<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] 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: 0-24087
ITERATED SYSTEMS, INC.
(Exact name of registrant as specified in Its charter)
<TABLE>
<S> <C>
GEORGIA 58-1741516
(State or other Jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3525 PIEDMONT ROAD
SEVEN PIEDMONT CENTER
SUITE 600 30305-1530
ATLANTA, GEORGIA (Zip Code)
(Address of principal executive offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 264-8000
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 [X] No [ ]
The number of shares of the issuer's class of capital stock as of October 1,
1998, the latest practicable date, is as follows: 13,073,125 shares of Common
Stock, $.01 par value.
===============================================================================
ITERATED SYSTEMS, INC.
<PAGE>
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1998
and 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I
Financial Information
ITEM 1. FINANCIAL STATEMENTS.
ITERATED SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 1997 SEPTEMBER 1998
---------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 7,633,283 $ 1,547,429
Short-term investments 9,999,420 8,640,000
Accounts receivable 495,668 218,725
Inventory 8,275 5,309
Other current assets 360,752 203,415
------------ ------------
Total current assets 18,497,398 10,614,878
Property and equipment 4,336,989 4,600,372
Accumulated depreciation (3,103,756) (3,800,667)
------------ ------------
Net property and equipment 1,233,233 799,705
Other assets 44,464 45,763
------------ ------------
Total assets $ 19,775,095 $ 11,460,346
============ ============
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 206,321 $ 270,978
Accrued liabilities 639,460 562,364
Deferred revenue 5,126 5,126
Current maturities of debt 119,615 4,675
Other current liabilities 34,572 34,572
------------ ------------
Total current liabilities 1,005,094 877,715
Non-current liabilities
Long-term debt 4,874 1,296
Other liabilities 48,977 23,048
------------ ------------
Total non-current liabilities 53,851 24,344
Shareholders' equity
Common stock 131,020 130,731
Additional paid-in capital 30,012,721 29,808,604
Retained earnings (11,436,434) (19,419,395)
Currency translation adjustments 8,843 38,347
------------ ------------
Total shareholders' equity 18,716,150 10,558,287
------------ ------------
Total liabilities and shareholders' equity $ 19,775,095 $ 11,460,346
============ ============
See accompanying notes.
</TABLE>
<PAGE>
Iterated Systems, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-----------------------------------------------------------------
1997 1998 1997 1998
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Development and exclusive license fees $ 2,368,000 $ 0 $ 8,145,000 $ 105,000
Software products and related revenues 105,318 0 356,185 904
Other license and contract revenues 97,281 149,041 116,006 477,467
------------ ----------- ------------ -----------
Total revenues 2,570,599 149,041 8,617,191 583,371
Operating expenses:
Costs of product revenues 11,691 0 121,282 0
Sales and marketing 1,106,781 1,054,657 4,010,194 3,295,838
Research, development and engineering 1,945,781 1,233,784 6,677,247 4,148,846
General and administrative 449,371 513,991 1,444,509 1,686,426
------------ ----------- ------------ -----------
Total operating expenses 3,513,624 2,802,432 12,253,232 9,131,110
Operating loss (943,025) (2,653,391) (3,636,041) (8,547,739)
Other income/(expense):
Interest income 46,293 153,476 121,201 587,647
Interest expense (84,599) (352) (141,366) (16,052)
Foreign currency exchange gain (loss) 2,632 27,781 5,013 (2,816)
------------ ----------- ------------ -----------
Total other income/(expenses) (35,674) 180,905 (15,152) 568,779
------------ ----------- ------------ -----------
Net loss before income taxes (978,699) (2,472,486) (3,651,193) (7,978,960)
Income taxes 0 0 0 4,000
------------ ----------- ------------ -----------
Net loss $ (978,699) $(2,472,486) $ (3,651,193) $(7,982,960)
============ =========== ============ ===========
Basic and diluted net loss per share of
common stock $ (0.09) $ (0.19) $ (0.34) $ (0.61)
============ =========== ============ ===========
Weighted average number of shares of
common stock outstanding 10,836,200 13,073,125 10,756,300 13,087,778
============ =========== ============ ===========
See accompanying notes.
</TABLE>
<PAGE>
Iterated Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------------------
1997 1998
------------ -----------
<S> <C> <C>
Operating activities
Net loss $ (3,651,193) $(7,982,960)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,002,608 696,911
Compensatory stock options, net 102,305 0
Foreign currency transaction gain (loss) (11,911) 29,504
Gain on disposal of assets (180) (30,095)
Changes in operating assets and liabilities:
Accounts receivable (158,457) 276,943
Prepaid expenses and other 291,705 159,004
Accounts payable and accrued expenses (260,874) (12,439)
Deferred revenue (2,550,756) 0
Other liabilities (25,929) (25,929)
------------ -----------
Net cash used in operating activities (5,262,682) (6,889,061)
Investing activities
Purchases of property and equipment (357,408) (263,383)
Proceeds from sale of property and equipment 1,088 0
Net change in short-term investments (9,999,420) 1,359,420
------------ -----------
Net cash provided by (used in) investing activities (10,355,740) 1,096,037
Financing activities
Proceeds from note payable to stockholder 3,000,000 0
Principal payments of notes and capitalized leases (222,414) (118,518)
Repurchase of common stock 0 (236,002)
Issuance of common stock 18,714,306 2,293
Issuance of warrants 0 31,597
------------ -----------
Net cash provided by (used in) financing activities 21,491,892 (320,630)
Effect of exchange rate fluctuation on cash (360) 27,800
------------ -----------
Increase (decrease) in cash and cash equivalents 5,873,110 (6,085,854)
Cash and cash equivalents at beginning of period 4,150,834 7,633,283
============ ===========
Cash and cash equivalents at end of period $ 10,023,944 $ 1,547,429
============ ===========
</TABLE>
See accompanying notes.
<PAGE>
ITERATED SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
1. PRESENTATION OF INTERIM INFORMATION
The accompanying condensed consolidated financial statements include all
adjustments consisting of normal recurring adjustments that Iterated Systems,
Inc. and its wholly owned subsidiary, Iterated Systems, Limited (collectively,
the "Company") considers necessary for a fair presentation of its unaudited
results of operations for the nine months ended September 30, 1997 and 1998.
Results for the three months ended September 30, 1998 are not necessarily
indicative of the results for the year. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the consolidated financial statements and footnotes for the year ended December
31,1997 included in the Company's Registration Statement on Form 10 filed with
the Securities and Exchange Commission on April 24, 1998, as amended.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned United Kingdom subsidiary, Iterated Systems, Limited.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
3. PURCHASES AND SALES OF COMMON STOCK
During the nine months ended September 30, 1998, the Company repurchased
36,100 shares of its common stock on the open market for a cost of approximately
$236,000. The Company also issued 7,200 shares upon the exercise of stock
options by employees for net proceeds of $2,000.
4. NET LOSS PER SHARE OF COMMON STOCK
In February 1997 the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, Earnings Per Share ("Statement 128"), which establishes
standards for computing and presenting earnings per share ("EPS") for entities
with publicly held common stock. Statement 128 requires the presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures. The Company adopted Statement 128 in 1997 and, in
accordance with the requirements thereof, restated its net loss per share for
all prior periods. The effect of adoption was not material to the accompanying
condensed consolidated financial statements. Net loss per share of common stock
is computed based on the weighted average number of shares outstanding during
the year.
5. COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income ("Statement 130"), which establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in financial statements. Statement 130 is effective for fiscal years
beginning after December 15, 1997. The Company adopted Statement 130 in 1998 and
has not presented a statement of comprehensive income because the effect of the
components of comprehensive income is not material to its consolidated financial
statements.
<PAGE>
ITEM 2.
ITERATED SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere
herein and the Company's Registration Statement on Form 10 filed with the
Securities and Exchange Commission on April 24, 1998, as amended.
LIQUIDITY AND FINANCIAL CONDITION
At September 30, 1998, Iterated Systems, Inc. (the "Company") had cash and
short-term investments in excess of $10,187,000 and shareholders' equity in
excess of $10,558,000. The Company believes it has adequate cash to cover its
needs for the next year. However, the Company will require significant
increases in revenue to cover operating costs and achieve a profitable level of
operations. If this level of revenues is not achieved on a timely basis, the
Company will need to raise additional capital.
On June 30, 1997, the Company amended the Bridge Financing Credit Facility
with Mosvold Farsund AS (the "Lender"), one of its shareholders, to allow the
Company to borrow up to $6,000,000 from the Lender until June 30, 1998. During
the second quarter of 1997, the Company borrowed $3,000,000 from the Lender
under this financing agreement. During the fourth quarter of 1997, the Lender
exercised its option to convert the $3,000,000 in outstanding borrowings into
300,000 shares of the Company's common stock at $10 per share. The Credit
Facility expired on June 30, 1998.
In the first nine months of 1997 and 1998 the Company used cash in
operating activities of $5,263,000 and $6,889,000. This cash was used to fund
the net loss for the respective periods. The increase in cash utilized in 1998
over 1997 was due to the significant reduction in revenues as discussed in
"Results of Operations" below.
In the first nine months of 1997 and 1998 the Company had cash provided by
(used in) investing activities of ($10,356,000) and $1,096,000 respectively.
The funds provided in 1998 were from the maturity of short-term investments.
In the first nine months of 1997 and 1998 the Company had cash provided by
(used in) financing activities of $21,492,000 and ($321,000), respectively.
During 1997 a loan from a stockholder provided $3,000,000 and the Company's
initial public offering on the Norwegian Stock Exchange provided $18,600,000
In the first nine months of 1998 the Company repurchased approximately 36,000
shares of Company common stock on the open market at a cost of $236,000 in
accordance with a plan authorized by the Company's Board of Directors to
repurchase up to $1,500,000 of the Company's stock.
<PAGE>
ITERATED SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues
Total revenues decreased 94% to $149,000 in the three months ended
September 30, 1998 compared to $2,571,000 in the same period in 1997. The
decrease was the result of the expiration of the MCI development contract at
September 30, 1997 and the decrease in the sale of packaged software products
resulting from the Company's planned shift in focus from research-based revenue
and packaged software products to the development of relationships with OEMs
whose position and time-to-market would be positively impacted by using the
Company's technology in their own products. The MCI contract resulted in
development fee and exclusive license fee revenue in the amount of $2,367,000
during the three month period ended September 30,1997.
Cost of Product Revenues
Cost of product revenues decreased 100% to $0 in the three months ended
September 30, 1998 from $12,000 in the same period in 1997. The Company is not
confident in the long-term sales growth of codec packaged software products, and
as a result has reduced its focus, expenditures and marketing efforts in these
markets.
Sales and Marketing
Sales and marketing expenses decreased 5% to $1,055,000 in the three months
ended September 30, 1998 from $1,107,000 during the same period in 1997. During
the third quarter of 1997, the Company restructured and reduced its workforce to
focus on a more effective implementation of its business plan. This resulted in
decreased personnel and associated expenses in the sales and marketing area
during the third quarter of 1998 compared to the same period in 1997.
Research, Development and Engineering
Research, development and engineering expenses decreased 37% to $1,234,000
in the three months ended September 30, 1998 from $1,946,000 in the same period
in 1997. The decrease is primarily the result of lower personnel and related
expenses resulting from the Company's personnel reductions during the third
quarter of 1997 as discussed above.
General and Administrative
General and administrative expenses increased 14% to $514,000 in the three
months ended September 30, 1998 from $449,000 in the same period in 1997. This
increase is primarily due to the increased costs associated with the Company
being publicly traded on the Oslo Stock Exchange and an SEC reporting company in
the United States and the legal costs associated with the new accord reached
with MCI as reported in its Form 8-K dated August 11, 1998 and filed with the
Securities and Exchange Commission on August 20, 1998.
<PAGE>
Interest Income
Interest income increased 232% to $154,000 in the three months ended
September 30, 1998 from $46,000 in the same period in 1997. In September 1997,
the Company received approximately $18,600,000 in net proceeds from an initial
public offering of common stock on the Oslo Stock Exchange. The increase is due
to higher interest earnings on the increased cash and short-term investment
balances resulting from the proceeds of the Company's public offering in the
third quarter of 1997.
Interest Expense
Interest expense decreased 100% in the three months ended September 30,
1998 from $85,000 in the same period in 1997. The decrease in 1998 is due to
reduced interest expense on outstanding borrowings under the Credit Facility
with Mosvold Farsund AS that was converted into equity in the fourth quarter of
1997.
<PAGE>
ITERATED SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues
Total revenues decreased 93% to $583,000 in the nine months ended September
30, 1998 compared to $8,617,000 in the same period in 1997. The decrease in
revenues is due to the expiration of the MCI development agreement at September
30, 1997 and the decrease in the sale of packaged software products resulting
from the Company's planned shift in business focus, as discussed previously.
Cost of Product Revenues
Cost of product revenues decreased 100% in the nine months ended September
30, 1998 from $121,000 in the same period in 1997 due to the Company's reduced
focus on the sale of packaged software products.
Sales and Marketing
Sales and marketing expenses decreased 18% to $3,296,000 in the nine months
ended September 30, 1998 from $4,010,000 in the same period in 1997. The
decrease is primarily the result of the workforce reductions discussed
previously.
Research, Development and Engineering
Research, development and engineering expenses decreased 38% to $4,149,000
in the nine months ended September 30, 1998 from $6,677,000 in the same period
in 1997. The decrease is primarily the result of the workforce reductions
discussed previously.
General and Administrative
General and administrative expenses increased 17% to $1,686,000 in the nine
months ended September 30, 1998 from $1,445,000 in the same period in 1997. This
increase is primarily due to the increased costs associated with the Company
being publicly traded on the Oslo Stock Exchange and an SEC reporting company in
the United States and the legal costs associated with the new accord reached
with MCI as reported in its Form 8-K dated August 11, 1998 and filed with the
Securities and Exchange Commission on August 20, 1998.
Interest Income
Interest income increased 385% to $588,000 in the nine months ended
September 30, 1998 from $121,000 in the same period in 1997. The increase is due
to higher interest earnings on the increased cash and short-term investment
balances resulting from the proceeds of the Company's public offering in the
third quarter of 1997.
<PAGE>
Interest Expense
Interest expense decreased 89% to $16,000 in the nine months ended
September 30, 1998 from $141,000 in the same period in 1997. The decrease in
1998 is primarily due to reduced interest expense on outstanding borrowings
under the Credit Facility with Mosvold Farsund AS that was converted into equity
in the fourth quarter of 1997.
IMPACT OF YEAR 2000
Many currently installed computer systems and software programs were
designed to use only a two digit date field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. Until the date fields are updated, the systems and programs could fail
or give erroneous results when referencing dates following December 31, 1999.
Such failure or errors could occur prior to the actual change in century. The
Company does not believe that any of its internally developed software products
will be adversely affected by Year 2000 issues. However, the Company relies on
computer applications to manage and monitor its accounting, sales, development
and administrative functions. In addition, the Company's customers, suppliers
and service providers are reliant upon computer applications, some of which may
contain software that may fail as a result of the upcoming change in century,
with respect to functions that materially affect their interactions with the
Company. The Company has undertaken, but has not yet completed, an assessment as
to whether any of its computer applications, customers, suppliers or service
providers will be affected by the upcoming change in century. Failure of
software used by the Company or the software of its customers, suppliers or
service providers could have a material impact on the Company's business,
financial condition and result of operations.
While the total cost to address the Company's Year 2000 issues has not yet
been determined, the Company has not identified significant costs to date. The
Company believes it has sufficient resources for the Year 2000 remediation
program from currently available cash, cash equivalents, liquid investments,
cash flow expected from operations and/or borrowings. The Company has not
established a contingency plan to handle any identifiable Year 2000 issues if
they are not adequately addressed prior to December 31, 1999, and the Company
does not foresee a need to create such a plan.
SOFTWARE REVENUE RECOGNITION
In October 1997 the American Institute of Certified Public Accountants
issued Statement of Position 97-2 ("SOP 97-2"), Software Revenue Recognition, to
clarify guidance on applying generally accepted accounting principles to
software transactions and to provide guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing, or otherwise
marketing computer software. The Company adopted SOP 97-2 during 1997. Such
adoption had no effect on the Company's methods of recognizing revenue.
INFLATION
The effects of inflation on the Company's operations were not significant
during the periods presented in the condensed consolidated financial statements
and the effects thereof, are not considered to be of significance in the future.
