UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number: 001-34108
DIGIMARC 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.) |
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9405 SW Gemini Drive, Beaverton, Oregon 97008 (Address of principal executive offices) (Zip Code) |
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(503) 469-4800 (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company ý |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes o No ý
As of July 27, 2009, there were 7,291,842 shares of the registrant's common stock, par value $0.001 per share, outstanding.
2
DIGIMARC CORPORATION
BALANCE SHEETS
(In thousands, except share data)
(UNAUDITED)
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Successor | Successor | |||||||
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June 30,
2009 |
December 31,
2008(1) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 11,586 | $ | 18,928 | |||||
Marketable securities |
31,815 | 21,240 | |||||||
Trade accounts receivable, net |
2,709 | 3,839 | |||||||
Other current assets |
920 | 875 | |||||||
Total current assets |
47,030 | 44,882 | |||||||
Marketable securities |
2,087 | 5,744 | |||||||
Property and equipment, net |
1,161 | 1,212 | |||||||
Intangibles, net |
892 | 456 | |||||||
Other assets, net |
372 | 147 | |||||||
Total assets |
$ | 51,542 | $ | 52,441 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable and other accrued liabilities |
$ | 978 | $ | 937 | |||||
Accrued payroll and related costs |
199 | 42 | |||||||
Accrued merger related liabilities |
176 | 386 | |||||||
Deferred revenue |
1,907 | 2,418 | |||||||
Total current liabilities |
3,260 | 3,783 | |||||||
Long-term liabilities |
189 | 257 | |||||||
Total liabilities |
3,449 | 4,040 | |||||||
Commitments and contingencies (Note 10) |
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Stockholders' equity: |
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Preferred stock (10,000 shares issued and outstanding at June 30, 2009 and December 31, 2008) |
50 | 50 | |||||||
Common stock (7,291,842 and 7,279,442 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively) |
7 | 7 | |||||||
Additional paid-in capital |
49,447 | 48,268 | |||||||
Retained earnings (accumulated deficit) |
(1,411 | ) | 76 | ||||||
Total stockholders' equity |
48,093 | 48,401 | |||||||
Total liabilities and stockholders' equity |
$ | 51,542 | $ | 52,441 | |||||
See Notes to Unaudited Financial Statements.
3
DIGIMARC CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
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Successor |
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Predecessor | Successor |
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Predecessor | |||||||||||||
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Three
Months Ended June 30, 2009 |
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Three
Months Ended June 30, 2008 |
Six
Months Ended June 30, 2009 |
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Six
Months Ended June 30, 2008 |
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Revenue: |
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Service |
$ | 2,585 | $ | 2,987 | $ | 5,055 | $ | 5,535 | |||||||||||
License and subscription |
1,739 | 2,128 | 3,698 | 4,665 | |||||||||||||||
Total revenue |
4,324 | 5,115 | 8,753 | 10,200 | |||||||||||||||
Cost of revenue: |
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Service |
1,480 | 1,643 | 2,897 | 2,992 | |||||||||||||||
License and subscription |
48 | 61 | 116 | 120 | |||||||||||||||
Total cost of revenue |
1,528 | 1,704 | 3,013 | 3,112 | |||||||||||||||
Gross profit |
2,796 | 3,411 | 5,740 | 7,088 | |||||||||||||||
Operating expenses: |
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Sales and marketing |
728 | 683 | 1,473 | 1,339 | |||||||||||||||
Research, development and engineering |
1,217 | 910 | 2,488 | 1,832 | |||||||||||||||
General and administrative |
1,496 | 927 | 3,184 | 1,907 | |||||||||||||||
Intellectual property |
217 | 448 | 494 | 926 | |||||||||||||||
Transitional services |
(48 | ) | | (108 | ) | | |||||||||||||
Total operating expenses |
3,610 | 2,968 | 7,531 | 6,004 | |||||||||||||||
Operating income (loss) |
(814 | ) | 443 | (1,791 | ) | 1,084 | |||||||||||||
Other income, net |
140 | 221 | 313 | 515 | |||||||||||||||
Income (loss) before provision for income taxes |
(674 | ) | 664 | (1,478 | ) | 1,599 | |||||||||||||
Provision for income taxes |
(4 | ) | | (9 | ) | (11 | ) | ||||||||||||
Net income (loss) |
$ | (678 | ) | $ | 664 | $ | (1,487 | ) | $ | 1,588 | |||||||||
Loss per share: |
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Net loss per sharebasic |
$ | (0.09 | ) | $ | (0.21 | ) | |||||||||||||
Net loss per sharediluted |
$ | (0.09 | ) | $ | (0.21 | ) | |||||||||||||
Weighted average shares outstandingbasic |
7,158 | 7,158 | |||||||||||||||||
Weighted average shares outstandingdiluted |
7,158 | 7,158 | |||||||||||||||||
Pro-forma earnings per share: |
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Net income per sharebasic |
$ | 0.09 | $ | 0.22 | |||||||||||||||
Net income per sharediluted |
$ | 0.09 | $ | 0.22 | |||||||||||||||
Weighted average shares outstandingbasic |
7,143 | 7,143 | |||||||||||||||||
Weighted average shares outstandingdiluted |
7,143 | 7,143 |
See Notes to Unaudited Financial Statements.
4
DIGIMARC CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(UNAUDITED)
See Notes to Unaudited Financial Statements.
5
DIGIMARC CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
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Successor |
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Predecessor | ||||||||||
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Six Months Ended
June 30, 2009 |
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Six Months Ended
June 30, 2008 |
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Cash flows from operating activities: |
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Net income (loss) |
$ | (1,487 | ) | $ | 1,588 | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
276 | 446 | |||||||||||
Stock-based compensation expense |
1,179 | 777 | |||||||||||
Changes in operating assets and liabilities: |
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Trade accounts receivable, net |
1,130 | (452 | ) | ||||||||||
Other current assets |
(45 | ) | (12 | ) | |||||||||
Other assets, net |
(225 | ) | (10 | ) | |||||||||
Accounts payable and other accrued liabilities |
40 | 24 | |||||||||||
Accrued payroll and related costs |
157 | 393 | |||||||||||
Accrued merger related liabilities |
(210 | ) | | ||||||||||
Deferred revenue |
(513 | ) | 132 | ||||||||||
Other liabilities |
(57 | ) | (8 | ) | |||||||||
Net cash provided by operating activities |
245 | 2,878 | |||||||||||
Cash flows from investing activities: |
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Purchase of property and equipment |
(214 | ) | (559 | ) | |||||||||
Capitalized patent costs |
(447 | ) | | ||||||||||
Sale or maturity of marketable securities |
15,685 | 103,395 | |||||||||||
Purchase of marketable securities |
(22,603 | ) | (103,676 | ) | |||||||||
Net cash used in investing activities |
(7,579 | ) | (840 | ) | |||||||||
Cash flows from financing activities: |
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Cash from Parent stock activity |
| 2,335 | |||||||||||
Net activity with Parent |
| (453 | ) | ||||||||||
Principal payments under capital lease obligations |
(8 | ) | | ||||||||||
Net cash provided by (used in) financing activities |
(8 | ) | 1,882 | ||||||||||
Net increase (decrease) in cash and cash equivalents |
(7,342 | ) | 3,920 | ||||||||||
Cash and cash equivalents at beginning of period |
18,928 | 29,145 | |||||||||||
Cash and cash equivalents at end of period |
$ | 11,586 | $ | 33,065 | |||||||||
Supplemental disclosure of cash flow information: |
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Cash paid for interest |
$ | 2 | $ | 4 | |||||||||
Cash paid for income taxes |
$ | 9 | $ | 11 |
See Notes to Unaudited Financial Statements.
6
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Digimarc Corporation ("Digimarc" or the "Company") enables 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. The Company's 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 generally 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 other traditional uses of it. The Company's technology permits computers and digital devices to quickly identify relevant data from vast amounts of media content.
Acquisition of Old Digimarc and Separation of DMRC Corporation
On June 29, 2008, the former Digimarc Corporation ("Old Digimarc") entered into an amended and restated merger agreement, as amended by Amendment No. 1 dated as of July 17, 2008, which we refer to as the Old Digimarc/L-1 merger agreement, with L-1 Identity Solutions, Inc. ("L-1") and Dolomite Acquisition Co. ("Dolomite"), a wholly owned subsidiary of L-1, pursuant to which Dolomite, in a transaction which we refer to as the offer, purchased more than 90% of the outstanding shares of Old Digimarc common stock, together with the associated preferred stock purchase rights, for $12.25 per share. On August 13, 2008, following the completion of the offer, Dolomite merged with and into Old Digimarc with Old Digimarc continuing as the surviving company and a wholly owned subsidiary of L-1.
On August 1, 2008, prior to the initial expiration of the offer, Old Digimarc contributed all of the assets and liabilities related to its digital watermarking business, which we refer to as the Digital Watermarking Business, together with all of Old Digimarc's cash, to DMRC LLC. Following the restructuring, all of the limited liability company interests of DMRC LLC were transferred to a newly created trust for the benefit of Old Digimarc record holders. DMRC LLC then merged with and into DMRC Corporation, and each limited liability company interest of DMRC LLC was converted into one share of common stock of DMRC Corporation. After completion of the Old Digimarc/L-1 merger, DMRC Corporation changed its name to Digimarc Corporation. The shares of Digimarc common stock were held by the trust until the Form 10, General Form for Registration of Securities , was declared effective by the Securities and Exchange Commission ("SEC") on October 16, 2008, at which time the shares were distributed to Old Digimarc record holders, as beneficiaries of the trust, pro rata in accordance with their ownership of shares of Old Digimarc common stock on August 1, 2008 at 5:30 pm Eastern time, the spin-off record date and time. Each Old Digimarc record holder was entitled to receive one share of Digimarc common stock for every three and one half shares of Old Digimarc common stock held by the stockholder as of the spin-off record date and time.
Joint Venture and Patent License Agreements with The Nielsen Company
On June 11, 2009 the Company entered into two joint venture agreements with The Nielsen Company ("Nielsen") to launch two new companies. The two joint venture agreements and a revised patent license agreement expand and replace the previous license and services agreement between the Company and Nielsen that has been in operation since late 2007. Under the new agreements, the
7
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
Company and Nielsen plan to work together to develop new products and services, including the expansion and deployment of those product and services that were in development under the prior agreement.
Under the terms of the patent license agreement, Nielsen agreed to pay Digimarc $18,750 during the period from July 2009 through January 2014, and Digimarc granted to Nielsen a non-exclusive license to the Digimarc's patents for use within Nielsen's business.
Joint venture I, TVaura LLC, will engage in the development of copyright filtering solutions, royalty/audit solutions for online video and audio rights organizations, guilds or other organizations involved in reconciliation of royalties, residuals and other payments, and other related products. Each of the Company and Nielsen will make an initial cash contribution aggregating $3,900 payable quarterly from July 2009 through October 2011. The Company will provide technical and development services to TVaura LLC's business for the following periods for the following minimum service fees: $1,130 for the remainder of 2009; $2,800 in 2010; and $2,740 in 2011, subject to adjustment for any development service fees paid to the Company by TVaura Mobile LLC.
Joint venture II, TVaura Mobile LLC, will engage in the development of certain enhanced television offerings, and other related products. Each of the Company and Nielsen will make an initial cash contribution aggregating $2,800 payable quarterly from July 2009 through October 2011.
Pursuant to the terms of the agreements and Emerging Issues Task Force ("EITF") Issue No. 96-16, " Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholders Have Certain Approval or Veto Rights, " the joint ventures will not be consolidated with the Company and will be separately disclosed in the financial statements and notes to financial statements.
Interim Financial Statements
The accompanying financial statements have been prepared from the Company's records without audit and, in management's opinion, include all adjustments (consisting of only normal recurring adjustments) necessary to fairly reflect the financial condition and the results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (the "U.S.") have been condensed or omitted in accordance with the rules and regulations of the SEC.
These financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the SEC on February 27, 2009. The results of operations for the interim periods presented in these financial statements are not necessarily indicative of the results for the full year.
Basis of Accounting; Predecessor Financial Statements
The predecessor financial statements include certain accounts of Old Digimarc and the assets, liabilities and results of operations of Old Digimarc's Digital Watermarking Business that were separated, or "carved-out" from Old Digimarc. The operating expenses included in the predecessor financial statements include proportional allocations of various shared services common costs of Old
8
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
Digimarc because specific identification of the expenses was not practicable. The common costs include expenses from Old Digimarc related to various operating shared services cost centers, including executive, finance and accounting, human resources, legal, marketing, intellectual property, facilities and information technology.
Management believes that the assumptions underlying the predecessor financial statements are reasonable. The cost allocation methods applied to certain shared services common cost centers include the following:
Other key assumptions differing from the historical accounting of Old Digimarc:
9
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
operations during the periods reported and were treated as research, development and engineering costs in Old Digimarc's financial statements. For Digimarc'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.
10
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
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 was allocated to Digimarc based on a combination of specific and shared services resource allocations from Old Digimarc.
The financial information in the predecessor financial statements does not include all of the expenses that would have been incurred had the predecessor been a separate, stand-alone public entity. As such, the predecessor financial information does not reflect the financial position, results of operations and cash flows of Digimarc's current business, had the predecessor operated as a separate, stand-alone public entity during the periods presented in the predecessor financial statements. Additionally, the predecessor financial statements include proportional allocations of various shared services common costs of Old Digimarc because specific identification of these expenses was not practicable. It is expected that the initial operating costs of Digimarc on a stand-alone basis will be higher than those allocated to the predecessor operations under the shared services methodology applied in the predecessor financial statements. Consequently, the financial position, results of operations and cash flows reflected in the predecessor financial statements may not be indicative of those that would have been achieved had the predecessor operated as a separate, stand-alone entity for the periods reflected in the predecessor financial statements.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires Digimarc to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Certain of the Company's accounting policies require higher degrees of judgment than others in their application. These include revenue recognition on long-term service contracts, impairments and estimation of useful lives of long-lived assets, reserves for uncollectible accounts receivable, contingencies and litigation and stock-based compensation. Digimarc bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in 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.
Marketable Securities
The Company considers all investments with original maturities over 90 days that mature in less than one year to be short-term marketable securities. Both short- and long-term marketable securities include federal agency notes, company notes, and commercial paper. The Company's 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 of fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is
11
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating that the cost of the investment is recoverable outweighs evidence to the contrary. There have been no other-than-temporary impairments identified or recorded by the Company.
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. Under this method, dividend and interest income are recognized when earned.
Fair Value of Financial Instruments
The Company adopted SFAS 157, " Fair Value Measurements ". SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and enhances disclosures about fair value measurements. SFAS 157 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
The Company also adopted SFAS No. 159, " The Fair Value Option for Financial Assets and Financial Liabilities ." SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect the fair value option under this statement as to specific assets or liabilities. Therefore, through June 30, 2009, the Company has not recognized the net change in fair value of its financial assets and liabilities.
The estimated fair values of the Company's financial instruments, which include cash and cash equivalents, short- and long-term marketable securities, accounts receivable, accounts payable and accrued payroll approximate their carrying values due to the short-term nature of these instruments. The carrying amounts of capital leases approximate fair value because the stated interest rates approximate current market rates. These items are classified as either Level 1 or Level 2 inputs.
The Company records marketable securities at amortized cost of $35,901, which approximates fair value. The fair value of the marketable securities at June 30, 2009, excluding accrued interest, was $35,920. The fair value is based on quoted market prices in active markets for identical assets, a Level 1 input.
12
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
The Company records money market funds at cost and continues to carry those amounts at cost which equals fair value. The fair value is based on quoted market prices in active markets for identical assets, a Level 1 input. As of June 30,2009, the cost and fair value of the Company's money market funds was equal to $9,580.
Concentrations of Business and Credit Risk
A significant portion of the Company's 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 Digimarc to concentrations of credit risk consist primarily of cash and cash equivalents, investments, and trade and unbilled accounts receivable. Digimarc 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 our 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.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
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 the Company's products has occurred shortly before general release and, therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs and has charged all such costs to research and development expense.
13
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
Research and Development
Research and development costs are expensed as incurred as defined in SFAS No. 2, Accounting for Research and Development Costs . Digimarc 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, Digimarc is not obligated to repay any of the amounts provided by the funding parties. As a result, Digimarc recognizes revenue as the services are performed.
Patent Costs
Costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at award date, which varies depending on the pendency period of the application, generally approximating seventeen years. Capitalized patent costs include internal legal labor, professional legal fees, government filing fees and translation fees related to obtaining the Company's patent portfolio. Such costs were expensed in the predecessor financial statements.
Costs associated with the maintenance and annuity fees of patents are accounted for as prepaid assets at the time of payment and amortized over the respective periods, generally from one to four years. These costs were expensed in the predecessor financial statements.
Revenue Recognition
The Company's revenue consists of subscription revenue, which includes hardware and software sales, royalties and revenues from the licensing of digital watermarking products and related authentication services. The Company's 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 EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables .
Other income (expense), net
The Company's other income (expense), net consists primarily of interest income earned on cash and short- and long-term investments. Some minor amounts are included in this category that relate to interest expense for capital lease allocations from Old Digimarc and for other non-operating items.
Stock-Based Compensation
The Company adopted 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 and employee stock purchases under a stock purchase plan based on
14
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
estimated fair values. The Company has applied the provisions of SAB 107 in the adoption of SFAS 123(R).
The Company uses the Black-Scholes option pricing model as its method of valuation for stock-based awards. The Company's determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected life of the award, our expected stock price volatility over the term of the award and actual and projected exercise behaviors. Although the fair value of stock-based awards is determined in accordance with SFAS 123(R) and SAB 107, the Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce tax assets to the amount expected to be realized.
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 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 157 is effective the first fiscal year beginning after November 15, 2007. The Company 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 2008, the FASB issued FASB Staff Position (FSP) 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 and FSP 157-2, " Effective Date of FASB Statement No. 157 ". FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope, and was effective upon initial adoption of SFAS 157. FSP 157-2 delayed the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2009. The Company
15
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
2. Recent Accounting Pronouncements (Continued)
applied the provisions of FSP 157-2 on non-financial assets and non-financial liabilities and noted no significant impact on our financial statements.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active . FSP 157-3 clarifies the application of SFAS 157 in a market that is not active, and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3 is effective for all periods presented in accordance with SFAS 157. The adoption of FSP 157-3 did not have a significant impact on our financial statements or the fair values of our financial assets and liabilities.
In April 2009, the FASB issued FSP 157-4: Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly . FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and identifying circumstances that indicate a transaction is not orderly. The adoption of FSP 157-4 did not have a significant impact on our financial statements or the fair values of our assets or liabilities.
In April 2009, the FASB issued FSP No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments . FSP 115-2 amends the other-than-temporary impairment guidance in U.S. generally accepted accounting principles (U.S. GAAP) for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. However, it does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The adoption of FSP 115-2 did not have a significant impact on our financial statements or the fair values of our assets or liabilities.
In April 2009, the FASB issued FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments . FSP 107-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, " Disclosures about Fair Value of Financial Instruments ," to interim periods for publicly traded entities. The adoption of FSP 107-1 did not have a significant impact on our financial statement disclosures.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events . SFAS 165 establishes general standards of accounting for and disclosure of events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 sets forth the period after the balance sheet date during which we should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which we should recognize events or transactions occurring after the balance sheet date in our financial statements and the disclosures that we should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim and annual fiscal periods ending after June 15, 2009. The adoption of SFAS 165 did not have a significant impact on the Company's financial statement disclosures. In preparing the Company's financial statements, the Company evaluated
16
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
2. Recent Accounting Pronouncements (Continued)
subsequent events through July 31, 2009, which is the date the Company's quarterly report was filed with the Securities and Exchange Commission.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) , is a revision to FASB Interpretation ("FIN") No. 46 (Revised December 2003) ("FIN 46(R)), Consolidation of Variable Interest Entities , which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity's purpose and design and the reporting entity's ability to direct the activities of the other entity that most significantly impact the other entity's economic performance. SFAS 167 is effective the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the adoption of this pronouncement will have a material impact on the Company's financial statements.
In June 2009, the FASB issued SFAS No. 168, The " FASB Accounting Standards Codification " and the Hierarchy of Generally Accepted Accounting Principles . Statement 168 establishes the FASB Accounting Standards Codification (Codification) to become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. SFAS 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of this pronouncement will have a material impact on the Company's financial statements.
3. Revenue Recognition
Revenue is recognized in accordance with SAB 104 when the following four criteria are met:
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:
17
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
3. Revenue Recognition (Continued)
For the Company's 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.
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 VSOE, 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.
Applicable revenue recognition criteria is considered separately for each separate unit of accounting as follows:
18
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
3. Revenue Recognition (Continued)
paid in advance and revenue is recognized ratably on a straight-line basis over the term of the service period.
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 U.S. and in non-U.S. countries through its sales personnel.
Revenue, based upon the "bill-to" location, by geographic area is as follows:
|
|
|
|
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Successor |
|
Predecessor | Successor |
|
Predecessor | ||||||||||||
|
Three Months Ended
June 30, 2009 |
|
Three Months Ended
June 30, 2008 |
Six Months Ended
June 30, 2009 |
|
Six Months Ended
June 30, 2008 |
||||||||||||
Domestic |
$ | 1,777 | $ | 2,656 | $ | 3,553 | $ | 5,314 | ||||||||||
International |
2,547 | 2,459 | 5,200 | 4,886 | ||||||||||||||
Total |
$ | 4,324 | $ | 5,115 | $ | 8,753 | $ | 10,200 | ||||||||||
Major Customers
Customers who accounted for more than 10% of the Company's revenues are as follows:
|
|
|
|
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Successor |
|
Predecessor | Successor |
|
Predecessor | |||||||||||
|
Three Months Ended
June 30, 2009 |
|
Three Months Ended
June 30, 2008 |
Six Months Ended
June 30, 2009 |
|
Six Months Ended
June 30, 2008 |
|||||||||||
Customer A |
54 | % | 42 | % | 52 | % | 39 | % | |||||||||
Customer B |
31 | % | 41 | % | 30 | % | 38 | % |
19
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
5. Stock-Based Compensation
Stock-based compensation includes expense charges for all stock-based awards to employees and directors. These awards include option grants and restricted stock awards.
Stock-based compensation expense was allocated to the predecessor based on a combination of specific and shared services resource allocations from Old Digimarc. All cash flow related to stock compensation generated by Old Digimarc was retained by Digimarc. Stock-based compensation recognized in the three- and six-month periods ended June 30, 2009 is based on the value of the portion of the stock-based award that vested during the period. Compensation cost for all stock-based awards is recognized using the straight-line method.
Determining Fair Value Under SFAS 123(R)
Preferred Stock
The Board of Directors authorized 10,000 shares of Series A Redeemable Nonvoting Preferred stock to be issued to the executive officers. 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.
The fair value of Series A Redeemable Nonvoting Preferred stock is based on the stated fair value of $5.00 per share, and the related stock compensation expense is recognized over the non-redeemable period of 5 years, or 60 months, through June 2013 using the straight-line method.
Stock Options
Valuation and Amortization Method. The Company estimates the fair value of stock-based awards granted using the Black-Scholes option valuation 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 using the Black-Scholes option pricing model.
Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determined the initial expected life based on a simplified method in accordance with SAB 110, giving consideration to the contractual terms, vesting schedules and pre-vesting and post-vesting forfeitures. Stock options granted generally vest over four years for executive grants and two years for director grants, and have contractual terms of ten years.
Expected Volatility. The Company estimated the initial volatility of its common stock at the date of grant based on an independent analysis of a peer group's historical volatility of their common stock using the Black-Scholes option valuation model based on historical stock prices over the most recent period commensurate with the estimated expected life of the award.
Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on an interest rate on a Treasury bond with a maturity commensurate with each expected term estimate.
20
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
5. Stock-Based Compensation (Continued)
Expected Dividend Yield. The Company has never paid any cash dividends on its common stock and 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 valuation model.
Expected Forfeitures. The Company uses a zero forfeiture for both the stock options granted to employees, which vest monthly, and the stock options granted to the Company's Directors, which vest 50% on the first anniversary of the date of grant and then monthly thereafter. The Company records stock-based compensation expense only for those awards that are expected to vest, including awards made to Directors who are expected to continue with the Company through the year following the date of grant. Forfeitures that occur during the month are not expensed.
A summary of the weighted average assumptions and results for options granted during the period August 2, 2008 through June 30, 2009 is as follows:
The estimated average fair value of outstanding stock options was $5.13 at June 30, 2009.
Restricted Stock
The Compensation Committee of the Board of Directors awarded restricted stock shares under the Company's 2008 Stock Incentive Plan to certain employees. The shares subject to the restricted stock awards vest over a certain period, usually four years, following the date of the grant. Specific terms of the restricted stock awards is governed by Restricted Stock Agreements between the Company and the award recipients.
The fair value of restricted stock awards granted is based on the fair market value of the Company'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.
21
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
5. Stock-Based Compensation (Continued)
Stock-based Compensation Under SFAS 123(R)
|
|
|
|
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Successor |
|
Predecessor | Successor |
|
Predecessor | ||||||||||||
|
Three Months Ended
June 30, 2009 |
|
Three Months Ended
June 30, 2008 |
Six Months Ended
June 30, 2009 |
|
Six Months Ended
June 30, 2008 |
||||||||||||
Stock-based compensation: |
||||||||||||||||||
Cost of revenue |
$ | 50 | $ | 42 | $ | 99 | $ | 85 | ||||||||||
Sales and marketing |
50 | 93 | 102 | 176 | ||||||||||||||
Research, development and engineering |
49 | 14 | 93 | 30 | ||||||||||||||
General and administrative |
433 | 236 | 839 | 456 | ||||||||||||||
Intellectual property |
23 | 15 | 46 | 30 | ||||||||||||||
Total stock-based compensation |
$ | 605 | $ | 400 | $ | 1,179 | $ | 777 | ||||||||||
At June 30, 2009, the Company had 10,000 Series A Redeemable Nonvoting Preferred stock, 1.0 million non-vested stock options and 133,400 shares of restricted stock outstanding. As of June 30, 2009, the Company had $7.4 million of total unrecognized compensation cost related to non-vested stock-based awards granted under all equity compensation plans, including preferred stock, stock options and restricted stock. Total unrecognized compensation cost will be adjusted for any future changes in estimated forfeitures. The Company expects to recognize this compensation cost for stock options and restricted stock over a weighted average period of 1.68 years and 2.03 years, respectively, through June 2013.
Stock Option Activity
As of June 30, 2009, under all of the Company's stock-based compensation plans, options to purchase an aggregate of 1.2 million shares were outstanding, and options to purchase an additional 1.1 million shares were authorized for future grants under the plans. The Company issues new shares upon option exercises.
22
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
5. Stock-Based Compensation (Continued)
Options granted, exercised, canceled and expired under the Company's stock option plans are summarized as follows:
Three-months ended June 30, 2009:
|
Options |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life |
||||||
---|---|---|---|---|---|---|---|---|---|
Outstanding at March 31, 2009 |
1,194,000 | $ | 9.64 | ||||||
Options granted |
30,000 | $ | 9.91 | ||||||
Options exercised |
| | |||||||
Options canceled or expired |
| | |||||||
Outstanding at June 30, 2009 |
1,224,000 | $ | 9.65 | 9.59 years | |||||
Exercisable at June 30, 2009 |
188,161 | $ | 9.64 | 9.59 years | |||||
Six-months ended June 30, 2009:
|
Options |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2008 |
1,194,000 | $ | 9.64 | ||||||||
Options granted |
30,000 | $ | 9.91 | ||||||||
Options exercised |
| | |||||||||
Options canceled or expired |
| | |||||||||
Outstanding at June 30, 2009 |
1,224,000 | $ | 9.65 | 9.59 years | |||||||
Exercisable at June 30, 2009 |
188,161 | $ | 9.64 | 9.59 years | |||||||
The following table summarizes information about stock options outstanding at June 30, 2009:
|
Options Outstanding | Options Exercisable | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices
|
Number
Outstanding |
Remaining
Contractual Life (Years) |
Weighted
Average Price |
Number
Exercisable |
Weighted
Average Price |
|||||||||||
$9.64 |
1,194,000 | 9.58 | $ | 9.64 | 185,661 | $ | 9.64 | |||||||||
$9.91 |
30,000 | 9.84 | $ | 9.91 | 2,500 | $ | 9.91 | |||||||||
$9.64 - $9.91 |
1,224,000 | 9.59 | $ | 9.65 | 188,161 | $ | 9.64 | |||||||||
At June 30, 2009, the aggregate intrinsic value of outstanding and exercisable stock options was $3,578 and $551, respectively. The aggregate intrinsic value is based on our closing price of $12.57 per share on June 30, 2009, which would have been received by the optionees had all of the options with exercise prices less than $12.57 per share been exercised on that date.
23
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
5. Stock-Based Compensation (Continued)
Restricted Stock Activity
The following table details the number of shares granted each period as restricted stock:
Date
|
Number of
Restricted Shares |
|||
---|---|---|---|---|
Period August 2, 2008 through December 31, 2008 |
136,000 | |||
Period January 1, 2009 through March 31, 2009 |
11,000 | |||
Period April 1, 2009 through June 30, 2009 |
1,400 |
The following table reconciles the unvested balance of restricted stock:
Three-months ended June 30, 2009:
|
Number of
Shares |
||||
---|---|---|---|---|---|
Unvested balance, March 31, 2009 |
132,000 | ||||
Granted |
1,400 | ||||
Vested |
| ||||
Canceled |
| ||||
Unvested balance, June 30, 2009 |
133,400 | ||||
Six-months ended June 30, 2009:
|
Number of
Shares |
||||
---|---|---|---|---|---|
Unvested balance, December 31, 2008 |
121,000 | ||||
Granted |
12,400 | ||||
Vested |
| ||||
Canceled |
| ||||
Unvested balance, June 30, 2009 |
133,400 | ||||
6. Trade Accounts Receivable
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest.
|
Successor | Successor | |||||
---|---|---|---|---|---|---|---|
|
June 30, 2009 | December 31, 2008 | |||||
Trade accounts receivable |
$ | 2,709 | $ | 3,839 | |||
Allowance for doubtful accounts |
| | |||||
Trade accounts receivable, net |
$ | 2,709 | $ | 3,839 | |||
Unpaid deferred revenues included in accounts receivable |
$ | 1,127 | $ | 2,155 | |||
24
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
6. Trade Accounts Receivable (Continued)
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. Unpaid deferred revenues from cash-basis revenue recognition customers are not included in accounts receivable nor deferred revenue accounts.
Major customers
Customers who accounted for more than 10% of accounts receivable, net, are as follows:
|
Successor | Successor | |||||
---|---|---|---|---|---|---|---|
|
June 30, 2009 | December 31, 2008 | |||||
Customer A |
51 | % | 58 | % | |||
Customer B |
43 | % | 27 | % |
7. Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital lease obligations are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value of the leased assets at the inception of the lease. Repairs and maintenance are charged to expense when incurred.
The property and equipment related to the Company were separated from Old Digimarc and recorded at net book value (cost less accumulated depreciation) and classified as used property and equipment.
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. Property and equipment held under capital leases are amortized by the straight-line method over the shorter of the lease term or the
25
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
7. Property and Equipment (Continued)
estimated useful life. Amortization of property and equipment under capital lease is included in depreciation expense.
|
Successor | Successor | |||||
---|---|---|---|---|---|---|---|
|
June 30, 2009 | December 31, 2008 | |||||
Office furniture fixture |
$ | 291 | $ | 291 | |||
Equipment |
932 | 793 | |||||
Leasehold improvements |
395 | 320 | |||||
|
1,618 | 1,404 | |||||
Less accumulated depreciation and amortization |
(457 | ) | (192 | ) | |||
|
$ | 1,161 | $ | 1,212 | |||
8. Intangible AssetsPurchase and Capitalized Patent Costs
Costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at award date, which varies depending on the pendency period of the application, generally approximating seventeen years. Capitalized patent costs include internal legal labor, professional legal fees, government filing fees and translation fees related to obtaining the Company's patent portfolio.
Costs associated with the maintenance and annuity fees of patents are accounted for as prepaid assets at the time of payment and amortized over the respective periods, generally from one to four years.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
|
Successor | Successor | |||||
---|---|---|---|---|---|---|---|
|
June 30, 2009 | December 31, 2008 | |||||
Gross intangible assets |
$ | 909 | $ | 462 | |||
Accumulated amortization |
(17 | ) | (6 | ) | |||
Intangible assets, net |
$ | 892 | $ | 456 | |||
9. Income Taxes
Old Digimarc. The provision for income taxes reflects withholding tax expense in various foreign jurisdictions. For all historic periods reported in the financial statements, Old Digimarc maintained valuation allowances against its net deferred tax assets, including net operating loss carry-forwards, because it was not more likely than not that such deferred taxes would be realized. The provision for income taxes included foreign taxes withheld by Old Digimarc's customers and paid to foreign jurisdictions on its behalf. The predecessor financial statements indicate cumulative losses through August 1, 2008.
26
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
9. Income Taxes (Continued)
Furthermore, the amounts of cumulative expenses in the financial statements that were not allowed for federal and state income tax purposes were not sufficient to result in positive taxable income which would have required the Company to record income tax expense. As a result, no Federal or 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 because any expense was offset by the benefit of net operating loss carry-forwards. Digimarc as a separate legal entity will not benefit from any of the carry-forward tax attributes of Old Digimarc, including net operating loss carry-forwards.
Digimarc. The provision for income taxes reflects withholding tax expense in various foreign jurisdictions. These withholding taxes are computed by our customers and paid to foreign jurisdictions on our behalf. There was no provision for current income taxes related to net income because the computation of taxable income resulted in a net operating loss for the period.
10. 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 June 30, 2009, the final disposition of these proceedings will not 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 5.
