date of such special meeting or, if the first public announcement of the date of such special meeting is less than 100 days prior to the date of such special meeting, the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall any adjournment or postponement of a special meeting or the announcement thereof commence a new time period for the giving of a stockholder’s notice as described above.

 

(c)  General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Bylaw shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Bylaw. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Bylaw and, if any proposed nomination or business is not in compliance with this Bylaw, to declare that such defective proposal or nomination shall be disregarded.

 

(2) For purposes of this Bylaw, “public announcement” shall mean disclosure in a press release reported by a national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act and the rules and regulations promulgated thereunder.

 

(3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw; provided, however, that any references in these Bylaws to the Exchange Act or the rules promulgated thereunder are not intended to and shall not limit the requirements applicable to nominations or proposals as to any other business to be considered pursuant to Section 2.4(a)(1)(c) or Section 2.4(b) of this Bylaw.  Nothing in this Bylaw shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

 

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SECTION 2.5 Submission of Questionnaire, Representation and Agreement.  To be eligible to be a nominee for election or reelection as a director of the Corporation, a person must deliver (in accordance with the time periods prescribed for delivery of notice under Section 2.4 of this Bylaw) to the Secretary at the principal executive offices of the Corporation a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the Secretary upon written request) and a written representation and agreement (in the form provided by the Secretary upon written request) that such person (A) is not and will not become a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the Corporation or (2) any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a director of the Corporation, with such person’s fiduciary duties under applicable law, (B) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, and (D) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director of the Corporation, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation.

 

ARTICLE III

BOARD OF DIRECTORS

 

SECTION 3.1 General Powers . The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws required to be exercised or done by the stockholders.

 

SECTION 3.2 Number, Tenure and Qualifications . Subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, the number of directors of the Corporation shall be fixed, and may be increased or decreased from time to time, exclusively by resolution approved by the affirmative vote of a majority of the Whole Board. The Board of Directors shall be elected by the stockholders at their annual meeting, and each director shall be elected to serve for the term of one year and until his successor shall be elected and qualified or until his earlier resignation or removal. Directors may, but need not, be stockholders.

 

SECTION 3.3 Regular Meetings . A regular meeting of the Board of Directors may be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of stockholders. The Board of Directors may, by resolution, provide the time and place for the holding of additional regular meetings without other notice than such resolution.

 

SECTION 3.4 Special Meetings . Special meetings of the Board of Directors may be called at the request of the Chairman of the Board, the Chief Executive Officer, the Secretary or a majority of the Board of Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of the meetings. Notice of any special meeting shall be given to each director and shall state the time and place for the special meeting.

 

SECTION 3.5 Notice . If notice of a Board of Directors meeting is required to be given, notice shall be given to each director at his or her business or residence in writing by hand delivery, first-class or

 

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overnight mail or courier service, electronic transmission (including, without limitation, via facsimile transmission or electronic mail), or orally by telephone. If mailed by first-class mail, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, no later than the third business day preceding the date of such meeting. If by overnight mail or courier service, such notice shall be deemed adequately delivered when the notice is delivered to the overnight mail or courier service company at least forty-eight (48) hours before such meeting. If by electronic transmission, such notice shall be deemed adequately delivered when the notice is transmitted at least twenty-four (24) hours before such meeting. If by telephone or by hand delivery, the notice shall be given at least twenty-four (24) hours prior to the time set for the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting, except for amendments to these Bylaws, as provided under Article IX of these Bylaws. A meeting may be held at any time without notice if all the directors are present, except when a director attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened, or if those not present waive notice of the meeting in accordance with Article VIII of these Bylaws.

 

SECTION 3.6 Quorum . Subject to Section 3.10 of these Bylaws, a number of directors equal to at least a majority of the Whole Board shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

 

SECTION 3.7 Use of Communications Equipment . Directors may participate in a meeting of the Board of Directors or any committee thereof by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

 

SECTION 3.8 Action by Consent of Board of Directors . Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee.

 

SECTION 3.9 Resignation and Removal .

 

(a)  Resignation :  Any director may resign at any time by delivering his or her written resignation to the Secretary.  Such resignation shall take effect at the time therein specified or, if no time is specified, immediately; and, unless otherwise specified in such notice, the acceptance of such resignation shall not be necessary to make it effective.

 

(b)  Removal :  Subject to the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, any director, or the entire Board of Directors, may be removed from office at any time, with or without cause but only by the affirmativ e vote of the holders of a majority of the voting power of all of the then-outstanding shares of Voting Stock, voting together as a single class.

 

SECTION 3.10 Vacancies . Subject to applicable law and the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, or by the sole remaining director, and directors so

 

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chosen shall hold office until the next annual meeting of stockholders and until such director’s successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Whole Board shall shorten the term of any incumbent director.

 

SECTION 3.11 Committees . The Board of Directors may designate one or more committees, each of which shall consist of one or more directors. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

 

Any committee shall, to the extent provided in a resolution of the Board of Directors and subject to the limitations contained in the DGCL, have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall keep such records and report to the Board of Directors in such manner as the Board of Directors may from time to time determine. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business. Unless otherwise provided in a resolution of the Board of Directors or in rules adopted by the committee, each committee shall conduct its business as nearly as possible in the same manner as provided in these Bylaws for the Board of Directors.

 

The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to dissolve any such committee. The term of office of the members of each committee shall be as fixed from time to time by the Board of Directors; provided , however , that any committee member who ceases to be a member of the Board of Directors shall automatically cease to be a committee member. Nothing herein shall be deemed to prevent the Board of Directors from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided , however , that no such committee shall have or may exercise any authority of the Board of Directors.

 

ARTICLE IV

BOOKS AND RECORDS

 

The Board of Directors shall cause to be kept a record containing the minutes of the proceedings of the meetings of the Board of Directors and of the stockholders, appropriate stock books and registers and such books of records and accounts as may be necessary for the proper conduct of the business of the Corporation. Unless otherwise required by the laws of Delaware, the books and records of the Corporation may be kept at the principal office of the Corporation, or at any other place or places inside or outside the State of Delaware, as the Board of Directors from time to time may designate.

 

ARTICLE V

OFFICERS

 

SECTION 5.1 Officers; Election or Appointment . The Board of Directors shall take such action as may be necessary from time to time to ensure that the Corporation has such officers as are necessary, under Section 6.1 of these Bylaws and the DGCL as currently in effect or as the same may hereafter be amended, to enable it to sign stock certificates. In addition, the Board of Directors at any time and from time to time may elect (a) one or more Chairmen of the Board and/or one or more Vice Chairmen of the Board from among its members, (b) one or more Chief Executive Officers, one or more Chief Financial Officers, one or more Chief Legal Officers, one or more Presidents and/or one or more Chief Operating Officers, (c) one or more Vice Presidents or Executive Vice Presidents, one or more Treasurers and/or one or more Secretaries and/or (d) one or more other officers, in each case if and to the extent the Board

 

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of Directors deems desirable. Any number of offices may be held by the same person and directors may hold any office unless the Certificate of Incorporation or these Bylaws otherwise provide.

 

SECTION 5.2 Term of Office; Resignation; Removal; Vacancies . Unless otherwise provided in the resolution of the Board of Directors electing or authorizing the appointment of any officer, each officer shall hold office until his or her successor is elected or appointed and qualified or until his or her earlier resignation or removal. Any officer may resign at any time by giving notice in writing or by electronic transmission to the Board of Directors or to such person or persons as the Board of Directors may designate; provided , however , that if such notice is given by electronic transmission, such electronic transmission must either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by the officer. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. The Board of Directors may remove any officer with or without cause at any time. The Chairman of the Board or the Chief Executive Officer authorized by the Board of Directors to appoint a person to hold an office of the Corporation may also remove such person from such office with or without cause at any time, unless otherwise provided in the resolution of the Board providing such authorization. Any such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation, but the election or appointment of an officer shall not of itself create contractual rights. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board of Directors at any regular or special meeting or by the Chairman of the Board or the Chief Executive Officer authorized by the Board of Directors to appoint a person to hold such office.

 

SECTION 5.3 Powers and Duties . The officers of the Corporation shall have such powers and duties in the management of the Corporation as shall be stated in these Bylaws or in a resolution of the Board of Directors which is not inconsistent with these Bylaws and, to the extent not so stated, as generally pertain to their respective offices, subject to the control of the Board of Directors and as are necessary to conduct customary management and operation of the Corporation. A Secretary or such other officer appointed to do so by the Board of Directors shall have the duty to record the proceedings of the meetings of the stockholders, the Board of Directors and any committees in a book to be kept for that purpose.

 

(a)  Duties of the Chairman of the Board of Directors : The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors.  In the absence of the Chairman of the Board, the Chairman of the Nominating and Corporate Governance Committee shall so preside.  Unless otherwise specifically determined by the Board of Directors or otherwise required by law, the Chairman of the Board shall possess the same power as the Chief Executive Officer to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors.  The Chairman of the Board of Directors shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time.  The Chairman of the Board shall be responsible, in consultation with the Chief Executive Officer, for setting an agenda for each meeting of the Board of Directors.

 

(b)  Duties of the Chief Executive Officer :   Subject to the control of the Board of Directors and such supervisory powers, if any, as may be given by the Board of Directors, the powers and duties of the Chief Executive Officer of the Corporation are:

 

(i) To act as the general manager and, subject to the control of the Board of Directors, to have general supervision, direction and control of the business and affairs of the Corporation;

 

(ii) To call meetings of the stockholders to be held at such times and, subject to the limitations prescribed by law or by these Bylaws, at such places as he or she shall deem proper; and

 

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(iii) To affix the signature of the Corporation to all deeds, conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board of Directors; to sign certificates for shares of stock of the Corporation; and, subject to the direction of the Board of Directors, to have general charge of the property of the Corporation and to supervise and direct all officers, agents and employees of the Corporation.

 

The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors shall designate another officer to be the Chief Executive Officer.  If there is no President, and the Board of Directors has not designated any other officer to be the Chief Executive Officer, then the Chairman of the Board shall be the Chief Executive Officer.

 

(c)  Duties of the President :   The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors shall have designated another officer as the Chief Executive Officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, and subject to the supervisory powers of the Chief Executive Officer (if the Chief Executive Officer is an officer other than the President), and subject to such supervisory powers and authority as may be given by the Board of Directors to the Chairman of the Board, and/or to any other officer, the President shall have the responsibility for the general management and the control of the business and affairs of the Corporation and the general supervision and direction of all of the officers, employees and agents of the Corporation (other than the Chief Executive Officer, if the Chief Executive Officer is an officer other than the President) and shall perform all duties and have all powers that are prescribed from time to time by the Board of Directors.

 

(d)  Duties of the Vice Presidents : Each Vice President, Senior or Executive Vice President shall have the duties and authority assigned by the Chief Executive Officer or the Board of Directors.

 

(e)  Duties of the Chief Financial Officer : The Chief Financial Officer shall be the principal financial and accounting officer of the Corporation. The Chief Financial Officer shall have general direction of and supervision over the financial and accounting affairs of the Corporation.  The Chief Legal Officer shall render to the Chief Executive Officer and the Board of Directors, at regular meetings of the Board of Directors, or whenever they may require it, an account of the financial condition of the corporation. The Chief Financial Officer shall have such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or the Chief Executive Officer.

 

(f)  Duties of the Chief Legal Officer : The Chief Legal Officer shall be the principal legal officer of the Corporation. The Chief Legal Officer shall have general direction of and supervision over the legal affairs of the Corporation and shall advise the Board of Directors and officers of the Corporation on all legal matters. The Chief Legal Officer shall have such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or the Chief Executive Officer.

 

(g)  Duties of the Secretary : The Secretary shall attend all meetings of the Board of Directors and any committee thereof and all meetings of stockholders and shall record all votes and minutes from all proceedings in a book to be kept for that purpose. The Secretary shall keep in safe custody the seal of the Corporation (if any) and, when authorized by the Board, affix the same to any instrument requiring it, and when so affixed, it shall be attested by the Secretary’s signature or by the signature of the Treasurer or an Assistant Secretary; provided, however, that the affixing of the seal of the Corporation to any document or instrument specifically shall not be required in order for such document or instrument to be binding on or the official act of the Corporation, and the signature of any authorized officer, without the seal of the Corporation, shall be sufficient for such purposes.  The Secretary shall perform such other duties and have such other authorities as are prescribed from time to time by the Board of Directors or the Chief

 

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Executive Officer.  The Chief Executive Officer may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer shall prescribe from time to time.

 

(h)  Duties of the Treasurer : The Treasurer shall be responsible for the care and custody of all funds and other financial assets, taxes, corporate debt, order entry and sales invoicing including credit memos, credit and collection of accounts receivable, cash receipts, and the banking and insurance functions of the Corporation.

 

ARTICLE VI

STOCK CERTIFICATES

 

SECTION 6.1 Stock Certificates . The Board of Directors may authorize the issuance of stock either in certificated or in uncertificated form. If shares are issued in uncertificated form, each stockholder shall be entitled upon written request to a stock certificate or certificates duly numbered, certifying the number and class of shares in the Corporation owned by him and otherwise as specified in this Section 6.1. Each certificate for shares of stock shall be in such form as may be prescribed by the Board of Directors and shall be signed in the name of the Corporation by (a) the Chairman of the Board, the Chief Executive Officer or a Vice President, and (b) by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Each certificate will include any legends required by law or deemed necessary or advisable by the Board.

 

SECTION 6.2 Lost Certificates . No certificate for shares of stock in the Corporation shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the Corporation of a bond of indemnity in such amount, upon such terms and secured by such surety, as the Board of Directors or any financial officer of the Corporation may in its or his or her discretion require.

 

SECTION 6.3 Transfers of Stock . The shares of the stock of the Corporation shall be transferable on the books of the Corporation by the holder thereof in a person or by his or her attorney upon surrender for cancellation of a certificate or certificates for at least the same number of shares, or other evidence of ownership if no certificates shall have been issued, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, and with such proof of the validity and authenticity of the signature as the Corporation or its agents may reasonably require.

 

ARTICLE VII

EXECUTION OF CORPORATE INSTRUMENTS

 

SECTION 7.1 Corporate Instruments . The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the Corporation.

 

SECTION 7.2 Depositaries and Checks .  Depositaries of the funds of the Corporation shall be designated by the Board of Directors; and all checks on such funds shall be signed by such officers or other employees of the Corporation as the Board of Directors from time to time may designate.

 

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ARTICLE VIII

WAIVER OF NOTICE

 

Any notice of a meeting required to be given by law, by the Certificate of Incorporation, or by these Bylaws may be waived by the person entitled thereto either in a writing signed by such person or by electronic transmission, either before or after the time of such meeting stated in such notice. If such a waiver is given by electronic transmission, the electronic transmission must either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by such person . Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders or the Board of Directors or committee thereof need be specified in any waiver of notice of such meeting.

 

ARTICLE IX

EMERGENCY BYLAWS

 

The Board of Directors may adopt, either before or during an emergency, as that term is defined by the DGCL, any emergency Bylaws permitted by the DGCL, which shall be operative only during such emergency. In the event the Board of Directors does not adopt any such emergency Bylaws, the special rules provided in the DGCL shall be applicable during an emergency as therein defined.

 

ARTICLE X

AMENDMENT

 

These Bylaws may be altered, amended, or repealed at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change was given in the notice of the meeting;   provided ,   however , that, in the case of any alteration, amendment or repeal by the Board of Directors, the affirmative vote of a majority of the Whole Board shall be required to alter, amend or repeal any provision of these Bylaws; and   provided further , that, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by the Certificate of Incorporation, in the case of any alteration, amendment or repeal by the stockholders of any of the provisions of these Bylaws, the affirmative vote of the holders of not less than 66 2 / 3 % of the voting power of all of the then-outstanding shares of Voting Stock, considered for purposes of this Article X as a single class, shall be required to alter, amend or repeal any such provision.

 

ARTICLE XI

INDEMNIFICATION AND INSURANCE

 

SECTION 11.1 Power to Indemnify in Actions, Suits or Proceedings other than Those by or in the Right of the Corporation . Subject to Section 11.3 of this Article XI, the Corporation shall indemnify, to the fullest extent authorized or permitted by law, as now or hereafter in effect, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter, a “Proceeding”) (other than an action by or in the right of the Corporation), by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (collectively, “Another Enterprise”), against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation,

 

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and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person’s conduct was unlawful.

 

SECTION 11.2 Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation . Subject to Section 11.3 of this Article XI, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of Another Enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

 

SECTION 11.3 Authorization of Indemnification . Any indemnification under this Article XI (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case following the final disposition of any Proceeding and upon a determination that indemnification of the present or former director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 11.1 or Section 11.2 of this Article XI, as the case may be. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (i) by a majority vote of the directors who are not parties to such Proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (iv) by the stockholders. Such determination shall be made, with respect to former directors and officers, by any person or persons having the authority to act on the matter on behalf of the Corporation. To the extent, however, that a present or former director or officer of the Corporation has been successful on the merits or otherwise in defense of any action Proceeding described above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case.

 

SECTION 11.4 Indemnification by a Court . Notwithstanding any contrary determination in the specific case under Section 11.3 of this Article XI, and notwithstanding the absence of any determination thereunder, any director or officer may apply to the Court of Chancery of the State of Delaware or any other court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Section 11.1 or Section 11.2 of this Article XI and for advancement of expenses to the extent otherwise permissible under Section 11.5 of this Article XI. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 11.1 or Section 11.2 of this Article XI, as the case may be. Neither a contrary determination in the specific case under Section 11.3 of this Article XI nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met

 

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any applicable standard of conduct. Notice of any application for indemnification or advancement of expenses pursuant to this Section 11.4 shall be given to the Corporation promptly upon the filing of such application. If successful in whole or in part in any suit brought pursuant to this Section 11.4 of this Arrticle XI, or in a suit brought by the Corporation to recover an advancement of expenses (whether pursuant to the terms of an undertaking or otherwise), the person seeking to enforce a right to indemnification or an advancement of expenses hereunder or the person from whom the Corporation sought to recover an advancement of expenses, as the case may be, shall be entitled to be paid by the Corporation the reasonable expenses (including attorneys’ fees) of prosecuting or defending such suit.

 

SECTION 11.5 Expenses Payable in Advance . Expenses (including attorneys’ fees) incurred by a director or officer in defending any Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article XI. Such expenses (including attorneys’ fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate.

 

SECTION 11.6 Nonexclusivity of Indemnification and Advancement of Expenses . The indemnification and advancement of expenses provided by, or granted pursuant to, this Article XI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, these Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Section 11.1 and Section 11.2 of this Article XI shall be made to the fullest extent permitted by law. The provisions of this Article XI shall not be deemed to preclude the indemnification of any person who is not specified in Section 11.1 or Section 11.2 of this Article XI but whom the Corporation has the power or obligation to indemnify under the provisions of the DGCL, or otherwise.

 

SECTION 11.7 Insurance . The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of Another Enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article XI.

 

SECTION 11.8 Survival of Indemnification and Advancement of Expenses . The indemnification and advancement of expenses provided by, or granted pursuant to, this Article XI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.

 

SECTION 11.9 Limitation on Indemnification . Notwithstanding anything contained in this Article XI to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 11.4 of this Article XI), the Corporation shall not be obligated to indemnify any director or officer (or his or her heirs, executors or personal or legal representatives) or advance expenses in connection with prosecuting a Proceeding (or part thereof) initiated by such person, whether initiated in such person’s capacity as a director or officer or in any other capacity, or in defending any counterclaim, cross-claim, affirmative defense, or like claim of the Corporation in such Proceeding (or part thereof), unless such Proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation.

 

SECTION 11.10 Indemnification of Employees and Agents . The Corporation may, to the extent

 

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authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article XI to directors and officers of the Corporation.

 

SECTION 11.11 Amendments . The rights to indemnification and advancement of expenses conferred upon any current or former director or officer of the Corporation pursuant to this Article XI (whether by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee, or agent of Another Enterprise) shall be contract rights, shall vest when such person becomes a director or officer of the Corporation, and shall continue as vested contract rights even if such person ceases to be a director or officer of the Corporation.  Any amendment, repeal, or modification of, or adoption of any provision inconsistent with, this Article XI (or any provision hereof) shall not adversely affect any right to indemnification or advancement of expenses granted to any person pursuant hereto with respect to any act or omission of such person occurring prior to the time of such amendment, repeal, modification, or adoption (regardless of whether the Proceeding relating to such acts or omissions, or any proceeding relating to such person’s rights to indemnification or to advancement of expenses, is commenced before or after the time of such amendment, repeal, modification, or adoption), and any such amendment, repeal, modification, or adoption that would adversely affect such person’s rights to indemnification or advancement of expenses hereunder shall be ineffective as to such person, except with respect to any Proceeding that relates to or arises from (and only to the extent such Proceeding relates to or arises from) any act or omission of such person occurring after the effective time of such amendment, repeal, modification, or adoption.

 

ARTICLE XII

MISCELLANEOUS PROVISIONS

 

SECTION 12.1 Fiscal Year . The fiscal year of the Corporation shall begin on the first (1 st ) day of January and end on the thirty-first (31 st ) day of December of each year.

 

SECTION 12.2 Corporate Seal .  The Corporation may adopt a corporate seal which, if adopted, shall have inscribed thereon the name of the Corporation, the year of its organization and the words “Corporate Seal, Delaware.”  The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

 

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Exhibit 10.1

 

TRANSITION SERVICES AGREEMENT

 

THIS TRANSITION SERVICES AGREEMENT, dated as of July     , 2008, but effective pursuant to Article  VII (this “ Agreement ”), is by and between Digimarc Corporation, a Delaware corporation (“ Digimarc ”), and DMRC Corporation (“ DMRC ”), a Delaware corporation and wholly owned subsidiary of DMRC LLC, a Delaware limited liability company (“ DMRC LLC ”).  Digimarc and DMRC are individually referred to herein as a “ Party ” and collectively as the “ Parties .”  Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Separation Agreement (as defined below).

 

WHEREAS, Digimarc entered into an Agreement and Plan of Merger, dated as of March 23, 2008 (the “ Original Merger Agreement ”), by and among Digimarc, L-1 Identity Solutions, Inc., a Delaware corporation (“ L-1 ”), and Dolomite Acquisition Co., a Delaware corporation and wholly owned subsidiary of L-1 (“ Merger Sub ”), pursuant to which Digimarc would merge with and into Merger Sub, with Digimarc continuing as a wholly owned subsidiary of L-1;

 

WHEREAS, Digimarc, L-1 and Merger Sub have entered into an Amended and Restated Agreement and Plan of Merger, dated as of June 29, 2008 (the “ Merger Agreement ”), which provides, among other things, for the Offer and the Merger;

 

WHEREAS, the Parties have entered into a Separation Agreement, dated as of the date hereof (the “ Separation Agreement ”), pursuant to which (i) Digimarc will transfer or cause to be transferred to DMRC LLC, all of the DMRC Assets, which represent all assets used primarily in the operation of the Digital Watermarking Business, and all of the DMRC Liabilities, (ii) subject to Section 3.04 of the Separation Agreement, all of the limited liability company interests of DMRC LLC will be distributed on a pro rata basis to the holders as of the Record Date of Digimarc Common Stock (the “ Spin-Off ”), and (iii) immediately following the Spin-Off, DMRC LLC will merge with and into DMRC, with DMRC continuing as the surviving corporation (the “ DMRC Merger ”);

 

WHEREAS, this Agreement, the Separation Agreement, and the License Agreement between Digimarc and DMRC, dated as of the date hereof (collectively, the “ Transaction Agreements ”) set forth certain transactions that are conditions to the completion of the Offer and the Merger; and

 

WHEREAS, Digimarc and one or more of the Digimarc Subsidiaries or Affiliates (collectively, the “ Digimarc Group ”), on the one hand, and DMRC and one or more of the DMRC Subsidiaries (collectively, the “ DMRC Group ”), on the other hand, will provide certain services (the “ Services ”) to each other in accordance with the terms and subject to the conditions set forth herein for a period described herein on and after the Distribution Date in order to assist in the separation and transition of the Digital Watermarking Business and the continued operation and transition of the Secure ID Business.

 

NOW, THEREFORE, in consideration of the covenants and agreements set forth in this

 



 

Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound hereby, agree as follows:

 

ARTICLE I

 

SERVICES

 

Section 1.1.             Services Provided by the Parties .  In order to continue the operation of the Secure ID Business and to facilitate the orderly and effective transition of the Digital Watermarking Business from Digimarc to DMRC and to assist in the continued operation and transition of the Secure ID Business, the DMRC Group and the Digimarc Group each shall provide to the other the Services set forth in Sections 1.2 and 1.3 , respectively (collectively, the “ Services ”).

 

Section 1.2.             Services Provided by the DMRC Group to the Digimarc Group .  The DMRC Group shall provide the Digimarc Group, to the extent such Services may be requested by the Digimarc Group from time to time for the term of this Agreement, the following Services set forth in this Section 1.2 (“ DMRC Services ”).  Any additional services to be provided by the DMRC Group but not specifically detailed in the schedules to this Section 1.2 (collectively, the “ DMRC Services Schedules ”), or any change in the fees to be charged from those set forth on any DMRC Services Schedule, shall be mutually agreed upon by the Parties as an amendment to the applicable schedule.

 

1.2.1         Accounting and Tax Services . The DMRC Group shall provide each of the accounting and tax services specified in Schedule 1.2.1 (the “ DMRC Accounting and Tax Services ”) to the Digimarc Group, in accordance with the terms and conditions for such DMRC Accounting and Tax Services, and at the applicable rates, fees and charges associated with such DMRC Accounting and Tax Services, as set forth on Schedule 1.2.1 .

 

1.2.2         Information Technology Services . The DMRC Group shall provide each of the information technology services specified in Schedule 1.2.2 (the “ DMRC IT Services ”) to the Digimarc Group, in accordance with the terms and conditions for such DMRC IT Services, and at the applicable rates, fees and charges associated with such DMRC IT Services, as set forth on Schedule 1.2.2 .

 

1.2.3         Legal Services . The DMRC Group shall provide each of the legal services specified in Schedule 1.2.3 (the “ DMRC Legal Services ”) to the Digimarc Group, in accordance with the terms and conditions for such DMRC Legal Services, and at the applicable rates, fees and charges associated with such DMRC Legal Services, as set forth on Schedule 1.2.3 .

 

1.2.4         Human Resources Services . The DMRC Group shall provide each of the human resources services specified in Schedule 1.2.4 (the “ DMRC Human Resources Services ”) to the Digimarc Group, in accordance with the terms and conditions for such DMRC Human Resources Services, and at the applicable rates, fees and charges associated with such DMRC Human Resources Services, as set forth on Schedule 1.2.4 .

 

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1.2.5         Other Services . To the extent fees for a specific DMRC Service to be provided to the Digimarc Group are not set forth in Schedule 1.2.1 through Schedule 1.2.4 , then the DMRC Group shall provide such additional Service in accordance with the terms and conditions listed on Schedule 1.2.5 .

 

Section 1.3.             Services Provided by Digimarc Group to the DMRC Group .  The Digimarc Group shall provide the DMRC Group, to the extent such Services may be requested by the DMRC Group from time to time for the term of this Agreement, the following Services set forth in this Section 1.3 (“ Digimarc Services ”).  Any additional services to be provided by the Digimarc Group but not specifically detailed in the schedules to this Section 1.3 (collectively, the “ Digimarc Services Schedules ”), or any change in the fees to be charged from those set forth on any Digimarc Services Schedule, shall be mutually agreed upon by the Parties as an amendment to the applicable schedule.

 

1.3.1         Accounting and Tax Services . The Digimarc Group shall provide each of the accounting and tax services specified in Schedule 1.3.1 (the “ Digimarc Accounting and Tax Services ”) to the DMRC Group, in accordance with the terms and conditions for such Digimarc Accounting and Tax Services, and at the applicable rates, fees and charges associated with such Digimarc Accounting and Tax Services, as set forth on Schedule 1.3.1 .

 

1.3.2         Information Technology Services . The Digimarc Group shall provide each of the information technology services specified in Schedule 1.3.2 (the “ Digimarc IT Services ”) to the DMRC Group, in accordance with the terms and conditions for such Digimarc IT Services, and at the applicable rates, fees and charges associated with such Digimarc IT Services, as set forth on Schedule 1.3.2 .

 

1.3.3         Legal Services . The Digimarc Group shall provide each of the legal services specified in Schedule 1.3.3 (the “ Digimarc Legal Services ”) to the DMRC Group, in accordance with the terms and conditions for such Digimarc Legal Services, and at the applicable rates, fees and charges associated with such Digimarc Legal Services, as set forth on Schedule 1.3.3 .

 

1.3.4         Human Resources Services . The Digimarc Group shall provide each of the human resources services specified in Schedule 1.3.4 (the “ Digimarc Human Resources Services ”) to the DMRC Group, in accordance with the terms and conditions for such Digimarc Human Resources Services, and at the applicable rates, fees and charges associated with such Digimarc Human Resources Services, as set forth on Schedule 1.3.4 .

 

1.3.5         Other Services . To the extent fees for a specific Digimarc Service to be provided to the DMRC Group are not set forth in Schedule 1.3.1 through Schedule 1.3.4 , then the Digimarc Group shall provide such additional Service in accordance with the terms and conditions listed on Schedule 1.3.5 .

 

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ARTICLE II

 

PERFORMANCE OF SERVICES

 

Section 2.1.             Manner of Performance .  Each of the Parties agrees that it shall provide the Services being requested herein with the degree of care, skill, confidentiality and diligence consistent with its current practices, but in no event less than in conformance with industry standards.  Each Party shall ensure that its personnel providing services hereunder, shall devote sufficient time and effort as reasonably required to perform the Services.  If a dispute arises over the nature or quality of the Services, the prior practice of Digimarc with respect to the Services shall be conclusive as to the nature and quality of the Services.

 

Section 2.2.             Provision of Information .  Any data, information, equipment or general directions necessary for the Digimarc Group or DMRC Group to perform the Services shall be provided to the Party performing the Services in a timely manner.

 

Section 2.3.             Termination of any Service .  The termination of any one or more of the specific Services shall have no impact on the Digimarc Group’s or the DMRC Group’s obligation to continue to provide any other Services.

 

Section 2.4.             Laws and Regulations .  The Parties agree that they will provide and use the Services contemplated hereunder only in accordance with all applicable federal, state and local laws and regulations, and in accordance with the conditions, rules, regulations and specifications which may be set forth in any manuals, materials, documents or instructions provided to the Party performing such Services on or prior to the date of this Agreement.

 

Section 2.5.             Modification of Service Levels .  Prior to the end of the first calendar month following the Distribution Date and prior to the end of each calendar month thereafter, the Parties will review the Services provided to discuss whether the Services will continue during, or terminate, the next immediately succeeding month.  Each Party will notify the other in writing of the termination of any Services pursuant to Article VIII .

 

Section 2.6.             No Representations or Warranties .

 

2.6.1.        THE PARTIES MAKE NO EXPRESS REPRESENTATIONS OR WARRANTIES EXCEPT THOSE EXPRESSLY STATED IN THIS AGREEMENT OR THE SCHEDULES HERETO.

 

2.6.2.        EXCEPT FOR THOSE EXPRESSLY STATED IN THIS AGREEMENT OR THE SCHEDULES HERETO, EACH PARTY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, REPRESENTATIONS AND CONDITIONS OF ANY KIND, WHETHER EXPRESS OR IMPLIED, TO THE FULL EXTENT PERMISSIBLE, INCLUDING, BUT NOT LIMITED TO, AVAILABILITY, ACCURACY, COMPLETENESS, CORRECTNESS, RELIABILITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE OR NON-INFRINGEMENT WITH RESPECT TO THE SERVICES, GOODS OR PRODUCTS FURNISHED IN CONNECTION HEREWITH.

 

Section 2.7.             Employees; Use of Subcontractors . The Parties shall employ and retain the

 

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employees necessary to enable the provider to perform the Services under the terms of this Agreement.  If either Party is unable to retain one or more employees necessary to provide or perform the Services for which the Party is obligated under this Agreement, each of the Parties may hire or engage one or more subcontractors to perform one or more of its Services; provided , that each of the Parties will in all cases remain responsible for its respective obligations under this Agreement, including, without limitation, with respect to the scope of the Services, the standard for Services and the content of the Services provided.  Under no circumstances will DMRC be responsible for making any payments directly to any subcontractor engaged by Digimarc, nor will Digimarc be responsible for making any payments directly to any subcontractor engaged by DMRC.

 

ARTICLE III

 

CHARGES FOR SERVICES

 

From and after the date of this Agreement and throughout the term of this Agreement, DMRC agrees to pay to Digimarc on a monthly basis the service fees set forth on the Digimarc Services Schedules, and Digimarc agrees to pay DMRC on a monthly basis the service fees set forth on the DMRC Services Schedules.  The Parties agree that, unless otherwise set forth in the DMRC Services Schedules or the Digimarc Services Schedules, the amounts to be paid for Services rendered hereunder are intended to reasonably cover each of the Digimarc Group’s and the DMRC Group’s costs in providing the Services.

 

ARTICLE IV

 

PAYMENT OF CHARGES AND REIMBURSEMENTS

 

On or before the thirtieth (30 th ) day of each month during the term of this Agreement, each Party (or its designee) shall submit to the other Party an invoice for the Services provided hereunder during the immediately preceding calendar month representing amounts determined in accordance with Article III above, if any.  Subject to Section 5.2 , each Party shall remit payment to the other Party within thirty (30) days after its receipt of such invoice.  Unless otherwise agreed to in writing, each Party shall remit all funds due under this Agreement to the other Party (or its designee) by wire transfer in immediately available funds based on the instructions set forth in Exhibit A , a copy of which is attached to and made a part of this Agreement.

 

ARTICLE V

 

RECORDS AND AUDITS

 

Section 5.1.             Records Maintenance and Audits .  The Parties shall, for two (2) years after the termination of this Agreement, maintain records and other evidence sufficient to accurately and properly calculate any amounts due pursuant to Article III hereof.  Each of the Parties, or their respective Representatives (as defined below), shall have reasonable access, after requesting such access in writing, during normal business hours to such records for the purpose of auditing and verifying the accuracy of the invoices submitted regarding such amounts due.

 

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Any such audits performed by or on behalf of Digimarc or DMRC shall be at the requesting Party’s sole cost and expense , unless the results of such audit reveals a five percent (5%) or more discrepancy in favor of the requesting Party, in which case the audited Party shall pay all reasonable costs and expenses directly associated with such audit.  The Party being audited shall reasonably cooperate with the auditing Party’s Representatives to accomplish the audit.  Each Party shall have the right to audit the other Party’s books for a period of one (1) year after the month in which the Services were rendered.

 

Section 5.2.             Disputed Amounts .  In the event of a good faith dispute as to the amount or propriety of any invoice or any portions thereof submitted pursuant to Articles III and IV , the Party receiving the Services shall pay all charges on such invoice other than disputed amounts and shall promptly notify the other Party in writing of such disputed amounts.  So long as the Parties are attempting in good faith and in accordance with the terms of Section 9.1 , to resolve the dispute, neither Party shall be entitled to terminate the Services related to, or that are the cause of, the disputed amounts. If it is determined, pursuant to Section 9.1 , that the Party receiving Services is required to pay all or a portion of the disputed amounts to the Party providing Services, the Party receiving the Services shall pay such amounts promptly and in no case more than five (5) days after such determination is made.

 

Section 5.3.             Undisputed Amounts .  Any statement or payment not disputed in writing by DMRC or Digimarc within six (6) months after the month in which the Services were rendered shall be considered final and no longer subject to adjustment.

 

ARTICLE VI

 

CONFIDENTIALITY

 

Section 6.1.             Confidential Information . Each Party acknowledges that in connection with its performance under this Agreement, it may gain access to confidential material and information that is of a proprietary, technical or business nature to the other Party with respect to the Services being performed hereunder.  Therefore, each Party agrees that it shall not, and shall cause each of its respective officers, directors, employees, and other agents and representatives, including attorneys, agents, customers, suppliers, contractors and consultants (collectively, such Party’s “ Representatives ”), not to disclose, reveal, divulge or communicate to any person (other than Representatives of such Party who reasonably need to know such information in providing Services hereunder) or use or otherwise exploit for its own benefit or for the benefit of any third Party, any of the other Party’s Confidential Information (as defined below).  If any Confidential Information is disclosed by a Party to its Representatives in connection with the Services hereunder, then the Confidential Information so disclosed shall be used only as required to perform the Services.  Such Party shall use the same degree of care to prevent and restrain the unauthorized use or disclosure of the other Party’s Confidential Information by any of its Representatives as they currently use for their own confidential information of a like nature, but in no event less than a reasonable standard of care.  If a Party is required to disclose Confidential Information of the other Party due to a provision of applicable law, a compulsory disclosure notice of a court or governmental agency or the rules and regulations of the New York Stock Exchange or Nasdaq Global Market, the Party required to make such disclosure shall promptly

 

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notify the other Party and shall assist the other Party in obtaining confidential treatment of such Confidential Information. “ Confidential Information ” of a Party means any information, material or documents relating to the business of such Party currently or formerly conducted, or proposed to be conducted, by such Party furnished to or in possession of the other Party, irrespective of the form of communication, and all notes, analyses, compilations, forecasts, data, translations, studies, memoranda or other documents prepared by or on behalf of the other Party that contain or otherwise reflect such information, material or documents.  Confidential Information does not include, and there shall be no obligation hereunder with respect to, information that (a) is or becomes generally available to the public, other than as a result of a disclosure by any member of the other Party or any of its Representatives not otherwise permissible hereunder, (b) the other Party can demonstrate was or became available to such other Party from a source other than the first Party, or (c) is developed independently by the other Party without reference to the Confidential Information; provided , however , that, in the case of clause (b) above, the source of such information was not known by the other Party to be bound by a confidentiality agreement with, or other contractual, legal or fiduciary obligation of confidentiality to, the first Party with respect to such information.

 

Section 6.2.             Return of Confidential Information . Following termination of the Services hereunder, upon written request at any time by either Party, the Parties shall use commercially reasonable efforts to account for and return or destroy all papers, books, records and electronic records containing any Confidential Information.

 

Section 6.3              Injunctive Relief.   The Parties acknowledge that a breach of this Article VI, will give rise to irreparable injury to a Party that is inadequately compensable in damages. Accordingly, in the event that either Party breaches this Article VI, the non-breaching Party may seek injunctive relief against the breach or threatened breach of the foregoing undertakings, in addition to any other legal remedies that may be available. The Parties acknowledge and agree that the covenants contained herein are necessary for the protection of the legitimate business interests of the Parties and are reasonable in scope and content.

 

ARTICLE VII

 

TERM OF AGREEMENT

 

Unless sooner terminated pursuant to Article VIII hereof, this Agreement shall become effective for a term commencing on the Distribution Date and ending upon the completion, or termination in accordance with Article VIII , of all Services pursuant to the terms set forth on the Digimarc Services Schedules and the DMRC Services Schedules, as may be amended from time to time.

 

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ARTICLE VIII

 

TERMINATION

 

Section 8.1.             Termination of Agreement .

 

8.1.1.        This Agreement may be terminated after the Distribution Date:

 

(a)           at the election of a non-breaching Party if the other Party fails to perform or violates any material obligation of this Agreement and fails to cure such breach within thirty (30) days after the receipt of  written notice of such breach from the non-breaching Party, in which case, the non-breaching party shall have no liability for such termination;

 

(b)           immediately (i) upon the filing by a Party of a voluntary petition in bankruptcy or insolvency or petitions for reorganization under any bankruptcy law, (ii) if a Party consents to involuntary petition in bankruptcy or if a receiving order is given against the Party under the United States Bankruptcy Code; or (iii) if an order, judgment or decree by a court of competent jurisdiction, upon the application of a creditor, is entered approving a petition seeking reorganization or appointing a receiver, trustee or liquidator of all or substantially all of such Party’s assets and such order, judgment or decree continues in effect for a period of thirty (30) consecutive days; or

 

(c)           by mutual written agreement of the Parties.