Generally, throughout the periods discussed above, the changes in revenue have
resulted primarily from fluctuations in sales levels, rather than price
increases.
<PAGE>
BUSINESS SEGMENTS
In June 1997, the FASB also issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information ("Statement 131"), which
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Operating segments are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997 but is not required for interim
financial statements in the year of adoption. The Company will adopt Statement
131 at the end of 1998 and does not expect the effect of such adoption to be
material to its consolidated financial statements.
FORWARD-LOOKING STATEMENTS
The discussions herein contain trend information and other forward-looking
statements that involve a number of risks and uncertainties. The actual results
of the Company could differ materially from its historical results of operations
and those discussed in the forward-looking statements. The forward-looking
statements are based on the beliefs of the Company's management as well as
assumptions made by and information currently available to the Company's
management. When used herein, the words "anticipate," "believe," "estimate,"
"expect" and "intend" and words or phrases of similar import, as they relate to
the Company or the Company's management, are intended to identify forward-
looking statements.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed with this Report:
Exhibit 10.1 Contract Between Iterated Systems, Inc. and MCI
Telecommunications Corporation dated August 7, 1998
Exhibit 10.2 Warrant Agreement between Iterated Systems, Inc.
and MCI Telecommunications Corporation dated August 7, 1998
Exhibit 10.3 Warrant for the Purchase of Shares of Common Stock
between Iterated Systems, Inc. and MCI Telecommunications
Corporation dated August 7, 1998
Exhibit 10.4 Registration Rights Agreement between Iterated
Systems, Inc. and MCI Telecommunications Corporation dated
August 7, 1998
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
Report on Form 8-K dated August 11, 1998 related to the accord
reached with MCI Telecommunications Corporation arising from a
dispute concerning their 1994 Development Agreement.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITERATED SYSTEMS, INC.
Date: November 10, 1998 /s/ John C. Bacon
----------------- -------------------------------------------
John C. Bacon
President and Chief Executive Officer
(Principal Executive Officer) and Director
Date: November 10, 1998 /s/ Haines H. Hargrett
----------------- -------------------------------------------
Haines H. Hargrett
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
CONTRACT BETWEEN ITERATED SYSTEMS, INC. AND
MCI TELECOMMUNICATIONS CORPORATION
This contract ("Contract"), is made as of this __ day of _______ 1998
("Effective Date") between Iterated Systems, Inc., a Georgia corporation
("ISI"), and MCI Telecommunications Corporation, a Delaware corporation ("MCI").
For and in consideration of the mutual undertakings of the parties
hereinafter set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. TERMINATION OF DEVELOPMENT AND LICENSE AGREEMENT. The parties
acknowledge and agree that on September 30, 1997 the Development and License
Agreement dated September 16, 1994 between ISI and MCI ("Agreement") expired
according to its terms. The parties agree that the Agreement and the Existing
Agreements (as defined below) are hereby terminated in all respects. Without in
any way limiting the generality of the foregoing, this termination includes the
termination of (i) Section 10.12 of the Agreement so that no terms in the
Agreement survive, and (ii) each party's rights and obligations under the
Agreement and the Existing Agreements, including, but not limited to, all
license rights. Each party is entitled to retain any payments received from the
other party prior to the Effective Date under the Agreement, the Existing
Agreements and any other written or oral agreements between ISI and MCI. The
parties acknowledge that any and all rights and obligations of either party
under the terms of the Agreement, the Existing Agreements and any other written
or oral agreements between ISI and MCI (including, but not limited to, any
materials delivered or to be delivered under the Agreement) will be governed and
controlled by the terms of this Contract. Notwithstanding the above, any
confidential information exchanged between MCI and ISI prior to the Effective
Date under the Agreement shall continue to be considered the confidential
information of the disclosing party and held in confidence by the party
receiving such confidential information according to the terms of EXHIBIT C of
this Contract.
2. DEFINITIONS.
"Affiliate(s)" means any entity or entities that is directly or indirectly
controlling, controlled by, or under common control with a party to this
Contract.
"Asserting Party" has the meaning set forth in Paragraph 18(b).
"Authorized Third Parties" has the meaning set forth in Paragraph 4(a).
"Codec" means a hardware or software encoder and/or decoder that can
compress and/or uncompress digital data.
"Confidential Information" has the meaning set forth in EXHIBIT C.
<PAGE>
"Deliverables" means collectively and individually the fractal real time
codec, and the audio and lossless codecs listed in EXHIBIT A. Deliverables
shall include Deliverables Source Code.
"Deliverables Source Code" means the following items:
(i) source code to all component modules of the Deliverables as such
component modules exist in their integrated form within the Deliverables in both
machine-readable and hard copy form (the source code may be in microcode and/or
assembly and/or C and/or C++ Projects);
(ii) any and all proprietary ISI libraries required for use with the items
listed in item (i) above; and
(iii) for the items listed in item (i) above all project and programming
documentation including but not limited to project overviews, functional
specifications, flowcharts, engineering design documents, software logic and use
documents, application programming interface descriptions, documentation of all
compile/debug options and complete documentation of all algorithms in generally
accepted mathematical terms, including complete definitions of all terms used,
but only to the extent the foregoing items are in ISI's archive of each of the
Deliverables and such items are proprietary to ISI.
"Derivative Work" has the meaning set forth in the U.S. Copyright Act, as
amended.
"Disclosing Party" has the meaning set forth in EXHIBIT C.
"Distributors" has the meaning set forth in Paragraph 5(a)(iii).
"Disclosure" has the meaning set forth in Paragraph 8(a).
"Existing Agreements" means collectively and individually the following
agreements:
(i) Letter Agreement dated December 1, 1996 among MCI, ISI, and
Oracle Corporation.
(ii) Letter Agreement dated December 1, 1996 among MCI, ISI, and
Network Computer, Inc.
(iii) Letter Agreement dated December 16, 1996 among MCI, ISI, and
Entertainment Made Convenient (Emc3) Int'l Holding B.V.
(iv) Letter Agreement dated February 6, 1998 between MCI and ISI
regarding Multi-Media Access Corporation.
(v) Letter Agreement dated September 11, 1996 between MCI and ISI
regarding Progressive Networks, Inc.
-2-
<PAGE>
"Export Laws" has the meaning set forth in Paragraph 22.
"Intellectual Property Rights" means any and all rights existing anywhere
in the world under copyright law, patent law, moral rights law, trade secret
law, confidential information law, trademark law, unfair competition law,
semiconductor chip protection law or other similar rights.
"Inventions" has the meaning set forth in Paragraph 8(a).
"ISI Attribution" means the ISI trademark, service mark, trade name,
insignia, logo or other designation provided by ISI to MCI from time to time to
be used in accordance with Paragraph 6.
"License Agreement" has the meaning set forth in Paragraph 5(b).
"Licensed Affiliates" means any entity or entities that is directly or
indirectly controlling, controlled by, or under common control with a party to
this Contract and which has agreed in writing with a party to this Contract to
be bound by the terms of this Contract.
"Licensees" has the meaning set forth in Paragraph 5(a)(ii).
"Limitation Period" has the meaning set forth in Paragraph 25.
"MCI Modification" means the portion of the MCI Modified Codec that is in
addition to the Deliverable being modified and includes, but is not limited to,
new developments that result from the use of Deliverables Source Code.
"MCI Modified Codec" has the meaning set forth in Paragraph 4(a).
"Non-soliciting Party" has the meaning set forth in Paragraph 25.
"Patent Rights" means any and all rights, existing anywhere in the world
under patent law, in an issued patent with any claims drawn to the Inventions.
"Personnel" has the meaning set forth in Paragraph 8(a).
"Plans and Reports" means the plans and reports delivered by ISI to MCI
under the Agreement.
"Receiving Party" has the meaning set forth in EXHIBIT C.
"Territory" means the U.S. and anywhere in the world where from time to
time the Deliverables may be exported in compliance with the terms of Paragraph
22 below.
"Third Party Modification" means the portion of the Third Party Modified
Codec that is in addition to the Deliverable being modified and includes, but is
not limited to, new developments that result from the use of the Deliverables
Source Code.
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"Third Party Modified Codec" has the meaning set forth in Paragraph 4(b).
"Warrant" has the meaning set forth in Paragraph 21.
3. DELIVERY OF SOURCE CODE FOR THE DELIVERABLES. No later than thirty
(30) business days after the Effective Date, ISI will deliver to MCI the
Deliverables Source Code. MCI may request ISI to provide certain Deliverables
sooner than other Deliverables and ISI will use reasonable efforts to satisfy
MCI's delivery request. At MCI's request ISI will provide up to forty (40)
hours of assistance for each of the three codec types (lossless, audio, real-
time video) to MCI from ISI's location in Atlanta, Georgia to facilitate the
delivery and use of the Deliverables Source Code, with such assistance to be
provided within thirty (30) days of delivery of each codec type. After ISI has
provided forty (40) hours of assistance for a Codec type, then ISI has no
further obligation to provide assistance for that Codec type.
4. LICENSE OF DELIVERABLES IN SOURCE CODE FORM.
(a) ISI grants MCI and its Licensed Affiliates the following perpetual,
non-exclusive, royalty-free right and license in the Territory to:
(i) use, make and reproduce the Deliverables Source Code solely for
MCI's and its Licensed Affiliates' internal implementation that includes a
Deliverable;
(ii) use, make and reproduce the Deliverables Source Code solely for
MCI's and its Licensed Affiliates' internal use to create a product or service
that includes a Deliverable;
(iii) modify the Deliverables Source Code to create Derivative Works of
the Deliverables that are Codecs (which Deliverable and modified Deliverables
Source Code shall collectively be referred to as a "MCI Modified Codec") solely
for MCI's and its Licensed Affiliates' internal use to create a product or
service or do an internal implementation;
(iv) compile the Deliverables Source Code together with an MCI
Modification to create an MCI Modified Codec in object code form solely for
MCI's and its Licensed Affiliates' internal use to create a product or service
or do an internal implementation; and
(v) distribute the Deliverables Source Code to third parties who are
obligated by written agreement with MCI or an MCI Licensed Affiliate to (x)
written terms of non-disclosure consistent in all material respects with the
terms set forth in EXHIBIT C, (y) use the Deliverables only as provided in
Paragraph 4(b) below, and (z) use the Deliverables, MCI Modifications and Third
Party Modifications only as provided in this Contract (such third parties
individually referred to as an "Authorized Third Party" and collectively
referred to as the "Authorized Third Parties").
(b) ISI grants MCI and its Licensed Affiliates the right to grant to an
Authorized Third Party the following perpetual, non-exclusive, royalty-free
right and license in the Territory to:
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(i) use, make and reproduce the Deliverables Source Code solely for
the Authorized Third Party's internal use to create a product or service;
(ii) modify the Deliverables Source Code to create Derivative Works
of the Deliverables that are Codecs (which Deliverable and modified Deliverables
Source Code shall collectively be referred to as a "Third Party Modified Codec")
solely for the Authorized Third Party's internal use to create a product or
service; and
(iii) compile the Deliverables Source Code together with a Third Party
Modification to create a Third Party Modified Codec in object code form solely
for the Authorized Third Party's internal use to create a product or service.
(c) Except for the limited distribution rights in Paragraph 4(a)(v), the
Deliverables, MCI Modifications, and Third Party Modifications may only be
distributed in object code form in a product or service as authorized in
Paragraph 5 and subject to the limitations in this Contract.
(d) Notwithstanding the rights granted above and except with ISI's prior
written consent, an Authorized Third Party shall not exercise the rights granted
in Paragraph 4(b) together with any rights that the Authorized Third Party may
have to (i) source code under a separate agreement with ISI, or (ii)
confidential information or trade secrets disclosed by ISI.
(e) Notwithstanding the rights granted in this Contract, for a period of
one year after the Effective Date, MCI, its Licensed Affiliates and the
Authorized Third Parties may not release a still image Codec with functionality
that competes with ISI's STiNG product in the form that STiNG is generally
available as of the Effective Date. As used herein the still image Codec shall
be deemed "released" on the date that MCI, its Licensed Affiliate or the
Authorized Third Party publicly announces its general availability for license
or purchase.
5. LICENSE OF DELIVERABLES IN OBJECT CODE FORM.
(a) ISI grants MCI and its Licensed Affiliates the following perpetual,
non-exclusive, royalty-free right and license in the Territory to:
(i) use, reproduce and distribute the object code version of the
Deliverables for MCI's and its Licensed Affiliates' internal implementation;
(ii) reproduce and distribute to third parties ("Licensees") the
object code version of the Deliverables and grant such Licensees a limited sub-
license to use the object version of the Deliverables in a product or service
subject to the limitations on use of the Deliverables, MCI Modifications and
Third Party Modifications in this Contract;
(iii) grant others ("Distributors") the right to exercise the rights
granted to MCI and its Licensed Affiliates in Paragraph 5(a)(ii), with or
without the right of such others to onward license still others with or without
such rights, and so on with respect to each successive onward license; and
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(iv) analyze and summarize Plans and Reports to explore and evaluate
the functionality, interoperability and marketability of a product or service.
(b) MCI, its Licensed Affiliates and Authorized Third Parties shall enter
into a license agreement with each Licensee and Distributor ("License
Agreement") that (i) prohibits reverse engineering, disassembling, or
decompiling the object code version of the Deliverables, MCI Modified Codec or
Third Party Modified Codec, (ii) grants a sub-license to the Deliverables that
is at least as restrictive as the rights granted to MCI and its Licensed
Affiliates in Paragraph 5(a) and includes the limitations in Paragraphs 4(d) and
9, and (iii) is consistent with the terms of this Contract (including, but not
limited to, the terms of Paragraph 7, as applicable). The License Agreement may
not impose any liabilities upon ISI and may not grant any warranty to the
Licensee or Distributor on behalf of ISI.
(c) If MCI becomes aware of any breach of any agreement granting rights
authorized under this Contract that affects ISI, then MCI shall (i) promptly
notify ISI, (ii) use commercially reasonable efforts to enforce the terms and
conditions of such agreements, (iii) allow ISI, at its expense, to join MCI as a
named plaintiff in any suit brought by MCI against an Authorized Third Party or
Licensee, and (iv) take such other actions, give such information and render
such aid, as may be necessary to allow ISI to bring and prosecute such suits
against an Authorized Third Party or Licensee.
(d) Upon ISI's request, MCI shall promptly deliver to ISI the form of
License Agreements and the form agreements for MCI's and its Licensed
Affiliates' arrangements with Authorized Third Parties as contemplated by this
Contract, to the extent MCI has such agreements.
(e) If a Licensee violates the terms of the License Agreement or an
Authorized Third Party violates the terms of an agreement contemplated by this
Contract with MCI or its Licensed Affiliates and does not cure such violation
within thirty (30) days of written notice of breach, then MCI shall promptly
terminate such Licensee's or Authorized Third Party's rights to the
Deliverables.
(f) MCI shall have the right with ISI's prior written consent, which shall
not be unreasonably withheld, to directly enforce, to the extent possible under
applicable law, ISI's Intellectual Property Rights in the Deliverables with
respect to any infringement thereof which falls within the scope of the licenses
granted to MCI and its Licensed Affiliates hereunder. MCI shall keep ISI
informed regarding the actions that MCI contemplates, including settlement of
any claims to the extent reasonably practicable. ISI shall have the option to
participate in any action described above, but only with respect to ISI's
Intellectual Property Rights, at its own expense.
6. ATTRIBUTION RIGHTS.
(a) Any sublicenses of the Deliverables, MCI Modified Codecs and Third
Party Modified Codecs or use thereof for the provision of services to end users
in accordance with Paragraphs 5(a)(ii) and 5(a)(iii), by MCI, an MCI Licensed
Affiliate, a Distributor or an Authorized Third Party and any marketing
materials used by MCI, an MCI Licensed Affiliate, a
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Distributor or an Authorized Third Party in connection with such sublicenses or
in connection with such services shall include the ISI Attribution displayed in
a manner specified by ISI in accordance with ISI's written policies provided to
MCI, but in any case, consistent with reasonable industry practices for the use
and placement of attribution marks. ISI shall have the right to modify the ISI
Attribution or its use from time to time by issuing to MCI an amended written
policy, and MCI, its Licensed Affiliates, Distributors and Authorized Third
Parties shall have a reasonable period of time (not to exceed six (6) months
from receipt of the written notice) to "phase out" use of materials conforming
to an earlier ISI written policy.