27
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
11. Quarterly Financial InformationUnaudited
|
Successor | Successor | |||||
---|---|---|---|---|---|---|---|
Quarter ended:
|
March 31 | June 30 | |||||
2009 |
|||||||
Service revenue |
$ | 2,470 | $ | 2,585 | |||
License and subscription revenue |
1,959 | 1,739 | |||||
Total revenue |
4,429 | 4,324 | |||||
Total cost of revenue |
1,485 | 1,528 | |||||
Gross profit |
2,944 | 2,796 | |||||
Gross profit percent, service revenue |
43 | % | 43 | % | |||
Gross profit percent, license and subscription revenue |
97 | % | 97 | % | |||
Gross profit percent, total |
66 | % | 65 | % | |||
Sales and marketing |
745 | 728 | |||||
Research, development and engineering |
1,271 | 1,217 | |||||
General and administrative |
1,688 | 1,496 | |||||
Intellectual property |
277 | 217 | |||||
Transitional services |
(60 | ) | (48 | ) | |||
Operating loss |
(977 | ) | (814 | ) | |||
Net loss |
(809 | ) | (678 | ) | |||
Loss per share: |
|||||||
Net loss per sharebasic & diluted |
$ | (0.11 | ) | $ | (0.09 | ) | |
Weighted average shares outstandingbasic and diluted |
7,158 | 7,158 |
28
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
11. Quarterly Financial InformationUnaudited (Continued)
|
Predecessor | Predecessor | Predecessor |
|
Successor | Successor | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Period
July 1 through August 1 |
|
Period
August 2 through September 30 |
|
||||||||||||
Quarter ended:
|
March 31 | June 30 |
|
December 31 | ||||||||||||||
2008 |
||||||||||||||||||
Service revenue |
$ | 2,548 | $ | 2,987 | $ | 921 | $ | 1,645 | $ | 2,419 | ||||||||
License and subscription revenue |
2,537 | 2,128 | 829 | 1,536 | 2,232 | |||||||||||||
Total revenue |
5,085 | 5,115 | 1,750 | 3,181 | 4,651 | |||||||||||||
Total cost of revenue |
1,408 | 1,704 | 552 | 934 | 1,428 | |||||||||||||
Gross profit |
3,677 | 3,411 | 1,198 | 2,247 | 3,223 | |||||||||||||
Gross profit percent, service revenue |
47 | % | 45 | % | 43 | % | 46 | % | 44 | % | ||||||||
Gross profit percent, license and subscription revenue |
98 | % | 97 | % | 97 | % | 97 | % | 97 | % | ||||||||
Gross profit percent, total |
72 | % | 67 | % | 69 | % | 71 | % | 69 | % | ||||||||
Sales and marketing |
656 | 683 | 589 | 390 | 764 | |||||||||||||
Research, development and engineering |
922 | 910 | 239 | 780 | 992 | |||||||||||||
General and administrative |
980 | 927 | 442 | 932 | 1,945 | |||||||||||||
Intellectual property |
478 | 448 | 176 | 120 | 184 | |||||||||||||
Transitional services |
| | | (196 | ) | (84 | ) | |||||||||||
Operating income (loss) |
641 | 443 | (248 | ) | 221 | (578 | ) | |||||||||||
Net income (loss) |
924 | 664 | (173 | ) | 400 | (324 | ) | |||||||||||
Earnings (loss) per share: |
||||||||||||||||||
Net income (loss) per sharebasic & diluted |
$ | 0.06 | $ | (0.05 | ) | |||||||||||||
Weighted average shares outstandingbasic and diluted |
7,143 | 7,156 | ||||||||||||||||
Pro-forma earnings (loss) per share: |
||||||||||||||||||
Net income (loss) per sharebasic & diluted |
$ | 0.13 | $ | 0.09 | $ | (0.02 | ) | |||||||||||
Weighted average shares outstandingbasic and diluted |
7,143 | 7,143 | 7,143 |
29
Item 2. 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 Digimarc, 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 Quarterly Report on Form 10-Q under the caption "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995."
The following discussion should be read in conjunction with our financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Readers are also urged to carefully review and consider the disclosures made in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and in the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009, and other reports and filings made with the Securities and Exchange Commission ("SEC").
Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to (i) "Digimarc," "we," "our" and "us" refer to Digimarc Corporation and (ii) "Old Digimarc" refers to the former Digimarc Corporation, which merged with and into a wholly owned subsidiary of L-1 Identity Solutions, Inc. ("L-1") on August 13, 2008, and its consolidated subsidiaries (other than us).
The Separation of the Digital Watermarking Business from Old Digimarc
On August 1, 2008, Old Digimarc spun off the common stock of Digimarc, which held all of the assets and liabilities of Old Digimarc's Digital Watermarking Business.
Until August 1, 2008, we were a wholly owned subsidiary of DMRC LLC, which immediately prior to the spin-off was a wholly owned subsidiary of Old 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 spin-off, in a transaction which we refer to as the restructuring, Old Digimarc contributed all of the assets and liabilities related to its Digital Watermarking Business, together with all of Old Digimarc's cash, including cash received upon the exercise of stock options, to DMRC LLC. The restructuring did not result in the loss of any significant Digital Watermarking Business customers or contracts.
Following the restructuring, all of the limited liability company interests of DMRC LLC were transferred to a newly created trust for the benefit of Old Digimarc record holders on the basis of one limited liability company interest of DMRC LLC for every three and one-half shares of Old Digimarc common stock held by the stockholder as of the spin-off record date and time. DMRC LLC then merged with and into DMRC Corporation, and each limited liability company interest of DMRC LLC was converted into one share of common stock of DMRC Corporation. After completion of the acquisition of Old Digimarc by L-1, DMRC Corporation changed its name to Digimarc Corporation. As a result, upon effectiveness of the Form 10 on October 16, 2008, each Old Digimarc record holder received one share of Digimarc common stock for every three and one-half shares of Old Digimarc common stock held by the stockholder as of the spin-off record date and time, and we became an independent, publicly-traded company owning and operating the Digital Watermarking Business.
Recent DevelopmentsNielsen Joint Venture
On July 1, 2009, we commenced operation of two joint ventures with The Nielsen Company (US) LLC, or Nielsen. In connection with these joint ventures, we terminated our agreement with Nielsen, dated as of October 1, 2007, to enter into the joint venture agreements, and entered into a new patent license agreement. Under the terms of the new patent license agreement, we granted Nielsen a non-exclusive license to Digimarc patents for use within Nielsen's business and Nielsen
30
agreed to pay us $18.75 million as follows: $2.0 million for the remainder of 2009; $3.6 million in 2010; $4.0 million in each of 2011, 2012 and 2103; and $1.15 million in 2014.
Under the first joint venture, TVaura LLC, Digimarc and Nielsen will engage in the development of copyright filtering solutions, royalty/audit solutions for online video and audio rights organizations, guilds or other organizations involved in reconciliation of royalties, residuals and other payments, and other related products. Under the second joint venture, TVaura Mobile LLC, Digimarc and Nielsen will engage in the development of certain enhanced television offerings, and other related products. We will provide technical and development services to TVaura LLC's business for the following periods for the following minimum service fees: $1.13 million for the remainder of 2009; $2.80 million in 2010; and $2.74 million in 2011, subject to adjustment for any development service fees paid to Digimarc by TVaura Mobile LLC.
The initial cash contribution of each of Digimarc and Nielsen to TVaura LLC will be an aggregate of $3.9 million payable in quarterly installments from July 2009 through October 2011. The initial cash contribution of each of Digimarc and Nielsen to TVaura Mobile LLC will be an aggregate of $2.8 million payable in quarterly installments from July 2009 through October 2011. Each of Digimarc and Nielsen own approximately half of each joint venture.
Overview
Digimarc Corporation enables 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 generally 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 other traditional uses of it. Our technology permits computers and digital devices to quickly identify relevant data from vast amounts of media content.
Our technology, and those of our licensees, span the complete range of media content, enabling our customers and those of our partners 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
31
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.
We provide technology-based solutions directly and through our licensees. Our proprietary technology has 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 the Central Banks, and many leading companies in the information technology industry. 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 improve 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 entertainment and commercial experiences.
To protect our significant efforts in creating our technology, 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. 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 525 U.S. and foreign patents and more than 410 U.S. and foreign patent applications on file as of June 30, 2009.
Backlog. Based on projected commitments we have for the periods under contract with our respective customers, we anticipate our current contracts as of June 30, 2009 will generate approximately $50 million in revenue during the contractual terms of such contracts, currently up to five years. We expect more than $10 million of this amount to be recognized as revenue during the remainder of 2009.
Some factors that lead to increased backlog include:
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, awards and contracts included in our backlog may be subject to modification, cancellation or suspension. We may not realize revenue on certain contracts, orders or awards included in our backlog or the timing of such realization may change.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. ("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,
32
fixed assets, intangible assets, income taxes, long-term service contracts, 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, impairments and estimation of useful lives of long-lived assets, 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:
Basis of Accounting; Predecessor Financial Statements The predecessor financial statements include certain accounts of Old Digimarc and the assets, liabilities and results of operations of Old Digimarc's Digital Watermarking Business that were separated, or "carved-out," from Old Digimarc. The operating expenses included in the predecessor financial statements include proportional allocations of various shared services common costs of Old Digimarc because specific identification of the expenses was not practicable. The common costs include expenses from Old Digimarc related to various operating shared services cost centers, including: executive, finance and accounting, human resources, legal, marketing, intellectual property, facilities and information technology. Management believes that the assumptions underlying the predecessor financial statements are reasonable. The cost allocation methods applied to certain shared services common cost centers include the following:
Other key assumptions differing from the historical accounting of Old Digimarc:
33
statements as non-restricted cash included in cash and cash equivalents in the predecessor financial statements. The letters of credit that required the restricted cash remained with Old Digimarc following its acquisition by L-1.
34
stock purchases under a stock purchase plan and restricted stock awards based on estimated fair values. Stock compensation expense was allocated to Digimarc based on a combination of specific and shared services resource allocations from Old Digimarc.
The financial information in the predecessor financial statements does not include all of the expenses that would have been incurred had the predecessor been a separate, stand-alone public entity. As such, the predecessor financial information does not reflect the financial position, results of operations and cash flows of Digimarc's current business had the predecessor operated as a separate, stand-alone public entity during the periods presented in the predecessor financial statements. Additionally, the predecessor financial statements include proportional allocations of various shared services common costs of Old Digimarc because specific identification of these expenses was not practicable. It is expected that the initial operating costs of Digimarc on a stand-alone basis will be higher than those allocated to the predecessor operations under the shared services methodology applied in the predecessor financial statements. Consequently, the financial position, results of operations and cash flows reflected in the predecessor financial statements may not be indicative of those that would have been achieved had the predecessor operated as a separate, stand-alone entity for the periods reflected in the predecessor financial statements.
Revenue recognition: Some customer arrangements encompass multiple deliverables, such as software, hardware sales, consumables sales, maintenance fees, and software development fees. We account for these arrangements in accordance with Emerging Issues Task Force ("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:
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 we have 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:
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 VSOE, 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
35
and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements.
Licensing and subscription revenues are paid in advance and recognized ratably over the term of the license or subscription period.
Impairments and estimation of useful lives of long-lived assets: We periodically assess long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the asset. Also, we periodically review the useful lives of long-lived assets whenever events or changes in circumstances indicate that the useful life may have changed. If the estimated useful lives of such assets do change, we adjust the depreciation or amortization period to a shorter or longer period, based on the circumstances identified.
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 5 are not met, but the probability of an adverse outcome is at least reasonably possible, we will disclose the nature of the contingency
36
and provide an estimate of the possible loss or range of loss, or state that such an estimate cannot be made.
Patent Costs: Costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at award date, which varies depending on the pendency period of the application, generally approximating seventeen years. Capitalized patent costs include internal legal labor, professional legal fees, government filing fees and translation fees related to obtaining the Company's patent portfolio. These costs were expensed in the predecessor financial statements.
Costs associated with the maintenance and annuity fees of patents are accounted for as prepaid assets at the time of payment and amortized over the respective periods, generally from one to four years. These costs were expensed in the predecessor financial statements.
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 and employee stock purchases under a stock purchase plan based on estimated fair values. We use the Black-Scholes option pricing model as our method of valuation for stock- based awards. Our determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited, to the expected life of the award, our expected stock price, volatility over the term of the award and actual and projected exercise behaviors. Although the fair value of stock-based awards is determined in accordance with SFAS 123(R), the Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results. The fair value of restricted stock awards granted is based on the fair market value of our common stock on the date of the grant (measurement date), and is being recognized over the vesting period of the related restricted stock using the straight-line method.
37
Results of Operations
The following table presents our statements of operations data for the periods indicated as a percentage of total revenue. Unless otherwise indicated, all references to the three- and six-month periods relate to the three- and six-month periods ended June 30, 2009 and all changes discussed with respect to the period reflect changes compared to the three- and six-month periods ended June 30, 2008.
|
Successor |
|
Predecessor | Successor |
|
Predecessor | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three
Months Ended June 30, 2009 |
|
Three
Months Ended June 30, 2008 |
Six
Months Ended June 30, 2009 |
|
Six
Months Ended June 30, 2008 |
|||||||||||||
Revenue: |
|||||||||||||||||||
Service |
60 | % | 58 | % | 58 | % | 54 | % | |||||||||||
License and subscription |
40 | 42 | 42 | 46 | |||||||||||||||
Total revenue |
100 | 100 | 100 | 100 | |||||||||||||||
Cost of revenue: |
|||||||||||||||||||
Service |
34 | 32 | 33 | 29 | |||||||||||||||
License and subscription |
1 | 1 | 1 | 1 | |||||||||||||||
Total cost of revenue |
35 | 33 | 34 | 30 | |||||||||||||||
Gross profit |
65 | 67 | 66 | 70 | |||||||||||||||
Operating expenses: |
|||||||||||||||||||
Sales and marketing |
17 | 13 | 17 | 13 | |||||||||||||||
Research, development and engineering |
28 | 18 | 28 | 18 | |||||||||||||||
General and administrative |
35 | 18 | 36 | 19 | |||||||||||||||
Intellectual property |
5 | 9 | 6 | 9 | |||||||||||||||
Transitional services |
(1 | ) | | (1 | ) | | |||||||||||||
Total operating expenses |
84 | 58 | 86 | 59 | |||||||||||||||
Operating income (loss) |
(19 | ) | 9 | (20 | ) | 11 | |||||||||||||
Other income (expense), net |
3 | 4 | 3 | 5 | |||||||||||||||
Income (loss) before provision for income taxes |
(16 | ) | 13 | (17 | ) | 16 | |||||||||||||
Provision for income taxes |
| | | | |||||||||||||||
Net income (loss) |
(16 | )% | 13 | % | (17 | )% | 16 | % | |||||||||||
Our revenue for the three- and six-month periods ended June 30, 2009 decreased 15% to $4.3 million from $5.1 million and 14% to $8.8 million from $10.2 million, respectively, for the prior year periods. The decreases were primarily the result of lower license and royalty revenues from a few of our customers based on a combination of contractual revenue, lower royalty reporting from our licensees whose revenues were slightly lower and receipt of cash from our cash basis customers whose revenues are non-linear in nature, offset in part by increased project work from the consortium of central banks. In addition, as further discussed below, we incurred higher operating expenses for the period during which we operated as a stand-alone company.
38
Revenue
|
Successor |
|
Predecessor |
|
|
Successor |
|
Predecessor |
|
|
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three
Months Ended June 30, 2009 |
|
Three
Months Ended June 30, 2008 |
Dollar
Decrease |
Percent
Decrease |
Six
Months Ended June 30, 2009 |
|
Six
Months Ended June 30, 2008 |
Dollar
Decrease |
Percent
Decrease |
|||||||||||||||||||||
|
|
|
|
|
(in thousands)
|
|
|
|
|
||||||||||||||||||||||
Revenue: |
|||||||||||||||||||||||||||||||
Service |
$ | 2,585 | $ | 2,987 | $ | (402 | ) | (13 | )% | $ | 5,055 | $ | 5,535 | $ | (480 | ) | (9 | )% | |||||||||||||
License and subscription |
1,739 | 2,128 | (389 | ) | (18 | )% | 3,698 | 4,665 | (967 | ) | (21 | )% | |||||||||||||||||||
Total |
$ | 4,324 | $ | 5,115 | $ | (791 | ) | (15 | )% | $ | 8,753 | $ | 10,200 | $ | (1,447 | ) | (14 | )% | |||||||||||||
Revenue (as % of total revenue): |
|||||||||||||||||||||||||||||||
Service |
60 | % | 58 | % | 58 | % | 54 | % | |||||||||||||||||||||||
License and subscription |
40 | % | 42 | % | 42 | % | 46 | % | |||||||||||||||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||||||||||
Service. Service revenue consists primarily of software development and consulting services. The majority of service revenue arrangements are 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, Nielsen, and other government agencies. The agreements can range from several months to several years in length, and our longer term contracts are subject to work plans that are reviewed and agreed upon at least annually. These contracts generally provide for billing hours worked at predetermined rates and, to a lesser extent, for cost reimbursement for third party costs and services. The increases or decreases in the services are generally subject to both volume and price changes. The volume of work is generally negotiated at least annually and can be modified as the needs of the customers arise. We also have provisions in our longer term contracts that allow for specific hourly rate price increases on an annual basis to account for cost of living variables. Contracts with other government agencies are generally shorter term in nature, are less linear in billings and less predictable than our longer terms contracts since they are subject to government budgets and funding.
The decrease in service revenue for the three- and six-month periods ended June 30, 2009, compared to the corresponding three- and six-month periods ended June 30, 2008, were due primarily to lower consulting revenues from Nielsen where we were engaged at an accelerated level of services in the initial year of the contract, and government contract revenues that are non-linear in nature, offset in part by increased revenue from additional program work from the Central Banks.
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 decrease in license and subscription revenue for the three- and six-month periods ended June 30, 2009, compared to the corresponding three- and six-month periods ended June 30, 2008, were due primarily to lower license revenue from Nielsen in accordance with contractual terms, and lower royalty reporting and receipt of cash from our cash basis customers.
39
Revenue by Geography
|
Successor |
|
Predecessor |
|
|
Successor |
|
Predecessor |
|
|
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three
Months Ended June 30, 2009 |
|
Three
Months Ended June 30, 2008 |
Dollar
Increase (Decrease) |
Percent
Increase (Decrease) |
Six
Months Ended June 30, 2009 |
|
Six
Months Ended June 30, 2008 |
Dollar
Increase (Decrease) |
Percent
Increase (Decrease) |
|||||||||||||||||||||
|
|
|
|
|
(in thousands)
|
|
|
|
|
||||||||||||||||||||||
Revenue by geography: |
|||||||||||||||||||||||||||||||
Domestic |
$ | 1,777 | $ | 2,656 | $ | (879 | ) | (33 | )% | $ | 3,553 | $ | 5,314 | $ | (1,761 | ) | (33 | )% | |||||||||||||
International |
2,547 | 2,459 | 88 | 4 | % | 5,200 | 4,886 | 314 | 6 | % | |||||||||||||||||||||
Total |
$ | 4,324 | $ | 5,115 | $ | (791 | ) | (15 | )% | $ | 8,753 | $ | 10,200 | $ | (1,447 | ) | (14 | )% | |||||||||||||
Revenue (as % of total revenue): |
|||||||||||||||||||||||||||||||
Domestic |
41 | % | 52 | % | 41 | % | 52 | % | |||||||||||||||||||||||
International |
59 | % | 48 | % | 59 | % | 48 | % | |||||||||||||||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||||||||||
Domestic revenue decreased for the three- and six-month periods ended June 30, 2009, compared to the corresponding three- and six-month periods ended June 30, 2008, due primarily to lower revenues from Nielsen, and to a lesser extent lower revenues from our government contracts and our royalty reporting licensees.
International revenue slightly increased for the three- and six-month periods ended June 30, 2009, compared to the corresponding three- and six-month periods ended June 30, 2008, due primarily to increased revenue from the Central Banks, offset by lower revenues from our royalty reporting licensees.
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, and, to a lesser extent, direct costs of program delivery for both personnel and operating expenses. Allocated costs include:
License and subscription. Cost of license and subscription revenue primarily includes:
40
Gross Profit
|
Successor |
|
Predecessor |
|
|
Successor |
|
Predecessor |
|
|
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three
Months Ended June 30, 2009 |
|
Three
Months Ended June 30, 2008 |
Dollar
Decrease |
Percent
Decrease |
Six
Months Ended June 30, 2009 |
|
Six
Months Ended June 30, 2008 |
Dollar
Decrease |
Percent
Decrease |
|||||||||||||||||||||
|
|
|
|
|
(in thousands)
|
|
|
|
|
||||||||||||||||||||||
Gross Profit: |
|||||||||||||||||||||||||||||||
Service |
$ | 1,105 | $ | 1,344 | $ | (239 | ) | (18 | )% | $ | 2,158 | $ | 2,543 | $ | (385 | ) | (15 | )% | |||||||||||||
License and subscription |
1,691 | 2,067 | (376 | ) | (18 | )% | 3,582 | 4,545 | (963 | ) | (21 | )% | |||||||||||||||||||
Total |
$ | 2,796 | $ | 3,411 | $ | (615 | ) | (18 | )% | $ | 5,740 | $ | 7,088 | $ | (1,348 | ) | (19 | )% | |||||||||||||
Gross Profit (as % of related revenue components): |
|||||||||||||||||||||||||||||||
Service |
43 | % | 45 | % | 43 | % | 46 | % | |||||||||||||||||||||||
License and subscription |
97 | % | 97 | % | 97 | % | 97 | % | |||||||||||||||||||||||
Total |
65 | % | 67 | % | 66 | % | 70 | % |
The decrease in gross profit dollars primarily reflect the impact of variations in scheduled payments in certain of our long-term contracts; a continued deferral of work on previously announced appropriations for federal defense projects; and to a lesser extent, lower royalties from some patent and technology licenses. The decrease in gross profit as a percentage of revenue for the three- and six-month periods ended June 30, 2009, compared to the corresponding three- and six-month periods ended June 30, 2008, were due primarily to:
Operating Expenses
The financial information in the predecessor financial statements does not include all of the expenses that would have been incurred had the predecessor operated as a separate, stand-alone public entity. As such, the predecessor financial information does not reflect the operating expenses of Digimarc's current business had the predecessor been a separate, stand-alone public entity during the periods presented in the predecessor's financial statements. Additionally, the predecessor financial statements include proportional allocations of various shared services common costs of Old Digimarc because specific identification of these expenses was not practicable. It is expected that the initial operating costs of Digimarc on a stand-alone basis will be higher than those allocated to the predecessor operations under the shared services methodology applied in the predecessor financial statements. Consequently, the operating expenses reflected in the predecessor financial statements may not be indicative of those that would have been achieved had the predecessor operated as a separate, stand-alone entity for the periods reflected in the predecessor financial statements. The operating expenses for the three- and six-month periods ended June 30, 2009 are in-line with our expectations as a stand-alone entity.
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Sales and marketing
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Sales and marketing |
$ | 728 | $ | 683 | $ | 45 | 7 | % | $ | 1,473 | $ | 1,339 | $ | 134 | 10 | % | |||||||||||||
Sales and marketing (as % of total revenue) |
17 | % | 13 | % | 17 | % | 13 | % |
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 to cost of service revenue:
We record all remaining, or "residual," costs as sales and marketing costs.
The increases in sales and marketing expense for the three- and six-month periods ended June 30, 2009, compared to the corresponding three- and six-month periods ended June 30, 2008, resulted primarily from higher expenses for the period during which we operated as a stand-alone company compared to the shared services allocation methodology applied in the predecessor financial statements.
We anticipate that we will continue to incur sales and marketing costs at higher levels to support ongoing sales initiatives.
Research, development and engineering
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Dollar
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Research, development and engineering |
$ | 1,217 | $ | 910 | $ | 307 | 34 | % | $ | 2,488 | $ | 1,832 | $ | 656 | 36 | % | |||||||||||||
Research, development and engineering (as % of total revenue) |
28 | % | 18 | % | 28 | % | 18 | % |
42
Research, development and engineering expenses arise primarily from three areas that support our business model:
Research, development and engineering expenses consist primarily of:
43
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 to cost of service revenue:
We record all remaining, or "residual," costs as research, development and engineering costs.
The increases in research, development and engineering expense for the three- and six-month periods ended June 30, 2009, compared to the corresponding three- and six-month periods ended June 30, 2008, resulted primarily from:
We anticipate that we will continue to invest in research, development and engineering expenses at existing or higher levels in the near term to support certain ongoing product initiatives and service contracts, and expect to moderate spending in the longer term.
General and administrative
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General and administrative |
$ | 1,496 | $ | 927 | $ | 569 | 61 | % | $ | 3,184 | $ | 1,907 | $ | 1,277 | 67 | % | |||||||||||||
General and administrative (as % of total revenue) |
35 | % | 18 | % | 36 | % | 19 | % |
We incur general and administrative costs in the functional areas of finance, legal, human resources, executive and board of directors. Costs for facilities and information technology are also managed as part of the general and administrative processes and are allocated to this area as well as each of the areas in costs of services, sales and marketing, and research development and engineering. General and administrative expenses consist primarily of:
The increases in general and administrative expenses for the three- and six-month periods ended June 30, 2009, compared to the corresponding three- and six-month periods ended June 30, 2008,
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resulted primarily from higher expenses for the period during which we operated as a stand-alone company compared to the shared services allocation methodology applied in the predecessor financial statements.
We anticipate that we will continue to incur general and administrative expenses at least at existing levels, while continuing to examine means to reduce general and administrative expenses as a percentage of revenue in the longer term.
Intellectual property
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Intellectual property |
$ | 217 | $ | 448 | $ | (231 | ) | (52 | )% | $ | 494 | $ | 926 | $ | (432 | ) | (47 | )% | |||||||||||
Intellectual property (as % of total revenue) |
5 | % | 9 | % | 6 | % | 9 | % |
We incur intellectual property expenses that arise primarily from costs associated with documenting, applying for, and maintaining domestic and international patents and trademarks:
Gross expenditures for intellectual property costs, before reflecting the effect of capitalized patent costs, primarily consist of:
Prior to August 2, 2008, the predecessor accounted for gross expenditures for intellectual property costs as expenses. On August 2, 2008 we began capitalizing patent application and award costs.
The decreases in intellectual property expenses for the three- and six-month periods ended June 30, 2009, compared to the corresponding three- and six-month periods ended June 30, 2008, resulted primarily from capitalized patent application and award costs aggregating $0.3 million and $0.5 million, respectively.
We anticipate that we will continue to invest in intellectual property expenses at current levels or higher.
Transitional services
In connection with the sale of Old Digimarc's Secure ID Business and the spin-off of the Digital Watermarking Business, Old Digimarc and Digimarc entered into a transition services agreement to provide one another with transition services and other assistance substantially consistent with the services provided before the spin-off.
To enable Old Digimarc to continue its operation of the Secure ID Business and facilitate the effective transition of the Digital Watermarking Business to Digimarc, under the transition services
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agreement Old Digimarc provides the following services or support to Digimarc: information technology services and legal services. Similarly, Digimarc provides the following services or support to Old Digimarc: accounting and tax services, information technology services, legal services, human resource services and facilities.
The fees for the transition services generally are intended to cover each party's reasonable costs incurred in connection with providing the transition services. Hourly rates for personnel performing transition services were determined based on fully loaded costs, taking into account base pay, a bonus based on obtaining target earnings, payroll taxes, benefit costs, a pro rata portion of overhead charges paid by Old Digimarc or Digimarc, as applicable, and the current year stock compensation charge for the individual, divided by the total hours available for the employee for the year, taking into account the need for administrative time.
The net transitional services expenses reimbursed to Digimarc aggregated $0.1 million for the three- and six-month periods ended June 30, 2009 and are expected to decline through the end of the year 2009 as the amount of transition services decline.
Stock-based compensation.
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Dollar
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Percent
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Six
Months Ended June 30, 2009 |
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Months Ended June 30, 2008 |
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Cost of revenue |
$ | 50 | $ | 42 | $ | 8 | 19 | % | $ | 99 | $ | 85 | $ | 14 | 16 | % | ||||||||||||||
Sales and marketing |
50 | 93 | (43 | ) | (46 | )% | 102 | 176 | (74 | ) | (42 | )% | ||||||||||||||||||
Research, development and engineering |
49 | 14 | 35 | 250 | % | 93 | 30 | 63 | 210 | % | ||||||||||||||||||||
General and administrative |
433 | 236 | 197 | 83 | % | 839 | 456 | 383 | 84 | % | ||||||||||||||||||||
Intellectual property |
23 | 15 | 8 | 53 | % | 46 | 30 | 16 | 53 | % | ||||||||||||||||||||
Total |
$ | 605 | $ | 400 | $ | 205 | 51 | % | $ | 1,179 | $ | 777 | $ | 402 | 52 | % | ||||||||||||||
Old Digimarc accounted for stock-based compensation in accordance with SFAS 123(R), 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 was allocated to the predecessor based on a combination of specific and shared services resource allocations from Old Digimarc.
The increases in stock-based compensation expense for the three- and six-month periods ended June 30, 2009, compared to the corresponding three-and six-month periods ended June 30, 2008, resulted primarily from Digimarc applying SFAS 123R with respect to our initial stock-based awards compared to the shared services allocation methodology applied in the predecessor financial statements.
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Other income, net
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Other income, net |
$ | 140 | $ | 221 | $ | (81 | ) | (37 | )% | $ | 313 | $ | 515 | $ | (202 | ) | (39 | )% |
Other income, net consists primarily of interest income from our cash and short- and long-term marketable securities.
The decreases in other income, net for the three- and six-month periods ended June 30, 2009, compared to the corresponding three- and six-month periods ended June 30, 2008, resulted primarily from lower interest earned on cash and investment balances, reflecting lower interest rates paid on these balances.
Provision for Income Taxes.
Old Digimarc. The provision for income taxes reflects expected tax expense from profitability in certain foreign jurisdictions. The predecessor recorded a full valuation allowance against net deferred tax assets at August 1, 2008 due to the uncertainty of realization of net operating losses. As a separate legal entity, we will not benefit from any of the carry-forward tax attributes of Old Digimarc, including net operating loss carry-forwards.
Digimarc. There was no provision for income taxes of Digimarc, other than foreign withholding taxes, for the three- and six-month period ended June 30, 2009 since the estimated effective tax rate for the period ending December 31, 2009 is expected to be zero.
Liquidity and Capital Resources
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June 30, 2009 | December 31, 2008 | |||||
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(in thousands)
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Working capital |
$ | 43,770 | $ | 41,099 | |||
Current (liquidity) ratio (1) |
14.4:1 | 11.9:1 | |||||
Cash, cash equivalents and short-term marketable securities |
$ | 43,401 | $ | 40,168 | |||
Long-term marketable securities |
$ | 2,087 | $ | 5,744 | |||
Total cash, cash equivalents and all marketable securities |
$ | 45,488 | $ | 45,912 |
The $2.7 million increase in working capital resulted primarily from the maturity of some of our long-term investments, offset by investments in our business for both capital and intellectual property initiatives.
Operating Cash Flow. The components of operating cash flows were:
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Ended June 30, 2009 |
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Ended June 30, 2008 |
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Net income (loss) |
$ | (1,487 | ) | $ | 1,588 | $ | (3,075 | ) | (194 | )% | |||||
Non-cash items |
1,455 | 1,223 | 232 | 19 | % | ||||||||||
Changes in operating assets and liabilities |
277 | 67 | 210 | 313 | % | ||||||||||
Net cash provided by (used in) operating activities |
$ | 245 | $ | 2,878 | $ | (2,633 | ) | (91 | )% | ||||||
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Net income (loss). The decrease in operating results primarily reflects lower revenues and higher expenses for the period during which we operated as a stand-alone company compared to the benefits received from the shared services cost allocation methodology in the predecessor financial statements.
Non-cash charges. The increase in non-cash charges was primarily the result of the shared services allocation methodology applied in the predecessor financial statements to both depreciation of property and equipment and stock compensation.
Operating assets and liabilities.
The primary changes in the operating assets and liabilities for the six-month period ended June 30, 2009 relate to:
The primary changes in the operating assets and liabilities for the six-month period ended June 30, 2008 relate to:
Cash flows from investing activities. The primary changes in our investing activities for the six-month periods ended June 30, 2009 and 2008 relate to:
Cash flows from financing activities. While there were no major financing activities for the six-month period ended June 30, 2009, the major changes for the six-month period ended June 30, 2008 were the result of cash transactions associated with Old Digimarc in accordance with the basis of accounting used in our financial statements. Specifically,
Future Cash Expectations.
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. Thereafter, we anticipate continuing to use cash, cash equivalents and 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
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obtain additional equity financing, debt financing, or credit facilities. We do not believe at this time, 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.
Contractual Obligations
Pursuant to the terms of the joint venture agreements with Nielsen, the Company will be contributing $6.7 million to the joint ventures paid in quarterly installments of $0.7 million from July 2009 through October 2011.
Our significant commitments consist of obligations under non-cancelable operating leases for our facilities, rent and various equipment leases, which totaled $1.9 million as of June 30, 2009 and are payable in monthly installments through February 2013. Other than as described above, as of June 30, 2009, there have been no material changes in the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.
Adjusted EBITDA
We define Adjusted EBITDA as net earnings before interest expense, income taxes, depreciation, amortization and non-cash expenditures for stock compensation. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles. Management uses Adjusted EBITDA in internal analyses as a supplemental measure of our financial performance to assist it in determining performance comparisons against its peer group of companies, as well as capital spending and other investing decisions. Adjusted EBITDA is also a common alternative measure of performance used by investors, financial analysts, and rating agencies to evaluate financial performance. Adjusted EBITDA should not be considered in isolation or as a substitute for net earnings, operating income, cash flows provided by operating activities or other income or cash flow data prepared in accordance with U.S. GAAP and this non-GAAP measure may not be comparable to similarly titled measures of other companies.