 

8.1.2.        Notwithstanding any other provision of this Agreement, this Agreement may be terminated at any time prior to the Distribution Date by the Board of Directors of Digimarc in the event the Merger Agreement is terminated in accordance with its terms.  In the event of such termination, no Party hereto shall have any liability to the other Party hereto by reason of this Agreement.

 

Section 8.2.             Termination of Services .  At any time or from time to time, either Party may terminate any one or more of the specific Services provided hereunder by giving the other Party at least thirty (30) days’ prior written notice to that effect.

 

ARTICLE IX

 

MISCELLANEOUS

 

Section 9.1.             Dispute Resolution . The procedures for discussion and negotiation set forth in this Section 9.1 shall apply to all disputes, controversies or claims (whether arising in contract, tort or otherwise) that may arise out of or relate to, or arise under or in connection with this Agreement or the transactions contemplated hereby.

 

9.1.1.        Primary Points of Contact . It is the intent of the Parties hereto to use their respective reasonable efforts to resolve expeditiously any dispute, controversy or claim between them with respect to the matters covered hereby that may arise from time to time on a mutually acceptable negotiated basis.  In furtherance of the foregoing, each of Digimarc and DMRC shall appoint one or more employees to serve as the primary contact to address questions and consider issues that arise under this Agreement.  Such Digimarc employee or employees shall be designated the “ Digimarc Contract Committee ” and such DMRC employee or employees shall be designated the “ DMRC Contract Committee .”  If a dispute arises, the Digimarc Contract Committee and the DMRC Contract Committee shall consider the dispute for up to seven (7) Business Days (as defined in Section 9.7 ) following receipt of a notice from either Party hereto

 

8



 

specifying the nature of the dispute, during which time the Digimarc Contract Committee and the DMRC Contract Committee shall meet in person at least once, and attempt to resolve the dispute.

 

9.1.2.        Senior Management . If the dispute is not resolved by the end of the seven (7) Business Day period referred to in Section 9.1.1 , or if the Digimarc Contract Committee and the DMRC Contract Committee agree that the dispute cannot be resolved by them, either Party hereto may deliver a notice (an “ Escalation Notice ”) demanding an in person meeting involving appropriate representatives of the Parties hereto at a senior level of management of the Parties hereto (or if the Parties agree, of the appropriate strategic business unit or division within such entity) (collectively, “ Senior Executives ”).  Thereupon, each of the Digimarc Contract Committee and the DMRC Contract Committee shall promptly prepare a memorandum stating (a)the issues in dispute and each Party’s position thereon, (b) a summary of the evidence and arguments supporting each Party’s positions (attaching all relevant documents), (c a summary of the negotiations that have taken place to date, and (d) the name and title of the Senior Executive or Senior Executives who shall represent each Party.  The Digimarc Contract Committee and the DMRC Contract Committee shall deliver such memorandum to its respective Senior Executive or Senior Executives promptly upon receipt of such memorandum from the Digimarc Contract Committee and the DMRC Contract Committee, respectively.  The Senior Executives shall meet for negotiations (which may be held telephonically) at a mutually agreed time and place within ten (10) days of receipt of the Escalation Notice, and thereafter as often as the Senior Executives deem reasonably necessary to resolve the dispute.

 

9.1.3.        Court Actions . In the event that any Party, after complying with the provisions set forth in Sections 9.1.1 and 9.1.2 , desires to commence an action, such Party may submit the dispute, controversy or claim (or such series of related disputes, controversies or claims), to the Chancery Court of the State of Delaware or any federal court sitting in the State of Delaware.  Unless otherwise agreed in writing, the Parties hereto shall continue to provide service and honor all other commitments under this Agreement during the course of dispute resolution pursuant to the provisions of this Section 9.1 with respect to all matters not subject to such dispute, controversy or claim.

 

Section 9.2.             Force Majeure .  Neither Party shall have any obligation to perform any specific Service hereunder if its failure to do so is caused by or results from any act of God, governmental action, natural disaster, strike, terrorism, war, insurrection or other cause or circumstances beyond its control, which acts or occurrences make it impossible for such Party to carry out its obligations under this Agreement.  During the term of the force majeure event, the Party receiving the Service shall have no obligation to pay for the specific Service that the other Party does not provide as a result of the force majeure event; provided , that the Party performing the Service, shall, unless instructed otherwise by the Party receiving the Service, use commercially reasonable efforts to remove or eliminate such cause of delay or default.

 

Section 9.3.            Limitation of Liability .  EXCEPT IN THE CASE OF FRAUD, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, INDIRECT, SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL LOSSES OR DAMAGES OF ANY KIND OR NATURE WHATSOEVER, INCLUDING LOST

 

9



 

PROFITS AND GOODWILL, WITH RESPECT TO THE SERVICES PROVIDED UNDER THIS AGREEMENT.

 

Section 9.4.             Indemnification .  Subject to the limitations set forth in Section 9.3 , each Party shall release, defend (upon the other Party’s request), protect, indemnify and save the other Party and its Affiliates harmless from and against all liability, claims, costs, expenses, demands, suits and causes of action of every kind and character which the first Party or any of its Affiliates may sustain or incur, arising, resulting from or related to the gross negligence, bad faith or willful misconduct of the other Party, its employees, contractors, agents or representatives in the provision of any Service.

 

Section 9.5.             Independent Contractor .  The Parties hereto agree that the Services rendered by the Digimarc Group and the DMRC Group in fulfillment of the terms and obligations of this Agreement shall be as an independent contractor and not as an employee, and with respect thereto, the Digimarc Group, the DMRC Group and their respective employees, contractors or agents are not entitled to the compensation or benefits provided by the other Party to its employees, including, without limitation, group insurance and participation in any employee benefit and pension plans.  Nothing stated in this Agreement shall be construed to create an agency relationship, partnership, association or joint venture between DMRC Group and Digimarc Group.  No employee, contractor or agent of either the Digimarc Group or the DMRC Group shall represent to any third-Party to be anything other than an independent contractor of the other Party.  Nothing in this Agreement shall permit the Digimarc Group or DMRC Group to create or assume any obligations or commitments in the name of such Party or for such Party without the prior consent and authorization of such Party.

 

Section 9.6.             Complete Agreement .  This Agreement and the schedules and exhibits hereto, the other Transaction Agreements and other documents referred to herein and therein shall constitute the entire agreement between the Parties hereto with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter.

 

Section 9.7.             Governing Law .  This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to its conflicts of laws principles.

 

Section 9.8.             Notices .  All notices, requests and other communications to any Party hereunder shall be in writing and shall be deemed given if delivered personally, facsimiled (which is confirmed), sent by e-mail (with a return receipt) or sent by overnight courier (providing proof of delivery) to the Parties to the following addresses:

 

If to Digimarc or any member of the Digimarc Group subsequent to the Distribution Date, to:

 

L-1 Identity Solutions, Inc.

177 Broad Street

Stamford, CT 06901

Attention: Mark Molina

Facsimile: (203)504-1104

E-mail: mmolina@L1ID.com

 

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with a copy (which shall not constitute notice) to:

 

Weil, Gotshal & Manges LLP

767 Fifth Avenue

New York, NY 10153

Attention: Marita A. Makinen

Facsimile: (212)310-8007

E-mail: Marita.Makinen@weil.com

 

and

 

Weil, Gotshal & Manges LLP

201 Redwood Shores Parkway

Redwood Shores, CA  94065

Attention: Kyle C. Krpata

Facsimile: (650) 802-3100

E-mail: Kyle.Krpata@weil.com

 

If to DMRC or any member of the DMRC Group, to:

 

DMRC Corporation

9405 SW Gemini Drive

Beaverton, OR 97008

Attention: Robert Chamness

Facsimile: (503)469-4771

E-mail: Robert.Chamness@digimarc.com

 

with a copy (which shall not constitute notice) to:

 

Perkins Coie LLP

1120 NW Couch Street

Tenth Floor

Portland, OR 97209

Attention: Roy W. Tucker and John R. Thomas

Facsimile: (503)727-2222

E-mail: rtucker@perkinscoie.com

jrthomas@perkinscoie.com

 

or such other addresses or facsimile number as such Party may hereafter specify by like notice to the other Parties hereto.  All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a Business Day (as defined below) in the place of receipt.  Otherwise,

 

11



 

any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt.  “ Business Day ” means a day except a Saturday, a Sunday or other day on which the Securities and Exchange Commission or banks in the City of New York are authorized or required by law to be closed.

 

Section 9.9.             Amendment and Modification .  This Agreement may be amended, modified or supplemented only by a written agreement signed by all of the Parties hereto.

 

Section 9.10.           Successors and Assigns; No Third-Party Beneficiaries .  This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties hereto and their successors and permitted assigns, but neither this Agreement nor any of the rights, interests and obligations hereunder shall be assigned by any Party hereto without the prior written consent of the other Party.   Except for the provisions of Section 9.3 , which are also for the benefit of the indemnitees, this Agreement is solely for the benefit of Digimarc and DMRC and their respective affiliates, successors and assigns, and is not intended to confer upon any other persons any rights or remedies hereunder

 

Section 9.11.           Counterparts .  This Agreement may be executed in counterparts (each of which shall be deemed an original but all of which taken together shall constitute one and the same instrument) and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party.

 

Section 9.12.           Interpretation .  The Section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the Parties hereto and shall not in any way affect the meaning or interpretation of this Agreement.

 

Section 9.13.           Severability .  If any provision of this Agreement or the application thereof to any person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any Party.

 

Section 9.14.           References; Construction .  References to any “Schedule,” “Exhibit” or “Section,” without more, are to Schedules, Exhibits and Sections to or of this Agreement.  Unless otherwise expressly stated, clauses beginning with the term “including” or similar words set forth examples only and in no way limit the generality of the matters thus exemplified.

 

Section 9.15.           Waivers .  Except as provided in this Agreement, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any Party, shall be deemed to constitute a waiver by the Party taking such action of compliance with any representations, warranties, covenants or agreements contained in this Agreement.  The waiver by any Party hereto of a breach of any provision hereunder shall not operate or be construed as a waiver of any prior or subsequent breach of the same or any other provision hereunder.

 

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Section 9.16.           Specific Performance .  The Parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the Parties shall be entitled to seek specific performance of the terms hereof, in addition to any other remedy at law or in equity.

 

Section 9.17.         Waiver of Jury Trial .  EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY LITIGATION, CLAIM, ACTION, SUIT, ARBITRATION, INQUIRY, PROCEEDING, INVESTIGATION OR COUNTERCLAIM (WHETHER BASED IN CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF THE PARTIES HERETO IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF.

 

Section 9.18.           Further Assurances .  Each of the Parties shall execute and deliver, or cause to be executed and delivered, all such instruments and shall take all such action as may reasonably be requested by the other Party in order to effectuate the intent and purposes of, and to carry out the terms of, this Agreement.

 

Section 9.19            Survival . The provisions of Articles IV , V , VI , and IX (other than Section 9.16 ), shall survive the expiration or termination of this Agreement.

 

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

 

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The Parties hereto have executed this Agreement on the date first written above, to be effective on the Distribution Date.

 

 

 

DIGIMARC CORPORATION

 

 

 

By:

 

 

Name:

 

Title:

 

 

 

 

 

DMRC LLC

 

 

 

By:

 

 

Name:

 

Title:

 



 

Exhibit A

 

Wire Instructions

 




Exhibit 10.2

 

EXECUTION VERSION

 

LICENSE AGREEMENT

 

This LICENSE AGREEMENT (this “ Agreement ”) is entered into as of                   , 2008 by and between DMRC Corporation, a Delaware corporation, and its Affiliates (“ DMRC ”), and L-1 Identity Solutions Operating Company, a Delaware corporation, and its Affiliates (the “ Company ”).

 

RECITALS

 

WHEREAS, L-1 Identity Solutions, Inc., a Delaware Corporation (“ L-1 Identity Solutions ”), Dolomite Acquisition Co., a Delaware corporation and wholly-owned subsidiary of L-1 Identity Solutions and Digimarc Corporation, a Delaware corporation (“ Digimarc Corporation ”), are parties to that certain Amended and Restated Agreement and Plan of Merger, dated as of June 29, 2008 (the “ Merger Agreement ”), pursuant to which, among other things, Digimarc Corporation will become a wholly-owned subsidiary of L-1 Identity Solutions;

 

WHEREAS, as contemplated by the Merger Agreement, Digimarc Corporation, DMRC and DMRC LLC, a Delaware limited liability company and wholly-owned subsidiary of Digimarc Corporation (“ DMRC LLC ”) are parties to that certain Separation Agreement, dated as of                             , 2008 (the “ Separation Agreement ”), in accordance with which, among other things, Digimarc Corporation is transferring or causing to be transferred to DMRC LLC or a DMRC Subsidiary (as defined in the Separation Agreement) certain assets as of the Distribution Date (as defined in the Separation Agreement);

 

WHEREAS, following the Distribution (as defined in the Separation Agreement), DMRC LLC will merge with and into DMRC pursuant to the DMRC Merger Agreement (as defined in the Separation Agreement);

 

WHEREAS, as contemplated by the Merger Agreement and in connection with the Separation Agreement and the Restructuring (as defined in the Merger Agreement), the Company desires certain licenses to the DMRC Patents, the IDMarc Software and the Digimarc Marks (each as defined below), and DMRC desires to grant such licenses to the Company on the terms and conditions set forth below; and

 

WHEREAS, as contemplated by the Merger Agreement and in connection with the Separation Agreement and the Restructuring, DMRC desires a certain license to the Company Patents (as defined below), and the Company desires to grant such license to DMRC on the terms and conditions set forth below.

 

NOW, THEREFORE, in consideration of the mutual promises contained herein and in the Merger Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Company and DMRC, the Company and DMRC agree as follows:

 

1.              DEFINITIONS

 

1.1            Acceptance Time ” shall have the meaning set forth in the Merger Agreement.

 



 

1.2            Affiliate ” means, as to any Person, any other Person that, directly or indirectly, controls, or is controlled by, or is under common control with, such Person.  For this purpose, “control” (including, without limitation, with its correlative meanings, “controlled by,” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of management or policies of a Person, whether through the ownership of securities or partnership or other ownership interests, by contract or otherwise.

 

1.3            Company Patents ” means all: (a) U.S. and foreign patents and patent applications owned by Digimarc Corporation as of the Acceptance Time, including, without limitation, the patents and patent applications set forth on Schedule A attached hereto; (b) continuations, continuations-in-part (but only to the extent of any claims therein that are entitled to claim priority from any of the foregoing in subclause (a) above), divisionals, provisionals, substitutes, reissues, re-examinations, extensions or renewals of any of the foregoing in subclause (a) above, and all patents issuing from any of the foregoing in this subclause (b); and (c) foreign patents or patent applications that are entitled to claim priority from any patent or patent application in subclause (a) above.

 

1.4            Digimarc Marks ” means the Marks set forth on Schedule B attached hereto and all applications, registrations, renewals and extensions therefor.

 

1.5            Digital Watermarking Field ” means digital watermarking, media fingerprinting (pattern recognition but not including any biometric identifiers), digital rights management and other media management approaches.

 

1.6            DMRC Digital Watermarking Platform ” means DMRC’s proprietary digital watermarking platform.

 

1.7            DMRC Patents ” means all: (a) U.S. and foreign patents and patent applications  owned by DMRC as of the Acceptance Time, including, without limitation, the patents and patent applications set forth on Schedule E-H attached hereto; (b) continuations, continuations-in-part (but only to the extent of any claims therein that are entitled to claim priority from any of the foregoing in subclause (a) above), divisionals, provisionals, substitutes, reissues, re-examinations, extensions or renewals of any of the foregoing in subclause (a) above, and all patents issuing from any of the foregoing in this subclause (b); and (c) foreign patents or patent applications that are entitled to claim priority from any patent or patent application in subclause (a) above.

 

1.8            IDMarc Software ” means (a) the software application product in object code format set forth on Schedule C attached hereto and documentation related thereto, as such software application product in object code format and documentation exist as of the Acceptance Time and (b) all bug fixes and workarounds to errors in such application product created or developed by or for DMRC in connection with the training and technical assistance to be provided by DMRC to the Company pursuant to Section 2.2(c) below.

 

1.9            IDMarc Source Code ” means the source code of the IDMarc Software and documentation related thereto, as such source code and documentation exist as of the Acceptance

 

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Time.  For the avoidance of doubt, IDMarc Source Code does not include the source code of the DMRC Digital Watermarking Platform.

 

1.10          Person ” means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity, including, without limitation, a governmental authority.

 

1.11          Prior Agreements ” means the agreements set forth on Schedule D hereto, the terms and conditions of which were in effect prior to the date of the Merger Agreement and include a patent license under any of the DMRC Patents within the Secure ID Field, which agreements Digimarc Corporation entered into prior to the date of the Merger Agreement and, in accordance with the Separation Agreement, has assigned to DMRC.  Schedule D includes, to the extent not precluded by confidentiality obligations to a third party, the scope of the licenses granted by Digimarc Corporation in each such agreement with respect to any DMRC Patents, IDMarc Software and/or IDMarc Source Code and the expiration date of each such license.

 

1.12          Secure ID Field ” means domestic or international: driver licenses, passports, national, federal, state or local government identity cards and any other national, federal, state or local government issued credentials.

 

2.              LICENSE GRANTS TO THE COMPANY

 

2.1            License to DMRC Patents .  Subject to the terms and conditions of this Agreement, DMRC grants to the Company, under the DMRC Patents, a worldwide, fully paid-up, royalty-free, perpetual, irrevocable license to make, have made, develop, have developed, use, have used, sell, have sold, offer to sell, have offered to sell, import, have imported, export, have exported and otherwise exploit and have exploited any products and services, and practice and have practiced any method, solely within the Secure ID Field.

 

The foregoing license granted in this Section 2.1 is exclusive for a period of five (5) years from the Acceptance Time, except to the extent of, and during the duration of, any license under any of the DMRC Patents granted by Digimarc Corporation to a third party under any Prior Agreement, which license includes the right for such third party to exercise such license within the Secure ID Field. After such five (5) year period, this license shall become non-exclusive.

 

The foregoing license granted in this Section 2.1 is sublicensable on a standalone basis without DMRC’s prior written consent.

 

2.2            IDMarc Software .

 

(a)            License .  Subject to the terms and conditions of this Agreement, DMRC grants to the Company, under DMRC’s rights in the IDMarc Software, a worldwide, fully paid-up, royalty-free, perpetual, irrevocable license to:

 

(i)             use, have used, reproduce, have reproduced, perform, have performed, display, have displayed and otherwise exploit and have exploited the IDMarc Software in object code format in the Secure ID Field;

 

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(ii)            use, have used and reproduce and have reproduced the IDMarc Source Code in connection with the Company’s exercise of the license granted in the foregoing clause (i) of this Section 2.2(a) in the Secure ID Field;

 

(iii)           modify and have modified, and create and have created derivative works of, the IDMarc Source Code in connection with the Company’s exercise of the license granted in the foregoing clause (i) of this Section 2.2(a) in the Secure ID Field (“ IDMarc Derivative Works ”); and

 

(iv)           use, have used, reproduce, have reproduced, perform, have performed, display, have displayed and otherwise exploit and have exploited IDMarc Derivative Works in the Secure ID Field.

 

The foregoing license granted in this Section 2.2(a) is exclusive.

 

The license rights granted in the foregoing subclauses (i) and (iv) in this Section 2.2(a) are sublicensable through multiple tiers of sublicensees without DMRC’s consent.

 

The Company may not grant any sublicenses under the license rights granted in the foregoing subclauses (ii) or (iii) in this Section 2.2(a) without DMRC’s prior written consent.

 

(b)            Delivery .  Within ten (10) business days after the Acceptance Time, DMRC shall deliver to the Company, in a format and manner mutually agreed upon by both parties in writing, a complete and accurate copy of (i) the IDMarc Software in object code format (and documentation therefor) and (ii) the IDMarc Source Code (and documentation therefor).

 

(c)            Training and Technical Assistance .  DMRC shall provide to the Company reasonable training and technical assistance sufficient to enable the Company to use and market the IDMarc Software and IDMarc Source Code.

 

(d)            Service Terms and Conditions .  DMRC and the Company agree that any maintenance and support services by DMRC with respect to the IDMarc Software, any customization services by DMRC related to the IDMarc Software, IDMarc Source Code and/or DMRC Digital Watermarking Platform, any other services by DMRC related to the IDMarc Software, IDMarc Source Code and/or DMRC Digital Watermarking Platform (other than the training and technical assistance to be provided by DMRC to the Company pursuant to Section 2.2(c) above), and any research, development, engineering, quality assurance, preparing, obtaining and maintaining jointly owned patents, project management, reporting, and such other services or activities as the parties may mutually agree shall be provided by DMRC in accordance with this Agreement and the Service Terms and Conditions attached hereto as Schedule I (“ Service Terms and Conditions ”).

 

2.3            License to Digimarc Marks .  Subject to the terms and conditions of this Agreement, DMRC grants to the Company under DMRC’s rights in the Digimarc Marks, a non-exclusive, worldwide, fully paid-up, royalty-free, irrevocable, non-sublicensable license to use and have used the Digimarc Marks in the Secure ID Field for a period of one (1) year after the Acceptance Time (or such longer period of time as the parties may mutually agree in writing);

 

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except that  the Company shall have no obligation to remove, terminate, decommission or otherwise cease, desist or retract usage of any of the Digimarc Marks that are associated with any data, documents, hardware, software, products or services directly or indirectly manufactured, sold, licensed, distributed or otherwise exploited by Digimarc Corporation or any representative of Digimarc Corporation prior to the Acceptance Time.

 

Although the foregoing license in this Section 2.3 is for a period of one (1) year, the parties agree that such license is a transition license and that the Company will use good faith efforts to stop using the Digimarc Marks as soon as reasonably practical after the Acceptance Time.

 

Any use of the Digimarc Marks by the Company under the license granted in this Section 2.3 will be in substantially the same manner as the use of the Digimarc Marks immediately prior to the Acceptance Time, unless otherwise agreed by the Company and DMRC in writing.  The Company will maintain the quality of the products and services offered under the Digimarc Marks at least at the level of quality of Digimarc Corporation’s products and services in the Secure ID Field immediately prior to the Acceptance Time.

 

Any goodwill arising out of or relating to the Company’s use of the Digimarc Marks shall inure to the sole benefit of DMRC.  The Company shall execute any documents reasonably requested by DMRC to evidence DMRC’s ownership of such Digimarc Marks on DMRC’s request.

 

2.4            Reservation of Rights by DMRC .  All rights not expressly granted by DMRC to the Company in this Article 2 or in any Statement of Work under the Service Terms and Conditions are reserved by DMRC.  Without limiting the generality of the foregoing sentence, the Company acknowledges and agrees that nothing in this Agreement shall be construed or interpreted as a grant, by implication or otherwise, of any license to the Company other than the licenses set forth in Section 2.1, Section 2.2(a) and Section 2.3 above and any licenses set forth in any Statement of Work.

 

3.              LICENSE GRANT TO DMRC

 

3.1            License to Company Patents .  Subject to the terms and conditions of this Agreement, the Company grants to DMRC, under the Company Patents, a worldwide, fully paid-up, royalty-free, perpetual, irrevocable license to make, have made, develop, have developed, use, have used, sell, have sold, offer to sell, have offered to sell, import, have imported, export, have exported and otherwise exploit and have exploited any products and services, and practice and have practiced any method, solely within the Digital Watermarking Field.

 

Subject to the following paragraph in this Section 3.1, the foregoing license granted in this Section 3.1 is sublicensable on a standalone basis without the Company’s prior written consent.

 

During the five (5)-year period immediately following the Acceptance Time: (a) DMRC shall include in any standalone patent license agreement pursuant to which DMRC grants any third party a patent license under any of the DMRC Patents and/or a patent sublicense under any of the Company Patents specific language to the effect that such license and/or sublicense, as the case may be, does not grant such third party any express or implied patent rights in the Secure ID Field; and (b) DMRC’s right to grant sublicenses on a standalone basis is subject to Section 4.10 (Non-Competition and Non-Solicitation) of the Separation Agreement.

 

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3.2            Reservation of Rights by the Company .  All rights not expressly granted by the Company to DMRC in this Article 3 are reserved by the Company.  Without limiting the generality of the foregoing sentence, DMRC acknowledges and agrees that nothing in this Agreement shall be construed or interpreted as a grant, by implication or otherwise, of any license to DMRC other than the license set forth in Section 3.1 above.

 

4.              OWNERSHIP

 

4.1            Ownership by DMRC .  As between the parties, subject to the licenses granted by DMRC to the Company under Section 2.1, Section 2.2(a) and Section 2.3 above, DMRC retains and owns all right, title and interest in and to the DMRC Patents, IDMarc Software, IDMarc Source Code, DMRC Digital Watermarking Platform and Digimarc Marks.

 

4.2            Ownership by the Company .  As between the parties, subject to the license granted by the Company to DMRC under Section 3.1 above, the Company retains and owns all right, title and interest in and to all (a) Company Patents and (b) IDMarc Derivative Works (subject to DMRC’s ownership of the underlying original IDMarc Software and IDMarc Source Code as set forth in Section 4.1 above).

 

5.              PROSECUTION AND MAINTENANCE; ENFORCEMENT

 

5.1            Prosecution and Maintenance .

 

(a)            Prosecution and Maintenance of the DMRC Patents .  As between the parties, DMRC shall be responsible for filing, prosecuting and maintaining the DMRC Patents, at its sole expense and discretion.  The parties acknowledge and agree that DMRC shall not be obligated to prosecute or maintain any patent or patent application included in the DMRC Patents.

 

(b)            Prosecution and Maintenance of the Company Patents .  As between the parties, the Company shall be responsible for filing, prosecuting and maintaining the Company Patents, at its sole cost and discretion.  The parties acknowledge and agree that the Company shall not be obligated to prosecute or maintain any patent or patent application included in the Company Patents.

 

5.2            Third Party Infringement; Enforcement .  Each party shall reasonably promptly notify the other party in writing of any actual or reasonably suspected infringement of which such party becomes aware of (a) any DMRC Patent or the IDMarc Software by a third party in the Secure ID Field or (b) any Company Patent by a third party in the Digital Watermarking Field.  Nothing in this Agreement or otherwise shall obligate either party to police the DMRC Patents, Company Patents or IDMarc Software or otherwise attempt to discover or investigate any third party infringement thereof.  The parties agree to discuss in good faith the possible resolution or abatement of any such infringement of any DMRC Patent or the IDMarc Software in the Secure ID Field or any Company Patent in the Digital Watermarking Field; provided , however , that (i) DMRC shall not be obligated to take any action against any third party with respect to any actual or alleged infringement of any DMRC Patent or the IDMarc Software, which action, if taken at all, shall be in DMRC’s sole discretion and (ii) the Company shall not be obligated to take any action against any third party with respect to any actual or alleged

 

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infringement of any Company Patent, which action, if taken at all, shall be in the Company’s sole discretion.

 

6.              TERM

 

6.1            Term .  This Agreement shall become effective at the Acceptance Time and shall continue in full force and effect in perpetuity, except that:

 

(a)            the license granted by DMRC in Section 2.1 above with respect to the DMRC Patents shall terminate upon the expiration of the last-to-expire of the DMRC Patents;

 

(b)            the license granted by DMRC in Section 2.3 above with respect to the Digimarc Marks shall terminate one (1) year (or such longer period of time as the parties may mutually agree in writing) after the Acceptance Time, except as otherwise expressly set forth in Section 2.3; and

 

(c)            the license granted by the Company in Section 3.1 above with respect to the Company Patents shall terminate upon the expiration of the last-to-expire of the Company Patents.

 

7.              WARRANTY DISCLAIMER

 

AS BETWEEN THE COMPANY AND DMRC, (A) NEITHER THE COMPANY NOR DMRC MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT (INCLUDING, WITHOUT LIMITATION, THE COMPANY PATENTS (IN THE CASE OF THE COMPANY) OR THE DMRC PATENTS, THE IDMARC SOFTWARE, THE IDMARC SOURCE CODE, THE DMRC DIGITAL WATERMARKING PLATFORM OR THE DIGIMARC MARKS (IN THE CASE OF DMRC)), (B) THE COMPANY SPECIFICALLY DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE COMPANY PATENTS AND (C) DMRC SPECIFICALLY DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE DMRC PATENTS, THE IDMARC SOFTWARE, THE IDMARC SOURCE CODE, THE DMRC DIGITAL WATERMARKING PLATFORM OR THE DIGIMARC MARKS.

 

8.              LIMITATION OF LIABILITY

 

NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, IN NO EVENT SHALL THE COMPANY OR DMRC BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY (A) CONSEQUENTIAL, INDIRECT, INCIDENTAL OR SPECIAL DAMAGES OR (B) LOST PROFITS OR LOST BUSINESS, EVEN IF THE REMEDIES PROVIDED FOR IN THIS AGREEMENT FAIL OF THEIR ESSENTIAL PURPOSE AND EVEN IF EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

 

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9.              CONFIDENTIALITY

 

9.1            Confidential Information .  “ Confidential Information ” means any confidential or proprietary information of a party, including, without limitation, know-how, trade secrets, algorithms, source code, specifications, methods of processing, manufacture and production, techniques, research, development, inventions (whether or not patentable or reduced or practice), ideas, concepts, drawings and schematics.  Without limiting the generality of the foregoing, the parties acknowledge and agree that (a) the unpublished patent applications included in the DMRC Patents and the IDMarc Source Code are Confidential Information of DMRC and (b) the unpublished patent applications included in the Company Patents and the IDMarc Derivative Works are Confidential Information of the Company.

 

9.2            Confidentiality Obligations .  Each party (the “ Receiving Party ”) that receives or otherwise obtains Confidential Information of the other party (the “ Disclosing Party ”) agrees to (a) keep the Disclosing Party’s Confidential Information confidential and not disclose or make available any of the Disclosing Party’s Confidential Information to any third party without the prior written consent of the Disclosing Party (except in accordance with clause (d) or clause (e) below in this Section 9.2), (b) use the Disclosing Party’s Confidential Information only as necessary to perform its obligations and exercise its rights under this Agreement, (c) use at least the same degree of care in keeping the Disclosing Party’s Confidential Information confidential as it uses for its own Confidential Information of a similar nature (but in no event less than a reasonable degree of care), (d) limit access to the Disclosing Party’s Confidential Information to the Receiving Party’s Affiliates and authorized sublicensees who have a need to access or know such Confidential Information for the purpose of exercising such Affiliate’s or sublicensee’s rights under this Agreement or the applicable sublicenses, as the case may be, provided that such Affiliate or sublicensee is bound in writing to confidentiality obligations at least as protective of the Confidential Information of the Disclosing Party as the confidentiality provisions of this Agreement, and (e) limit access to the Disclosing Party’s Confidential Information to its employees and contractors, and cause each of its Affiliates and sublicensees to limit access to the Receiving Party’s Confidential Information to its respective employees and contractors, who have a need to access or know such Confidential Information for the purpose of the Receiving Party, such Affiliate or such sublicensee to exercise its rights under this Agreement or the applicable sublicense, as the case may be, provided that such employees and contractors are bound in writing to confidentiality obligations at least as protective of the Confidential Information of the Disclosing Party as the confidentiality provisions of this Agreement.  Except as otherwise expressly provided in this Agreement, nothing in this Agreement is intended to grant to a party any rights in or to any Confidential Information of the other party.

 

9.3            Exceptions .  The Receiving Party shall not be obligated under Section 9.2 above with respect to any information the Receiving Party can document (a) is or, through no improper action or inaction by the Receiving Party or any Affiliate, employee, consultant or advisor of the Receiving Party, becomes generally available and known to the public, (b) was rightfully in its possession or known by it without any obligation of confidentiality prior to receipt from the Disclosing Party, (c) was rightfully disclosed to it without restriction by a third party that, to the Receiving Party’s knowledge, was authorized to make such disclosure, (d) was independently developed by the Receiving Party without the use of or reference to any Confidential Information of the Disclosing Party or (e) is disclosed by the Disclosing Party to a third party without

 

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restriction on such third party’s rights to disclose or use the same.  Notwithstanding the foregoing in this Section 9.3, all Confidential Information of Digimarc Corporation existing prior to the Acceptance Time and transferred by Digimarc Corporation to DMRC in accordance with the Separation Agreement shall, for the purpose of this Agreement, be deemed the Confidential Information of DMRC, and the exceptions in clause (b) and clause (d) in this Section 9.3 above will not be applicable thereto.

 

9.4            Disclosure Required by Law .  In the event the Receiving Party is requested or required by law, regulation or judicial process to disclose any Confidential Information of the Disclosing Party, the Receiving Party shall provide reasonable advance written notice to the Disclosing Party of any such request or requirement so that the Disclosing Party may seek confidential treatment of such Confidential Information prior to its disclosure (whether through protective orders or otherwise).  If, in the absence of a protective order, other confidential treatment or waiver under this Agreement, the Receiving Party is advised by its legal counsel that such Receiving Party is legally required to disclose such Confidential Information, the Receiving Party may disclose such Confidential Information without liability under this Agreement, provided that the Receiving Party exercises commercially reasonable efforts to obtain reliable assurances that confidential treatment will be accorded any such Confidential Information prior to its disclosure and discloses only the minimum amount of such Confidential Information necessary to comply with such legal requirements.

 

10.           MISCELLANEOUS

 

10.1          Assignment .  Except as set forth in any other Transaction Agreement (as defined in the Separation Agreement), neither this Agreement nor any of the rights, interests or obligations under this Agreement will be assigned, in whole or in part, by operation of Law (as defined in the Merger Agreement) or otherwise, by either of the parties without the prior written consent of the other party, except (a) for assignments in connection with the acquisition of beneficial ownership of fifty percent (50%) or more of the voting securities of such party, including by way of merger or any other business combination, or the sale of all or substantially all assets of such party, and (b) that either party may assign any or all of its rights, interests or obligations under this Agreement to any one or more of its direct or indirect wholly owned Subsidiaries (as defined in the Merger Agreement) or DMRC Subsidiaries (as defined in the Separation Agreement); provided that no such assignment will relieve the assigning party from any of its obligations under this Agreement.  Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by the Company and DMRC and their respective successors and assigns.

 

10.2          Governing Law .  This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, applicable to contracts executed in and to be performed entirely within that State.

 

10.3          Amendment .  Except as otherwise permitted herein, this Agreement and its provisions may be amended, supplemented, changed, discharged, modified or terminated only by a writing signed by both parties hereto.

 

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10.4          Waiver .  No waiver of any provision of this Agreement shall be effective unless made in writing and signed by both of the parties hereto.  The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach, and no failure by either party to exercise any right or privilege hereunder shall be deemed a waiver of such party’s rights or privileges hereunder or shall be deemed a waiver of such party’s rights to exercise the same at any subsequent time or times hereunder.

 

10.5          Notices .  All notices, requests and other communications to a party hereunder shall be in writing and shall be deemed given if delivered personally, facsimiled (which is confirmed), sent by email (with a return receipt) or sent by overnight courier (providing proof of delivery) to the parties at the following addresses:

 

If to the Company, to:

 

L-1 Identity Solutions Operating Company

c/o L-1 Identity Solutions, Inc.

177 Broad Street

Stamford, CT 06901

Attention: Mark Molina

Facsimile: (203) 504-1104

E-mail: mmolina@L1ID.com

 

with copies (which shall not constitute notice) to:

 

Weil, Gotshal & Manges LLP

767 Fifth Avenue

New York, NY 10153

Attention: Marita A. Makinen

Facsimile: (212) 310-8007

E-mail: marita.makinen@weil.com

 

and

 

Weil, Gotshal & Manges LLP

201 Redwood Shores Parkway

Redwood Shores, CA 94065

Attention: Kyle C. Krpata

Facsimile: (802) 650-3100

E-mail: kyle.krpata@weil.com

 

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If to DMRC, to:

 

DMRC Corporation

9405 SW Gemini Drive

Beaverton, OR 97008

Attention: Robert Chamness, Secretary and Chief Legal Officer

Facsimile: (503) 469-4771

E-mail: Robert.Chamness@Company.com

 

or such other address or facsimile number as either party may hereafter specify by like notice to the other party hereto.  All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 pm in the place of receipt and such day is a business day in the place of receipt.  Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding business day in the place of receipt.

 

10.6          Entire Agreement; Third-Party Beneficiaries .  This Agreement (including the Schedules hereto and other agreements referred to herein) (a) constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (b) except as expressly set forth in this Agreement, is not intended to and shall not confer upon any person or entity other than the parties hereto any rights or remedies hereunder.

 

10.7          Independent Contractor .  Each party hereto is acting as, and shall be considered, an independent contractor, and no relationship of partnership, joint venture, employment, franchise, agency or similar arrangement is being created pursuant to or by virtue of this Agreement.

 

10.8          No Authority to Bind Other Party .  In no event shall either party have any authority to negotiate or enter into any contract or commitment for or on behalf of, or in the name of, the other party, or otherwise possess any authority to bind such other party in matters of contract, indebtedness or otherwise, without the prior written approval in each instance of such other party.  Neither party shall represent itself as having any such authority, express or implied, from the other party.

 

10.9          Severability .  If any term or other provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms, provisions and conditions of this Agreement shall nevertheless remain in full force and effect.  Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.

 

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10.10        Remedies Cumulative .  The rights and remedies available under this Agreement or otherwise available shall be cumulative of all other rights and remedies and may be exercised successively.

 

10.11        Counterparts .  This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.

 

10.12        Headings .  The headings in this Agreement are for convenience of reference only and shall not affect or be utilized in construing or interpreting this Agreement.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written.

 

 

L-1 IDENTITY SOLUTIONS

 

OPERATING COMPANY

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

 

 

 

 

DMRC CORPORATION

 

 

 

By:

 

 

 

Name:

 

 

Title:

 

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Exhibit 99.1

                , 2008

Dear Digimarc Corporation Stockholder:

        As previously announced, Digimarc Corporation has entered into an amended and restated merger agreement, as amended by that Amendment No. 1 dated as of July 17, 2008 and as may be further amended, which we refer to as the Digimarc/L-1 merger agreement, with L-1 Identity Solutions, Inc., which we refer to as L-1, and Dolomite Acquisition Co, which we refer to as Dolomite, a wholly owned subsidiary of L-1, pursuant to which Dolomite has offered to purchase all of the outstanding shares of Digimarc common stock, together with the associated preferred stock purchase rights. We refer to the offer to purchase as the offer. The Digimarc/L-1 merger agreement provides, among other things, that following the completion of the offer and subject to other conditions set forth in the Digimarc/L-1 merger agreement, Dolomite will merge with and into Digimarc with Digimarc continuing as the surviving company and a wholly owned subsidiary of L-1. We refer to the merger of Digimarc and Dolomite as the Digimarc/L-1 merger.

        In connection with the offer and the Digimarc/L-1 merger, the Board of Directors of Digimarc approved a plan to separate its secure ID systems and digital watermarking businesses. To accomplish the separation, prior to the expiration of the offer, and as a condition to the Digimarc/L-1 merger, Digimarc will contribute all of the assets and liabilities related to its digital watermarking business, together with all of Digimarc's cash, including cash received upon the exercise of stock options, to a wholly owned subsidiary of Digimarc, which we refer to as DMRC LLC, the interests of which will be (1) distributed to holders of shares of Digimarc common stock in a taxable spin-off transaction, which we refer to as the LLC spin-off, or (2) pending effectiveness of the Registration Statement on Form 10, of which this information statement is a part and which we refer to as the Form 10, transferred to a newly-created trust for the benefit of holders of shares of Digimarc common stock, which we refer to as the trust transfer, in either case, on the basis of one unit of DMRC LLC for every three and one-half shares of Digimarc Corporation common stock held by the stockholder. Immediately following the spin-off, DMRC LLC will merge with and into its wholly owned subsidiary, DMRC Corporation, and each limited liability company interest of DMRC LLC will be converted into one share of common stock of DMRC Corporation. As a result, each Digimarc stockholder will receive one share of DMRC Corporation for every three and one-half shares of Digimarc common stock held by the stockholder. If the trust transfer occurs, the trust will distribute the shares of DMRC Corporation common stock to Digimarc stockholders upon effectiveness of the Form 10.