(b) ISI grants to MCI, its Licensed Affiliates, Authorized Third Parties
and Distributors a non-exclusive, royalty-free right and license to use the ISI
Attribution solely in connection with the promotion, marketing, distribution and
sublicense of the Deliverables, MCI Modified Codecs and Third Party Modified
Codecs as part of a product or in connection with a service, in each case in
accordance with ISI's written policies described in Paragraph 6(a) hereof. To
the extent the ISI Attribution does not infringe MCI's or a third party's
intellectual property rights, MCI agrees and acknowledges that (i) the ISI
Attribution, whether or not registered, is the sole property of ISI and or its
suppliers, (ii) MCI's, its Licensed Affiliates', Distributors' and its
Authorized Third Parties' reproduction of the ISI Attribution inures to the
benefit of ISI, and (iii) MCI, its Licensed Affiliates, Distributors and
Authorized Third Parties acquire no legal rights in the ISI Attribution. MCI,
its Licensed Affiliates, Distributors and Authorized Third Parties shall use the
appropriate registered or common law trademark symbols in connection with the
ISI Attribution.
7. RESERVATION OF RIGHTS; PROPRIETARY NOTICES; OWNERSHIP.
(a) Except for the rights expressly granted in this Contract, ISI owns all
other rights, including, but not limited to, (i) all other Intellectual Property
Rights in the Deliverables, (ii) all Intellectual Property Rights in any
materials other than the Deliverables that are developed by ISI before or after
the Effective Date, and (iii) all Patent Rights that ISI elects to acquire as
provided in Paragraph 8.
(b) MCI, its Licensed Affiliates and Distributors and Authorized Third
Parties shall not remove any copyright, patent or other proprietary notices that
appear in or on the Deliverables as provided by ISI. MCI, its Licensed
Affiliates, Distributors and Authorized Third Parties shall affix ISI's
copyright, patent and any other applicable proprietary notices on all copies of
the Deliverables, MCI Modified Codecs and Third Party Modified Codecs.
(c) Notwithstanding ISI's rights in the Deliverables, except for ISI's
agreement with Multi-Media Access Corporation dated March 25, 1998, ISI shall
not license the Deliverables to third parties unless such Deliverables include a
material modification, integration or productization of the Deliverables.
(d) Notwithstanding the rights and licenses granted in this Contract, MCI,
its Licensed Affiliates, Distributors, Authorized Third Parties and Licensees
shall have no express or implied license under any patent owned by ISI which
issues on a patent application filed after the Effective Date except as provided
in Paragraph 11.
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(e) ISI is under no obligation to deliver any source code, object code or
other technical material to MCI, its Licensed Affiliates, Authorized Third
Parties, Distributors and Licensees other than as expressly provided for in this
Contract.
(f) Except as expressly stated in this Contract, neither party has any
express or implied right to use in any manner any Intellectual Property Rights
of the other party. Except for the limited license rights set forth in
Paragraphs 4(b) and 5, MCI may grant no other rights in the Deliverables to any
third party including, but not limited to, Licensed Affiliates, Authorized Third
Parties, Distributors or Licensees.
8. PATENTS.
(a) MCI agrees that if one or more employees or independent contractors of
MCI, its Licensed Affiliates or Authorized Third Parties (collectively, the
"Personnel") conceives or reduces to practice a new idea or invention (whether
or not patentable) in the course of exercising the rights granted in Paragraph 4
("Inventions"), then MCI shall promptly deliver to ISI or cause its Licensed
Affiliates or Authorized Third Parties, as applicable, to promptly deliver an
invention disclosure form for the Invention containing, at a minimum, the
information described in EXHIBIT G (the "Disclosure"). The Confidential
Information of MCI, its Licensed Affiliates and Authorized Third Parties that is
provided to ISI and/or its counsel in connection with delivery of a Disclosure
shall be treated by ISI or its counsel receiving such Confidential Information
as the Disclosing Party's Confidential Information according to the terms of
EXHIBIT C; provided, however, that ISI may disclose such information solely for
purposes of preparing, filing and prosecuting a patent application for the
Disclosure.
(b) Upon ISI's receipt of a Disclosure and upon ISI's request, ISI may
interview the inventor or co-inventors named on the Disclosure and MCI, its
Licensed Affiliates and the Authorized Third Parties shall deliver to ISI all
materials and shall take reasonable actions to ensure that the inventors
cooperate in providing all information reasonably necessary to prepare and file
patent applications resulting from such Disclosure.
(c) ISI shall have three (3) months after its receipt of the Disclosure to
evaluate the Disclosure and either (i) provide MCI written notice within the
three (3) month period of ISI's election to (x) own the Patent Rights covered by
the Disclosure and have such Patent Rights assigned to ISI according to
Paragraph 8(h), and (y) prepare and file a patent application based on the
Disclosure, or (ii) provide MCI written notice that ISI does not desire to
acquire the Patent Rights and file a patent application at that time covering
the Disclosure.
(d) During the three (3) month period described in Paragraph 8(c), MCI
shall refrain from any act and shall cause its Licensed Affiliates and
Authorized Third Parties to refrain from any act that adversely impacts ISI's
ability to obtain a patent application based on the Disclosure.
(e) Upon MCI's receipt of the notice described in Paragraph 8(c) to the
effect that ISI does not desire to file a patent application at that time
covering the Disclosure, MCI may, at its option, prepare and file a patent
application based on the Disclosure. At any time after MCI's receipt of the
notice described in Paragraph 8(c) to the effect that ISI does not desire to
file a
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patent application at that time covering the Disclosure, MCI shall provide at
ISI's request a status report of MCI's analysis and prosecution, if any, of a
patent for an Invention.
(f) If MCI elects to file and prepare a patent application based on the
Disclosure, then MCI (i) shall deliver to ISI a copy of the claims that are to
be filed relating to such Disclosure prior to filing the patent application, and
(ii) shall from time to time provide ISI copies of all correspondence related to
the prosecution of the applicable patent.
(g) After MCI's receipt of the notice described in Paragraph 8(c) to the
effect that ISI does not desire to file a patent application at that time
covering the Disclosure and at any time through issuance of a patent covering
such claims, ISI may elect to acquire the Patent Rights or future Patent Rights
covered by the applicable Disclosure according to the terms in Paragraph 8(h) by
providing written notice to MCI of such election and promptly reimbursing MCI
for its legal costs and expenses (including MCI's reasonable internal costs)
that have been incurred up to the time of such election by ISI in connection
with the filing, preparation, prosecution and issuance of a patent for the
Inventions set forth in the Disclosure. If, after ISI's election to acquire the
Patent Rights for a Disclosure, ISI elects to have MCI's internal legal staff
file, prepare and prosecute a patent application based on such Disclosure, then
ISI shall reimburse MCI for its reasonable internal costs and expenses
associated with such activities.
(h) If ISI elects to acquire the Patent Rights as described above, then MCI
shall assign and cause its Licensed Affiliates and Authorized Third Parties and
the Personnel of MCI, its Licensed Affiliates and Authorized Third Parties to
assign to ISI, without further consideration, all right, title and interest in
and to the Patent Rights. MCI shall execute and cause its Personnel to execute
and deliver such instruments and take such further action as may be requested by
ISI to perfect the assignment of Patent Rights. MCI shall cause its Authorized
Third Parties and its Authorized Third Parties' Personnel to execute and deliver
such instruments and take such other action as may be requested by ISI to
perfect the assignment effected by this Contract and maintain patents granted
thereon.
(i) Except as provided above, MCI shall not, and shall obligate its
Licensed Affiliates and Authorized Third Parties by written agreement not to,
file any patent application with claims drawn in whole or in part to the
Deliverables, MCI Modified Codecs, Third Party Modified Codecs, MCI
Modifications, and Third Party Modifications.
9. LIMITATION ON MCI MODIFICATIONS AND THIRD PARTY MODIFICATIONS.
(a) Notwithstanding MCI's, its Licensed Affiliates' and/or the Authorized
Third Parties' ownership rights in an MCI Modification or a Third Party
Modification, except as provided in Paragraph 4(a)(v), MCI shall not, and shall
obligate its Licensed Affiliates, Authorized Third Parties and Distributors by
written agreement not to, distribute at any time any source code version of the
MCI Modifications or Third Party Modifications.
(b) Notwithstanding MCI's, its Licensed Affiliates' and/or an Authorized
Third Party's ownership rights in an MCI Modification or a Third Party
Modification, MCI shall not, and shall obligate its Licensed Affiliates,
Authorized Third Parties and Distributors by written
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agreement not to, distribute at any time any object code version of the MCI
Modifications or Third Party Modifications unless such object code version of
the MCI Modifications or Third Party Modifications are a part of an MCI Modified
Codec or a Third Party Modified Codec, respectively.
10. REPORTS. Within thirty (30) days after the last day of each calendar
quarter, MCI shall deliver to ISI a report in the form attached as EXHIBIT F
describing all MCI Modifications and Third Party Modifications created during
such calendar quarter by MCI, its Licensed Affiliates and the Authorized Third
Parties ("Modification Report"). Notwithstanding the above, MCI, its Licensed
Affiliates and Authorized Third Parties are not obligated to report
modifications of the Deliverables Source Code that result from normal repairs
(including bug fixes).
11. USE OF PATENTS.
(a) MCI, its Licensed Affiliates, Authorized Third Parties and Distributors
shall receive an implied license to any Patent Rights that are acquired by ISI
under this Contract, the scope of which shall be defined by the rights granted
in Paragraphs 4 and 5. The term of the implied license to the Patent Rights
described above shall not exceed the term of the issued patent that is
applicable to such Patent Rights.
(b) ISI shall not be restricted in its ability to practice any Patent
Rights that are acquired by ISI under this Contract.
12. MOST FAVORED CUSTOMER. On projects agreed to by ISI and MCI after the
Effective Date and for two years thereafter, ISI shall offer to MCI service
rates at least as favorable as service rates offered to ISI's other customers
for similar projects performed by persons with similar skills. If during the
two years after the Effective Date, MCI provides ISI a written request to use
and/or distribute a product (other than the Deliverables) that is generally
offered directly by ISI to third parties, then ISI will offer the product for
license fees that are at least as favorable as ISI offers to its other customers
(excluding ISI's exclusive licensees and exclusive distributors) for the same
type of license and according to the same terms and conditions.
13. AUDIT RIGHT. Upon at least twenty-one (21) days advance written
notice to MCI and no more than once during any twelve (12) month period, ISI may
examine the MCI Modifications or Third Party Modifications at MCI's office
solely for the purpose of verifying compliance with Paragraphs 8 and 10 of this
Contract.
14. INDEMNIFICATION. The parties agree to the indemnification provisions
set forth in EXHIBIT B.
15. WARRANTIES.
(a) ISI warrants to MCI that the Deliverables Source Code delivered under
this Contract can be compiled to the Deliverables provided under the Agreement.
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(b) ISI warrants to MCI that to its actual knowledge the Deliverables
Source Code as delivered by ISI to MCI under this Contract does not contain
software traps, viruses, worms, trap doors, back doors or other similar code
that may interfere with MCI's, its Licensed Affiliates' and its Authorized Third
Parties' use of the Deliverables as authorized in this Contract.
(c) Subject to the limitations, restrictions and disclaimers set forth in
this Contract, ISI warrants to MCI that to the extent the Deliverables Source
Code as provided by ISI processes date or date dependent information, from the
Effective Date until August 7, 2002 the Deliverables Source Code, when used as
authorized in this Contract, is capable of correctly processing, providing
and/or receiving four-digit year data within and between the twentieth and the
twenty-first centuries, provided that all products (i.e., hardware, software and
firmware) used with the Deliverables Source Code properly exchange four-digit
and accurate year data with it. ISI's sole obligation and MCI's sole and
exclusive remedy with respect to a breach of this warranty is to provide MCI
with modified Deliverables Source Code which meets the requirements set forth
above.
(d) MCI acknowledges that (i) third party software as well as software
developed by MCI and its Licensed Affiliates (collectively, the "Other
Software") are used with the Deliverables Source Code provided by ISI, (ii)
ISI's Deliverables Source Code may rely on the underlying platform and operating
system software (collectively, the "Operating System Software") for time and
date services, and (iii) the Other Software and Operating System Software may
introduce Year 2000 bugs independent of ISI's Deliverables Source Code.
Accordingly, MCI acknowledges and agrees that (i) ISI makes no representations,
warranties, or covenants of any kind with respect to the Other Software or the
Operating System Software, and (ii) ISI shall have no liability of any kind
whatsoever for any damages incurred by MCI or any third party arising from the
Other Software or Operating System Software.
(e) Except for Clear Video Live licenses, ISI represents and warrants to
MCI that it has not licensed the Deliverables to anyone other than MCI and its
Affiliates between September 16, 1994 until the Effective Date.
(f) MCI represents and warrants to ISI that prior to the Effective Date it
has not granted anyone any license to ISI technology that did not contain
confidentiality restrictions and reverse engineering restrictions.
(g) ISI represents and warrants to MCI that the Deliverables Source Code
has not been materially modified since September 30, 1997 until the Effective
Date. MCI's sole and exclusive remedy for any breach of this warranty shall be
for ISI to promptly deliver such material modifications to MCI. Any material
modifications to the Deliverables Source Code delivered to MCI under this
Paragraph 15(g) shall be treated as part of a Deliverable.
16. DISCLAIMER OF WARRANTIES. MCI ACKNOWLEDGES AND AGREES THAT THE
DELIVERABLES AND ANY OTHER MATERIALS OF ANY KIND PROVIDED UNDER THE AGREEMENT
AND THIS CONTRACT ARE PROVIDED "AS-IS" EXCEPT FOR THE WARRANTIES IN PARAGRAPH 15
OF THIS CONTRACT. ISI AND THE ISI AFFILIATES DISCLAIM ANY AND ALL OTHER
REPRESENTATIONS, CONDITIONS,
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AND WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT
LIMITED TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, AND NON-INFRINGEMENT.
17. LIMITATION OF LIABILITY. NEITHER PARTY NOR ITS AFFILIATES WILL BE
LIABLE TO THE OTHER PARTY OR ITS AFFILIATES FOR ANY LOSS OF REVENUE OR INDIRECT,
PUNITIVE, EXEMPLARY, SPECIAL, OR CONSEQUENTIAL DAMAGES ARISING FROM THE
AGREEMENT, EXISTING AGREEMENTS, THIS CONTRACT OR ANY OTHER WRITTEN OR ORAL
AGREEMENTS BETWEEN ISI (INCLUDING ITS AFFILIATES) AND MCI (INCLUDING ITS
AFFILIATES), EVEN IF SUCH PARTY HAS BEEN ADVISED AS TO THE POSSIBILITY OF SUCH
DAMAGES. EXCEPT FOR CLAIMS THAT MAY ARISE UNDER THE TERMS OF PARAGRAPHS 4, 5,
7, 14 AND 19 AND EXHIBITS B AND C, EACH PARTY AGREES THAT THE AGGREGATE
LIABILITY OF THE OTHER PARTY AND ITS AFFILIATES, AGENTS, AND LICENSORS, IF ANY,
ARISING OUT OF ANY KIND OF CLAIM (WHETHER IN CONTRACT, TORT, OR OTHERWISE), IN
ANY WAY ARISING OUT OF OR RELATED TO THE AGREEMENT, EXISTING AGREEMENTS, THIS
CONTRACT OR ANY OTHER WRITTEN OR ORAL AGREEMENTS BETWEEN ISI (INCLUDING ITS
AFFILIATES) AND MCI (INCLUDING ITS AFFILIATES) SHALL NOT EXCEED $1,000,000 IN
THE AGGREGATE.
18. RELEASE.
(a) In consideration of the agreements contained in this Contract and
except as expressly set forth in Paragraphs 18(b) and 18(c) below, each party
hereby releases, acquits and forever discharges the other party and its
predecessors, successors, assigns, parents, subsidiaries, Affiliates, officers,
directors, partners, agents, attorneys and employees from any and all
liabilities, claims, complaints, demands, actions, causes of action and damages
of any kind or nature arising out of or related to (i) the Agreement, (ii) the
Existing Agreements, and (iii) any other written or oral agreements between ISI
(including its Affiliates) and MCI (including its Affiliates) on or before the
Effective Date.