The following table presents a reconciliation of Adjusted EBITDA to net earnings:
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Three
Months Ended June 30, 2008 |
Dollar
Increase (Decrease) |
Percent
Increase (Decrease) |
Six
Months Ended June 30, 2009 |
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Three
Months Ended June 30, 2008 |
Dollar
Increase (Decrease) |
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Increase (Decrease) |
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Net income (loss) |
$ | (678 | ) | $ | 664 | $ | (1,342 | ) | (202 | )% | $ | (1,487 | ) | $ | 1,588 | $ | (3,075 | ) | (194 | )% | ||||||||||
Adjustments: |
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Provision for income taxes |
4 | | 4 | 100 | % | 9 | 11 | (2 | ) | (18 | )% | |||||||||||||||||||
Interest income, net |
(137 | ) | (221 | ) | 84 | (38 | )% | (312 | ) | (515 | ) | 203 | 39 | % | ||||||||||||||||
Depreciation and amortization |
141 | 170 | (29 | ) | (17 | )% | 276 | 446 | (170 | ) | (38 | )% | ||||||||||||||||||
Stock compensation |
605 | 400 | 205 | 51 | % | 1,179 | 777 | 402 | 52 | % | ||||||||||||||||||||
Adjusted EBITDA |
$ | (65 | ) | $ | 1,013 | $ | (1,078 | ) | (106 | )% | $ | (335 | ) | $ | 2,307 | $ | (2,642 | ) | (115 | )% | ||||||||||
The decrease in Adjusted EBITDA for the three- and six-month periods ended June 30, 2009, compared to the corresponding three- and six-month periods ended June 30, 2008, were due primarily to lower revenues and higher operational costs incurred by Digimarc compared to the benefits received from the shared services cost allocation methodology in the predecessor financial statements.
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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 are material to our business.
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 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 157 is effective the first fiscal year beginning after November 15, 2007. We 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 2008, the FASB issued FASB Staff Position (FSP) 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" and FSP 157-2, "Effective Date of FASB Statement No. 157". FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope, and was effective upon initial adoption of SFAS 157. FSP 157-2 delayed the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2009. We applied the provisions of FSP 157-2 on non-financial assets and non-financial liabilities and noted no significant impact on our financial statements.
In October 2008, the FASB issued FSP 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active". FSP 157-3 clarifies the application of SFAS 157 in a market that is not active, and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3 is effective for all periods presented in accordance with SFAS 157. The adoption of FSP 157-3 did not have a significant impact on our financial statements or the fair values of our financial assets and liabilities.
In April 2009, the FASB issued FSP 157-4: "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly". FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and identifying circumstances that indicate a transaction is not orderly. The adoption of FSP 157-4 did not have a significant impact on our financial statements or the fair values of our assets or liabilities.
In April 2009, the FASB issued FSP No. 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments". FSP 115-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. However, it does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The adoption of FSP 115-2 did not have a significant impact on our financial statements or the fair values of our assets or liabilities.
In April 2009, the FASB issued FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments". FSP 107-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, "Disclosures about Fair Value of Financial
50
Instruments," to interim periods for publicly traded entities. The adoption of FSP 107-1 did not have a significant impact on our financial statement disclosures.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events . SFAS 165 establishes general standards of accounting for and disclosure of events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 sets forth the period after the balance sheet date during which we should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which we should recognize events or transactions occurring after the balance sheet date in our financial statements and the disclosures that we should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim and annual fiscal periods ending after June 15, 2009. The adoption of SFAS 165 did not have a significant impact on our financial statement disclosures. In preparing our financial statements, we evaluated subsequent events through July 31, 2009, which is the date our quarterly report was filed with the Securities and Exchange Commission.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), is a revision to FASB Interpretation ("FIN") No. 46 (Revised December 2003) ("FIN 46(R)), Consolidation of Variable Interest Entities , which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity's purpose and design and the reporting entity's ability to direct the activities of the other entity that most significantly impact the other entity's economic performance. SFAS 167 is effective the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. We do not expect the adoption of this pronouncement will have a material impact on our financial statements.
In June 2009, the FASB issued SFAS No. 168, The " FASB Accounting Standards Codification " and the Hierarchy of Generally Accepted Accounting Principles. SFAS 168 establishes the FASB Accounting Standards Codification (Codification) to become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. SFAS 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect the adoption of this pronouncement will have a material impact on our financial statements.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Words such as "may," "plan," "should," "could," "expect," "anticipate," "intend," "believe," "project," "forecast," "estimate," "continue," variations of such terms or similar expressions are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us, and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements, and investors are cautioned not to place undue reliance on such statements. Forward-looking statements include but are not limited to statements relating to:
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We believe that the factors described in "Item 1A. Risk Factors," among others, could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf. Investors should understand that it is not possible to predict or identify all risk factors and that there may be other factors that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements made by us or by persons acting on our behalf apply only as of the date of this Quarterly Report. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of the filing of this Quarterly on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The market risk disclosures as set forth in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2008 have not changed materially.
Item 4T. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this Form 10-Q, were effective in ensuring that information required to be disclosed by us in reports
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that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Controls
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) that occurred during the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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.
The following risks relate principally to our business and our status as a publicly-traded company. The risks and uncertainties described below are those risks of which we are aware, that we consider to be material to our business. If any of the following risks and uncertainties develops 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. Our business, financial condition, results of operations and cash flows may be affected by a number of factors, including the factors set forth below.
(1) We have limited operating history as a separate public company and our historical financial information prior to the spin-off is not necessarily representative of the results we would have achieved as a separate publicly-traded company, and may not be a reliable indicator of our future results.
The predecessor financial statements have been "carved out" from Old Digimarc's consolidated financial statements and reflect assumptions and allocations made by Old Digimarc. The predecessor financial statements do not fully represent what the predecessor's financial position, results of operations and cash flow would have been had it operated as a stand-alone public company for the periods presented, or those that we expect to achieve in the future because, among other reasons, prior to the spin-off, the digital watermarking business was operated by Old Digimarc as part of a larger corporate organization. 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 Old 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 formerly provided by Old Digimarc, the need for additional personnel to perform services formerly provided by Old 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 information included in this Quarterly Report on Form 10-Q is not necessarily indicative of what our future financial position, results of operations and cash flow will be. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
(2) We have a history of losses, and although we achieved profitability in 2008, we may not sustain profitability, particularly if we were to lose large contracts.
Old Digimarc's Digital Watermarking Business had incurred significant net losses from inception. Old Digimarc's accumulated deficit was $100 million as of December 31, 2007. For the combined periods January 1, 2008 through August 1, 2008 and August 2, 2008 through December 31, 2008 we generated net income of $1,491; however, we generated a net loss for the six-month period ended June 30, 2009. Achieving profitability in the future will depend upon a variety of factors, including our ability to maintain and obtain more significant partnerships like those with the Central Banks and Nielsen, growth in revenues of our licensees, and our efficiency in executing our business strategy and capitalizing on new opportunities. Various adverse developments, including the loss of large contracts or cost overruns on our existing contracts, could have a negative effect on our revenues, margins and profitability.
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(3) The current capital and credit market conditions may adversely affect our access to capital, cost of capital and business operations.
Recently, the general economic and capital market conditions in the U.S. and other parts of the world have deteriorated significantly and have adversely affected access to capital and increased the cost of capital. If these conditions continue or become worse, our future cost of debt and equity capital and our access to capital markets could be adversely affected. Any inability to obtain adequate financing from debt or equity capital sources could force us to self-fund strategic initiatives or even forgo some opportunities, potentially harming our business operations and results.
In addition, our ability to find investments that are both safe and liquid and that provide a reasonable return may be impaired. This could result in lower interest income, longer investment tenures or higher other-than-temporary impairments.
(4) The current economic downturn may impair the financial soundness of our licensees and customers, which could adversely affect our business operations.
As a result of the current economic downturn and macro-economic challenges currently affecting the economy of the U.S. and other parts of the world, our customers and licensees may be negatively affected in ways that reduce our revenues and margins, quality of receivables, and cash flow.
(5) A small number of customers account for a substantial portion of our revenues and the loss of any large contract could materially disrupt our business.
Historically, we have derived a significant portion of our revenues from a limited number of customers. Two customers, the Bank for International Settlements, acting on behalf of the Central Banks, and Nielsen, represented approximately 85 and 82% for the three- and six-month period ended June 30, 2009, respectively, and 77% of our revenue for the twelve-month period ended December 31, 2008. Most of our revenues come from long-term contracts generally having terms of three to five years, with some licenses for the life of the associated patents, which could be up to 20 years. Some contracts we enter into contain termination for convenience provisions. If we were to lose such a contract for any reason, 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.
(6) The joint ventures agreements we entered into with Nielsen may not produce marketable products that will provide a return on investment on the initial cash contributions.
We entered into two joint venture agreements with Nielsen to deliver products and services to enhance television viewing, facilitate mobile commerce, and create valuable other new opportunities for television networks and consumer brands to more deeply engage with audiences. These products and services are new and untested, and they may not have a ready market. We are nonetheless committed to provide financial support to both joint ventures through October 2011.
We cannot predict how the market will react to our product offerings or any potential revenue that may or may not be realized. Our initial investment in these two joint ventures may result in neither product offerings nor a return on investment.
(7) Our joint venture transactions with Nielsen may not realize all of their intended benefits.
In connection with TVaura LLC and TVaura Mobile LLC, our joint ventures with Nielsen, we may experience:
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Moreover, since Nielsen has significant oversight and voting rights with respect to major business decisions of TVaura LLC and TVaura Mobile LLC, we do not have complete control over the joint ventures' operations, including business decisions that may affect each joint venture's profitability or success in meeting its objectives. For any of these reasons, or as a result of other factors, we may not realize the anticipated benefits of the joint ventures, and our participation in the joint ventures could adversely affect the results of our other business efforts.
(8) Disagreements between Nielsen and us regarding the strategy and priorities of the joint ventures or shortage of additional funding for the joint ventures may impede the development of the joint venture products, which could negatively affect the value of our investment in TVaura LLC and TVaura Mobile LLC.
TVaura LLC is a jointly owned company that we established with Nielsen to focus on the discovery, development and commercialization of copyright filtering solutions, royalty/audit for online video and audio rights organizations, guilds or other organizations involved in reconciliation of royalties, residuals and other payments, and other related products. TVaura Mobile LLC is a jointly owned company that we established with Nielsen to focus on the discovery, development and commercialization of certain enhanced television offerings, and other related products.
As part of these joint ventures, we licensed to each of TVaura LLC and TVaura Mobile LLC all of our patents and technology not already subject to exclusive license grants to other licensees. Each of TVaura LLC and TVaura Mobile LLC is operated as an independent company and governed by a members' committee. We and Nielsen can elect an equal number of representatives to serve on each members' committee. The joint venture plan to develop the contemplated products pursuant to an operating plan that is approved by the members' committee. Any disagreements between Nielsen and us regarding a development decision or any other decision submitted to either joint venture's members' committee may cause significant delays in the development and commercialization of the joint ventures' products and technology and could negatively affect the value of our investment in the joint ventures.
In addition, neither we nor Nielsen have any obligation to fund the joint ventures beyond the initial cash contributions provided in the joint venture agreements. If the joint ventures are unable to generate cash sufficient to develop and commercialize their products, and if additional funding is unavailable from us, Nielsen or third parties, we may not recognize the intended benefits of the joint ventures.
(9) A significant portion 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.
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(10) The market for our products is highly competitive and alternative technology 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 technology. Because the market solutions based on our technologies are still in an early stage of development, we also may face competition from unexpected sources.
Alternative technology that may directly or indirectly compete with particular applications of our watermarking technologies include:
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 technology could have a long-term effect on our growth and results of operations.
New developments are expected to continue, and discoveries by others, including current and potential competitors, possibly could 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
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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 may be unable to compete successfully against current or future participants in our market or against alternative technologies, and the competitive pressures we face could decrease our revenue and profits in the future.
(11) 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 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.
(12) If leading companies in our industry or standard-setting bodies or institutions downplay, minimize, or reject the use of our technology, 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 technology. 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 technology. Such a development would make the achievement of our business objectives in this market difficult or impossible.
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(13) 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 these standards effectively, our growth and the development of various 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.
(14) 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 increase costs and impede our ability to achieve or sustain profitability in the short term.
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. Although we believe that increasing our workforce would potentially support anticipated growth and profitability, it would increase our costs. If we experience such an increase in costs, we may not succeed in achieving or sustaining profitability in the short term.
(15) 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 technology by third-party software developers and original equipment manufacturers. For example, one form of our technology 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 form of our technology is used in our anti-counterfeiting products. If third parties who include our technology in their products cease to do so, or we fail to obtain other partners who will incorporate, embed, integrate or bundle our technology, or these partners are unsuccessful in their efforts, our efforts to expand deployment of our technology would be adversely affected and, consequently, our ability to increase revenues would be adversely affected and we may suffer other
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adverse effects to our business. In addition, if our technology does not perform according to market expectations, our future sales would suffer as customers seek other providers.
(16) 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 technology.
Our IP licensing business and strategy rely, in part, on successful deployment of our technology 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 technology 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 technology does not perform according to market expectations, our future sales would suffer as customers seek other providers.
(17) An increase in our operations outside of the U.S. subjects us to risks additional to those to which we are exposed in our domestic operations.
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 U.S., including the following:
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.
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(18) 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:
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. If we fail to meet contractual milestones or other performance requirements as promised, or to successfully resolve customer disputes, we could incur 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.
(19) Products deploying our technology 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 arise 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.
(20) 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
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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.
(21) 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 technology, products and services are exposed. These risks include the following:
Some of our key technology and solutions from our patent or technology licensees are in the development stage. Consequently, products incorporating our technology 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.
(22) 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 technology. 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 may result in the loss of revenue to us. 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 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 challenged, and the possibility that third parties will be able to
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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 technology 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 technology 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 technology 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 U.S. 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. Although we rely on some of these technologies for our products or for our licenses to third parties, to date, the licensed patents have not been material to our operations.
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 technology or develop non-infringing technologies. In these circumstances, continued use of our technology 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 technology 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 may seek contractual assurances that we will pursueby litigation if necessarytheir 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 technology, solutions, documentation and other proprietary information. Despite these procedures, third parties could copy or otherwise obtain and make unauthorized use of our technology, solutions or other proprietary information or independently develop similar technologies,
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solutions or information. The steps that we have taken to prevent misappropriation of our solutions, technology or other proprietary information may not prevent their misappropriation.
(23) Our internal controls and procedures may not 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 our system may not 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.
(24) 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.
(25) While we currently have no material claims, litigation or regulatory actions filed or pending by or against us, 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, Old Digimarc had 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, we could be exposed to potentially self-funding certain future liabilities ordinarily mitigated by director and officer liability insurance. Increased insurance risk could also make it more difficult for us to retain and attract officers and directors.
(26) Our common stock price may be volatile, and you could lose all or part of your investment in shares of our 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:
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(27) 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 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, we issued to our executive officers an aggregate of 10,000 shares of Series A Redeemable Nonvoting Preferred stock. In the event of our liquidation, dissolution or other winding up, 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 us at any time on or after June 18, 2013.
(28) 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
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requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders.
Item 4. Submission of Matters to a Vote of Security Holders.
We held our annual meeting of stockholders on May 1, 2009. Three proposals were voted on by our stockholders.
Proposal 1: Election of Directors
Bruce Davis, William J. Miller, James T. Richardson, Peter W. Smith and Bernard Whitney were elected as directors for a term of one year. The voting for each director was as follows:
|
For | Withheld | |||||
---|---|---|---|---|---|---|---|
Bruce Davis. |
6,059,367 | 741,465 | |||||
William J. Miller |
6,060,298 | 740,534 | |||||
James T. Richardson |
6,060,298 | 740,534 | |||||
Peter W. Smith |
6,060,575 | 740,257 | |||||
Bernard Whitney |
6,052,360 | 748,472 |
Proposal 2: Approval and Adoption of the Digimarc Corporation 2008 Incentive Plan
The Digimarc Corporation 2008 incentive plan was approved and adopted with 2,492,719 votes in favor, 102,794 votes against and 2,223 abstentions.
Proposal 3: Ratification of the Appointment of Grant Thornton LLP as the Company's Independent Certified Public Accountants
Grant Thornton was ratified as our independent certified public accountants for the fiscal year ending December 31, 2009 with 6,727,316 votes in favor, 64,069 votes against and 9,447 abstentions.
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Digimarc or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other party or parties to the applicable agreement and:
Accordingly, there representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Digimarc may be found elsewhere in this Quarterly Report on Form 10-Q, Digimarc's Annual Report on Form 10-K for the
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year ended December 31, 2008 and in Digimarc's other public filings, which are available without charge through the SEC's website at http://www.sec.gov .
Exhibit
Number |
Exhibit Description | ||
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10.1* | Patent License Agreement, dated as of June 11, 2009 between Digimarc Corporation and The Nielsen Company (US), LLC | ||
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10.2* |
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Limited Liability Company I Agreement, dated June 11, 2009 between Digimarc Corporation and The Nielsen Company (US), LLC |
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10.3* |
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Limited Liability Company II Agreement, dated June 11, 2009 between Digimarc Corporation and The Nielsen Company (US), LLC |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
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32.1 |
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Section 1350 Certification of Chief Executive Officer |
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32.2 |
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Section 1350 Certification of Chief Financial Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 31, 2009 | DIGIMARC CORPORATION | |||
|
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By: |
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/s/ MICHAEL MCCONNELL Michael McConnell Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) |
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EXHIBIT 10.1
CONFIDENTIAL PORTIONS OMITTED
PATENT LICENSE AGREEMENT
This PATENT LICENSE AGREEMENT (the Agreement) is between Digimarc Corporation, a Delaware Corporation, having a place of business at 9405 SW Gemini Drive, Beaverton, Oregon 97008 and its Subsidiaries (Digimarc), and The Nielsen Company (US), LLC, a New York limited liability company, having a place of business at 770 Broadway, New York, New York 10003, its Su bsidiaries and Affiliates (Nielsen), each of Digimarc and Nielsen referred to herein as a Party and collectively as the Parties.
Whereas , Nielsen and Digimarc have entered into an agreement executed on November 27, 2007 with an effective date of October 1, 2007 (the Prior Agreement), said Prior Agreement including terms and conditions under which Digimarc provided Digimarc Services for Nielsen and granted to Nielsen certain licenses under Digimarc patents;
Whereas, under the Prior Agreement, Nielsen had certain rights to terminate the Prior Agreement at the end of the second year, upon the satisfaction of certain conditions;
Whereas , for good and valuable consideration, Nielsen and Digimarc have agreed to expand and extend their relationship and supersede the Prior Agreement by contemporaneously entering into this Agreement and the Agreements of Newco 1 LLC and Newco 2 LLC of even date herewith; and
Whereas , the Parties wish to supersede said Prior Agreement and desire that the terms and conditions of this Agreement shall control with regard to the grant of patent rights and license for the Nielsen Business, as provided herein.
NOW, THEREFORE , for good and valuable consideration as stated herein, t he Parties hereby agree as follows .
1. Definitions.
Affiliates shall mean The Nielsen Company, B.V., a Netherlands Corporation, and the Subsidiaries of The Nielsen Company, B.V. that are not also a Subsidiary of The Nielsen Company (US), LLC.
Digimarc Patents shall mean all patents (including extensions, reissues, re-examinations, substitutions, renewals or equivalents of any of the foregoing, and moral and economic rights of inventors in any of the foregoing), other than the Excluded Patents, throughout the world, including industrial and utility models, industrial designs, typeface design patents and registrations, petty patents, patents of importation, patents of addition, certificates of invention, and any other indicia of invention ownership issued or granted by any governmental agency or other authority:
(a) issued or issuing on patent applications (including all provisional applications, priority, continuations, divisionals, continuations-in-part and counterparts thereof) entitled to an effective filing date prior to the Futures Date,
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or claiming priority, directly or indirectly, to a patent or patent application having an effective filing date prior to the Futures Date; and
(b) under which patents or the patent applications therefor Digimarc or any of its Subsidiaries has as of the Effective Date, or thereafter obtains, the right to grant a license to Nielsen within the scope granted herein, without such grant or the exercise of rights thereunder resulting in the payment of royalties or other consideration by Digimarc or its Subsidiaries to third parties (except for payments among Digimarc and its Subsidiaries, and payments to third parties for inventions made by said third parties while employed by Digimarc or any of its Subsidiaries).
Digimarc Patents shall include (other than the Excluded Patents) all patent applications throughout the world (including all provisional applications, priority, continuations, divisionals, continuations-in-part and counterparts thereof) entitled to either an effective filing date prior to the Futures Date, or claiming priority, directly or indirectly, to a patent or patent application having an effective filing date prior to the Futures Date, that satisfy part (b) of this definition, and all patents issuing therefrom (including extensions, reissues, re-examinations, substitutions, renewals or equivalents of any of the foregoing), and moral and economic rights of inventors in any of the foregoing.
Effective Date of this Agreement is July 1, 2009.
Excluded Patents means those Digimarc patents listed in Exhibit A attached hereto.
Futures Date is [**].
Nielsen Business means the [**] .
Sale, sell, offer for sale offer to sell, other transfer, otherwise transfer and other forms of such terms with respect to copyrightable materials, such as software products, shall mean the granting of licenses to use such copyrightable materials.
Subsidiary shall mean any corporation, partnership or other entity (Entity) in which Digimarc, The Nielsen Company (US), LLC or The Nielsen Company, B.V. now or hereafter holds, directly or indirectly, ownership of, or the right to vote on behalf of, more than forty percent (40%) of its voting stock or other voting equity or ownership interests, for so long as such ownership or right to vote exists (excluding the companies being formed under separate Agreements of Newco 1 LLC and Newco 2 LLC) . An Entity in which Digimarc, The Nielsen Company (US), LLC or The Nielsen Company, B.V. owns more than forty percent (40%) of its voting stock or other voting equity interests but less than a majority of the voting stock or other voting equity interests, is not considered a Subsidiary under this definition unless that Entity agrees in a writing to be bound to all applicable provisions of this Agreement.
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2. License and [**].
2.1 Grant to Nielsen . Subject to the terms and conditions of this Agreement, Digimarc on behalf of itself and its Subsidiaries (hereinafter referred to as Grantor) hereby grants to Nielsen, its Subsidiaries and Affiliates (hereinafter individually or collectively referred to, as the context indicates, as Grantee) as of the Effective Date, a worldwide, non-exclusive, [**], [**] ([**] as set forth in [**]), irrevocable (except as set forth in Section 5.4) license under the Digimarc Patents to:
(a) make (including the right to use one or more apparatus and practice one or more methods in making), use (including to provide one or more services and practice one or more methods) , have used, import, have imported, offer to sell, sell, lease, license and otherwise transfer Grantee product and/or service(s) or any combinations of, enhancements, improvements or other modifications to such Grantee product or services within the field of the Nielsen Business; and
(b) have Grantee product and/or services made (including to have practiced one or more methods for Grantee and have one or more services provided to or for Grantee) by a third party for the use, importation, offer for sale, sale, lease, license, and/or other transfer of such Grantee products and services or any combinations of, enhancements, improvements or other modifications to such Grantee product or services within the field of the Nielsen Business.
2.2 [**]. Grantor irrevocably [**] Grantee and its and their respective customers [**], [**], [**] licensed under this Agreement. The [**] under this Section 2.2 shall be effective as of the date provided in Section 4.2.
2.3 In the event that Grantor does not have the right to grant a license under any particular Digimarc Patent of the scope set forth in this Section 2, then the license granted herein under said Digimarc Patent shall be of the broadest scope which Grantor has the right to grant within the scope set forth above.
2.4 This license [**] to Nielsen is subject to previously exclusively licensed patent grants by Digimarc limited to the following fields of use, which are not licensed to Nielsen [**] the same:
2.4.1 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; and
2.4.2 deterring the unauthorized digital reproduction of banknotes.
2.5 No implied licenses . Nothing contained in this Agreement will be construed as conferring by implication, estoppel or otherwise, any license or other right under any patent rights or other industrial or intellectual property rights of either Party, except for the license expressly granted herein.
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2.6 If a third party has the right to grant licenses under one or more patents to Nielsen (as a Licensee) within the field of the Nielsen Business with the consent of Digimarc hereto, Digimarc shall provide said third party with any consent required to enable said third party to license said Licensee on whatever terms such third party may deem appropriate. Digimarc hereby waives any right it may have to receive royalties or other consideration from said third party as a result of said third partys so licensing said Licensee within the scope of the license granted under this Agreement.
3. Consideration.
3.1 Consideration Exchanged. The consideration for the patent license [**] in this Agreement includes: (i) the agreement by Nielsen to pay to Digimarc a total of eighteen million seven hundred fifty thousand United States dollars (US$18,750,000.00) in Section 3.2; (ii) Nielsens [**] as set forth in the [**] of [**] and [**]; (iii) the minimum service fees to be paid to Digimarc under the Agreements of Newco 1 LLC and Newco 2 LLC; and (iv) the consideration paid by Nielsen to Digimarc under the Prior Agreement.
3.2 Royalties. Nielsen shall pay to Digimarc eighteen million seven hundred fifty thousand United States dollars (US$18,750,000.00) in royalties with payment spread out as follows:
2009 (remaining): Two million United States dollars (US$2,000,000.00);
2010: Three Million Six Hundred Thousand United States dollars (US$3,600,000.00);
2011: Four Million United States dollars (US$4,000,000.00);
2012: Four Million United States dollars (US$4,000,000.00);
2013: Four Million United States dollars (US$4,000,000.00); and
2014: One Million One Hundred Fifty Thousand United States dollars (US$1,150,000.00) .
3.3 Royalty Payment Schedule. The payments for 2009 shall be $1 million due by July 10, 2009, and $1 million due by October 1, 2009. The payments for 2010 shall be in quarterly installments of $900,000 due by the first business day of each calendar quarter. The payments for 2011-13 shall be in quarterly installments of $1M due by the first business day of each calendar quarter. The $1.15 million payment for 2014 shall be due by January 2, 2014.
3.4 Overdue Amounts. Digimarc can terminate this Agreement for overdue payment obligations of Nielsen, subject to the Breach and cure provisions of Section 5.2 and 5.3. In addition, Digimarc will be entitled to charge, and Nielsen will pay, interest on any overdue amounts or underpayments under this Agreement at the rate of one percent (1%) per month (or part thereof), or at such lower rate as may be the maximum rate allowed under applicable law.
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4. Term .
4.1 Agreement. The term of this Agreement and the term of the license granted herein shall commence on the Effective Date and continue until the expiration of the last to expire of the Digimarc Patents licensed hereunder, unless earlier terminated in accordance with this Agreement.
4.2 [**]. The [**] granted by Digimarc to Nielsen under Section 2.2 of this Agreement is effective upon [**]. Once effective, such [**] is irrevocable and will survive any termination or expiration of this Agreement or any termination or expiration [**] under this Agreement.
5. Termination and Remedies .
5.1 Responsibility for Performance . The Nielsen Company (US), LLC shall be solely responsible for its performance under this Agreement. A Breach of this Agreement by a Subsidiary or by an Affiliate shall be deemed to be a Breach of this Agreement by The Nielsen Company (US), LLC, except as provided under Section 5.4(i).
5.2 Remedies for Breach . If either Party materially breaches this Agreement, becomes insolvent or files or has filed against it a petition in bankruptcy (Breach) (subject to the cure provisions of Section 5.3), the non-Breaching Party may, in addition to other remedies at law and in equity, terminate this Agreement to the extent permitted by law.
5.3 Cure . Prior to terminating this Agreement for Breach, the Party not in Breach must first give the Party in Breach written notice specifying in detail the alleged Breach. Such termination will be effective seventy five (75) days after such written notice (the Notice/Cure Period) if the Breach remains uncured.
5.4 Termination by Digimarc . Subject to Section 5.3, Digimarc can terminate this Agreement, including the license granted under this Agreement: (i) as to the Nielsen Company (US), LLC, The Nielsen Company, B.V. or any one or more applicable Nielsen Affiliates or Nielsen Subsidiaries licensed under this Agreement that files an action challenging the validity or enforceability of any Digimarc Patent licensed hereunder; except as a defense or counterclaim (including a declaratory judgment action) to a threat of, or an action for, infringement brought by Digimarc or its assigns against such licensee; or (ii) as to Nielsen in the event of a Breach by Nielsen resulting from non-payment of a payment obligation under Section 3.
If the Breach under this Section 5.4(i) or 5.4(ii) remains uncured upon expiration of the Notice/Cure Period, any such termination will be effective immediately upon such expiration.
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5.5 The parties agree that notwithstanding any inference that could be drawn either from this Agreement, or any reference in this Agreement to the Agreements of Newco 1 LLC or Newco 2 LLC (including but not limited to references to the consideration exchanged under Section 3.1), under no circumstances may any expiration, termination, rescission, breach, default or violation of the Agreements of Newco 1 LLC or Newco 2 LLC provide a basis for any claim of a Breach, default, failure or violation of this Agreement or otherwise cause the termination or rescission of this Agreement or the termination or revocation of any of the rights and license granted hereunder.
5.6 Effects of Termination . Termination of this Agreement in accordance with Section 5.4 as to the applicable licensee(s) licensed under this Agreement (the Nielsen Company (US), LLC; The Nielsen Company, B.V.; or any one or more applicable Nielsen Affiliates or Nielsen Subsidiaries) also terminates the license [**] granted under Section 2 as to such licensee(s). In the event of such termination of this Agreement and such license [**] as to one or more of such licensees, [**]. In other words, in the event of such termination, [**] and Digimarc will not be barred from [**]. [**], [**].
6. Other Provisions.
6.1 Securities Disclosures and Public Announcements . Disclosure of a potential restructuring of the Digimarc-Nielsen agreement or other future businesses or business concepts discussed or agreed between the Parties, the financial impact of this Agreement and related transactions upon Parties, and of the terms of this Agreement (both in summary form and through an exhibit filing) may be required under SEC regulations, stock market rules or any other laws. Members may rely in good faith on advice of counsel when determining whether such disclosure is required. If a Party reasonably believes (such as by relying in good faith on the advice of its counsel) that it is subject to such a disclosure under SEC regulations or laws, prior to disclosing such information, such Party will provide the other Party with reasonable prior notice for the other Party to seek a protective order or for redaction of the information and will only disclose that information that is necessary and required. Except for a disclosure in accordance with either this Section 6.1 or Section 6.2, neither Party will make public announcements, disclosures, or issue press releases relating to this Agreement without the prior written consent of the other Party, which consent or refusal will not be unreasonably withheld.
6.2 Confidentiality . Subject to Section 6.1, each Party agrees that it will treat any provision of this Agreement not required to be publicly disclosed as confidential and will handle the Agreement in a manner consistent with the policies and practices of that Party for handling its own confidential information and in no case with less than a reasonable standard of care. Notwithstanding the foregoing, either Party may provide a copy of this Agreement to a third party considering in good faith a bona fide transaction as contemplated in Section 6.3, provided that such third party agrees in writing to be bound to a confidentiality agreement customary to such transactions and prohibiting use
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of its knowledge of this Agreement or its provisions for any competitive purpose. If the entire Agreement is terminated, the obligations set out in this Section will extend for a period of [**] years from this termination date.
6.3 Assignment, Acquisitions and Transfers.
6.3.1 Assignment . Digimarc may assign any right under any Digimarc Patent(s) to a third party as long as the assignment is made subject to the terms of this Agreement. Except as in the prior sentence, neither Party may assign or grant any of its rights or obligations under this Agreement to any person without the prior written consent of the other, and any such purported assignment shall be null and void from inception; provided, however, that (a) either Party may assign all its rights and delegate all its obligations hereunder to a single entity without such consent in connection with: (i) a merger, consolidation, reorganization, statutory conversion, amalgamation or similar corporate transaction, or (ii) a sale or other disposition of all or substantially all of its assets in the businesses relating to this Agreement (including, in the case of Digimarc, a sale of all or substantially all of its patent assets), and (b) Nielsen may assign all its rights and delegate all its responsibilities without such consent in connection with a restructuring or reorganization of Nielsen, including without limitation to a Subsidiary or Affiliate of The Nielsen Company (US), LLC .
6.3.1.1 In the event that Digimarc assigns this Agreement (including an assignment of all its rights and delegation of all its obligations hereunder) to [**] in accordance with Section 6.3.1 such that Digimarc [**], Digimarc [**] may, upon prior written notice to Nielsen, limit, the rights and license granted to patent applications that are part of the definition of Digimarc Patents in this Agreement to include [**] (including, continuations, divisionals and continuations-in-part) [**] .
6.3.2. Acquisitions . If, after the Effective Date, Nielsen either acquires an entity or acquires substantially all of the assets from an entity and said entity is, immediately prior to the date of acquisition, licensed under one or more Digimarc patents through an existing agreement pursuant to which royalties or other payments are an obligation of said entity to Digimarc:
(i) if such entity survives said acquisition, the license and other rights granted to said entity or through the use of said assets and for all such products or services before the acquisition, [**] and such royalties or other payments [**] the remaining term of and as provided under said existing agreement [**] such products are manufactured or services are provided by said entity;
(ii) if such entity is merged into or otherwise does not survive said acquisition and at the time of said merger or acquisition the products or services of such entity are not within the scope of the rights and licenses granted to Nielsen under this Agreement, the license and other rights granted to said entity or through the use of said assets and for all such licensed products or services before the merger or acquisition, [**] and such
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royalties or other payments [**] the remaining term of and as provided under said existing agreement [**] such licensed products or services are provided by Nielsen; and
(iii) if such entity is merged into or otherwise does not survive said acquisition and at the time of said merger or acquisition the products or services of such entity are within the scope of the rights and licenses granted to Nielsen under this Agreement, the license and other rights granted to said entity or through the use of said assets and for all such licensed products or services before the merger or acquisition, [**] and such royalties or other payments [**] the remaining term [**] agreement [**] such products or services are provided by Nielsen; provided that if the products or services of such entity are completely within the scope of the license granted to Nielsen under this Agreement, [**] after the time of said merger or acquisition [**] such license and rights under such existing agreement [**] immediately prior to the time of said merger or acquisition.