        Stockholder approval of the spin-off is not required, and you are not required to take any action to receive your DMRC Corporation common stock.

        The attached information statement, which is being mailed to all Digimarc Corporation stockholders of record as of                 , 2008, the record date, describes the spin-off and contains important information, including financial statements, about DMRC Corporation. DMRC Corporation intends to file an application to list its common stock under the trading symbol "DMRCD" on The Nasdaq Global Market.

        We look forward to our future as a separately-traded public company and to your support as a holder of DMRC Corporation common stock.


The information contained herein is not complete and may be changed. A Registration Statement on Form 10 relating to these securities has been filed with the United States Securities and Exchange Commission under the United States Securities Exchange Act of 1934, as amended. This preliminary information statement is not an offer to sell or a solicitation of an offer to buy any securities.

Preliminary and Subject to Completion, dated July 22, 2008

INFORMATION STATEMENT

DMRC Corporation
Common Stock
(Par value $0.001 per share)

          This information statement is being furnished in connection with the issuance of shares of DMRC Corporation common stock to holders of Digimarc Corporation common stock in connection with the spin-off of DMRC LLC, and the subsequent merger of DMRC LLC with and into its wholly owned subsidiary, DMRC Corporation.

          As previously announced, Digimarc Corporation has entered into an amended and restated merger agreement, as amended by that Amendment No. 1 dated as of July 17, 2008 and as may be further amended, which we refer to as the Digimarc/L-1 merger agreement, with L-1 Identity Solutions, Inc., which we refer to as L-1, and Dolomite Acquisition Co, which we refer to as Dolomite, a wholly owned subsidiary of L-1, pursuant to which Dolomite has offered to purchase all of the outstanding shares of Digimarc common stock, together with the associated preferred stock purchase rights. We refer to the offer to purchase as the offer. The Digimarc/L-1 merger agreement provides, among other things, that following the completion of the offer and subject to other conditions set forth in the Digimarc/L-1 merger agreement, Dolomite will merge with and into Digimarc with Digimarc continuing as the surviving company and a wholly owned subsidiary of L-1. We refer to the merger of Digimarc and Dolomite as the Digimarc/L-1 merger.

          Prior to the expiration of the offer, and as a condition to the Digimarc/L-1 merger, Digimarc will contribute all of the assets and liabilities related to its digital watermarking business, together with all of Digimarc's cash, including cash received upon the exercise of stock options, to a wholly owned subsidiary of Digimarc, which we refer to as DMRC LLC, the interests of which will be (1) distributed to holders of shares of Digimarc common stock in a taxable spin-off transaction, which we refer to as the LLC spin-off, or (2) pending effectiveness of the Registration Statement on Form 10, of which this information statement is a part and which we refer to as the Form 10, transferred to a newly-created trust for the benefit of holders of shares of Digimarc common stock, which we refer to as the trust transfer, in either case, on the basis of one unit of DMRC LLC for every three and one-half shares of Digimarc Corporation common stock held by the stockholder. We refer to the transfer of assets and assumption of liabilities as the restructuring. We refer to the distribution of the DMRC LLC interests, whether by LLC spin-off or trust transfer, and the restructuring collectively as the spin-off. Following the spin-off, DMRC LLC will merge with and into its wholly owned subsidiary, DMRC Corporation, which we refer to as the DMRC Corporation merger, and each limited liability company interest of DMRC LLC will be converted into one share of common stock of DMRC Corporation. As a result, each Digimarc stockholder will receive one share of DMRC Corporation for every three and one-half shares of Digimarc common stock held by the stockholder. If the trust transfer occurs, the trust will distribute the shares of DMRC Corporation common stock to the Digimarc stockholders upon effectiveness of the Form 10.

          In the spin-off, the units of DMRC LLC will be distributed to holders of Digimarc Corporation common stock that held shares on                                    , 2008, which will be the record date. These stockholders will receive one unit of DMRC LLC for every three and one-half shares of Digimarc Corporation common stock held by the stockholder on the record date. The distribution will be effective as of                                    , 2008, which we also refer to as the distribution date. Immediately following the spin-off, each unit of DMRC LLC will be converted into one share of DMRC Corporation common stock in the DMRC Corporation merger. As a result, Digimarc stockholders will receive one share of DMRC Corporation common stock for every three and one-half shares of Digimarc Corporation common stock held by the stockholder on the record date. Digimarc stockholders will receive shares of DMRC Corporation common stock on (1)                                     , 2008, the distribution date, if the LLC spin-off occurs, or (2) if the trust transfer occurs, upon effectiveness of the Form 10, which date in each case we refer to as the DMRC stock delivery date. Following the DMRC Corporation merger, Dolomite will merge with and into Digimarc, with Digimarc surviving as a wholly owned subsidiary of L-1. Following the DMRC stock delivery date, DMRC Corporation will be an independent public company.

          YOUR VOTE IS NOT REQUIRED, AND WE ARE NOT ASKING YOU FOR A PROXY.

          All of the outstanding shares of DMRC Corporation common stock are owned indirectly by Digimarc Corporation. Accordingly, there currently is no public trading market for DMRC Corporation common stock. DMRC Corporation intends to file an application to list its common stock under the trading symbol "DMRCD" on The Nasdaq Global Market. We anticipate that normal trading of DMRC Corporation common stock will begin on the first trading day following the DMRC stock delivery date.

           In reviewing this information statement, you should carefully consider the matters described under the caption "Risk Factors" beginning on page 10.

           Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

          This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

          The date of this information statement is                , 2008.

          This information statement was first mailed to Digimarc Corporation stockholders on or about                , 2008.



TABLE OF CONTENTS

SUMMARY   3

RISK FACTORS

 

10

THE SPIN-OFF

 

21

DIVIDEND POLICY

 

25

CAPITALIZATION

 

26

SELECTED HISTORICAL FINANCIAL INFORMATION

 

27

PRO FORMA FINANCIAL INFORMATION

 

29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

34

BUSINESS OF DMRC CORPORATION

 

56

MANAGEMENT

 

61

DIRECTOR COMPENSATION

 

66

COMPENSATION DISCUSSION AND ANALYSIS

 

68

EXECUTIVE COMPENSATION

 

73

OUR RELATIONSHIP WITH DIGIMARC CORPORATION AFTER THE SPIN-OFF

 

82

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

89

DESCRIPTION OF OUR CAPITAL STOCK

 

91

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

93

CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

 

94

WHERE YOU CAN FIND MORE INFORMATION

 

98

INDEX TO FINANCIAL STATEMENTS

 

F-1

This information statement contains trademarks, trade names and service marks of companies other than DMRC Corporation, which are the property of their respective owners.

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SUMMARY

         This summary highlights information contained elsewhere in this information statement and provides an overview of our company and the material aspects of our spin-off from Digimarc Corporation. You should read this entire information statement carefully, especially the risk factors discussed beginning on page 10 and our pro forma financial statements and notes to those statements appearing elsewhere in this information statement. Unless the context otherwise requires, references in this information statement to (i) "DMRC Corporation," "DMRC," "we," "our" and "us" refer to DMRC Corporation and (ii) "Digimarc" refers to Digimarc Corporation and its consolidated subsidiaries (other than us).

         You should not assume that the information contained in this information statement is accurate as of any date other than the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and we undertake no obligation to update the information, except in the normal course of our public disclosure obligations and practices.

Our Business

        DMRC Corporation is a leading innovator and technology provider, enabling governments and enterprises around the world to give digital identities to media and objects that computers can sense and recognize and to which they can react. Our technology provides the means to infuse persistent digital information, perceptible only to computers and digital devices, into all forms of media content. The unique digital identifier placed in media persists with it regardless of the distribution path and whether it is copied, manipulated or converted to a different format, and does not affect the quality of the content or the enjoyment or usefulness of it. Our technology permits computers and digital devices to quickly identify relevant data from vast amounts of media content.

        Our technologies, and those of our licensees, span the complete range of media content, enabling governments and enterprises to:

        At the core of our intellectual property is a signal processing technology innovation known as "digital watermarking" which allows imperceptible digital information to be embedded in all forms of digitally designed, produced or distributed media content and some physical objects, including photographs, movies, music, television, personal identification documents, financial instruments, industrial parts and product packages. The digital information can be detected and read by a wide range of computers, mobile phones, and other digital devices.

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        We provide technology-based solutions directly and through our licensees. Our proprietary technologies have proven to be a powerful element of document security, giving rise to our long-term relationship with a consortium of central banks, which we refer to as Central Banks, and many leading companies in the information technology industry. In addition, we and our licensees have successfully propagated digital watermarking in music, movies, television broadcasts, images and printed materials. Digital watermarks have been used in these applications to provide improved media rights and asset management, reduce piracy and counterfeiting losses, improve marketing programs, permit more efficient and effective distribution of valuable media content and enhance consumer experiences.

        To protect our significant efforts in creating these technologies, we have implemented an extensive intellectual property protection program that relies on a combination of patent, copyright, trademark and trade secret laws, and nondisclosure agreements and other contracts. As a result, we believe we have one of the world's most extensive patent portfolios in the field of digital watermarking and related media enhancement innovations, with over 350 U.S. and over 85 foreign issued patents and more than 400 U.S. and foreign patent applications on file as of March 31, 2008.

The Separation and the Merger

        Digimarc will, prior to and in connection with the Digimarc/L-1 merger, spin off the limited liability company interests of DMRC LLC, which holds all of the assets and liabilities of its digital watermarking business, which we refer to as the Digital Watermarking Business. The interests will be (1) distributed to holders of shares of Digimarc common stock in the LLC spin-off, or (2) pending effectiveness of the Form 10, transferred to a newly created trust for the benefit of holders of shares of Digimarc common stock in the trust transfer, in either case, on the basis of one unit of DMRC LLC for every three and one-half shares of Digimarc Corporation common stock held by the stockholder. Immediately following the spin-off, DMRC LLC will merge with and into its wholly owned subsidiary, DMRC Corporation, with DMRC Corporation being the surviving company in the merger. Each unit of DMRC LLC will be converted into one share of DMRC Corporation common stock. As a result, each Digimarc stockholder will receive one share of DMRC Corporation common stock for every three and one-half shares of Digimarc common stock held by the stockholder. When we refer in this information statement to shares of DMRC Corporation common stock, we mean the shares of DMRC Corporation common stock that Digimarc stockholders will receive following the conversion of the units of DMRC LLC into shares of DMRC Corporation common stock in the DMRC Corporation merger. Following the spin-off and completion of the DMRC Corporation merger, we will issue to the executive officers of DMRC Corporation shares of Series A Redeemable Nonvoting Preferred stock in the aggregate amount of $50,000.

        Following and in connection with the spin-off, a wholly owned subsidiary of L-1 will merge with and into Digimarc, which will consist principally of the secure ID business, which we refer to as the Secure ID Business. The distribution and the Digimarc/L-1 merger will take place on                 , 2008. The DMRC stock delivery date will occur on (1)                         , 2008, the distribution date, if the LLC spin-off occurs, or (2) if the trust transfer occurs, upon effectiveness of the Form 10.

Summary of the Transactions

        The following is a brief summary of the terms of the spin-off and the related transactions:

Distributing company   Digimarc. After the spin-off, Digimarc will not own any shares of our capital stock.

Distributed company

 

DMRC LLC, a wholly owned subsidiary of Digimarc. Following the spin-off, DMRC LLC will merge with and into its wholly owned subsidiary, DMRC Corporation,

 

 

 

4



 

 

with DMRC Corporation being the surviving company in the merger. After the DMRC Corporation merger and the DMRC stock delivery date, DMRC Corporation will be an independent public company.

Securities to be distributed

 

Units of DMRC LLC. Upon the merger of DMRC LLC and DMRC Corporation, which will occur following the spin-off, each unit of DMRC LLC will be converted into one share of DMRC Corporation common stock.

Distribution ratio

 

Each holder of Digimarc common stock will receive one unit of DMRC LLC for every three and one-half shares of Digimarc common stock held by the stockholder on the record date. Each unit of DMRC LLC will, following the spin-off, be converted into one share of DMRC Corporation common stock in the DMRC Corporation merger.

Method of distribution

 

For registered Digimarc stockholders, our transfer agent will credit shares of our common stock to book-entry accounts established to hold shares of our common stock. Book-entry refers to a method of recording stock ownership in our records in which no physical certificates are issued. For stockholders who own Digimarc common stock through a broker or other nominee, shares of our common stock will be credited to their accounts by the broker or other nominee. Following the distribution of shares of our common stock, stockholders whose shares are held in book-entry form may request the transfer of their shares of our common stock to a brokerage or other account at any time and may request the delivery of physical stock certificates for their shares, in each case without charge.

Record date

 

The record date is                        , 2008. In order to be entitled to receive shares of our common stock in the spin-off, holders of shares of Digimarc common stock must be stockholders on the record date.

Distribution date

 

                , 2008.

DMRC stock delivery date

 

The DMRC stock delivery date will be (1)                          , 2008, the distribution date, if the LLC spin-off occurs, or (2) if the trust transfer occurs, the date upon which the Form 10 is declared effective.

Distribution agent, transfer agent and registrar

 

Computershare Trust Company

Stock Exchange Listing

 

We intend to apply for listing of our common stock on The Nasdaq Global Market under the symbol "DMRCD." On the first trading day following the distribution date, trading of our common stock will begin. We cannot predict the trading prices for our common stock on or after the distribution date.

The offer

 

Digimarc has entered into the Digimarc/L-1 merger agreement with L-1 and Dolomite Acquisition Co., a wholly owned

 

 

 

5



 

 

subsidiary of L-1, pursuant to which Dolomite Acquisition Co. has offered to purchase all of the outstanding shares of Digimarc common stock, together with the associated preferred stock purchase rights, for $12.25 per share, net to the seller in cash, without interest thereon and less any required withholding taxes. The per share price to be paid in the offer does not include the value attributable to the spin-off. The occurrence of the spin-off is a condition to the completion of the offer.

Digimarc/L-1 merger

 

Digimarc has entered into an agreement with L-1 and Dolomite Acquisition Co., a wholly owned subsidiary of L-1, pursuant to which Dolomite Acquisition Co. will merge with and into Digimarc. The Digimarc/L-1 merger will occur following the spin-off. The occurrence of the spin-off and completion of the offer is a condition to the occurrence of the Digimarc/L-1 Merger.

Tax consequences to stockholders

 

For U.S. federal income tax purposes, Digimarc and L-1 will treat and report the spin-off, the offer and the Digimarc/L-1 merger as a single integrated transaction with respect to Holders (as defined in "Certain Material U.S. Federal Income Tax Consequences," beginning on page 94 of this information statement) of Digimarc stock in which the spin-off will be treated as a taxable redemption of shares of Digimarc common stock that qualifies for "exchange" treatment. Accordingly, with respect to each U.S. Holder (as defined in "Certain Material U.S. Federal Income Tax Consequences," beginning on page 94 of this information statement) who holds his or her shares of Digimarc common stock as a capital asset (generally, assets held for investment), we expect that such a U.S. Holder generally will recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between (1) the sum of the fair market value of the DMRC LLC interests received in the spin-off, the amount of cash received in the offer, and the amount of cash received in the Digimarc/L-1 merger, and (2) the U.S. Holder's adjusted tax basis in his or her shares of Digimarc common stock surrendered or deemed surrendered in the transactions. The deduction of any recognized loss may be delayed or otherwise adversely affected by certain loss limitation rules. In addition, we do not expect that such a U.S. Holder will recognize any gain or loss in the DMRC Corporation merger. With respect to each non-U.S. Holder (as defined in "Certain Material U.S. Federal Income Tax Consequences," beginning on page 94 of this information statement) who holds his or her shares of Digimarc common stock as a capital asset, we expect that such a non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain realized on the receipt of cash, DMRC LLC interests or shares of DMRC Corporation stock in exchange for shares of Digimarc common stock in the spin-off,

 

 

 

6



 

 

the offer, the Digimarc/L-1 merger and the DMRC Corporation merger.

 

 

Tax matters are complicated and the tax consequences of the spin-off, the offer, the Digimarc/L-1 merger and the DMRC Corporation merger to you will depend on your individual circumstances. You should consult your tax advisor to determine the specific tax consequences of the spin-off, the offer, the Digimarc/L-1 merger and the DMRC Corporation merger to you.

 

 

For additional information, please see "Certain Material U.S. Federal Income Tax Consequences," beginning on page 94 of this information statement.

Dividend policy

 

We do not intend to pay dividends on our common stock in the foreseeable future.

Relationship between DMRC Corporation and Digimarc Corporation after the spin-off

 

After the spin-off, Digimarc will not own any shares of our common stock. We, Digimarc and DMRC LLC will enter into a number of agreements that will govern the spin-off from Digimarc and our future relationship, including a Separation Agreement, a Transition Services Agreement and a License Agreement. The Separation Agreement among Digimarc, DMRC LLC, us, and with respect to certain sections, L-1, which will contain the key provisions related to the spin-off of the Digital Watermarking Business from Digimarc, will continue in effect following the spin-off with respect to various indemnification, insurance, confidentiality and cooperation provisions. See "Our Relationship with Digimarc After the Spin-Off."

Anti-takeover effects

 

Some provisions of our certificate of incorporation, our bylaws and Delaware law may have the effect of making more difficult an acquisition of control of us in a transaction not approved by our board of directors. For more information, see "Description of Our Capital Stock."

         You should carefully read the "Risk Factors" beginning on page 10 of this information statement.

7


Corporate Information and Structure

        We were incorporated in Delaware on June 18, 2008 by Digimarc to facilitate the separation of its Secure ID Business and its Digital Watermarking Business through the spin-off and pursuant to the Digimarc/L-1 merger. Our principal executive offices are located at 9405 S.W. Gemini Drive, Beaverton, Oregon 97008, and our telephone number is (503) 469-4800. We will maintain a Web site, which, following the DMRC Corporation merger, we expect to be at www.digimarc.com . Our Web site and the information contained on that site, or connected to that site, are not incorporated into this information statement.

Summary Historical and Pro Forma Financial Information

        The following table sets forth our selected historical financial data as of and for each of the periods indicated. We derived the selected historical financial data as of and for each of the five years ended December 31 and for the three months ended March 31 from our financial statements. The pro forma financial information set forth below portrays how our spin off from Digimarc might have affected our historical financial information if it had occurred on March 31, 2008 for balance sheet purposes and on January 1, 2007 for income statement purposes. This information is only a summary and you should read it in conjunction with our historical financial statements included in this information statement and the related notes, the pro forma financial information and the related notes and the section entitled "Management's Discussion and Analysis of the Financial Condition and Results of Operations," included in this information statement. As you read this, you should understand that the pro forma financial information is presented for informational purposes only, and is not intended to show what our financial position or results of operations would have been had we been operating as an independent, publicly-traded company during these periods or what our financial position or results of operations might be in the future. Our financial information may not be indicative of our future performance and does not necessarily reflect what our financial condition and results of operations would have been had we operated as an independent, stand-alone entity for the periods presented, particularly since many changes will occur in our operations and capitalization as a result of our spin-off from Digimarc.

        The pro forma financial information presented reflects our financial results as fully described in the financial statements and the notes to our financial statements beginning on page F-3 of this information statement and gives effect to the following pro forma transactions:

        The pro forma financial information presented does not give effect to the following:

        It is expected that the initial operating costs of DMRC on a stand-alone basis will be higher than those allocated to the DMRC operations under the shared services methodology applied in the audited financial statements of DMRC. Consequently, the financial position, results of operations and cash flows of DMRC reflected in the financial statements of DMRC may not be indicative of those that

8



would have been achieved or that might be achieved in the future had DMRC been operated as a separate, stand-alone entity for the periods reflected in its financial statements.

        The dollar amounts in the tables below are in thousands.

 
  For the Years Ended December 31,
  For the Three Months Ended March 31,
  Pro Forma for Three Months Ended March 31,
 
(1)
  2003
(unaudited)

  2004
(unaudited)

  2005
(audited)

  2006
(audited)

  2007
(audited)

  2007
(unaudited)

  2008
(unaudited)

  2008
(unaudited)

 
Operating revenues   $ 9,306   $ 11,184   $ 11,119   $ 11,071   $ 13,025   $ 3,485   $ 5,085   $ 5,085  
Gross profit percentage     58 %   68 %   69 %   66 %   69 %   72 %   73 %   73 %
Operating income (loss)     (2 )   (2 ) $ (5,770 ) $ (3,908 ) $ (1,310 ) $ (121 ) $ 641   $ 641  
 
 
  For the Years Ended December 31,
  As of March 31,
  Pro Forma As of March 31,
(1)
  2003
(unaudited)

  2004
(unaudited)

  2005
(audited)

  2006
(audited)

  2007
(audited)

  2007
(unaudited)

  2008
(unaudited)

  2008
(unaudited)

Cash, cash equivalents and short term investments   $ 78,633   $ 51,836   $ 31,982   $ 33,073   $ 32,713   $ 31,505   $ 37,435   $ 54,035
Total assets     (2 ) $ 56,210   $ 36,896   $ 37,658   $ 38,451   $ 35,469   $ 42,499   $ 59,099
Long-term obligations   $ 0   $ 160   $ 295   $ 294   $ 215   $ 240   $ 220   $ 220

(1)
The Digimarc/L-1 merger agreement provides that all cash and cash equivalents, short term investments and restricted cash (aggregate cash) of Digimarc are treated as cash retained by DMRC Corporation in its carved-out financial statements. As a result, the presentation of the financial statements and operating data of DMRC Corporation during the carve-out periods, reflect the cash flow of Digimarc, including its Secure ID Business, combined with DMRC Corporation. During 2003 through 2007, the consolidated results of Digimarc reflected operating losses of $0.1 million, $9.5 million, $23.6 million, $13.1 million and $1.6 million, respectively. Cash provided by (used in) operations for those same periods were $25.3 million, $4.7 million, ($3.2) million, $9.3 million and $16.3 million respectively. Also, capital expenditures for those periods were $14 million, $39.7 million, $15.5 million, $10.5 million and $17.7 million respectively. In addition, aggregate cash balances were reduced from $78.6 million at the end of 2003 to $32.7 million at the end of 2007, reflecting the funding of operating losses for the combined Secure ID Business and Digital Watermarking Business and for funding capital expenditures, the majority being for the Secure ID Business.


Prior to the acquisition of the Secure ID Business from Polaroid by Digimarc in late December 2001, DMRC Corporation operated as a separate entity. Its revenues for 2000 and 2001 were $11.9 million and $13.2 million, respectively, and its operating losses exceeded $20 million in each of those years. In the years after the acquisition and up through the present date, Digimarc's business, including DMRC Corporation, began to benefit from a shared services operating model where its general and administrative costs, among others, could be spread more efficiently across multiple operating activities. In addition, beginning in mid-2005, after incurring significant operating losses in 2004 and projecting further significant losses in the future, the company began a reorganization of its business to focus on its core strengths while significantly reducing its cost of operations in all areas, while growing revenues in both the Secure ID Business and Digital Watermarking Business. The change in the operating results of DMRC Corporation since its early loss years prior to the acquisition began to benefit from the shared services operating model in 2002, and later, beginning in 2005, as operating costs were reduced and revenues began to rise to current levels. As a result, DMRC Corporation's operating losses, reduced over the years to $1.3 million in 2007 and eventually achieved an operating profit of $0.6 million in the first quarter of 2008.

(2)
Certain financial data for the years ended December 31, 2003 and 2004 have been omitted from this information statement because they are not available without unreasonable effort and expense. We believe the omission of these financial data for the years ended December 31, 2003 and 2004 are not material to an understanding of our financial performance and related trends.

9



RISK FACTORS

         You should carefully consider each of the following risks and all of the other information set forth in this information statement. The following risks relate principally to our business, our relationship with Digimarc and our status as a separate publicly-traded company, as well as risks related to the nature of the spin-off itself. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we now believe to be immaterial may also adversely affect our business. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our common stock could decline.

Risks Related to our Common Stock and the Spin-off

A trading market may not develop for shares of DMRC common stock, which could adversely affect the market price of those shares.

        Until the spin-off, DMRC will be 100% owned by Digimarc and, accordingly, there currently is no trading market for shares of DMRC common stock. We do not assure you that such a market will develop or be sustained after the DMRC stock delivery date. DMRC will apply to have its shares of common stock listed on the Nasdaq Global Market under the symbol "DMRCD;" however, if the trust transfer occurs, following the spin-off and the DMRC Corporation merger, the shares of DMRC common stock will be held in trust for the benefit of Digimarc stockholders until the Form 10 is declared effective by the SEC. Until that time, the shares will not be listed for trading and you will not be able to sell any of your shares of DMRC common stock. Once the shares have been listed and trading commences, we cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market in our common stock on the Nasdaq Global Market or otherwise. If an active trading market does not develop, you may have difficulty selling any of your shares of common stock.

Substantial sales of our common stock following the spin-off may have an adverse impact on the trading price of our common stock.

        Digimarc expects that under the United States federal securities laws all of the shares of DMRC common stock distributed to Digimarc stockholders in the spin-off will be eligible for resale in the public market, except for shares held by our affiliates. Some of the Digimarc stockholders who receive our shares of common stock may decide that their investment objectives do not include ownership of our shares, and may sell their shares of common stock following the spin-off. In particular, Digimarc stockholders that are institutional investors may have investment parameters that require their portfolio companies to maintain a minimum market capitalization that we may not achieve as a result of the separation from Digimarc. We cannot predict whether stockholders will sell large numbers of our shares of common stock in the public market following the spin-off, or how quickly they may sell these shares. If our stockholders sell large numbers of our shares of common stock over a short period of time, or if investors anticipate large sales of our shares of common stock over a short period of time, the trading price of our shares of common stock could be adversely affected.

We have no recent operating history as a separate company. Our historical and pro forma financial information are not necessarily representative of the results we would have achieved as a separate publicly-traded company, and they may not be a reliable indicator of our future results.

        Digimarc did not account for DMRC, and DMRC was not operated, as a stand-alone public company for the periods presented in DMRC's financial statements included in this information statement. The financial statements of DMRC have been "carved out" from Digimarc's consolidated financial statements and reflect assumptions and allocations made by Digimarc. The financial

10



statements do not fully represent what DMRC's financial position, results of operations and cash flow would have been had DMRC operated as a stand-alone public company for the periods presented. Significant changes may occur in our cost structure, tax structure, management, financing and business operations as a result of our operating as a public company separate from Digimarc. These changes may result in increased costs associated with reduced economies of scale, marketing expenses, the incurrence of debt and interest expense, stand-alone costs for services currently provided by Digimarc, the need for additional personnel to perform services now provided by Digimarc, and the legal, accounting, compliance and other costs associated with being a public company with equity securities listed on a national exchange. As a result, the historical and pro forma information included in this information statement are not necessarily indicative of what DMRC's financial position, results of operations and cash flow will be following the spin-off. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Pro Forma Financial Information" and DMRC's financial statements and related notes included elsewhere in this information statement.

Our common stock price may be volatile, and you could lose all or part of your investment in shares of DMRC common stock.

        The price of shares of our common stock may fluctuate as a result of changes in our operating performance or prospects and other factors. Some specific factors that may have a significant effect on the price of shares of our common stock include:

We have the ability to issue additional equity securities, which would lead to dilution of our issued and outstanding common stock.

        The issuance of additional equity securities or securities convertible into equity securities would result in dilution of our existing stockholders' equity interests. We are authorized to issue, without stockholder approval, up to 2,500,000 shares of preferred stock, par value $0.001 per share, in one or more series, which may give other stockholders dividend, conversion, voting, and liquidation rights, among other rights, which may be superior to the rights of holders of our common stock. In addition, we are authorized to issue up to 50,000,000 shares of common stock, par value $0.001 per share. We

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are authorized to issue, without stockholder approval except as required by law or Nasdaq regulations, securities convertible into either common stock or preferred stock.

        Following the spin-off and the DMRC Corporation merger, we will issue to the executive officers of DMRC Corporation shares of Series A Redeemable Nonvoting Preferred stock in the aggregate amount of $50,000. In the event of the liquidation, dissolution or other winding up of DMRC Corporation, before any payment or distribution is made to the holders of common stock, holders of the Series A Redeemable Nonvoting Preferred Stock will be entitled to receive a value of $5.00 per share of Series A Redeemable Nonvoting Preferred stock held by the stockholder. The Series A Redeemable Nonvoting Preferred has no voting rights, and may be redeemed by the board of directors at any time on or after June 18, 2013.

Our corporate governance documents as well as Delaware law may delay or prevent an acquisition of us that stockholders may consider favorable, which could decrease the value of your shares.

        Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include supermajority voting requirements for stockholders to amend our organizational documents and limitations on actions by our stockholders by written consent. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law also imposes some restrictions on mergers and other business combinations between any holder of 15% or more of our outstanding common stock and us. Although we believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics and thereby provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders. See "Description of Our Capital Stock."

Risks Related to Our Business

We have a history of losses and we may not achieve or sustain profitability, particularly if we were to lose large contracts.

        Digimarc's Digital Watermarking Business has incurred significant net losses from inception. Digimarc's accumulated deficit was $100 million as of December 31, 2007. Although we anticipate that DMRC will be a profitable company from its inception, in order to achieve sustained profitability we will need to generate higher revenue than Digimarc's Digital Watermarking Business has in prior years and control expenditures. Achieving sustained profitability will depend upon a variety of factors, including the extent to which we may be required to increase the size of our workforce in order to execute our business strategy and capitalize on new opportunities. In addition, we will evaluate our strategy and market opportunities on an ongoing basis and will adjust our approach to market conditions from time to time. Finally, various adverse developments, including the loss of large contracts or cost overruns on our existing contracts, could have a negative effect on our revenue or our margins. Accordingly, increases in our expenses may not be offset by revenue increases and as a result we may not be able to achieve or sustain profitability.

A small number of customers account for a substantial portion of our revenues and the loss of any large contract may result in loss of revenue.

        Historically, we have derived a significant portion of our revenues from a limited number of customers. Two customers represented approximately 73% of our revenue for the three months ended March 31, 2008. Contracts between our large central banking, federal and commercial customers generally have terms of three to five or more years in length and sometimes for the life of the patents under license, which could be up to 20 years. Some contracts we enter into contain termination for

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convenience provisions. If we were to lose a contract due to termination for convenience or in a competitive situation, our financial results could be adversely affected.

        We expect to continue to depend upon a small number of customers for a significant portion of our revenues for the foreseeable future. The loss of, or decline in, orders or backlog from one or more major customers could reduce our revenues and have a material adverse effect on our financial results.

The majority of our revenue is subject to commercial contracts and development of new markets that may involve unpredictable delays and other unexpected changes, which might limit our actual revenue in any given quarter or year.

        We derive substantial portions of our revenue from commercial contracts tied to development schedules or development of new markets, which could shift for months, quarters or years as the needs of our customers and the markets in which they participate change. Government agencies and commercial customers also face budget pressures that introduce added uncertainty. Any shift in development schedules, the markets in which we or our licensees participate, or customer procurement processes, which are outside our control and may not be predictable, could result in delays in bookings forecasted for any particular period, could affect the predictability of our quarterly and annual results, and might limit our actual revenue in any given quarter or year, resulting in reduced and less predictable revenue and adversely affecting profitability.

The market for our products is highly competitive and alternative technologies or larger companies may undermine, limit or eliminate the market for our products' technologies, which would decrease our revenue and profits.

        The markets in which we compete for business are intensely competitive and rapidly evolving. We expect competition to continue from both existing competitors and new market entrants. We face competition from other companies and from alternative technologies. Because the market solutions based on our technologies is still in an early stage of development, we also may face competition from unexpected sources.

        Alternative technologies that may directly or indirectly compete with particular applications of our watermarking technologies include:

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        In the competitive environment in which we operate, product generation, development and marketing processes relating to technology 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 accommodate future changes in technologies related to our technologies could have a long-term effect on our growth and results of operations.

        New developments are expected to continue, and we do not assure you that discoveries by others, including current and potential competitors, will not render our services and products noncompetitive. Moreover, because of rapid technological changes, we may be required to expend greater amounts of time and money than anticipated to develop new products and services, which in turn may require greater revenue streams from these products and services to cover developmental costs. Many of the companies that compete with us for some of our business, as well as other companies with whom we may compete in the future, are larger and may have greater technical, financial, marketing, and political 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 or otherwise impede our progress. We do not assure you that we will be able to compete successfully against current or future participants in our market or against alternative technologies, or that the competitive pressures we face will not decrease our revenue and profits in the future.

We depend on our management and key employees for our future success. If we are not able to retain, hire or integrate these employees, we may not be able to meet our commitments.

        Our success depends to a significant extent on the performance and continued service of our management and our intellectual property team. The loss of the services of any of these employees could limit our growth or undermine customer relationships.

        Due to the high level of technical expertise that our industry requires, our ability to successfully develop, market, sell, license and support our products, services, and intellectual property depends to a significant degree upon the continued contributions of our key personnel in engineering, sales, marketing, operations, legal and licensing, many of whom would be difficult to replace. We believe our future success will depend in large part upon our ability to retain our current key employees and our ability to attract, integrate and retain these personnel in the future. It may not be practical for us to match the compensation some of our employees could garner at other employment. In addition, we may encounter difficulties in hiring and retaining employees because of concerns related to our financial performance. These circumstances may have a negative effect on the market price of our common stock, and employees and prospective employees may factor in the uncertainties relating to our stability and the value of any equity-based incentives in their decisions regarding employment opportunities and decide to leave our employ. Moreover, our business is based in large part on patented technology, which is unique and not generally known. New employees require substantial training, involving significant resources and management attention. Competition for experienced personnel in our business can be intense. If we do not succeed in attracting new, qualified personnel or in integrating, retaining and motivating our current personnel, our growth and ability to deliver products and services that our customers require may be hampered. Although our employees generally

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have executed agreements containing non-competition clauses, we do not assure you 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 could be able to freely join our competitors. Although we generally attempt to control access to and distribution of our proprietary information by our employees, we do not assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. Any of these events could have a material adverse effect on our financial and business prospects.

If leading companies in our industry or standard-setting bodies or institutions downplay, minimize, or reject the use of our technologies, deployment may be slowed and we may be unable to achieve revenue growth, particularly in the media and entertainment sectors.

        Many of our business endeavors, such as our licensing of intellectual property in support of audio and video copy-control applications, can be impeded or frustrated by larger, more influential companies or by standard-setting bodies or institutions downplaying, minimizing or rejecting the value or use of our other technologies. A negative position by these companies, bodies or institutions, if taken, may result in obstacles for us that we would be incapable of overcoming and may block or impede the adoption of digital watermarking, particularly in the media and entertainment market. In addition, potential customers in the media and entertainment industry may delay or reject initiatives that relate to deployment of our technologies. Such a development would make the achievement of our business objectives in this market difficult or impossible.

If we are unable to respond to regulatory or industry standards effectively, or if we are unable to develop and integrate new technologies effectively, our growth and the development of our products and services could be delayed or limited.

        Our future success will depend in part on our ability to enhance and improve the responsiveness, functionality and features of our products and services, and those of our business partners, in accordance with regulatory or industry standards. Our ability to remain competitive will depend in part on our ability to influence and respond to emerging industry and governmental standards in a timely and cost-effective manner. If we are unable to influence these or other standards or respond to such standards effectively, our growth and the development of certain products and services could be delayed or limited.

        Our market is characterized by new and evolving technologies. The success of our business will depend on our ability to develop and integrate new technologies effectively and 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:

        We do not assure you that we will be successful in responding to these technological and industry challenges in a timely and cost-effective manner. If we are unable to develop or integrate new technologies effectively or respond to these changing needs, our margins could decrease, and our release of new products and services and the deployment of our watermarking technology could be adversely affected.

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We may need to retain additional employees or contract labor in the future in order to take advantage of new business opportunities arising from increased demand, which could impede our ability to achieve or sustain profitability.

        We have staffed our company with the intent of achieving and sustaining profitability. Our current staffing levels could affect our ability to respond to increased demand for our services. In addition, to meet any increased demand and take advantage of new business opportunities in the future, we may need to increase our workforce through additional employees or contract labor, which would increase our costs. If we experience such an increase in costs, we may not succeed in achieving or sustaining profitability.

Our future growth will depend to some extent on our successful implementation of our technology in solutions provided by third parties, including partners and suppliers.

        Our business and strategy rely substantially on deployment of our technologies by third-party software developers and original equipment manufacturers. For example, one of our technologies is commonly deployed in image editing applications to permit users of these products to read data embedded in imagery, and thereby identify ownership and discern the identities of image owners. Another of our technologies is used in our anti-counterfeiting products. If third parties who include our technologies in their products cease to do so, or we fail to obtain other partners who will incorporate, embed, integrate or bundle our technologies, or these partners are unsuccessful in their efforts, our efforts to expand deployment of our technologies would be adversely affected and, consequently, our ability to increase revenues would be adversely affected and we may suffer other adverse effects to our business. In addition, if our technologies do not perform according to market expectations, our future sales would suffer as customers seek other providers.

Our growth of IP licensing revenues depends on successful implementation of solutions by our licensees and third parties and successful development of new markets for our technologies.

        Our IP licensing business and strategy rely, in part, on successful deployment of our technologies by our licensees and other third-party software developers and original equipment manufacturers. For example, our technology is being deployed as part of Digital Cinema systems to theatres around the world by companies that integrate technologies and subsystems. If third parties who license our intellectual property for their products cease to do so, or we fail to obtain other partners who will incorporate, embed, integrate or bundle our technologies and intellectual property, or these partners are unsuccessful in their efforts, our ability to increase licensing revenues would be adversely affected. In addition, if our technologies do not perform according to market expectations, our future sales would suffer as customers seek other providers.

The loss of international customers or the failure to find new international customers could adversely affect our profitability and slow our growth.

        We believe that revenue from sales of products and services to commercial, governmental and other customers outside the U.S. could represent a growing percentage of our total revenue in the future. International sales and services are subject to a number of risks that can adversely affect our sales of products and services to customers outside of the United States, including the following:

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        We do not have an extensive operational infrastructure for international business. We generally depend on local or international business partners and subcontractors for performance of substantial portions of our business. These factors may result in greater risk of performance problems or of reduced profitability with respect to our international programs in these markets. In addition, if foreign customers, in particular foreign government authorities, terminate or delay the implementation of our products and services, it may be difficult for us to recover our potential losses.

        We are exposed to currency exchange fluctuations and do not engage in foreign currency hedging transactions. We may in the future choose to limit our exposure by the purchase of forward foreign exchange contracts, collared options, currency swap agreements or through similar hedging strategies. No currency hedging strategy, however, can fully protect against exchange-related losses.

The terms and conditions of our contracts could subject us to damages, losses and other expenses if we fail to meet delivery and other performance requirements.

        Our service contracts typically include provisions imposing (i) development, delivery and installation schedules and milestones, (ii) customer acceptance and testing requirements and (iii) other performance requirements. To the extent these provisions involve performance over extended periods of time, risks of noncompliance may increase. From time to time we have experienced delays in system implementation, timely acceptance of programs, concerns regarding program performance and other contractual disputes. Any failure to meet contractual milestones or other performance requirements as promised, or to successfully resolve customer disputes, could result in us incurring liability for damages, as well as increased costs, lower margins, or compensatory obligations in addition to other losses, such as harm to our reputation. Any unexpected increases in costs to meet our contractual obligations or any other requirements necessary to address claims and damages with regard to our customer contracts could have a material adverse effect on our business and financial results.