(b) The release set forth in Paragraph 18(a) above shall not apply to a
dispute between ISI and MCI regarding an obligation, prior to the Effective
Date, under the Agreement, the Existing Agreements or any other written or oral
agreement between the parties, to pay royalties with respect to revenues from
license fees which revenues were not disclosed or reported to MCI (including any
public disclosure of such revenues), but only where the party asserting
liability on the part of the other ("Asserting Party") establishes that (1) the
amount of unpaid royalties exceeds $100,000, (2) the party allegedly owing the
royalties (x) had actual knowledge, prior to the Effective Date, of the events
giving rise to the obligation to pay royalties, and (y) had actual knowledge,
prior to the Effective Date, that its failure to pay such royalties was contrary
to its obligations under the Agreement or the Existing Agreements, and (3) the
Asserting Party had no actual knowledge prior to the Effective Date of such
failure to pay royalties. The parties acknowledge and agree that MCI has no
right to claim a royalty from ISI's STiNG product under the Agreement, the
Existing Agreements or any other written or oral agreement between the parties.
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(c) The release set forth in Paragraph 18(a) above shall not apply to
claims of infringement arising between September 30, 1994 through the Effective
Date based on MCI's authorized use of the Deliverables and such claims shall be
subject to EXHIBIT B.
19. CONFIDENTIALITY. The parties agree to the confidentiality provisions
set forth in EXHIBIT C.
20. DISPUTE RESOLUTION. The parties agree to the dispute resolution
provisions set forth in EXHIBIT D.
21. WARRANTS. ISI agrees to issue and deliver to MCI the warrant attached
hereto as EXHIBIT E ("Warrant") to purchase from ISI up to 1,452,570 shares of
ISI common stock at any time, or from time to time, in whole or in part, after
the Effective Date and before 5:00 p.m. Eastern Time, August __, 2002.
22. EXPORT. MCI shall comply fully with all laws and regulations of the
U.S. and other countries relating to the export or import of information
("Export Laws") to assure that neither the Deliverables and the other materials
provided under this Contract, nor any direct products thereof are (i) exported,
directly or indirectly, in violation of the Export Laws, or (ii) are used for
any purpose prohibited by the Export Laws.
23. TERM AND TERMINATION. The terms of this Contract shall commence on
the Effective Date and, except as provided in Paragraphs 3, 12, 15(c), 21 and
25, shall continue in perpetuity.
24. NOTICE.
(a) All communications required or permitted under this Contract shall be
in writing and either mailed first class, postage pre-paid, sent by reputable
overnight delivery services (with request for written confirmation of receipt),
hand-delivered or sent by facsimile transmission (with facsimile generated
confirmation of transmission) to the parties at the addresses shown below, or at
such other addresses as one party may notify the other of from time to time:
If to ISI: John C. Bacon
President and CEO
Iterated Systems, Inc.
3525 Piedmont Road, Suite 600
Atlanta, Georgia 30305
FAX: 404-264-8300
with copies to: John C. Yates, Esq.
Morris, Manning & Martin, LLP
3343 Peachtree Road, N.E.
Suite 1600
Atlanta, GA 30326
FAX: 404-365-9532
-13-
<PAGE>
If to MCI: MCI Telecommunications Corporation
Tysons II
1650 Tysons Blvd
McLean, VA 22102
Attn: Senior Manager Network Media Initiatives
FAX: 703-506-6641
with copies to: MCI Communications Corporation
1133 19th Street, NW
Washington, DC 20036
Attn: Chief Technology Counsel
FAX: 202-736-6382
(b) All communications shall be deemed effective upon personal delivery or
on the date of actual receipt if sent by facsimile transmission or registered or
certified mail.
(c) ISI shall promptly advise MCI of any legal notice served on it relating
to this Contract. MCI shall promptly advise ISI of any legal notice served on
it relating to this Contract.
(d) Upon appointing any Authorized Third Party or Distributor, MCI shall
promptly notify ISI of the name of such Authorized Third Party or Distributor.
25. EMPLOYEE NON-SOLICITATION. For a period of three years after the
Effective Date ("Limitation Period"), each party and its Licensed Affiliates
agree not to call upon, solicit, recruit, or assist others in calling upon,
recruiting or soliciting any person who is or was an employee of the other party
or its Affiliates ("Non-soliciting Party") during the Limitation Period, for the
purpose of having such person perform services that are the same or similar to
the services that the person performed for the Non-soliciting Party during the
Limitation Period. MCI and its Licensed Affiliates shall include in their
agreements with Authorized Third Parties a provision similar to this Paragraph
25 that restricts the Authorized Third Party from soliciting ISI's employees for
the same purpose for a period of one (1) year after MCI or its Licensed
Affiliate enters into an agreement with the Authorized Third Party. ISI shall
not solicit an Authorized Third Party's employees for the same purpose for a
period of one (1) year after MCI or its Licensed Affiliates enters into an
agreement with the Authorized Third Party; provided that MCI has given ISI
written notice of such Authorized Third Party prior to the date such agreement
is entered into.
-14-
<PAGE>
26. MISCELLANEOUS. This Contract shall be governed by and construed and
interpreted in accordance with the laws of the State of New York without giving
effect to its rules regarding conflicts of law and any applicable federal laws
of the United States of America, as from time to time amended and in effect.
This Contract, which includes the attached Exhibits, constitutes the entire
understanding of ISI and MCI and supersedes all prior written and oral
agreements of any kind between ISI and MCI, including but not limited to the
Agreement and the Existing Agreements. Except as provided in this Contract, any
representation, promise or condition of any kind between ISI and MCI shall not
be binding on either party. In any proceeding to enforce any of the terms of
this Contract, the prevailing party shall be entitled to recover its reasonable
expenses, including reasonable attorneys' fees. This Contract may not be
assigned, in whole or in part, by either party without the other party's written
consent, which consents shall not be unreasonably withheld. Notwithstanding the
foregoing, either party may assign this Contract to an Affiliate of, or
successor to, the assigning party without the consent of the other party;
provided, however, that the Affiliate or successor agrees to the terms of the
Contract. Any other attempt to assign the Contract shall be null, void, and of
no force or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed by their respective duly authorized representatives.
MCI TELECOMMUNICATIONS ITERATED SYSTEMS, INC.
CORPORATION
- --------------------------------- ----------------------------------
By (Sign) By (Sign)
- --------------------------------- ----------------------------------
Name (Print) Name (Print)
- --------------------------------- ----------------------------------
Title Title
- --------------------------------- ----------------------------------
Date Date
-15-
<PAGE>
EXHIBIT A
DELIVERABLES
<TABLE>
<CAPTION>
Date of Shipment
Description Under the Agreement
- ----------- -------------------
<S> <C>
PC Audio Codec May 30, 1996
Host Lab Audio Codec September 30, 1996
Prototype Lossless Data Codec September 30, 1996
C30 Audio Codec December 31, 1996
Enhanced Fractal Real-time Video Codec December 31, 1996
C50 Audio Codec March 31, 1997
FRTC Reference Design Kit Version 3.0 June 6, 1997
Host Lab Audio Codec (P.C. version) June 30, 1997
C30 Audio Codec Reference Design Kit September 12, 1997
FRTC (I-Cam Version 1.0) September 30, 1997
MVM Audio Codec TMSC320C3x Version 2.0 September 30, 1997
Next Generation Real-time Video Codec September 30, 1997
Reference Design Kit Version 1.2
Lossless Video Codec (CCIR-601) September 30, 1997
</TABLE>
-16-
<PAGE>
EXHIBIT B
INDEMNIFICATION
1. ISI INDEMNIFICATION OF MCI
(a) ISI shall (i) defend at its expense and indemnify MCI and MCI's
directors, officers, employees, agents and advisers (collectively, the "MCI
Indemnified Parties," and individually, the "MCI Indemnified Party") and (ii)
hold the MCI Indemnified Parties harmless from and against any claim, in any
action, suit, or proceeding, or settlement thereof, that use of the Deliverables
infringes any Intellectual Property Rights of any third party. ISI shall pay
those damages and costs awarded against any MCI Indemnified Party, in such
action, suit, proceeding or settlement that are attributable to such claim. MCI
shall (i) notify ISI in writing of any such claim within five (5) days after an
MCI Indemnified Party receives notice of such claim, (ii) permit ISI sole
control of the defense, settlement or other compromise of such claim, and (iii)
ensure that the MCI Indemnified Party cooperates with ISI in the defense and
settlement of such claim, including providing to ISI, at the expense of ISI,
such information and assistance as ISI may reasonably request. If MCI fails to
perform any of the obligations described in the preceding sentence and such
failure has an adverse impact on ISI's or MCI's liability to the applicable
third party or ISI's ability to defend such claim, then ISI shall no longer be
obligated to indemnify the MCI Indemnified Parties for such claim or pay for
such damage or cost. The MCI Indemnified Party may, at its own expense, be
represented by counsel of its own choice in defense of such claim; provided,
however, that ISI shall continue to have sole control of the defense,
settlement, or other compromise of such claim.
(b) Notwithstanding Paragraph (a) above, the indemnification obligations of
ISI shall not extend to claims for infringement resulting from any additions or
modifications to the Deliverables other than by a person engaged or employed by
ISI by or under the direct control of ISI.
(c) If use of the Deliverables is enjoined due to a claim of infringement
that ISI is obligated to indemnify under Paragraph (a) above, then ISI shall, at
its own expense and to MCI's reasonable satisfaction, either (i) procure for MCI
the right to continue using the allegedly infringing Deliverables, as
applicable; (ii) replace the same with functionally substantially equivalent
non-infringing components, matter or materials; or (iii) modify the same to
become non-infringing.
2. MCI INDEMNIFICATION OF ISI
MCI shall (i) defend at its expense and indemnify ISI and ISI's directors,
officers, employees, agents and advisers (collectively, the "ISI Indemnified
Parties", and individually, an "ISI Indemnified Party") and (ii) hold the ISI
Indemnified Parties harmless from and against any claim, in any action, suit, or
proceeding, or settlement thereof, that the Intellectual Property Rights of the
claimant are infringed by additions or modifications to the Deliverables made by
-17-
<PAGE>
anyone receiving rights under this Contract other than ISI. MCI shall pay those
damages and costs awarded against any ISI Indemnified Party in such action,
suit, proceeding or settlement that are attributable to such claim. ISI shall
(i) notify MCI in writing of any such claim within five (5) days after an ISI
Indemnified Party receives notice of such claim; (ii) permit MCI sole control of
the defense, settlement, or other compromise of such claim; and (iii) ensure
that the ISI Indemnified Party cooperates with MCI in the defense, settlement or
other compromise of such claim, including providing to MCI, at the expense of
MCI, such information and assistance as MCI may reasonably request. If ISI
fails to perform any of the obligations described in the proceeding sentence and
such failure has an adverse impact on MCI's or ISI's liability to the applicable
third party or MCI's ability to defend such claim, then MCI shall no longer be
obligated to indemnify the MCI Indemnified parties for such claim or pay for
such damage or cost. The ISI Indemnified Party may, at its own expense, be
represented by counsel of its own choice in defense of such claim; provided,
however, that MCI shall continue to have sole control of the defense,
settlement, or other compromise of such claim.
3. LIMITATIONS ON INDEMNITY OBLIGATIONS
Each party's indemnification obligation set forth in this EXHIBIT B shall
be limited according to the terms in Paragraph 17 of this Contract.
-18-
<PAGE>
EXHIBIT C
CONFIDENTIALITY COVENANTS
1. Each of MCI and ISI shall (i) use reasonable efforts to maintain the
confidentiality of the information and materials of the other that may be
reasonably understood, from legends, the nature of such information itself
and/or the circumstances of such information's disclosure, to be confidential
and/or proprietary thereto or of third parties to which either of them owe a
duty of non-disclosure (collectively, "Confidential Information"); (ii) take
reasonable steps in connection therewith, including at least the steps that each
takes to protect the confidentiality of its comparable proprietary assets; (iii)
with respect to any source code in the possession of either of them, use
reasonable care in the selection and assignment of personnel to work with such
source code and instruct all personnel so assigned to take reasonable
precautions to prevent unauthorized disclosures; and (iv) with respect to any
person to which disclosure is contemplated, require such person to execute an
agreement providing for the treatment of Confidential Information set forth in
clauses (i) through (iii) above. The foregoing shall not require separate
written agreements with employees and agents already subject to written
agreements substantially conforming to the requirements of this EXHIBIT C nor
with professionals or others that are bound under applicable law, canons, or
codes of ethics to respect the confidentiality of client communications and
materials.
2. The obligations set forth in this EXHIBIT C shall not apply to any
information and materials which: (i) become public knowledge through no act or
failure to act of the party receiving the Confidential Information ("Receiving
Party"); (ii) are publicly disclosed by the owner of the Confidential
Information ("Disclosing Party"); (iii) are lawfully obtained by the Receiving
Party without obligations of confidentiality from a third party or third parties
after reasonable inquiry regarding the authority of such third party or third
parties to possess and divulge the same; (iv) are independently developed by the
Receiving Party from sources or through persons that such person can demonstrate
had no access to Confidential Information; or (v) are lawfully known by the
Receiving Party at the time of disclosure other than by reason of discussions
with or disclosures by the parties. The obligations set forth in this EXHIBIT C
with respect to the Confidential Information shall remain in effect for a period
of two years after the disclosure thereof and thereafter unless and until the
Confidential Information is no longer deemed to be trade secret under applicable
law through no act or omission of MCI, its Affiliates and each of their
respective licensees.
-19-
<PAGE>
EXHIBIT D
DISPUTE RESOLUTION
1. SCOPE OF ARBITRATION. All disputes between ISI and MCI arising out of
or relating to this Contract and all royalty disputes and infringement disputes
described in Paragraphs 18(b) and 18(c) of the Contract, shall be resolved by
final and binding arbitration conducted in accordance with and subject to the
provisions of the United States Arbitration Act, 9 U.S.C. Sections 1 et seq.,
provided, however, that prior to filing a demand for arbitration, the parties
shall attempt to resolve their disputes through negotiation, and, if the dispute
remains unresolved, by non-binding mediation, as provided in this EXHIBIT D.
2. MEETING BEFORE ARBITRATION. In the event there is a dispute arising
out of or relating to this Contract or a royalty dispute or infringement dispute
as described in Paragraphs 18(b) and 18(c) of the Contract, the parties first
shall attempt to resolve the dispute by negotiations between senior executives
of the parties who have authority to settle the controversy. The disputing
party shall give the other party written notice of the dispute. Within twenty
days after receipt of said notice, the receiving party shall submit a written
response to the disputing party. The notice and response shall include (a) a
statement of each party's position and a summary of the evidence and arguments
supporting its position, and (b) the name and title of the executive who will
represent that party. The executives shall meet at a mutually acceptable time
and place within thirty days after the date of receipt of the disputing party's
notice and, after that, as often as they reasonably deem necessary to exchange
relevant information and to attempt to resolve the dispute. If the matter is
not resolved within sixty days after the receipt of the disputing party's
notice, or if the party receiving said notice will not meet within thirty days,
then either party may initiate mediation of the dispute according to the terms
provided below.
3. MEDIATION BEFORE ARBITRATION. In the event the dispute is not resolved
by negotiation as provided in the preceding paragraph, then, prior to filing a
demand for arbitration, either party shall, if it still wishes to resolve the
dispute, refer the dispute to mediation, i.e., an informal, non-binding
conference or conferences between the parties in which a mediator will seek to
guide the parties to a resolution of the dispute. The mediation shall take
place in Washington, D.C. if requested by ISI, and shall take place in Atlanta,
Georgia if requested by MCI. The mediation shall be conducted under the
auspices of the J.A.M.S./ENDISPUTE ("JAMS") office in the city where the
mediation is to be conducted, or, if JAMS has no office in that city, under the
auspices of the JAMS office closest to the city where the mediation is to be
conducted. The parties are free to select any mutually acceptable mediator from
the list provided by such JAMS office. If the parties cannot agree or have no
particular choice of mediator, then a list and resumes of available mediators
will be sent to the parties, each of whom shall inform JAMS of those mediators
who are acceptable, provided that at least one such mediator shall be designated
acceptable. JAMS shall then select a mediator who is acceptable to both
parties. The mediation shall occur within sixty days after the request for
mediation. The fees and costs of the mediation shall conform to the then
current fee schedule at JAMS and, in the absence of an agreement to the
contrary, shall be borne equally by each party.