6.3.3. Transfer of a Product or Service . If, subsequent to the Effective Date, Nielsen or any of its Subsidiaries or Affiliates (the Transferring Party)
either: (i) transfers a product or service line to a third party without transferring a Subsidiary or Affiliate to said third party; or (ii) spins off a Subsidiary or Affiliate (either by disposing of it to a third party or in some other manner reducing ownership or control so that the spun-off entity is no longer a Subsidiary or Affiliate of the Transferring Party); and
if such transfer or spin off includes: (i) at least [**] or [**] in a [**] or [**]; and (ii) tangible assets having a value of at least [**] U.S. dollars (US$[**]),
then after written request to Digimarc jointly by the Transferring Party and either: (i) such third party in the case of a transfer; or (ii) such ex-Subsidiary or ex-Affiliate in the case of a spin off; and
where, in either case, such request is within ninety (90) days following the transfer or spin off,
Digimarc shall grant a license (under the same terms as the license granted to the Transferring Party herein but without further consideration by Nielsen above that required under Section 3, the Transferring Party, or the spun-off entity) under the Digimarc Patents for the field of [**] such third party or such ex-Subsidiary or ex-Affiliate (the Recipient), provided that:
(a) such field shall not be defined [**] than the scope of [**] to the [**], nor [**] the [**] being transferred or spun off;
(b) the license granted shall be limited in the [**] immediately following such transfer or spin off to a volume of licensed products or services having an aggregate selling price equal to no more than the aggregate selling prices of such products or services by said Transferring Party in the [**] preceding such transfer or spin off plus [**]; and shall be limited, in each of the successive [**] periods following such transfer or spin off, to a volume of licensed products or services having an aggregate selling price equal to [**] the [**] for the [**] period plus [**];
(c) this Section 6.3.3 and Section 3 (Consideration) shall be omitted from the license granted to the Recipient; and
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(d) the license granted to the Recipient shall [**] if the license [**] to the [**] or [**] for any reason.
6.4 Bankruptcy . Any intellectual property licenses and rights granted hereunder or pursuant hereto are, and will be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code (Code) licenses of intellectual property, as defined under the Code. Notwithstanding any provision contained herein to the contrary, if a Party is under any proceeding under the Code and the trustee in bankruptcy of that Party, or that Party as a debtor in possession, rightfully elects to reject this Agreement, then the other Party pursuant to the relevant portions of Section 365(n) of the Code may retain any and all of such other Partys licenses and rights hereunder to the maximum extent permitted by law.
6.5 Remedies.
6.5.1 Remedies under the Agreement. NONE OF DIGIMARC, NIELSEN, NOR ITS OR THEIR SUBSIDIARIES OR AFFILATES WILL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, EXEMPLARY, RELIANCE, PUNITIVE OR SPECIAL DAMAGES ARISING UNDER THIS AGREEMENT, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. In the event of termination of the Agreement and the license granted hereunder in accordance with Section 5.4 as to the Nielsen Company (US), LLC, The Nielsen Company, B.V. or any one or more applicable Nielsen Affiliates or Nielsen Subsidiaries, Digimarc shall be entitled to any and all remedies against such terminated licensee for patent infringement in the US or abroad, including the remedies identified in 6.5.2.
6.5.2 Infringement Remedies. Nothing in this Agreement prevents Digimarc, the Nielsen Company (US), LLC, The Nielsen Company, B.V. or any one or more applicable Nielsen Affiliates or Nielsen Subsidiaries licensed under this Agreement from seeking any available remedies under patent law for any patent infringement by another party to this Agreement in periods when that other party does not have a license, release or non-assert covenant for that activity, including any remedies available under 35 U.S.C. 281, 283, 284 and 285.
6.5.3 Tolling. Nielsen agrees to toll any statute of limitations and any time limitation on damages under [**] relative to [**]. In return for this tolling agreement, Digimarc on behalf of itself, its Subsidiaries, licensees, and assigns, covenants not to [**] . [**].
6.6 Governing Law, Jurisdiction and Venue. This Agreement shall be governed by New York law. Effective as of the termination of the Agreement as provided under Section 5.4 as to Nielsen Company (US), LLC, The Nielsen Company, B.V. or any one or more applicable Nielsen Affiliates or Nielsen Subsidiaries licensed under this Agreement, Digimarc may seek judgment and remedies for alleged infringement of its patents for periods when such licensee does not have a license, release
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or non-assert covenant for that activity, in any forum where jurisdiction and venue are generally proper, including the United States International Trade Commission or Government Customs Service proceedings, for alleged infringement occurring before January 1, 2008 and after such Agreement termination date. All other matters concerning the interpretation of or performance under, this Agreement will be resolved in the state or federal courts in New York applying New York law and jurisdiction and venue will be proper in such New York courts.
6.7 Assertion and Defense of Patents. All defense and litigation of Digimarc Patents will remain the sole responsibility and expense of Digimarc. Digimarc has no duty to enforce any Digimarc Patents.
6.8 No Waiver. Each and all of the various rights, powers and remedies of the Parties will be considered to be cumulative with and in addition to any other rights, powers and remedies which such Parties may have at law or in equity in the event of Breach of any of the terms of this Agreement. The exercise or partial exercises of any rights, powers or remedies will neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such Party. In no event will any waiver of any rights hereunder constitute the waiver of such rights in any future instance unless the waiver so specifies in writing.
6.9 Notices . All notices including those alleging Breach or early termination must be made in writing. Any written notice under this Agreement may be sent by e-mail provided that in any event to be followed (or alternatively) by a hard copy sent via certified mail, return receipt requested, or by recognized courier service with tracking capabilities. The notice will be deemed effective as of the earlier of (i) the date of delivery, as evidenced by a delivery receipt or the addressees registry, or (ii) five business days after sending notice to the correct address in the authorized manner. The addresses of the Parties, as set forth above, will be used for any such notice unless either Party hereafter designates a substitute address in writing in accordance with this provision.
The contacts to address the notices to are:
For Digimarc: Bruce Davis, CEO; with a co-copy to: Robert Chamness, Chief Legal Officer and Secretary; and
For Nielsen: Itzhak Fisher, Global Product Leadership; with a co-copy to: Chief Legal Officer.
6.10 Integration . This Agreement embodies the entire agreement of the Parties hereto regarding the subject matter herein, and supersedes all previous negotiations, agreements or commitments with respect to them, including without limitation the terms and conditions under the Prior Agreement (including all payment obligations of Nielsen after the Effective Date); provided , however , if any patent licensed under the definition of
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Digimarc Patents in the Prior Agreement is not licensed under the definition of Digimarc Patents in this Agreement, such patent shall be licensed (at no additional cost to Nielsen beyond that required under Section 3 of this Agreement) under this Agreement.
6.11 Severability . If any provision of this Agreement is held to be void or unenforceable, the Parties agree that such determination will not result in the nullity or unenforceability of the remaining portions of this Agreement. The Parties further agree to replace such void or unenforceable provisions of this Agreement with valid and enforceable provisions that will achieve, to the extent legally permissible, the economic, business and other purposes of the void or unenforceable provisions and that reflect the intent of the Parties when entering into this Agreement.
6.12 Amendments . This Agreement may not be modified in any manner except by an instrument in writing duly signed by each of the Parties hereto.
6.13 Construction . The headings of sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. Each Party and its counsel have participated fully in the review and revision of this Agreement. Any rule or construction to the effect that ambiguities are to be resolved against the drafting Party will not apply in interpreting this Agreement.
6.14 Other Documents. Each Party hereto will execute any documents which may be necessary or advisable to carry out or effectuate the foregoing.
6.15 Survival. Any rights and obligations which by their nature (or explicit statement) survive and continue after any expiration or termination of this Agreement will survive and continue and will bind the Parties and their successors and assigns. For avoidance of doubt, upon any expiration or termination of this Agreement, the provisions of Sections 3, 5.1, 5.5, 5.6 and 6 will survive and remain in effect.
6.16 Representations and Warranties .
6.16.1 Digimarc represents and warrants:
(a) that it has and will have the full right and power to grant the rights, license [**] set forth in this Agreement on behalf of itself and its Subsidiaries, and that there are no outstanding agreements, assignments or encumbrances inconsistent with the provisions of such rights, license [**] or with any other provision of this Agreement; and
(b) that as of the Effective Date, it has no Subsidiaries.
6.16.2 Nielsen represents and warrants that there are no outstanding agreements, assignments or encumbrances inconsistent with the provisions of this Agreement.
6.16.3 Each Party represents that it has the authority to enter into this Agreement.
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6.16.4 Except as expressly stated in this Agreement, neither Party makes any other representation or warranty, express or implied.
6. 17 Counterparts. This Agreement may be executed in separate counterparts, and by facsimile, each of which will be deemed an original, and when executed, separately or together, will constitute a single original instrument, effective in the same manner as if the Parties had executed one and the same instrument.
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By: |
/s/ Itzhak Fisher |
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Name: |
Itzhak Fisher |
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Its: |
Global Product Leadership |
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Date: June 11, 2009 |
13
Exhibit A
Excluded Patents
Patent No. |
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Title |
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USPN [**] |
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[**] |
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USPN [**] (a continuation of USPN [**]) |
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[**] |
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USPN [**] |
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[**] |
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USPN [**] |
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[**] |
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and any reissues, continuations, continuations-in-part, divisionals, extensions, re-examinations, substitutions, renewals and foreign counterparts and equivalents of those patents.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
14
EXHIBIT 10.2
CONFIDENTIAL PORTIONS OMITTED
LIMITED LIABILITY COMPANY AGREEMENT
OF
NEWCO 1, LLC
DATED JUNE 11 , 2009
TABLE OF CONTENTS
|
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Page |
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|
|
|
|
ARTICLE I |
DEFINITIONS |
1 |
|
|
|
|
|
ARTICLE II |
BUSINESS PURPOSE AND ACTIVITIES |
6 |
|
2.01. |
Place of Business |
6 |
|
2.02. |
Nature of Business |
6 |
|
2.03. |
Excluded Scope |
7 |
|
2.04. |
Marketing and Sales To Current Customers of Digimarc or Nielsen |
7 |
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|
|
|
|
ARTICLE III |
FORMATION AND TERM |
7 |
|
3.01. |
Formation |
7 |
|
3.02. |
Members Interests |
8 |
|
3.03. |
Name |
8 |
|
3.04. |
Term |
8 |
|
3.05. |
Registered Agent and Office |
8 |
|
3.06. |
Title to Assets |
8 |
|
|
|
|
|
ARTICLE IV |
MANAGEMENT OF THE COMPANY |
8 |
|
4.01. |
Members Committee |
10 |
|
4.02. |
Management of the Company |
11 |
|
4.03. |
Prior Approval |
12 |
|
4.04. |
Additional Funding |
|
|
|
|
|
|
ARTICLE V |
RIGHTS IN IP; ANCILLARY LICENSES AND SERVICES |
12 |
|
5.01. |
Company Rights to Developed Intellectual Property |
12 |
|
5.02. |
Digimarc License and Services |
13 |
|
5.03. |
Nielsen Licenses and Services |
14 |
|
5.04. |
Ability to Grant Licenses |
15 |
|
5.05. |
Transitional Services; Real Estate Arrangements |
15 |
|
|
|
|
|
ARTICLE VI |
FUNDING, ALLOCATIONS, DISTRIBUTIONS AND CAPITAL ACCOUNTS |
15 |
|
6.01. |
Funding; Capital Contributions |
15 |
|
6.02. |
Fiscal Year |
16 |
|
6.03. |
Distributions to the Members |
16 |
|
6.04. |
Certain Other Allocation Rights |
17 |
|
6.05 |
Additional Capital Contribution |
18 |
|
6.06 |
Members Failure To Make Capital Contributions |
18 |
|
6.07. |
Accounting Procedures |
18 |
|
6.08 |
Principle Tax Matters |
19 |
|
6.09 |
Payment and Withholding of Certain Taxes |
20 |
|
6.10 |
Organizational Expenses |
21 |
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6.11 |
Classification |
21 |
|
i
ARTICLE VII |
BUDGETS AND BUSINESS PLANS |
21 |
|
7.01. |
Business Plans and Budgets |
21 |
|
7.02. |
Approval by the Members Committee |
21 |
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7.03. |
Default Budget |
21 |
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7.04. |
Default Business Plan |
22 |
|
|
|
|
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ARTICLE VIII |
CERTAIN REPRESENTATIONS, WARRANTIES, AND COVENANTS |
22 |
|
8.01. |
Authorization |
22 |
|
8.02. |
Absence of Conflict |
22 |
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8.03. |
Certain Covenants |
23 |
|
8.04. |
Restricted Transfer of the Company Interest |
23 |
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|
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ARTICLE IX |
DISSOLUTION |
23 |
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9.01. |
Dissolution |
23 |
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9.02. |
Liquidation |
24 |
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ARTICLE X |
FORCE MAJEURE |
24 |
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ARTICLE XI |
LIABILITY AND INSURANCE |
25 |
|
11.01. |
Liability |
25 |
|
11.02. |
Insurance |
25 |
|
|
|
|
|
ARTICLE XII |
GENERAL PROVISIONS |
25 |
|
12.01. |
No Publicity or Advertisement Without Prior Consultation |
25 |
|
12.02. |
Severability |
25 |
|
12.03. |
Article and Section Headings, Schedules and Exhibits |
25 |
|
12.04. |
Counterparts |
26 |
|
12.05. |
Gender and Number |
26 |
|
12.06. |
Expenses |
26 |
|
12.07. |
Notices |
26 |
|
12.08. |
No Third Party Beneficiaries |
27 |
|
12.09. |
Governing Law; Arbitration |
27 |
|
12.10. |
Modifications, Amendments or Waivers |
27 |
|
12.11. |
Assignment, Successors and Assigns |
27 |
|
12.12. |
Joint Preparation |
28 |
|
12.13. |
Entire Agreement; Termination of Prior Agreement |
28 |
|
12.14. |
Further Assurances |
28 |
|
12.15. |
Security Disclosures and Public Announcements |
28 |
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12.16. |
Confidentiality |
28 |
|
12.17. |
Bankruptcy |
29 |
|
12.18. |
Survival |
29 |
|
ii
This LIMITED LIABILITY COMPANY AGREEMENT of Newco 1, LLC (the Company ) is made and entered into as of June 11, 2009 by and between The Nielsen Company (US) LLC, a New York limited liability company, having offices at 770 Broadway, New York, New York 10003 (Nielsen), and Digimarc Corporation, a Delaware corporation, with offices at 9405 SW Gemini Drive, Beaverton, Oregon 97008 (Digimarc).
INTRODUCTION
Whereas , Nielsen and Digimarc have entered into an agreement executed on November 27, 2007 with an effective date of October 1, 2007, (the Prior Agreement), said Prior Agreement including terms and conditions under which Digimarc provided Digimarc Services for Nielsen, and granted to Nielsen certain licenses under Digimarc patents;
Whereas, under the Prior Agreement, Nielsen had certain rights to terminate the Prior Agreement at the end of the second year or subsequently during the term thereof, upon the satisfaction of certain conditions;
Whereas , for good and valuable consideration, Nielsen and Digimarc have agreed to expand and extend their relationship and supersede the Prior Agreement by entering into this Agreement and contemporaneously entering into the Patent License Agreement and the Agreement of Newco 2, LLC of even date herewith.
NOW, THEREFORE , for good and valuable consideration as stated herein, the parties hereby agree as follows.
The following terms have the following meanings when used in this Agreement, unless the context expressly or by necessary implication otherwise requires:
Agreement shall mean this Limited Liability Company Agreement.
Affiliate of a specified Person shall mean a Person that directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified. For purposes of this definition the term control (including the terms controlling, controlled by and under common control with) means directly or indirectly owning equity securities (or other ownership interests) representing more than fifty percent (50%) of the voting power of all the outstanding equity securities of such specified Person. That Person is an Affiliate with the Person specified only for so long as such control of or being controlled by the Person specified exists.
Approved Budget shall mean an annual budget, expressed in terms of net cash flow (including revenue, operating and capital expenses) approved by the Members Committee in accordance with Sections 7.01 and 7.02 hereof.
1
Approved Business Plan shall mean a two-year business plan approved by the Members Committee in accordance with Sections 7.01 and 7.02 hereof.
Assets of a Person shall mean all of that Persons properties and assets (real, personal or mixed, tangible or intangible), unless otherwise specified.
Business shall have the meaning described in Section 2.02 hereof.
Capital Account shall have the meaning described in Section 6.03 (a) hereof.
Certificate means the Certificate of Formation of the Company and any and all amendments thereto and restatements thereof, as filed with the Secretary of State of the State of Delaware pursuant to the Delaware Act.
Chairman of the Members Committee shall mean Bruce Davis, the then current Chief Executive Officer of Digimarc, or any other designee of Digimarc, for so long as Digimarc maintains an interest of at least 25% in the Company.
Code shall mean the Internal Revenue Code of 1986, as amended.
Company shall mean Newco 1, LLC, the Delaware limited liability company the Members form by entering into this Agreement.
Company Products means any business, product or service developed and marketed by the Company that combines Digimarc Licensed IP and Nielsen Licensed IP as authorized by this Agreement or otherwise approved by the Members Committee.
[**] means a product that: (a) [**]; (b) [**]; and (c) includes all software, hardware and other networked components required to achieve (a) and (b).
Default Budget shall have the meaning described in Section 7.03 hereof.
Delaware Act shall mean the Delaware Limited Liability Company Act, 6 Del. C. §18-101, et seq., as amended from time to time.
Digimarc shall have the meaning set forth in the opening paragraph of the Agreement.
Digimarc Licensed IP shall mean the Digimarc Licensed Patents and the Digimarc technology as reasonably required for the commercialization, development and marketing by Company of Company Products within the scope of the Business.
Digimarc Licensed Patents shall mean all patents (including extensions, reissues, re-examinations, substitutions, renewals or equivalents of any of the foregoing, and moral and economic rights of inventors in any of the foregoing), other than the Excluded Patents, throughout the world, including industrial and utility models, industrial designs, typeface design
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
2
patents and registrations, petty patents, patents of importation, patents of addition, certificates of invention, and any other indicia of invention ownership issued or granted by any governmental agency or other authority:
(a) issued or issuing on patent applications (including all provisional applications, priority, continuations, divisionals, continuations-in-part and counterparts thereof); and
(b) under which patents or the patent applications therefor Digimarc or any of its Affiliates has as of the Effective Date, or thereafter obtains, the right to a grant license to the Company within the scope granted herein, without such grant or the exercise of rights thereunder resulting in the payment of royalties or other consideration by Digimarc or any of its Affiliates to third parties (except for payments among Digimarc and its Affiliates and payments to third parties for inventions made by said third parties while employed by Digimarc or any of its Affiliates).
Digimarc Licensed Patents shall include (other than the Excluded Patents) all patent applications throughout the world (including all provisional applications, priority, continuations, divisionals, continuations-in-part and counterparts thereof) that satisfy part (b) of this definition, and all patents issuing therefrom (including extensions, reissues, re-examinations, substitutions, renewals or equivalents of any of the foregoing), and moral and economic rights of inventors in any of the foregoing.
Digimarc Products and Services means those products and services described in the Form 10-K filed by Digimarc with the U.S. Securities and Exchange Commission (SEC) most recently prior to the Effective Date.
Effective Date of this Agreement is July 1, 2009.
Excluded Patents shall mean those Digimarc patents listed in Schedule 5.02 attached hereto.
Excluded Scope shall have the meaning set forth in Section 2.03 hereof.
Financial Statements shall mean a balance sheet of the Company and related statements of operations and cash flows, as of the end of each month, quarter or year, as the case may be, and for the corresponding period then ended.
Force Majeure shall mean any event or condition, not existing as of the Effective Date, not reasonably foreseeable as of such date and not reasonably within the control of either Member, which prevents, in whole or in material part, the performance by a Member of its obligations under this Agreement, other than an obligation on the part of a Member to make any payment hereunder. Without limiting the generality of the foregoing, the following shall constitute events or conditions of Force Majeure: state or governmental action, riots, war, acts of terrorism, sabotage, strikes, lock-outs, prolonged shortage of energy or other supplies, fire, flood, hurricanes, earthquakes, lightning, and explosion.
GAAP shall mean U.S. generally accepted accounting principles.
3
Indebtedness shall mean (a) indebtedness for borrowed money, (b) obligations (as lessee or guarantor) to pay rent under a lease of real or personal property which is required by GAAP to be capitalized on a balance sheet of the Company prepared in accordance with the provisions of this Agreement, (c) purchase money obligations, and (d) any extension, refinancing or modification of any of the foregoing.
Interest means the limited liability company interest of a Member in the Company at any particular time, including the right of such Member to any and all benefits to which a Member may be entitled as provided in this Agreement, together with the obligations of such Member to comply with all the terms and provisions of this Agreement.
IRS shall have the meaning described in Section 6.09(a) hereof.
Judicial Review shall have the meaning described in Section 6.06(b)(i) hereof.
Law means any statute, law, regulation, ordinance, rule, injunction, order, decree, directive or any similar form of decision of, or determination by, any governmental or self-regulatory authority.
Management shall mean the President and other officers of the Company appointed in accordance with the provisions of Section 4.02 hereof.
[**] means Nielsen Products and Services involving [**].
Members means Digimarc and Nielsen and any other Person added as a member of the Company from time to time.
Members Committee shall mean that Committee which is created according to the provisions of Section 4.01 hereof.
Nielsen Data License means Nielsens then standard form of license agreement for any Nielsen Data Services provided to the Company during the Term, provided that there shall be no payment by the Company to Nielsen in connection therewith. The current version of such license is attached hereto in Schedule 5.03.
Nielsen Data Services means Nielsen Syndicated Research and back-office meta-data [**] pursuant to a Nielsen Data License.
Nielsen Licensed IP means the Nielsen Licensed Patents and the Nielsen technology as reasonably required for the commercialization, development and marketing by Company of Company Products within the scope of the Business.
Nielsen Licensed Patents shall mean all patents (including extensions, reissues, re-examinations, substitutions, renewals or equivalents of any of the foregoing, and moral and economic rights of inventors in any of the foregoing) throughout the world, including industrial and utility models, industrial designs, typeface design patents and registrations, petty patents,
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
4
patents of importation, patents of addition, certificates of invention, and any other indicia of invention ownership issued or granted by any governmental agency or other authority:
(a) issued or issuing on patent applications (including all provisional applications, priority, continuations, divisionals, continuations-in-part and counterparts thereof); and
Nielsen Licensed Patents shall include all patent applications throughout the world (including all provisional applications, priority, continuations, divisionals, continuations-in-part and counterparts thereof) that satisfy part (b) of this definition, and all patents issuing therefrom (including extensions, reissues, re-examinations, substitutions, renewals or equivalents of any of the foregoing), and moral and economic rights of inventors in any of the foregoing.
Nielsen Products and Services means those products and services [**].
Nielsen Syndicated Research means Syndicated published data/reports including access to and use of Nielsens market intelligence information and reports (and data underlying reports), in any format then-currently available.
Percentage Interest shall mean a Members Interest in the Company expressed as a percentage of all Interests. The initial Percentage Interests shall be forty-nine percent (49%) for Nielsen and fifty-one percent (51%) for Digimarc.
Person shall mean any natural person, firm, corporation, limited liability company, partnership, association, trust or similar organization or governmental body.
President shall mean the president of the Company appointed in accordance with the provisions of Section 4.02 hereof.
Representative shall mean an individual appointed by a Member to the Members Committee.
Sale , Sell , Offer for Sale , Other Transfer , Otherwise Transfer and other forms of such terms with respect to copyrightable materials, such as software products, mean the granting of licenses to use copyrightable materials.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
5
Subsidiary of a Person shall mean any corporation, partnership or other entity (Entity) in which a party now or hereafter holds, directly or indirectly, ownership of, or the right to vote on behalf of, more than fifty percent (50%) of its voting stock or other voting equity interests, for so long as such ownership or right to vote exists.
Syndicated means a report or information that is created for more than one unique client.
Tax Matters Member shall have the meaning described in Section 6.06(a) hereof.
Treasury Regulations shall mean the income tax regulations, including temporary regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).
2.01. Place of Business
The principal place of business of the Company shall be Beaverton, Oregon. At any time, the Members Committee may change the location of the Companys principal place of business to another location by mutual agreement.
2.02. Nature of Business
The Company business shall be to develop and market Company Products outside the Excluded Scope in the following areas and any others the parties may agree (the Business):
(a) Copyright Filtering Solutions . Marketing of [**] services, solutions, tools, equipment and software to companies seeking to [**]. In connection with this service, Nielsen will make available its [**], and provide commercially reasonable [**] and updates refreshed on a regular basis mutually agreed by Company management and Nielsen. Presently such [**] are manually generated on a daily basis. If the Company requires [**] of such [**], and such [**] requires more than incidental development effort by Nielsen, Nielsen agrees that, at the Companys option, Nielsen will either: provide such [**] to the Company at Nielsens cost; or it will cooperate and support the Company in [**] such [**] feeds at the Companys expense and effort.
(b) Royalty/Audit for Online Video or Audio to Rights Organizations, Guilds or Other Organizations Interested in Reconciliation of Royalties, Residuals or Other Similar Payments . [**] services, [**], for the purpose of [**] primarily available to rights organizations such as [**]. This service would [**] and report on [**] to organizations requiring this
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
6
information to enforce royalty agreements. In connection with this service, Nielsen will make available its [**] tools on an as is basis, at no charge to facilitate [**].
(c) Other Company Products . The Company may develop or market other products or services that utilize Digimarc Licensed IP and Nielsen Licensed IP outside the Excluded Scope, as from time to time agreed by the Members Committee and incorporated in the Companys annual plan and budget.
(d) No Obligation to Proceed . Neither the Company nor Nielsen nor Digimarc shall be obligated to develop any product referenced in Section 2.02.
2.03 Excluded Scope
(a) The Company shall not use, make, have made, develop, market, offer for sale, sell, lease, import, license or otherwise transfer: (i) any Company Product that competes with Digimarc Products and Services, Nielsen Products and Services, or the products or services of Newco 2, LLC; or (ii) any Digimarc Licensed IP or Nielsen License IP on a stand-alone basis, i.e., in the form of a naked resale/license that is not materially embodied in a Company Product.
(b) Notwithstanding the forgoing, the Company shall not be prohibited from providing [**] to a client in the context of a sales pitch for the Companys products or services or from reporting to a client about the [**] on behalf of that client .
2.04. Marketing and Sales to Current Customers of Digimarc or Nielsen
For the purpose of coordinating mutual customer relationships, the Company will [**], as the case may be. [**].
3.01. Formation
The Members hereby form the Company as a limited liability company under and pursuant to the provisions of the Delaware Act, and agree that the rights, duties and liabilities of the Members shall be as provided in the Delaware Act, except as otherwise provided in this Agreement. Upon the Effective Date of this Agreement, Nielsen and Digimarc shall be admitted as Members. The Members hereby designate Robert P. Chamness to file the Certificate of Formation of the Company. The Members may jointly describe any person as an authorized person, within the meaning of the Delaware Act, to execute, deliver and file any amendments and/or restatements thereof with the office of the Secretary of State of the State of Delaware pursuant to the Delaware Act.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
7
3.02. Members Interests
As of the date of this Agreement, Digimarc shall own fifty-one percent (51%) of the Company Interests and Nielsen shall own forty-nine percent (49%) of the Company Interests.
3.03. Name
The name of the Company is Newco 1, LLC, and may be changed by the consent of the Members. The business of the Company may be conducted under the name of the Company, or under any other name designated by the Members Committee. The Company shall be described as a joint venture of Nielsen and Digimarc.
3.04. Term
The Company shall commence as of the date of the filing of the Certificate. The term of the Company shall continue for a period of twenty-five (25) years from the date hereof, unless terminated earlier in accordance with the provisions of Sections 9.01 hereof. The existence of the Company as a separate legal entity shall continue until the cancellation of the Certificate as provided in the Delaware Act.
3.05. Registered Agent and Office
The Companys registered agent and office in the State of Delaware shall be The Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County, Delaware 01980. At any time, the Members Committee may mutually designate another registered agent or registered office.
3.06. Title to Assets
Except as otherwise provided in this Agreement, all Assets shall be owned by the Company as an entity, and no Member shall have any ownership interest in such Assets in the Members individual name or right. The Company shall hold all Assets in the name of the Company.
4.01. Members Committee
8
9
4.02. Management of the Company
(d) Legal Compliance . The Company shall formulate such policies and procedures as are required for the Company to comply with all laws, regulations and requirements applicable to the Company or the Members, including, without limitation, U.S. federal and state securities laws and the rules and regulations of the SEC and stock exchanges.
In the absence of such specific policies and procedures adopted by the Company, the Members Committee shall determine which policies and procedures shall apply to the Companys governance and operations.
10
4.03. Prior Approval
No act shall be taken, sum expended, decision made or obligation incurred by or on behalf of the Company with respect to any matter described below unless such proposed action shall have been approved by at least three Representatives of the Members Committee:
11
(p) transactions with any Member or any Affiliate of any Member.
4.04 Additional Funding
In addition to the provisions set forth in Article VI, below, if at any time the Annual Budget calls for expenditures that exceed the Companys cash on hand, either Member may call a meeting of the Members Committee to propose and vote upon any of the following methods to fund or otherwise provide for the Companys continuing operations:
(a) Incurring indebtedness to a third party or to one or both of the Members. The amount of such indebtedness shall be repaid prior to any distributions pursuant to Section 6.03, unless the Members otherwise agree;
(b) Admitting a new Member. Any required adjustment to existing Members Interest shall be shared equally between Nielsen and Digimarc.
5.01 Company Rights to Developed Intellectual Property
(a) Company shall own (and shall use commercially reasonable efforts to ensure that it shall own) all right, title and interest to all materials and intellectual property first conceived or developed in the performance of work by or for Company (including that under any services contract between either Member and the Company) within the field of the Company Business (and for avoidance of doubt, in all events outside of the Excluded Scope), whether conceived or first reduced to practice solely by Company or jointly with one or more of the Members or third parties (Company IP), subject to the license granted to Nielsen and Digimarc under Section 5.01(b).
(b) Company agrees to grant and hereby grants a worldwide, non-exclusive, royalty free, nontransferable, irrevocable right and license under all intellectual property owned
12
5.02 Digimarc License and Services
(a) IP License . Subject to the terms and conditions of this Agreement, Digimarc hereby grants to the Company, as of the Effective Date, a worldwide, non-exclusive, royalty free, nontransferable, irrevocable license under any and all Digimarc Licensed IP as reasonably required for use by or for the Company in the manufacture (by or for), development, marketing, offer for sale, sale, import, lease, license and other transfer to Company customers of Company Products within the scope of the Business.
(b) Previously Licensed Exclusive Grants . Notwithstanding the above, the license granted in Subsection (a) is subject to previously licensed exclusive grants by Digimarc in the following fields of use, which are not licensed to the Company:
(i) 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;
(ii) embedding watermarks in [**] in the [**] for the purpose of [**]. For the avoidance of doubt, this does not include embedding watermarks in [**]; and
(iii) deterring the unauthorized digital reproduction of banknotes.
(c) No Implied Licenses . Nothing contained in this Agreement will be construed as conferring by implication, estoppel or otherwise, any license or other right under any patent rights or other industrial or intellectual property rights of Digimarc, except for the license expressly granted herein.
(d) Services . As more fully set forth in that certain Service Agreement entered into simultaneously herewith and attached hereto as Schedule 5.02 (d), Digimarc shall provide incidental management support at no cost to the Company and will provide technical and development services within the scope of the Business to the Company over the following period in the following minimum amounts:
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
13
Remainder of 2009: |
$ |
1.13 million |
|
|
2010: |
2.80 million |
|
||
2011: |
2.74 million |
|
||
|
$ |
6.67 million |
|
|
In the event that Digimarc is retained to provide technical and developmental services to Newco 2, LLC during the periods referenced above, the amounts paid by Newco 2, LLC shall be credited against the minimums due under this Section 5.02 (d).
5.03. Nielsen Licenses and Services
(a) Nielsen Support and Data Services . Nielsen shall provide incidental management support at no cost to the Company and pursuant to the terms and conditions substantially as set forth in the Nielsen Data License in Schedule 5.03, to the extent the provisions of such form of license are not in conflict with the terms of this Agreement, it will also irrevocably provide:
(i) Free access to and use of any Nielsen Data Services as reasonably required for the development and marketing of Company Products within the scope of the Business. The Nielsen Data Services will be available through the variety of means it is made available to Nielsens clients, including desktop based (downloaded to a PC or sent via CD-ROM as delivered to current Nielsen clients) or web based (Nielsen operates several web based report platforms). Free access by the Company to Nielsen information assets (including Nielsen Data Services) will be via all means accessible to any client. The free access to specific Nielsen Data Services will be as reasonably required for the operation of any Company Product within the scope of the Business, or for evaluation of any such Company Product, as determined by the reasonable judgment of Company management; and
(ii) Free access to and use of Nielsen Data Services in the formats that they exist in at the time of the delivery to the extent such Nielsen Data Services are reasonably required for the development and marketing of Company Products within the scope of the Business.
With respect to the foregoing, the Company will be a client of Nielsen, but will receive Nielsen Data Services at no cost. Non-syndicated custom formatted guides and reports shall not be Nielsen Data Services, but may be provided to the Company upon request, at a reasonable market price, or at such other price and on such terms as the parties agree.
(b) No Implied Licenses . Nothing contained in this Agreement will be construed as conferring by implication, estoppel or otherwise, any license or other right under any patent rights or other industrial or intellectual property rights of Nielsen, except for the license expressly granted herein.
(c) IP License . Subject to the terms and conditions of this Agreement, Nielsen hereby grants to the Company, as of the Effective Date, a worldwide, non-exclusive, royalty free, nontransferable, irrevocable license under any and all Nielsen Licensed IP as reasonably required
14
for use by or for the Company in the manufacture (by or for), development, marketing, offer for sale, sale, import, lease, license and other transfer to Company customers of Company Products within the scope of the Business.
5.04 Ability to Grant Licenses
For purposes of certainty, nothing in this Agreement shall limit either Member from granting exclusive licenses outside identified areas of the Company Business and initial business plan as set forth in Section 2.02. All later business opportunities for the Company are subject to discussion and mutual agreement, including whether exclusivity is commercially reasonable or appropriate.
5.05 Transitional Services; Real Estate
Any transitional, ongoing, administrative or other services and real estate arrangements of the Company shall be provided in accordance with the Approved Business Plan and the Approved Budget.