Our products could have unknown defects or errors, which may give rise to claims against us, divert application of our resources from other purposes or increase our project implementation and support costs.

        Products and services as complex as those we offer or develop may contain undetected defects or errors. Furthermore, we often provide complex implementation, integration, customization, consulting and other technical services in connection with the implementation and ongoing maintenance of our products. Despite testing, defects or errors in our products and services may occur, which could result in delays in the development and implementation of products and systems, inability to meet customer requirements or expectations in a timely manner, loss of revenue or market share, increased implementation and support costs, failure to achieve market acceptance, diversion of development resources, injury to our reputation, increased insurance costs, increased service and warranty costs and warranty or breach of contract claims. Although we attempt to reduce the risk of losses resulting from warranty or breach of contract claims through warranty disclaimers and liability limitation clauses in our sales agreements when we can, these contractual provisions are sometimes not included and may not be enforceable in every instance. If a court refuses 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, the expense associated with defending these actions or paying the resultant claims could be significant.

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The security systems used in our product and service offerings may be circumvented or sabotaged by third parties, which could result in the disclosure of sensitive information or private personal information or cause other business interruptions that could damage our reputation and disrupt our business.

        Our business relies on computers and other information technologies, both internal and at customer locations. The protective measures that we use may not prevent security breaches, and failure to prevent security breaches may disrupt our business, damage our reputation, and expose us to litigation and liability. A party who is able to circumvent security measures could misappropriate sensitive or proprietary information or materials or cause interruptions or otherwise damage our products, services and reputation, and the property of our customers. If unintended parties obtain sensitive data and information, or create bugs or viruses or otherwise sabotage the functionality of our systems, 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. Further, our insurance coverage may be insufficient to cover losses and liabilities that may result from these events.

        In addition, 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. Any protection or remedial measures may not be available at a reasonable price or at all, or may not be entirely effective if commenced.

We are subject to risks encountered by companies developing and relying upon new technologies, products and services for substantial amounts of their growth or revenue.

        Our business and prospects must be considered in light of the risks and uncertainties to which companies with new and rapidly evolving technologies, products and services are exposed. These risks include the following:

        Some of our key technologies and solutions from our patent or technology licensees are in the development stage. Consequently, products incorporating these technologies and solutions are undergoing technological change and are in the early stage of introduction in the marketplace. Delays in the adoption of these products or adverse competitive developments may result in delays in the development of new revenue sources or the growth in our revenue. In addition, we may be required to incur unanticipated expenditures if product changes or improvements are required. Additionally, new industry standards might redefine the products that we or our licensees are able to sell, especially if these products are only in the prototype stage of development. If product changes or improvements are required, success in marketing these products by us or our licensees and achieving profitability from these products could be delayed or halted. We also may be required to fund any changes or improvements out of operating income, which could adversely affect our profitability.

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We may not be able to protect adequately our intellectual property, and we may be subject to infringement claims and other litigation, which could adversely affect our business.

        Our success depends in part on licensing our proprietary technologies. To protect our intellectual property portfolio, we rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements. Unlicensed copying and use of our intellectual property or infringement of our intellectual property rights result in the loss of revenue to us.

        We face risks associated with our patent position, including the potential need from time to time to engage in significant legal proceedings to enforce our patents, the possibility that the validity or enforceability of our patents may be denied, and the possibility that third parties will be able to compete against us without infringing our patents. Budgetary concerns may cause us not to file, or continue, litigation against known infringers of our patent rights, or may cause us not to file for, or pursue, patent protection for all of our inventive technologies in jurisdictions where they may have value. Some governmental entities that might infringe our intellectual property rights may enjoy sovereign immunity from such claims. Failure to reliably enforce our patent rights against infringers may make licensing more difficult. If we fail to protect our intellectual property rights and proprietary technologies adequately, if there are changes in applicable laws that are adverse to our interests, or if we become involved in litigation relating to our intellectual property rights and proprietary technologies or relating to the intellectual property rights of others, our business could be seriously harmed because the value ascribed to our intellectual property could diminish and result in a lower stock price or we may incur significant costs in bringing legal proceedings against third parties who are infringing our patents.

        Effective protection of intellectual property rights may be unavailable or limited. Patent protection throughout the world is generally established on a country-by-country basis. We have applied for patent protection in the United States and in various other countries. We do not assure you, however, that pending patents will be issued or that issued patents will be valid or enforceable. Failure to obtain these patents or failure to enforce those patents that are obtained may result in a loss of revenue to us. We do not 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 of our patents or other intellectual property rights.

        We are the exclusive licensee under some third-party patents, and may need the assistance of these parties if we choose to enforce any of these patent rights. The cooperation of these third parties cannot be assured even though we rely on some of these technologies for our products or for our licenses to third parties.

        As more companies engage in business activities relating to digital watermarking, and develop corresponding intellectual property rights, it is increasingly likely that claims may arise which assert that some of our products or services infringe upon other parties' intellectual property rights. These claims could subject us to costly litigation, divert management resources and result in the invalidation of our intellectual property rights. These claims may require us to pay significant damages, cease production of infringing products, terminate our use of infringing technologies or develop non-infringing technologies. In these circumstances, continued use of our technologies may require that we acquire licenses to the intellectual property that is the subject of the alleged infringement, and we might not be able to obtain these licenses on commercially reasonable terms or at all. Our use of protected technologies may result in liability that threatens our continuing operation.

        Some of our contracts include provisions regarding our non-infringement of third-party intellectual property rights. As deployment of our technology increases, and more companies enter our markets, the likelihood of a third party lawsuit resulting from these provisions increases. If an infringement arose in a context governed by such a contract, we may have to refund to our customer amounts already paid to us or pay significant damages, or we may be sued by the party allegedly infringed upon. Similarly, as we seek to broaden the number of companies licensed under our patent portfolio, some

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may seek contractual assurances that we will pursue—by litigation if necessary—their competitors who use our patented technology but are not licensed to do so. Compliance with any such contract provisions may require that we pursue litigation where our costs exceed our likely recovery.

        As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees, directors, consultants and corporate partners, and attempt to control access to and distribution of our technologies, solutions, documentation and other proprietary information. Despite these procedures, third parties could copy or otherwise obtain and make unauthorized use of our technologies, solutions or other proprietary information or independently develop similar technologies, solutions or information. The steps that we have taken to prevent misappropriation of our solutions, technologies or other proprietary information may not prevent their misappropriation, particularly outside the United States where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.

We do not assure that our internal controls and procedures will succeed in achieving their stated goals under all potential future conditions, regardless of how remote.

        We have deployed significant resources to design, implement, and maintain effective internal controls and procedures, including disclosure controls and procedures. Although our internal controls and procedures are designed to provide reasonable assurance of achieving their objectives, the design of any system of controls is based in part upon various assumptions about the likelihood of future events, and we do not assure you that our system will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Any failure to maintain adequate controls or to adequately implement required new or improved controls could harm our operating results or cause us to fail to meet our reporting obligations in a timely and accurate manner.

If our revenue models and pricing structures relating to products and services that are under development do not gain market acceptance, the products and services may fail to attract or retain customers and we may not be able to generate new or sustain existing revenue.

        Some of our business involves embedding digital watermarks in traditional and digital media, including identification documents, secure documents, audio, video and imagery, and licensing our intellectual property. Our revenue stream is based primarily on a combination of development, consulting, subscription and license fees from copyright protection and counterfeit deterrence applications. We have not fully developed revenue models for some of our future digital watermarking applications and licensing endeavors. Because some of our products and services are not yet well-established in the marketplace, and because some of these products and services will not directly displace existing solutions, we cannot be certain that the pricing structure for these products and services will gain market acceptance or be sustainable over time or that the marketing for these products and services will be effective.

While we currently have no claims, litigation or regulatory actions filed or pending by or against DMRC, future claims, litigation or enforcement actions could arise, and any obligation to pay a judgment or damages could materially harm our business or financial condition.

        From time to time, Digimarc has been engaged in litigation and incurred significant costs relating to these matters. The inherent uncertainties of litigation, and the ultimate cost and outcome of litigation cannot be predicted. We carry director and officer liability insurance and other insurance policies that provide protection against various liabilities relating to claims against us and our executive officers and directors up to prescribed policy limits. If these policies do not adequately cover expenses and liabilities relating to future lawsuits, our financial condition could be materially harmed. In addition, if this insurance coverage becomes unavailable to us or premiums increase significantly in the future, it could make it more difficult for us to retain and attract officers and directors and could expose us to potentially self-funding certain future liabilities ordinarily mitigated by director and officer liability insurance.

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THE SPIN-OFF

Reasons for the Spin-Off

        On June 29, 2008, Digimarc's board of directors approved the Digimarc/L-1 merger and the spin-off under the terms of the Digimarc/L-1 merger agreement. Digimarc believes that the Digimarc/L-1 merger and spin-off will enhance value for stockholders of Digimarc and stockholders of DMRC Corporation, by creating significant opportunities and benefits, including:


The Separation of the Digital Watermarking Business from Digimarc

        We are a wholly owned subsidiary of DMRC LLC, which has been and will be immediately prior to the spin-off a wholly owned subsidiary of Digimarc. DMRC LLC was formed in Delaware on June 18, 2008, in anticipation of the spin-off of the Digital Watermarking Business. Prior to the expiration of, and as a condition to, the offer, Digimarc will contribute all of the assets and liabilities related to its Digital Watermarking Business, together with all of Digimarc's cash, including cash received upon the exercise of stock options, to DMRC LLC. We do not believe that the restructuring will result in the loss of any significant customers or contracts.

Description of the Spin-Off

        Following, the restructuring, all of the limited liability company interests of DMRC LLC will be (1) distributed to holders of shares of Digimarc common stock in the LLC spin-off, or (2) pending effectiveness of the Form 10, transferred to a newly-created trust for the benefit of holders of shares of Digimarc common stock in the trust transfer, in either case, on the basis of one unit of DMRC LLC for every three and one-half shares of Digimarc common stock held by the stockholder. Following the spin-off, DMRC LLC will merge with and into its wholly owned subsidiary, DMRC Corporation, and each limited liability company interest of DMRC LLC will be converted into one share of common stock of DMRC Corporation. As a result, each Digimarc stockholder will receive one share of DMRC Corporation for every three and one-half shares of Digimarc common stock held by the stockholder. If the trust transfer occurs, the trust will distribute the shares of DMRC Corporation common stock to the Digimarc stockholders upon effectiveness of the Form 10.

        If the trust transfer occurs, a trust will be established under Delaware law for the benefit of Digimarc's record stockholders as of the record date. The trust will hold all of the interests in DMRC LLC, and following the DMRC Corporation merger, the shares of DMRC Corporation until the Form 10 is declared effective by the SEC, at which time the shares will be distributed to Digimarc's stockholders as of the record date, as beneficiaries of the trust, pro rata in accordance with their ownership of shares of Digimarc common stock on the record date. The DMRC Corporation shares will be the sole asset of the trust, and the sole purpose of the trust will be to hold and distribute those shares, as described. The trustees of the trust will be selected from Digimarc's current independent directors, and will have exclusive authority to take actions on behalf of the trust within its stated purposes. Beneficial interests in the trust will not be issued in certificated form or otherwise evidenced by separate instruments of any kind, and will not be permitted to be traded. Following distribution of the DMRC Corporation shares by the trust to the beneficiaries, the trust will be liquidated.

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        For all U.S. federal and applicable state and local income tax purposes, we, Digimarc and L-1 will treat the trust transfer as a transfer of the DMRC LLC interests to Digimarc's stockholders followed by a transfer of such interests by such stockholders to the trust, and such Digimarc stockholders will be treated as the grantors and owners of such interests held in the trust pursuant to Section 677 of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, and the trust will be treated as a liquidating trust within the meaning of Treasury Regulations Section 301.7701-4(d). The trustees will value, or cause to be valued, the DMRC LLC interests and notify the stockholders in writing of such valuation.

Manner of Effecting the Spin-Off

        The general terms and conditions of the spin-off will be set forth in the separation agreement to be entered into by and among Digimarc, DMRC LLC, us and, with respect to certain sections, L-1. For a description of the terms of the separation agreement, see "Our Relationship with Digimarc After the Spin-Off—Separation Agreement."

        Digimarc stockholders are not required to pay for shares of our common stock to be received in connection with the spin-off and the DMRC Corporation merger. No vote of Digimarc stockholders is required or sought in connection with the spin-off or the DMRC Corporation merger, and Digimarc stockholders have no appraisal rights in connection with the distribution and the DMRC Corporation merger. The occurrence of the spin-off is a condition to the occurrence of the offer.

        On the DMRC stock delivery date, registered holders of Digimarc common stock will have their shares of DMRC Corporation common stock credited to book-entry accounts established for them by Computershare. Computershare will mail an account statement to each such registered holder stating the number of shares of DMRC Corporation common stock credited to the holder's account. Holders of record shall receive cash equal to the fair market value of any fractional shares of DMRC Corporation common stock. After the DMRC stock delivery date, any holder may request:


        If you become a registered holder of our common stock in connection with the spin-off and the DMRC Corporation merger and you prefer to receive one or more physical share certificates representing your shares of our common stock, you will receive one or more certificates for all shares of DMRC Corporation common stock. Computershare will mail you certificates representing your shares of our common stock as soon after the date of request as practicable.

        For those holders of Digimarc common stock who hold their shares through a broker, bank or other nominee, Computershare will credit the shares of our common stock to the accounts of those nominees who are registered holders, who, in turn, will credit their customers' accounts with our common stock. We and Digimarc anticipate that brokers, banks and other nominees will generally credit their customers' accounts with DMRC Corporation common stock on or shortly after the DMRC stock delivery date.

Results of the Spin-Off

        Following the spin-off, the DMRC Corporation merger and the DMRC stock delivery date, we will be an independent, publicly-traded company owning and operating the Digital Watermarking Business. We expect that approximately            shares of our common stock will be issued and outstanding immediately following the spin-off, based upon the distribution of one share of our common stock for every three and one-half shares of Digimarc common stock, and the approximate number of outstanding shares of Digimarc common stock on                 , 2008. The actual number of shares to be

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distributed will be determined based on the number of Digimarc shares outstanding on                 , 2008, the record date.

        Stockholder approval of the spin-off is not required, and you are not required to take any action to receive your DMRC Corporation common stock.

Market for Our Common Stock

        There is currently no trading market for our common stock. We will apply to list our common stock on The Nasdaq Global Market under the symbol "DMRCD." We have not and will not set the initial price of our common stock. The initial price will be established by the public markets.

        We cannot predict the price at which our common stock will trade after the DMRC stock delivery date. The price at which our common stock trades is likely to fluctuate significantly, particularly until an orderly public market develops. Trading prices for our common stock will be determined in the public markets and may be influenced by many factors. For more information, see "Risk Factors—Risks Related to Our Common Stock and the Spin-Off."

        Shares of our common stock distributed to holders in connection with the spin-off will, as of the DMRC stock delivery date, be transferable without registration under the Securities Act except for shares received by persons who may be deemed to be our affiliates. Persons who may be deemed to be our affiliates after the distribution generally include individuals or entities that control, are controlled by or are under common control with us, which may include our executive officers, directors or principal stockholders. Securities held by our affiliates will be subject to resale restrictions under the Securities Act. Our affiliates will be permitted to sell shares of our common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.

Spin-Off Conditions and Termination

        We expect that the distribution will be effective on the distribution date,                 , 2008, provided that, among other things:

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        The spin-off is contemplated in connection with completion of the Digimarc/L-1merger. The Digimarc/L-1 merger agreement may be terminated at any time prior to the effective time of the Digimarc/L-1 merger:

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DIVIDEND POLICY

        We do not expect to pay any dividends on our common stock in the foreseeable future. Payment of future cash dividends will be at the discretion of our board of directors in accordance with applicable law after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, plans for expansion and contractual restrictions with respect to the payment of dividends.

25



CAPITALIZATION

        The following table shows our capitalization as of March 31, 2008 on both an historical basis and a pro forma basis giving effect to our anticipated post-spin-off capital structure as if the spin-off occurred on March 31, 2008. This table should be read in conjunction with our historical financial statements and accompanying notes included in this information statement and the sections entitled "Selected Historical Financial Information," "Pro Forma Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Our Capital Stock."

        Our pro forma capitalization is not necessarily indicative of our capitalization had the spin-off been completed on March 31, 2008. The pro forma capitalization below may not reflect the capitalization or financial condition that would have resulted had we been operating as an independent, publicly-traded company at that date, and is not necessarily indicative of our future capitalization or financial condition. For an explanation of the pro forma adjustments made to our historical financial statements for the anticipated spin-off and the transactions related to the proposed spin-off to derive the pro forma capitalization described below, please see "Pro Forma Financial Information."

 
  As of March 31, 2008
 
  Historical
  Pro Forma(1)
 
  (In thousands)

Cash and cash equivalents and short-term investments   $ 37,435   $ 54,035
   
 
Total long-term debt        
Stockholders' equity:            
  Net parent's investment     38,514    
  Preferred stock         50
  Common stock         7,225
  Additional paid-in capital         39,439
   
 
Total stockholders' equity   $ 38,514   $ 46,714
   
 
Total capitalization   $ 38,514   $ 46,714
   
 

        Upon the completion of the spin-off, Digimarc's net investment in DMRC will be reclassified as DMRC stockholders' equity and will be allocated between common stock and additional paid-in capital based on the number of shares of DMRC common stock outstanding at the completion of the spin-off. We have assumed for purposes of the pro forma financial statements a distribution ratio of one share of our common stock for every three and one-half shares of outstanding Digimarc common stock, excluding shares held in treasury.

26



SELECTED HISTORICAL FINANCIAL INFORMATION

        The following table sets forth our selected financial information as of and for each of the years in the five-year period ended December 31, 2007, as of and for the three months ended March 31, 2007 and 2008, which has been derived from (a) audited financial statements as of December 31, 2005, 2006 and 2007 and for the years ended December 31, 2005, 2006 and 2007, which are included elsewhere in this information statement, (b) unaudited financial information as of December 31, 2003 and 2004 and for the years ended December 31, 2003 and 2004, which are not included in this information statement and (c) unaudited financial information as of March 31, 2007 and 2008 and for the three months ended March 31, 2007 and 2008, which are included elsewhere in this information statement. In our opinion, the information derived from our unaudited financial statements is presented on a basis consistent with the information in our audited financial statements. The selected financial information presented may not reflect the results of operations or financial condition that would have resulted had we been operating as an independent, publicly-traded company during the periods presented, and is not necessarily indicative of our future performance as an independent company. See "Risk Factors—Risks Related to our Common Stock and the Spin-Off."

        The selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the pro forma financial information and accompanying notes, and the historical financial statements and the accompanying notes included elsewhere in this information statement.

Statement of Operations Data(1)

 
  For the Years Ended December 31,
  For the Three Months Ended March 31,
 
 
  2003
(unaudited)

  2004
(unaudited)

  2005
(audited)

  2006
(audited)

  2007
(audited)

  2007
(unaudited)

  2008
(unaudited)

 
Operating revenues   $ 9,306   $ 11,184   $ 11,119   $ 11,071   $ 13,025   $ 3,485   $ 5,085  
Gross profit percentage     58 %   68 %   69 %   66 %   69 %   72 %   73 %
Operating income (loss)     (2 )   (2 ) $ (5,770 ) $ (3,908 ) $ (1,310 ) $ (121 ) $ 641  

Balance Sheet Data(1)

 
  For the Years Ended December 31,
  As of March 31,
 
  2003
(unaudited)

  2004
(unaudited)

  2005
(audited)

  2006
(audited)

  2007
(audited)

  2007
(unaudited)

  2008
(unaudited)

Cash, cash equivalents and short term investments   $ 78,633   $ 51,836   $ 31,982   $ 33,073   $ 32,713   $ 31,505   $ 37,435
Total assets     (2 ) $ 56,210   $ 36,896   $ 37,658   $ 38,451   $ 35,469   $ 42,499
Long-term obligations   $ 0   $ 160   $ 295   $ 294   $ 215   $ 240   $ 220
                                                                              

(1)
The Digimarc/L-1 merger agreement provides that all cash and cash equivalents, short term investments and restricted cash (aggregate cash) of Digimarc are treated as cash retained by DMRC Corporation in its carved-out financial statements. As a result, the presentation of the financial statements and operating data of DMRC Corporation during the carve-out periods, reflect the cash flow of Digimarc, including its Secure ID Business, combined with DMRC Corporation. During 2003 through 2007, the consolidated results of Digimarc reflected operating losses of $0.1 million, $9.5 million, $23.6 million, $13.1 million and $1.6 million respectively. Cash provided by (used in) operations for those same periods were $25.3 million, $4.7 million, ($3.2) million, $9.3 million and $16.3 million respectively. Also, capital expenditures for those periods were $14 million, $39.7 million, $15.5 million, $10.5 million and $17.7 million respectively. In addition, aggregate cash balances were reduced from $78.6 million at the end of 2003 to

27


(2)
Certain financial data for the years ended December 31, 2004 and 2003 have been omitted from this information statement because they are not available without unreasonable effort and expense. We believe the omission of these financial data for the years ended December 31, 2004 and 2003 are not material to an understanding of our financial performance and related trends.

28



PRO FORMA FINANCIAL INFORMATION

        The pro forma financial information set forth below portrays how our spin-off from Digimarc might have affected our historical financial information if it had occurred on March 31, 2008 for balance sheet purposes and on January 1, 2007 for income statement purposes. As you read this, you should be aware that the pro forma financial information is presented for informational purposes only, and is not intended to show what our financial position or results of operations would have been had we been operating as an independent, publicly-traded company during these periods or what our financial position or results of operations might be in the future. The pro forma financial information should be read with our historical financial statements included in this information statement and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."

How we prepared the pro forma financial information

        We prepared the pro forma financial information based upon our historical financial statements adjusted to reflect our estimate of the effect of events that are directly attributable to the spin-off, expected to have a continuing effect on our operations, and are factually supportable. The pro forma adjustments were derived from available information and were based on assumptions that we believe are reasonable and that reflect our current intentions.

Events that are reflected in the pro forma financial information

        The pro forma financial information reflects:

Events that are not reflected in the pro forma financial information

        The pro forma financial information does not reflect:


29



    DMRC Corporation

    Unaudited Pro Forma Statement of Operations

    For the Year Ended December 31, 2007

    (In thousands, except per share data)

 
  Historical
  The Transaction
  Pro Forma
 
Revenue:                    
  Service   $ 7,806         $ 7,806  
  License and subscription     5,219           5,219  
   
 
 
 
    Total revenue     13,025         13,025  

Cost of revenue:

 

 

 

 

 

 

 

 

 

 
  Service     3,815           3,815  
  License and subscription     217           217  
   
 
 
 
    Total cost of revenue     4,032         4,032  
   
             

Gross profit

 

 

8,993

 

 


 

 

8,993

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 
  Sales and marketing     2,453           2,453  
  Research, development and engineering     2,912           2,912  
  General and administrative     3,345           3,345 (5)
  Intellectual Property     1,593           1,593  
   
 
 
 
    Total operating expenses     10,303         10,303  
   
 
 
 

Operating income (loss)

 

 

(1,310

)

 


 

 

(1,310

)
Other income (expense), net     1,387           1,387  
   
 
 
 
Income (loss) before provision for income taxes     77         77  
Provision for income taxes     (22 )         (22 )
   
 
 
 
  Net income (loss)   $ 55   $     $ 55  
   
 
 
 

Pro Forma

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share—basic and diluted

 

 

 

 

 

 

 

$

0.01

 
  Weighted average shares outstanding—basic and diluted                 7,225  

30



DMRC Corporation

Unaudited Pro Forma Statement of Operations

For the Three Months Ended March 31, 2008

(In thousands, except per share data)

 
  Historical
  The Transaction
  Pro Forma
 
Revenue:                    
  Service   $ 2,548         $ 2,548  
  License and subscription     2,537           2,537  
   
 
 
 
    Total revenue     5,085         5,085  

Cost of revenue:

 

 

 

 

 

 

 

 

 

 
  Service     1,349           1,349  
  License and subscription     59           59  
   
 
 
 
    Total cost of revenue     1,408         1,408  
   
 
 
 

Gross profit

 

 

3,677

 

 


 

 

3,677

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 
  Sales and marketing     656           656  
  Research, development and engineering     922           922  
  General and administrative     980           980 (5)
  Intellectual Property     478           478  
   
 
 
 
    Total operating expenses     3,036         3,036  
   
 
 
 

Operating income (loss)

 

 

641

 

 


 

 

641

 
Other income (expense), net     294           294  
   
 
 
 
Income (loss) before provision for income taxes     935         935  
Provision for income taxes     (11 )         (11 )
   
 
 
 
  Net income (loss)   $ 924   $     $ 924  
   
 
 
 

Pro Forma

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share—basic and diluted

 

 

 

 

 

 

 

$

0.13

 
  Weighted average shares outstanding—basic and diluted                 7,225  

31


DMRC Corporation

Unaudited Pro Forma Balance Sheet

As of March 31, 2008

(In thousands, except share data)

 
  Historical
  The
Transaction

  Pro Forma
 
ASSETS                    

Current assets:

 

 

 

 

 

 

 

 

 

 
  Cash and cash equivalents   $ 33,586   $ 16,600   $ 50,186 (2)
  Short-term investments     3,849           3,849  
  Trade accounts receivable, net     3,233           3,233  
  Other current assets     278           278  
   
 
 
 
    Total current assets     40,946     16,600     57,546  
  Property and equipment, net     1,167           1,167  
  Other assets, net     386           386  
   
 
 
 
    Total assets   $ 42,499   $ 16,600   $ 59,099  
   
 
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 
  Accounts payable and other accrued liabilities   $ 411   $ 8,400   $ 8,811 (1)
  Accrued payroll and related costs     325           325  
  Deferred revenue     3,029           3,029  
   
 
 
 
    Total current liabilities     3,765     8,400     12,165  
  Long-term liabilities     220           220  
   
 
 
 
    Total liabilities     3,985     8,400     12,385  
Commitments and contingencies                    
Stockholders' equity:                    
  Net parent's investment     38,514     (38,514 )    
  Preferred stock           50     50 (4)
  Common stock           7,225     7,225 (2)(3)
  Additional paid-in capital           39,439     39,439 (2)(3)(4)
   
 
 
 
    Total stockholders' equity     38,514     8,200     46,714  
   
 
 
 
    Total liabilities and stockholders' equity   $ 42,499   $ 16,600   $ 59,099  
   
 
 
 

        The transactions included in the unaudited pro-forma balance sheet reflects the following:

32


33



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of DMRC Corporation, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Please see the discussion regarding forward-looking statements included in this information statement, under the caption "Forward-Looking Statements."

         Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not give any assurances that these expectations will prove to be correct. These statements by their nature involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in our forward-looking statements, and we do not intend to update or revise any forward-looking statements as a result of new information, future events or otherwise. We urge you to carefully review and consider the various disclosures we have made that attempt to advise interested parties of the factors which affect our business, including the disclosures made under the caption "Forward Looking Statements" in this information statement, the audited financial statements and related notes included in this information statement, and other reports and filings made with the SEC by Digimarc.

         The following discussion should be read in conjunction with our financial statements and the related notes and other financial information appearing elsewhere in this information statement.

         All dollar amounts are in thousands, unless otherwise noted.

Planned Merger and Separation

        On June 29, 2008, Digimarc entered into an amended and restated merger agreement, as amended by that Amendment No. 1 dated as of July 17, 2008 and as may be further amended, which we refer to as the Digimarc/L-1 merger agreement, with L-1 and Dolomite, a wholly owned subsidiary of L-1, pursuant to which Dolomite has offered to purchase all of the outstanding shares of Digimarc common stock, together with the associated preferred stock purchase rights for $12.25 per share. The Digimarc/L-1 merger agreement provides, among other things, that following the completion of the offer and subject to other conditions set forth in the Digimarc/L-1 merger agreement, Dolomite will merge with and into Digimarc with Digimarc continuing as the surviving company and a wholly owned subsidiary of L-1.

        Prior to the expiration of the offer, and as a condition to the Digimarc/L-1 merger, Digimarc will contribute all of the assets and liabilities related to its digital watermarking business, together with all of Digimarc's cash, including cash received upon the exercise of stock options, to a wholly owned subsidiary of Digimarc, DMRC LLC, the interests of which will be (1) distributed to holders of shares of Digimarc common stock in the LLC spin-off, or (2) pending effectiveness of the Form 10, transferred to a newly-created trust for the benefit of holders of shares of Digimarc common stock in the trust transfer, in either case, on the basis of one unit of DMRC LLC for every three and one-half shares of Digimarc Corporation common stock held by the stockholder. Following the spin-off, DMRC LLC will merge with and into its wholly owned subsidiary, DMRC Corporation, which we refer to as the DMRC Corporation merger, and each limited liability company interest of DMRC LLC will be converted into one share of common stock of DMRC Corporation. As a result, each Digimarc stockholder will receive one share of DMRC Corporation for every three and one-half shares of Digimarc common stock held by the stockholder. If the trust transfer occurs, the trust will distribute the shares of DMRC Corporation common stock to Digimarc stockholders upon effectiveness of the Form 10.

        In connection with the Digimarc/L-1 merger, we will enter into a separation agreement with Digimarc, DMRC LLC and, with respect to certain sections, L-1 which will contain many of the key

34



provisions related to the spin-off the Digital Watermarking Business from Digimarc. We will enter into a transition services agreement with Digimarc to provide one another with transition services and other assistance substantially consistent with the services provided before completion of the spin-off, and a license agreement with L-1 Identity Solutions Operating Company, under which we will license to one another certain intellectual property to be used in the other's business following the spin-off. After the completion of the Digimarc/L-1 merger, DMRC Corporation will change its name to Digimarc Corporation. The following Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the historical financial condition and results of operations for the Digital Watermarking Business, or DMRC Corporation, without giving effect to the proposed transactions.

Overview

        Our technologies, and those of our licensees, span the complete range of media content, enabling governments and enterprises to:

        Our revenue is generated primarily from patent and technology license fees paid by business partners, and development and service contracts with a variety of government and commercial organizations, including a consortium of Central Banks and a major media and audience measurement company.

Basis of Accounting

        The financial statements include the assets, liabilities and results of operations of the components of Digimarc that constitute the business of DMRC to be separated, or "carved-out" in connection with the Digimarc/L-1 merger and spin-off. This information primarily consists of the Digital Watermarking Business and certain accounts of Digimarc. All intercompany balances have been eliminated in the carve-out.

        Management believes that the assumptions underlying the financial statements are reasonable. The financial information in these financial statements does not include all of the expenses that would have been incurred had DMRC been a separate, stand-alone public entity. As such, the financial information herein does not reflect the financial position, results of operations and cash flows of DMRC in the future or what they would have been, had DMRC been a separate, stand-alone public entity during the periods presented. Additionally, these historical financial statements include proportional allocations of various shared-services common costs of Digimarc because specific identification of these expenses was not practicable. The common costs include expenses from Digimarc related to various operating shared-

35



services cost centers, including: executive, finance and accounting, human resources, legal, marketing, intellectual property, facilities and information technology. It is expected that the initial operating costs of DMRC on a stand-alone basis will be higher than those allocated to the DMRC operations under the shared services methodology applied in the audited financial statements of DMRC. Consequently, the financial position, results of operations and cash flows of DMRC reflected in the financial statements of DMRC may not be indicative of those that would have been achieved or that might be achieved in the future had DMRC been operated as a separate, stand-alone entity for the periods reflected in its financial statements.

        Commitments and contingencies related to DMRC operations have been included in the financial statements and those relating to Digimarc have been excluded.

Critical Accounting Policies and Estimates

        The preparation of financial statements in accordance with accounting principles generally accepted in the U.S., which we refer to as U.S. GAAP, requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, income taxes, long-term service contracts, license and subscription agreements, investments, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

        Some of our accounting policies require higher degrees of judgment than others in their application. These include revenue recognition on long-term service contracts, revenue recognition on license and subscription arrangements, reserves for uncollectible accounts receivable, contingencies and litigation and stock-based compensation. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:

        Balances and expenses assignment and allocations:     Balances and expenses were assigned to the different business units based on the following hierarchy:

36


        Revenue recognition on long-term service contracts:     Revenue from professional service arrangements is generally determined based on time and material. Revenue for professional services is recognized as the services are performed. Billing for services rendered generally occurs within one month following when the services are provided. Revenue earned which has not been invoiced at the reported balance sheet date is classified as unbilled trade receivables, which are included in the balance of trade accounts receivable, net in the balance sheets.

        Revenue recognition on license and subscription arrangements:     Royalty revenue is recognized when the royalty amounts owed to DMRC Corporation have been earned, are determinable, and collection is probable. These revenues include the licensing of digital watermarking products and services for use in authenticating documents, detecting fraudulent documents and deterring unauthorized duplication or alteration of high-value documents, for use in communicating copyright, asset management and business-to-business image commerce solutions, and for use in connecting analog media to a digital environment. Subscriptions are paid in advance and revenue is recognized ratably over the term of the subscription.

        Reserves for uncollectible accounts receivable:     We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We determine the allowance based on historical write-off experience and current information. We review, and adjust when appropriate, our allowance for doubtful accounts on at least a quarterly basis. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

        Contingencies and litigation:     We periodically evaluate all pending or threatened contingencies or commitments, if any, that are reasonably likely to have a material adverse effect on our operations or financial position. We assess the probability of an adverse outcome and determine if it is remote, reasonably possible or probable as defined in accordance with the provisions of SFAS No. 5, Accounting for Contingencies . If information available prior to the issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of our financial statements, and the amount of the loss, or the range of probable loss can be reasonably estimated, then such loss is accrued and charged to operations. If no accrual is made for a loss contingency because one or both of the conditions pursuant to SFAS No. 5 are not met, but the probability of an adverse outcome is at least reasonably possible, we will disclose the nature of the contingency and provide an estimate of the possible loss or range of loss, or state that such an estimate cannot be made.

        Stock-based compensation:     We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment (Revised 2004) , which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options, employee stock purchases under a stock purchase plan and restricted stock awards based on estimated fair values. Stock compensation expense is allocated to DMRC based on a combination of specific and shared services resource allocations from Digimarc.

37


        Income Taxes:     For all historic periods reported in this filing:

Backlog

        Based on projected commitments we have for the periods under contract with our respective customers, we anticipate our current contracts as of March 31, 2008 will generate approximately $65 million in revenue during the terms of the contracts, currently up to five years. We expect more than $13 million of this amount to be recognized as revenue during the remainder of 2008. This amount includes commitments reasonably expected to be achieved under currently effective contracts. Backlog as of December 31, 2007 and 2006 was approximately $46 million and $13 million respectively. The increase in backlog reflects factors noted below.

38


        Some factors that lead to increased backlog are:

        Some factors that lead to decreased backlog are:

The mix of these factors, among others, dictates whether our backlog increases or decreases for any given period. There is no assurance that our backlog will result in actual revenue in any particular period, because the orders and contracts included in our backlog may be subject to modification, cancellation or suspension. We may not realize revenue on some orders included in our backlog, or the timing of recognition may change.

39


Results of Operations

        The following table presents our statements of operations data for the periods indicated as a percentage of total revenue.

 
  Three Months Ended March 31,
  Year Ended December 31,
 
 
  2008
  2007
  2007
  2006
  2005
 
Revenue:                      
  Service   50 % 54 % 60 % 62 % 63 %
  License and subscription   50   46   40   38   37  
   
 
 
 
 
 
    Total revenue   100   100   100   100   100  
Cost of revenue:                      
  Service   27   26   29   33   29  
  License and subscription   1   1   2   1   2  
   
 
 
 
 
 
    Total cost of revenue   28   27   31   34   31  
Gross profit   72   73   69   66   69  
Operating expenses:                      
  Sales and marketing   13   18   19   34   42  
  Research, development and engineering   18   21   22   22   28  
  General and administrative   19   25   26   31   33  
  Intellectual property   10   12   12   14   17  
   
 
 
 
 
 
    Total operating expenses   60   76   79   101   120  
   
 
 
 
 
 
Operating income (loss)   12   (3 ) (10 ) (35 ) (51 )
   
 
 
 
 
 
Other income (expense), net   6   11   11   11   8  
   
 
 
 
 
 
Income (loss) before provision for income taxes   18   8   1   (24 ) (43 )
   
 
 
 
 
 
Provision for income taxes   0   0   0   0   0  
   
 
 
 
 
 
    Net income (loss)   18 % 8 % 1 % (24 )% (43 )%
   
 
 
 
 
 

        The overall financial results of DMRC have improved significantly over the past two years as revenues grew, the adoption of products and services based on our technologies became more widespread, and we reduced costs through various improvements in our business processes, which we refer to as "cost reduction initiatives."

40


Three Months Ended March 31, 2008 and 2007

Revenue

 
  Three Months Ended
March 31,

   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2008
  2007
 
Revenue:                        
  Service   $ 2,548   $ 1,877   $ 671   36 %
  License and subscription     2,537     1,608     929   58 %
   
 
 
     
    Total   $ 5,085   $ 3,485   $ 1,600   46 %
   
 
 
     

Revenue (as % of total revenue):

 

 

 

 

 

 

 

 

 

 

 

 
  Service     50 %   54 %          
  License and subscription     50 %   46 %          
   
 
           
    Total     100 %   100 %          
   
 
           

        Service.     Service revenue consists primarily of software development and consulting services. The majority of service revenue arrangements are typically structured as time and materials consulting agreements, or fixed price consulting agreements. The majority of our services revenue is derived from contracts with an international consortium of Central Banks, The Nielsen Company, which we refer to as Nielsen, and with other government agencies.

        The increase in service revenue for the three-month period was primarily attributable to increased consulting revenues, a large portion of which related to our new contract with Nielsen.

        License and subscription.     License revenue originates primarily from licensing our technology and patents where we receive royalties as our income stream. Subscription revenue consists primarily of royalty revenue from the sale of our web-based subscriptions related to various software products, which are more recurring in nature. Revenues from our licensed products have minimal associated direct costs, and thus are highly profitable.

        The increase in license and subscription revenue for the three-month period was primarily due to initial license revenues from Nielsen.

Revenue by Geography

 
  Three Months Ended
March 31,

   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2008
  2007
 
Revenue by geography:                        
  Domestic   $ 2,658   $ 1,118   $ 1,540   138 %
  International     2,427     2,367     60   3 %
   
 
 
     
    Total   $ 5,085   $ 3,485   $ 1,600   46 %
   
 
 
     

Revenue (as % of total revenue):

 

 

 

 

 

 

 

 

 

 

 

 
  Domestic     52 %   32 %          
  International     48 %   68 %          
   
 
           
    Total     100 %   100 %          
   
 
           

        The increase in domestic revenue for the three-month period was due primarily to additional service and license revenues associated with the Nielsen contract.

41


Cost of Revenue

        Service.     Cost of service revenue primarily includes costs that are allocated from research, development, engineering and sales and marketing that relate directly to producing revenue under our customer contracts. Allocated costs include:

        License and subscription.     Cost of license and subscription revenue primarily include:

Gross Profit

 
  Three Months Ended
March 31,

   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2008
  2007
 
Gross profit:                        
  Service   $ 1,199   $ 958   $ 241   25 %
  License and subscription     2,478     1,577     901   57 %
   
 
 
     
    Total   $ 3,677   $ 2,535   $ 1,142   45 %
   
 
 
     

Gross profit (as % of related revenue component):

 

 

 

 

 

 

 

 

 

 

 

 
  Service     47 %   51 %          
  License and subscription     98 %   98 %          
    Total     72 %   73 %          

        The slight reduction in overall gross profit as a percentage of revenue for the three-month period primarily reflects:

42


Operating Expenses

    Sales and marketing

 
  Three Months Ended
March 31,

   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2008
  2007
 
Sales and marketing   $ 656   $ 639   $ 17   3 %
Sales and marketing (as % of total revenue)     13 %   18 %          

        Sales and marketing expenses consist primarily of:

        We allocate certain costs of sales and marketing to cost of service revenue when they relate directly to our service contracts. For direct billable labor hours, we allocate salaries, a payroll tax and benefits factor and incentive compensation related to our bonus and stock compensation plans. We record all remaining, or "residual," costs as sales and marketing costs.