-20-
<PAGE>
4. ARBITRATION. If the dispute is not finally resolved within thirty days
after the first day of the mediation, then either party may demand arbitration
by filing a demand for arbitration. The arbitration shall be conducted under
the auspices of JAMS. An arbitration demanded by ISI shall take place in
Washington, D.C. and an arbitration demanded by MCI shall take place in Atlanta,
Georgia. The arbitration shall be conducted by one arbitrator mutually agreed
upon by ISI and MCI, under the JAMS Arbitration Rules and Procedures in effect
on the Effective Date of the Contract, except that the parties shall have any
right to discovery as would be permitted under the Federal Rules of Civil
Procedure for a period of ninety days following the selection of the arbitrator,
and the arbitrator shall resolve any dispute which arises in connection with
such discovery. The fees and costs of JAMS and the arbitrator shall, in the
absence of an agreement to the contrary, be borne equally by each party. The
prevailing party shall be entitled to an award of costs, expenses and reasonable
attorneys' fees. Judgment upon the award rendered by the arbitrator may be
entered in any court of competent jurisdiction. The award shall not include,
and the arbitrator shall not have the power to award, any damages or relief
which are excluded by the Contract.
5. LIMITATION OF ACTIONS. Any request for a meeting to resolve a dispute,
as provided in Paragraph 2 of this EXHIBIT D, must be served upon the other
party no later than one year from the date that the facts giving rise to such
dispute occurred.
6. EXCLUSION OF REQUEST FOR INTERIM INJUNCTIVE RELIEF. Notwithstanding
this EXHIBIT D, either party may apply to any court of competent jurisdiction
for a temporary restraining order, preliminary injunction or other interim
injunctive relief, as may be necessary to protect such party's Intellectual
Property Rights and Confidential Information.
-21-
<PAGE>
EXHIBIT E
WARRANT AGREEMENT
WARRANT AGREEMENT ATTACHED
-22-
<PAGE>
EXHIBIT F
MODIFICATION REPORT
CALENDAR QUARTER ______
This report is submitted according to the terms of Paragraph 10 of the
Contract dated August __, 1998 between Iterated Systems, Inc. ("ISI") and MCI
Telecommunications Corporation ("MCI") (the "Contract").
List and describe below all MCI Modifications and Third Party Modifications
created during the above indicated calendar quarter by MCI, its Licensed
Affiliates and the Authorized Third Parties ("Modification Report").
Notwithstanding the above, MCI, its Licensed Affiliates and Authorized Third
Parties are not obligated to report modifications of the Deliverables Source
Code that result from normal repairs (including bug fixes).
You may attach additional pages, if necessary, to further describe the
modifications made to the Deliverables.
<TABLE>
<CAPTION>
DATE
DELIVERABLES
SOURCE CODE
DELIVERED TO
AUTHORIZED
DESCRIPTION DATE PROJECT THIRD PARTY
STARTED (IF
APPLICABLE)
<S> <C> <C>
ITEM #
------ ------------ -----------
DELIVERABLE MODIFIED:
---------------------------------
NAME AND ADDRESS OF MCI ENTITY OR AUTHORIZED THIRD PARTY:
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
DESCRIPTION OF MODIFICATION:
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
ITEM #
------ ------------ -----------
DELIVERABLE MODIFIED:
---------------------------------
NAME AND ADDRESS OF MCI ENTITY OR AUTHORIZED THIRD PARTY:
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
DESCRIPTION OF MODIFICATION:
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
</TABLE>
-23-
<PAGE>
EXHIBIT G
MCI
INVENTION DISCLOSURE FORM
Item 1. Provide a short, descriptive title of the invention:
Item 2a. When and under what circumstances was the invention first conceived
(if you have any written evidence of this date, include copies):
Item 2b. What is the date of the first sketch or drawing of the invention:
Item 2c. What is the date of the first written description of the invention:
Item 2d. What is the date of the first test or operation of the invention:
Item 3a. List all contributors (use other pages if necessary) to this
conception of the invention and indicate the contributor's company if
not an MCI employee (also identify one person as the primary contact
with an "X" next to the name):
Printed Name:__________________________________________________________________
Last Name First Middle Initial
Phone#: (w)___________ (h) ____________ Dept/Loc:__________ E-MailD:__________
Current Address:_______________________________________________________________
Street City State Zip Code
Country:_____________ Citizenship:_________________ Job Title:_________________
Job assignment at Invention conception:________________________________________
Printed Name:__________________________________________________________________
Last Name First Middle Initial
Phone#: (w)___________ (h) ____________ Dept/Loc:__________ E-MailD:__________
Current Address:_______________________________________________________________
Street City State Zip Code
Country:_____________ Citizenship:______________ Job Title:___________________
Job assignment at Invention conception:________________________________________
Item 3b. Provide the management chain (though VP) of the originating
organization for the invention:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Inventor Signature(s) Date | Read, understood, and witnessed Date
- -----------------------------------------------------------------------------------------------------------------
<S> <C> | <C> <C>
|
| 1.
- -----------------------------------------------------------------------------------------------------------------
|
- -----------------------------------------------------------------------------------------------------------------
|
| 2.
- -----------------------------------------------------------------------------------------------------------------
|
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-24-
<PAGE>
MCI
INVENTION DISCLOSURE FORM
Item 4a. Has the invention been disclosed, or is it likely to be disclosed in
the near future, to persons outside of MCI, such as to a vendor, at a
technical conference or a trade show:
Yes__________ No___________ Don't Know/Other______________
If the answer above is yes, list the name, company/agency, date and
place of the disclosure:
Item 4b. Has the invention been disclosed, or is it likely to be disclosed in
the near future, in technical papers, oral presentations, etc. (please
indicate date):
Item 4c. If the answer to Items a or b is Yes or Don't Know/Other, was a non-
disclosure agreement used, or have you contacted one of the attorneys
listed in the instruction section to obtain a non-disclosure
agreement.
Item 4d. Have there been any attempts to demonstrate, publicly use, market or
sell the service or product:
Yes__________ No___________ Don't Know/Other______________
Item 4e. If the answer to Item 4d is Yes or Don't Know/Other, provide a
description of each such attempt:
Item 5a. Identify each MCI service, network or product which utilizes or may
utilize the invention:
Item 5b. Describe any potential or existing market for sale or license of this
item or the technology:
a. Government:
b. Commercial:
c. Identify any known firms or vendors who may be interested
in this item:
Item 6. If this item was first conceived or constructed with:
a. A governmental contract, provide the government contract
number:
b. An Internal Research and Development (RAD) or company
project, provide the project identification number:
c. Neither a or b, explain:
Item 7. Identify and attach copies of any prior references which you are aware
of and which may be relevant to the invention (products, brochures,
patents, publications, etc.), but do not perform a search for
references in order to complete this form:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Inventor Signature(s) Date | Read, understood, and witnessed Date
- -----------------------------------------------------------------------------------------------------------------
<S> <C> | <C> <C>
|
| 1.
- -----------------------------------------------------------------------------------------------------------------
|
- -----------------------------------------------------------------------------------------------------------------
|
| 2.
- -----------------------------------------------------------------------------------------------------------------
|
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-25-
<PAGE>
MCI
INVENTION DISCLOSURE FORM
Item 8. Describe the invention using the following format. Use as many pages
as necessary. Mark each additional page "MCI Confidential."
1. Discuss the problems which the item is designed to solve. Refer to
any prior devices of a similar nature with which you may be
familiar.
2. Describe how the invention qualifies as a solution to the problem,
and state the advantage of the item over presently known devices,
systems or processes.
3. Specifically describe the item and its operation. Attach copies of
drawings, sketches, prints, photographs and illustrations, which
should be signed, witnessed and dated. Use numbers and descriptive
names in descriptions and drawings.
4. List all known and other possible uses for the item.
5. List the features of the item that are believed to be novel.
6. State why the invention is important to MCI.
7. List some related key words to facilitate searching for this
disclosure at a later time.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Inventor Signature(s) Date | Read, understood, and witnessed Date
- -----------------------------------------------------------------------------------------------------------------
<S> <C> | <C> <C>
|
| 1.
- -----------------------------------------------------------------------------------------------------------------
|
- -----------------------------------------------------------------------------------------------------------------
|
| 2.
- -----------------------------------------------------------------------------------------------------------------
|
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-26-
<PAGE>
MCI
INVENTION DISCLOSURE FORM
Attach Text or Drawings:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Inventor Signature(s) Date | Read, understood, and witnessed Date
- -----------------------------------------------------------------------------------------------------------------
<S> <C> | <C> <C>
|
| 1.
- -----------------------------------------------------------------------------------------------------------------
|
- -----------------------------------------------------------------------------------------------------------------
|
| 2.
- -----------------------------------------------------------------------------------------------------------------
|
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-27-
<PAGE>
WARRANT AGREEMENT
This WARRANT AGREEMENT (this "Agreement") dated as of August 7, 1998,
is by and between Iterated Systems, Inc., a Georgia corporation ("Iterated"),
and MCI Telecommunications Corporation, a Delaware corporation ("MCI").
WHEREAS, as of the date hereof, Iterated and MCI have executed that
certain Contract (the "Master License Agreement");
WHEREAS, as inducement for MCI to enter into the Master License
Agreement, Iterated has agreed to enter into this Agreement and to issue to MCI
warrants to purchase shares of its Common Stock, subject to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of premises set forth herein, the
mutual terms, covenants and conditions contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE 1 -- DEFINITIONS
1.1 Capitalized Terms. Capitalized terms used but not defined herein
-----------------
which are defined in the Master License Agreement shall have the meanings
assigned to such terms in the Master License Agreement.
1.2 Definitions. The following capitalized terms shall have the meanings
-----------
set forth below:
"Affiliate" shall mean, with respect to any Person, any other Person which
---------
controls, directly or indirectly, is controlled by, or is under common control
with such Person. For purposes hereof, the term "control" shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of any such Person whether through the
ownership of voting securities, by contract, or otherwise.
"Agreement" shall mean this Agreement and the exhibits and schedules
---------
attached hereto and incorporated herein.
"Business Day" means any day that is not a Saturday, Sunday or legal
------------
holiday in New York City.
"Capital Stock" means any and all shares, interests, participations, or
-------------
other equivalents (however designated) of capital stock, or any and all
equivalent ownership interests.
<PAGE>
"Cash Merger Transaction" shall have the meaning set forth in Section 3.2.
-----------------------
"Common Stock" means the common stock of Iterated, par value $.01 per
------------
share, and any and all shares, interests, participations or equivalent ownership
interests of Iterated, including without limitation any class or series of stock
(regardless of how classified or designated) of Iterated that has the right
(subject to any prior rights of any other class or series of stock) to
participate in any distribution of the assets or earnings of Iterated without
effective or practical limit as to per share amount.
"Holder" shall mean MCI and any other Person which, at the time, holds any
------
Warrants.
"Initial Exercise Price" shall have the meaning set forth in Section 2.1.
----------------------
"Initial Public Offering" means the initial Public Offering of Iterated's
-----------------------
Common Stock.
"IPO Date" shall mean the date on which the consummation of the Initial
--------
Public Offering occurs.
"Market Price" as of any date with respect to any security means the
------------
average of the Quoted Prices of such security for the twenty (20) consecutive
days such securities are traded ("Trading Days") (or, if such security is
publicly traded but has been so traded for less than twenty (20) consecutive
Trading Days, such shorter period in which such security has been publicly
traded) immediately preceding such date; provided, however, that, if an
Adjustment Event occurs with respect to such security during the period from the
first of such consecutive Trading Days through the last of such consecutive
Trading Days, the computation of Market Price shall be appropriately adjusted to
take account of such Adjustment Event. "Quoted Price" of any security for any
date shall be the last reported sales price of such security as reported by the
principal national securities exchange on which such security is listed or
traded, or as reported by the Nasdaq National Market, or if such security is
neither so reported nor listed or traded, the average of the last reported bid
and ask prices of such security in the over-the-counter market on such date. If
such security is not listed or traded on any national securities exchange or
quoted in the over-the-counter market, the Market Price shall be deemed an
amount mutually agreed upon between Iterated and MCI, and if no agreement can be
reached, then the Market Price of such security as of any date shall be the fair
market value thereof as determined by an independent nationally recognized
investment banking firm selected by investment banking firms representing each
of Iterated and MCI. Iterated shall pay all costs of all determinations of fair
market value by such nationally recognized investment banking firm.
"Outstanding Basis" means at any date as of which the number of shares of
-----------------
Iterated is to be determined the sum of (a) all shares of Common Stock of
Iterated outstanding at such date, and (b) the maximum number of shares of
Common Stock of Iterated issuable pursuant to the Warrants, as if the Warrants
had been exercised.
2
<PAGE>
"Person" means any individual, sole proprietorship, partnership,
------
corporation, limited liability company, joint venture, trust, association,
institution, public benefit corporation, governmental agency or other entity and
the heirs, executors, administrators, legal representatives, successors and
assigns of such Person, as the context may require.
"Public Offering" means after the date hereof the sale and issuance by
----------------
Iterated of shares of Common Stock pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended, with the
Securities and Exchange Commission, which is underwritten on a firmly committed
basis.
"Successor" shall have the meaning set forth in Section 3.1.
---------
"Warrant" or "Warrants" shall have the meaning set forth in Section 2.1.
---------------------
ARTICLE 2 -- WARRANT GRANT
2.1 Grant. Concurrently with the execution and delivery of this Agreement
-----
and the Master License Agreement, Iterated shall issue and deliver to MCI
warrants to purchase shares of Common Stock, which warrants shall be
substantially in the form of Exhibit A attached hereto (the "Warrants"). The
---------
Warrants shall entitle the Holder thereof to purchase up to 1,452,570 shares of
Common Stock (representing, as of the date hereof, ten percent (10%) of the
number of shares of Capital Stock of Iterated, on an Outstanding Basis,
calculated after giving effect to the grant of the Warrants, hereinafter
referred to as the "Warrant Shares"), subject to adjustment as set forth
therein.
2.2 Exercise Price. The initial exercise price for the Warrants shall be
--------------
equal to $5.00 per share, subject to adjustment as set forth therein (the
"Initial Exercise Price").
2.3 Exercise Period. The Warrants shall be exercisable at any time and
---------------
from time to time, in whole or in part, for a period of four (4) years
commencing from and after the date of issuance of the Warrants, as such exercise
period may be extended as provided in the Warrants for the purpose of obtaining
any necessary governmental approvals or curing any default.
ARTICLE 3 --CERTAIN MERGERS AND ASSET SALES
3.1 Non-Cash Merger. In case any of the following shall occur:
---------------
(a) the consummation of any consolidation or merger to which Iterated
is a party (other than (i) a merger in which Iterated is the surviving
corporation and which does not result in any reclassification of, or change
in, any of the outstanding shares of Common Stock of Iterated, or (ii) a
merger or consolidation which results in the holders of all
3
<PAGE>
outstanding shares of Common Stock of Iterated being entitled to receive
solely cash and/or securities that are not equity securities of the
Successor with respect to or in exchange for their shares of Common Stock
of Iterated); or
(b) the consummation of any sale or conveyance to another Person of
the property of Iterated as an entirety or substantially as an entirety
which is effected in such a way that holders of any of the outstanding
shares of Common Stock of Iterated are entitled to receive stock,
securities or property (including cash) with respect to or in exchange for
shares of Common Stock of Iterated (other than a transaction which results
in the holders of outstanding shares of Common Stock of Iterated being
entitled to receive solely cash and/or securities that are not equity
securities of the Successor with respect to or in exchange for their shares
of Common Stock of Iterated),
then, and in each such case, the Person resulting from or surviving such
consolidation or merger or the Person purchasing or receiving such assets (or
the Person which is to be the issuer of shares of Common Stock or other equity
securities to be issued or delivered with respect to or in exchange for shares
of Common Stock of Iterated) shall, prior to or simultaneously with the
consummation of such transaction, confirm in writing that such Person (the
"Successor") shall assume all of the obligations of Iterated under this
Agreement.