6.01. Funding; Capital Contributions
Date |
|
Amount |
|
|
|
|
|
|
|
July 1, 2009 |
|
$ |
350,000 |
|
|
|
|
|
|
October 1, 2009 |
|
$ |
350,000 |
|
|
|
|
|
|
January 1, 2010 |
|
$ |
400,000 |
|
|
|
|
|
|
April 1, 2010 |
|
$ |
400,000 |
|
|
|
|
|
|
July 1, 2010 |
|
$ |
400,000 |
|
|
|
|
|
|
October 1, 2010 |
|
$ |
400,000 |
|
|
|
|
|
|
January 1, 2011 |
|
$ |
400,000 |
|
|
|
|
|
|
April 1, 2011 |
|
$ |
400,000 |
|
|
|
|
|
|
July 1, 2011 |
|
$ |
400,000 |
|
|
|
|
|
|
October 1, 2011 |
|
$ |
400,000 |
|
15
6.02. Fiscal Year
The fiscal year of the Company shall be the calendar year.
6.03. Distributions to the Members
(a) Capital Accounts . The Company shall maintain a capital account for each Member in accordance with Treas. Regs. § 1.704-1(b)(2)(iv) and administrative guidance issued with respect thereto (each such account as so maintained, a Capital Account). The provisions of this Agreement relating to Capital Accounts are intended to comply with such provisions and related provisions issued with respect to section 704 of the Code and shall be interpreted consistently therewith. The Company shall have the authority to make such adjustments to the Members Capital Accounts as may be required to cause the allocations made by the Company to comply with such provisions.
(b) Adjustments to Capital Accounts . At least once each taxable year of the Company for United States tax purposes (as determined under Code section 706, a Fiscal Year), after adjusting each Members Capital Account for all contributions and distributions with respect to such Fiscal Year, the Company shall allocate all profits and losses and items thereof in the following order of priority: (A) First, (1) allocations of nonrecourse deductions shall be allocated among the Members pro rata in proportion to their Percentage Interests under Treas. Regs. § 1.704-2, including, without limitation, Treas. Regs. §§ 1.704-2(e) and 1.704-2(j)(1), (2) allocations of partner nonrecourse deductions attributable to a particular partner nonrecourse liability shall be allocated to the Member who has the economic risk of loss for that liability to the extent required under Treas. Regs. §§ 1.704-2(i) and 1.704-2(j)(1), (3) allocations of income and gain shall be made to Members whose share of partnership minimum gain is reduced to the extent required under Treas. Regs. §§ 1.704-2(f) and 1.704-1(j)(2), (4) allocations of income and gain shall be made to Members whose share of partner nonrecourse debt minimum gain is reduced to the extent required under Treas. Regs. §§ 1.704-2(i)(4) and 1.704-1(j)(2), and (5) a Member who unexpectedly receives an adjustment, allocation, or distribution described in Treas. Regs. § 1.704-1(b)(2)(ii)( d )( 4 ), ( 5 ), or (6) shall be allocated items of income and gain (consisting of a pro rata portion of each item of partnership income, including gross income, and gain for such year) in an amount and manner sufficient to eliminate such deficit balance as quickly as possible; and (B) all remaining profits and losses and items thereof shall be allocated to the Members Capital Accounts in a manner such that, after such allocations have been made, the balance of each Members Capital Account (which may be a positive, negative, or zero balance) shall equal (1) the amount that would be distributed to such Member, determined as if the Company were to sell all of its assets for the section 704(b) Book Value (as defined below) thereof and distribute the proceeds thereof (net of any sales commissions and other similar transaction fees and payments required to be made to creditors) pursuant to the relevant legal documents setting forth such distributions, minus (2) the sum of (a) such Members share of the partnership minimum gain (as determined under Treas. Regs. §§ 1.704-2(d) and (g)) and
16
partner nonrecourse debt minimum gain (as determined under Treas. Regs. § 1.704-2(i)), and (b) the amount, if any, that such Member is obligated (or is deemed for United States tax purposes to be obligated) to contribute, in its capacity as a Member, to the capital of the Company as of the last day of such Fiscal Year. Notwithstanding the preceding provisions of this paragraph, all allocations of gain or loss recognized for Capital Accounting purposes in connection with property contributed by a Member to the Company that, on liquidation of the Company would be distributed to that Member, shall be specially allocated to that Member.
(c) Code Section 704(c)(1)(A) . Except as provided in the following provisions of this Section 3, each item of taxable income, gain, loss, deduction, or credit shall be allocated in the same manner as its correlative item of book items allocated pursuant to Section 2. In accordance with Code Section 704(c)(1)(A) (and the principles thereof) and Treas. Regs. § 1.704-3, income, gain, loss and deduction with respect to any property contributed to the capital of the Company, or after Company property has been revalued under Treas. Regs. § 1.704-1(b)(2)(iv)( f ), shall, solely for United States federal, state and local tax purposes, be allocated among the Members so as to take into account any variation between the adjusted basis of such Company property to the Company for United States federal income tax purposes and its value as so determined at the time of the contribution or revaluation of Company property. This Paragraph shall be construed to authorize the Company to utilize only the traditional method described in Treas. Regs. § 1.704-3(b) unless all Members agree otherwise. Any elections or other decisions relating to such allocations shall be made by the Company. Allocations pursuant to this Paragraph are solely for United States tax purposes and shall not affect, or in any way be taken into account in computing, any Members Capital Account or share of profit, loss, or other items, pursuant to any provision of this Agreement or otherwise affect the Members rights (including, without limitation, rights to distributions) and obligations with respect to the Company.
(d) Certain Definitions . For purposes of this Agreement: (A) the term section 704(b) Book Value means, with respect to any Company property, the Companys adjusted basis for United States tax purposes, adjusted from time to time to reflect the adjustments required or permitted by Treas. Regs. §§ 1.704-1(b)(2)(iv)(d) through ( g ), provided that on the date of the contribution of an asset to the Company, the section 704(b) Book Value of any asset contributed to the Company shall be equal to the fair market value (as reasonably determined by the Parties) of such asset on the date of such contribution, (B) the term Treas. Regs. means Treasury Regulations issued under the Code, and (C) the term profits and losses shall mean the items of profit and loss of the Company (including separately stated items) as computed under Treas. Regs. § 1.704-1(b)(2)(iv).
6.04. Certain Other Allocation Rules
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6.05 Additional Capital Contributions
If and when the Company has used all of the Initial Capital Contribution, the Members Committee may determine that the Company requires additional capital to expand the Business. The Members Committee shall notify the Members of the required amount and each Member may, but shall not be required to, make a capital contribution in an amount equal to their Percent Interest portion of such required capital.
6.06 Members Failure To Make Capital Contributions
In case either Member (the Non-Contributing Member) elects not to make such a capital contribution, then the other Member (the Other Member) may elect to exercise one or more of the provisions set forth below.
(a) The Other Member may withdraw its additional capital contribution in an amount comparable to that which the Noncontributing Member failed to make.
(b) The Other Member may advance for its own Capital Account (in addition to its pro-rata share of the additional capital contribution), the additional capital contribution requested from the Noncontributing Member. Thereafter allocations of excess cash distributions, net profits, and net losses, as well as distributions of the Assets and properties of the Company upon termination of this Agreement shall be made to each Member accordance with revised Percentage Interests determined in accordance with aggregate capital contributions made to the Company ignoring any prior return of Initial Capital Contributions or Additional Capital Contributions.
6.07 Accounting Procedures
(a) Accounting Principles . The books of account of the Company shall be kept and maintained at the principal place of business of the Company, or at such other place or places as shall be determined by the Members Committee. The books of account and the Financial Statements of the Company shall be prepared in accordance with GAAP, consistently applied, which shall be utilized in the preparation of the books of account and Financial Statements of the Company.
(b) Financial Statements . The Company shall cause Financial Statements to be prepared and furnished to each of the Members, as soon as is practicable after the end of each
18
month, quarter and year, as the case may be, but in no event later than twelve (12) working days after the end of each month or quarter or twenty-five (25) working days after the end of a year. The Financial Statements shall be prepared in accordance with Section 6.05 (a) hereof, and shall be accompanied by:
The president of the Company and the principal financial employee of the Company responsible for providing accounting services to the Company shall also provide each Member and the Members Committee with such other reports relating to the operations of the Company as it may from time to time request. Any audit under subparagraph (i) or (ii) hereof shall be at the Companys expense.
6.08 Principle Tax Matters
(b) The Tax Matters Member shall, with the prior approval of the Members Committee, be permitted to:
(i) enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of the Company items required to be taken into account by a Member for income tax purposes (such administrative proceedings being referred to as a Tax Audit and such judicial proceedings being referred to as Judicial Review );
(ii) in the event that a notice of a final administrative adjustment at the Company level of any item required to be taken into account by a Member for tax purposes (a Final Adjustment ) is mailed to the Tax Matters Member, seek Judicial Review of such Final Adjustment, including the filing of a petition for readjustment with the Tax Court or the United States Claims Court, or the filing of a complaint for refund with the District Court of the United States for the district in which the Companys principal place of business is located;
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The Tax Matters Member shall consult with the other Member (that is not the Tax Matters Member) and receive the other Members written approval before taking any action pursuant to this Section 6.06(b) and show the other Member the relevant paperwork that such Member requests associated with such action. In the case of a disagreement between the Tax Matters Member and the other Member, an accounting firm to be selected by the Members Committee will resolve such disputes.
The Tax Matters Member shall receive no compensation for its services. All third party costs and expenses incurred by the Tax Matters Member in performing its duties as such (including legal and accounting fees and any out-of-pocket expenses) shall be borne by the Company. Nothing herein shall be construed to restrict the Company from engaging an accounting firm or other experts or consultants to assist the Tax Matters Member in discharging its duties hereunder, so long as the compensation paid by the Company for such services is reasonable.
6.09 Payment and Withholding of Certain Taxes
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6.10 Organizational Expenses
The Company shall elect to deduct expenses, if any, incurred by it in organizing the Company ratably over a 180-month period as provided in Section 709 of the Code and the regulations promulgated thereunder.
6.11 Classification
The Company will file information returns in a manner consistent with treatment of the Company as a partnership for United States federal income tax purposes and will not elect to be treated as a corporation for United States federal income tax purposes.
7.01. Business Plans and Budgets
7.02. Approval by the Members Committee
If approved by the Members Committee in accordance with the terms of Section 7.01 hereof, the proposed two-year business plan shall become the Approved Business Plan for the applicable three-year (or shorter) period, and the proposed budget for the following two (2) years shall become the Approved Budget for the applicable two (2) year (or shorter) period under Section 7.01(b) hereof.
7.03. Default Budget
In the event that the Members Committee fails to approve a budget for any two (2) year period pursuant to Sections 7.01 and 7.02 hereof, then the Approved Budget for the next ensuing year shall be the budget for the second year of the two (2) year period as was contemplated within the then effective Approved Budget (for the avoidance of doubt, 2010 being the second year of the initial Approved Budget) and if the two (2) year period covered by the
21
most recent Approved Budget expires and no further budget is approved by the Members Committee, there shall be a Default Budget (as defined below) for the next ensuing year. The default budget (a Default Budget ) shall be equal to the annualized operating expenditures of the Company for the most recent three months.
7.04. Default Business Plan
In the event a two-year business plan which is submitted to the Members Committee shall not be adopted pursuant to Sections 7.01 and 7.02 hereof, the Approved Business Plan which is then in effect shall continue to be the Approved Business Plan of the Company, except that the projected budget contained therein for any relevant year shall be deemed to have been superseded by the Approved Budget or Default Budget, as applicable, for such year. If the most recent Approved Business Plan expires and no further business plan is approved by the Members Committee, then the Company shall continue operating on a basis consistent with the last year of the most recent Approved Business Plan.
8.01. Authorization
Each Member represents and warrants to the other Member that it has taken all action necessary for the authorization, execution, delivery and performance by it of this Agreement, and that when this Agreement is executed, it will constitute its valid and binding obligation in accordance with its terms. Each Member represents and warrants it has all necessary corporate and other power with respect to the foregoing.
8.02. Absence of Conflict
Each Member represents and warrants to the other Member that neither the execution, delivery or performance of this Agreement, or any patent or other License Agreements executed contemporaneously herewith, or any other Related Agreements being executed and delivered simultaneously herewith to which it is a party, nor the consummation of the transactions herein or therein contemplated, nor the fulfillment of or compliance with the terms and conditions hereof or thereof, will (nor with the giving of notice or lapse of time would) (a) conflict with its Certificate of Incorporation, Bylaws or other instrument pursuant to which it is organized, as amended or restated and as currently in effect or (b) result in a breach of or constitute a default under or conflict with any material contract, agreement or instrument to which it is a party or by which it or any of its Assets are bound (including, without limitation, any agreements with any banks or other lenders to which either Member or any of its Affiliates are a party or subject), or (c) violate any law, rule or regulation applicable to it or any of its Assets. Any third party, governmental or administrative consents or approvals which are required in connection with the foregoing have been obtained and are in full force and effect.
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8.03. Certain Covenant
8.04. Restricted Transfer of the Company Interest
A Member may not, without the prior written consent of the other Member, sell, assign, encumber or otherwise transfer (directly or indirectly, through one or more transactions, and whether voluntary, involuntary, by operation of law or otherwise) its Interest in the Company or any part thereof to any Person. Notwithstanding the previous sentence, either Member may transfer its Interest: (i) by operation of law, pursuant to a merger, consolidation, reorganization, statutory conversion, amalgamation or similar corporate transaction; or (ii) in connection with a sale or other transfer of all or substantially all of its assets or business; or (iii) upon receiving the written consent of the other Member, which consent shall not be unreasonably withheld, to an Affiliate which is wholly owned by, or which wholly owns, such Member. It shall be a condition precedent to any transfer that the transferee agrees in writing to be bound by the terms of this Agreement. Any transfer that is not made in strict compliance with the terms of this Section 8.04 shall be null and void.
9.01. Dissolution
(iv) by the end of 2013, the Company is no longer solvent or is not generating at least [**] dollars of annualized revenues from unrelated entities.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
23
9.02. Liquidation
(a) Upon the dissolution of the Company, the Members Committee shall seek to resolve all issues of ownership, separation and distribution of Company assets, to make settlement and payment of all Company obligations, and to wind up and liquidate the affairs of the Company in an orderly and businesslike manner. If the Members Committee cannot reach such an agreement, they shall appoint a Person to act as liquidator to wind up the Company. The liquidator shall have full power and authority to sell, assign, and encumber any or all of the Companys assets and to wind up and liquidate the affairs of the Company in an orderly and businesslike manner. All proceeds from liquidation and any remaining funds or assets of the Company shall be distributed in the following order of priority: (i) to the payment of debts and liabilities of the Company (including, to the extent permitted by the Act, debts of the Company that are owed to a Member) and the expenses of liquidation; (ii) to the setting up of such reserves (including, cash escrow accounts) as the liquidator may reasonably deem necessary for any contingent liabilities of the Company; and (iii) by distribution of cash or property (at the election of each Member), to the Members in accordance with their Percentage Interests.
(b) If a Member elects to take its distribution in cash, and sufficient cash is not available to make the full cash distribution to each Member, the liquidator shall sell at fair market value Company property as necessary to make such distribution in cash. The other Members may purchase the property sold at its fair market value.
(c) The distribution of cash or property to the Members in accordance with the provisions of this Section 9.02 shall constitute a complete return to the Members of their respective Capital Contributions and a complete distribution to the Members of their respective Interests and all Company property. In the event that any Members Capital Account balance is a negative amount after all allocations to such account in accordance with Article VI and distributions in accordance with Section 9.02(a), such Member shall have no obligation to contribute any amount to the Company as a result of such negative Capital Account; provided, however, that this provision shall not override any obligation of a Member to make a Capital Contribution under Section 6.01.
(d) Any distributions to the Members pursuant to this Section 9.02 shall be made in accordance with the time requirements set forth in Treasury Regulation section 1.704-1(b)(2)(ii)(b)(2).
A Member whose performance hereunder is prevented by an event or condition of Force Majeure, upon providing written notice to the other Member of such event or condition, shall be excused from performance to the extent such event or condition prevents its performance, provided that the Member so affected shall use reasonable efforts to avoid or remove the cause of nonperformance and shall continue performance hereunder immediately upon the removal of such causes.
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11.01. Liability
To the fullest extent permitted by law, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Member shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member.
11.02. Insurance
The Company shall purchase and maintain directors and officers errors and omissions insurance, to the extent and in such amounts as the Members Committee shall, in its discretion, deem reasonable.
12.01. No Publicity or Advertisement Without Prior Consultation
Except after consultation with the other parties to this Agreement, none of the Members or the Company shall, and each of the parties shall use its reasonable efforts to assure that none of its officers, directors, employees, agents or advisors shall, publicize, advertise, announce or describe to any governmental entity or other third person the terms of this Agreement, the parties hereto or the transactions contemplated hereby, except as it believes in good faith to be required by applicable law, regulation, or stock market rules or as permitted pursuant to this Agreement.
12.02. Severability
Any portion or provision of this Agreement which is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining portions or provisions hereof in such jurisdiction or, to the extent permitted by law, rendering that or any other portion or provision hereof invalid, illegal or unenforceable in any other jurisdiction.
12.03. Article and Section Headings, Schedules and Exhibits
The Article and Section headings included in this Agreement are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. Schedules and Exhibits referred to in this Agreement are an integral part of this Agreement.
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12.04. Counterparts
This Agreement and any documents executed pursuant hereto may be executed in any number of counterparts, each one of which shall be an original and all of which shall constitute one and the same document.
12.05. Gender and Number
In this Agreement (unless the context requires otherwise), the masculine, feminine and neuter genders and the singular and the plural include one another.
12.06. Expenses
Unless otherwise provided in this Agreement, the parties shall each bear their own fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby (including without limitation all fees and expenses of counsel).
12.07. Notices
All notices given pursuant to this Agreement shall be in writing and be personally delivered or mailed with postage prepaid, by registered or certified mail, return receipt requested to the address set forth below or such other address as a party may from time to time specify in writing to the other party. If so mailed and also sent by telegram or facsimile machine, the notice will conclusively be deemed to have been received on the business day next occurring 48 hours after the latest to occur of such mailing and telegraphic or facsimile communication; otherwise, no notice shall be deemed given until it actually arrives at the address in question. The addressees to which notices are initially to be sent are as follows:
Digimarc Corporation
9405 SW Gemini Drive
Beaverton, Oregon 97008
Attention: Bruce Davis, CEO
with a copy to Robert Chamness, Chief Legal Officer and Secretary
Facsimile No.: (503) 469-4771
The Nielsen Company (US) LLC
770 Broadway
New York, NY 10003
Attention: Itzhak Fisher, Global Product Leadership
with a copy to the Chief Legal Officer
Facsimile No.: (646) 654-8318
26
12.08. No Third Party Beneficiaries
No employee of the Company (or his/her spouse or beneficiary), or any other Person not a party to this Agreement, shall be entitled to assert any claim hereunder. This Agreement shall be binding upon and inure to the benefit only of the parties hereto and their respective successors. Notwithstanding any other provisions to the contrary except with respect to such successors, it is not intended and shall not be construed for the benefit of any third party or any Person not a signatory hereto. In no event shall this Agreement constitute a third party beneficiary contract.
12.09. Governing Law; Arbitration
This Agreement is governed by, and is to be construed and interpreted in accordance with, the law of the State of Delaware, without giving effect to the conflict of law principles thereof. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in Beaverton, Oregon, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Unless otherwise agreed in writing by the parties, the arbitration panel shall have no authority to amend or contravene this Agreement, to expand or otherwise modify the scope of the Business of the Company or to make any award or finding contrary to the provisions of an applicable Approved Budget or Approved Business Plan. The prevailing party in the arbitration shall be entitled to recoup its reasonable attorneys fees from the other party as part of any judgment entered. Judgment on the award may be entered in any court having jurisdiction thereof.
12.10. Modifications, Amendments or Waivers
Except as otherwise provided herein, provisions of this Agreement may be modified, amended or waived only by a written document specifically identifying this Agreement and signed by a duly authorized executive officer of each Member.
12.11. Assignment, Successors and Assigns
Except as set forth in Section 8.04 hereof, without the other Members prior written consent, this Agreement and the rights and obligations hereunder shall not be assignable by any Member. This Agreement and the rights and obligations hereunder shall be binding upon, and inure to the benefit of, the respective successors and permitted assigns of the parties hereto. Notwithstanding anything to the contrary in this Agreement, in the event that either party assigns this Agreement and the rights and obligations hereunder to an unrelated third party, such that the assigning party ceases to function or exist as a separate business entity, the rights and license granted to the Company under either Members Licensed Patents in this Agreement shall include only those patents and patent applications that were part of the definition of that Members Licensed Patents prior to the date of such assignment and having an effective filing date prior to the date of such assignment (including reissues, reexaminations, continuations, divisionals, continuations-in-part, extensions, substitutions, renewals, foreign counterparts and equivalents thereof) and patents issuing therefrom and patents claiming priority to such patents or patent applications having an effective filing date prior to the date of such assignment. For the avoidance of doubt, no patents of any entity that acquires either Party after the Effective Date are within the definition of Digimarc Licensed Patents or Nielsen Licensed Patents.
27
12.12. Joint Preparation
This Agreement has been jointly prepared by the Members and the provisions of this Agreement shall not be construed more strictly against any Member as a result of its participation in such preparation.
12.13. Entire Agreement; Termination of Prior Agreement
This Agreement (including the Schedules and Exhibits hereto) constitutes the entire agreement of the Members with respect to the subject matter hereof and supersede all prior written or oral and all contemporaneous oral agreements, understandings and negotiations between the Members with respect to the subject matter hereof.
12.14. Further Assurances
Each Member shall fully and faithfully carry out all its respective agreements and covenants expressly set forth in this Agreement. Each of the Members agrees to execute, acknowledge and deliver such additional documents and take such further actions, as may reasonably be required from time to time to carry out each of the provisions, and the intent, of this Agreement, and every agreement or document relating hereto, or entered into in connection herewith.
12.15. Securities Disclosures and Public Announcements
Disclosure of this Agreement, the financial impact of this Agreement and related transactions on the parties, and the terms and conditions of this Agreement (both in summary form and through exhibit filings) may be required under SEC regulations, stock market rules, or any other laws. Members may rely in good faith on advice of counsel when determining whether such disclosure is required. Except as recited above and in Section 12.01, no Member will make public announcements nor issue press releases relating to this Agreement without the prior written consent of the other Member(s), which consent will not be unreasonably withheld.
12.16. Confidentiality
Subject to Section 12.15, each party agrees that it will treat any provisions of this Agreement not required to be publically disclosed as confidential and will handle confidential information of the other party in a manner consistent with the policies and practices of that party for handling its own confidential information and in no case with less than a reasonable standard of care. Notwithstanding the foregoing, either party may provide a copy of this Agreement to a third party considering in good faith a bona fide transaction as contemplated in Sections 8.04 or 12.11, provided that such third party agrees in writing to be bound to a confidentiality agreement customary to such transactions and prohibiting use of its knowledge of this Agreement or its provisions for any competitive purpose. If the entire Agreement is terminated, the obligations set out in this Section will extend for a period of five (5) years from this termination date.
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12.17. Bankruptcy
Any intellectual property licenses and rights granted hereunder or pursuant hereto are, and will be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code (Code) licenses of intellectual property, as defined under the Code. Notwithstanding any provision contained herein to the contrary, if a party is under any proceeding under the Code and the trustee in bankruptcy of that party, or that party as a debtor in possession, rightfully elects to reject this Agreement, then the other party pursuant to the relevant portions of Section 365(n) of the Code may retain any and all of such other partys licenses and rights hereunder to the maximum extent permitted by law.
12.18. Survival
Any rights and obligations which by their nature (or explicit statement) survive and continue after any expiration or termination of this Agreement will survive and continue and will bind the parties and their successors and assigns, until such obligations are fulfilled. For avoidance of doubt, upon expiration or termination of this Agreement, the provisions of Sections 2.03, 2.04, 3.06, 5.01, 5.02, 5.03, 5.04, 8.04, 9.01, 12.07, 12.08, 12.09, 12.11, 12.16, and 12.17 will survive and remain in effect until fulfilled.
End of text; the signature page follows
29
IN WITNESS WHEREOF, the members hereto have caused this Agreement to be executed by their duly authorized representatives, effective as of the Effective Date.
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DIGIMARC CORPORATION |
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By: |
/s/ Bruce Davis |
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Name: Bruce Davis |
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Its: Chief Executive Officer |
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THE NIELSEN COMPANY (US) LLC |
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By: |
/s/ Itzhak Fisher |
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Name: Itzhak Fisher |
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Its: Global Product Leadership |
Schedule 4.01
Members Committee
Digimarc Representatives :
1. Bruce Davis
2. Robert Chamness
Nielsen Representatives :
1. Itzhak Fisher
2. Bruce Haymes
Schedule 5.02
Excluded Patents
Patent No./Serial No. |
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Title |
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USPN [**] |
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[**] |
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USPN [**] (a continuation of USPN [**]) |
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[**] |
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USPN [**] |
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[**] |
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USPN [**] |
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[**] |
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and any reissues, continuations, continuations-in-part, divisionals, extensions, re-examinations, substitutions, renewals and foreign counterparts and equivalents of those patents.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Schedule 5.02 (d)
Services Agreement
Schedule 5.02 (d)
DEVELOPMENT SERVICES AGREEMENT
This is a Development Services Agreement (the Agreement) between Digimarc Corporation, a Delaware corporation, having a place of business at 9405 SW Gemini Drive, Beaverton, Oregon 97008, and its subsidiaries (Digimarc), and [Newco 1, LLC], a Delaware limited liability company, having a place of business at 9405 SW Gemini Drive, Beaverton, 97008 (Newco 1).
For good and valuable consideration as stated herein, the parties hereby agree as follows:
This Agreement is entered into contemporaneously with, and appended as a schedule to, the Limited Liability Company Agreement of [Newco 1, LLC].
The effective date of this Agreement is July 1, 2009 (Effective Date).
Definitions of terms defined in the Limited Liability Company Agreement of [Newco 1, LLC] are not repeated here.
1. IP Ownership and License Grants.
1.1. Technology and Patents Developed Pursuant to Development Services Agreement . Ownership and licensing of intellectual property shall be consistent with section 5.01 of the Limited Liability Company Agreement of [Newco 1, LLC] with respect to the Digimarc Services provided for herein.
2. Digimarc Services.
2.1. Authorized Services. Digimarc will perform services for Newco 1 relating to the development of Newco 1 products and services (the Digimarc Services), including research, development, engineering, quality assurance, market research and development, strategic planning, strategy development, business development, project management, reporting, and such other services or activities as will be determined from time to time by the management of Newco 1 and the Members Committee of Newco 1. Digimarc will perform the Digimarc Services in good faith and with a reasonable standard of quality, but in no event with a standard of quality less than that Digimarc employs for services Digimarc performs for itself . The Digimarc Services shall not include any time or labor spent by Digimarc in its own strategic planning or the management of its own organization, outside of the management of the specific activities to be conducted as part of such Services.
2.2. Annual Work Plan. The particular Digimarc Services to be performed and expenditures to be made by Digimarc shall be set forth in an annual work
plan and budget (the Annual Work Plan) as adopted and approved by the management of Newco 1. The parties shall mutually agree upon a process for determining the Annual Work Plan consistent with the Approved Budget and Approved Business Plan process of and for Newco 1. The Annual Work Plan shall state reasonable and specific objectives to be met by Digimarc, and which shall take into account Newco 1s strategic goals and operational experience, Digimarcs resources and capabilities to assist Newco 1 in achieving those goals, and the market conditions then prevailing. The parties shall also mutually agree upon an informal process for change management and for resolving disputes concerning determination of the Annual Work Plan. In all events, Digimarc shall make resources available in each year covered by a timely submitted and reasonable Annual Work Plan (a Plan Year) sufficient to perform the Digimarc Services identified in the Annual Work Plan. The first Plan Year for the rest of 2009 will begin on July 1, 2009, prior to completion of the Annual Work Plan, based upon a short statement of work to be agreed upon by the parties. The Annual Work Plan for 2010 will be determined as soon as practicable thereafter, and no later than December 31, 2009. Successive Annual Work Plans shall be determined no later than ninety (90) days prior to the beginning of each subsequent Plan Year. If Digimarc reasonably believes that any requested changes to the Annual Work Plan will result in additional expenditures exceeding those approved by Newco 1 in the Annual Work Plan, it shall so inform Newco 1. If Newco 1 and Digimarc agree to the requested changes and such additional expenditures, they shall amend the Annual Work Plan to reflect such changes. Unless the Members Committee of Newco 1 authorizes such additional expenditures in writing, Newco 1 shall not be obligated to pay for Digimarc Services in excess of the larger of (a) the amount set forth in the Annual Work Plan (including as amended pursuant to the preceding sentence) or (b) the Service Minimum Fee (as defined below).
2.3. Quarterly Reporting and Review . Within thirty (30) days following the end of each quarter during each Plan Year, Digimarc shall provide reports stating its progress in achieving the objectives set forth in the Annual Work Plan, and describing in detail the Digimarc Services performed and expenditures made in that quarter. The parties shall mutually agree upon a process for a joint quarterly review of Digimarcs progress in achieving the objectives set forth in the Annual Work Plan, and for considering any changes that either Newco 1 or Digimarc may propose to the Annual Work Plan.
2.4. Minimum Service Fees. Subject to any termination of its obligation to engage Digimarc to perform the Digimarc Services, Newco 1 shall pay, in equal quarterly payments as set forth below, the following minimum annual amounts for Digimarc Services in each Plan Year (the Minimum Service Fees):
Annual Work Plan Period |
|
Plan Year 2009 |
|
Plan Year 2010 |
|
Plan Year 2011 |
|
|||
Minimum Fees |
|
$ |
1.13 million |
|
$ |
2.80 million |
|
$ |
2.74 million |
|
In the event that Digimarc is retained to provide development services to [Newco 2, LLC] during the term of this Agreement, the amounts paid by [Newco 2, LLC] shall be
credited against the minimums set forth above. Quarterly payments of such fees, including Minimum Service Fees, will be due and payable to Digimarc only for those quarters in which Digimarc performs Digimarc Services in accordance with a timely submitted and reasonable Annual Work Plan, at such levels as would be sufficient to generate the Minimum Service Fees as set forth above; or if Newco 1 fails to timely submit a reasonable Annual Work Plan, in which Digimarc was ready, willing and able to perform such level of Digimarc Services. Quarterly Minimum Service Fee payments are due and payable to Digimarc on the first day of each quarter in which the Digimarc Services are to be provided. Minimum Service Fees do not include any hardware, equipment or software purchased on behalf of Newco 1 by Digimarc. Hardware, equipment or software will only be purchased on behalf of Newco 1 by Digimarc upon written approval by Newco 1 and will be charged back to Newco 1 with no markup.
2.5. Labor Rates. Labor rates charged for Digimarc Services will be as shown in Appendix A. The labor rates will be increased on January 1 of each year based on the report used by Digimarc for evaluating annual labor rates for similar project work, reflecting an determination of average rates of wage and benefits cost inflation, and may otherwise be adjusted by mutual agreement of the parties. The Members shall have an opportunity to review the aforementioned labor report prior to implementation of any annual labor rate adjustments.
2.6. Digimarc Services Payment Schedule and Invoice. Digimarc shall furnish an invoice to Newco 1 following each quarter of any Plan Year. The invoice shall be accompanied by an itemization of the Digimarc Services actually performed in that quarter, including an identification of individual timekeepers, their respective hours and rates, and the nature of the work performed by them with reference to the objectives of the Annual Work Plan. The invoice shall also be accompanied by an itemization of those out-of-pocket expenditures reasonably incurred by Digimarc in performing the Digimarc Services, reimbursement of which shall be included in the Minimum Service Fees. Within thirty (30) days of receipt of such invoice, Newco 1 shall pay for Digimarc Services actually performed by Digimarc in accordance with the then-current Annual Work Plan in that quarter to the extent that the Digimarc Services actually performed by Digimarc within that Plan Year to date, as reflected in the cumulative quarterly invoices for that Plan Year, exceed the Minimum Service Fees owed for that Plan Year cumulatively to date. If the amount of Digimarc Services actually performed and invoiced in that quarter, when added to the amount of Digimarc Services actually performed and invoiced in prior quarters of that Plan Year, is less than the Minimum Service Fees owed for that Plan Year cumulatively to date, Newco 1 shall [**].
2.7. Audit Rights. For a period of three (3) years following the end of any Plan Year, or until resolution of a dispute concerning the accuracy of the invoices or quarterly reports for a particular Plan Year arising within that three-year period, Newco 1 (and its designated agents) shall have the right to inspect and examine Digimarcs books and records relating to the Digimarc Services, including time records and activity logs,
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
for the purpose of determining whether Digimarcs invoices and quarterly reports for that Plan Year are accurate; provided, however, that Digimarc may redact such documents to preserve the confidentiality of Digimarc proprietary information that is not necessary to verify the accuracy of the invoices or quarterly reports . Any such inspection and examination will take place upon reasonable prior written notice to Digimarc, during regular business hours and no more than once a year. Digimarc shall promptly refund to Newco 1 any amount that the audit shows was overpaid by Newco 1 in that Plan Year per the Agreement and, if the overpayment is greater than 5% of the total payment for that Plan Year, Digimarc shall also pay the reasonable out-of-pocket costs of the inspection and examination.
2.8. Newco 1 Commitment of Resources. Newco 1 shall use its commercially reasonable efforts to develop and support its products and services, including the commitment of a reasonable amount of marketing, financial and organizational resources. In furtherance of those efforts, Newco 1 shall prepare an Annual Work Plan for the development and support of the Newco 1 products and services business, shall invite Digimarc to advise and contribute to the formation of such plan, and shall share such plan with Digimarc. The Members Committee shall review the Annual Work Plan at each quarterly meeting and make whatever changes it believes necessary and appropriate for the operation of the Company.
2.9. Digimarc Opportunity to Bid . For so long as [**], Newco 1 shall provide Digimarc with a reasonable opportunity to [**].