        Overall, sales and marketing costs remained relatively flat for the three-month period. The operating costs reflected a greater allocation of billable marketing resources to the cost of sales revenue of $0.1 million, offset by higher incentive compensation accruals for incentive bonuses, compared to no bonus accrual for the 2007 period.

        Under the current basis of accounting explained above, we anticipate that we will continue to incur sales and marketing costs at current or higher levels for the remainder of 2008.

 
  Three Months Ended
March 31,

   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2008
  2007
 
Research, development and engineering   $ 922   $ 729   $ 193   26 %
Research, development and engineering (as % of total revenue)     18 %   21 %          

        Research, development and engineering expenses consist primarily of:

        We allocate certain costs of research, development and engineering to cost of service revenue when they relate directly to our service contracts. For direct billable labor hours, we allocate salaries, a payroll tax and benefits factor and incentive compensation related to our bonus and stock

43



compensation plans. We record all remaining, or "residual," costs as research, development and engineering costs.

        The increase in research, development and engineering costs for the three-month period resulted primarily from an increase in engineering personnel and higher incentive compensation accruals for incentive bonuses, compared to no bonus accrual for the 2007 period.

        Under the current basis of accounting explained above, we anticipate that we will continue to incur research, development and engineering costs at current levels or higher for the remainder of 2008.

 
  Three Months Ended
March 31,

   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2008
  2007
 
General and administrative   $ 980   $ 857   $ 123   14 %
General and administrative (as % of total revenue)     19 %   25 %          

        General and administrative expenses consist primarily of:


        The increase in general and administrative costs for the three-month period resulted primarily from increased compensation related costs, the majority of which related to higher incentive compensation accruals for incentive bonuses, compared to no bonus accrual for the 2007 period.

        Under the current basis of accounting explained above, we anticipate that we will continue to incur general and administrative expenses at least at the current levels for the remainder of 2008, while continuing to examine means to reduce general and administrative spending as a percentage of revenue in the longer term.

 
  Three Months Ended
March 31,

   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2008
  2007
 
Intellectual Property   $ 478   $ 431   $ 47   11 %
Intellectual Property (as % of total revenue)     10 %   12 %          

        Intellectual property costs primarily consist of:

        The slight increase for the three-month period ended resulted primarily from increased compensation related costs, the majority of which related to higher incentive compensation accruals for incentive bonuses, compared to no bonus accrual for the 2007 period.

        Under the current basis of accounting explained above, we anticipate that we will continue to incur intellectual property costs at least at the current levels for the remainder of 2008.

44


 
  Three Months Ended
March 31,

   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2008
  2007
 
Cost of service   $ 43   $ 16   $ 27   169 %
Sales and marketing     83     72     11   15 %
Research, development and engineering     16     8     8   100 %
General and administrative     220     184     36   20 %
Intellectual property     15     10     5   50 %
   
 
 
     
  Total   $ 377   $ 290   $ 87   30 %
   
 
 
     

        We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment (Revised 2004) , which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors, including stock options, employee stock purchases under a stock purchase plan and restricted stock awards based on estimated fair values. Stock compensation expense is allocated to DMRC based on a combination of specific and shared services resource allocations from Digimarc.

        The increase in stock-based compensation expense for the three-month period was primarily due to an additional layer of stock-based awards expensed pursuant to the adoption of SFAS 123(R).

        We anticipate incurring additional stock-based compensation expense in the future from Digimarc through the allocation process described above until the close date of the transaction. Thereafter, DMRC will adopt its own stock-based compensation expense under SFAS 123(R). The future effect of the adoption of this statement on our financial position and results of operations will be determined by stock-based awards granted in future periods and the assumptions on which the value of those stock-based awards are based.

Other income (expense), net

 
  Three Months Ended March 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2008
  2007
 
Other income (expense), net   $ 294   $ 375   $ (81 ) (22 )%

        Other income (expense), net consists primarily of interest income from our cash and short term investments.

        The decrease in other income (expense) for the three-month period was due primarily to lower interest earned on cash and investment balances.

        Provision for Income Taxes.     The provision for income taxes reflects foreign withholding tax expense in various foreign jurisdictions. For all historic periods reported in the financial statements, Digimarc maintained valuation allowances against its net deferred tax assets, including net operating loss carryforwards, because it was more likely than not that the deferred taxes would not be realized. The provision for income taxes include foreign taxes withheld by our customers and paid to foreign jurisdictions on our behalf. The DMRC "carve-out" financial statements indicate cumulative losses through the first three months of 2008. Furthermore, the amounts of cumulative expenses in the financial statements that were not allowed for Federal and state income tax purposes were not sufficient enough to require us to record income tax expense. As a result of the above, no Federal and state income tax benefit was recognized for the book losses that were incurred in those periods prior to 2007 and no income tax expense was recognized during the 2007 and 2008 periods as any expense was offset by the benefit of net operating loss carry-forwards. After the spin-off, DMRC Corporation, as a

45



separate legal entity, will not benefit from any of the carrryforward tax attributes of Digimarc, including net operating loss carryforwards.

Years Ended December 31, 2007 and 2006

Revenue

 
  Year Ended December 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2007
  2006
 
Revenue:                        
  Service   $ 7,806   $ 6,812   $ 994   15 %
  License and subscription     5,219     4,259     960   23 %
   
 
 
     
    Total   $ 13,025   $ 11,071   $ 1,954   18 %
   
 
 
     

Revenue (as % of total revenue):

 

 

 

 

 

 

 

 

 

 

 

 
  Service     60 %   62 %          
  License and subscription     40 %   38 %          
   
 
           
    Total     100 %   100 %          
   
 
           

        The increase in service revenue for the year was primarily due to increases in consulting revenue from our Central Banks consortium, Nielsen, and contracts with various other government agencies. We entered into our contract with Nielsen in late 2007.

        The increase in license and subscription revenue for the year was primarily attributable to higher license revenues from customers whose revenues fluctuate from period to period and a combination of growing levels of fixed and variable royalties from a larger customer base.

Revenue by Geography

 
  Year Ended December 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2007
  2006
 
 
  (in 000'S)

   
 
Revenue by geography:                        
  Domestic   $ 3,696   $ 2,414   $ 1,282   53 %
  International     9,329     8,657     672   8 %
   
 
 
     
    Total   $ 13,025   $ 11,071   $ 1,954   18 %
   
 
 
     

Revenue (as % of total revenue):

 

 

 

 

 

 

 

 

 

 

 

 
  Domestic     28 %   22 %          
  International     72 %   78 %          
   
 
           
    Total     100 %   100 %          
   
 
           

        The increase in domestic revenue for the year was due primarily to increases in service and license revenues from Nielsen.

        The increase in international revenue for the year was due primarily to growing license revenues from various international customers.

46


Gross Profit

 
  Year Ended December 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2007
  2006
 
Gross profit:                        
  Service   $ 3,991   $ 3,179   $ 812   26 %
  License and subscription     5,002     4,123     879   21 %
   
 
 
     
    Total   $ 8,993   $ 7,302   $ 1,691   23 %
   
 
 
     

Gross profit (as % of related revenue component):

 

 

 

 

 

 

 

 

 

 

 

 
  Service     51 %   47 %          
  License and subscription     96 %   97 %          
    Total     69 %   66 %          

        The overall improvement of gross profit as a percentage of revenue for the year primarily reflects:

Operating Expenses

    Sales and marketing

 
  Year Ended December 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2007
  2006
 
Sales and marketing   $ 2,453   $ 3,740   $ (1,287 ) (34 )%
Sales and marketing (as % of total revenue)     19 %   34 %          

        The decrease in sales and marketing expense for year primarily reflects:

 
  Year Ended December 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2007
  2006
 
Research, development and engineering   $ 2,912   $ 2,448   $ 464   19 %
Research, development and engineering (as % of total revenue)     22 %   22 %          

        The increase in research, development and engineering expense for the year reflects:

47


 
  Year Ended December 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2007
  2006
 
General and administrative   $ 3,345   $ 3,433   $ (88 ) (3 )%
General and administrative (as % of total revenue)     26 %   31 %          

        The slight decrease in general and administrative expense for the year reflects a decrease in our incentive bonus program, reflecting no bonus accrual for the 2007 period.

 
  Year Ended March 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2007
  2006
 
Intellectual Property   $ 1,593   $ 1,589   $ 4   0 %
Intellectual Property (as % of total revenue)     12 %   14 %          

        Intellectual property expense remained relatively consistent from year to year.

 
  Year Ended December 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2007
  2006
 
Cost of service   $ 102   $ 42   $ 60   143 %
Sales and marketing     287     172     115   67 %
Research, development and engineering     47     51     (4 ) (8 )%
General and administrative     728     495     233   47 %
Intellectual property     45     30     15   50 %
   
 
 
     
  Total   $ 1,209   $ 790   $ 419   53 %
   
 
 
     

        The increase in stock-based compensation expense for the year was primarily due to an additional layer of stock-based awards expensed pursuant to the adoption of SFAS 123(R).

 
  Year Ended December 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2007
  2006
 
Other income (expense), net   $ 1,387   $ 1,242   $ 145   12 %

        The increase in other income (expense) for the year reflects higher average interest rates on our cash and investment balances.

48


Years Ended December 31, 2006 and 2005

Revenue

 
  Year Ended December 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2006
  2005
 
Revenue:                        
  Service   $ 6,812   $ 7,051   $ (239 ) (3 )%
  License and subscription     4,259     4,068     191   5 %
   
 
 
     
    Total   $ 11,071   $ 11,119   $ (48 ) 0 %
   
 
 
     

Revenue (as % of total revenue):

 

 

 

 

 

 

 

 

 

 

 

 
  Service     62 %   63 %          
  License and subscription     38 %   37 %          
   
 
           
    Total     100 %   100 %          
   
 
           

        The decrease in service revenue for the year was primarily due to decreased services provided to government agencies other than Central Banks, where projects are sometimes non-recurring in nature.

        The increase in license and subscription revenue for the year was primarily due to a combination of growing levels of fixed and variable royalties from a larger customer base.

Revenue by Geography

 
  Year Ended December 31,
   
   
 
 
  Dollar
Increase
(Decrease)

  Percent
Increase
(Decrease)

 
 
  2006
  2005
 
Revenue by geography:                        
  Domestic   $ 2,414   $ 2,882   $ (468 ) (16 )%
  International     8,657     8,237     420   5 %
   
 
 
     
    Total   $ 11,071   $ 11,119   $ (48 ) 0 %
   
 
 
     

Revenue (as % of total revenue):

 

 

 

 

 

 

 

 

 

 

 

 
  Domestic     22 %   26 %          
  International     78 %   74 %          
   
 
           
    Total     100 %   100 %          
   
 
           

        The decrease in domestic revenue for the year was due primarily to decreased services provided to government agencies other than Central Banks as discussed above.

        The increase in international revenue for the year was due primarily to increased service revenues from our Central Banks contract and increased license revenues from various customers as discussed above.

49


Gross Profit

 
  Year Ended December 31,
   
   
 
 
  Dollar Increase (Decrease)
  Percent Increase (Decrease)
 
 
  2006
  2005
 
Gross profit:                        
  Service   $ 3,179   $ 3,752   $ (573 ) (15 )%
  License and subscription     4,123     3,886     237   6 %
   
 
 
     
    Total   $ 7,302   $ 7,638   $ (336 ) (4 )%
   
 
 
     
Gross profit (as % of related revenue component):                        
  Service     47 %   53 %          
  License and subscription     97 %   96 %          
    Total     66 %   69 %          

        The reduction in overall gross profit as a percentage of revenue, for the year reflects:

Operating Expenses

    Sales and marketing

 
  Year Ended December 31,
   
   
 
 
  Dollar Increase (Decrease)
  Percent Increase (Decrease)
 
 
  2006
  2005
 
Sales and marketing   $ 3,740   $ 4,692   $ (952 ) (20 )%
Sales and marketing (as % of total revenue)     34 %   42 %          

        The decrease in sales and marketing expense for year resulted primarily from:

 
  Year Ended December 31,
   
   
 
 
  Dollar Increase (Decrease)
  Percent Increase (Decrease)
 
 
  2006
  2005
 
Research, development and engineering   $ 2,448   $ 3,208   $ (760 ) (24 )%
Research, development and engineering (as % of total revenue)     22 %   28 %          

        The decrease in research, development and engineering expense for the year resulted primarily from:

50


 
  Year Ended December 31,
   
   
 
 
  Dollar Increase (Decrease)
  Percent Increase (Decrease)
 
 
  2006
  2005
 
General and administrative   $ 3,433   $ 3,645   $ (212 ) (6 )%
General and administrative (as % of total revenue)     31 %   33 %          

        The decrease in general and administrative expense for the year resulted primarily from:

 
  Three Months Ended March 31,
   
   
 
 
  Dollar Increase (Decrease)
  Percent Increase (Decrease)
 
 
  2006
  2005
 
Intellectual Property   $ 1,589   $ 1,863   $ (274 ) (15 )%
Intellectual Property (as % of total revenue)     14 %   17 %          

        The decrease in intellectual property expenses resulted primarily from realignment of our resources and reduction of third party agent and government fees associated with our cost reduction initiatives.

 
  Year Ended December 31,
   
   
 
 
  Dollar Increase (Decrease)
  Percent Increase (Decrease)
 
 
  2006
  2005
 
Cost of service   $ 42       $ 42   0 %
Sales and marketing     172     56     116   207 %
Research, development and engineering     51         51   0 %
General and administrative     495     147     348   237 %
Intellectual property     30         30   0 %
   
 
 
     
  Total   $ 790   $ 203   $ 587   289 %
   
 
 
     

        The increase in stock-based compensation expense for year was primarily due to the adoption of SFAS 123(R) effective in 2006 that required expensing of all stock based awards, including stock options and restricted stock. For 2005, our restricted stock grants recorded stock compensation expense in accordance with SFAS 123.

51


 
  Year Ended December 31,
   
   
 
 
  Dollar Increase (Decrease)
  Percent Increase (Decrease)
 
 
  2006
  2005
 
Other income (expense), net   $ 1,242   $ 928   $ 314   34 %

        The increase in other income (expense) for the year was primarily due to higher interest rates earned on our cash and investment balances.

Liquidity and Capital Resources

        As of March 31, 2008, we had cash and cash equivalents and short-term investments of $37.4 million, representing an increase of approximately $4.7 million from $32.7 million at December 31, 2007. Working capital at March 31, 2008 was $37.2 million, compared to working capital of $33.5 million at December 31, 2007. Cash flow generated by the Parent, which flows to this business unit, and improved operating results contributed to our improved cash and working capital positions.

        Operating Cash Flow.     The components of operating cash flows were:

 
  Three Months Ended March 31,
  Year Ended December 31,
 
 
  (unaudited)

   
   
   
 
 
  2008
  2007
  2007
  2006
  2005
 
Net income (loss)   $ 924   $ 250   $ 55   $ (2,687 ) $ (4,842 )
Non-cash items     653     446     1,821     1,393     769  
Changes in operating assets and liabilities     987     342     (851 )   (473 )   239  
   
 
 
 
 
 
  Net cash provided by (used in) operating activities   $ 2,564   $ 1,038   $ 1,025   $ (1,767 ) $ (3,834 )
   
 
 
 
 
 

        Net income (loss).     The improving operating results in each of the comparable periods reflect:

        Non-cash charges.     The increase in non-cash charges in each of the comparable periods is primarily the result of:

        Operating assets and liabilities.     The major changes in the operating assets and liabilities for the comparable periods primarily reflect timing differences for:

52


        Cash provided by (used in) investing activities.     The major changes in our investing activities are the result of:

        Cash provided by (used in) financing activities.     The major changes in our financing activities are the result of cash transactions associated with Digimarc in accordance with the basis of accounting used in these financial statements. Specifically:

    Commitments and Contingencies.

        Our significant commitments consist of obligations under non-cancelable operating leases for our facilities rent and various equipment leases, which totaled $3.2 million as of December 31, 2007, and are payable in monthly installments through July 2011. Our significant commitments and payment obligations under non-cancelable operating leases at December 31, 2007 are as follows:


Contractual Obligations

 
  Payment Due by Period (in 000's)
 
  Total
  Less than 1 year
  2-3 years
  4-5 years
  More than 5 years
Total contractual obligations   $ 3,174   $ 837   $ 1,738   $ 599   $
   
 
 
 
 

        We believe that our current cash, cash equivalents, and short-term investment balances will satisfy our projected working capital and capital expenditure requirements for at least the next 12 months. In addition, we expect to generate positive cash flow from operations in 2008 that we can use to fund our operating and capital needs. Thereafter, we anticipate continuing to use cash, cash equivalents, short-term investment balances to satisfy our projected working capital and capital expenditure requirements.

        We may utilize cash resources to fund acquisitions or investments in complementary businesses, technologies or product lines. In order to take advantage of opportunities, we may find it necessary to obtain additional equity financing, debt financing, or credit facilities. We do not believe at this time,

53



however, that our long-term working capital and capital expenditures would require us to take steps to remedy any such potential deficiencies. If it were necessary to obtain additional financings or credit facilities, we may not be able to do so, or if these funds are available, they may not be available on satisfactory terms.

Off-Balance Sheet Arrangements

        We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material.

Recent Accounting Pronouncements

        In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective the first fiscal year beginning after November 15, 2007. We have applied the provisions of this standard regarding the framework of measuring fair value and noted no material effect on the current financial statements.

        In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure certain financial assets and liabilities at fair value. SFAS No. 159 is effective the first fiscal year beginning after November 15, 2007. We have elected not to measure certain financial assets and liabilities at fair value as permitted by SFAS No. 159.

Forward-Looking Statements

        Because this information statement contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, any of the risk factors set forth in this information statement or elsewhere in this information statement or incorporated herein by reference could cause our actual results to differ materially from those results projected or suggested in such forward-looking statements. Statements that are not historical facts are hereby identified as "forward-looking statements" for the purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Such forward-looking statements include but are not limited to statements relating to:

54


        Such forward-looking statements also include other statements containing words such as "anticipate," "estimate," "expect," "management believes," "we believe," "we intend," "should" and similar words or phrases, which are intended to identify forward-looking statements. Actual results may vary materially due to, among other things, our failure to become profitable, the failure of the potential markets for our digital watermarking technology to develop as anticipated, the adoption of alternative technologies within these markets, as well as changes in economic, business, competitive, technology and/or regulatory factors and trends, and the other factors described in this information statement or in our other documents filed with the SEC. All forward-looking statements are necessarily only estimates of future results and there can be no assurance that actual results will not differ materially from expectations, and, therefore, investors are cautioned not to place undue reliance on such statements. Investors should understand that it is not possible to predict or identify all risk factors and that the risks discussed in this information statement should not be considered a complete statement of all potential risks and uncertainties. We do not intend to update any forward-looking statements as a result of future events or developments, except as required by law.

55



BUSINESS OF DMRC CORPORATION

Overview

        DMRC Corporation is a leading innovator and technology provider, enabling governments and enterprises around the world to give digital identities to media and objects that computers can sense and recognize and to which they can react. Our technology provides the means to infuse persistent digital information, perceptible only to computers and digital devices, into all forms of media content. The unique digital identifier placed in media persists with it regardless of the distribution path and whether it is copied, manipulated or converted to a different format, and does not affect the quality of the content or the enjoyment or usefulness of it. Our technology permits computers and digital devices to quickly identify relevant data from vast amounts of media content.

        Our technologies, and those of our licensees, span the complete range of media content, enabling governments and enterprises to:

        Our revenue is generated primarily from patent and technology license fees paid by business partners, and development and service contracts with a variety of government and commercial organizations, including a consortium of Central Banks and a major media and audience measurement company.

        Financial information about geographic areas is included in Note 4 of our financial statements.

History

        We were formed in Delaware on June 18, 2008 by Digimarc to hold and operate the Digital Watermarking Business and to facilitate the separation of its Secure ID Business through the spin-off and the Digimarc/L-1 merger. Digimarc was founded to commercialize a signal processing innovation known as "digital watermarking." Digital watermarking is a technology that allows our customers to infuse digital data into any media content that is digitally processed at some point during its lifecycle. The technology can be applied to printed materials, video, audio, and images. The inclusion of these digital data enables a wide range of improvements in security and media management, and new business models for distribution and consumption of media content. Over the years our technology and intellectual property portfolios have grown to encompass many related technologies.

        Banknote counterfeit deterrence was the first commercially successful use of our technologies. Digimarc, in cooperation with an international consortium of Central Banks, developed a system to deter the use of digital technologies in the unauthorized reproduction of banknotes. More recently,

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innovations based on our digital watermarking technology and experience have been leveraged to create new products to deter counterfeiting and tampering of driver licenses and other government-issued secure credentials. In parallel, our business partners, under patent or technology licenses from us, are delivering digital watermarking solutions to track and monitor the distribution of music, images, television and movies to consumers. Recently, in November of 2007, we announced a relationship with Nielsen to license our patents in support of their audience measurement across more than 95% of the television shows broadcast in the United States and to provide development services for Nielsen's new Digital Media Manager content identification and management system to be brought to market by Nielsen in 2008.

Customers and Business Partners

        Our revenue is generated through commercial and government applications of our technologies, including a long-term contract with a consortium of Central Banks. Our contract with the Central Bank consortium is in its tenth year. The contract is in the final year of a 5-year extension and provides for two additional 3-year extensions. The Central Bank consortium has agreed to the first 3-year extension. We also have a development and services agreement with Nielsen, and engage in other development or service initiatives for government or commercial clients from time to time. Other revenue is generated primarily from patent and technology license fees paid by business partners providing media identification and management solutions to movie studios and music labels, television broadcasters, creative professionals and other customers around the world. Patent and technology licensing is expected to continue to contribute most of the revenues from non-government customers for the foreseeable future.

        As part of our work with government customers, we must comply with and are affected by laws and regulations relating to the award, administration and performance of government contracts. Government contract laws and regulations affect how we do business with our customers and, in some instances, impose added costs on our business.

        In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the government agency may terminate any of our contracts and, in general, subcontracts, at its convenience, as well as for default based on performance. Upon termination for convenience of a fixed-price type contract, we normally are entitled to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-process and an allowance for profit on the contract or adjustment for loss if completion of performance would have resulted in a loss. Upon termination for convenience of a cost reimbursement contract, we normally are entitled to reimbursement of allowable costs plus a portion of the fee.

        In addition, our government contracts typically span one or more base years and multiple option years. The government agency generally has the right to not exercise option periods and may not exercise an option period if the agency is not satisfied with our performance on the contract.

Products and Services

        We provide some media identification and management solutions to commercial entities and government customers. Our license solutions primarily target the media and entertainment industry. We have two multi-year development agreements, one with an international consortium of Central Banks, and the other with Nielsen.

        Commercial customers use secure media solutions from our business partners and us to identify, track, manage and protect content as it is distributed and consumed—either digitally or physically—and to enable new consumer applications to access networks and information from personal computers and

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mobile devices. Many movie studios, record labels, broadcasters, creative professionals and other customers rely on our technologies as a cost-effective means to:

        Licensees of our technology or intellectual property include AquaMobile, Cinea, Inc., a subsidiary of Dolby Laboratories, Inc., GCS Research LLC, MediaGrid, Microsoft Corporation, Mobile Data Systems, Inc., The Nielsen Company, Royal Philips Electronics, Signum Technologies Limited, Thomson Multimedia, S.A., USA Video, Verance corporation, Verimatrix, Inc. and VCP (an affiliate of VEIL Interactive Technologies).

Technology and Intellectual Property

        We develop and patent intellectual property to differentiate products and technologies, mitigate infringement risk, and develop opportunities for licensing. Licensing of our technologies is supported by a broad patent portfolio covering a wide range of methods, applications, system architectures and business processes.

        Most of our patents relate to various methods for embedding digital information in video, audio, images, and printed materials, whether the content is rendered in analog or digital formats. The digital information is generally embedded by making subtle modifications to the fundamental elements of the content itself, generally at a signal processing level. The changes necessary to embed this information are so subtle that they are generally not noticeable by people during normal use. Because the message is carried by the content itself, it is file-format independent. The message generally survives most normal compression, edits, rotation, scaling, re-sampling, file-format transformations, copying, scanning and printing.

        To protect our intellectual property rights, we have implemented an extensive intellectual property protection program that relies on a combination of patent, copyright, trademark and trade secret laws, and nondisclosure agreements and other contracts. As a result, we believe we have one of the world's most extensive patent portfolios in the field of digital watermarking, with over 350 U.S. and over 85 foreign issued patents and more than 400 U.S. and foreign patent applications on file as of March 31, 2008 in the areas of digital watermarking and related technologies. Separately, we own registered trademarks in both the U.S. and other countries and have applied for other trademarks. We continue to develop and broaden our portfolio of patented technologies, including digital watermarking and related applications and systems.

        Although we devote significant resources to developing and protecting our technologies, and periodically evaluate potential competitors of our technologies for infringement of our intellectual property rights, these infringements may nonetheless go undetected or may arise in the future. We expect that infringement claims may increase as companies become more concerned with protecting their content from electronic copying.

Markets

        Our technologies are used in various media identification and management products and solutions supporting a variety of media objects, from movies, music TV programming and images, to banknotes,

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secure credentials and physical products or packaging. Each media object enabled by our technology can be recognized by networks and digital devices, resulting in a wide range of applications for our technologies, including in the fields of:


        We believe the market potential for our technologies is in the early stages of development and that existing solutions represent only a small portion of the potential market for our products, services, and technologies.

Competition

        Our business partners and we generally compete with application-specific alternative technologies for the security or marketing budgets of the producers and distributors of media objects, documents, products and advertising. These application-specific alternatives include technologies and solutions based on encryption, fingerprinting and pattern recognition. We anticipate that our competitive position within certain markets may be affected by factors such as reluctance to adopt new technologies and, positively or negatively, by changes in government regulations.

Backlog

        Based on projected commitments we have for the periods under contract with our respective customers, we anticipate our current contracts as of March 31, 2008 will generate approximately $65 million in revenue during the terms of the contracts, currently up to 5 years. We expect more than $13 million of this amount to be recognized as revenue during the remainder of 2008. This amount includes commitments reasonably expected to be achieved under currently effective contracts. Backlog as of December 31, 2007 and 2006 was approximately $46 million and $13 million respectively.

Employees

        At December 31, 2007, we had 95 full-time employees, including 16 in sales, marketing, technical support and customer support; 37 in research, development and engineering; and 42 in finance, administration, information technology and legal. We also had 4 contract workers, primarily utilized to support billing services. The employee breakout was based on the same allocation methodology that was applied to carving out DMRC's financial statements. 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.

Properties and Facilities

        Our principal administrative, marketing, research, and intellectual property development facility is located in Beaverton, Oregon. Information about our office leases is set forth below.

 
  Square Feet
  Expires
Beaverton, Oregon   46,000   August 2011

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Legal Proceedings

        From time to time in our normal course of business we are a party to various legal claims, actions and complaints. Currently, we do not have any pending litigation that we consider material.

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MANAGEMENT

Executive Officers and Directors

        Following the DMRC Corporation merger, we expect that our Board of Directors will be composed of five directors. Set forth below are the names and ages and current positions of persons we expect to serve as our directors and executive officers as of the distribution date.

 
  Age
  Position
Bruce Davis   56   Chief Executive Officer and Chairman of the Board of Directors
William J. Miller   62   Director
James T. Richardson   60   Director
Peter W. Smith   74   Director
Bernard Whitney   51   Director
Robert Chamness   55   Executive Vice President, Chief Legal Officer and Secretary
Michael McConnell   58   Chief Financial Officer and Treasurer

        Bruce Davis.     Mr. Davis is expected to serve as our Chief Executive Officer and as Chairman of the Board of Directors. Prior to the spin-off, Mr. Davis served as Digimarc's Chief Executive Officer since 2001, and a director since December 1997, as Digimarc's chairman of the Board of Directors since May 2002, and as its President from December 1997 through May 2001. 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.

        William J. Miller.     Mr. Miller is expected to serve on our Board of Directors, and prior to the spin-off served on the Board of Directors of Digimarc since 2005. Mr. Miller is a retired corporate executive with thirty-six years of experience in the high technology and legal sectors, and has, since 1999, served as an independent director and consultant. He serves as a member of the Board of Directors for each of the following companies: Nvidia Corp (Nasdaq: NVDA), a provider of graphics processing units, media and communications processors, wireless media processors, and related software for personal computers, handheld devices, and consumer electronics platforms; Waters Corporation (NYSE: WAT), a manufacturer of analytical instruments; and Overland Storage, Inc. (Nasdaq: OVRL), a supplier of data storage products. Mr. Miller received a B.A. in speech communication from the University of Minnesota and a J.D. from the University of Minnesota.

        James T. Richardson.     Mr. Richardson is expected to serve on our Board of Directors, and prior to the spin-off served on the Board of Directors of Digimarc since 2003. Mr. Richardson is a director of and consultant to companies in the high-technology sector. Mr. Richardson serves as chairman of the Board of Directors of FEI Company (Nasdaq: FEIC) and as a director and audit committee chair of Tripwire, Inc., a Portland, Oregon-based network security company. Mr. Richardson received a B.A. in finance and accounting from Lewis and Clark College, an M.B.A. from the University of Portland, and a J.D. from Lewis and Clark Law School, and is a licensed C.P.A. and attorney in Oregon.

        Peter W. Smith.     Mr. Smith is expected to serve on our Board of Directors, and prior to the spin-off served on the Board of Directors of Digimarc since 2000. Mr. Smith is a retired corporate executive and has served as a consultant to various other companies since 2000. Most recently, Mr. Smith served as president of News Technology for News America from January 1998 until his retirement in February 2000, where he coordinated technology throughout News Corporation and served as a technology advisor to its Board of Directors. Mr. Smith received a B.E. and B.Sc. from the University of Sydney, with first class honors.

        Bernard Whitney.     Mr. Whitney is expected to serve on our Board of Directors, and prior to the spin-off served on the Board of Directors of Digimarc since 2005. Mr. Whitney is a retired corporate

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executive with twenty-seven years of experience in the high technology and finance sectors, and has since 2002 served as an independent director and consultant. He currently serves as a director for a number of private and non-profit entities. Mr. Whitney received a B.S. in business administration, majoring in finance, from California State University Chico, and a masters in business administration from San Jose State University.

        Robert Chamness     Mr. Chamness is expected to serve as our Executive Vice President, Chief Legal Officer and Secretary. Mr. Chamness joined Digimarc in January 2002, and prior to the spin-off, served as Vice President and General Counsel, Secretary, Vice President of Human Resources, Chief Legal Officer, and Executive Vice President. He also served as Digimarc's Compliance Officer and Privacy Officer. Mr. Chamness holds an A.B. cum laude from Wabash College and a J.D. summa cum laude from the Indiana University School of Law.

        Michael McConnell     Mr. McConnell is expected to serve as our Chief Financial Officer and Treasurer. Mr. McConnell joined Digimarc in June of 2004, and prior to the spin-off, served as Chief Financial Officer and Treasurer of Digimarc. Before joining Digimarc, Mr. McConnell was senior vice president, chief financial officer and treasurer at WatchGuard Technologies (1999 to 2004). Mr. McConnell is a CPA and holds a B.A. from California Polytechnic State University, San Luis Obispo.

Determination of Independence

        The Board of Directors anticipates that each of Messrs. Smith, Richardson, Miller, and Whitney, collectively representing a majority of the members of our Board of Directors, will be "independent" as that term is defined by Nasdaq Marketplace Rule 4200. There were no related person transactions involving any of the independent directors of DMRC Corporation.

Committees of the Board of Directors

        The Board of Directors is expected to have three standing committees: an Audit Committee, a Compensation Committee and a Governance and Nominating Committee. The members of these committees are set forth in the following table:

Non-Employee Directors

  Audit
  Governance and
Nominating

  Compensation
William J. Miller   X       Chair
James T. Richardson   X       X
Peter W. Smith       Chair   X
Bernard Whitney   Chair   X    

Audit Committee

        We expect to have a standing Audit Committee of the Board of Directors, consisting of Messrs. Whitney (chairman), Richardson, and Miller, that is responsible for overseeing the quality and integrity of our accounting, auditing, and financial reporting practices, the audits of our financial statements, and other duties assigned by the Board of Directors. The Audit Committee's role will include a particular focus on the qualitative aspects of financial reporting to stockholders, our processes to manage business and financial risk, and compliance with significant applicable legal, ethical, and regulatory requirements. The Audit Committee will be directly responsible for the appointment, compensation, retention and oversight of the independent registered public accounting firm, including the resolution of any disagreements between management and the independent registered public accounting firm regarding financial reporting, engaged to prepare or issue an audit report on our

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financial statements or to perform other audit, review or attestation services for us. The Audit Committee is expected to also serves as our Qualified Legal Compliance Committee.

        The Board of Directors will adopt a charter for the Audit Committee to authorize powers consistent with the provisions of the Sarbanes-Oxley Act of 2002 and other requirements. A copy of this charter will be posted on the DMRC website, which we expect to be www.digimarc.com , on the Corporate Governance page. The Board of Directors expects that each of the three members of the Audit Committee will:

        The Board of Directors further expects that each of Messrs. Whitney, Richardson and Miller will qualify as an "Audit Committee financial expert" in compliance with Item 407(d)(5) of Regulation S-K.

Governance and Nominating Committee

        We expect that the Governance and Nominating Committee will initially consist of Messrs. Smith (chairman) and Whitney. The Board of Directors will delegate to the Governance and Nominating Committee the responsibility for overseeing the quality and integrity of our corporate governance practices and for assessing the size, membership, skills and characteristics necessary and appropriate for members of the Board of Directors and its committees. The Board of Directors will adopt a written charter for the Governance and Nominating Committee, a copy of which will be posted on the DMRC website, which we expect to be www.digimarc.com , on the Corporate Governance page. The Board of Directors expects that all members of the Governance and Nominating Committee will be "independent" as that term is defined in Nasdaq Marketplace Rule 4200.

        The Governance and Nominating Committee's responsibilities will include the review, monitoring, and general oversight of our policies and procedures involving corporate governance and compliance with significant legal, ethical, and regulatory requirements. This oversight responsibility will include monitoring compliance with the Sarbanes-Oxley Act of 2002. The Governance and Nominating Committee will also oversee the structure and evaluation of the Board of Directors and its committees, and the development, monitoring, and enforcement of the corporate governance principles applicable to us.

        The Governance and Nominating Committee will be responsible for recruiting individuals to become members of the Board of Directors and evaluating their qualifications under the guidelines described under "Director Nomination Policy" below. The Governance and Nominating Committee will also be responsible for the composition of the Board committees. The Board of Directors may assign the Governance and Nominating Committee additional duties and functions from time to time consistent with its charter, our Bylaws and governing law. Succession planning is one such responsibility that will be assigned to the committee.

        Director Nomination Policy.     The Governance and Nominating Committee will adopt a formal written policy addressing the nominating process. A copy of this policy will be posted on the DMRC website, which we expect to be www.digimarc.com , on the Corporate Governance page, attached as an exhibit to the Governance and Nominating Committee charter located on the Corporate Governance page of the site. Pursuant to its written policy addressing the nominating process, the Governance and Nominating Committee will welcome and encourage recommendations of director candidates from our stockholders, and will consider any director candidates recommended by our stockholders, provided that the information regarding director candidates who are recommended is submitted to the Governance and Nominating Committee in compliance with the terms of its policy. Stockholders will be

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able to submit director candidate nominations in accordance with the terms of DMRC's bylaws and applicable securities laws.

        In evaluating a potential candidate's qualification for nomination to the Board, the Governance and Nominating Committee will consider the potential candidate's experience, areas of expertise, and other factors relative to the overall composition of the Board of Directors. The Governance and Nominating Committee will also review from time to time the skills and characteristics necessary and appropriate for directors in the context of the current composition of the Board of Directors. Directors will be expected to devote sufficient time to carry out their duties and responsibilities effectively, ensure that other existing and planned future commitments do not materially interfere with his/her service as a director, and attend at least 75% of all Board of Directors and applicable committee meetings.

        The Governance and Nominating Committee's process for identifying and evaluating nominees for director, including nominees recommended by stockholders, is expected to involve compiling names of potentially eligible candidates, vetting those candidates against the factors described above, conducting background and reference checks, conducting interviews with candidates, meeting to consider and approve final candidates and, as appropriate, preparing and presenting to the Board of Directors an analysis with regard to a candidate. It is expected that there will be no differences in the manner in which the Governance and Nominating Committee evaluates nominees for director based on whether the nominee is recommended by a stockholder or by the Governance and Nominating Committee. The committee will have the authority to, from time to time, pay professional search firms to assist in the identification and evaluation of potential nominees.

Stockholder Communications with the Board of Directors

        The Board of Directors encourages communication from stockholders. All communications must be in written form, addressed to the Board of Directors or to one or more individual members of the Board of Directors, and sent care of the Secretary of DMRC at the address of our principal executive offices or via fax to (503) 469-4771. The Secretary of DMRC will promptly provide all communications to the applicable member(s) of the Board of Directors or the entire Board of Directors, as specified by the stockholder.

Director Resignation Upon Change of Employment

        The Board of Directors is expected to approve a policy that will provide any director who experiences a substantial change in principal employment responsibility that may adversely affect his or her ability to carry out his or her responsibilities as a director effectively to tender his or her resignation from the Board, unless the change was anticipated by the Governance and Nominating Committee at the time of the director's nomination or election to the Board. In accordance with the terms of the anticipated policy, upon receipt of a resignation offered under these circumstances, the Governance and Nominating Committee will review the director's change in employment responsibilities to evaluate whether the director's continued service is appropriate.

Compensation Committee

        We expect that the Compensation Committee will consist of Messrs. Miller (chairman), Smith and Richardson and will have the authority and responsibility to:

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        The Compensation Committee's role will include a particular focus on the compensation of our executive officers and non-employee directors and the administration of our stock incentive plans and significant employee benefit programs.

        The Compensation Committee will adopt a written charter, a copy of which will be available on the DMRC website, which we expect to be www.digimarc.com , on the Corporate Governance page. The Board of Directors expects that all members of the Compensation Committee will be:

        The Compensation Committee will be permitted, under its charter, to delegate responsibilities to subcommittees of the Committee as necessary and appropriate.

        We expect that the Compensation Committee, together with our Chief Executive Officer, will review assessments of executive compensation practices at least annually against comparative data and our compensation philosophy. Our Chief Executive Officer will make recommendations to the Compensation Committee with the intent of keeping our executive officer compensation practices aligned with our compensation philosophy, and the Compensation Committee will be required to approve any recommended changes before they can be made.

        The Compensation Committee will have the authority to retain and terminate any compensation and benefits consultant and the authority to approve the related fees and other retention terms of the consultant.

Code of Business Conduct and Ethics

        Our Code of Business Conduct will be posted on the Corporate Governance page of our website, which we expect to be www.digimarc.com . The Code of Business Conduct will apply to all employees of DMRC and its subsidiaries, as well as to directors, temporary contractors, and other independent contractors or consultants when engaged by or otherwise representing us or our interests, and sets forth internal policies and guidelines designed to support and encourage ethical conduct and compliance with the laws, rules and regulations that govern our business operations.