3.2 Cash Merger. In case any of the following shall occur:
-----------
(a) the consummation of any consolidation or merger to which Iterated
is a party which results in the holders of outstanding shares of Common Stock of
Iterated being entitled to receive solely cash and/or securities that are not
equity securities of the Successor with respect to or in exchange for their
shares of Common Stock of Iterated; or
(b) the consummation of any sale or conveyance to another Person of
the property of Iterated as an entirety or substantially as an entirety which
results in the holders of outstanding shares of Common Stock of Iterated being
entitled to receive solely cash and/or securities that are not equity securities
of the Successor with respect to or in exchange for their shares of Common Stock
of Iterated;
Iterated shall, so long as any Warrants remain outstanding, in addition to any
other rights MCI may have as a holder of the Warrants, pay or cause to be paid
to MCI, simultaneously with (i) the consummation of such transaction (the "Cash
Merger Transaction") and (ii) the exercise of all outstanding Warrants by the
Holders, an amount in cash computed in accordance with the following formula:
A = (2.0% - (X))(W)(Y)(Z)
4
<PAGE>
where:
A = the amount to be paid to MCI
W = the number of Warrant Shares (as defined in the Warrant) then
held by the Holders immediately prior to the Cash Merger
Transaction divided by the number of Warrant Shares granted to
MCI hereunder
X = the product of 0.1667% multiplied by the number of consecutive
three (3) month periods that have passed since the grant of the
Warrants
Y = the amount (in cash and/or in market value of securities (based
on the Market Price of such securities at the time of
consummation of the Cash Merger Transaction)) on a weighted
average basis per share of Common Stock that holders of Common
Stock will be entitled to receive with respect to or in exchange
for their shares of Common Stock upon consummation of the Cash
Merger Transaction
Z = the total number of outstanding shares of Common Stock of
Iterated immediately prior to consummation of the Cash Merger
Transaction
ARTICLE 4 -- COVENANTS
4.1 Reservation of Shares; Preservation of Rights. Iterated hereby agrees
---------------------------------------------
that prior to the issuance of any Warrants, and at all times thereafter, there
shall be reserved for issuance such number of shares of Common Stock and/or
other securities as shall be sufficient for the issuance and delivery thereof
upon exercise of all outstanding Warrants, and that Iterated shall take any and
all corporate action necessary for Iterated to validly and legally issue fully
paid and nonassessable shares of Common Stock and/or other securities upon the
exercise of such Warrants.
4.2 Deliveries. In connection with the issuance and delivery to MCI of
----------
the Warrants, Iterated shall deliver, or arrange to deliver, the following:
(a) Officer's Certificates. A certificate, dated as of the date of
----------------------
such issuance, duly executed on behalf of Iterated by its chief financial
officer, certifying that (i) such Warrants entitle the holder thereof to
purchase the correct number of shares of Common Stock or other securities, at
the correct exercise price, pursuant to the terms of this Agreement; (ii)
Iterated has reserved for issuance such number of shares of Common Stock or
other securities sufficient for the issuance and delivery to the holder thereof
upon exercise of the Warrants; and (iii) Iterated has taken all corporate action
necessary to validly and legally issue fully paid and nonassessable
5
<PAGE>
shares of Common Stock or other securities upon the exercise of such Warrants.
Such officer's certificate shall be accompanied by a detailed report setting
forth the calculation of the number of shares of Common Stock or other
securities, determined under clause (i) of this Section 4.2(a). In addition,
Iterated shall deliver a certificate, dated as of the date of such issuance,
duly executed on behalf of Iterated by its secretary whose title and signature
shall be certified by another executive officer, certifying as to (w) the
Articles of Incorporation and the By-Laws of Iterated; (x) the resolutions of
the Board of Directors of Iterated authorizing the execution, delivery and
performance of this Agreement, the Warrants and any agreements relating thereto;
(y) the incumbency of the officers executing the Warrants and any agreements
relating thereto; and (z) the accuracy in all material respects of Iterated's
representations and warranties set forth in this Agreement and any other
agreements in connection herewith and Iterated's performance of all covenants
and agreements required hereunder and under the Warrants.
(b) Good Standing Certificates. A certificate of good standing with
--------------------------
respect to Iterated, dated within twenty (20) days prior to the date of issuance
of the Warrants, of the Secretary of State of the State of Georgia.
4.3 Government Filings and Approvals. At the request of any Holder,
--------------------------------
Iterated shall, at its own expense, diligently make all filings with
governmental authorities, except for filings made pursuant to the Hart-Scott-
Rodino Anti-Trust Improvements Act of 1976, as amended, in order to obtain any
approval, waiver or consent that is necessary or required for the exercise of
any Warrants by any Holder thereof not to cause a violation of any applicable
law, regulation, rule or order.
4.4 Certain Negative Covenants. Prior to the IPO Date, Iterated shall
--------------------------
not, without the prior written consent of MCI:
(a) pay any dividends or make any other distribution on its Common
Stock of any class or series, other than a stock dividend;
(b) amend its articles of incorporation (except any amendment which
increases the number of authorized shares of Common Stock) to the extent
such amendment could reasonably have a material adverse effect on the
economic value of the Warrants or could reasonably impair the ability of
Iterated to issue Warrants or the exercise thereunder by any Holder; and
(c) be a party to (i) any merger or consolidation with an Affiliate
of Iterated (other than a merger in which Iterated is the surviving
corporation and which does not result in any reclassification of, or change
in, any of the outstanding shares of Common Stock of Iterated (other than a
subdivision or combination, on the same pro rata basis, of the outstanding
shares of Common Stock); or (ii) any transaction with an Affiliate of
Iterated which results in any reclassification of any class or series of
its Common Stock.
6
<PAGE>
4.5 Financial Statements and Other Reports. If at any time Iterated does
--------------------------------------
not have a class of equity securities registered under Section 12 of the
Exchange Act, and so long as MCI or its Affiliates are the Holders of any of
the Warrants, Iterated shall furnish to the Holders:
(a) As soon as available and in any event within forty-five (45) days
after the end of each fiscal quarter of Iterated (except for the fourth fiscal
quarter), the consolidated balance sheets of Iterated its subsidiaries as at the
end of such fiscal quarter and related consolidated statements of income and
retained earnings and cash flow statements for Iterated and its subsidiaries for
such fiscal quarter and for the period commencing at the end of the previous
fiscal year and ending with the end of such fiscal quarter setting forth in each
case in comparative form the corresponding figures for the corresponding period
of the preceding fiscal year, all in reasonable detail and duly certified
(subject to normal year-end audit adjustment) by the chief financial officer of
Iterated as having been prepared in accordance with generally accepted
accounting principles.
(b) As soon as available and in any event within forty-five (45) days
after the end of each fiscal quarter of Iterated, a certificate detailing the
ownership of the Capital Stock of Iterated and the issuance of Capital Stock or
warrants, options, convertible securities or other similar rights to purchase
Capital Stock during the prior fiscal quarter, duly executed on behalf of
Iterated by its chief financial officer.
(c) As soon as available and in any event within ninety (90) days
after the end of each fiscal year of Iterated, a copy of the annual audit report
for such fiscal year for Iterated, including the consolidated balance sheets of
Iterated and its subsidiaries as at the end of such fiscal year and related
consolidated statements of income and retained earnings and cash flow statements
for Iterated and its subsidiaries for such fiscal year.
(d) Such other information and documents as MCI may from time to time
reasonably request.
4.6 Listing of Shares. Iterated shall, after the consummation of the
-----------------
Initial Public Offering, use its best efforts to maintain (a) its qualification
for listing on a national securities exchange, or (b) its designation for
quotation on the Nasdaq National Market, as the case may be.
4.7 Registration. Iterated shall maintain at its principal place of
------------
business a register for the registration of the Warrants and registration of
transfer of Warrants.
4.8 Books and Accounts. So long as any of the Warrants shall remain
------------------
outstanding, Iterated shall, and shall cause each consolidated subsidiary to,
maintain proper books of record and account in which true and correct entries
shall be made of its transactions and set aside on its books from its earnings
for each fiscal year all such proper reserves as in each case shall be required
in accordance with generally accepted accounting principles.
7
<PAGE>
4.9 Transferability of Warrants. Until the earlier of (a) three (3) years
---------------------------
from the date of this Agreement and (b) the IPO Date, the Warrants may only be
transferred with the consent of Iterated, which consent will not be unreasonably
conditioned, delayed or withheld, except that transfers to or among Affiliates
of MCI will not require Iterated's consent. After such date, the Warrants will
be fully transferable at any time, in whole or in part, at MCI's sole
discretion. Shares issuable pursuant to the exercise of Warrants will be freely
tradable, subject to applicable restrictions of transfer under federal
securities laws.
4.10 Public Announcements. Except as otherwise permitted under the Master
--------------------
License Agreement or unless required to be made pursuant to any applicable law,
regulation or other requirement of any governmental authority, neither Iterated
nor MCI shall make any public announcement regarding this Agreement without the
prior written consent of the other party hereto to such announcement or press
release and its contents.
4.11 Cooperation; Further Assurances. Each of the parties hereto shall
-------------------------------
cooperate fully with the other and shall use all reasonable efforts to take, or
cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations, or
otherwise to fulfill its obligations under this Agreement and to carry out fully
the transactions contemplated hereby.
4.12 Consents; Filings. Iterated shall make or cause to be made all such
-----------------
filings and submissions under laws and regulations applicable to Iterated, if
any, as may be required of Iterated, in order to carry out the transactions
contemplated by this Agreement, including the issuance of any of the Warrants.
Iterated further agrees to take all action and make all filings and submissions
required to be made by Iterated that would be necessary for the exercise of a
Warrant not to violate any law or regulation.
4.13 Confidentiality. Each of the parties and their respective agents,
---------------
accountants and attorneys shall keep confidential any information obtained from
the other parties hereto except to the extent that (a) such information is or
hereafter becomes lawfully obtainable from other sources, (b) it is necessary or
appropriate to disclose such information in connection with the regulatory
filings necessary to carry out the transactions contemplated herein or may
otherwise be required by law or (c) to the extent such duty as to
confidentiality is waived by the other party.
4.14 Inconsistent Actions. Iterated agrees that it shall not take or agree
--------------------
to take any of the actions prohibited by this Agreement. Iterated further agrees
that it will not take or agree to take any action that is inconsistent with this
Agreement or that could impair the ability of Iterated to issue the Warrants or
the exercise thereunder by any Holder thereof. In addition, Iterated agrees that
it will not have or adopt or amend a "poison pill" stockholder rights plan or
similar plan which, at any time and whether or not MCI holds any other
securities of Iterated at such time or any time thereafter, would have the
effect of impairing the ability of MCI to receive, hold or exercise Warrants or
securities issuable or issued upon the exercise of Warrants.
8
<PAGE>
ARTICLE 5 -- REPRESENTATIONS AND WARRANTIES
Iterated hereby represents and warrants to MCI that the following matters
are true, correct and complete as of the date hereof:
5.1 Authorization of Transaction. Iterated has the full corporate power and
-----------------------------
authority to execute and deliver this Agreement, the Warrants and any other
agreements or instruments to be executed by Iterated hereunder, and to perform
its obligations hereunder. The execution and delivery by Iterated of this
Agreement, the Warrants, and any other agreements or instruments to be executed
by Iterated and the performance of Iterated's obligations hereunder have been
duly and validly authorized by all necessary corporate action. This Agreement
has been, and the Warrants and any other agreements and instruments to be
executed by Iterated will be, duly and validly executed and delivered by
Iterated and constitute, or will constitute, the legal, valid and binding
obligations of Iterated, enforceable against Iterated in accordance with their
terms.
5.2 Noncontravention. Neither the execution, delivery or performance of
-----------------
this Agreement, the Warrants and any other agreements or instruments to be
executed by Iterated hereunder will (a) conflict with or violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any governmental authority to which
Iterated or any of its property is subject; or (b) conflict with or violate any
provision of the articles of incorporation or bylaws of Iterated.
5.3 Governmental and Third Party Consents. No consent, approval, order or
--------------------------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any governmental authority on the part of Iterated is required in
connection with the execution, delivery and performance of this Agreement or the
Warrants. No consent or waiver of any Person is required in connection with the
execution, delivery and performance of this Agreement or the Warrants.
5.4 Capitalization. The 1,452,570 Warrant Shares represent ten percent
---------------
(10%) of the number of shares of Capital Stock of Iterated, on an Outstanding
Basis as of the date hereof and the date of grant of the Warrants, calculated
after giving effect to the Warrants. Iterated has delivered to MCI true and
correct copies of its articles of incorporation and by-laws, and all amendments
thereto, as in effect on the date hereof. As of the date hereof, the issued and
outstanding Capital Stock of Iterated is as set forth in Schedule I attached
hereto, and the number of shares of Common Stock of Iterated, on an Outstanding
Basis, together with a reasonably detailed calculation of such number, is as set
forth in Schedule I.
5.5 Disclosure. Iterated has provided MCI with all documents and
-----------
information which MCI has requested and all information reasonably believed by
Iterated to be material to a decision to enter into this Agreement and the
Master License Agreement.
9
<PAGE>
ARTICLE 6 -- MISCELLANEOUS
6.1 Notices. All notices, demands, requests, or other communications which
--------
may be or are required to be given or made by any party to any other party
pursuant to this Agreement shall be in writing and shall be hand delivered, or
mailed first-class registered or certified mail, return receipt requested,
postage pre-paid, or delivered by overnight air courier, or transmitted by
facsimile transmission addressed as follows:
If to MCI:
MCI Telecommunications Corporation
1801 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Attn: Chief Financial Officer
Fax: 202-887-2348
with a copy to:
MCI Communications Corporation
1801 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Attn: General Counsel
Fax: 202-887-3353
If to Iterated:
Iterated Systems, Inc.
3525 Piedmont Road
Suite 600
Atlanta, Georgia 30305
Attention: President and CEO
Fax: 404-264-8300
with a copy to:
Morris Manning & Martin, LLP
3343 Peachtree Road, N.E.
Suite 1600
Atlanta, Georgia 30326
Attention: John C. Yates, Esq.
Fax: 404-365-9532
10
<PAGE>
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be given, served or sent. Each
notice, demand, request or communication which shall be mailed, delivered, or
transmitted in the manner described above shall be deemed sufficiently given,
served, sent or received for all purposes as such time as it is delivered to the
addressees (with the return receipt, the facsimile confirmed receipt, the
delivery receipt or affidavit of messenger being deemed conclusive evidence of
such delivery) or at such time as delivery is refused by the addressee upon
presentation.
6.2 Entire Agreement. This Agreement, together with the Master License
-----------------
Agreement, including the schedules and exhibits hereto and thereto, supersedes
all prior discussions and agreements between the parties with respect to the
subject matter hereof, and constitutes the sole and entire agreement between the
parties with respect to the subject matter hereof and thereof.
6.3 Waiver. Any term or condition of this Agreement may be waived at any
-------
time by the party that is entitled to the benefit thereof, but no such waiver
shall be effective unless set forth in a written instrument duly executed by or
on behalf of the party waiving such term or condition. No waiver by any party of
any term or condition of this Agreement, in any one or more instances, shall be
deemed to be or construed as a waiver of the same or any other term or condition
of this Agreement on any future occasion. All remedies, either under this
Agreement or by law or otherwise afforded, will be cumulative and not
alternative.
6.4 Amendment. This Agreement may be amended, supplemented or modified only
----------
by a written instrument duly executed by or on behalf of each party.
6.5 No Third Party Beneficiary. The terms and provisions of this Agreement
---------------------------
are intended solely for the benefit of each party hereto and their respective
permitted successors or assigns, and, except as specifically provided in this
Agreement, it is not the intention of the parties to confer third-party
beneficiary rights upon any other person.
6.6 Binding Effect. This Agreement shall be binding upon,inures to the
---------------
benefit of and is enforceable by the parties hereto and their respective
successors and assigns.
6.7 Headings. The headings used in this Agreement have been inserted for
---------
convenience of reference only and do not define or limit the provisions hereof.
6.8 Schedules and Exhibits. The schedules and exhibits specifically
-----------------------
referred to in and delivered pursuant to this Agreement are incorporated herein
and shall be part of this Agreement for all purposes.
6.9 Severability; Reformation. Should any one or more of the provisions of
--------------------------
this Agreement or of any agreement entered into pursuant to this Agreement be
determined by an arbitrator or court of proper jurisdiction to be illegal or
unenforceable, then such illegal or unenforceable provision shall be modified by
the proper court or arbitrator to the extent
11
<PAGE>
necessary and possible to make such provision enforceable, and such modified
provision and all other provisions of this Agreement and of each other agreement
entered into pursuant to this Agreement shall be given effect separately from
the provision or portion thereof determined to be illegal or unenforceable and
shall not be affected thereby.
6.10 Governing Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New York, without giving effect to the
conflict of laws provisions thereof.
6.11 Counterparts. To facilitate execution, this Agreement may be executed
-------------
in as many counterparts as may be required; and it shall not be necessary that
the signatures of, or on behalf of, each party, or the signatures of all persons
required to bind a party, appear on each counterpart; but it shall be sufficient
that the signature of, or on behalf of, each party, or the signatures of the
persons required to bind any party, appear on one or more of the counterparts.