2.10. Limitations on Digimarc Services for Other Parties . For as long as Newco 1 is timely paying Digimarc for Digimarc Services, Digimarc shall not [**].
2.11. Patent Prosecution . To the extent that the parties identify potentially patentable inventions arising from the Digimarc Services, with the consent of and pursuant to the direction of the Members Committee, the parties will determine how and whether to prosecute a patent for such inventions.
3. Remedies for Breach .
3.1. Remedies for Breach . If either party materially breaches this Agreement, the non-breaching party may, in addition to other remedies at law and in equity, terminate this Agreement. Prior to terminating this Agreement for breach, the non-breaching party must first give the breaching party written notice specifying in detail the alleged breach. The breaching party shall then have seventy-five (75) days to cure such breach.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
4. Termination .
The term of this Agreement is through December 31, 2011.
5. Other Provisions.
5.1. Confidentiality . Each party agrees that it will treat confidential information of the other party in a manner consistent with the confidentiality agreement between the parties. Notwithstanding the foregoing, either party may provide a copy of this Agreement to a third party considering in good faith a bona fide transaction as contemplated in Section 5.2, provided that such third party agrees in writing to be bound to a confidentiality agreement customary to such transactions and prohibiting use of its knowledge of this Agreement or its provisions for any competitive purpose. Upon request by the disclosing party with respect to specifically identified information, the receiving party will return to the disclosing party or destroy all of the confidential information in the receiving partys possession or control furnished to it by the disclosing party which the receiving party does not need to retain in order to perform any obligations imposed, or exercise any rights (including rights of ownership) acquired, by this Agreement, and shall certify in writing its return or destruction of such confidential information. If the receiving party is subject to judicial or governmental proceedings or is subject to government regulations requiring disclosure of confidential information of the disclosing party, then prior to disclosing such information, the receiving party will provide the disclosing party with reasonable prior notice for the disclosing party to seek a protective order for confidential treatment of the confidential information and will only disclose that information that is necessary and required. If the entire Agreement is terminated, the obligations set out in this Section will extend for a period of [**] years from this termination date, except that the confidential information of the disclosing party that is specifically identified by it as a trade secret will be protected for a period of [**] years.
5.2. Assignment . Neither party may assign any of its rights or obligations under this Agreement to any person without the prior written consent of the other, and any such purported assignment shall be null and void from inception; provided, however, that (a) either party may assign all its rights and delegate all its obligations hereunder to a single person without such approval in connection with: (i) a merger, consolidation, reorganization, statutory conversion, amalgamation or similar corporate transaction, or (ii) a sale or other disposition of all or substantially all of its assets in the businesses relating to this Agreement, and (b) Newco 1 may assign all its rights and delegate all its responsibilities to an Affiliate in connection with a restructuring or reorganization of Newco 1.
5.3. Bankruptcy . Any intellectual property licenses and rights granted to either party hereunder or pursuant hereto are, and will be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code (Code) licenses of intellectual property, as defined under the Code. Notwithstanding any provision contained herein to the contrary, if a party is under any proceeding under the Code and the trustee in bankruptcy of that party, or that party as a debtor in possession, rightfully elects to reject
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
this Agreement, then the other party pursuant to the relevant portions of Section 365(n) of the Code may retain any and all of such other partys licenses and rights hereunder to the maximum extent permitted by law.
5.4. Limitations on Damages. NEITHER DIGIMARC NOR NEWCO 1 WILL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, EXEMPLARY, RELIANCE, PUNITIVE OR SPECIAL DAMAGES ARISING UNDER THIS AGREEMENT, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
5.5. Governing Law, Jurisdiction and Venue. This Agreement shall be governed by New York law. All matters concerning the interpretation of, or performance under, this Agreement will be resolved in the state or federal courts in New York applying New York law and jurisdiction and venue will be proper in such New York courts.
5.6. No Waiver. Each and all of the various rights, powers and remedies of the parties will be considered to be cumulative with and in addition to any other rights, powers and remedies which such parties may have at law or in equity in the event of breach of any of the terms of this Agreement. The exercise or partial exercises of any rights, powers or remedies will neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such party. In no event will any waiver of any rights hereunder constitute the waiver of such rights in any future instance unless the waiver so specifies in writing.
5.7. Notices . All notices of breach or early termination must be made in writing. Any written notice under this Agreement will be sent by email with a hard copy sent via certified mail, return receipt requested, or by recognized courier service with tracking capabilities. The notice will be deemed effective as of the earlier of (i) the date of delivery, as evidenced by a delivery receipt or the addressees registry, or (ii) five business days after sending notice to the correct address in the authorized manner. The addresses of the parties, as set forth above, will be used for any such notice unless either party hereafter designates a substitute address in writing in accordance with this provision.
The contacts to address the notices to are:
If to Digimarc:
Digimarc Corporation
9405 S.W. Gemini Drive
Beaverton, Oregon 97008
Attention: Bruce Davis, CEO
with a copy to Robert Chamness, Chief Legal Officer and Secretary
Facsimile No.: (503) 469-4771
If to Newco 1:
Newco 1, LLC
9405 S.W. Gemini Drive
Beaverton, Oregon 97008
Attention:
,
CEO
with a copy to the Legal Officer and Secretary
Facsimile No.: (503) 469-4771
If to Nielsen:
The Nielsen Company (US) LLC
770 Broadway
New York, NY 10036
Attention: Itzhak Fisher, Global Product Leadership
with a copy to the Chief Legal Officer
Facsimile No.: (646) 654-8318
5.8. Integration . This Agreement embodies the entire agreement of the parties hereto regarding the subject matter herein, and supersedes and cancels any and all previous negotiations, agreements or commitments with respect to them, including without limitation the terms and conditions under a prior agreement between Digimarc and Nielsen executed on November 27, 2007, with an effective date of October 1, 2007 (the Prior Agreement) (including all payment obligations of Nielsen accruing after the Effective Date).
5.9. Severability . If any provision of this Agreement is held to be void or unenforceable, the parties agree that such determination will not result in the nullity or unenforceability of the remaining portions of this Agreement. The parties further agree to replace such void or unenforceable provisions of this Agreement with valid and enforceable provisions that will achieve, to the extent legally permissible, the economic, business and other purposes of the void or unenforceable provisions and that reflect the intent of the parties when entering into this Agreement.
5.10. Amendments . This Agreement may not be modified in any manner except by an instrument in writing duly signed by each of the parties hereto.
5.11. Construction . Each party and its counsel have participated fully in the review and revision of this Agreement. Any rule or construction to the effect that ambiguities are to be resolved against the drafting party will not apply in interpreting this Agreement.
5.12. No Agency. Nothing in this Agreement will be construed as creating any agency, partnership or other form of joint enterprise between Digimarc and Newco 1. Neither party will have authority under this Agreement to contract for or bind the other in any manner whatsoever.
5.13. Other Documents. Each party hereto will execute any documents which may be necessary or advisable to carry out or effectuate the foregoing.
5.14. Survival. Upon expiration or termination of this Agreement, rights to payment under this Agreement and the provisions set out in Sections 1, 2.4, 2.7, 3.1, 5.1, 5.2, 5.3, 5.4, 5.6, 5.7, and 5.13 will remain in effect.
5.15. Counterparts. This Agreement may be executed in separate counterparts, and by facsimile, each of which will be deemed an original, and when executed, separately or together, will constitute a single original instrument, effective in the same manner as if the parties had executed one and the same instrument.
IN WITNESS WHEREOF, the Members Committee has adopted this Agreement as part of the Limited Liability Company Agreement of [Newco 1, LLC], to be effective as of the Effective Date.
APPENDIX A: LABOR RATES (current rates)
Job Classification |
|
Rate |
|
|
Account Manager |
|
$ |
[**] |
|
Director |
|
$ |
[**] |
|
Engineering Manager |
|
$ |
[**] |
|
Executive |
|
$ |
[**] |
|
Lawyer |
|
$ |
[**] |
|
Paralegal |
|
$ |
[**] |
|
Market Development Manager |
|
$ |
[**] |
|
Marketing Engineer |
|
$ |
[**] |
|
Product Manager |
|
$ |
[**] |
|
Project Director |
|
$ |
[**] |
|
QA Engineer |
|
$ |
[**] |
|
R&D Engineer |
|
$ |
[**] |
|
Software Engineer |
|
$ |
[**] |
|
Technical Writer |
|
$ |
[**] |
|
IT Network Support |
|
$ |
[**] |
|
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION .
Schedule 5.03
Nielsen Data License
MASTER
SERVICES AGREEMENT
BY AND BETWEEN
THE NIELSEN COMPANY (US), INC.
AND
[Name of Client]
This Agreement (Agreement), dated as of [effective date of Agreement], between The Nielsen Company (US), Inc., a New York corporation (Nielsen), and [Name of Client], a [state/type of organization] (Client), governs the provision and use of data, information, technology and related services (Services) identified in one or more local service agreements or in a project order for Custom Services (as defined below) (each an LSA), entered into by Nielsen and Client and/or their respective affiliates. Nielsen shall mean Nielsen and/or its affiliates and Client shall mean Client and/or its affiliates, and in each LSA Nielsen shall mean the Nielsen entity providing the Services and Client shall mean the Client entity receiving the Services under such LSA. Each LSA binds only the Nielsen and Client entities which execute the LSA, or on behalf of which the LSA is executed, and does not vest rights in any affiliate that is not a party to such LSA. This Agreement shall apply to any services provided to Client during the term of this Agreement, whether or not specified in an LSA.
Article 1. Scope of Service
1.1 Services; Ownership and License . Nielsen shall deliver the Services set forth in each LSA (which may include one or more of the following) for use solely by Client in accordance with this Agreement and such LSA. The data and information included in Services are referred to as Nielsen Information. Client agrees that:
(a) Licensed Services are services to which Nielsen retains ownership and which Nielsen does not sell but licenses to multiple clients including, among others, media, household panel, retail tracking, online and mobile services and Technology Services (as defined below). Client is granted a limited, non-exclusive license to use Licensed Services as set forth in this Agreement and any applicable LSA.
(b) Custom Services include BASES and certain customized research Services (not including any Technology Services) and ownership of such Custom Services shall be subject to the terms of the applicable LSA and/or project order.
(c) Technology Services include Internet portals, access and analytic tools, licensed systems, templates and software (including delivery media, manuals, updates and new versions provided by Nielsen), and Client shall maintain, and upgrade if necessary, its hardware, operating systems and third party software consistent with any requirements and/or changes to the Technology Services, and Nielsen shall provide Client with notice of such requirements and/or changes for the operation of Technology Services prior to implementation.
Article 2. Fees and Taxes
2.1 Fees . Client agrees to pay the fees set forth in each LSA and such fees are due when invoiced and are payable within 30 days of the date of the invoice. Client agrees to pay interest at 1.5% per month (or, if lower, the maximum legal rate) from the date originally due until payment is received by Nielsen on all amounts thereafter.
2.2 Taxes . Client is responsible for all value-added, goods and services, sales, use and similar taxes due with respect to the Services.
Article 3. Use of Services
3.1 Uses and Disclosure of Services . Client may only use Services internally except as permitted in (a) and (b) below and in an LSA or other written agreement signed by an expressly and duly authorized representative of Nielsen. Client may:
(a) in the case of Licensed Services, include Limited Excerpts (meaning Nielsen Information that is not of sufficient quantity or quality as to have independent commercial value, as determined by Nielsen in its sole discretion) in annual reports, reports to the financial community and releases to the media for the purpose of corporate image-building or product promotion; and
(b) in the case of Custom Services, use Nielsen Information (i) in the conduct of its business with partners, suppliers and customers, and (ii) with Nielsens prior written consent, in advertising or promotion of Clients products or services.
Any Nielsen Information that is disclosed must be accurately sourced to Nielsen, be disclosed only to authorized third parties, and not be presented in a misleading manner.
3.2 Uses of References . Disaggregated data, data dictionaries, reference tools, data methodologies, data attributes/characteristics and flat files are referred to as References and may only be used internally unless disclosure to a third party is authorized in writing by Nielsen.
3.3 Restrictions . Client shall not decompile, reverse engineer, disassemble, sublicense, distribute, dispose of, modify, adapt, translate, or remove any proprietary or copyright legend from any Service or Nielsen Information.
3.4 Third Parties . Client may furnish Nielsen Information to third parties (such as consultants and third party processors) retained by Client for use solely on behalf of Client provided that, prior to accessing such Nielsen Information, the third party shall have entered into Nielsens then standard form of agreement for such third party, as determined by Nielsen in its sole discretion. At its discretion, Nielsen may decline to enter into such agreement or grant a particular third party access or rights to Nielsen Information, and Nielsen reserves the right to charge for such access. Nielsen is not responsible for the accuracy of information produced by such third party from Nielsen Information.
3.5 Legal Proceedings . No Services or Nielsen Information may be used in any legal or administrative proceeding. If such use is compelled by legal process, Client shall
promptly give Nielsen advance written notice and, before such use, obtain confidentiality agreements, protective orders and evidentiary stipulations acceptable to Nielsen and shall limit the use to the minimum necessary to comply with such legal requirement.
Article 4. Changes to Services and Charges
4.1 Changes to Service . Nielsen may, from time to time, in its sole discretion, make changes to any Service or portion thereof including, without limitation, formats, schedules, specifications and/or techniques.
4.2 Charges . In the event of a change to a Service, Nielsen may, upon 30 days prior written notice, adjust the fees for such Service. Such fee change shall become effective on the date stated in Nielsens notice unless, within 15 days after such notice, Client notifies Nielsen in writing of its refusal to accept the fee change, in which event the applicable Service to Client shall terminate as of the effective date of the change; provided, however, that Nielsen may, in its sole discretion, elect to rescind the fee change, in which case the Service to Client, as changed, shall continue as provided in the applicable LSA.
Article 5. Warranties, Limitation of Liability, Exclusive Remedy and Indemnification
5.1 Disclaimer of Warranties . Client recognizes that Nielsen Information represents Nielsens opinion based on its analysis of data and information, including data from sample households and other sources that may not be under Nielsens control, and that Nielsen cannot guarantee the accuracy of Nielsen Information. Without limiting the foregoing, NIELSEN DISCLAIMS, AND CLIENT HEREBY WAIVES, ANY AND ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, TO CLIENT OR TO ANY THIRD PARTY, CONCERNING THE SERVICES AND NIELSEN INFORMATION PROVIDED HEREUNDER OR UNDER AN LSA INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, QUALITY OR FITNESS FOR ANY PARTICULAR PURPOSE. The foregoing disclaimer shall not act as or constitute an admission by Nielsen that any Services or Nielsen Information constitute goods, commodities or tangible personal property under applicable law.
5.2 Limitation of Nielsens Liability; Exclusive Remedies . Nielsen will give a pro rata refund of fees paid for any Nielsen Information for such period of time as it fails to provide the Nielsen Information and will use reasonable efforts to correct material errors Client identifies in Nielsen Information. Nielsen will not be liable, in contract, tort (including negligence) or otherwise, for any loss, expense or damage of any kind including, without limitation, special, incidental or consequential damages, due to any failure to provide any Service or resulting from any errors or inaccuracies in the Nielsen Information or from the use by Client or others of any Service or Nielsen Information. UNLESS OTHERWISE PROHIBITED BY APPLICABLE LAW, NIELSEN SHALL NOT BE LIABLE FOR ANY CLAIM BROUGHT AFTER THE SHORTER OF 1 YEAR AFTER THE CAUSE OF ACTION HAS ACCRUED OR MORE THAN 2
YEARS AFTER THE TERMINATION OF THIS AGREEMENT OR THE APPLICABLE LSA. THESE REMEDIES ARE EXCLUSIVE.
5.3 Indemnity . Client agrees to indemnify and hold Nielsen harmless from and against all claims, damages, loss or expenses (including attorneys fees) arising, directly or indirectly, from (i) Clients permitted disclosure pursuant to paragraph 3.1 or an LSA or (ii) Clients disclosure or use of the Services or Nielsen Information contrary to the terms of this Agreement or an LSA.
Article 6. Term, Suspension and Termination
6.1 Term . Unless terminated in accordance with the terms hereof, this Agreement, licenses and the Services rendered hereunder shall commence on the date hereof and shall remain in effect for so long as any LSA remains in full force and effect.
6.2 Return of Materials upon Termination . Upon termination or expiration of this Agreement or any LSA, (i) Client shall discontinue use of and return to Nielsen all Licensed Services and Technology Services and the Nielsen Information, including References provided thereunder, and (ii) all rights and licenses granted to Client to use such Services shall cease and terminate immediately. In lieu of return, Client may remove Nielsen Services from its systems and records, destroy tangible forms thereof, and certify such removal/destruction in a written form satisfactory to Nielsen.
6.3 Partial Termination of Services Due To Third Party Activity . Certain Services are based on data or information from third parties and Nielsen may discontinue furnishing a Service or any portion thereof to the extent any such third party data or information ceases to be available to Nielsen for any reason.
6.4 Suspension of Services . The provision of Services or licenses, or any portion thereof, may be suspended by Nielsen at any time in the event that Client fails to perform its payment or other obligations set forth herein or in an LSA. Such suspension of Service shall not suspend or otherwise affect Clients payment obligations set forth herein or in an LSA.
6.5 Termination by Nielsen . This Agreement and any LSA and any or all of the Services or licenses provided hereunder or under an LSA may be terminated by Nielsen on any date specified by Nielsen (i) if Client has failed to perform any one or more of its payment or other obligations hereunder, (ii) if Nielsen is or will become unable for any reason beyond its control to perform its obligations hereunder, or (iii) if Nielsen is terminating such Service to all clients then subscribing to a class of such Service.
Article 7. General Provisions
7.1 Survival . The rights and obligations of Nielsen and Client set forth in Articles 2, 3, and 5 and Sections 6.2, 7.6 and 7.8 shall survive the termination of this Agreement or of any LSA.
7.2 Force Majeure . In the event either party is delayed in or prevented from performing any act required hereunder due to failure of any communication system or on- or off-line computing equipment, labor troubles, inability to procure materials, governmental or judicial orders, acts of God, acts of terrorism, weather conditions, third party interference or other similar reason beyond its control, then performance of such act shall be excused for the period of such delay; provided, however, that Clients obligation to make any payment pursuant to this Agreement or an LSA shall not be excused for more than ten (10) days.
7.3 Independent Contractor Relationship . The parties to this Agreement are independent contractors and neither shall have authority to bind or obligate the other.
7.4 Notices . Any notice or request given hereunder shall be in writing and deemed given on the date received when delivered personally or by internationally recognized delivery service (i) if to Nielsen at The Nielsen Company (US), Inc., 770 Broadway, New York, NY 10003, Attention: Chief Executive Officer, with a copy to the same address, Attention: Chief Legal Officer; and (ii) if to Client at [Client Name, Address], Attention: [Chief Executive Officer/General Counsel).
7.5 Assignment . This Agreement is for the benefit of and binding on the parties and their successors and assigns. Subject to the prior written consent of Nielsen, Client may assign its rights under this Agreement to a successor to all or substantially all of the business of Client, provided all obligations of Client are assumed by the assignee and documentation satisfactory to Nielsen of such assumption has been delivered to Nielsen. Nielsen reserves the right to assign its rights to an affiliate of Nielsen or a successor to all or substantially all of the business of Nielsen, and reserves the right to have any Services rendered by such affiliate or successor, after providing notice in writing to Client.
7.6 Injunctive Relief . Any breach of the use of services provisions of Article 3 of this Agreement or similar provisions in an LSA may cause irreparable harm to Nielsen, for which Nielsens remedies at law will not be adequate. Nielsen shall be entitled to injunctive relief without having to prove irreparable injury, lack of an adequate remedy at law, posting bond or waiving any other rights.
7.7 Entire Agreement; Modification or Amendment; Waiver . This Agreement together with any LSA contains the entire understanding of the parties with respect to the provision of Services covered by such LSA and supersedes all previous discussions and agreements relating to such Services. Neither this Agreement nor any LSA may be modified or amended except in a writing executed by the parties. No waiver by a party of any breach of this Agreement or an LSA shall be deemed a waiver of any prior or subsequent breach.
7.8 Governing Law . This Agreement shall be governed by the law of the State of Illinois, United States of America, without regard to its choice of law provisions. The parties agree to the exclusive personal jurisdiction of the State and Federal courts located in Chicago, Illinois for purposes of determining all disputes arising in connection with this Agreement and hereby waive all objections to venue in those courts. Each LSA shall
be governed by the laws of the State of Illinois unless another jurisdiction is specified in such LSA.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto through their duly authorized representatives as of the date set forth above.
THE NIELSEN COMPANY (US), INC. |
|
|
[Name of Client] |
||
|
|
|
|
||
By |
|
|
|
By |
|
|
|
|
|
|
|
Name: |
|
|
|
Name: |
|
|
|
|
|
|
|
Title: |
|
|
|
Title: |
|
EXHIBIT 10.3
CONFIDENTIAL PORTIONS OMITTED
LIMITED LIABILITY COMPANY AGREEMENT
OF
NEWCO 2, LLC
DATED JUNE 11 , 2009
TABLE OF CONTENTS
|
|
Page |
|
|
|
ARTICLE I DEFINITIONS |
1 |
|
|
|
|
ARTICLE II BUSINESS PURPOSE AND ACTIVITIES |
6 |
|
2.01. |
Place of Business |
6 |
2.02. |
Nature of Business |
6 |
2.03. |
Excluded Scope |
7 |
2.04. |
Marketing and Sales To Current Customers of Digimarc or Nielsen |
7 |
|
|
|
ARTICLE III FORMATION AND TERM |
7 |
|
3.01. |
Formation |
7 |
3.02. |
Members Interests |
8 |
3.03. |
Name |
8 |
3.04. |
Term |
8 |
3.05. |
Registered Agent and Office |
8 |
3.06. |
Title to Assets |
8 |
|
|
|
ARTICLE IV MANAGEMENT OF THE COMPANY |
8 |
|
4.01. |
Members Committee |
8 |
4.02. |
Management of the Company |
10 |
4.03. |
Prior Approval |
10 |
4.04. |
Additional Funding |
12 |
|
|
|
ARTICLE V RIGHTS IN IP; ANCILLARY LICENSES AND SERVICES |
12 |
|
5.01. |
Company Rights to Developed Intellectual Property |
12 |
5.02. |
Digimarc License and Services |
13 |
5.03. |
Nielsen Licenses and Services |
13 |
5.04. |
Ability to Grant Licenses |
14 |
5.05. |
Transitional Services; Real Estate Arrangements |
15 |
5.06. |
Company License and Services |
15 |
|
|
|
ARTICLE VI FUNDING, ALLOCATIONS, DISTRIBUTIONS AND CAPITAL ACCOUNTS |
15 |
|
6.01. |
Funding; Capital Contributions |
15 |
6.02. |
Fiscal Year |
16 |
6.03. |
Distributions to the Members |
16 |
6.04. |
Certain Other Allocation Rights |
18 |
6.05 |
Additional Capital Contribution |
18 |
6.06 |
Members Failure To Make Capital Contributions |
18 |
6.07. |
Accounting Procedures |
19 |
6.08 |
Principle Tax Matters |
19 |
6.09 |
Payment and Withholding of Certain Taxes |
20 |
6.10 |
Organizational Expenses |
21 |
6.11 |
Classification |
21 |
i
ARTICLE VII BUDGETS AND BUSINESS PLANS |
22 |
|
7.01. |
Business Plans and Budgets |
22 |
7.02. |
Approval by the Members Committee |
22 |
7.03. |
Default Budget |
22 |
7.04. |
Default Business Plan |
22 |
|
|
|
ARTICLE VIII CERTAIN REPRESENTATIONS, WARRANTIES, AND COVENANTS |
23 |
|
8.01. |
Authorization |
23 |
8.02. |
Absence of Conflict |
23 |
8.03. |
Certain Covenants |
23 |
8.04. |
Restricted Transfer of the Company Interest |
23 |
|
|
|
ARTICLE IX DISSOLUTION |
24 |
|
9.01. |
Dissolution |
24 |
9.02. |
Liquidation |
24 |
|
|
|
ARTICLE X FORCE MAJEURE |
25 |
|
|
|
|
ARTICLE XI LIABILITY AND INSURANCE |
26 |
|
11.01. |
Liability |
26 |
11.02. |
Insurance |
26 |
|
|
|
ARTICLE XII GENERAL PROVISIONS |
26 |
|
12.01. |
No Publicity or Advertisement Without Prior Consultation |
26 |
12.02. |
Severability |
26 |
12.03. |
Article and Section Headings, Schedules and Exhibits |
26 |
12.04. |
Counterparts |
26 |
12.05. |
Gender and Number |
27 |
12.06. |
Expenses |
27 |
12.07. |
Notices |
27 |
12.08. |
No Third Party Beneficiaries |
28 |
12.09. |
Governing Law; Arbitration |
28 |
12.10. |
Modifications, Amendments or Waivers |
28 |
12.11. |
Assignment, Successors and Assigns |
28 |
12.12. |
Joint Preparation |
29 |
12.13. |
Entire Agreement; Termination of Prior Agreement |
29 |
12.14. |
Further Assurances |
29 |
12.15. |
Security Disclosures and Public Announcements |
29 |
12.16. |
Confidentiality |
29 |
12.17. |
Bankruptcy |
30 |
12.18. |
Survival |
30 |
ii
This LIMITED LIABILITY COMPANY AGREEMENT of Newco 2, LLC (the Company ) is made and entered into as of June 11, 2009 by and between The Nielsen Company (US) LLC, a New York limited liability company, having offices at 770 Broadway, New York, New York 10003 (Nielsen), and Digimarc Corporation, a Delaware corporation, with offices at 9405 SW Gemini Drive, Beaverton, Oregon 97008 (Digimarc).
INTRODUCTION
Whereas , Nielsen and Digimarc have entered into an agreement executed on November 27, 2007 with an effective date of October 1, 2007, (the Prior Agreement), said Prior Agreement including terms and conditions under which Digimarc provided Digimarc Services for Nielsen, and granted to Nielsen certain licenses under Digimarc patents;
Whereas, under the Prior Agreement, Nielsen had certain rights to terminate the Prior Agreement at the end of the second year or subsequently during the term thereof, upon the satisfaction of certain conditions;
Whereas , for good and valuable consideration, Nielsen and Digimarc have agreed to expand and extend their relationship and supersede the Prior Agreement by entering into this Agreement and contemporaneously entering into the Patent License Agreement and the Agreement with Newco 1, LLC of even date herewith.
NOW, THEREFORE , for good and valuable consideration as stated herein, the parties hereby agree as follows.
The following terms have the following meanings when used in this Agreement, unless the context expressly or by necessary implication otherwise requires:
Agreement shall mean this Limited Liability Company Agreement.
Affiliate of a specified Person shall mean a Person that directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified. For purposes of this definition the term control (including the terms controlling, controlled by and under common control with) means directly or indirectly owning equity securities (or other ownership interests) representing more than fifty percent (50%) of the voting power of all the outstanding equity securities of such specified Person. That Person is an Affiliate with the Person specified only for so long as such control of or being controlled by the Person specified exists.
Approved Budget shall mean an annual budget, expressed in terms of net cash flow (including revenue, operating and capital expenses) approved by the Members Committee in accordance with Sections 7.01 and 7.02 hereof.
1
Approved Business Plan shall mean a two-year business plan approved by the Members Committee in accordance with Sections 7.01 and 7.02 hereof.
Assets of a Person shall mean all of that Persons properties and assets (real, personal or mixed, tangible or intangible), unless otherwise specified.
Business shall have the meaning described in Section 2.02 hereof.
Capital Account shall have the meaning described in Section 6.03(a) hereof.
Certificate means the Certificate of Formation of the Company and any and all amendments thereto and restatements thereof, as filed with the Secretary of State of the State of Delaware pursuant to the Delaware Act.
Chairman of the Members Committee shall mean Itzhak Fisher, Global Product Leadership, or any other designee of Nielsen, for so long as Nielsen maintains an interest of at least 25% in the Company.
Code shall mean the Internal Revenue Code of 1986, as amended.
Company shall mean Newco 2, LLC, the Delaware limited liability company the Members form by entering into this Agreement.
Company Data License means the Companys then standard form of license agreement (substantially similar to the Nielsen Data License) for any Company Data Services provided to Nielsen during the Term, provided that there shall be no payment by Nielsen to the Company in connection therewith.
Company Data Services means data related to [**] generated by the Company Products, including [**] .
Company Products means any business, product or service developed and marketed by the Company that combines Digimarc Licensed IP and Nielsen Licensed IP as authorized by this Agreement or otherwise approved by the Members Committee.
[**] means a product that: (a) [**]; (b) [**]; and (c) includes all software, hardware and other networked components required to achieve (a) and (b).
Default Budget shall have the meaning described in Section 7.03 hereof.
Delaware Act shall mean the Delaware Limited Liability Company Act, 6 Del. C. §18-101, et seq., as amended from time to time.
Digimarc shall have the meaning set forth in the opening paragraph of the Agreement.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
2
Digimarc Licensed IP shall mean the Digimarc Licensed Patents and the Digimarc technology as reasonably required for the commercialization, development and marketing by Company of Company Products within the scope of the Business.
Digimarc Licensed Patents shall mean all patents (including extensions, reissues, re-examinations, substitutions, renewals or equivalents of any of the foregoing, and moral and economic rights of inventors in any of the foregoing), other than the Excluded Patents, throughout the world, including industrial and utility models, industrial designs, typeface design patents and registrations, petty patents, patents of importation, patents of addition, certificates of invention, and any other indicia of invention ownership issued or granted by any governmental agency or other authority:
(a) issued or issuing on patent applications (including all provisional applications, priority, continuations, divisionals, continuations-in-part and counterparts thereof); and
(b) under which patents or the patent applications therefor Digimarc or any of its Affiliates has as of the Effective Date, or thereafter obtains, the right to a grant license to the Company within the scope granted herein, without such grant or the exercise of rights thereunder resulting in the payment of royalties or other consideration by Digimarc or any of its Affiliates to third parties (except for payments among Digimarc and its Affiliates and payments to third parties for inventions made by said third parties while employed by Digimarc or any of its Affiliates).
Digimarc Licensed Patents shall include (other than the Excluded Patents) all patent applications throughout the world (including all provisional applications, priority, continuations, divisionals, continuations-in-part and counterparts thereof) that satisfy part (b) of this definition, and all patents issuing therefrom (including extensions, reissues, re-examinations, substitutions, renewals or equivalents of any of the foregoing), and moral and economic rights of inventors in any of the foregoing.
Digimarc Products and Services means those products and services described in the Form 10-K filed by Digimarc with the U.S. Securities and Exchange Commission (SEC) most recently prior to the Effective Date.
Effective Date of this Agreement is July 1, 2009.
Excluded Patents shall mean those Digimarc patents listed in Schedule 5.02 attached hereto.
Excluded Scope shall have the meaning set forth in Section 2.03 hereof.
Financial Statements shall mean a balance sheet of the Company and related statements of operations and cash flows, as of the end of each month, quarter or year, as the case may be, and for the corresponding period then ended.
Force Majeure shall mean any event or condition, not existing as of the Effective Date, not reasonably foreseeable as of such date and not reasonably within the control
3
of either Member, which prevents, in whole or in material part, the performance by a Member of its obligations under this Agreement, other than an obligation on the part of a Member to make any payment hereunder. Without limiting the generality of the foregoing, the following shall constitute events or conditions of Force Majeure: state or governmental action, riots, war, acts of terrorism, sabotage, strikes, lock-outs, prolonged shortage of energy or other supplies, fire, flood, hurricanes, earthquakes, lightning, and explosion.
GAAP shall mean U.S. generally accepted accounting principles.
Indebtedness shall mean (a) indebtedness for borrowed money, (b) obligations (as lessee or guarantor) to pay rent under a lease of real or personal property which is required by GAAP to be capitalized on a balance sheet of the Company prepared in accordance with the provisions of this Agreement, (c) purchase money obligations, and (d) any extension, refinancing or modification of any of the foregoing.
Interest means the limited liability company interest of a Member in the Company at any particular time, including the right of such Member to any and all benefits to which a Member may be entitled as provided in this Agreement, together with the obligations of such Member to comply with all the terms and provisions of this Agreement.
IRS shall have the meaning described in Section 6.09(a) hereof.
Judicial Review shall have the meaning described in Section 6.06(b)(i) hereof.
Law means any statute, law, regulation, ordinance, rule, injunction, order, decree, directive or any similar form of decision of, or determination by, any governmental or self-regulatory authority.
Management shall mean the President and other officers of the Company appointed in accordance with the provisions of Section 4.02 hereof.
[**] means Nielsen Products and Services involving [**].
Members means Digimarc and Nielsen and any other Person added as a member of the Company from time to time.
Members Committee shall mean that Committee which is created according to the provisions of Section 4.01 hereof.
Nielsen Data License means Nielsens then standard form of license agreement for any Nielsen Data Services provided to the Company during the Term, provided that there shall be no payment by the Company to Nielsen in connection therewith. The current version of such license is attached hereto in Schedule 5.03.
Nielsen Data Services means Nielsen Syndicated Research and back-office meta-data [**] pursuant to a Nielsen Data License.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
4
Nielsen Licensed IP means the Nielsen Licensed Patents and the Nielsen technology as reasonably required for the commercialization, development and marketing by Company of Company Products within the scope of the Business.
Nielsen Licensed Patents shall mean all patents (including extensions, reissues, re-examinations, substitutions, renewals or equivalents of any of the foregoing, and moral and economic rights of inventors in any of the foregoing) throughout the world, including industrial and utility models, industrial designs, typeface design patents and registrations, petty patents, patents of importation, patents of addition, certificates of invention, and any other indicia of invention ownership issued or granted by any governmental agency or other authority:
(a) issued or issuing on patent applications (including all provisional applications, priority, continuations, divisionals, continuations-in-part and counterparts thereof); and
Nielsen Licensed Patents shall include all patent applications throughout the world (including all provisional applications, priority, continuations, divisionals, continuations-in-part and counterparts thereof) that satisfy part (b) of this definition, and all patents issuing therefrom (including extensions, reissues, re-examinations, substitutions, renewals or equivalents of any of the foregoing), and moral and economic rights of inventors in any of the foregoing.