Compensation Committee Interlocks and Insider Participation

        No executive officer of DMRC served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any committee performing equivalent functions, the entire Board of Directors) of another entity, or as a director of another entity, where one of the other entity's executive officers served on the Compensation Committee of DMRC or as a director of DMRC.

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DIRECTOR COMPENSATION

        The following table provides information on compensation that our expected non-employee directors received from Digimarc for the year ended December 31, 2007. Directors who were also Digimarc employees received no additional compensation for their services as directors. During 2007, Mr. Davis was the only director who was an employee of Digimarc. Mr. Davis's compensation is discussed in this information statement under the heading "Executive Compensation."

        The size and scope of DMRC's operations, based on its configuration and business after its separation from Digimarc, will be significantly smaller than those of Digimarc. Consequently, there will be fewer outside directors (four instead of eight) and compensation will be decreased to be commensurate with that paid at comparable companies, defined as companies of similar size within the high tech and software services industries that share similar financial characteristics to DMRC. Only the directors who will continue with DMRC are listed below, but their compensation for the balance of 2008 and beyond will be reduced materially from that set forth herein.

2007 Director Compensation Table

Name

  Fees Earned or Paid in Cash
($)

  Stock Awards
($)(1)

  Option Awards
($)(2)

  Total
($)

Peter W. Smith   $ 37,500   $ 25,496   $ 26,986   $ 89,982
James T. Richardson   $ 70,000   $ 25,496   $ 26,986   $ 122,482
Bernard Whitney   $ 50,000   $ 25,496   $ 39,628   $ 115,124
William J. Miller   $ 40,000   $ 25,496   $ 39,628   $ 105,124

(1)
On May 2, 2007, each director received from Digimarc a grant of 3,000 shares of Digimarc restricted stock with a grant date fair value of $29,640. The amounts disclosed above reflect the expense taken by Digimarc in 2007 for stock granted to the indicated director in 2007 and previous years. This grant was Digimarc's second grant of restricted stock to its directors, and the total number of shares of restricted stock held by each director as of December 31, 2007 was a total of 5,400 shares of restricted stock. A summary of the assumptions Digimarc applies in calculating these amounts is set forth in the Notes to Consolidated Financial Statements included in Digimarc's Annual Report on Form 10-K for the year ended December 31, 2007 on page F-17 under the caption "Restricted Stock and Performance Vesting Shares." The same 3,000 share grant was made by Digimarc on May 1, 2008 with a fair value on the grant date of $33,240.

(2)
These amounts represent the amount of expense Digimarc took in 2007 for stock options granted to the indicated director in 2007 and previous years. On May 2, 2007, each director was granted an option to purchase 6,000 shares of Digimarc common stock with a grant date fair value of $28,609. A summary of the assumptions Digimarc applies in calculating these amounts is set forth in the Notes to Consolidated Financial Statements included in Digimarc's Annual Report on Form 10-K for the year ended December 31, 2007 on pages F-15 to F-16 under the caption "Stock Options." As of December 31, 2007, the total number of outstanding options held by each director was as follows: Mr. Smith, 100,000; Mr. Richardson, 62,000; Mr. Whitney, 32,000; and Mr. Miller, 32,000.

All directors were also reimbursed for reasonable and necessary travel, communications, and other out-of-pocket business expenses incurred in connection with their attendance at meetings, while on corporate business or for continuing education related to their board service.

        Cash Compensation.     In 2007, each non-employee director of Digimarc received an annual cash retainer of $30,000. The Lead Director received an additional annual cash retainer of $30,000. Members of the Digimarc audit committee received an annual cash retainer of $10,000, with the chair of the audit committee receiving an annual cash retainer of $20,000. Members of the Digimarc

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compensation committee received an annual cash retainer of $5,000, with the chair of the Digimarc compensation committee receiving an annual cash retainer of $10,000. Members of other standing committees of the Digimarc board of directors received an additional annual cash retainer of $3,750 for each committee on which the member served, with the chair receiving an annual cash retainer of $7,500. In addition, each Digimarc committee member received a fee of $1,000 for each in-person committee meeting and would have received a fee of $500 for each teleconference committee meeting in excess of eight meetings of the particular committee held in 2007. No fees for excess meetings were paid during 2007.

        Equity Compensation.     Digimarc's 1999 Non-Employee Director Option Program establishes an automatic option grant program for the grant of awards to its non-employee directors. Under this program, each non-employee director who first was elected to Digimarc's board of directors on or after March 29, 2002 is automatically granted an option to acquire 20,000 shares of common stock at an exercise price per share equal to the fair market value of the common stock at the date of grant. These options vest and become exercisable in 36 equal installments on each monthly anniversary of the grant date, so the stock option become fully exercisable three years after the grant date. No new directors were elected to Digimrc's board of directors in 2007. On the date of each annual stockholders meeting, each non-employee director who has been a member of Digimarc's board of directors for at least six months prior to the date of the stockholders meeting automatically receives an option to acquire 6,000 shares of Digimarc common stock at an exercise price per share equal to the fair market value of the common stock at the date of grant, and an automatic grant of 3,000 shares of Digimarc restricted stock. The options vest and become exercisable in twelve equal installments on each monthly anniversary of the grant date, so the stock options become fully exercisable one year after the grant date. The restricted stock awards are subject to a forfeiture restriction that lapses as to 100% of the shares subject to the award one year after the grant date. Messrs. Smith, Richardson, Miller and Whitney all received grants of options and restricted stock from Digimarc in 2007.

        In addition, Digimarc's 1999 Non-Employee Director Option Program provides that, immediately following each annual meeting of its stockholders, each non-employee director who serves as a member of a standing committee of the Board and who has been a member of the Board of Directors for at least six months prior to the date of the stockholders meeting receives an option to acquire 3,000 shares of common stock at an exercise price per share equal to the fair market value of the common stock at the date of grant. These options vest and become exercisable in twelve equal installments on each monthly anniversary of the grant date, so the stock option is fully exercisable one year after the grant date.

        The Digimarc board of directors has discretion to elect not to make the annual option and restricted stock grants to continuing board members and standing committee members. Since 2004, the Digimarc board of directors has elected not to make the annual 3,000 share option grant to directors for service on one or more standing committees. The shares for committee service are a vestige of the former program under which Digimarc directors received only equity compensation, rather than a combination of cash and equity compensation, which is the case now. The Digimarc board of directors determined that the value of the options and restricted stock grants provided sufficient equity compensation for their service as directors of Digimarc.

New Compensation Proposal for DMRC Directors

        The following is a summary of the anticipated cash compensation program for our non-employee members of the DMRC board of directors:

Annual Cash Retainer   $ 40,000
Initial Restricted Stock Grant (New/Initial Director)   $ 40,000
Annual Restricted Stock Grant (Continuing Director)   $ 40,000

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COMPENSATION DISCUSSION AND ANALYSIS

        This Compensation Discussion and Analysis describes the compensation policy we expect to apply to our named executive officers with respect to fiscal 2008.

General Compensation Policy

        Our executive compensation programs are designed to attract, retain, motivate and appropriately reward our executive officers, as well as to align the interests of executive officers with those of our stockholders. The objectives of our compensation programs are to:

Setting Executive Compensation

        Executive compensation is structured to foster achievement of the objectives of our compensation philosophy and is generally commensurate with compensation structures and levels at companies of similar size within the high tech and software services industries that share similar financial and operating characteristics.

        In general, compensation to Named Executive Officers is based upon the scope of their responsibilities, experience, skills, talents, demonstrated prior performance, and potential contributions to our success. In making these determinations, the Compensation Committee has considered compensation practices at comparable companies, among other data points, to judge the reasonableness of its decisions. The Committee also has used the services of Mercer, a nationally recognized independent consulting firm, to assist it in determining appropriate compensation. Mercer performed analyses and made recommendations with respect to compensation for each Named Executive Officer', including the appropriate number of stock options and other equity awards to be considered.

        In establishing the compensation to be provided to our Named Executive Officers, the Compensation Committee considered the factors referred to above, including market data and advice provided by Mercer. As a general guideline, for our Named Executive Officers, we set base cash compensation between the 50 th  and 75 th  percentiles, total cash compensation (base plus annual cash incentive ("bonus") compensation) for our Named Executive Officers at or between the 50 th  and 75 th  percentiles (with top quartile opportunity for superior performance) and total equity compensation between the 50 th  and 75 th  percentiles of similar companies. We believe that these levels will enable us to attract, retain and motivate executives of high quality, while at the same time keep our overall compensation levels in line with those of comparable companies.

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2008 Compensation Components

        The primary elements of each Named Executive Officer's compensation package for the year ended December 31, 2008 will be:

The reasons for choosing each of these components are set forth in the discussion below. Because base compensation, annual cash bonuses, and equity awards are such basic elements of compensation within our industry, as well as the high tech and software industries in general, and are generally expected by employees, we believe that these components must be included in our compensation mix in order for us to compete effectively for talented executives. In determining the mix of these components, we applied our compensation philosophy and principles and considered the advice of Mercer concerning compensation levels for executives at comparable companies. Our objective was to establish a mix that would facilitate the following objectives:

        We use stock options as an element of executive compensation for several reasons. First, stock options facilitate retention of our executives. Stock options will provide a return to the executive only if he or she remains in our employ. Second, stock options align executive compensation with the interests of our stockholders and thereby focus executives on increasing value for the stockholders. Third, stock options are performance based; providing a return to executives only to the extent that the market price of our common stock appreciates over the option term. Fourth, stock options create incentive for increases in stockholder value over a longer term. In determining the number of options to be granted to executives, we take into account the individual's position, scope of responsibility, ability to affect profits and stockholder value, the individual's past and recent performance, and the estimated value of stock options at the time of grant. Assuming individual performance at a level satisfactory to the Compensation Committee, the size of stock option grants to our executives is generally set between the 50 th  and 75 th  percentiles for comparable companies, with top quartile opportunity for superior performance.

        We use time-based restricted stock to help encourage retention and to minimize the burn rate relating to equity awards. Restricted stock provides some of the same benefits as stock options, such as facilitating (i) alignment of the value of an executive's compensation with our performance, the market value of our common stock and the interests of our stockholders and (ii) retention of the executive as an employee. Both stock options and restricted stock provide a return to the executive only to the extent he or she remains in our employ during the vesting period. In the case of restricted stock, the employee receives actual shares, rather than a right to purchase shares at a fixed price. Once the restricted shares vest, they will generally have some value to the employee, even if the share price has not increased since the grant date. On the other hand, stock options will have no value unless the share price increases following the date of grant. As a result, to the extent the stock price has not increased since the date of grant, restricted stock may provide a greater retention benefit than that of stock options. Accordingly, we believe that a mix of stock options and restricted stock provides a more certain baseline retention benefit.

69


        In allocating compensation among the elements identified above, we believe that a substantial portion of the total compensation of our Named Executive Officers, the level of management having the greatest ability to influence our performance, should be performance-based. Accordingly, a substantial portion of the compensation of each Named Executive Officer consisted of incentive cash bonus, stock options, and restricted stock.

        In allocating long term incentive compensation among stock options, time-based restricted stock and performance-based restricted stock, our general guideline is to provide approximately 2 / 3 of the annual long-term incentive value for each Named Executive Officer in the form of stock options, based on the Black-Scholes valuation model. The remaining annual long-term incentive value will be provided in the form of time-based restricted stock. The Committee has determined that stock options align the interests of the executives with the stockholders and therefore a substantial portion of the value of the equity grants was allocated to the executives in the form of stock options, while time-based restricted stock assists in the retention of executives while maintaining alignment with growth in stockholder value.

        Salary.     The salary for each Named Executive Officer is set on the basis of the position and the salary levels in effect for comparable positions with other comparable companies in the industry. Salaries are generally targeted between the 50 th  and 75 th  percentiles, with the opportunity for high-performers and successful incumbents occupying critical positions to have salaries that reflect their seasoning, experience, performance and contributions. During the annual review, the Committee determined that the targeted annual compensation was competitive with the pay targets established by the Compensation Committee.

        The 2008 base salaries proposed for our Named Executive Officers are as follows: Bruce Davis, $            ,000; Robert Chamness, $            ,000; and Michael McConnell, $            ,000.

        Annual Cash Incentive Compensation.     The Compensation Committee has established an incentive compensation program for Named Executive Officers. Under this program, our executive officers receive annual cash bonuses based upon the achievement of specified performance objectives. These executives are responsible for establishing strategic direction and are to be responsible for major functional or operating units and have an impact on bottom-line results. Accordingly, evaluation of performance of objectives is generally based on measure of Company performance as well as individual performance. Compensation objectives are explicitly linked to goals and objectives set forth in our Annual Operating Plan, as approved by the Board of Directors.

        The target bonus amounts and the specific company and individual objectives applicable to the cash bonuses paid to our Named Executive Officers will be set annually, with a stub-year plan for the rest of 2008. With respect to each Named Executive Officer, as a general guideline, 20 - 40% of the annual incentive bonus will be based on the achievement of individual performance goals and 60 - 80% will be based on key measures of financial performance.

        The 2008 target bonus amount for Mr. Davis will be set at 75% of his base salary (or $            ,000). The target bonus amounts for our other Named Executive Officers were set at 50% of their base salaries (or $            ,000). The committee determined that these percentages were competitive within the marketplace and consistent with its overall compensation philosophy of targeting total cash compensation between the 50 th  and 75 th  percentiles. A larger portion of Mr. Davis' cash compensation is performance based because we believe that Mr. Davis, as our Chief Executive Officer, has a greater impact on our results than our other executive officers.

        The individual performance goals will vary with each executive and are to be set in January as part of the strategic performance management process. If fully performed, they could be 20 - 40% of an executive's annual bonus. The Compensation Committee will determine the achievement of the individual key objectives, from 0% to 100%, in a year-end evaluation based on relevant qualitative and

70



quantitative measures and information provided by the Chief Executive Officer. For the balance of 2008, the non-financial goals consist of the following objectives:

        While these goals may vary in difficulty, they are the goals determined to be of the highest importance to us, will require significant effort to accomplish, contribute to the achievement of the annual operating plan, and will result in direct benefit to our stockholders.

        Equity Compensation.     The Compensation Committee intends to award stock options and restricted stock to each of our executive officers upon their initial hiring and from time to time thereafter. These forms of equity compensation are designed to align the interests of our executive officers with those of our stockholders and to provide each executive officer with a significant incentive to manage us from the perspective of an owner with an equity stake in the business.

        The size of the grants made to each executive officer is set at a level that the Compensation Committee deems appropriate to create a meaningful opportunity for stock ownership based upon the individual's current position with us and individual and company performance. The Compensation Committee also takes into account comparable awards to individuals in similar positions in the industry as reflected in external surveys, the individual's potential for future responsibility and promotion, the individual's performance in recent periods, and our anticipated stock option burn rate. The relative weight given to each of these factors will vary from individual to individual in the Compensation Committee's discretion.

        With the exception of significant promotions and initial hires, including the awards at the time of the spinoff, we will make these awards at the first meeting of the Compensation Committee each calendar year following approval of the Annual Operating Plan by the Board. This process enables us to align compensation with the AOP and to properly budget for associated costs.

        The Compensation Committee intends to award stock options and restricted stock to each executive officer. The size of the grants will be set at a level that the Compensation Committee deems appropriate to create a meaningful opportunity for stock ownership based upon the individual's anticipated position with us. In making these awards, the Committee will look at competitive long term incentive values, and attempt to grant equity compensation to our executives with a value to the executives between the 50 th  and 75 th  percentiles of our peer group for their position. The Committee will allocate approximately 2 / 3 of that value to stock options and the remainder to time-based restricted stock.

71


        Benefits and Perquisites.     Benefits are established based upon an assessment of competitive market factors and a determination of what is needed to attract and retain talent. The primary benefits received by our Named Executive Officers are the same as for all other employees and include participation in our health, dental and vision plans, the employee stock purchase plan and our disability and life insurance plans. Our general policy is not to provide perquisites or other personal benefits to our Named Executive Officers, other than those benefits provided for all other employees.

Compliance with Internal Revenue Code Section 162(m)

        Section 162(m) of the Code generally disallows a tax deduction to public companies for compensation exceeding $1 million paid to certain executive officers. The limitation applies only to compensation that is not considered to be performance-based. We believe that the non-performance-based compensation paid to each of our executive officers in 2008 will not exceed the $1 million limit and, therefore, no deductions will be disallowed under Section 162(m).

        The Compensation Committee is aware of the limitations imposed by Section 162(m), and its exemptions, and will address the issue of deductibility when and if circumstances warrant. We review proposed compensation plans in light of applicable tax deductions, and generally seek to maximize the deductibility for tax purposes of all elements of compensation. However, we may approve compensation that does not qualify for deductibility if and when we deem it to be in our best interests.

Practices Regarding Equity Grants

        As a general matter, except for new hire grants, we will grant awards of stock options and restricted stock (time based and performance based) to our Named Executive Officers at a Compensation Committee meeting held in early January. Pursuant to our written policy and standard operating procedures with respect to the stock grants, the grant date of these awards is the date of approval of the grants. Our executives have no role in selecting the grant date. The exercise price of stock options is always the closing price of the underlying common stock on the grant date. All stock option, restricted stock and performance vesting share awards to executives are promptly reported on Form 4 filings.

Termination and Change in Control Payments

        We anticipate entering into new employment agreements with Messrs. Davis, Chamness and McConnell.

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EXECUTIVE COMPENSATION

        The following tables contain information concerning the compensation paid to only the Named Executive Officers of Digimarc who we expect to continue with DMRC for services rendered to Digimarc for the year ended December 31, 2007. All of the information included in these tables reflects compensation earned by the individuals for services performed for Digimarc. All references in the following tables to stock options, restricted stock, restricted stock units, and other stock awards relate to awards granted by Digimarc in regard to Digimarc common stock.

        The amounts and forms of compensation reported below do not necessarily reflect the compensation the Named Executive Officers will receive following the spin-off, which could be higher or lower, because historical compensation was determined by Digimarc and future compensation levels will be determined by our compensation committee.

2007 Summary Compensation Table

Name and Principal Position

  Year
  Salary
($)

  Bonus
($)(1)

  Stock Awards
($)(2)

  Option Awards
($)(3)

  All Other Compensation
($)(4)

  Total
($)


Bruce Davis,
Chief Executive Officer and Chairman of the Board of Directors

 

2007

 

$

410,000

 

 


 

$

500,834

 

$

255,302

 

$

6,750

 

$

1,172,886

Michael McConnell,
Chief Financial Officer and Treasurer

 

2007

 

$

260,000

 

$


 

$

194,120

 

$

127,188

 

$

6,750

 

$

588,058

Robert Chamness,
Chief Legal Officer and Secretary

 

2007

 

$

250,000

 

 


 

$

163,290

 

$

77,734

 

$

6,750

 

$

497,774

(1)
No bonuses or non-equity incentive plan compensation were paid for 2007, because Digimarc did not achieve profitability.

(2)
These amounts represent the expense taken by Digimarc in 2007 with respect to time based restricted stock and performance based restricted stock granted in 2007 and previous years, based on the estimated fair value of these awards calculated under FAS 123R. A summary of the assumptions Digimarc applies in calculating these estimates is set forth in the Notes to Consolidated Financial Statements included in Digimarc's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 on page F-17 under the caption "Restricted Stock and Performance Vesting Shares." The awards for which expense is shown in this column include awards described in the Grants of Plan-Based Awards Table and in the Outstanding Equity Awards at Fiscal Year-End Table.

(3)
These amounts represent the expense taken by Digimarc in 2007 with respect to stock options granted in 2007 and previous years, based on the estimated fair value of these awards. Digimarc estimates the fair value of stock options under FAS 123R using the Black-Scholes option valuation model. A summary of the assumptions Digimarc applies in calculating these amounts is set forth in the Notes to Consolidated Financial Statements included in Digimarc's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 on pages F-15 to F-16, under the caption "Stock Options". The awards for which expense is shown in this column include awards described in the Grants of Plan-Based Awards Table and in the Outstanding Equity Awards at Fiscal Year-End Table.

(4)
These amounts consist of matching contributions to the Digimarc 401(k) plan made by Digimarc in 2008 for the 2007 fiscal year. These contributions are made at the same rate as for all other Digimarc employees who elect to participate in the plan.

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2007 Grants of Plan-Based Awards Table

        The following table sets forth certain information with respect to stock options and other plan-based awards granted by Digimarc with respect to Digimarc common stock during the year ended December 31, 2007 to each of the Named Executive Officers. Immediately prior to the record date for the distribution, outstanding Digimarc equity incentive awards will be adjusted as described in "Executive Compensation—Treatment of Outstanding Equity Awards in Connection with the Spin-Off."

 
   
  Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards

  Estimated Future Payouts
Under Equity
Incentive Plan Awards

   
   
   
   
Name

  Grant Date
  Threshold
($)

  Target
($)

  Maximum
($)

  Threshold
(#)

  Target
(#)

  Maximum
(#)

  All Other Stock Awards: Number of Shares of Stock or Units
(#)

  All Other Option Awards: Number of Securities Underlying Options
(#)

  Exercise or Base Price of Option Awards
($/Sh)

  Grant Date Fair Value of Stock and Option Awards
($)

Bruce Davis  
1/2/07
1/2/07
1/2/07
  0   $ 328,000    


0
 


30,000
 


30,000
 

30,000
 
100,000
 
$

8.79
 
$
$
$

424,210
263,700
192,264

Michael McConnell

 


1/2/07
1/2/07
1/2/07

 

0

 

$

143,500

 


 




0

 




10,000

 




10,000

 



10,000

 


40,000

 


$


8.79

 


$
$
$


169,684
87,900
64,088

Robert Chamness

 


1/2/07
1/2/07
1/2/07

 

0

 

$

137,500

 


 




0

 




7,500

 




7,500

 



7,500

 


30,000

 


$


8.79

 


$
$
$


127,263
65,925
48,066

Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table

        Estimated Future Payouts Under Non-Equity Incentive Plan Awards.     The "target" amounts represent the 2007 annual bonus target establsihed by Digimarc for each Named Executive Officer.

        Estimated Future Payouts Under Equity Incentive Plan Awards.     These amounts represent the number of shares covered by performance based restricted stock awards granted by Digimarc on January 2, 2007. The grant date fair value of this award was determined by Digimarc using a Monte Carlo valuation model that resulted in a substantial discount to the fair market value of Digimarc's common stock on the date of grant, based on the probability weighting of the specified performance goal.

        All Other Stock Awards.     These amounts represent the number of shares covered by time-based restricted stock awards granted by Digimarc on January 2, 2007. The grant date fair value of this award was based on $8.79 per share (which was the closing price of Digimarc common stock on December 29, 2006), the most recent closing price of Digimarc's common stock.

        All Other Option Awards.     These amounts represent the number of shares covered by stock options granted by Digimarc on January 2, 2007. These options have an exercise price of $8.79 per share (which was the closing price of Digimarc common stock on December 29, 2006, the most recent closing price of Digimarc's common stock). The grant date fair value was determined by Digimarc using the Black-Scholes valuation model.

Employment Agreement with Mr. Davis

        Digimarc has entered into an employment agreement with Bruce Davis, pursuant to which Digimarc agreed to pay Mr. Davis an initial base salary of not less than $300,000 per year and an annual performance bonus of up to 50% of his base salary per year. Consistent with its charter, the

74



Digimarc compensation committee annually reviews and determines the compensation of the Chief Executive Officer and other executive officers. The Digimarc compensation committee is not restricted from setting base and bonus amounts at a higher level than as provided in Mr. Davis's employment agreement. Since the date of the employment agreement, Digimarc's compensation arrangement with Mr. Davis has evolved and, over time, the Digimarc compensation committee has determined to increase the amount of base compensation and the percentage amount of Mr. Davis's target bonus. The Digimarc compensation committee determined in 2005 to set the base and annual performance bonus for Mr. Davis in amounts higher than those set forth in his employment agreement, as noted above in the 2007 Summary Compensation Table.

        Mr. Davis also receives vacation and other benefits as are generally provided to other Digimarc executives. Digimarc will grant additional stock options to Mr. Davis consistent with general market practices for similarly situated executives. The employment agreement provides that as long as Mr. Davis serves as Digimarc's Chief Executive Officer, it is our intention that he will be nominated to serve as a director and as chairman of Digimarc's Board of Directors. The employment agreement provides for an initial term from July 16, 2001 to December 31, 2002, automatically renewing for successive two-year periods unless terminated by written notice received at least one year prior to any scheduled termination.

        Other than the agreement with Mr. Davis referenced above, there are no employment contracts between Named Executive Officers and Digimarc. However, as described more fully under "Potential Post-Employment Payments" below, on January 2, 2007, the Digimarc compensation committee approved a more limited Change of Control Retention Agreement between Digimarc and each of Messrs. McConnell and Chamness. All obligations under the Change of Control Retention Agreements will be assumed by DMRC Corporation following the spin-off and DMRC Corporation merger.

Annual Cash Incentive Compensation

        Digimarc did not pay annual cash incentive bonuses for 2007 performance.

        Under Digimarc's incentive compensation program for executive officers, non-equity incentive plan awards are not capped at the target level. The Digimarc plan allows for bonuses to be paid up to 130% of the target if Digimarc's performance exceeds the Digimarc plan.

Equity Compensation

        The awards included in the 2007 Summary Compensation table include awards that are also described in the 2007 Grants of Plan-Based Awards table and in the 2007 Outstanding Equity Awards at Fiscal Year-End table.

        Stock Options.     All options granted to the Named Executive Officers in 2007 are intended to be incentive stock options, but only to the extent that the aggregate fair market value of the common stock with respect to which the stock options are exercisable for the first time during any calendar year under all Digimarc's equity incentive plans for each executive does not exceed $100,000. Any excess over $100,000 is treated as a non-qualified stock option. Each grant allows the executive officer to acquire shares of Digimarc's common stock at a fixed price per share, which is the market price on the grant date over a specified period of time up to 10 years. Such options become exercisable in monthly installments over a four-year period, contingent upon the executive officer's continued employment with Digimarc.

        Time Based Restricted Stock.     Each grant of Digimarc time-based restricted stock granted to the Named Executive Officers in 2007 allows the executive officer to acquire shares of Digimarc common stock at no cost immediately at the time of the grant, subject to divestiture over a specified period of time (in this instance, four years). At the end of each of the first four years following the grant date, the restrictions will lapse on 25 percent of the restricted shares subject to each of these grants, at which time such shares are no longer subject to forfeiture.

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        Performance Based Restricted Stock.     The form of agreement used in connection with the grant of Digimarc performance based restricted stock to its executive officers in 2007 provides that the shares will fully vest, subject to the terms of the agreement, if the Total Stockholder Return (as defined below) for certain specified periods is equal to or greater than specified percentile targets as compared to the weighted peer group used by Digimarc's compensation committee for the purposes of determining executive compensation for 2007. If, for the period from the date of grant to December 31, 2009, Digimarc's Total Stockholder Return is equal to or greater than the 60 th  percentile performance of the weighted peer group, then the shares will vest in full as of December 31, 2009. However, if, for the period from the date of grant to December 31, 2008, Digimarc's Total Stockholder Return is equal to or greater than the 75 th  percentile performance of the weighted peer group, then the shares will vest in full as of December 31, 2008. Assuming that all conditions are satisfied, the shares will vest and no longer be subject to forfeiture as of the date on which the performance condition is satisfied. Subject to certain exceptions, all rights to shares of performance based restricted stock are contingent on the executive remaining continuously employed by Digimarc, or any parent or subsidiary of Digimarc, from the grant date through the vesting date. The shares will be automatically forfeited on the third anniversary of the date of grant if the performance condition has not been fully satisfied by such time.

        Digimarc calculates Total Stockholder Return by dividing (i) the change in the share price from December 31, 2006 to the end of the relevant measurement period, plus dividends paid during such period (including stock splits, cash dividends, stock dividends and share repurchases) by (ii) the share price at the date of grant. For purposes of the above calculation, the share price is the closing price on the relevant measurement date. Because the stock markets were closed on January 1, 2007 (the beginning of the measurement periods), Digimarc used the closing price on Friday, December 29, 2006, which was the last preceding trading date for which a closing price was reported. Accordingly, the share price of Digimarc common stock on January 1, 2007 is deemed to be $8.79, the closing price of Digimarc common stock on December 29, 2006.

        For purposes of determining whether Digimarc has met the performance conditions, the Total Stockholder Return of each of the peer companies in Group I is weighted by a factor of three and the Total Stockholder Return of each of the peer companies in Group II is given no additional weighting. Digimarc's compensation committee determines the precise formula to be used to calculate Digimarc's percentile ranking calculation. Digimarc's compensation committee also makes additional adjustments to the calculation of Total Stockholder Return and percentile ranking as it deems appropriate to reflect changes in Digimarc's outstanding shares or any of the companies that comprise the peer group, or other similar non-market factors that may affect share price. The Digimarc compensation committee chose the Total Stockholder Return of Digimarc relative to its peer group as the performance measure in order to closely align a portion of compensation with direct benefit to stockholders. Since Digimarc based a portion of short term incentive compensation (annual incentive cash bonus) on target levels of return on equity, Digimarc felt it appropriate to use share price as the performance measure for performance based restricted stock. Digimarc utilized an "all or nothing" approach in structuring the performance measure in order to provide the maximum incentive to reach the specified goal. Digimarc may consider revising the "all or nothing" approach in future years to more closely reflect other comparable programs in the peer group.

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2007 Outstanding Equity Awards at Fiscal Year-End Table

        The following table provides summary information, as to the Named Executive Officers, concerning Digimarc equity awards outstanding as of December 31, 2007. Immediately prior to the record date for the distribution, outstanding Digimarc equity incentive awards will be adjusted as described in "Executive Compensation—Treatment of Outstanding Equity Awards in Connection with the Spin-Off."

 
  Option Awards(1)
  Stock Awards
 
   
   
   
   
   
   
   
   
  Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($)(5)

 
   
   
   
   
   
   
   
  Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)(4)

 
   
  Number of
Securities
Underlying
Unexercised
Options
(#)

  Number of
Securities
Underlying
Unexercised
Options
(#)

   
   
   
  Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
($)(3)

 
   
   
   
  Number of
Shares or
Units of
Stock
That
Have Not
Vested
(#)(2)

 
   
  Option
Exercise
Price
($)

   
Name

  Grant
Date

  Option
Expiration
Date

  Exercisable
  Unexercisable
Bruce Davis     
01/31/00
07/17/00
12/21/00
12/18/01
06/25/02
12/12/02
01/02/04
01/05/05
01/03/06
01/02/07
    
100,000
200,000
250,000
150,000
50,000
200,000
110,000
25,000
89,569
22,917
  90,431
77,083
 
$
$
$
$
$
$
$
$
$
$
  
53.9375
26.25
14.125
18.16
8.67
15.24
13.00
9.07
5.91
8.79
    
01/31/10
07/17/10
12/21/10
12/18/11
06/25/12
12/12/12
01/02/14
01/05/15
01/03/16
01/02/17
  85,250   $ 751,905   65,000   $ 573,300
Michael McConnell    
06/01/04
01/05/05
01/03/06
01/02/07
    
200,000
10,000
32,344
9,167
  32,656
30,833
 
$
$
$
$
 
11.53
9.07
5.91
8.79
    
06/01/14
01/05/15
01/03/16
01/02/17
  33,000   $ 291,060   25,000   $ 220,500
Robert Chamness     
01/02/02
12/12/02
01/02/04
01/05/05
01/03/06
01/02/07
    
100,000
28,000
30,000
10,000
24,880
6,875
  25,120
23,125
 
$
$
$
$
$
$
  
19.93
15.24
13.00
9.07
5.91
8.79
    
01/02/12
12/12/12
01/02/14
01/05/15
01/03/16
01/02/17
  26,750   $ 235,935   17,500   $ 154,350

(1)
Option awards vest monthly over a four-year period following the date of grant contingent upon the executive officer's continued employment with Digimarc.

(2)
The awards in this column consist of shares of time based restricted stock granted in 2007 and prior years. These shares will vest annually over a four-year period following the date of grant contingent upon the executive officer's continued employment with Digimarc.

(3)
Based on the $8.82 per share closing price of Digimarc's common stock on December 31, 2007 (which was the last trading day of the 2007 fiscal year).

(4)
The awards in this column consist of shares of performance based restricted stock granted in 2007 and prior years. The 2007 shares will fully vest, subject to the terms of the agreement, if the Total Stockholder Return for certain specified periods is equal to or greater than specified percentile targets as compared to the weighted peer group used by Digimarc's Compensation Committee for the purposes of determining executive compensation for 2007. If, for the period from the date of grant to December 31, 2009, Digimarc's Total Stockholder Return is equal to or greater than the 60 th  percentile performance of the weighted peer group, then the shares shall vest in full as of December 31, 2009. However, if, for the period from the date of grant

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(5)
Based on the $8.82 per share closing price of Digimarc's common stock on December 31, 2007 (which was the last trading day of the 2007 fiscal year).

        The awards in the Outstanding Awards at Fiscal Year-End table include awards that are also described in the 2007 Summary Compensation Table and in the 2007 Grants of Plan-Based Awards Table.

2007 Option Exercises and Stock Vested Table

        The following table provides summary information, as to the Named Executive Officers, concerning Digimarc stock options exercised and Digimarc stock awards vested during 2007.

 
  Stock Awards
Name

  Number of Shares
Acquired on Vesting
(#)

  Value Realized
on Vesting
($)(1)

Bruce Davis   37,750   $ 329,455
Michael McConnell   15,500   $ 135,210
Robert Chamness   14,250   $ 124,685

      (1)
      Based on the $8.82 per share closing price of Digimarc common stock on December 31, 2007, the last trading day of the 2007 calendar year.

2007 Potential Payments Upon Termination or Change-in-Control

        Davis Employment Agreement.     The employment agreement entered into between Digimarc and Mr. Davis provides that if Digimarc terminates Mr. Davis's employment without cause, or if Mr. Davis terminates his employment due to an adverse change in conditions of his employment, Mr. Davis's stock options will immediately and fully vest and Digimarc will be obligated to continue to pay Mr. Davis the benefits described below for two years from the date of termination. "Cause" is defined as "an action or inaction adverse to Digimarc, including dishonesty, grossly negligent misconduct, willful misconduct, disloyalty, an act of bad faith, neglect of duty or material breach of the employment agreement." "Adverse change" includes any of the following changes, if done without Mr. Davis's prior written consent: reduction in title or responsibilities, or mandatory relocation more than 35 miles from current place of employment. For a period of two years following the date of termination, Mr. Davis would continue to receive base compensation at the level in effect on the date of termination and annual bonus compensation at the level earned in the most recent fiscal year. These amounts would be paid according to Digimarc's standard payroll schedules from the date of termination, as if Mr. Davis had not been terminated. For a period of two years following the date of termination, Digimarc would also provide for Mr. Davis and his dependents, continued health, disability and other fringe benefits as are generally provided to other executives of Digimarc. In consideration for the provisions in the employment agreement providing for the post-termination payments described above, Mr. Davis has agreed to certain non-competition and non-solicitation obligations in favor of Digimarc.

        Stock Option Policy.     The Board of Directors of Digimarc adopted a policy, applicable to all of its current and future officers, pursuant to which all shares subject to stock options that have not vested will immediately vest if the following two conditions are met:

    Digimarc merges with another company, which results in a change of control of Digimarc, or Digimarc sells substantially all of its assets to another company; and

78


    the officer's employment is terminated, or constructively terminated, within twelve months thereafter.

        Restricted Stock Agreement.     Digimarc's compensation committee approved a form of the restricted stock agreement for restricted stock awards (both time based and performance based) granted to officers of Digimarc pursuant to its 1999 Stock Incentive Plan, which provides, among other things, that the shares will vest in full upon the termination of the officer's employment without cause or the officer's resignation for good reason following a change in control of Digimarc. Notwithstanding the foregoing, the Digimarc compensation committee has discretionary authority to determine the terms and conditions of any award granted under Digimarc's 1999 Stock Incentive Plan.

        Change of Control Retention Agreement.     On January 2, 2007, Digimarc's compensation committee approved a form of Change of Control Retention Agreement to be entered into by and between Digimarc and each of Messrs. McConnell and Chamness. The Change of Control Retention Agreement is effective until December 31, 2009 and provides for certain severance benefits in the event of termination of the executive without cause by Digimarc, or termination by the executive for good reason, within 12 months following a change of control of Digimarc or the sale of certain divisions of Digimarc during the term of the Change of Control Retention Agreement. "Cause" is defined as willful misconduct that is significantly injurious to Digimarc; fraud, dishonesty, embezzlement, misrepresentation or theft of Digimarc; conviction of (or plea of no contest to) a felony or crime involving moral turpitude; breach of any agreement with Digimarc; unauthorized disclosure of Digimarc's proprietary or confidential information or breach of any confidentiality/invention/proprietary information agreement(s) with Digimarc; violation of Digimarc's code of ethics (if applicable), code of business conduct and ethics or any other employment rule, code or policy; continued failure or refusal to follow our lawful instructions after five days has passed following delivery of a written notice identifying the failure or refusal; a court order or a consent decree barring the executive from serving as an officer or director of a public company; or continued failure to meet and sustain an acceptable level of performance of Executive's duties and obligations to Digimarc for thirty days following notice of failure to perform.

        "Good reason" is defined as a substantial reduction in duties or responsibilities (with certain exceptions); a material reduction in base salary, benefits or total cash compensation, other than as part of an overall reduction for all employees at the same level; a mandatory transfer to another geographic location more than 35 miles from the prior location of employment, other than normal business travel obligations; the failure of a successor to Digimarc to assume the obligations under the agreement; or Digimarc's failure to comply with its obligations under the agreement.

        The severance benefits payable by Digimarc upon such a termination include 12 months' salary, a prorated bonus payment and up to 18 months' premiums necessary to continue the executive's health insurance coverage under Digimarc's health insurance plan and are conditioned upon the executive signing a release of claims. All obligations under the Change of Control Retention Agreements will be assumed by DMRC Corporation following the spin-off and DMRC Corporation merger.

        The following table summarizes potential payments to each of the Named Executive Officers upon termination of employment with Digimarc or a change in control of Digimarc. The amounts set forth in the table are based on the assumption that the triggering event occurred on the last business day of Digimarc's last completed fiscal year and that Digimarc's stock price was the closing market price per share on that date. In the case of stock options, the value of the acceleration was determined based on the difference between (i) the exercise price of the shares for which vesting was accelerated and (ii) the $8.82 closing price on December 31, 2007. In the case of restricted stock, the value of the acceleration

79



was determined by multiplying (i) the number of shares for which vesting was accelerated by (ii) the $8.82 per share closing price on December 31, 2007.

Name

  Benefit
  Before Change in
Control
Termination
w/o Cause or
for Good Reason

  After Change in
Control
Termination
w/o Cause or
for Good Reason

Bruce Davis   Stock Option Vesting Acceleration
Restricted Stock Vesting Acceleration
Salary Continuation
Bonus Continuation
Benefits Continuation
Total Value
  $
$
$
$
$
$
265,467
1,325,205
820,000
0
33,498
2,444,170
  $
$
$
$
$
$
265,467
1,325,205
820,000
0
33,498
2,444,170
Michael McConnell   Stock Option Vesting Acceleration
Restricted Stock Vesting Acceleration
Salary Continuation
Bonus Continuation
Benefits Continuation
Total Value
  $
$
$
$
$
$
0
0
0
0
0
0
  $
$
$
$
$
$
95,954
511,560
260,000
0
17,490
885,004
Robert Chamness   Stock Option Vesting Acceleration
Restricted Stock Vesting Acceleration
Salary Continuation
Bonus Continuation
Benefits Continuation
Total Value
  $
$
$
$
$
$
0
0
0
0
0
0
  $
$
$
$
$
$
73,793
390,285
250,000
0
25,123
739,201

        The salary continuation amounts shown in the table above are based on the Named Executive Officer's base salary, paid by Digimarc, in 2007. Bonus amounts shown in the table represent the cash bonus earned by the Named Executive officer in 2007 under Digimarc's annual incentive bonus cash compensation program.