All counterparts shall collectively constitute a single agreement.
6.12 Remedies. All rights, remedies, undertakings, obligations, options,
--------
covenants, conditions and agreements contained in this Agreement or provided by
law shall be cumulative and no one of them shall be exclusive of any other. A
party may pursue any one or more of its rights, options or remedies hereunder or
may seek damages or specific performance in the event of any other party's
breach hereunder, or may pursue any other remedy by law or equity, whether or
not stated in this Agreement. MCI and Iterated recognize that any breach of the
terms of this Agreement may give rise to irreparable harm for which money
damages would not be an adequate remedy, and accordingly agree that, in addition
to other remedies any non-breaching party shall be entitled to enforce the terms
of this Agreement by a decree of specific performance without the necessity of
proving the inadequacy of money damages as a remedy.
6.13 Further Assurances. Each party agrees to perform any further acts
------------------
and to execute and deliver any further documents reasonably necessary to or in
furtherance of the intent and purposes of this Agreement.
6.14 Attorneys' Fees. In the event any action is brought for enforcement
---------------
or interpretation of this Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees and costs (including allocated in-house
attorney costs) incurred in said action, including enforcement and collection of
any judgment or award rendered therein. Said costs and attorneys' fees shall be
included as part of the judgment in any such action.
6.15 Registration Rights Agreement. Simultaneously with the execution and
-----------------------------
delivery of this Agreement, MCI and Iterated are entering into a Registration
Rights Agreement in the form annexed hereto as Exhibit B.
---------
6.16 Assignment. The rights and obligations under this Agreement may not
----------
be assigned by either party without the prior written consent of the other
party, provided that either
12
<PAGE>
party may assign its rights and obligations under this Agreement to an Affiliate
(i) of which such party beneficially owns directly or indirectly 80% of the
voting power or (ii) of which beneficially owns directly or indirectly 80% of
the voting power of such party.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
13
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Warrant
Agreement as of the date and year first above written.
ITERATED SYSTEMS, INC.
By:____________________________
Name:
Title:
MCI TELECOMMUNICATIONS CORPORATION
By:____________________________
Name:
Title:
14
<PAGE>
SCHEDULE I
CAPITALIZATION OF ITERATED
CAPITAL STOCK - OUTSTANDING BASIS
Current Common Shares Outstanding 13,073,125
Plus: MCI Warrants (as if issued) 1,452,570
----------
Capitalization - Outstanding Basis 14,525,695
10% of Capitalization 1,452,570
==========
CAPITAL STOCK - FULLY DILUTED
Common Shares Outstanding * 13,073,125
MCI Warrants (as if issued) 1,452,570
Employee Options Outstanding 3,010,650
Director Options Outstanding 100,000
Warrants - Mosvold Farsund 100,000
----------
Capitalization - Fully Diluted 17,736,345
==========
This assumes that 36,100 shares repurchased by Iterated in March 1998 and May
1998 and in the process of being retired have been retired.
15
<PAGE>
EXHIBIT A
FORM OF WARRANT
16
<PAGE>
EXHIBIT B
FORM OF REGISTRATION RIGHTS AGREEMENT
17
<PAGE>
EXHIBIT A
FORM OF WARRANT
---------------
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE AND THIS WARRANT AND SUCH SECURITIES MAY NOT
BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT THEREFOR OR AN APPLICABLE EXEMPTION
FROM REGISTRATION THEREFROM UNDER SAID ACT AND SUCH LAWS.
UNTIL THE EARLIER OF (A) THREE YEARS FROM THE DATE OF THIS WARRANT AND (B)
THE IPO DATE (AS HEREINAFTER DEFINED), THIS WARRANT MAY ONLY BE TRANSFERRED
WITH THE CONSENT OF THE COMPANY, WHICH CONSENT WILL NOT BE UNREASONABLY
CONDITIONED, DELAYED OR WITHHELD, EXCEPT THAT TRANSFERS TO OR AMONG
AFFILIATES (AS HEREINAFTER DEFINED) OF THE HOLDER WILL NOT REQUIRE THE
COMPANY?S CONSENT. AFTER SUCH DATE, THIS WARRANT WILL BE FULLY
TRANSFERABLE AT ANY TIME, IN WHOLE OR IN PART, AT THE HOLDER?S SOLE
DISCRETION. SHARES ISSUABLE PURSUANT TO THE EXERCISE OF THIS WARRANT WILL
BE FREELY TRADABLE, SUBJECT TO APPLICABLE RESTRICTIONS OF TRANSFER UNDER
FEDERAL SECURITIES LAWS.
ITERATED SYSTEMS, INC.
Warrant for the Purchase of Shares
of Common Stock
FOR VALUE RECEIVED and subject to the terms and conditions contained
herein, Iterated Systems, Inc., a Georgia corporation (the "Company"), hereby
certifies that for value received MCI Telecommunications Corporation, or its
permitted assigns, are entitled to purchase, from the Company at any time or
from time to time during the Exercise Period (as defined below) any or all of
the Warrant Shares (as defined below) for the Exercise Price (as defined below).
The Exercise Price shall not be subject to adjustment, except as set forth in
paragraph 3 hereof.
<PAGE>
1 Definitions.
-----------
As used in this Warrant, the following terms have the respective
meanings set forth below:
"ADDITIONAL SHARES OF COMMON STOCK" means any shares of Common Stock
issued by the Company on or after the Issue Date, other than shares of Common
Stock issued pursuant to this Warrant.
"AFFILIATE" of a Person means any Person who directly or indirectly
controls, is controlled by or is under common control with such other Person.
"BUSINESS DAY" means any day that is not a Saturday, a Sunday or a
legal holiday in New York City.
"CAPITAL STOCK" means any and all shares, interests, participations,
or other equivalents (however designated) of capital stock, or any and all
equivalent ownership interests.
"COMMON STOCK" means the common stock of the Company and any Capital
Stock into which such common stock may be changed on or after the Issue Date
and any class or series of Capital Stock of the Company (regardless of how
denominated), that has the right (subject to any prior rights of any other class
or series of stock) to participate in any distribution of the assets or earnings
of the Company without limit as to per share amount and shall also include
shares of common stock of any successor or acquiring corporation referred to in
paragraph 3(c) received by or distributed to the holders of such Capital Stock
in the circumstances contemplated by paragraph 3(c).
"CONVERTIBLE SECURITIES" means evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable, with or
without payment of additional consideration in cash or property, for Additional
Shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.
"CURRENT MARKET PRICE" as of any date with respect to any security
means the average of the Quoted Prices of such security for the twenty (20)
consecutive days such securities are traded ("Trading Days") (or, if such
security is publicly traded but has been so traded for less than twenty (20)
consecutive Trading Days, such shorter period in which such security has been
publicly traded) immediately preceding such date; provided, however, that, if an
event described in clauses (i) through (iii) of paragraph 3(a) occurs with
respect to such security during the period from the first of such consecutive
Trading Days through the last of such consecutive Trading Days, the computation
of Current Market Price shall be appropriately adjusted to take account of such
event. "Quoted Price" of any security for any date shall be the last reported
sales price of such security as reported by the principal national securities
exchange on which such security is listed or traded, or as reported by the
Nasdaq National Market, or if such security is neither so reported nor listed or
traded, the average of the last reported bid and ask prices of
<PAGE>
such security in the over-the-counter market on such date. If such security is
not listed or traded on any national securities exchange or quoted in the over-
the-counter market, the Current Market Price shall be deemed an amount mutually
agreed upon between the Company and the Holder, and if no agreement can be
reached, then the Current Market Price of such security as of any date shall be
the fair market value thereof as determined by an independent nationally
recognized investment banking firm selected by investment banking firms
representing each of the Company and the Holder. The Company shall pay all costs
of all determinations of fair market value by such nationally recognized
investment banking firm.
"EXERCISE DATE" means the date on which the Holder exercises this
Warrant, in whole or in part.
"EXERCISE PERIOD" means the period commencing on the Issue Date and
ending at 5:00 p.m., Eastern standard time, on the Termination Date.
"EXERCISE PRICE" means a price for each Warrant Share equal to $5.00
per share, subject to adjustment on or after the Issue Date pursuant only to the
provisions of paragraph 3 of this Warrant.
"HOLDER" means MCI or any permitted transferee of this Warrant.
"INITIAL PUBLIC OFFERING" shall mean the initial Public Offering of
the Company's Capital Stock.
"IPO DATE" shall mean the date on which the consummation of the
Initial Public Offering occurs.
"ISSUE DATE" means August 7, 1998.
"MCI" means MCI Telecommunications Corporation, a Delaware
corporation.
"MERGER TRIGGERING EVENT" has the meaning assigned to that term in
paragraph 3(c).
"PERSON" means any individual, sole proprietorship, partnership,
corporation, limited liability company, joint venture, trust, association,
institution, public benefit corporation, governmental agency or other entity and
the heirs, executors, administrators, legal representatives, successors and
assigns of such Person, as the context may require.
3
<PAGE>
"PUBLIC OFFERING" means the sale and issuance by the Company of Common
Stock pursuant to an effective registration statement filed under the Securities
Act with the Securities and Exchange Commission, which is underwritten on a
firmly committed basis.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of August 7, 1998, between the Company and MCI
Telecommunications Corporation.
"SECURITIES" means any debt or equity securities of the Company,
whether now or hereafter authorized, and any instrument convertible into or
exchangeable for Securities or a Security. "Security" means one of the
Securities.
"SECURITIES ACT" means the Securities Act of 1933, as amended from
time to time, and the regulations promulgated thereunder.
"TERMINATION DATE" means the fourth anniversary of the Issue Date;
provided, however, that if, on such date, the Company is then required, pursuant
- -------- -------
to an effective request therefor, to effect, or is in the process of effecting,
a registration under the Securities Act for an underwritten public offering in
which Warrant Shares are, pursuant to the Registration Rights Agreement,
entitled to be included, or if the Company is in default of any material
obligations created by this Warrant or by the Registration Rights Agreement, the
Termination Date shall be deemed to be, and the right to exercise this Warrant
and purchase Warrant Shares shall expire at 5:00 p.m., Eastern standard time,
on, the 30th day following the date on which such registration shall have become
effective (but in no event later than 180 days beyond the date this Warrant
otherwise would have expired) or on the 30th day following the date all of such
defaults have been cured, as the case may be; and provided, further, that if an
approval or waiver is required to be obtained from a governmental authority (or
a filing with a governmental authority and/or expiration of a period of time
following such filing) in order for an exercise of this Warrant, in whole or in
part, or the issuance of any or all of the Warrant Shares upon such exercise, to
comply with applicable law (including, without limitation, the Hart-Scott-Rodino
Anti-Trust Improvements Act of 1976, as amended) and the Holder delivers to the
Company on or prior to the last date with respect to which this Warrant can be
exercised with respect to such Warrant Shares a written notification of the
Holder's intent to exercise this Warrant and evidence reasonably satisfactory to
the Company that the Holder has made all filings required to be made by the
Holder to obtain such approval or waiver or to satisfy any other filing
requirements, and a request that the Company make all filings required to be
made by the Company to obtain such approval or waiver or to satisfy any other
filing requirements, and the Holder thereafter diligently continues to attempt
to obtain such approval or waiver and/or expiration of waiting period, then the
Termination Date shall be deemed to be, and the last date on which this Warrant
can be exercised with respect to such Warrant Shares shall be extended through,
the date five Business Days after the date on which a final ruling is made with
respect to the filing(s) requesting such approval or waiver or the expiration of
such waiting period, as the case may be. The Company agrees to provide
reasonable assistance to, and cooperate with, the Holder in making such filings
required to be made by the Holder, and the Company shall make all filings
required to be made
4
<PAGE>
by the Company, for obtaining such approvals or waivers or to satisfy any other
filing requirements, as are necessary for the exercise of this Warrant by the
Holder not to constitute a violation of any other law or regulation.
"TRANSACTION CONSIDERATION" has the meaning assigned in paragraph
3(c).
"WARRANT AGREEMENT" shall mean the Warrant Agreement dated as of
August 7, 1998 between the Company and MCI.
"WARRANT CONSIDERATION AMOUNT" has the meaning specified in Section
2(b) hereof.
"WARRANT SHARES" means any of the shares of Common Stock issuable upon
exercise of this Warrant. The number of Warrant Shares shall initially be
1,452,570 shares of Common Stock, subject to adjustment on or after the Issue
Date pursuant only to the provisions of paragraph 3 of this Warrant.
2 Exercise of Warrant. (a) This Warrant may be exercised, in whole
-------------------
at any time or in part from time to time, during the Exercise Period, by
the Holder by the surrender of this Warrant (with the subscription duly
executed) at the address set forth in paragraph 11(a) hereof, together with
proper payment of the Exercise Price. Payment for the Warrant Shares to be
purchased shall be made by wire transfer or certified or official bank
check payable to the order of the Company. If this Warrant is exercised in
part, this Warrant must be exercised for a whole number of shares of the
Common Stock, and the Holder is entitled to receive a new Warrant covering
the number of Warrant Shares in respect of which this Warrant has not been
exercised. Upon such surrender of this Warrant, the Company will issue a
certificate or certificates in the name of the Holder for the number of
shares of the Common Stock to which the Holder shall be entitled. The
Company shall not be required to issue a fractional share of Common Stock
upon any exercise of this Warrant, but the Company shall pay an amount in
cash equal to the Current Market Price for one Warrant Share on the date
the Warrant is exercised, multiplied by the fraction of a Warrant Share
that would be issuable on the exercise of this Warrant.
(b) In the event any Holder elects upon exercise to surrender this
Warrant for payment of the applicable Exercise Price for the shares being
purchased, this Warrant shall be surrendered and canceled. To the extent
any Holder elects to pay all or part of the Exercise Price by surrendering
this Warrant to the Company, the number of purchasable shares under this
Warrant required to be surrendered as payment for the Exercise Price (the
"Warrant Consideration Amount") shall be equal to that number obtained by
-----------------------------
dividing (i) that amount of the aggregate Exercise Price that any Holder
elects by written notice to the Company to pay by the application of this
Warrant (such notice setting forth, in addition, the required reduction in
the number of shares purchasable by this Warrant as calculated and shown in
sufficient detail in accordance
5
<PAGE>
with the immediately succeeding clause), by (ii) the difference obtained by
subtracting (A) the Exercise Price per share on the date of exercise from
(B) the Current Market Price of the Warrant Shares on the date of exercise.
(c) In the event of any exercise of the rights represented by this
Warrant, (i) certificates for the shares of Warrant Shares so purchased
shall be dated the date of such exercise and delivered to the Holder hereof
within a reasonable time, not exceeding ten (10) Business Days after such
exercise, and the Holder hereof shall be deemed for all purposes to be the
Holder of the shares of Warrant Shares so purchased as of the date of such
exercise, and (ii) unless this Warrant has expired, a new Warrant
representing the number of shares equal to (A) the number of shares
purchasable under this Warrant less (B) the sum of (1) the number of shares
of Warrant Shares purchased upon exercise and (2) the Warrant Consideration
Amount, if any, shall be issued to the Holder hereof within such time.
3 Certain Adjustments. The Exercise Price and the kind and number
-------------------
of shares of Common Stock issuable upon exercise of this Warrant shall be
subject to adjustment as set forth below in this paragraph 3. The Company shall
give the registered Holder notice of any event described below which requires an
adjustment pursuant to this paragraph 3 in accordance with the provisions of
paragraph 4.
(a) Stock Dividends, Subdivisions and Combinations. If at any time
----------------------------------------------
the Company shall:
(i) fix a record date for the purpose of determining the holders
of its Common Stock entitled to receive a dividend payable in, or
other distribution of, Additional Shares of Common Stock;
(ii) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock;
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock; or
(iv) issue any shares of its capital stock or other Securities
by reclassification of the Common Stock (other than pursuant to
paragraph 3(c) below); then the Exercise Price shall be
proportionately decreased in the case of such a dividend or
distribution of Additional Shares of Common Stock or such a
subdivision, or proportionately increased in the case of such a
combination, or the kind of capital stock or other securities of the
Company which may be purchased shall be adjusted in the case of such a
reclassification of the Common Stock, each on the record date for such
dividend or distribution or effective date of such subdivision,
combination or reclassification, as the case may be, such that the
6
<PAGE>
Holder shall be entitled to receive, upon exercise of this Warrant,
the aggregate number and kind of shares of Common Stock which, if this
Warrant had been fully exercised immediately prior to such date, it
would have owned upon such exercise and been entitled to receive by
virtue of such dividend, distribution, subdivision, combination or
reclassification.