Nielsen Products and Services means those products and services [**].
Nielsen Syndicated Research means Syndicated published data/reports including access to and use of Nielsens market intelligence information and reports (and data underlying reports), in any format then-currently available.
Percentage Interest shall mean a Members Interest in the Company expressed as a percentage of all Interests. The initial Percentage Interests shall be forty-nine percent (49%) for Digimarc and fifty-one percent (51%) for Nielsen.
Person shall mean any natural person, firm, corporation, limited liability company, partnership, association, trust or similar organization or governmental body.
President shall mean the president of the Company appointed in accordance with the provisions of Section 4.02 hereof.
Representative shall mean an individual appointed by a Member to the Members Committee.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
5
Sale , Sell , Offer for Sale , Other Transfer , Otherwise Transfer and other forms of such terms with respect to copyrightable materials, such as software products, mean the granting of licenses to use copyrightable materials.
Subsidiary of a Person shall mean any corporation, partnership or other entity (Entity) in which a party now or hereafter holds, directly or indirectly, ownership of, or the right to vote on behalf of, more than fifty percent (50%) of its voting stock or other voting equity interests, for so long as such ownership or right to vote exists.
Syndicated means a report or information that is created for more than one unique client.
Tax Matters Member shall have the meaning described in Section 6.06(a) hereof.
Treasury Regulations shall mean the income tax regulations, including temporary regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).
2.01. Place of Business
The principal place of business of the Company shall be New York, New York. At any time, the Members Committee may change the location of the Companys principal place of business to another location by mutual agreement.
2.02. Nature of Business
The Company business shall be to develop and market Company Products outside the Excluded Scope in the following areas and any others the parties may agree (the Business):
(a) [**]. The Company will develop and market [**] as directed by the Members Committee. For the avoidance of doubt, [**] for [**] is not within the scope of the Company Business and is within the Excluded Scope. All other aspects of [**] are within the scope of the Company Business.
(c) No Obligation to Proceed . Neither the Company nor Nielsen nor Digimarc shall be obligated to develop any product referenced in Section 2.02.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
6
2.03 Excluded Scope
(a) The Company shall not use, make, have made, develop, market, offer for sale, sell, lease, import, license or otherwise transfer: (i) any Company Product that competes with Digimarc Products and Services, Nielsen Products and Services or the products or services of Newco 1, LLC; or (ii) any Digimarc Licensed IP or Nielsen License IP on a stand-alone basis, i.e., in the form of a naked resale/license that is not materially embodied in a Company Product.
(b) Notwithstanding the forgoing, the Company shall not be prohibited from providing [**] to a client in the context of a sales pitch for the Companys products or services or from reporting to a client about the [**] on behalf of that client .
2.04. Marketing and Sales to Current Customers of Digimarc or Nielsen
For the purpose of coordinating mutual customer relationships, t he Company will [**] , as the case may be . [**].
3.01. Formation
The Members hereby form the Company as a limited liability company under and pursuant to the provisions of the Delaware Act, and agree that the rights, duties and liabilities of the Members shall be as provided in the Delaware Act, except as otherwise provided in this Agreement. Upon the Effective Date of this Agreement, Nielsen and Digimarc shall be admitted as Members. The Members hereby designate Robert P. Chamness to file the Certificate of Formation of the Company. The Members may jointly describe any person as an authorized person, within the meaning of the Delaware Act, to execute, deliver and file any amendments and/or restatements thereof with the office of the Secretary of State of the State of Delaware pursuant to the Delaware Act.
3.02. Members Interests
As of the date of this Agreement, Nielsen shall own fifty-one percent (51%) of the Company Interests and Digimarc shall own forty-nine percent (49%) of the Company Interests.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
7
3.03. Name
The name of the Company is Newco 2, LLC, and may be changed by the consent of the Members. The business of the Company may be conducted under the name of the Company, or under any other name designated by the Members Committee. The Company shall be described as a joint venture of Nielsen and Digimarc.
3.04. Term
The Company shall commence as of the date of the filing of the Certificate. The term of the Company shall continue for a period of twenty-five (25) years from the date hereof, unless terminated earlier in accordance with the provisions of Sections 9.01 hereof. The existence of the Company as a separate legal entity shall continue until the cancellation of the Certificate as provided in the Delaware Act.
3.05. Registered Agent and Office
The Companys registered agent and office in the State of Delaware shall be The Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County, Delaware 01980. At any time, the Members Committee may mutually designate another registered agent or registered office.
3.06. Title to Assets
Except as otherwise provided in this Agreement, all Assets shall be owned by the Company as an entity, and no Member shall have any ownership interest in such Assets in the Members individual name or right. The Company shall hold all Assets in the name of the Company.
4.01. Members Committee
8
9
4.02. Management of the Company
4.03. Prior Approval
No act shall be taken, sum expended, decision made or obligation incurred by or on behalf of the Company with respect to any matter described below unless such proposed action shall have been approved by at least three Representatives of the Members Committee:
10
11
4.04 Additional Funding
In addition to the provisions set forth in Article VI, below, if at any time the Annual Budget calls for expenditures that exceed the Companys cash on hand, either Member may call a meeting of the Members Committee to propose and vote upon any of the following methods to fund or otherwise provide for the Companys continuing operations:
(i) Incurring indebtedness to a third party or to one or both of the Members. The amount of such indebtedness shall be repaid prior to any distributions pursuant to Section 6.03, unless the Members otherwise agree;
(ii) Admitting a new Member. Any required adjustment to existing Members Interest shall be shared equally between Nielsen and Digimarc.
5.01 Company Rights to Developed Intellectual Property
(a) Company shall own (and shall use commercially reasonable efforts to ensure that it shall own) all right, title and interest to all materials and intellectual property first conceived or developed in the performance of work by or for Company (including that under any services contract between either Member and the Company) within the field of the Company Business (and for avoidance of doubt, in all events outside of the Excluded Scope), whether conceived or first reduced to practice solely by Company or jointly with one or more of the Members or third parties (Company IP), subject to the license granted to Nielsen and Digimarc under Section 5.01(b).
(b) Company agrees to grant and hereby grants a worldwide, non-exclusive, royalty free, nontransferable, irrevocable right and license under all intellectual property owned or licensable by the Company (including Company IP): (i) to Digimarc and its Affiliates to make, have made, use, offer for sale, sell, import, lease, license and otherwise transfer any product or service: (x) within the field of Digimarc Products and Services outside of the Company Business; and (y) upon the dissolution of the Company under Article IX, within the field of the Company Business; and (ii) to Nielsen and its Affiliates to make, have made, use, offer for sale, sell, import, lease, license and otherwise transfer any product or service: (x) within the field of Nielsen Products and Services outside of the Company Business ( including
12
for the avoidance of doubt, [**] for [**]); and (y) upon the dissolution of the Company under Article IX, within the field of the Company Business; provided, further , that in the case of developments that are derivatives of underlying Digimarc Licensed IP or Nielsen Licensed IP licensed to the Company by a party, such license granted under this Section is subject to each partys underlying rights.
5.02 Digimarc License and Services
(a) IP License . Subject to the terms and conditions of this Agreement, Digimarc hereby grants to the Company, as of the Effective Date, a worldwide, non-exclusive, royalty free, nontransferable, irrevocable license under any and all Digimarc Licensed IP as reasonably required for use by or for the Company in the manufacture (by or for), development, marketing, offer for sale, sale, import, lease, license and other transfer to Company customers of Company Products within the scope of the Business.
(b) Previously Licensed Exclusive Grants . Notwithstanding the above, the license granted in Subsection (a) is subject to previously licensed exclusive grants by Digimarc in the following fields of use, which are not licensed to the Company:
(i) 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;
(ii) embedding watermarks in [**] in the [**] for the purpose of [**]. For the avoidance of doubt, this does not include embedding watermarks in [**]; and
(iii) deterring the unauthorized digital reproduction of banknotes.
(c) No Implied Licenses . Nothing contained in this Agreement will be construed as conferring by implication, estoppel or otherwise, any license or other right under any patent rights or other industrial or intellectual property rights of Digimarc, except for the license expressly granted herein.
(d) Services . As more fully set forth in that certain Service Agreement entered into simultaneously herewith and attached hereto as Schedule 5.02 (d), Digimarc shall provide incidental management support at no cost to the Company and will provide technical and development services within the scope of the Business to the Company as the Members shall determine from time to time. In the event that Digimarc is retained to provide services to Newco 2, LLC during the periods referenced in Section 5.02 (d) of the Limited Liability Agreement of Newco 1, LLC, the amounts paid by Newco 2, LLC shall be credited against the minimums due under that agreement.
5.03. Nielsen Licenses and Services
(a) Nielsen Support and Data Services . Nielsen shall provide incidental management support at no cost to the Company and pursuant to the terms and conditions
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
13
substantially as set forth in the Nielsen Data License in Schedule 5.03, to the extent the provisions of such form of license are not in conflict with the terms of this Agreement, it will also irrevocably provide:
(i) Free access to and use of any Nielsen Data Services as reasonably required for the development and marketing of Company Products within the scope of the Business. The Nielsen Data Services will be available through the variety of means it is made available to Nielsens clients, including desktop based (downloaded to a PC or sent via CD-ROM as delivered to current Nielsen clients) or web based (Nielsen operates several web based report platforms). Free access by the Company to Nielsen information assets (including Nielsen Data Services) will be via all means accessible to any client. The free access to specific Nielsen Data Services will be as reasonably required for the operation of any Company Product within the scope of the Business, or for evaluation of any such Company Product, as determined by the reasonable judgment of Company management; and
(ii) Free access to and use of Nielsen Data Services in the formats that they exist in at the time of the delivery to the extent such Nielsen Data Services are reasonably required for the development and marketing of Company Products within the scope of the Business.
With respect to the foregoing, the Company will be a client of Nielsen, but will receive Nielsen Data Services at no cost. Non-syndicated custom formatted guides and reports shall not be Nielsen Data Services, but may be provided to the Company upon request, at a reasonable market price, or at such other price and on such terms as the parties agree.
(b) No Implied Licenses . Nothing contained in this Agreement will be construed as conferring by implication, estoppel or otherwise, any license or other right under any patent rights or other industrial or intellectual property rights of Nielsen, except for the license expressly granted herein.
(c) IP License . Subject to the terms and conditions of this Agreement, Nielsen hereby grants to the Company, as of the Effective Date, a worldwide, non-exclusive, royalty free, nontransferable, irrevocable license under any and all Nielsen Licensed IP as reasonably required for use by or for the Company in the manufacture (by or for), development, marketing, offer for sale, sale, import, lease, license and other transfer to Company customers of Company Products within the scope of the Business.
(d) Services . Nielsen will provide technical and development services to the Company within the scope of the Business at rates to be agreed upon between the Members, as and to the extent set forth in any Annual Budget or as otherwise agreed pursuant to 4.03 (p).
5.04 Ability to Grant Licenses
For purposes of certainty, nothing in this Agreement shall limit either Member from granting exclusive licenses outside identified areas of the Company Business and initial
14
business plan as set forth in Section 2.02. All later business opportunities for the Company are subject to discussion and mutual agreement, including whether exclusivity is commercially reasonable or appropriate.
5.05 Transitional Services; Real Estate
Any transitional, ongoing, administrative or other services and real estate arrangements of the Company shall be provided in accordance with the Approved Business Plan and the Approved Budget.
5.06. Company License and Services
(a) Company Data Services . Pursuant to the terms set forth in the Company Data License, the Company will irrevocably provide to Nielsen:
(i) Free access to and use of any Company Data Services as reasonably required for the development and marketing of Nielsen Products and Services. Free access by Nielsen to the Company information assets (including Company Data Services) will be via all means accessible to any client. The free access to specific Company Data Services will be as reasonably required for the operation of any Nielsen Products and Services; and
(ii) Free access to and use of Company Data Services in the formats that they exist in at the time of the delivery.
With respect to the foregoing, Nielsen will be a client of the Company, but will receive Company Data Services at no cost.
(b) Marketing . Nielsen may market [**] products on terms to be agreed upon by the Members.
6.01. Funding; Capital Contributions
Date |
|
Amount |
|
|
|
|
|
|
|
July 1, 2009 |
|
$ |
200,000 |
|
|
|
|
|
|
October 1, 2009 |
|
$ |
200,000 |
|
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
15
January 1, 2010 |
|
$ |
300,000 |
|
|
|
|
|
|
April 1, 2010 |
|
$ |
300,000 |
|
|
|
|
|
|
July 1, 2010 |
|
$ |
300,000 |
|
|
|
|
|
|
October 1, 2010 |
|
$ |
300,000 |
|
|
|
|
|
|
January 1, 2011 |
|
$ |
300,000 |
|
|
|
|
|
|
April 1, 20211 |
|
$ |
300,000 |
|
|
|
|
|
|
July 1, 2011 |
|
$ |
300,000 |
|
|
|
|
|
|
October 1, 2011 |
|
$ |
300,000 |
|
6.02. Fiscal Year
The fiscal year of the Company shall be the calendar year.
6.03. Distributions to the Members
(a) Capital Accounts . The Company shall maintain a capital account for each Member in accordance with Treas. Regs. § 1.704-1(b)(2)(iv) and administrative guidance issued with respect thereto (each such account as so maintained, a Capital Account). The provisions of this Agreement relating to Capital Accounts are intended to comply with such provisions and related provisions issued with respect to section 704 of the Code and shall be interpreted consistently therewith. The Company shall have the authority to make such adjustments to the Members Capital Accounts as may be required to cause the allocations made by the Company to comply with such provisions.
(b) Adjustments to Capital Accounts . At least once each taxable year of the Company for United States tax purposes (as determined under Code section 706, a Fiscal Year), after adjusting each Members Capital Account for all contributions and distributions with respect to such Fiscal Year, the Company shall allocate all profits and losses and items thereof in the following order of priority: (A) First, (1) allocations of nonrecourse deductions shall be allocated among the Members pro rata in proportion to their Percentage Interests under Treas. Regs. § 1.704-2, including, without limitation, Treas. Regs. §§ 1.704-2(e) and 1.704-2(j)(1), (2) allocations of partner nonrecourse deductions attributable to a particular partner nonrecourse liability shall be allocated to the Member who has the economic risk of loss for that liability to the extent required under Treas. Regs. §§ 1.704-2(i) and 1.704-2(j)(1), (3) allocations of income and gain shall be made to Members whose share of partnership minimum gain is reduced to the extent required under Treas. Regs. §§ 1.704-2(f) and 1.704-1(j)(2), (4) allocations of income and gain shall be made to Members whose share of partner nonrecourse debt
16
minimum gain is reduced to the extent required under Treas. Regs. §§ 1.704-2(i)(4) and 1.704-1(j)(2), and (5) a Member who unexpectedly receives an adjustment, allocation, or distribution described in Treas. Regs. § 1.704-1(b)(2)(ii)( d )( 4 ), ( 5 ), or (6) shall be allocated items of income and gain (consisting of a pro rata portion of each item of partnership income, including gross income, and gain for such year) in an amount and manner sufficient to eliminate such deficit balance as quickly as possible; and (B) all remaining profits and losses and items thereof shall be allocated to the Members Capital Accounts in a manner such that, after such allocations have been made, the balance of each Members Capital Account (which may be a positive, negative, or zero balance) shall equal (1) the amount that would be distributed to such Member, determined as if the Company were to sell all of its assets for the section 704(b) Book Value (as defined below) thereof and distribute the proceeds thereof (net of any sales commissions and other similar transaction fees and payments required to be made to creditors) pursuant to the relevant legal documents setting forth such distributions, minus (2) the sum of (a) such Members share of the partnership minimum gain (as determined under Treas. Regs. §§ 1.704-2(d) and (g)) and partner nonrecourse debt minimum gain (as determined under Treas. Regs. § 1.704-2(i)), and (b) the amount, if any, that such Member is obligated (or is deemed for United States tax purposes to be obligated) to contribute, in its capacity as a Member, to the capital of the Company as of the last day of such Fiscal Year. Notwithstanding the preceding provisions of this paragraph, all allocations of gain or loss recognized for Capital Accounting purposes in connection with property contributed by a Member to the Company that, on liquidation of the Company would be distributed to that Member, shall be specially allocated to that Member.
(c) Code Section 704(c)(1)(A) . Except as provided in the following provisions of this Section 3, each item of taxable income, gain, loss, deduction, or credit shall be allocated in the same manner as its correlative item of book items allocated pursuant to Section 2. In accordance with Code Section 704(c)(1)(A) (and the principles thereof) and Treas. Regs. § 1.704-3, income, gain, loss and deduction with respect to any property contributed to the capital of the Company, or after Company property has been revalued under Treas. Regs. § 1.704-1(b)(2)(iv)( f ), shall, solely for United States federal, state and local tax purposes, be allocated among the Members so as to take into account any variation between the adjusted basis of such Company property to the Company for United States federal income tax purposes and its value as so determined at the time of the contribution or revaluation of Company property. This Paragraph shall be construed to authorize the Company to utilize only the traditional method described in Treas. Regs. § 1.704-3(b) unless all Members agree otherwise. Any elections or other decisions relating to such allocations shall be made by the Company. Allocations pursuant to this Paragraph are solely for United States tax purposes and shall not affect, or in any way be taken into account in computing, any Members Capital Account or share of profit, loss, or other items, pursuant to any provision of this Agreement or otherwise affect the Members rights (including, without limitation, rights to distributions) and obligations with respect to the Company.
(d) Certain Definitions . For purposes of this Agreement: (A) the term section 704(b) Book Value means, with respect to any Company property, the Companys adjusted basis for United States tax purposes, adjusted from time to time to reflect the adjustments required or permitted by Treas. Regs. §§ 1.704-1(b)(2)(iv)(d) through ( g ), provided that on the date of the contribution of an asset to the Company, the section 704(b) Book Value of any asset contributed to the Company shall be equal to the fair market value (as reasonably determined by the Parties) of such asset on the date of such contribution, (B) the term Treas. Regs. means
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Treasury Regulations issued under the Code, and (C) the term profits and losses shall mean the items of profit and loss of the Company (including separately stated items) as computed under Treas. Regs. § 1.704-1(b)(2)(iv).
6.04. Certain Other Allocation Rules
6.05 Additional Capital Contributions
If and when the Company has used all of the Initial Capital Contribution, the Members Committee may determine that the Company requires additional capital to expand the Business. The Members Committee shall notify the Members of the required amount and each Member may, but shall not be required to, make a capital contribution in an amount equal to their Percent Interest portion of such required capital.
6.06 Members Failure To Make Capital Contributions
In case either Member (the Non-Contributing Member) elects not to make such a capital contribution, then the other Member (the Other Member) may elect to exercise one or more of the provisions set forth below.
(a) The Other Member may withdraw its additional capital contribution in an amount comparable to that which the Noncontributing Member failed to make.
(b) The Other Member may advance for its own Capital Account (in addition to its pro-rata share of the additional capital contribution), the additional capital contribution requested from the Noncontributing Member. Thereafter allocations of excess cash distributions, net profits, and net losses, as well as distributions of the Assets and properties of the Company upon termination of this Agreement shall be made to each Member accordance with revised Percentage Interests determined in accordance with aggregate capital contributions made to the Company ignoring any prior return of Initial Capital Contributions or Additional Capital Contributions.
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6.07 Accounting Procedures
(a) Accounting Principles . The books of account of the Company shall be kept and maintained at the principal place of business of the Company, or at such other place or places as shall be determined by the Members Committee. The books of account and the Financial Statements of the Company shall be prepared in accordance with GAAP, consistently applied, which shall be utilized in the preparation of the books of account and Financial Statements of the Company.
(b) Financial Statements . The Company shall cause Financial Statements to be prepared and furnished to each of the Members, as soon as is practicable after the end of each month, quarter and year, as the case may be, but in no event later than twelve (12) working days after the end of each month or quarter or twenty-five (25) working days after the end of a year. The Financial Statements shall be prepared in accordance with Section 6.05 (a) hereof, and shall be accompanied by:
The president of the Company and the principal financial employee of the Company responsible for providing accounting services to the Company shall also provide each Member and the Members Committee with such other reports relating to the operations of the Company as it may from time to time request. Any audit under subparagraph (i) or (ii) hereof shall be at the Companys expense.
6.08 Principle Tax Matters
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(i) enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of the Company items required to be taken into account by a Member for income tax purposes (such administrative proceedings being referred to as a Tax Audit and such judicial proceedings being referred to as Judicial Review );
(ii) in the event that a notice of a final administrative adjustment at the Company level of any item required to be taken into account by a Member for tax purposes (a Final Adjustment ) is mailed to the Tax Matters Member, seek Judicial Review of such Final Adjustment, including the filing of a petition for readjustment with the Tax Court or the United States Claims Court, or the filing of a complaint for refund with the District Court of the United States for the district in which the Companys principal place of business is located;
The Tax Matters Member shall consult with the other Member (that is not the Tax Matters Member) and receive the other Members written approval before taking any action pursuant to this Section 6.06(b) and show the other Member the relevant paperwork that such Member requests associated with such action. In the case of a disagreement between the Tax Matters Member and the other Member, an accounting firm to be selected by the Members Committee will resolve such disputes.
The Tax Matters Member shall receive no compensation for its services. All third party costs and expenses incurred by the Tax Matters Member in performing its duties as such (including legal and accounting fees and any out-of-pocket expenses) shall be borne by the Company. Nothing herein shall be construed to restrict the Company from engaging an accounting firm or other experts or consultants to assist the Tax Matters Member in discharging its duties hereunder, so long as the compensation paid by the Company for such services is reasonable.
6.09 Payment and Withholding of Certain Taxes
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6. 10 Organizational Expenses
The Company shall elect to deduct expenses, if any, incurred by it in organizing the Company ratably over a 180-month period as provided in Section 709 of the Code and the regulations promulgated thereunder.
6.11 Classification
The Company will file information returns in a manner consistent with treatment of the Company as a partnership for United States federal income tax purposes and will not elect to be treated as a corporation for United States federal income tax purposes.
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7.01. Business Plans and Budgets
7.02. Approval by The Members Committee
If approved by the Members Committee in accordance with the terms of Section 7.01 hereof, the proposed two-year business plan shall become the Approved Business Plan for the applicable three-year (or shorter) period, and the proposed budget for the following two (2) years shall become the Approved Budget for the applicable two (2) year (or shorter) period under Section 7.01(b) hereof.
7.03 Default Budget
In the event that the Members Committee fails to approve a budget for any two (2) year period pursuant to Sections 7.01 and 7.02 hereof, then the Approved Budget for the next ensuing year shall be the budget for the second year of the two (2) year period as was contemplated within the then effective Approved Budget (for the avoidance of doubt, 2010 being the second year of the initial Approved Budget) and if the two (2) year period covered by the most recent Approved Budget expires and no further budget is approved by the Members Committee, there shall be a Default Budget (as defined below) for the next ensuing year. The default budget (a Default Budget ) shall be equal to the annualized operating expenditures of the Company for the most recent three months.
7.04 Default Business Plan
In the event a two-year business plan which is submitted to the Members Committee shall not be adopted pursuant to Sections 7.01 and 7.02 hereof, the Approved Business Plan which is then in effect shall continue to be the Approved Business Plan of the Company, except that the projected budget contained therein for any relevant year shall be deemed to have been superseded by the Approved Budget or Default Budget, as applicable, for such year. If the most recent Approved Business Plan expires and no further business plan is
22
approved by the Members Committee, then the Company shall continue operating on a basis consistent with the last year of the most recent Approved Business Plan.
8.01. Authorization
Each Member represents and warrants to the other Member that it has taken all action necessary for the authorization, execution, delivery and performance by it of this Agreement, and that when this Agreement is executed, it will constitute its valid and binding obligation in accordance with its terms. Each Member represents and warrants it has all necessary corporate and other power with respect to the foregoing.
8.02. Absence of Conflict
Each Member represents and warrants to the other Member that neither the execution, delivery or performance of this Agreement, or any patent or other License Agreements executed contemporaneously herewith, or any other Related Agreements being executed and delivered simultaneously herewith to which it is a party, nor the consummation of the transactions herein or therein contemplated, nor the fulfillment of or compliance with the terms and conditions hereof or thereof, will (nor with the giving of notice or lapse of time would) (a) conflict with its Certificate of Incorporation, Bylaws or other instrument pursuant to which it is organized, as amended or restated and as currently in effect or (b) result in a breach of or constitute a default under or conflict with any material contract, agreement or instrument to which it is a party or by which it or any of its Assets are bound (including, without limitation, any agreements with any banks or other lenders to which either Member or any of its Affiliates are a party or subject), or (c) violate any law, rule or regulation applicable to it or any of its Assets. Any third party, governmental or administrative consents or approvals which are required in connection with the foregoing have been obtained and are in full force and effect.
8.03. Certain Covenants
8.04. Restricted Transfer of the Company Interest
A Member may not, without the prior written consent of the other Member, sell, assign, encumber or otherwise transfer (directly or indirectly, through one or more transactions, and whether voluntary, involuntary, by operation of law or otherwise) its Interest in the Company or any part thereof to any Person. Notwithstanding the previous sentence, either Member may transfer its Interest: (i) by operation of law, pursuant to a merger, consolidation, reorganization, statutory conversion, amalgamation or similar corporate transaction; or (ii) in connection with a sale or other transfer of all or substantially all of its assets or business; or (iii)
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upon receiving the written consent of the other Member, which consent shall not be unreasonably withheld, to an Affiliate which is wholly owned by, or which wholly owns, such Member. It shall be a condition precedent to any transfer that the transferee agrees in writing to be bound by the terms of this Agreement. Any transfer that is not made in strict compliance with the terms of this Section 8.04 shall be null and void.
9.01. Dissolution
(iv) by the later of December 31 2013 or [**] years following the [**], the Company is no longer solvent or is not generating at least [**] dollars of annualized revenues from unrelated entities.
9.02. Liquidation
(a) Upon the dissolution of the Company, the Members Committee shall seek to resolve all issues of ownership, separation and distribution of Company assets, to make settlement and payment of all Company obligations, and to wind up and liquidate the affairs of the Company in an orderly and businesslike manner. If the Members Committee cannot reach such an agreement, they shall appoint a Person to act as liquidator to wind up the Company. The liquidator shall have full power and authority to sell, assign, and encumber any or all of the Companys assets and to wind up and liquidate the affairs of the Company in an orderly and businesslike manner. All proceeds from liquidation and any remaining funds or assets of the Company shall be distributed in the following order of priority: (i) to the payment of debts and
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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liabilities of the Company (including, to the extent permitted by the Act, debts of the Company that are owed to a Member) and the expenses of liquidation; (ii) to the setting up of such reserves (including, cash escrow accounts) as the liquidator may reasonably deem necessary for any contingent liabilities of the Company; and (iii) by distribution of cash or property (at the election of each Member), to the Members in accordance with their Percentage Interests.
(b) If a Member elects to take its distribution in cash, and sufficient cash is not available to make the full cash distribution to each Member, the liquidator shall sell at fair market value Company property as necessary to make such distribution in cash. The other Members may purchase the property sold at its fair market value.
(c) The distribution of cash or property to the Members in accordance with the provisions of this Section 9.02 shall constitute a complete return to the Members of their respective Capital Contributions and a complete distribution to the Members of their respective Interests and all Company property. In the event that any Members Capital Account balance is a negative amount after all allocations to such account in accordance with Article VI and distributions in accordance with Section 9.02(a), such Member shall have no obligation to contribute any amount to the Company as a result of such negative Capital Account; provided, however, that this provision shall not override any obligation of a Member to make a Capital Contribution under Section 6.01.
(d) Any distributions to the Members pursuant to this Section 9.02 shall be made in accordance with the time requirements set forth in Treasury Regulation section 1.704-1(b)(2)(ii)(b)(2).
A Member whose performance hereunder is prevented by an event or condition of Force Majeure, upon providing written notice to the other Member of such event or condition, shall be excused from performance to the extent such event or condition prevents its performance, provided that the Member so affected shall use reasonable efforts to avoid or remove the cause of nonperformance and shall continue performance hereunder immediately upon the removal of such causes.
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11.01. Liability
To the fullest extent permitted by law, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Member shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member.
11.02. Insurance
The Company shall purchase and maintain directors and officers errors and omissions insurance, to the extent and in such amounts as the Members Committee shall, in its discretion, deem reasonable.
12.01. No Publicity or Advertisement Without Prior Consultation
Except after consultation with the other parties to this Agreement, none of the Members or the Company shall, and each of the parties shall use its reasonable efforts to assure that none of its officers, directors, employees, agents or advisors shall, publicize, advertise, announce or describe to any governmental entity or other third person the terms of this Agreement, the parties hereto or the transactions contemplated hereby, except as it believes in good faith to be required by applicable law, regulation, or stock market rules or as permitted pursuant to this Agreement.
12.02. Severability
Any portion or provision of this Agreement which is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining portions or provisions hereof in such jurisdiction or, to the extent permitted by law, rendering that or any other portion or provision hereof invalid, illegal or unenforceable in any other jurisdiction.
12.03. Article and Section Headings, Schedules and Exhibits
The Article and Section headings included in this Agreement are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. Schedules and Exhibits referred to in this Agreement are an integral part of this Agreement.
12.04. Counterparts
This Agreement and any documents executed pursuant hereto may be executed in any number of counterparts, each one of which shall be an original and all of which shall constitute one and the same document.
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12.05. Gender and Number
In this Agreement (unless the context requires otherwise), the masculine, feminine and neuter genders and the singular and the plural include one another.
12.06. Expenses
Unless otherwise provided in this Agreement, the parties shall each bear their own fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby (including without limitation all fees and expenses of counsel).
12.07. Notices
All notices given pursuant to this Agreement shall be in writing and be personally delivered or mailed with postage prepaid, by registered or certified mail, return receipt requested to the address set forth below or such other address as a party may from time to time specify in writing to the other party. If so mailed and also sent by telegram or facsimile machine, the notice will conclusively be deemed to have been received on the business day next occurring 48 hours after the latest to occur of such mailing and telegraphic or facsimile communication; otherwise, no notice shall be deemed given until it actually arrives at the address in question. The addressees to which notices are initially to be sent are as follows:
Digimarc Corporation
9405 SW Gemini Drive
Beaverton, Oregon 97008
Attention: Bruce Davis, CEO
with a copy to Robert Chamness, Chief Legal Officer and Secretary
Facsimile No.: (503) 469-4771
If to Nielsen:
The Nielsen Company (US) LLC
770 Broadway
New York, NY 10003
Attention: Itzhak Fisher, Global Product Leadership
with a copy to the Chief Legal Officer
Facsimile No.: (646) 654-8318
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12.08. No Third Party Beneficiaries
No employee of the Company (or his/her spouse or beneficiary), or any other Person not a party to this Agreement, shall be entitled to assert any claim hereunder. This Agreement shall be binding upon and inure to the benefit only of the parties hereto and their respective successors. Notwithstanding any other provisions to the contrary except with respect to such successors, it is not intended and shall not be construed for the benefit of any third party or any Person not a signatory hereto. In no event shall this Agreement constitute a third party beneficiary contract.
12.09. Governing Law; Arbitration
This Agreement is governed by, and is to be construed and interpreted in accordance with, the law of the State of Delaware, without giving effect to the conflict of law principles thereof. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in New York, New York, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Unless otherwise agreed in writing by the parties, the arbitration panel shall have no authority to amend or contravene this Agreement, to expand or otherwise modify the scope of the Business of the Company or to make any award or finding contrary to the provisions of an applicable Approved Budget or Approved Business Plan. The prevailing party in the arbitration shall be entitled to recoup its reasonable attorneys fees from the other party as part of any judgment entered. Judgment on the award may be entered in any court having jurisdiction thereof.
12.10. Modifications, Amendments or Waivers
Except as otherwise provided herein, provisions of this Agreement may be modified, amended or waived only by a written document specifically identifying this Agreement and signed by a duly authorized executive officer of each Member.
12.11. Assignment, Successors and Assigns
Except as set forth in Section 8.04 hereof, without the other Members prior written consent, this Agreement and the rights and obligations hereunder shall not be assignable by any Member. This Agreement and the rights and obligations hereunder shall be binding upon, and inure to the benefit of, the respective successors and permitted assigns of the parties hereto. Notwithstanding anything to the contrary in this Agreement, in the event that either party assigns this Agreement and the rights and obligations hereunder to an unrelated third party, such that the assigning party ceases to function or exist as a separate business entity, the rights and license granted to the Company under either Members Licensed Patents in this Agreement shall include only those patents and patent applications that were part of the definition of that Members Licensed Patents prior to the date of such assignment and having an effective filing date prior to the date of such assignment (including reissues, reexaminations, continuations, divisionals, continuations-in-part, extensions, substitutions, renewals, foreign counterparts and equivalents thereof) and patents issuing therefrom and patents claiming priority to such patents or patent applications having an effective filing date prior to the date of such assignment. For the avoidance of doubt, no patents of any entity that
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acquires either Party after the Effective Date are within the definition of Digimarc Licensed Patents or Nielsen Licensed Patents.
12.12. Joint Preparation
This Agreement has been jointly prepared by the Members and the provisions of this Agreement shall not be construed more strictly against any Member as a result of its participation in such preparation.
12.13. Entire Agreement; Termination of Prior Agreement
This Agreement (including the Schedules and Exhibits hereto) constitutes the entire agreement of the Members with respect to the subject matter hereof and supersede all prior written or oral and all contemporaneous oral agreements, understandings and negotiations between the Members with respect to the subject matter hereof.
12.14. Further Assurances
Each Member shall fully and faithfully carry out all its respective agreements and covenants expressly set forth in this Agreement. Each of the Members agrees to execute, acknowledge and deliver such additional documents and take such further actions, as may reasonably be required from time to time to carry out each of the provisions, and the intent, of this Agreement, and every agreement or document relating hereto, or entered into in connection herewith.
12.15. Securities Disclosures and Public Announcements
Disclosure of this Agreement, the financial impact of this Agreement and related transactions on the parties, and the terms and conditions of this Agreement (both in summary form and through exhibit filings) may be required under SEC regulations, stock market rules, or any other laws. Members may rely in good faith on advice of counsel when determining whether such disclosure is required. Except as recited above and in Section 12.01, no Member will make public announcements nor issue press releases relating to this Agreement without the prior written consent of the other Member(s), which consent will not be unreasonably withheld.