Treatment of Outstanding Equity Awards in Connection with the Spin-Off

Treatment of Digimarc Stock Options

        All outstanding options to purchase shares of Digimarc common stock are fully vested and exercisable. Holders of Digimarc stock options will be given the opportunity to exercise their stock options on or prior to the record date. Following the exercise of the stock options on or prior to the record date, the holders of Digimarc common stock issued upon exercise will be entitled to receive shares of DMRC Corporation common stock in connection with the spin-off and subsequent DMRC Corporation merger and, to the extent the stockholders remain stockholders until the acceptance time or Digimarc/L-1 merger, they will also be entitled to receive the offer price or the merger consideration, in an amount equal to the offer price per share, as the case may be. Subject to the terms and conditions of Digimarc's stock option plans, Digimarc will use its reasonable best efforts to cause all outstanding Digimarc stock options that are not exercised on or prior to the record date to be cancelled as of the spin-off. All Digimarc stock options that are not exercised or cancelled prior to the effective time of the merger will be cancelled and null and void as of the effective time of the merger.

        In connection with the termination of Digimarc's 1995 Stock Incentive Plan, Restated 1999 Stock Plan, 2000 Non-Officer Employee Stock Incentive Plan and 1999 Non-Employee Director Option Program, following the Digimarc/L-1 merger, no holder of Digimarc stock options, or any participant or beneficiary of the plans, will have any right to acquire or receive any equity securities of the surviving corporation, any subsidiary of the surviving corporation or any consideration other than as discussed above.

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Treatment of Digimarc Restricted Stock

        All outstanding shares of Digimarc restricted stock are fully vested and are entitled to a distribution of shares of DMRC Corporation common stock in connection with the spin-off. The holders of Digimarc restricted stock will be entitled to receive the offer price or merger consideration, in an amount equal to the offer price per share, as the case may be, and shares of DMRC Corporation common stock in connection with the spin-off and subsequent DMRC Corporation merger.

Treatment of Rights under the Digimarc Employee Stock Purchase Plan

        Digimarc notified participants in the Digimarc Employee Stock Purchase Plan, which we refer to as the ESPP, that the current offer period will terminate on July 25, 2008. Upon the termination of the ESPP, all accumulated payroll deductions allocated to a participant's account under the ESPP during the current offer period will be returned to the participant as provided by the terms of the ESPP and no shares of Digimarc common stock will be purchased under the plan for the current offering period.

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OUR RELATIONSHIP WITH DIGIMARC CORPORATION AFTER THE SPIN-OFF

Overview

        We will enter into a separation agreement with Digimarc, DMRC LLC, and with respect to certain sections, L-1, which contains many of the key provisions related to the spin-off of the Digital Watermarking Business from Digimarc. The transition services agreement referenced in the separation agreement governs certain aspects relating to the spin-off and various interim and ongoing relationships between Digimarc and us following the spin-off and the merger. Because we are, and until completion of the spin-off will be, a wholly owned subsidiary of Digimarc, these agreements are not being negotiated at arms' length and may not reflect terms that would be negotiated between independent parties. The following are summaries of the material provisions of the agreements to be entered into in connection with the spin-off. These summaries do not purport to provide a complete description of the agreements.

Separation Agreement

        We will enter into a separation agreement with Digimarc, DMRC LLC, and with respect to certain sections, L-1, which we refer to as the separation agreement, to provide for, upon the terms and subject to the conditions set forth in the separation agreement, (1) the transfer of specified assets of Digimarc and its subsidiaries to, and the assumption of specified liabilities of Digimarc and its subsidiaries by, DMRC LLC and its subsidiaries, which we refer to as the restructuring, and (2) the distribution of the interests of DMRC LLC to Digimarc's stockholders, which we refer to as the distribution. We refer to the restructuring together with the distribution as the spin-off. Following the DMRC Corporation merger, DMRC Corporation will succeed to all of the rights, interests, and obligations of DMRC LLC under the separation agreement by operation of law. The following summary of the separation agreement is qualified in its entirety by reference to the complete text of the form of separation agreement, which is incorporated by reference into this document and attached as exhibit 2.1 to the Form 10. We encourage you to read the separation agreement in its entirety for a more complete description of the terms and conditions of the separation agreement.

The Restructuring

        On a date prior to the expiration of the offer and prior to the date on which the distribution will be effected, which we refer to as the distribution date, and in connection with the restructuring, DMRC LLC will assume ownership of the following assets of Digimarc, which we refer to as the DMRC assets:

    any assets used primarily in the operation of the Digital Watermarking Business;

    specified assets allocated to the Digital Watermarking Business but shared with Digimarc as the owner of the Secure ID Business;

    specified intellectual property and technology allocated to DMRC LLC;

    specified equity investments in companies in the watermarking business made by Digimarc;

    right, title and interest in the real property located at 9405 S.W. Gemini Drive, Beaverton, Oregon 97008 (Digimarc's current headquarters); and

    all cash, cash equivalents, short term investments and restricted cash of Digimarc immediately prior to the distribution date.

        Digimarc will retain ownership and possession of all other assets.

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        Also in connection with the restructuring, DMRC LLC will assume the following liabilities, which we refer to as DMRC liabilities:

    whether arising before, on or after the distribution date:

    any liabilities primarily relating to the Digital Watermarking Business and the DMRC assets;

    certain liabilities, each of which are liabilities other than corporate level liabilities that are not primarily related to either the Secure ID Business or the Digital Watermarking Business, that have been allocated to DMRC LLC;

    all liabilities, agreements and obligations of DMRC LLC or its subsidiaries under the Digimarc/L-1 merger agreement, the separation agreement, the license agreement and the transition services agreement, which we collectively refer to as the transaction agreements; and

    any liabilities relating to, arising out of or resulting from the restructuring and the distribution (except for any tax liabilities arising in connection therewith);

    any liabilities arising out of or resulting from the operation of any business conducted by DMRC LLC or its subsidiaries at any time after the distribution date;

    any liabilities arising out of or resulting from any benefit plan or relating to, arising out of or resulting from any contract with any employees who will become employees of DMRC LLC;

    any liabilities triggered at the acceptance time or any termination of employment concurrently therewith or thereafter arising under any contracts entered into between Digimarc (or any of its subsidiaries) and any of Robert Chamness, Bruce Davis, Michael McConnell or Reed Stager and any other employee of Digimarc who becomes employed by DMRC LLC;

    all liabilities relating to, arising out of or resulting from the termination of (1) any employees who will become employees of DMRC LLC, (2) any employees not employed by Digimarc or its subsidiaries immediately prior to the acceptance time and (3) all employees of Digimarc or its subsidiaries terminated prior to the acceptance time in connection with the spin-off;

    all costs, expenses and fees incurred by or on behalf of Digimarc or DMRC LLC in connection with the transactions contemplated by the Digimarc/L-1 merger agreement prior to the acceptance time; and

    any liabilities relating to, arising out of or resulting from any indemnification or exculpation claims by any employees who will become employees of DMRC LLC or director or officer of DMRC LLC under any contract, bylaw or other governing document or statutory provision, whether such claim arises prior to, on or after the distribution date; provided that such claim for indemnification or exculpation must relate to, arise out of or result from the acts or omissions of such indemnified person with respect to the Digital Watermarking Business.

        Digimarc will remain responsible for all other liabilities.

The Distribution

        Subject to the satisfaction or waiver of the conditions to the restructuring described below, the distribution will be effective on the distribution date and, on or as soon as practicable after the distribution date, each holder of record of Digimarc common stock as of the record date selected for the distribution, will receive one unit of DMRC LLC for every three and one-half shares of Digimarc common stock held on the record date for the distribution. The ratio of units of DMRC LLC to be issued for each share of Digimarc common stock is subject to change as a result of market conditions

83



and other factors. Each unit of DMRC LLC will then be converted into one share of DMRC Corporation common stock in connection with the DMRC Corporation merger.

        If the Form 10 has not been declared effective immediately prior to the expiration of the offer, and Digimarc and L-1 are reasonably satisfied that no governmental authority with oversight of the trust transfer and the spin-off will object to the trust transfer, Digimarc will effect the trust transfer. If the trust transfer is effected, the trust will distribute shares of DMRC Corporation common stock to Digimarc stockholders upon effectiveness of the Form 10.

Additional Covenants

        The separation agreement contains a number of additional agreements between Digimarc and DMRC LLC, including:

    Employee Matters.   As of the distribution date, employees who will become employees of DMRC LLC will cease to be employees of Digimarc, and any employment records of such employees will be transferred to DMRC LLC. Also effective as of the distribution date, Digimarc will assign and DMRC LLC will assume Digimarc's 401(k) plan. Employees of the Secure ID Business will continue to participate in Digimarc's 401(k) plan until the effective time of the Digimarc/L-1 merger, at which time such employees will be allowed to transfer their account balances under Digimarc's 401(k) plan to L-1's 401(k) plan in a direct rollover.

    On, or as soon as reasonably practicable after the distribution date, Digimarc and DMRC LLC will split each group welfare plan into two separate plans, to be administered by each of Digimarc and DMRC LLC and available to their respective employees.

    Non-Competition.   Except as expressly contemplated by the transaction agreements, during the five-year period immediately following the distribution date, each of Digimarc and DMRC LLC (and their respective subsidiaries and affiliates) will not, directly or through another person, in the United States or in any other geographical location in which the other party, its subsidiaries or affiliates is then doing business, own, manage, operate, control, participate in, invest in, lend money to, acquire or hold any investment in, or otherwise carry on, a business that competes with the Digital Watermarking Business or the Secure ID Business, as applicable.

    Non-Solicitation of Employees.   Except as expressly contemplated by the transaction agreements and subject to specified exceptions, during the five-year period immediately following the distribution date, each of Digimarc and DMRC LLC (and their respective subsidiaries), will not, on its own behalf or on behalf of any other person, directly or indirectly, hire, engage, solicit or attempt to solicit for hire any person who is then an employee of the other party.

    Non-Solicitation of Others.   Except as expressly contemplated by the transaction agreements, during the five-year period immediately following the distribution date, each of Digimarc and DMRC LLC (and their respective subsidiaries and affiliates), will not, directly or through another person, in any manner or capacity, (1) solicit or attempt to solicit any person or entity who was a customer of the other party during the 18 months immediately prior to the distribution date or who becomes a customer of the other party during the term of the transition services agreement for the purposes of selling, marketing or engaging in any activity that competes with the digital watermarking business or the Secure ID Business, as applicable, or (2) solicit, request, advise or induce any supplier or other business contact of the other party to cancel, curtail or otherwise adversely change its relationship with the other party.

    Tax Matters.   Digimarc will bear all property and ad valorem tax liability and similar recurring taxes with respect to the DMRC assets for periods ending on or prior to the date of the spin-off irrespective of the reporting and payment dates of such taxes. All other property or ad valorem tax obligations and similar recurring taxes on the DMRC assets (including certain delayed

84


      transfer assets) for taxable periods beginning before, and ending after, the date of the spin-off, will be prorated between Digimarc and DMRC LLC as of the date of the spin-off. Digimarc will include in its income tax returns for all taxable periods that include the spin-off, all tax items attributable to DMRC LLC, its assets, and the digital watermarking business through the date of the spin-off. Each of Digimarc and DMRC LLC will cooperate with respect to all tax filings and proceedings. Each of Digimarc and DMRC LLC will treat and report the spin-off and the Digimarc/L-1 merger in a consistent manner. Each of Digimarc and DMRC LLC will be entitled to any refunds in respect of taxes for which it is responsible under the separation agreement.

    Purchase Price Excess or Shortfall.   If, at the closing of the Digimarc/L-1 merger, the aggregate price paid to the holders of Digimarc common stock in the offer and Digimarc/L-1 merger (i) exceeds $310,000,000, then DMRC Corporation will pay to L-1 a cash amount equal to the excess, or (2) is less than $310,000,000, then Digimarc will pay to DMRC Corporation a cash amount equal to the shortfall.

Mutual Releases; Indemnification

        Digimarc and DMRC LLC will mutually release each other from any and all liabilities owing to them or their subsidiaries, whether or not known as of the distribution date, including in connection with the transactions contemplated by the Digimarc/L-1 merger agreement and all other activities to implement the restructuring and the distribution, subject to certain exceptions.

        Digimarc and DMRC LLC will indemnify, defend (or, where applicable, pay the defense costs for) and hold harmless each other's indemnitees from, against and in respect of losses, claims, liabilities, damages, costs and expenses relating to:

    the liabilities retained by such party pursuant to the separation agreement;

    any and all liabilities (including third party claims) incurred by the other party's indemnitees that relate to, arise out of or result from the failure of such party or its subsidiary or any other person to pay, perform or otherwise promptly discharge such party's liabilities in accordance with their terms, whether occurring, arising, existing or asserted before, on or after the distribution date;

    any breach by such party or its subsidiary of any of the transaction agreements; and

    the failure by such party to perform in connection with any delayed transfer assets and liabilities.

        Digimarc will also indemnify DMRC LLC with respect to certain tax matters.

Conditions to the Spin-Off

        Pursuant to the separation agreement, the obligations of Digimarc to effect the spin-off will be subject to the fulfillment (or waiver by Digimarc) at or prior to the distribution date of the following conditions:

    Digimarc's board of directors having approved the spin-off and not having abandoned, deferred or modified the spin-off at any time prior to the record date selected for the distribution;

    each of the transaction agreements having been duly executed and delivered by the parties thereto;

    each of the transaction agreements being in full force and effect and the parties thereto having performed or complied with all of their respective covenants, obligations and agreements contained is such agreements and as required to be performed or complied with prior to the distribution date;

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    all approvals required in connection with the transactions contemplated by the separation agreement having been received and being in full force and effect;

    the restructuring having been completed in accordance with the separation agreement;

    all of the conditions of the offer having been satisfied or waived (other than those conditions to be satisfied on the expiration of the offer, which must be satisfied as of the distribution date) and the expiration date of the offer being scheduled to occur immediately following the distribution date;

    Digimarc having established the record date for the distribution and having provided notice to the National Association of Securities Dealers no later than 10 days prior to the record date for the distribution in compliance with Rule 10b-17 under the Exchange Act; and

    all inter-group indebtedness having been paid in full and all actions in respect of liability novation contemplated under the separation agreement having occurred.

Further Assurances and Additional Covenants

        At or prior to the effective time of the Digimarc/L-1 merger (1) DMRC LLC will take such action necessary to change its corporate name to "Digimarc Corporation," (2) Digimarc will take such action necessary to change its corporate name, and (3) Digimarc will take such action necessary to remove the term "Digimarc" from the names of each of its subsidiaries.

        Any material showing any affiliation or connection of each of Digimarc or DMRC LLC or any of its respective subsidiaries or affiliates with the other party or any of its respective subsidiaries or affiliates will not be used by such party or its subsidiaries or affiliates after the distribution date, except as required by applicable law or regulations of securities exchanges for filings, reports and other documents required to be filed. On and after the distribution date, neither Digimarc or DMRC LLC, as applicable, nor its subsidiaries, will represent to third parties that any of them is affiliated or connected with the other party or any of its subsidiaries or affiliates. However, in the case of Digimarc and its subsidiaries and affiliates, such restriction is subject to the license agreement.

Termination

        The separation agreement may be terminated by Digimarc and the spin-off may be abandoned prior to the distribution date at any time following the termination of the Digimarc/L-1 merger agreement in accordance with its terms. Upon such termination of the separation agreement, no party to the separation agreement (or any of its representatives) will have any liability or further obligation to any other party or third party with respect to the separation agreement, except as provided in the Digimarc/L-1 merger agreement.

License Agreement

        L-1 Identity Solutions Operating Company, which we refer to as L-1 Operating Company, and DMRC Corporation will enter into a license agreement, which we refer to as the license agreement, pursuant to which L-1 Operating Company will license certain intellectual property to be owned by it upon the completion of the spin-off to DMRC Corporation and its affiliates, and DMRC Corporation will license certain intellectual property and software to be owned by it upon the completion of the spin-off to L-1 Operating Company and its affiliates, as generally described below. The following summary of the license agreement is qualified in its entirety by reference to the complete text of the form of license agreement, which is incorporated by reference into this document and attached as exhibit 10.2 to the Form 10. We encourage you to read the license agreement in its entirety for a more complete description of the terms and conditions of the license agreement.

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        Pursuant to the license agreement, L-1 Operating Company will grant to DMRC Corporation and its affiliates a license under certain patents for use and exploitation in the field of digital watermarking, media fingerprinting (pattern recognition but not including any biometric identifiers), digital rights management and other media management approaches. DMRC Corporation will grant to L-1 Operating Company and its affiliates an exclusive license under certain patents for use and exploitation in the field of domestic or international driver licenses, passports, national, federal, state or local government identity cards and any other national, federal, state or local government issued credentials, which we refer to as the secure ID field. Such license will be exclusive (subject to certain pre-existing licenses) for five years and non-exclusive thereafter. DMRC Corporation will also grant to L-1 Operating Company and its affiliates an exclusive license to use, modify and exploit certain software and derivative works thereof in the secure ID field and, for a transition period, a license to use certain trademarks in the secure ID field. DMRC Corporation will provide certain training and technical assistance to L-1 Operating Company with respect to the software licensed to L-1 Operating Company to enable L-1 Operating Company to use and market the licensed software.

Transition Services Agreement

        Digimarc and DMRC Corporation will enter into a transition services agreement, which we refer to as the transition services agreement, to provide one another with transition services and other assistance substantially consistent with the services provided before completion of the spin-off. The following summary of the transition services agreement is qualified in its entirety by reference to the complete text of the form of transition services agreement, which is incorporated by reference into this document and attached as exhibit 10.1 to the Form 10. We encourage you to read the transition services agreement in its entirety for a more complete description of the terms and conditions of the transition services agreement.

        Pursuant to the transition services agreement, Digimarc and DMRC Corporation will provide transition services to one another, including accounting and tax services, information technology services, legal services, human resources services and related services to enable Digimarc to continue its operation of the Secure ID Business and facilitate the effective transition of the Digital Watermarking Business to DMRC Corporation.

        The fees for the transition services generally are intended to cover each party's reasonable costs incurred in connection with providing the transition services. The fees to be paid for the transition services will be paid within 30 days after receipt of an invoice from the other party for transition services performed in the immediately preceding calendar month. Additional transition services may be added upon mutual agreement of the parties, and any transition service may be terminated without affecting the provision of any other transition services. The parties will review the transition services on a monthly basis to determine whether each transition service will continue during the following month. Either party may choose to terminate a transition service upon providing 30 days' prior written notice to the other party. Unless sooner terminated in accordance with the terms of the transition services agreement, the transition services agreement will terminate upon completion of all transition services to be provided by the parties under the agreement.

        Under the terms of the transition services agreement, except in the case of fraud, neither party will be liable to the other for incidental, punitive or consequential damages with respect to the transition services provided under the transition services agreement. However, each party will be liable and will indemnify the other party for liabilities resulting from the gross negligence, bad faith or willful misconduct of the party, its employees, contractors, agents or representatives in the provision of any transition service.

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Non-Competition Agreements

        In connection with the spin-off, certain executive officers of DMRC Corporation will enter into a non-competition agreement with Digimarc and L-1, which we refer to as the non-competition agreement, pursuant to which each executive officer will agree not to compete with the Secure ID Business for a certain period of time following the distribution date. In addition, pursuant to the non-competition agreement, each executive officer will agree not to solicit customers of the Secure ID Business or employees of the Secure ID Business for a certain period of time following the distribution date.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        As of the date hereof, all of the outstanding shares of our common stock are owned by Digimarc. After the spin-off, Digimarc will own none of our common stock. The following table provides information with respect to the expected beneficial ownership of our common stock by (1) each of our stockholders who we believe will be a beneficial owner of more than 5% of our outstanding common stock, (2) each of our directors, (3) each Named Executive Officer and (4) all of our executive officers and directors as a group.

        To the extent that our executive officers and directors own Digimarc common stock at the time of the spin-off, they will participate in the distribution on the same terms as other holders of Digimarc common stock. Immediately prior to the record date for the distribution, outstanding equity incentive awards will be adjusted as described in "Executive Compensation—Treatment of Outstanding Equity Awards in Connection with the Spin-Off."

        We based the share amounts on each person's beneficial ownership of Digimarc common stock as of June 27, 2008, unless we indicate some other basis for the share amounts, and assumed a distribution ratio of one share of our common stock for every three and one-half shares of Digimarc common stock. We assumed that we will have outstanding approximately 7,519,303 shares of common stock based upon approximately 26,317,561 million shares of Digimarc common stock outstanding on June 27, 2008, excluding treasury shares and assuming the exercise of 3,808,944 options, which constitutes all of the options outstanding on June 27, 2008, with an exercise price lower than $13.39, the closing price of Digimarc common stock on June 27, 2008.

        Except as otherwise noted in the footnotes below, each person or entity identified below has sole voting and investment power with respect to such securities. Unless otherwise stated, the business address of each person listed is c/o Digimarc, 9405 SW Gemini Drive, Beaverton, Oregon 97008.

Name and Address of Beneficial Owner

  Number of Shares
Beneficially Owned

  Percentage of Shares
Beneficially Owned

 
The Clark Estates, Inc.(1)
One Rockefeller Plaza, 31st Floor
New York, NY 10020
  587,445   7.81 %

Koninklijke Philips Electronics N. V.(2)
Eindhoven
The Netherlands

 

552,537

 

7.35

%

Dimensional Fund Advisors LP(3)
1299 Ocean Avenue
Santa Monica, CA 90401

 

414,273

 

5.51

%

Burnham Asset Management Corporation
Burnham Securities Inc.(4)
1325 Avenue of the Americas
New York, NY 10019

 

326,286

 

4.34

%

Named Executive Officers:

 

 

 

 

 
Bruce Davis(5)   240,291   3.13 %

Michael McConnell

 

130,457

 

1.71

%

Robert Chamness

 

64,183

 

*

 

Directors:

 

 

 

 

 
Peter W. Smith   12,686   *  

James T. Richardson

 

21,257

 

*

 

Bernard Whitney

 

11,543

 

*

 

William Miller

 

11,543

 

*

 

All executive officers and directors as a group (7 persons)

 

491,960

 

6.26

%

89



*
Less than 1%.

(1)
The Clark Estates, Inc. serves as an investment advisor for a number of clients who have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities. The foregoing information is based solely on the Schedule 13G filed on March 3, 2008 by The Clark Estates.

(2)
The foregoing information is based solely on the records at the transfer agent involving the purchase of shares by Koninklijke Philips Electronics N.V.

(3)
Dimensional Fund Advisors LP ("Dimensional") furnishes investment advice to four investment companies and serves as investment manager to certain other commingled group trusts and separate accounts. The shares reported in the table are owned by these investment companies, group trusts and separate accounts. Dimensional possesses voting power over the shares, but disclaims beneficial ownership of the shares. The foregoing information is based solely on the Schedule 13G/A filed on February 6, 2008 by Dimensional.

(4)
Burnham Asset Management Corporation ("Burnham") serves as the investment manager for a number of managed accounts with respect to which it has dispositive authority. The reporting persons disclaim beneficial ownership of the common stock. The foregoing information is based solely on the Schedule 13G filed on January 25, 2008 by Burnham.

(5)
Includes 10,971 shares of common stock held in trust for minor children.

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DESCRIPTION OF OUR CAPITAL STOCK

         Below is a summary description of our capital stock. This description is not complete. You should read the full text of our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this information statement is a part, as well as the applicable provisions of Delaware law.

General

        Our authorized capital stock consists of 50,000,000 shares of common stock, par value $0.001 per share, and 2,500,000 shares of preferred stock, par value $0.001 per share. Immediately following the spin-off and the DMRC Corporation merger, there will be approximately                shares of common stock and no shares of preferred stock outstanding. Following the completion of the DMRC Corporation merger, we will issue to the executive officers of DMRC Corporation shares of Series A Redeemable Nonvoting Preferred stock in the aggregate amount of $50,000.

Common Stock

        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 our stockholders, including the election of directors. Subject to preferences that may be granted to any then outstanding preferred stock, holders of common stock are entitled to receive ratably those dividends as may be declared by our board of directors out of funds legally available for such purpose, as well as any distributions to our 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

        We are authorized to issue 2,500,000 shares of preferred stock. Our board of directors has 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 stockholders and may adversely affect the voting and other rights of the holders of common stock.

        Ten thousand (10,000) shares of the authorized preferred stock have been designated as Series A Redeemable Nonvoting Preferred stock. In the event of the liquidation, dissolution or other winding up of DMRC Corporation, before any payment or distribution is made to the holders of common stock, holders of the Series A Redeemable Nonvoting Preferred stock will be entitled to receive a value of $5.00 per share of Series A Redeemable Nonvoting Preferred stock held by the stockholder. The Series A Redeemable Nonvoting Preferred stock has no voting rights, except as required by law, and may be redeemed by the board of directors at any time on or after June 18, 2013. Following the spin-off and completion of the DMRC Corporation merger, we will issue to the executive officers of DMRC Corporation shares of Series A Redeemable Nonvoting Preferred stock in the aggregate amount of $50,000.

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Delaware Takeover Statute

        We are 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;

    upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers, and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

    at or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, 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:

    Provide that special meetings of the stockholders may be called only by our chairman of the board, by our secretary or at the direction of our board of directors.

92


    Provide that following the spin-off, the right of our stockholders to act by written consent is expressly prohibited and that stockholder action must take place at a duly called annual or a special meeting of our stockholders.

    Provide advance notice procedures with respect to stockholder proposals and nominations of candidates for election as directors other than nominations made by or at the direction of our board of directors or a committee of our board of directors. The business to be conducted at an annual meeting will be limited to business properly brought before the annual meeting by or at the direction of our board of directors or a duly authorized committee thereof or by a stockholder of record who has given timely written notice to our secretary of the stockholder's intention to bring business before the meeting.

    Do not include a provision for cumulative voting in the election of directors. Under cumulative voting, a minority stockholder holding a sufficient number of shares may be able to ensure the election of one or more directors. The absence of cumulative voting may have the effect of limiting the ability of minority stockholders to effect changes in the board and, as a result, may have the effect of deterring a hostile takeover or delaying or preventing changes in control or management of Digimarc.

    Provide that vacancies on our board of directors 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 2,500,000 shares of undesignated preferred stock with rights senior to those of the common stock and that otherwise could adversely affect the rights and powers, including voting rights, of the holders of common stock. In certain circumstances, this issuance could have the effect of decreasing the market price of the common stock, as well as having the anti-takeover effect discussed above.

        These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by them, and to discourage certain types of transactions that may involve an actual or threatened change in control of Digimarc. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights. However, these provisions could have the effect of discouraging others from making tender offers for our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management.

Transfer Agent and Registrar

        The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.

Nasdaq Listing

        DMRC will apply to list its shares of common stock on The Nasdaq Global Market under the symbol "DMRCD."


LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

        DMRC is incorporated in Delaware. Section 145 of the Delaware General Corporation Law permits a corporation to indemnify its directors and officers against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties, if such directors or officers acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. In a derivative action, i.e. , one by or in the right of the

93



corporation, indemnification may be made only for expenses actually and reasonably incurred by directors and officers in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable for negligence or misconduct in the performance of his or her respective duties to the corporation, although the court in which the action or suit was brought may determine upon application that the defendant officers or directors are fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability.

        Section 102(b)(7) of the Delaware General Corporation Law provides that a corporation may eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provisions shall not eliminate or limit the liability of a director (1) for any breach of the director's duty of loyalty to the corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under section 174 of the Delaware General Corporation Law or (4) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring before the date when such provision becomes effective. The limitations described above do not affect the ability of DMRC or its stockholders to seek non-monetary based remedies, such as an injunction or rescission, against a director for breach of his or her fiduciary duty nor would such limitations limit liability under the federal securities laws.

        Following the spin-off, DMRC's certificate of incorporation will require indemnification of directors and officers to the full extent permitted by the Delaware General Corporation Law and provides that, in any action by a claimant, DMRC shall bear the burden of proof that the claimant is not entitled to indemnification. DMRC will also enter into indemnification agreements with each of its directors and executive officers whereby it is contractually obligated to indemnify the director and advance expenses to the full extent permitted by the Delaware General Corporation Law.


CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

The following discussion summarizes certain material U.S. federal income tax consequences of the spin-off, the Digimarc/L-1 merger and the DMRC Corporation merger that may be relevant to Digimarc stockholders that hold shares of Digimarc common stock as a capital asset (generally, assets held for investment) for U.S. federal income tax purposes, which we refer to as Holders. This discussion is based on the Code, applicable Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, each as in effect as of the date hereof, all of which may change, possibly with retroactive effect.

        The discussion does not address all of the U.S. federal income tax considerations that may be relevant to particular Holders in light of their particular circumstances, or to Holders that are subject to special treatment under U.S. federal income tax laws, including banks, insurance companies, mutual funds or other financial institutions, broker-dealers, traders, expatriates, certain former citizens or long-term residents of the United States, tax-exempt organizations, persons who are subject to the U.S. alternative minimum tax, persons who hold their shares of common stock as part of an integrated investment (including as part of a "straddle" or as part of a "hedging," "conversion" or other risk reduction transaction), controlled foreign corporations, passive foreign investment companies, corporations subject to anti-inversion rules, persons that are partnerships, S corporations or other pass-through entities, persons that have a functional currency other than the U.S. dollar or persons who acquired their shares of Digimarc common stock through stock option or stock purchase plan programs or in other compensatory arrangements.

        In addition, this discussion does not address the U.S. federal income tax considerations applicable to holders of options or warrants, if any, to purchase Digimarc common stock or to Holders who

94



exercise dissenters' rights. Furthermore, except as provided below, this discussion does not address any U.S. federal estate and gift tax consequences or any state, local or foreign tax consequences applicable to Holders.

        For purposes of this discussion, a "U.S. Holder" means a Holder that is:

    an individual who is a citizen or resident of the United States;

    a corporation, or other entity taxable as a corporation for U.S. federal tax purposes, created or organized in or under the laws of the United States or any state thereof or the District of Columbia;

    an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

    a trust (a) the administration over which a U.S. court can exercise primary supervision and all of the substantial decisions of which one or more U.S. persons have the authority to control and (b) certain other trusts considered U.S. persons for U.S. federal income tax purposes.

        A "Non-U.S. Holder" is a Holder (other than an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes) that is not a U.S. Holder.

        If a partnership (or other entity classified as a partnership for U.S. federal tax purposes) is a beneficial owner of shares of Digimarc common stock, the tax treatment of a partner in that partnership generally will depend on the status of the partner and the activities of the partnership. Holders that are partnerships and partners in these partnerships are urged to consult their tax advisors regarding the U.S. federal income tax consequences of the spin-off, the Digimarc/L-1 merger and the DMRC Corporation merger to them.

Tax Consequences of the Spin-Off, the Offer, the Digimarc/L-1 merger and the DMRC Corporation merger

        Digimarc and L-1 intend that for U.S. federal income tax purposes the spin-off, the offer and the Digimarc/L-1 merger will constitute a single integrated transaction with respect to the Holders in which the spin-off will be treated as a taxable redemption of shares of Digimarc common stock in connection with the complete termination of the Holders' interests in Digimarc. Digimarc and L-1 will treat and report the spin-off, the offer and the Digimarc/L-1 merger in a manner consistent with such characterization, and the following discussion assumes this characterization will be respected. Although we believe the foregoing treatment correctly characterizes the transaction for U.S. federal income tax purposes, the Internal Revenue Service, which we refer to as the IRS, could conceivably assert a different characterization, and were the IRS to prevail, a Holder could experience U.S. federal income tax consequences that are different from those described below.

        We expect that if the trust transfer occurs, it will be treated as a transfer of the DMRC LLC interests to Digimarc's stockholders followed by a transfer of such interests by such stockholders to the trust, and such Digimarc stockholders will be treated as the grantors and owners of such interests held in the trust pursuant to Section 677 of the Code and the trust will be treated as a liquidating trust within the meaning of Treasury Regulations Section 301.7701-4(d).

        Holders are urged to consult their own tax advisors with respect to the tax consequences of the spin-off, the offer, the Digimarc/L-1 merger and the DMRC Corporation merger to them.

U.S. Holders

        U.S. Holders generally should recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between (1) the sum of the fair market value of the DMRC LLC

95



interests received in the spin-off, the amount of cash received in the offer and the amount of cash received in the Digimarc/L-1 merger, and (2) such U.S. Holder's adjusted tax basis in his or her shares of Digimarc common stock surrendered or deemed surrendered in the transactions. The deduction of any recognized loss may be delayed or otherwise adversely affected by certain loss limitation rules.

        We do not expect that DMRC LLC or U.S. Holders will recognize any gain or loss in the DMRC Corporation merger. We expect that the fair market value, determined when the spin-off occurs, of the DMRC LLC interests received in the spin-off by the U.S. Holders will equal the fair market value of the DMRC Corporation common stock received by the U.S. Holders in the DMRC Corporation merger, and as a result, there would be no gain or loss to recognize in the DMRC Corporation merger. We expect that a U.S. Holder will, immediately following the DMRC Corporation merger, have an aggregate adjusted basis in his or her shares of DMRC Corporation common stock received in the DMRC Corporation merger equal to the fair market value of the DMRC LLC interests received in the spin-off, and his or her holding period in such shares will begin on the day following the spin-off and the DMRC Corporation merger. U.S. Holders should consult their tax advisors with respect to the tax consequences of the DMRC Corporation merger.

        U.S. federal income tax law does not specifically identify how you should determine the fair market value of the DMRC LLC interests. There are several potential methods for determining the fair market values of the equity of DMRC LLC, including, but not limited to (1) the opening trading price of DMRC Corporation shares on the first trading day of those shares, (2) the average high and low trading prices of the DMRC Corporation shares on the first trading day of those shares, (3) the closing trading prices of the DMRC Corporation shares on the first trading day of those shares, or (4) the volume weighted average price of the DMRC Corporation shares on the first trading day of those shares, in each case, immediately after the spin-off. If the trust transfer is completed, the trustees will value, or cause to be valued, the DMRC LLC interests and notify Digimarc stockholders in writing of such valuation. U.S. Holders are urged to consult their tax advisors regarding the manner in which the fair market value of the DMRC Corporation shares, and gain or loss should be calculated in connection with the spin-off, the offer, the Digimarc/L-1 merger and the DMRC Corporation merger.

Non-U.S. Holders

        A Non-U.S. Holder generally should not be subject to U.S. federal income tax on any gain realized on the receipt of the DMRC LLC interests and cash in the spin-off, the offer or the Digimarc/L-1 merger, or the DMRC Corporation common stock received in the DMRC Corporation merger, unless:

    the Non-U.S. Holder is an individual who was present in the United States for 183 days or more during the taxable year of the spin-off, the offer, and the Digimarc/L-1 merger and certain other conditions are satisfied;

    the gain is effectively connected with the Non-U.S. Holder's conduct of a trade or business in the United States, or, if required by an applicable tax treaty, attributable to a permanent establishment maintained by the Holder in the United States; or

    Digimarc is or has been a "United States real property holding corporation," which we refer to as a USRPHC, for U.S. federal income tax purposes at any time within the shorter of the five year period preceding the closing date of the transactions or such Non-U.S. Holder's holding period of Digimarc common stock. We do not believe that Digimarc is, and do not anticipate it becoming, a USRPHC for U.S. federal income tax purposes. If Digimarc were or were to become a USRPHC at any time during the applicable period, however, any gain recognized on a sale or other disposition of its common stock by a Non-U.S. Holder that did not own (actually or constructively) more than 5% of Digimarc's common stock during the five years preceding the closing date of the transactions would not be subject to U.S. federal income tax.

96


        Gain described in the first bullet point above generally will be subject to U.S. federal income tax at a flat 30% (or lower applicable treaty) rate, but may be offset by U.S. source capital losses. Unless a tax treaty provides otherwise, gain described in the second bullet point above will be subject to U.S. federal income tax on a net income basis in the same manner as if the Non-U.S. Holder were a resident of the United States. Non-U.S. Holders that are foreign corporations also may be subject to a 30% branch profits tax (or lower applicable treaty rate). Non-U.S. Holders are urged to consult any applicable tax treaties that may provide for different rules.

        Prior to the DMRC Corporation merger and immediately following the spin-off, DMRC LLC will not be treated as a corporation for U.S. federal income tax purposes. Non-U.S. Holders are urged to consult their tax advisors concerning the consequences to them (including potential tax filing obligations) of owning DMRC LLC interests during the period when it may not be treated as a corporation for U.S. federal income tax purposes.

Information Reporting and Backup Withholding

        Under U.S. federal income tax laws, the depositary generally will be required to report to a U.S. Holder and to the IRS any reportable payments made to such U.S. Holder in the spin-off, the offer, the Digimarc/L-1 merger and the DMRC Corporation merger. Additionally, a U.S. Holder may be subject to a backup withholding tax, unless the U.S. Holder provides the depositary with the holder's correct taxpayer identification number, which in the case of an individual is his or her social security number, or, in the alternative, establishes a basis for exemption from backup withholding. If the correct taxpayer identification number or an adequate basis for exemption is not provided, a U.S. Holder will be subject to backup withholding (currently at a rate of 28%) on any reportable payment. To prevent backup withholding, each U.S. Holder must complete the IRS Form W-9 or a substitute Form W-9 which will be provided by Computershare Inc., the depositary for the offer, with the letter of transmittal.

        Payments made to Non-U.S. Holders in the spin-off, the offer, the Digimarc/L-1 merger and the DMRC Corporation merger may be subject to information reporting and backup withholding. Non-U.S. Holders generally may avoid backup withholding by furnishing a properly executed IRS Form W-8BEN (or other applicable IRS Form W-8) certifying the Holder's non-U.S. status or by otherwise establishing an exemption.

        Backup withholding is not an additional tax. Rather, Holders may use amounts withheld as a credit against their U.S. federal income tax liability or may claim a refund of any excess amounts withheld by timely and duly filing a claim for refund with the IRS.

        If the trust transfer occurs, the trustees will furnish Holders with the information required by Holders to file their tax returns with respect to their beneficial ownership of the shares of DMRC Corporation stock held in the trust.

THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT INTENDED TO BE LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER. TAX MATTERS REGARDING THE SPIN-OFF, THE OFFER, THE DIGIMARC/L-1 MERGER AND THE DMRC CORPORATION MERGER ARE COMPLICATED, AND THE TAX CONSEQUENCES OF THE SPIN-OFF, THE OFFER, THE DIGIMARC/L-1 MERGER AND THE DMRC CORPORATION MERGER TO ANY PARTICULAR HOLDER WILL DEPEND ON THAT STOCKHOLDER'S INDIVIDUAL SITUATION. HOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE SPIN-OFF, THE OFFER, THE DIGIMARC/L-1 MERGER AND THE DMRC CORPORATION MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF ANY PROPOSED CHANGE IN THE TAX LAWS TO THEM.

97



WHERE YOU CAN FIND MORE INFORMATION

        We have filed a registration statement on Form 10 with the SEC with respect to the shares of our common stock being distributed as contemplated by this information statement. This information statement is a part of, and does not contain all of the information set forth in, the registration statement and the exhibits and schedules to the registration statement. For further information with respect to our company and our common stock, please refer to the registration statement, including its exhibits and schedules. Statements made in this information statement relating to any contract or other document are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may review a copy of the registration statement, including its exhibits and schedules, at the SEC's public reference room, located at 100 F Street, N.E., Washington, D.C. 20549, as well as on the Internet web site maintained by the SEC at www.sec.gov . Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Information contained on any web site referenced in this information statement is not incorporated by reference into this information statement or the registration statement of which this information statement is a part.