12.16. Confidentiality
Subject to Section 12.15, each party agrees that it will treat any provisions of this Agreement not required to be publically disclosed as confidential and will handle confidential information of the other party in a manner consistent with the policies and practices of that party for handling its own confidential information and in no case with less than a reasonable standard of care. Notwithstanding the foregoing, either party may provide a copy of this Agreement to a third party considering in good faith a bona fide transaction as contemplated in Sections 8.04 or 12.11, provided that such third party agrees in writing to be bound to a confidentiality agreement customary to such transactions and prohibiting use of its knowledge of this Agreement or its provisions for
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any competitive purpose. If the entire Agreement is terminated, the obligations set out in this Section will extend for a period of five (5) years from this termination date.
12.17. Bankruptcy
Any intellectual property licenses and rights granted hereunder or pursuant hereto are, and will be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code (Code) licenses of intellectual property, as defined under the Code. Notwithstanding any provision contained herein to the contrary, if a party is under any proceeding under the Code and the trustee in bankruptcy of that party, or that party as a debtor in possession, rightfully elects to reject this Agreement, then the other party pursuant to the relevant portions of Section 365(n) of the Code may retain any and all of such other partys licenses and rights hereunder to the maximum extent permitted by law.
12.18. Survival
Any rights and obligations which by their nature (or explicit statement) survive and continue after any expiration or termination of this Agreement will survive and continue and will bind the parties and their successors and assigns, until such obligations are fulfilled. For avoidance of doubt, upon expiration or termination of this Agreement, the provisions of Sections 2.03, 2.04, 3.06, 5.01, 5.02, 5.03, 5.04, 8.04, 9.01, 12.07, 12.08, 12.09, 12.11, 12.16, and 12.17 will survive and remain in effect until fulfilled.
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IN WITNESS WHEREOF, the members hereto have caused this Agreement to be executed by their duly authorized representatives, effective as of the Effective Date.
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DIGIMARC CORPORATION |
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By: |
/s/ Bruce Davis |
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Name: Bruce Davis |
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Its: Chief Executive Officer |
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THE NIELSEN COMPANY (US) LLC |
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By: |
/s/ Itzhak Fisher |
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Name: Itzhak Fisher |
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Its: Global Product Leadership |
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Schedule 4.01
Members Committee
Digimarc Representatives :
1. Bruce Davis
2. Robert Chamness
Nielsen Representatives :
1. Itzhak Fisher
2. Bruce Haymes
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Schedule 5.02
Excluded Patents
Patent No./Serial No. |
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Title |
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USPN [**] |
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[**] |
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USPN [**] (a continuation of USPN [**]) |
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[**] |
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USPN [**] |
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[**] |
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USPN [**] |
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[**] |
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and any reissues, continuations, continuations-in-part, divisionals, extensions, re-examinations, substitutions, renewals and foreign counterparts and equivalents of those patents.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Schedule 5.02 (d)
Services Agreement
Unless otherwise determined by the Members Committee, the terms and conditions of that Service Agreement set forth in Schedule 5.02 (d) of the Limited Liability Company Agreement of Newco 1, LLC shall also govern any services provided or performed under under this Newco 2, LLC Agreement.
Schedule 5.02 (d)
DEVELOPMENT SERVICES AGREEMENT
This is a Development Services Agreement (the Agreement) between Digimarc Corporation, a Delaware corporation, having a place of business at 9405 SW Gemini Drive, Beaverton, Oregon 97008, and its subsidiaries (Digimarc), and [Newco 1, LLC], a Delaware limited liability company, having a place of business at 9405 SW Gemini Drive, Beaverton, 97008 (Newco 1).
For good and valuable consideration as stated herein, the parties hereby agree as follows:
This Agreement is entered into contemporaneously with, and appended as a schedule to, the Limited Liability Company Agreement of [Newco 1, LLC].
The effective date of this Agreement is July 1, 2009 (Effective Date).
Definitions of terms defined in the Limited Liability Company Agreement of [Newco 1, LLC] are not repeated here.
1. IP Ownership and License Grants.
1.1. Technology and Patents Developed Pursuant to Development Services Agreement . Ownership and licensing of intellectual property shall be consistent with section 5.01 of the Limited Liability Company Agreement of [Newco 1, LLC] with respect to the Digimarc Services provided for herein.
2. Digimarc Services.
2.1. Authorized Services. Digimarc will perform services for Newco 1 relating to the development of Newco 1 products and services (the Digimarc Services), including research, development, engineering, quality assurance, market research and development, strategic planning, strategy development, business development, project management, reporting, and such other services or activities as will be determined from time to time by the management of Newco 1 and the Members Committee of Newco 1. Digimarc will perform the Digimarc Services in good faith and with a reasonable standard of quality, but in no event with a standard of quality less than that Digimarc employs for services Digimarc performs for itself . The Digimarc Services shall not include any time or labor spent by Digimarc in its own strategic planning or the management of its own organization, outside of the management of the specific activities to be conducted as part of such Services.
2.2. Annual Work Plan. The particular Digimarc Services to be performed and expenditures to be made by Digimarc shall be set forth in an annual work plan and budget (the Annual Work Plan) as adopted and approved by the management
of Newco 1. The parties shall mutually agree upon a process for determining the Annual Work Plan consistent with the Approved Budget and Approved Business Plan process of and for Newco 1. The Annual Work Plan shall state reasonable and specific objectives to be met by Digimarc, and which shall take into account Newco 1s strategic goals and operational experience, Digimarcs resources and capabilities to assist Newco 1 in achieving those goals, and the market conditions then prevailing. The parties shall also mutually agree upon an informal process for change management and for resolving disputes concerning determination of the Annual Work Plan. In all events, Digimarc shall make resources available in each year covered by a timely submitted and reasonable Annual Work Plan (a Plan Year) sufficient to perform the Digimarc Services identified in the Annual Work Plan. The first Plan Year for the rest of 2009 will begin on July 1, 2009, prior to completion of the Annual Work Plan, based upon a short statement of work to be agreed upon by the parties. The Annual Work Plan for 2010 will be determined as soon as practicable thereafter, and no later than December 31, 2009. Successive Annual Work Plans shall be determined no later than ninety (90) days prior to the beginning of each subsequent Plan Year. If Digimarc reasonably believes that any requested changes to the Annual Work Plan will result in additional expenditures exceeding those approved by Newco 1 in the Annual Work Plan, it shall so inform Newco 1. If Newco 1 and Digimarc agree to the requested changes and such additional expenditures, they shall amend the Annual Work Plan to reflect such changes. Unless the Members Committee of Newco 1 authorizes such additional expenditures in writing, Newco 1 shall not be obligated to pay for Digimarc Services in excess of the larger of (a) the amount set forth in the Annual Work Plan (including as amended pursuant to the preceding sentence) or (b) the Service Minimum Fee (as defined below).
2.3. Quarterly Reporting and Review . Within thirty (30) days following the end of each quarter during each Plan Year, Digimarc shall provide reports stating its progress in achieving the objectives set forth in the Annual Work Plan, and describing in detail the Digimarc Services performed and expenditures made in that quarter. The parties shall mutually agree upon a process for a joint quarterly review of Digimarcs progress in achieving the objectives set forth in the Annual Work Plan, and for considering any changes that either Newco 1 or Digimarc may propose to the Annual Work Plan.
2.4. Minimum Service Fees. Subject to any termination of its obligation to engage Digimarc to perform the Digimarc Services, Newco 1 shall pay, in equal quarterly payments as set forth below, the following minimum annual amounts for Digimarc Services in each Plan Year (the Minimum Service Fees):
Annual Work Plan Period |
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Plan Year 2009 |
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Plan Year 2010 |
|
Plan Year 2011 |
|
|||
|
|
|
|
|
|
|
|
|||
Minimum Fees |
|
$ |
1.13 million |
|
$ |
2.80 million |
|
$ |
2.74 million |
|
In the event that Digimarc is retained to provide development services to [Newco 2, LLC] during the term of this Agreement, the amounts paid by [Newco 2, LLC] shall be credited against the minimums set forth above. Quarterly payments of such fees,
including Minimum Service Fees, will be due and payable to Digimarc only for those quarters in which Digimarc performs Digimarc Services in accordance with a timely submitted and reasonable Annual Work Plan, at such levels as would be sufficient to generate the Minimum Service Fees as set forth above; or if Newco 1 fails to timely submit a reasonable Annual Work Plan, in which Digimarc was ready, willing and able to perform such level of Digimarc Services. Quarterly Minimum Service Fee payments are due and payable to Digimarc on the first day of each quarter in which the Digimarc Services are to be provided. Minimum Service Fees do not include any hardware, equipment or software purchased on behalf of Newco 1 by Digimarc. Hardware, equipment or software will only be purchased on behalf of Newco 1 by Digimarc upon written approval by Newco 1 and will be charged back to Newco 1 with no markup.
2.5. Labor Rates. Labor rates charged for Digimarc Services will be as shown in Appendix A. The labor rates will be increased on January 1 of each year based on the report used by Digimarc for evaluating annual labor rates for similar project work, reflecting an determination of average rates of wage and benefits cost inflation, and may otherwise be adjusted by mutual agreement of the parties. The Members shall have an opportunity to review the aforementioned labor report prior to implementation of any annual labor rate adjustments.
2.6. Digimarc Services Payment Schedule and Invoice. Digimarc shall furnish an invoice to Newco 1 following each quarter of any Plan Year. The invoice shall be accompanied by an itemization of the Digimarc Services actually performed in that quarter, including an identification of individual timekeepers, their respective hours and rates, and the nature of the work performed by them with reference to the objectives of the Annual Work Plan. The invoice shall also be accompanied by an itemization of those out-of-pocket expenditures reasonably incurred by Digimarc in performing the Digimarc Services, reimbursement of which shall be included in the Minimum Service Fees. Within thirty (30) days of receipt of such invoice, Newco 1 shall pay for Digimarc Services actually performed by Digimarc in accordance with the then-current Annual Work Plan in that quarter to the extent that the Digimarc Services actually performed by Digimarc within that Plan Year to date, as reflected in the cumulative quarterly invoices for that Plan Year, exceed the Minimum Service Fees owed for that Plan Year cumulatively to date. If the amount of Digimarc Services actually performed and invoiced in that quarter, when added to the amount of Digimarc Services actually performed and invoiced in prior quarters of that Plan Year, is less than the Minimum Service Fees owed for that Plan Year cumulatively to date, Newco 1 shall [**].
2.7. Audit Rights. For a period of three (3) years following the end of any Plan Year, or until resolution of a dispute concerning the accuracy of the invoices or quarterly reports for a particular Plan Year arising within that three-year period, Newco 1 (and its designated agents) shall have the right to inspect and examine Digimarcs books and records relating to the Digimarc Services, including time records and activity logs, for the purpose of determining whether Digimarcs invoices and quarterly reports for that Plan Year are accurate; provided, however, that Digimarc may redact such documents to
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
preserve the confidentiality of Digimarc proprietary information that is not necessary to verify the accuracy of the invoices or quarterly reports . Any such inspection and examination will take place upon reasonable prior written notice to Digimarc, during regular business hours and no more than once a year. Digimarc shall promptly refund to Newco 1 any amount that the audit shows was overpaid by Newco 1 in that Plan Year per the Agreement and, if the overpayment is greater than 5% of the total payment for that Plan Year, Digimarc shall also pay the reasonable out-of-pocket costs of the inspection and examination.
2.8. Newco 1 Commitment of Resources. Newco 1 shall use its commercially reasonable efforts to develop and support its products and services, including the commitment of a reasonable amount of marketing, financial and organizational resources. In furtherance of those efforts, Newco 1 shall prepare an Annual Work Plan for the development and support of the Newco 1 products and services business, shall invite Digimarc to advise and contribute to the formation of such plan, and shall share such plan with Digimarc. The Members Committee shall review the Annual Work Plan at each quarterly meeting and make whatever changes it believes necessary and appropriate for the operation of the Company.
2.9. Digimarc Opportunity to Bid . For so long as [**], Newco 1 shall provide Digimarc with a reasonable opportunity to [**].
2.10. Limitations on Digimarc Services for Other Parties . For as long as Newco 1 is timely paying Digimarc for Digimarc Services, Digimarc shall not [**].
2.11. Patent Prosecution . To the extent that the parties identify potentially patentable inventions arising from the Digimarc Services, with the consent of and pursuant to the direction of the Members Committee, the parties will determine how and whether to prosecute a patent for such inventions.
3. Remedies for Breach .
3.1. Remedies for Breach . If either party materially breaches this Agreement, the non-breaching party may, in addition to other remedies at law and in equity, terminate this Agreement. Prior to terminating this Agreement for breach, the non-breaching party must first give the breaching party written notice specifying in detail the alleged breach. The breaching party shall then have seventy-five (75) days to cure such breach.
4. Termination .
The term of this Agreement is through December 31, 2011.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
5. Other Provisions.
5.1. Confidentiality . Each party agrees that it will treat confidential information of the other party in a manner consistent with the confidentiality agreement between the parties. Notwithstanding the foregoing, either party may provide a copy of this Agreement to a third party considering in good faith a bona fide transaction as contemplated in Section 5.2, provided that such third party agrees in writing to be bound to a confidentiality agreement customary to such transactions and prohibiting use of its knowledge of this Agreement or its provisions for any competitive purpose. Upon request by the disclosing party with respect to specifically identified information, the receiving party will return to the disclosing party or destroy all of the confidential information in the receiving partys possession or control furnished to it by the disclosing party which the receiving party does not need to retain in order to perform any obligations imposed, or exercise any rights (including rights of ownership) acquired, by this Agreement, and shall certify in writing its return or destruction of such confidential information. If the receiving party is subject to judicial or governmental proceedings or is subject to government regulations requiring disclosure of confidential information of the disclosing party, then prior to disclosing such information, the receiving party will provide the disclosing party with reasonable prior notice for the disclosing party to seek a protective order for confidential treatment of the confidential information and will only disclose that information that is necessary and required. If the entire Agreement is terminated, the obligations set out in this Section will extend for a period of [**] years from this termination date, except that the confidential information of the disclosing party that is specifically identified by it as a trade secret will be protected for a period of [**] years.
5.2. Assignment . Neither party may assign any of its rights or obligations under this Agreement to any person without the prior written consent of the other, and any such purported assignment shall be null and void from inception; provided, however, that (a) either party may assign all its rights and delegate all its obligations hereunder to a single person without such approval in connection with: (i) a merger, consolidation, reorganization, statutory conversion, amalgamation or similar corporate transaction, or (ii) a sale or other disposition of all or substantially all of its assets in the businesses relating to this Agreement, and (b) Newco 1 may assign all its rights and delegate all its responsibilities to an Affiliate in connection with a restructuring or reorganization of Newco 1.
5.3. Bankruptcy . Any intellectual property licenses and rights granted to either party hereunder or pursuant hereto are, and will be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code (Code) licenses of intellectual property, as defined under the Code. Notwithstanding any provision contained herein to
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
the contrary, if a party is under any proceeding under the Code and the trustee in bankruptcy of that party, or that party as a debtor in possession, rightfully elects to reject this Agreement, then the other party pursuant to the relevant portions of Section 365(n) of the Code may retain any and all of such other partys licenses and rights hereunder to the maximum extent permitted by law.
5.4. Limitations on Damages. NEITHER DIGIMARC NOR NEWCO 1 WILL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, EXEMPLARY, RELIANCE, PUNITIVE OR SPECIAL DAMAGES ARISING UNDER THIS AGREEMENT, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
5.5. Governing Law, Jurisdiction and Venue. This Agreement shall be governed by New York law. All matters concerning the interpretation of, or performance under, this Agreement will be resolved in the state or federal courts in New York applying New York law and jurisdiction and venue will be proper in such New York courts.
5.6. No Waiver. Each and all of the various rights, powers and remedies of the parties will be considered to be cumulative with and in addition to any other rights, powers and remedies which such parties may have at law or in equity in the event of breach of any of the terms of this Agreement. The exercise or partial exercises of any rights, powers or remedies will neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such party. In no event will any waiver of any rights hereunder constitute the waiver of such rights in any future instance unless the waiver so specifies in writing.
5.7. Notices . All notices of breach or early termination must be made in writing. Any written notice under this Agreement will be sent by email with a hard copy sent via certified mail, return receipt requested, or by recognized courier service with tracking capabilities. The notice will be deemed effective as of the earlier of (i) the date of delivery, as evidenced by a delivery receipt or the addressees registry, or (ii) five business days after sending notice to the correct address in the authorized manner. The addresses of the parties, as set forth above, will be used for any such notice unless either party hereafter designates a substitute address in writing in accordance with this provision.
The contacts to address the notices to are:
If to Digimarc:
Digimarc Corporation
9405 S.W. Gemini Drive
Beaverton, Oregon 97008
Attention: Bruce Davis, CEO
with a copy to Robert Chamness, Chief Legal Officer and Secretary
Facsimile No.: (503) 469-4771
If to Newco 1:
Newco 1, LLC
9405 S.W. Gemini Drive
Beaverton, Oregon 97008
Attention:
,
CEO
with a copy to the Legal Officer and Secretary
Facsimile No.: (503) 469-4771
If to Nielsen:
The Nielsen Company (US) LLC
770 Broadway
New York, NY 10036
Attention: Itzhak Fisher, Global Product Leadership
with a copy to the Chief Legal Officer
Facsimile No.: (646) 654-8318
5.8. Integration . This Agreement embodies the entire agreement of the parties hereto regarding the subject matter herein, and supersedes and cancels any and all previous negotiations, agreements or commitments with respect to them, including without limitation the terms and conditions under a prior agreement between Digimarc and Nielsen executed on November 27, 2007, with an effective date of October 1, 2007 (the Prior Agreement) (including all payment obligations of Nielsen accruing after the Effective Date).
5.9. Severability . If any provision of this Agreement is held to be void or unenforceable, the parties agree that such determination will not result in the nullity or unenforceability of the remaining portions of this Agreement. The parties further agree to replace such void or unenforceable provisions of this Agreement with valid and enforceable provisions that will achieve, to the extent legally permissible, the economic, business and other purposes of the void or unenforceable provisions and that reflect the intent of the parties when entering into this Agreement.
5.10. Amendments . This Agreement may not be modified in any manner except by an instrument in writing duly signed by each of the parties hereto.
5.11. Construction . Each party and its counsel have participated fully in the review and revision of this Agreement. Any rule or construction to the effect that ambiguities are to be resolved against the drafting party will not apply in interpreting this Agreement.
5.12. No Agency. Nothing in this Agreement will be construed as creating any agency, partnership or other form of joint enterprise between Digimarc and Newco 1. Neither party will have authority under this Agreement to contract for or bind the other in any manner whatsoever.
5.13. Other Documents. Each party hereto will execute any documents which may be necessary or advisable to carry out or effectuate the foregoing.
5.14. Survival. Upon expiration or termination of this Agreement, rights to payment under this Agreement and the provisions set out in Sections 1, 2.4, 2.7, 3.1, 5.1, 5.2, 5.3, 5.4, 5.6, 5.7, and 5.13 will remain in effect.
5.15. Counterparts. This Agreement may be executed in separate counterparts, and by facsimile, each of which will be deemed an original, and when executed, separately or together, will constitute a single original instrument, effective in the same manner as if the parties had executed one and the same instrument.
IN WITNESS WHEREOF, the Members Committee has adopted this Agreement as part of the Limited Liability Company Agreement of [Newco 1, LLC], to be effective as of the Effective Date.
APPENDIX A: LABOR RATES (current rates)
Job Classification |
|
Rate |
|
|
Account Manager |
|
$ |
[**] |
|
Director |
|
$ |
[**] |
|
Engineering Manager |
|
$ |
[**] |
|
Executive |
|
$ |
[**] |
|
Lawyer |
|
$ |
[**] |
|
Paralegal |
|
$ |
[**] |
|
Market Development Manager |
|
$ |
[**] |
|
Marketing Engineer |
|
$ |
[**] |
|
Product Manager |
|
$ |
[**] |
|
Project Director |
|
$ |
[**] |
|
QA Engineer |
|
$ |
[**] |
|
R&D Engineer |
|
$ |
[**] |
|
Software Engineer |
|
$ |
[**] |
|
Technical Writer |
|
$ |
[**] |
|
IT Network Support |
|
$ |
[**] |
|
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Schedule 5.03
Nielsen Data License
MASTER
SERVICES AGREEMENT
BY AND BETWEEN
THE NIELSEN COMPANY (US), INC.
AND
[Name of Client]
This Agreement (Agreement), dated as of [effective date of Agreement], between The Nielsen Company (US), Inc., a New York corporation (Nielsen), and [Name of Client], a [state/type of organization] (Client), governs the provision and use of data, information, technology and related services (Services) identified in one or more local service agreements or in a project order for Custom Services (as defined below) (each an LSA), entered into by Nielsen and Client and/or their respective affiliates. Nielsen shall mean Nielsen and/or its affiliates and Client shall mean Client and/or its affiliates, and in each LSA Nielsen shall mean the Nielsen entity providing the Services and Client shall mean the Client entity receiving the Services under such LSA. Each LSA binds only the Nielsen and Client entities which execute the LSA, or on behalf of which the LSA is executed, and does not vest rights in any affiliate that is not a party to such LSA. This Agreement shall apply to any services provided to Client during the term of this Agreement, whether or not specified in an LSA.
Article 1. Scope of Service
1.1 Services; Ownership and License . Nielsen shall deliver the Services set forth in each LSA (which may include one or more of the following) for use solely by Client in accordance with this Agreement and such LSA. The data and information included in Services are referred to as Nielsen Information. Client agrees that:
(a) Licensed Services are services to which Nielsen retains ownership and which Nielsen does not sell but licenses to multiple clients including, among others, media, household panel, retail tracking, online and mobile services and Technology Services (as defined below). Client is granted a limited, non-exclusive license to use Licensed Services as set forth in this Agreement and any applicable LSA.
(b) Custom Services include BASES and certain customized research Services (not including any Technology Services) and ownership of such Custom Services shall be subject to the terms of the applicable LSA and/or project order.
(c) Technology Services include Internet portals, access and analytic tools, licensed systems, templates and software (including delivery media, manuals, updates and new versions provided by Nielsen), and Client shall maintain, and upgrade if necessary, its hardware, operating systems and third party software consistent with any requirements and/or changes to the Technology Services, and Nielsen shall provide Client with notice of such requirements and/or changes for the operation of Technology Services prior to implementation.
Article 2. Fees and Taxes
2.1 Fees . Client agrees to pay the fees set forth in each LSA and such fees are due when invoiced and are payable within 30 days of the date of the invoice. Client agrees to pay interest at 1.5% per month (or, if lower, the maximum legal rate) from the date originally due until payment is received by Nielsen on all amounts thereafter.
2.2 Taxes . Client is responsible for all value-added, goods and services, sales, use and similar taxes due with respect to the Services.
Article 3. Use of Services
3.1 Uses and Disclosure of Services . Client may only use Services internally except as permitted in (a) and (b) below and in an LSA or other written agreement signed by an expressly and duly authorized representative of Nielsen. Client may:
(a) in the case of Licensed Services, include Limited Excerpts (meaning Nielsen Information that is not of sufficient quantity or quality as to have independent commercial value, as determined by Nielsen in its sole discretion) in annual reports, reports to the financial community and releases to the media for the purpose of corporate image-building or product promotion; and
(b) in the case of Custom Services, use Nielsen Information (i) in the conduct of its business with partners, suppliers and customers, and (ii) with Nielsens prior written consent, in advertising or promotion of Clients products or services.
Any Nielsen Information that is disclosed must be accurately sourced to Nielsen, be disclosed only to authorized third parties, and not be presented in a misleading manner.
3.2 Uses of References . Disaggregated data, data dictionaries, reference tools, data methodologies, data attributes/characteristics and flat files are referred to as References and may only be used internally unless disclosure to a third party is authorized in writing by Nielsen.
3.3 Restrictions . Client shall not decompile, reverse engineer, disassemble, sublicense, distribute, dispose of, modify, adapt, translate, or remove any proprietary or copyright legend from any Service or Nielsen Information.
3.4 Third Parties . Client may furnish Nielsen Information to third parties (such as consultants and third party processors) retained by Client for use solely on behalf of Client provided that, prior to accessing such Nielsen Information, the third party shall have entered into Nielsens then standard form of agreement for such third party, as determined by Nielsen in its sole discretion. At its discretion, Nielsen may decline to enter into such agreement or grant a particular third party access or rights to Nielsen Information, and Nielsen reserves the right to charge for such access. Nielsen is not responsible for the accuracy of information produced by such third party from Nielsen Information.
3.5 Legal Proceedings . No Services or Nielsen Information may be used in any legal or administrative proceeding. If such use is compelled by legal process, Client shall
promptly give Nielsen advance written notice and, before such use, obtain confidentiality agreements, protective orders and evidentiary stipulations acceptable to Nielsen and shall limit the use to the minimum necessary to comply with such legal requirement.
Article 4. Changes to Services and Charges
4.1 Changes to Service . Nielsen may, from time to time, in its sole discretion, make changes to any Service or portion thereof including, without limitation, formats, schedules, specifications and/or techniques.
4.2 Charges . In the event of a change to a Service, Nielsen may, upon 30 days prior written notice, adjust the fees for such Service. Such fee change shall become effective on the date stated in Nielsens notice unless, within 15 days after such notice, Client notifies Nielsen in writing of its refusal to accept the fee change, in which event the applicable Service to Client shall terminate as of the effective date of the change; provided, however, that Nielsen may, in its sole discretion, elect to rescind the fee change, in which case the Service to Client, as changed, shall continue as provided in the applicable LSA.
Article 5. Warranties, Limitation of Liability, Exclusive Remedy and Indemnification
5.1 Disclaimer of Warranties . Client recognizes that Nielsen Information represents Nielsens opinion based on its analysis of data and information, including data from sample households and other sources that may not be under Nielsens control, and that Nielsen cannot guarantee the accuracy of Nielsen Information. Without limiting the foregoing, NIELSEN DISCLAIMS, AND CLIENT HEREBY WAIVES, ANY AND ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, TO CLIENT OR TO ANY THIRD PARTY, CONCERNING THE SERVICES AND NIELSEN INFORMATION PROVIDED HEREUNDER OR UNDER AN LSA INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, QUALITY OR FITNESS FOR ANY PARTICULAR PURPOSE. The foregoing disclaimer shall not act as or constitute an admission by Nielsen that any Services or Nielsen Information constitute goods, commodities or tangible personal property under applicable law.
5.2 Limitation of Nielsens Liability; Exclusive Remedies . Nielsen will give a pro rata refund of fees paid for any Nielsen Information for such period of time as it fails to provide the Nielsen Information and will use reasonable efforts to correct material errors Client identifies in Nielsen Information. Nielsen will not be liable, in contract, tort (including negligence) or otherwise, for any loss, expense or damage of any kind including, without limitation, special, incidental or consequential damages, due to any failure to provide any Service or resulting from any errors or inaccuracies in the Nielsen Information or from the use by Client or others of any Service or Nielsen Information. UNLESS OTHERWISE PROHIBITED BY APPLICABLE LAW, NIELSEN SHALL NOT BE LIABLE FOR ANY CLAIM BROUGHT AFTER THE SHORTER OF 1 YEAR AFTER THE CAUSE OF ACTION HAS ACCRUED OR MORE THAN 2
YEARS AFTER THE TERMINATION OF THIS AGREEMENT OR THE APPLICABLE LSA. THESE REMEDIES ARE EXCLUSIVE.
5.3 Indemnity . Client agrees to indemnify and hold Nielsen harmless from and against all claims, damages, loss or expenses (including attorneys fees) arising, directly or indirectly, from (i) Clients permitted disclosure pursuant to paragraph 3.1 or an LSA or (ii) Clients disclosure or use of the Services or Nielsen Information contrary to the terms of this Agreement or an LSA.
Article 6. Term, Suspension and Termination
6.1 Term . Unless terminated in accordance with the terms hereof, this Agreement, licenses and the Services rendered hereunder shall commence on the date hereof and shall remain in effect for so long as any LSA remains in full force and effect.
6.2 Return of Materials upon Termination . Upon termination or expiration of this Agreement or any LSA, (i) Client shall discontinue use of and return to Nielsen all Licensed Services and Technology Services and the Nielsen Information, including References provided thereunder, and (ii) all rights and licenses granted to Client to use such Services shall cease and terminate immediately. In lieu of return, Client may remove Nielsen Services from its systems and records, destroy tangible forms thereof, and certify such removal/destruction in a written form satisfactory to Nielsen.
6.3 Partial Termination of Services Due To Third Party Activity . Certain Services are based on data or information from third parties and Nielsen may discontinue furnishing a Service or any portion thereof to the extent any such third party data or information ceases to be available to Nielsen for any reason.
6.4 Suspension of Services . The provision of Services or licenses, or any portion thereof, may be suspended by Nielsen at any time in the event that Client fails to perform its payment or other obligations set forth herein or in an LSA. Such suspension of Service shall not suspend or otherwise affect Clients payment obligations set forth herein or in an LSA.
6.5 Termination by Nielsen . This Agreement and any LSA and any or all of the Services or licenses provided hereunder or under an LSA may be terminated by Nielsen on any date specified by Nielsen (i) if Client has failed to perform any one or more of its payment or other obligations hereunder, (ii) if Nielsen is or will become unable for any reason beyond its control to perform its obligations hereunder, or (iii) if Nielsen is terminating such Service to all clients then subscribing to a class of such Service.
Article 7. General Provisions
7.1 Survival . The rights and obligations of Nielsen and Client set forth in Articles 2, 3, and 5 and Sections 6.2, 7.6 and 7.8 shall survive the termination of this Agreement or of any LSA.
7.2 Force Majeure . In the event either party is delayed in or prevented from performing any act required hereunder due to failure of any communication system or on- or off-line computing equipment, labor troubles, inability to procure materials, governmental or judicial orders, acts of God, acts of terrorism, weather conditions, third party interference or other similar reason beyond its control, then performance of such act shall be excused for the period of such delay; provided, however, that Clients obligation to make any payment pursuant to this Agreement or an LSA shall not be excused for more than ten (10) days.
7.3 Independent Contractor Relationship . The parties to this Agreement are independent contractors and neither shall have authority to bind or obligate the other.
7.4 Notices . Any notice or request given hereunder shall be in writing and deemed given on the date received when delivered personally or by internationally recognized delivery service (i) if to Nielsen at The Nielsen Company (US), Inc., 770 Broadway, New York, NY 10003, Attention: Chief Executive Officer, with a copy to the same address, Attention: Chief Legal Officer; and (ii) if to Client at [Client Name, Address], Attention: [Chief Executive Officer/General Counsel).
7.5 Assignment . This Agreement is for the benefit of and binding on the parties and their successors and assigns. Subject to the prior written consent of Nielsen, Client may assign its rights under this Agreement to a successor to all or substantially all of the business of Client, provided all obligations of Client are assumed by the assignee and documentation satisfactory to Nielsen of such assumption has been delivered to Nielsen. Nielsen reserves the right to assign its rights to an affiliate of Nielsen or a successor to all or substantially all of the business of Nielsen, and reserves the right to have any Services rendered by such affiliate or successor, after providing notice in writing to Client.
7.6 Injunctive Relief . Any breach of the use of services provisions of Article 3 of this Agreement or similar provisions in an LSA may cause irreparable harm to Nielsen, for which Nielsens remedies at law will not be adequate. Nielsen shall be entitled to injunctive relief without having to prove irreparable injury, lack of an adequate remedy at law, posting bond or waiving any other rights.
7.7 Entire Agreement; Modification or Amendment; Waiver . This Agreement together with any LSA contains the entire understanding of the parties with respect to the provision of Services covered by such LSA and supersedes all previous discussions and agreements relating to such Services. Neither this Agreement nor any LSA may be modified or amended except in a writing executed by the parties. No waiver by a party of any breach of this Agreement or an LSA shall be deemed a waiver of any prior or subsequent breach.
7.8 Governing Law . This Agreement shall be governed by the law of the State of Illinois, United States of America, without regard to its choice of law provisions. The parties agree to the exclusive personal jurisdiction of the State and Federal courts located in Chicago, Illinois for purposes of determining all disputes arising in connection with this Agreement and hereby waive all objections to venue in those courts. Each LSA shall
be governed by the laws of the State of Illinois unless another jurisdiction is specified in such LSA.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto through their duly authorized representatives as of the date set forth above.
THE NIELSEN COMPANY (US), INC. |
|
|
[Name of Client] |
||
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||
By |
|
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By |
|
|
|
|
|
|
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Name: |
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|
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Name: |
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Title: |
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Title: |
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DIGIMARC CORPORATION
CERTIFICATION
I, Bruce Davis, certify that:
Date: July 31, 2009
By: |
/s/ BRUCE DAVIS
Bruce Davis Chief Executive Officer |
DIGIMARC CORPORATION
CERTIFICATION
I, Michael McConnell, certify that:
Date: July 31, 2009
By: |
/s/ MICHAEL MCCONNELL
Michael McConnell Chief Financial Officer |
DIGIMARC CORPORATION
CERTIFICATION
In connection with the periodic report of Digimarc Corporation (the "Company") on Form 10-Q for the period ended June 30, 2009 as filed with the Securities and Exchange Commission (the "Report"), I, Bruce Davis, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the U.S. Code, that to the best of my knowledge:
This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.
Date: July 31, 2009
By: |
/s/ BRUCE DAVIS
Bruce Davis Chief Executive Officer |
DIGIMARC CORPORATION
CERTIFICATION
In connection with the periodic report of Digimarc Corporation (the "Company") on Form 10-Q for the period ended June 30, 2009 as filed with the Securities and Exchange Commission (the "Report"), I, Michael McConnell, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the U.S. Code, that to the best of my knowledge:
This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.
Date: July 31, 2009
By: |
/s/ MICHAEL MCCONNELL
Michael McConnell Chief Financial Officer |