        After the spin-off, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, we will file periodic reports, proxy statements and other information with the SEC.

        Our SEC filings will be available to the public at no charge from the SEC's website, as described above, and, following the DMRC Corporation merger, on our Web site under the "Investors" tab at www.digimarc.com . Information on our website is not incorporated into this information statement or other securities filings and is not a part of these filings. You may also request a copy of our future SEC filings at no cost, by writing or telephoning us at:

DMRC Corporation
Attn: Robert P. Chamness
9405 SW Gemini Drive
Beaverton, OR 97008
Phone: (503) 469-4800
Fax: (503) 469-4771

        You should rely only on the information contained in this information statement or to which we have referred you. We have not authorized any person to provide you with different information or to make any representation not contained in this information statement.

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INDEX TO FINANCIAL STATEMENTS

 
  Page

Report of Independent Registered Public Accounting Firm

 

F-2

Balance Sheets

 

F-3

Statements of Operations

 

F-4

Statements of Parent's Investment

 

F-5

Statements of Cash Flows

 

F-6

Notes to Financial Statements

 

F-7

F-1



Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Digimarc Corporation

        We have audited the accompanying balance sheets of DMRC Corporation (a carved-out business unit of Digimarc Corporation) as of December 31, 2007 and 2006 and the related statements of operations, changes in parent's investment, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 DMRC Corporation as of December 31, 2007 and 2006, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

        As more fully described in Note 1 to the financial statements, certain expenses of DMRC Corporation represent allocations from Digimarc Corporation. The accompanying financial statements include such allocations and may not necessarily be representative of the financial position or results of operations had DMRC Corporation operated as an unaffiliated company during the periods presented.

/S/ GRANT THORNTON LLP

Portland, Oregon
June 20, 2008, (except for the first three
paragraphs of Note 1, as to which the date
is July 18, 2008)

F-2



DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

BALANCE SHEETS

(In thousands)

 
  March 31,
2008

  December 31,
2007

  December 31,
2006

 
  (unaudited)

   
   
ASSETS                  
Current assets:                  
  Cash and cash equivalents   $ 33,586   $ 29,145   $ 33,073
  Short-term investments     3,849     3,568    
  Trade accounts receivable, net     3,233     3,752     2,441
  Other current assets     278     387     309
   
 
 
    Total current assets     40,946     36,852     35,823
Property and equipment, net     1,167     1,227     1,472
Other assets, net     386     372     363
   
 
 
    Total assets   $ 42,499   $ 38,451   $ 37,658
   
 
 

LIABILITIES AND NET PARENT'S INVESTMENT

 

 

 

 

 

 

 

 

 
Current liabilities:                  
  Accounts payable and other accrued liabilities   $ 411   $ 464   $ 382
  Accrued payroll and related costs     325     199     773
  Deferred revenue     3,029     2,734     1,616
   
 
 
    Total current liabilities     3,765     3,397     2,771
Long-term liabilities     220     215     294
   
 
 
    Total liabilities     3,985     3,612     3,065

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

Parent's investment:

 

 

 

 

 

 

 

 

 
    Net Parent's investment     38,514     34,839     34,593
   
 
 
    Total liabilities and net Parent's investment   $ 42,499   $ 38,451   $ 37,658
   
 
 

See accompanying notes to financial statements

F-3



DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

STATEMENTS OF OPERATIONS

(In thousands)

 
  Three Months Ended March 31,
  Year Ended December 31,
 
 
  2008
  2007
  2007
  2006
  2005
 
 
  (unaudited)

   
   
   
 
Revenue:                                
  Service   $ 2,548   $ 1,877   $ 7,806   $ 6,812   $ 7,051  
  License and subscription     2,537     1,608     5,219     4,259     4,068  
   
 
 
 
 
 
    Total revenue     5,085     3,485     13,025     11,071     11,119  

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Service     1,349     919     3,815     3,633     3,299  
  License and subscription     59     31     217     136     182  
   
 
 
 
 
 
    Total cost of revenue     1,408     950     4,032     3,769     3,481  

Gross profit

 

 

3,677

 

 

2,535

 

 

8,993

 

 

7,302

 

 

7,638

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Sales and marketing     656     639     2,453     3,740     4,692  
  Research, development and engineering     922     729     2,912     2,448     3,208  
  General and administrative     980     857     3,345     3,433     3,645  
  Intellectual property     478     431     1,593     1,589     1,863  
   
 
 
 
 
 
    Total operating expenses     3,036     2,656     10,303     11,210     13,408  
   
 
 
 
 
 

Operating income (loss)

 

 

641

 

 

(121

)

 

(1,310

)

 

(3,908

)

 

(5,770

)
Other income (expense), net     294     375     1,387     1,242     928  
   
 
 
 
 
 
Income (loss) before provision for income taxes     935     254     77     (2,666 )   (4,842 )
Provision for income taxes     11     4     22     21      
   
 
 
 
 
 
  Net income (loss)   $ 924   $ 250   $ 55   $ (2,687 ) $ (4,842 )
   
 
 
 
 
 

See accompanying notes to financial statements

F-4



DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

STATEMENTS OF CHANGES IN PARENT'S INVESTMENT

(In thousands)

BALANCE AT DECEMBER 31, 2004   $ 53,249  
Cash from Parent stock activity     333  
Stock compensation allocated from Parent     203  
Net activity with Parent     (15,847 )
Net loss     (4,842 )
   
 
BALANCE AT DECEMBER 31, 2005     33,096  
Cash from Parent stock activity     242  
Stock compensation allocated from Parent     790  
Net activity with Parent     3,152  
Net loss     (2,687 )
   
 
BALANCE AT DECEMBER 31, 2006     34,593  
Cash from Parent stock activity     2,187  
Stock compensation allocated from Parent     1,209  
Net activity with Parent     (3,205 )
Net income     55  
   
 
BALANCE AT DECEMBER 31, 2007     34,839  
Cash from Parent stock activity     102 (1)
Stock compensation allocated from Parent     377 (1)
Net activity with Parent     2,272 (1)
Net income     924 (1)
   
 
BALANCE AT MARCH 31, 2008   $ 38,514 (1)
   
 

(1)
Unaudited

See accompanying notes to financial statements.

F-5



DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

STATEMENTS OF CASH FLOWS

(In thousands)

 
  Three Months Ended
March 31,

  Year Ended December 31,
 
 
  2008
  2007
  2007
  2006
  2005
 
 
  (Unaudited)

   
   
   
 
Cash flows from operating activities:                                
  Net income (loss)   $ 924   $ 250   $ 55   $ (2,687 ) $ (4,842 )
  Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                                
    Depreciation and amortization of property and equipment     276     156     612     616     659  
    Stock-based compensation expense     377     290     1,209     790     203  
    Increase (decrease) in allowance for doubtful accounts                 (13 )   (93 )
    Changes in operating assets and liabilities:                                
      Trade and unbilled accounts receivable, net     519     522     (1,311 )   199     (403 )
      Other current assets     109     35     (78 )   63     (215 )
      Other assets, net     (14 )   (11 )   (9 )       18  
      Accounts payable and other accrued liabilities     (50 )   (84 )   23     (147 )   83  
      Accrued payroll and related costs     126     (560 )   (574 )   (206 )   236  
      Deferred revenue     297     440     1,098     (382 )   520  
   
 
 
 
 
 
        Net cash provided by (used in) operating
activities
    2,564     1,038     1,025     (1,767 )   (3,384 )

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
    Purchase of property and equipment     (216 )   (81 )   (367 )   (536 )   (506 )
    Sale or maturity of short-term investments     41,534     38,355     150,775     136,946     180,568  
    Purchase of short-term investments     (41,815 )   (38,355 )   (154,343 )   (136,207 )   (156,239 )
   
 
 
 
 
 
      Net cash provided by (used in) investing activities     (497 )   (81 )   (3,935 )   203     23,823  

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
    Cash from Parent stock activity     102     442     2,187     242     333  
    Net activity with Parent     2,272     (2,967 )   (3,205 )   3,152     (15,847 )
   
 
 
 
 
 
      Net cash provided by (used in) financing activities     2,374     (2,525 )   (1,018 )   3,394     (15,514 )
   
 
 
 
 
 
      Net increase (decrease) in cash and cash equivalents     4,441     (1,568 )   (3,928 )   1,830     4,475  
      Cash and cash equivalents at beginning of period     29,145     33,073     33,073     31,243     26,768  
   
 
 
 
 
 
Cash and cash equivalents at end of period   $ 33,586   $ 31,505   $ 29,145   $ 33,073   $ 31,243  
   
 
 
 
 
 

See accompanying notes to financial statements.

F-6



DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS

(in thousands)

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

    Planned Merger and Separation

        On June 29, 2008, Digimarc Corporation, which we refer to as Digimarc or Parent, entered into an amended and restated merger agreement, as amended by that Amendment No. 1 dated as of July 17, 2008 and as may be further amended, which we refer to as the Digimarc/L-1 merger agreement, with, L-1 Identity Solutions, Inc., which we refer to as L-1, and Dolomite Acquisition Co, which we refer to as Dolomite, a wholly owned subsidiary of L-1, pursuant to which Dolomite has offered to purchase all of the outstanding shares of Digimarc common stock, together with the associated preferred stock purchase rights for $12.25 per share. We refer to the offer to purchase as the offer. The Digimarc/L-1 merger agreement provides, among other things, that following the completion of the offer and subject to other conditions set forth in the Digimarc/L-1 merger agreement, Dolomite will merge with and into Digimarc with Digimarc continuing as the surviving company and a wholly owned subsidiary of L-1. We refer to the merger of Digimarc and Dolomite as the Digimarc/L-1 merger.

        Prior to the expiration of, and as a condition to, the offer and the Digimarc/L-1 merger, Digimarc will contribute all of the assets and liabilities related to its digital watermarking business, together with all of Digimarc's cash, including cash received upon the exercise of stock options, to a wholly owned subsidiary of Digimarc, which we refer to as DMRC LLC, the interests of which will be (1) distributed to holders of shares of Digimarc common stock in a taxable spin-off transaction, which we refer to as the LLC spin-off, or (2) pending effectiveness of the Registration Statement on Form 10, of which this information statement is a part and which we refer to as the Form 10, transferred to a newly-created trust for the benefit of holders of shares of Digimarc common stock, which we refer to as the trust transfer, in either case, on the basis of one unit of DMRC LLC for every three and one-half shares of Digimarc Corporation common stock held by the stockholder. We refer to the transfer of assets and assumption of liabilities as the restructuring. We refer to the distribution of the DMRC LLC interests, whether by LLC spin-off or trust transfer, and the restructuring collectively as the spin-off. Following the spin-off, DMRC LLC will merge with and into its wholly owned subsidiary, DMRC Corporation, which we refer to as the DMRC Corporation merger, and each limited liability company interest of DMRC LLC will be converted into one share of common stock of DMRC Corporation. As a result, each Digimarc stockholder will receive one share of DMRC Corporation for every three and one-half shares of Digimarc common stock held by the stockholder. If the trust transfer occurs, the trust will distribute the shares of DMRC Corporation common stock to Digimarc stockholders upon effectiveness of the Form 10.

        Digimarc, L-1, DMRC LLC and DMRC Corporation will enter into various agreements in order to accomplish the spin-off transaction. After the spin-off and completion of the merger, DMRC Corporation will change its name to Digimarc Corporation.

        DMRC is a supplier of advanced technologies for use in media identification and management. our solutions enable governments and businesses around the world to deter counterfeiting and piracy, combat identity theft and fraud, improve the management of media content, and support new digital media distribution models that provide consumers with more choice and access to media content.

F-7


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

1. Description of Business and Summary of Significant Accounting Policies (Continued)

Unaudited Interim Results

        The accompanying balance sheet as of March 31, 2008, the statements of operations and cash flows for the three months ended March 31, 2007 and 2008, and the statement of changes in parent's investment for the three months ended March 31, 2008 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position at March 31, 2008 and its results of operations and cash flows for the three months ended March 31, 2007 and 2008. The financial data and other information disclosed in these notes to the financial statements related to the three-month periods are unaudited. The results for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the year ending December 31, 2008 or for any other interim period or for any other future period.

Basis of Accounting

        The financial statements include the assets, liabilities and results of operations of the components of Digimarc that constitute the business of DMRC to be separated, or "carved-out". DMRC's business primarily consists of Digimarc's Digital Watermarking Business and certain accounts of Digimarc. All intercompany balances have been eliminated in the carve-out.

        Management believes that the assumptions underlying the financial statements are reasonable. The financial information in these financial statements does not include all of the expenses that would have been incurred had DMRC been a separate, stand-alone public entity. As such, the financial information herein does not reflect the financial position, results of operations and cash flows of DMRC in the future or what they would have been, had DMRC been a separate, stand-alone public entity during the periods presented. Additionally, these historical financial statements include proportional allocations of various shared-services common costs of Digimarc because specific identification of these expenses was not practicable. The common costs include expenses from Digimarc related to various operating shared-services cost centers, including: executive, finance and accounting, human resources, legal, marketing, intellectual property, facilities and information technology. It is expected that the initial operating costs of DMRC on a stand-alone basis will be higher than those allocated to the DMRC operations under the shared services methodology applied in the audited financial statements of DMRC. Consequently, the financial position, results of operations and cash flows of DMRC reflected in the financial statements of DMRC may not be indicative of those that would have been achieved or that might be achieved in the future had DMRC been operated as a separate, stand-alone entity for the periods reflected in its financial statements.

        The cost allocation methods applied to certain shared-services common cost centers include the following:

    Specific identification —where the amounts were specifically identified to DMRC or Secure ID Business unit, they were classified accordingly.

    Reasonable allocation —where the amounts were not clearly or specifically identified, we determined if a reasonable allocation method may be applied. For example in the shared-services Human Resources (HR) cost center we allocated the costs based on the relative

F-8


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

1. Description of Business and Summary of Significant Accounting Policies (Continued)

      headcount of the DMRC and Secure ID Business units based on the assumption that HR support costs should be relatively equal per employee across the broader population. And in the Intellectual Property cost center we allocated the costs based on the relative number of patents that are used between the two business units.

    General allocation approach —for consistency, when specific identification or reasonable allocation method did not seem to fit the situation, we used a general allocation approach. This approach consisted of a blended rate based on what we have determined to be the primary drivers for shared-services:

    Revenue ratio between the business units.

    Property and Equipment balances (proxy for capital expenditures)—the effort expended on capital projects is a factor in the expense and effort of shared-services. To avoid fluctuations that happen in capital spending, we believe that these balances represent a relative trend of capital spending between the business units. In determining the relative balances of property, we have removed the central IT assets as it supports the entire organization.

    Headcount between the business units.

    Other key assumptions differing from the historical accounting of the Parent:

    Cash:     All cash balances of Digimarc are treated as retained by DMRC, which is consistent with the Digimarc/L-1 merger agreement. As such, restricted cash on the books of Digimarc that related directly to its operations, flows through to DMRC in these financial statements, as non-restricted cash and is included as cash and cash equivalents in these carved-out financials statements. The letters of credit that required the restricted cash remains with Digimarc as acquired by L-1.

    Incentive compensation allocations to cost of services:     Cost of incentive compensation for bonus and stock compensation charges for employees in the research, development and engineering cost centers, was not considered significant to Digimarc's consolidated operations during the periods reported on and were treated as research, development and engineering costs in those financial statements. For DMRC's reporting purposes, these incentive compensation costs have been allocated to cost of services to the extent that their pro rata salary allocations were made to the cost of services expense category. The impact for the reported periods ranged from a 1% to 3% reduction in margins compared to the results had the allocations not been made.

    Earnings (loss) per share:     As a business unit of Digimarc, earnings per share calculations are not applicable.

    Stock activity:     All stock activity (transactions from stock options, restricted stock, employee stock purchase plan and stock compensation) is carried on the books of Digimarc. All net cash from these activities is retained by DMRC and stock based compensation expense associated with stock activity is allocated to DMRC in accordance with the basis of accounting methodology outlined above.

F-9


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

1. Description of Business and Summary of Significant Accounting Policies (Continued)

    Capital leases:     DMRC shares various infrastructure activities with Digimarc and is charged for its allocated share of capital lease costs in the form of allocated depreciation and interest expense. The assets and liabilities associated with the capital leases are carried on the books of Digimarc.

    Leasehold improvements:     DMRC occupies the majority of Digimarc's Beaverton facility and will assume the lease and most all related furniture, fixtures and leasehold improvements once DMRC becomes a separate public company. The leaseholds are recorded as part of property and equipment in the balance sheet of DMRC, and as a result, pro rata depreciation and rent expenses are allocated to Digimarc.

    Intercompany transactions:     With the retention by DMRC of all Digimarc cash, DMRC's cash balances effectively funds the operations, if needed, of Digimarc in these financial statements. The net difference of cash needs for operating and capital expenditures to and from Digimarc is shown as "net activity with Parent" in the Statement of Parent's Investment. All intercompany transactions have been eliminated.

    Commitments and contingencies:     Commitments and contingencies related to DMRC operations have been included in these financial statements, and those relating to Digimarc have been excluded.

Use of Estimates

        The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires DMRC to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Some of our accounting policies require higher degrees of judgment than others in their application. These include revenue recognition on long-term service contracts, revenue recognition on license and subscription arrangements, reserves for uncollectible accounts receivable, contingencies and litigation and stock-based compensation. DMRC bases its estimates on historical experience as a business unit of Digimarc and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Cash Equivalents

        We consider all highly liquid investments with original maturities of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents include money market funds, certificates of deposit, commercial paper, and investments in government bonds. Cash equivalents are carried at cost or amortized cost, which approximates market.

Investments

        DMRC Corporation considers all investments with original maturities over 90 days that mature in less than one year to be short-term investments. Investments with maturities beyond one year may be

F-10


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

1. Description of Business and Summary of Significant Accounting Policies (Continued)


classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. Short-term investments include federal agency notes, company notes, and commercial paper. Our marketable securities are generally classified as held-to-maturity as of the balance sheet date and are reported at amortized cost, which approximates market. The book value of these investments approximates fair market value and, accordingly, no amounts have been recorded to other comprehensive income.

        A decline in the market value of any security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, we consider whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. There have been no other-than-temporary impairments identified or recorded by DMRC Corporation.

        Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using a method that approximates the effective-interest method. Dividend and interest income are recognized when earned.

Fair Value of Financial Instruments

        The carrying amounts of cash and cash equivalents, short-term investments, trade accounts receivable, accounts payable and accrued payroll approximate fair value due to the short-term nature of these instruments. 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.

Concentrations of Business and Credit Risk

        A significant portion of our business depends on a limited number of large contracts. The loss of any large contract may result in loss of revenue and margin on a prospective basis.

        Financial instruments that potentially subject DMRC Corporation to concentrations of credit risk consist primarily of cash and cash equivalents, investments, and trade and unbilled accounts receivable. DMRC Corporation places its cash and cash equivalents with major banks and financial institutions and at times deposits may exceed insured limits. Other than cash used for operating needs, which may include short-term investments with our principal banks, our investment policy limits its credit exposure to any one financial institution or type of financial instrument by limiting the maximum of 5% or $1,000, whichever is greater, to be invested in any one issuer except for the U.S. Government and U. S. federal agencies, which have no limits, at the time of purchase. As a result, the credit risk associated with cash and investments is believed to be minimal.

F-11


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

1. Description of Business and Summary of Significant Accounting Policies (Continued)

Software Development Costs

        Under SFAS No. 86, Accounting for the Cost of Computer Software to Be Sold, Leased, or Otherwise Marketed, 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 our products has occurred shortly before general release and, therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, DMRC Corporation has not capitalized any software development costs and has charged all such costs to research and development expense.

        Internal use software development costs are accounted for in accordance with AICPA SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use . Costs incurred in the preliminary project stage are expensed as incurred and costs incurred in the application development stage, which meet the capitalization criteria, are capitalized and amortized on a straight-line basis over the estimated useful life of the asset, generally three to five years. Costs incurred in the post-implementation stage are expensed as incurred.

Research and Development

        Research and development costs are expensed as incurred as defined in SFAS No. 2, Accounting for Research and Development Costs . DMRC Corporation accounts for amounts received under its funded research and development arrangements in accordance with the provisions of SFAS No. 68, Research and Development Arrangements . Under the terms of the arrangements, DMRC Corporation is not obligated to repay any of the amounts provided by the funding parties. As a result, DMRC Corporation recognizes revenue as the services are performed.

Revenue Recognition

our revenue is comprised of subscription revenue which includes hardware and software sales, royalties and revenues from the licensing of digital watermarking products and related authentication services. Our revenue recognition policy follows SEC Staff Accounting Bulletin ("SAB") No. 104 Revenue Recognition, SOP No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Modification of SOP No. 97-2, Software Recognition, With Respect to Certain Transactions, SOP 81-1 Accounting for the Performance of Construction Type and Certain Production-Type Contracts, and Emerging Issues Task Force ("EITF") Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.

Other income (expense), net

        Our other income (expense), net consists primarily of interest income earned our on cash and short term investments. Some minor amounts are included in this category that relate to interest expense for capital lease allocations from Digimarc and for other non-operating items.

2. Recent Accounting Pronouncements

        In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in

F-12


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

2. Recent Accounting Pronouncements (Continued)


generally accepted accounting principles, and expands disclosures about fair value. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective the first fiscal year beginning after November 15, 2007. DMRC Corporation has applied the provisions of this standard regarding the framework of measuring fair value and noted no material effect on the current financial statements.

        In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for the Financial Assets and Financial Liabilities, which permits entities to choose to measure certain financial assets and liabilities at fair value. SFAS No. 159 is effective the first fiscal year beginning after November 15, 2007. DMRC Corporation has elected not to measure certain financial assets and liabilities at fair value as permitted by SFAS No. 159.

3. Revenue Recognition

        Some customer arrangements encompass multiple deliverables, such as software, maintenance fees, and software development fees. The Company accounts for these arrangements in accordance with EITF Issue No. 00-21. If the deliverables meet the criteria in EITF Issue No. 00-21, the deliverables are divided into separate units of accounting and revenue is allocated to the deliverables based on their relative fair values. The criteria specified in EITF Issue No. 00-21 are as follows: (i) the delivered item has value to the customer on a stand-alone basis, (ii) there is objective and reliable evidence of the fair value of the undelivered item, and (iii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. For our purposes, fair value is generally defined as the price at which a customer could purchase each of the elements independently from other vendors or as the price that the Company has sold the element separately to another customer. Management applies judgment to ensure appropriate application of EITF Issue No. 00-21, including value allocation among multiple deliverables, determination of whether undelivered elements are essential to the functionality of delivered elements and timing of revenue recognition, among others. Revenue is recognized in accordance with SAB 104 when the following four criteria are met (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collection is probable.

        AICPA SOP No. 98-9 requires that revenue be recognized using the "residual method" in circumstances when vendor specific objective evidence ("VSOE") exists only for undelivered elements. Under the residual method, revenue is recognized as follows: (1) the total fair value of undelivered elements, as indicated by vendor specific objective evidence, is deferred and subsequently recognized in accordance with the relevant sections of AICPA SOP No. 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.

F-13


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

3. Revenue Recognition (Continued)

        Applicable revenue recognition criteria are considered separately for each separate unit of accounting as follows:

    Revenue from professional service arrangements is generally determined based on time and material. Revenue for professional services is recognized as the services are performed. Billing for services rendered generally occurs within one month following when the services are provided.

    Royalty revenue is recognized when the royalty amounts owed to the Company have been earned, are determinable, and collection is probable. Subscriptions are paid in advance and revenue is recognized ratably over the term of the subscription. These revenues include the licensing of digital watermarking products and services for use in authenticating documents, detecting fraudulent documents and deterring unauthorized duplication or alteration of high-value documents, for use in communicating copyright, asset management and business-to-business image commerce solutions, and for use in connecting analog media to a digital environment.

    Software revenue is recognized in accordance with AICPA SOP No. 97-2, as amended by AICPA SOP No. 98-9. Revenue for licenses of the Company's software products is recognized upon the Company meeting the following criteria: persuasive evidence of an arrangement exists; delivery has occurred; the vendor's fee is fixed or determinable; and collectibility is probable. Software revenue is recognized over the term of the license or upon delivery and acceptance if the Company grants a perpetual license with no further obligations.

    Maintenance revenue is recognized when the maintenance amounts owed to the Company have been earned, are determinable, and collection is probable. Maintenance contracts are, at times, paid in advance and revenue is recognized ratably on a straight-line basis over the term of the service period.

    The Company records revenue from some customers upon cash receipt as a result of collectibility not being reasonably assured.

    Revenue earned that has not been invoiced is classified as unbilled trade receivables, which is included in the balance of trade accounts receivable, net in the balance sheets.

    Deferred revenue consists of payments billed and or received in advance for professional services, licenses, subscriptions and maintenance for which revenue has not been earned.

4. Segment Information

    Geographic Information

        The Company derives its revenue from a single reporting segment: media management solutions. Revenue is generated in this segment through licensing of intellectual property, subscriptions to various products and services, and the delivery of services pursuant to contracts with various customers. The Company markets its products in the United States and in non-U.S. countries through its sales personnel.

F-14


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

4. Segment Information (Continued)

        Information regarding geographic areas for the three-month periods ended March 31 and the years ended December 31 follow:

 
  Three Months
Ended
March 31,

   
   
   
 
  Years Ended December 31,
Revenue:

  2008
  2007
  2007
  2006
  2005
 
  (unaudited)
   
   
   
Domestic   $ 2,658   $ 1,118   $ 3,696   $ 2,414   $ 2,882
International     2,427     2,367     9,329     8,657     8,237
   
 
 
 
 
  Total   $ 5,085   $ 3,485   $ 13,025   $ 11,071   $ 11,119
   
 
 
 
 

Major Customers

        Customers who accounted for more than 10% of the Company's revenues for the three-month periods ended March 31, 2008 and 2007 respectively and for each of the three years ended December 31, 2007 are summarized as follows:

 
  Three Months
Ended
March 31,

  Years Ended December 31,
 
Revenue:

 
  2008
  2007
  2007
  2006
  2005
 
 
  (unaudited)
   
   
   
 
Customer A   37 % 57 % 60 % 65 % 64 %
Customer B   36 % *   *   *   *  
Customer C   *   19 % 10 % *   *  

      *
      less than 10%

5. Stock-Based Compensation

        Stock-based compensation includes expense charges for all stock-based awards to employees and directors. Such awards include option grants, restricted stock awards, and shares expected to be purchased under an employee stock purchase plan. Stock compensation expense is allocated to DMRC based on a combination of specific and shared services resource allocations from Digimarc. All cash flow related to stock compensation generated by Digimarc is retained by DMRC.

        Stock-based compensation recognized in the Company's financial statements is based on the value of the portion of the stock-based award that vested during the period, adjusted for expected forfeitures for stock-based awards granted prior to, but not fully vested as of, December 31, 2005 and stock-based awards granted subsequent to December 31, 2005. The compensation cost for awards granted prior to January 1, 2006 is based on the grant date fair value estimated in accordance with the pro forma provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation , while awards granted on or after January 1, 2006 follow the provisions of SFAS 123(R) to determine the grant date fair value

F-15


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

5. Stock-Based Compensation (Continued)


and compensation cost. Compensation cost for all stock-based awards is recognized using the straight-line method.

    Determining Fair Value Under SFAS 123(R)

    Stock Options

        Valuation and Amortization Method.     The Company estimates the fair value of stock-based awards granted using the Black-Scholes option pricing model. The Company amortizes the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods. The fair value of each option grant is estimated on the date of grant.

        Expected Life.     The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and pre-vesting and post-vesting forfeitures. Stock options granted generally vest over four years and have contractual terms of ten years.

        Expected Volatility.     The Company estimates the volatility of Digimarc's common stock at the date of grant based on the historical volatility of its common stock using the Black-Scholes option pricing model based on historical stock prices over the most recent period commensurate with the estimated expected life of the award. This historical period excludes portions of time when unusual transactions occurred, such as a significant acquisition.

        Risk-Free Interest Rate.     The Company bases the risk-free interest rate used in the Black-Scholes option pricing model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term approximately equal to the expected life of the award.

        Expected Dividend Yield.     Neither the Company nor Digimarc has ever paid any cash dividends on its common stock and the Company does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option pricing model.

        Expected Forfeitures.     The Company uses relevant historical data to estimate pre-vesting option forfeitures. The Company records stock-based compensation only for those awards that are expected to vest.

F-16


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

5. Stock-Based Compensation (Continued)

        A summary of the weighted average assumptions and results for options granted during the periods presented is as follows:

 
  Three Months
Ended
March 31,

  Years Ended December 31,
 
 
  2008
  2007
  2007
  2006
  2005
 
 
  (unaudited)
   
   
   
 
Expected life (in years)     5.7     5.8     5.8     6.0     4.0  
Expected volatility     44 %   44 %   44 %   53 %   50 %
Risk-free interest rate     2.5 %   4.7 %   4.7 %   4.7 %   4.5 %
Expected dividend yield     0 %   0 %   0 %   0 %   0 %
Expected forfeiture rate     15 %   16 %   16 %   14 %   20 %
Fair value   $ 3.65   $ 4.27   $ 4.38   $ 3.62   $ 2.85  

    Employee Stock Purchase Plans

        The Company also recognizes stock-based compensation in connection with Digimarc's 1999 Employee Stock Purchase Plan. The plan, as amended on November 2, 2006, allows employees to purchase shares of Digimarc common stock through payroll deductions of up to 15% of their base compensation during each three-month plan period, up to a maximum deduction of $5.3 for each plan period, not to exceed $21 per year. The three-month plan periods begin December 1, March 1, June 1 and September 1. The price an employee pays for the shares is 85% of the lower of (i) the fair market value of Digimarc common stock at the beginning of the plan period or (ii) the fair market value at the end of the plan period.

    Restricted Stock and Market or Performance Based Vesting Shares

        The Compensation Committee of the Board of Directors awarded restricted stock shares under Digimarc's 1999 Stock Incentive Plan, as amended, to certain officers, employees and directors. The shares subject to the restricted stock awards vest over a certain period, usually one to four years, following the date of the grant.

        The fair value of restricted stock awards granted is based on the fair market value of Digimarc's common stock on the date of the grant (measurement date), and is recognized over the vesting period of the related restricted stock using the straight-line method.

        In addition to restricted stock shares that vest over time, the Compensation Committee awarded restricted stock that vests upon satisfaction of either market based or employee performance based conditions under the 1999 Stock Incentive Plan, as amended.

        The fair value of restricted stock awards that vest upon the satisfaction of market based conditions is calculated using a Monte Carlo valuation model that results in a discount factor applied to the fair market value of Digimarc's common stock on the date of the grant (measurement date). Compensation cost is recognized over the derived service period, which is shorter than the performance period, using the straight-line method. If the market condition is met prior to completion of the derived service

F-17


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

5. Stock-Based Compensation (Continued)


period, all remaining expense is immediately recognized in the period the awards vest. Expense for market based awards is recognized if the employee completes the derived service period, regardless of whether the market condition is met. If the market condition is not met, the shares will be forfeited.

        The fair value of restricted stock awards that vest upon the satisfaction of employee performance conditions is based on the fair market value of Digimarc's common stock on the date of grant (measurement date). Management has determined it is probable that all performance conditions can be achieved; therefore, compensation cost is recognized on a straight line basis over the explicit service period. If the performance condition is satisfied early, all remaining compensation cost will be recognized in the period the condition is satisfied. If the performance vesting condition is not met by the end of the explicit service condition, all previously recognized compensation cost will be reversed and the shares will be forfeited.

        Specific terms of the restricted stock awards (including market or performance based vesting share awards) are governed by restricted stock agreements between Digimarc and the award recipients.

    Stock-based Compensation Under FAS 123(R)

        The following table summarizes stock-based compensation expense related to stock-based awards under SFAS 123(R) for the three-months ended March 31, 2008 and 2007 and the years ended December 31, 2007, 2006, and 2005, which incurred as follows:

 
  Three Months
Ended
March 31,

  Year Ended December 31,
 
  2008
  2007
  2007
  2006
  2005
 
  (unaudited)
   
   
   
Cost of service   $ 43   $ 16   $ 102   $ 42   $
Sales and marketing     83     72     287     172     56
Research, development and engineering     16     8     47     51    
General and administrative     220     184     728     495     147
Intellectual property     15     10     45     30    
   
 
 
 
 
Total stock-based compensation   $ 377   $ 290   $ 1,209   $ 790   $ 203
   
 
 
 
 

F-18


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

6. Trade Accounts Receivable

    Trade Accounts Receivable

        Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Revenue earned which has not been invoiced as of the balance sheet date, and generally billed the following month, is classified as unbilled trade receivables in the balance sheets.

 
   
  Year Ended December, 31
 
 
  Three Months
Ended
March 31,
2008

 
 
  2007
  2006
 
 
  (unaudited)
   
   
 
Billed trade receivables   $ 2,714   $ 3,236   $ 2001  
Unbilled trade receivables     562     559     483  
   
 
 
 
  Subtotal     3,276     3,795     2,484  
Allowance for doubtful accounts     (43 )   (43 )   (43 )
   
 
 
 
Trade accounts receivable, net   $ 3,233   $ 3,752   $ 2,441  
   
 
 
 
Unpaid Deferred revenues included in accounts receivable   $ 1,541   $ 2,271   $ 961  
   
 
 
 

    Allowance for doubtful accounts

        The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on historical write-off experience and current information. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

    Unpaid deferred revenues

        The unpaid deferred revenues that are included in accounts receivable are billed in accordance with the provisions of the contracts with the Company's customers.

F-19


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

6. Trade Accounts Receivable (Continued)

    Major Customers

        Customers who accounted for more than 10% of net accounts receivable, at March 31, 2008, December 31, 2007 and December 31, 2006, respectively were:

 
   
  Year Ended December, 31
 
 
  Three Months
Ended
March 31,
2008

 
 
  2007
  2006
 
 
  (unaudited)
   
   
 
Customer A   33 % 24 % 42 %
Customer B   45 % 36 % *  
Customer C   *   *   24 %

      *
      less than 10%

7. Property and Equipment

    Property and Equipment

        Property and equipment are stated at cost. 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 two to seven years.

 
   
  Year Ended December 31,
 
 
  Three Months
Ended
March 31,
2008

 
 
  2007
  2006
 
 
  (unaudited)
   
   
 
Office furniture fixture   $ 1,086   $ 1,086   $ 1,086  
Equipment     3,627     3,411     3,059  
Leasehold improvements     679     679     664  
   
 
 
 
      5,392     5,176     4,809  
Less accumulated depreciation and amortization     (4,225 )   (3,949 )   (3,337 )
   
 
 
 
    $ 1,167   $ 1,227   $ 1,472  
   
 
 
 

F-20


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

7. Property and Equipment (Continued)

    Leases

        Future minimum lease payments under non-cancelable operating leases related to rent and office equipment are as follows:

Year ending December 31:

  Operating
Leases

2008   $ 837
2009     856
2010     882
2011     599
Thereafter    
   
Total minimum lease payments   $ 3,174
   

        Rent expense on the operating leases for the three months ended March 31, 2008 and 2007 and for the years ended December 31, 2007, 2006 and 2005 totaled $185, $185, $742, $742 and $742, respectively.

8. Income Taxes

        Provision for Income Taxes.     The provision for income taxes reflects withholding tax expense in various foreign jurisdictions. For all historic periods reported in the financial statements, Digimarc maintained valuation allowances against its net deferred tax assets, including net operating loss carryforwards, because it was more likely than not that the deferred taxes would not be realized. The provision for income taxes included foreign taxes withheld by our customers and paid to foreign jurisdictions on our behalf. The DMRC "carve-out" financial statements indicate cumulative losses through the first three months of 2008. Furthermore, the amounts of cumulative expenses in the financial statements that were not allowed for federal and state income tax purposes were not sufficient enough to result in positive taxable income which would have required the company to record income tax expense. As a result of the above, no Federal and state income tax benefit was recognized for the book losses that were incurred in those periods prior to 2007 and no income tax expense was recognized during the 2007 and 2008 periods as any expense was offset by the benefit of net operating loss carry-forwards. After the spin-off, DMRC Corporation as a separate legal entity, will not benefit from any of the carrryforward tax attributes of Digimarc, including net operating loss carryforwards.

9. Commitments and Contingencies

        Certain of the Company's product license and services agreements include an indemnification provision for claims from third parties relating to the Company's intellectual property. Such indemnification provisions are accounted for in accordance with SFAS No. 5, Accounting for Contingencies . To date, there have been no claims made under such indemnification provisions.

        The Company is subject from time to time to other legal proceedings and claims arising in the ordinary course of business. Although the ultimate outcome of these matters cannot be determined, management believes that, as of March 31, 2008, the final disposition of these proceedings will not

F-21


DMRC CORPORATION
(a carved-out business of Digimarc Corporation)

NOTES TO FINANCIAL STATEMENTS (Continued)

(in thousands)

9. Commitments and Contingencies (Continued)


have a material adverse effect on the financial position, results of operations, or liquidity of the Company. No accrual has been recorded because the amounts are not probable or reasonably estimatable in accordance with SFAS No. 5, Accounting for Contingencies .

10. Quarterly Financial Information (unaudited)

Quarter ended:

  March 31
  June 30
  September 30
  December 31
 
2008                          
Service revenue   $ 2,548                    
License and subscription revenue     2,537                    
   
                   
Total revenue     5,085                    
Total cost of revenue     1,408                    
Gross profit     3,677                    
Gross profit percent     72 %                  
Sales and marketing     656                    
Research, development and engineering     922                    
General and administrative     980                    
Intellectual property     478                    
Operating income (loss)     641                    
Net income (loss)     924                    

2007

 

 

 

 

 

 

 

 

 

 

 

 

 
Service revenue   $ 1,877   $ 1,751   $ 2,063   $ 2,115  
License and subscription revenue     1,608     1,095     1,244     1,272  
   
 
 
 
 
Total revenue     3,485     2,846     3,307     3,387  
Total cost of revenue     950     936     993     1,153  
Gross profit     2,535     1,910     2,314     2,234  
Gross profit percent     73 %   67 %   70 %   66 %
Sales and marketing     639     667     634     513  
Research, development and engineering     729     829     656     698  
General and administrative     857     844     797     847  
Intellectual property     431     413     373     376  
Operating income (loss)     (121 )   (843 )   (146 )   (200 )
Net income (loss)     250     (518 )   175     148  

F-22




QuickLinks

TABLE OF CONTENTS
SUMMARY
RISK FACTORS
THE SPIN-OFF
DIVIDEND POLICY
CAPITALIZATION
SELECTED HISTORICAL FINANCIAL INFORMATION
PRO FORMA FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Contractual Obligations
BUSINESS OF DMRC CORPORATION
MANAGEMENT
DIRECTOR COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
EXECUTIVE COMPENSATION
OUR RELATIONSHIP WITH DIGIMARC CORPORATION AFTER THE SPIN-OFF
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
DESCRIPTION OF OUR CAPITAL STOCK
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
DMRC CORPORATION (a carved-out business of Digimarc Corporation) BALANCE SHEETS (In thousands)
DMRC CORPORATION (a carved-out business of Digimarc Corporation) STATEMENTS OF OPERATIONS (In thousands)
DMRC CORPORATION (a carved-out business of Digimarc Corporation) STATEMENTS OF CHANGES IN PARENT'S INVESTMENT (In thousands)
DMRC CORPORATION (a carved-out business of Digimarc Corporation) STATEMENTS OF CASH FLOWS (In thousands)
DMRC CORPORATION (a carved-out business of Digimarc Corporation) NOTES TO FINANCIAL STATEMENTS (in thousands)