(b) Certain Other Dividends and Distributions. If at any time the
-----------------------------------------
Company shall fix a record date for the purpose of determining the holders
of its Common Stock entitled to receive any dividend or other distribution
(including any such distribution made in connection with a consolidation or
merger, but excluding any distribution referred to in subparagraph (a)
above) of:
(i) any evidences of indebtedness, any shares of its capital
stock (including Convertible Securities but excluding Common Stock) or
any other securities or property of any nature whatsoever (including
cash but excluding normal cash dividends or cash distributions
permitted under applicable law so long as in each case such cash is
payable solely out of earnings or earned surplus of the Company); or
(ii) any warrants or other rights to subscribe for or purchase
any evidences of its indebtedness, any shares of its capital stock
(including Convertible Securities) or any other of its securities or
its property of any nature whatsoever;
then the Exercise Price shall be adjusted to equal the Exercise Price in
effect prior to such distribution or dividend multiplied by a fraction, (A)
the numerator of which shall be (1) the Current Market Price per share of
the Common Stock on such record date minus (2) the amount allocable to one
share of Common Stock of the fair value of any and all such evidences of
indebtedness, shares of stock, other securities or property or warrants or
other subscription or purchase rights so distributable (as determined in
good faith by the Board of Directors of the Company and, unless waived by
the Holder, supported by an opinion from an investment banking firm of
nationally recognized standing (the costs of such investment banking firm
to be shared equally by the Holder and the Company) approved by the Holder,
which approval shall not be unreasonably withheld), and (B) the denominator
of which shall be such Current Market Price per share of Common Stock on
such record date. Such adjustments shall be made whenever such a record
date is fixed. A reclassification of the Common Stock (other than a change
in par value, or from par value to no par value or from no par value to par
value) into shares of Common Stock and shares of any other class of stock
shall be deemed a distribution by the Company to the holders of its Common
Stock of such shares of such other class of stock within the meaning of
this subparagraph (b) and, if the outstanding shares of Common Stock shall
be changed into a larger or smaller number of shares of Common Stock as a
part of such reclassification, such change shall be deemed a subdivision or
combination, as the case
7
<PAGE>
may be, of the outstanding shares of Common Stock within the meaning
of subparagraph (a).
(c) Adjustments for Consolidation, Merger, Sale of Assets,
------------------------------------------------------
Reorganization, etc.
--------------------
(i) In case the Company after the date hereof (A) shall
consolidate with or merge into any other Person and shall not be the
continuing or surviving corporation of such consolidation or merger,
or (B) shall permit any other Person to consolidate with or merge into
the Company and the Company shall be the continuing or surviving
Person but, in connection with such consolidation or merger, the
Common Stock shall be changed into or exchanged for stock or other
securities of any other Person or cash or any other property, or (C)
shall transfer all or substantially all of its properties or assets to
any other Person or (D) shall effect a capital reorganization or
reclassification of the Common Stock (other than a capital
reorganization or reclassification for which adjustment in the
Exercise Price is provided in subparagraph 3(a) or subparagraph 3(b)),
then, and in the case of each such transaction, proper provision shall
be made so that, upon the basis and the terms and in the manner
provided in this Warrant, the Holder of this Warrant shall be entitled
upon the exercise hereof at any time after the consummation of such
transaction, to the extent this Warrant is not exercised prior to such
transaction, or is redeemed in connection with such transaction, to
receive at the Exercise Price in effect at the time immediately prior
to the consummation of such transaction in lieu of the Common Stock
issuable upon such exercise of this Warrant prior to such transaction
the stock and other securities, cash and property to which such Holder
would have been entitled upon the consummation of such transaction if
such Holder had exercised the rights represented by this Warrant
immediately prior thereto, subject to adjustments (subsequent to such
corporate action) as nearly equivalent as possible to the adjustments
provided for in this paragraph 3.
(ii) Notwithstanding anything contained in this Warrant to the
contrary, the Company will not effect any of the transactions
described in clauses (a) through (d) of the above subparagraph (i)
unless, prior to the consummation thereof, the surviving Person (if
other than the Company) in any merger or consolidation described in
such clauses, each Person which is to acquire the Company's assets in
any transaction described in clause (c) above, and each Person (other
than the Company) which may be required to deliver any stock,
securities, cash or property upon the exercise of this Warrant as
provided herein, shall assume, by written instrument delivered to, and
reasonably satisfactory to, the Holder of this Warrant, (A) the
obligations of the Company under this Warrant (and if the Company
shall survive the consummation of such transaction, such assumption
shall be in addition to, and shall not release the Company from, any
continuing obligations of the Company under this Warrant) and (B) the
obligation
8
<PAGE>
to deliver to such Holder such shares of stock, securities, cash or
property as, in accordance with the foregoing provisions of this
paragraph (c), such Holder shall be entitled to receive, and such
Person shall have similarly delivered to such Holder an opinion of
counsel for such Person, which counsel shall be reasonably
satisfactory to such Holder, stating that this Warrant shall
thereafter continue in full force and effect and the terms hereof
(including, without limitation, all of the provisions of this
paragraph 3) shall be applicable to the stock, securities, cash or
property which such Person may be required to deliver upon any
exercise of this Warrant or the exercise of any rights pursuant
hereto.
(iii) In case any of the transactions described in clauses (A)
through (C) of subparagraph (i) shall be proposed to be effected (any
such transaction a "Merger Triggering Event"), the Holder of this
-----------------------
Warrant may, and the Company agrees that as a condition to the
consummation of any such Merger Triggering Event the Company shall
secure the right of such Holder to, sell this Warrant (or, at such
Holder's election, a portion thereof) to the Person continuing after
or surviving such Merger Triggering Event, or the Company (if the
Company is the continuing or surviving Person), simultaneously with,
the effective date or closing of such Merger Triggering Event, at a
sale price equal to the amount of cash, property and/or the number of
shares of Common Stock or other securities to which a holder of the
number of shares of Common Stock which would otherwise have been
deliverable upon the exercise of this Warrant or the portion hereof
redeemed would have been entitled upon the effective date or closing
of such Merger Triggering Event (the "Transaction Consideration"),
-------------------------
less the amount or portion of such Transaction Consideration having a
fair value equal to the aggregate Exercise Price applicable to this
Warrant or the portion hereof so sold. In the event that the Holder
of this Warrant exercises its rights under this subparagraph (iii) to
sell this Warrant (or a portion thereof) simultaneously with the
effective date or closing of any such Merger Triggering Event, the
Company shall not effect any such Merger Triggering Event unless upon
or prior to the consummation thereof such amounts of cash, property,
Common Stock, or other securities are delivered to the Holder of this
Warrant.
(d) Issuance of Shares, Warrants or other Rights. (i) Except for
--------------------------------------------
issuances of (i) options granted to employees and directors of the Company
under the 1994 Amended and Restated Stock Option Plan or the 1994 Directors
Stock Option Plan, other than options granted to John C. Bacon, Michael F.
Barnsley and Alan D. Sloan (Messrs. Bacon, Barnsley and Sloan are
hereinafter referred to as the ?Restricted Individuals?), and (ii) warrants
or other convertible securities representing less than one percent (1%) of
the outstanding equity of the Company at the time of such issuance, if at
any time the Company shall issue or sell to any Person any Additional
Shares of Common Stock, or warrants or other similar rights to subscribe
for or purchase any Additional Shares of Common Stock or Convertible
Securities, whether or not the rights to exchange or
9
<PAGE>
convert thereunder are immediately exercisable (but excluding any
distributions in subparagraphs (a) or (b) above), the price per share of
such Common Stock or for which Common Stock is issuable upon the exercise
of such warrants or other rights or upon conversion or exchange of such
Convertible Securities shall be less than the Exercise Price of such shares
then in effect, then the Exercise Price upon each such issuance shall be
reduced to equal the lesser of (x) the price per share of such Common Stock
or for which such Common Stock is issuable upon the exercise of such
warrants or other rights or upon conversion or exchange of such Convertible
Securities and (y) the Exercise Price that would be in effect in the
absence of the adjustment provided for in this subparagraph (d)(i);
provided, that in the event of an adjustment--------required under this
paragraph 3(d), notwithstanding anything to the contrary set forth in this
paragraph 3(d), the Exercise Price shall not be adjusted below $4.00 per
Warrant Share, as the amount per share may be adjusted in accordance with
paragraphs 3(a), 3(b) or 3(c) hereof, unless such adjustment relates to an
issuance to any of the Restricted Individuals.
(ii) In the case of the issuance or sale of warrants or other
rights or Convertible Securities, any adjustment under this
subparagraph (d) shall be made on the basis that (A) the maximum
number of Additional Shares of Common Stock issuable pursuant to all
such warrants or other similar rights or necessary to effect the
conversion or exchange of all such Convertible Securities shall be
deemed to have been issued and outstanding, (B) the price per share
for such Additional Shares of Common Stock shall be deemed to be the
lowest possible price per share in any range of prices per share at
which such Additional Shares of Common Stock are available to such
holders, and (C) the Company shall be deemed to have received all of
the consideration payable therefor, if any, as of the date of the
actual issuance of such warrants or other similar rights. No further
adjustments of the Exercise Price shall be made upon the actual issue
of such Common Stock upon exercise of such warrants or other similar
rights or upon the actual issue of such Common Stock upon such
conversion or exchange of such Convertible Securities. Such
adjustments shall be made upon the date of the issuance or sale of
such warrants or other similar rights.
(iii) this subparagraph (d) shall not apply (and subparagraph
(e) shall not apply) to the exercise of warrants, options or other
similar rights, or the conversion or exchange of Convertible
Securities, outstanding on the Issue Date.
(e) Issuance of Convertible Securities. (i) Except for issuances of
----------------------------------
(i) options granted to employees and directors of the Company under the
1994 Amended and Restated Stock Option Plan or the 1994 Directors Stock
Option Plan, other than options granted to the Restricted Individuals, and
(ii) warrants or other convertible securities representing less than one
percent (1%) of the outstanding equity of the Company at the time of such
issuance, if at any time the Company shall issue or sell to any Person any
Convertible Securities (other than securities distributed in a transaction
described in
10
<PAGE>
subparagraphs (b) and (d) above), whether or not the rights to exchange or
convert thereunder are immediately exercisable, the price per share for
which Common Stock is issuable upon such conversion or exchange shall be
less than the Exercise Price of shares then in effect on the date of such
issuance or sale or if, after any such issuance or sale, the price per
share for which Additional Shares of Common Stock may be issuable
thereafter is amended (other than as a result of the operation of
antidilution provisions of or relating to Convertible Securities
outstanding as of the Issue Date pursuant to events or circumstances which
would also result in an adjustment in the Exercise Price), and such price
as so amended shall be less than the Exercise Price in effect at the time
of such amendment, then the Exercise Price upon each such issuance or
amendment shall be reduced to equal the lesser of (1) the price per share
for which such Common Stock is issuable upon conversion or exchange of such
Convertible Securities and (2) the Exercise Price that would be in effect
in the absence of the adjustment provided for in this subparagraph (e)(i);
provided, that in the event of an adjustment required under this paragraph
--------
3(d), notwithstanding anything to the contrary set forth in this paragraph
3(d), the Exercise Price shall not be adjusted below $4.00 per Warrant
Share, as the amount per share may be adjusted in accordance with
paragraphs 3(a), 3(b) or 3(c) hereof, unless such adjustment relates to an
issuance to any of the Restricted Individuals.
(ii) In the case of the issuance or sale of Convertible
Securities, any adjustment under this subparagraph (e) shall be made
on the basis that (A) the maximum number of Additional Shares of
Common Stock necessary to effect the conversion or exchange of all
such Convertible Securities shall be deemed to have been issued and
outstanding, (B) the price per share of such Additional Shares of
Common Stock shall be deemed to be the lowest possible price in any
range of prices at which such Additional Shares of Common Stock are
available to such holders, and (C) the Company shall be deemed to have
received all of the consideration payable therefor, if any, as of the
date of actual issuance of such Convertible Securities. No adjustment
of the Exercise Price shall be made under this subparagraph (e)(ii)
upon the issuance of any Convertible Securities which are issued
pursuant to the exercise of any warrants or other subscription or
purchase rights therefor, if any such adjustment shall previously have
been made upon the issuance of such warrants or other rights pursuant
to subparagraph (d) above. No further adjustments of the Exercise
Price shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities and, if any
issue or sale of such Convertible Securities is made upon exercise of
any warrant or other right to subscribe for or to purchase any such
Convertible Securities for which adjustments of the Exercise Price
have been or are to be made pursuant to other provisions of this
paragraph 3, no further adjustments of the Exercise Price shall be
made by reason of such issue or sale. Such adjustments shall be made
upon each issuance or amendment of Convertible Securities and shall
become effective immediately after such issuance or amendment.
11
<PAGE>
(f) Adjustment of Number of Warrant Shares. Upon each adjustment of
--------------------------------------
the Exercise Price, as the case may be, pursuant to subparagraph (a) or (b)
of this paragraph 3, this Warrant shall be deemed to evidence the right to
purchase, at the adjusted Exercise Price, that number of shares of Common
Stock obtained by multiplying the number of shares of Common Stock covered
by this Warrant immediately prior to such adjustment by the Exercise Price
in effect prior to such adjustment and dividing the product so obtained by
the Exercise Price in effect after such adjustment. If the Company shall
be in default under any provision of this Warrant so that shares issued at
the Exercise Price adjusted in accordance with the terms of this Warrant
would not be validly issued, the adjustment of number of shares provided
for in the foregoing sentence shall nonetheless be made and the Holder of
this Warrant shall be entitled to purchase such greater number of shares at
the lowest price at which such shares may then be validly issued under
applicable law. Such exercise shall not constitute a waiver of any claim
arising against the Company by reason of its default under this Warrant.
(g) When Adjustments To Be Made. No adjustment in the Exercise Price
---------------------------
shall be required by this paragraph 3 if such adjustment either by itself
or with other adjustments not previously made would require an increase or
decrease of less than 1% in such price. Any adjustment representing a
change of less than such minimum amount which is postponed shall be carried
forward and made as soon as such adjustment, together with other
adjustments required by this paragraph 3 and not previously made, would
result in a minimum adjustment. Notwithstanding the foregoing, any
adjustment carried forward shall be made no later than ten Business Days
prior to the Termination Date. All calculations under this subparagraph
(g) shall be made to the nearest cent. For the purpose of any adjustment,
any specified event shall be deemed to have occurred at the close of
business on the date of its occurrence.
(h) Fractional Interests. In computing adjustments under this
--------------------
paragraph 3, fractional interests in Common Stock shall be taken into
account to the nearest whole share.
(i) When Adjustments Not Required. If the Company shall fix a record
-----------------------------
date for the purpose of determining the holders of its Common Stock
entitled to receive a dividend or distribution and shall, thereafter and
before the distribution to stockholders thereof, legally abandon its plan
to pay or deliver such dividend or distribution, then thereafter no
adjustment shall be required by reason of the taking of such record and any
such adjustment previously made in respect thereof shall be rescinded and
annulled.
(j) Certain Limitations. Subject to the provisions of paragraph 6,
-------------------
there shall be no adjustment of the Exercise Price hereunder to the extent
that such adjustment would cause the Exercise Price to be less than the par
value per share of the Common Stock, which par value shall not at any time
while this Warrant is outstanding exceed $.01.
12
<PAGE>
(k) Other Action Affecting Common Stock. In case after the date
-----------------------------------
hereof the Company shall take any action affecting its Common Stock, other
than an action described in any of the foregoing subparagraphs (a) through
(j) of this paragraph 3, inclusive, and the failure to make any adjustment
would not fairly protect the purchase rights represented by this Warrant in
accordance with the essential intent and principle of this paragraph 3,
then the Exercise Price and/or the number of Warrant Shares shall be
adjusted in such manner and at such time as the Board of Directors of the
Company may in good faith determine to be equitable in the circumstances.
4 Notices (a) Notices of Adjustments. Whenever the Exercise Price
------- ----------------------
or the number of Warrant Shares shall be adjusted pursuant to paragraph 3, the
Company shall forthwith deliver to the Holder a certificate prepared by the
Company, setting forth, in reasonable detail, the event requiring the adjustment
and the method by which such adjustment was calculated (including a description
of the basis on which the Board of Directors of the Company determined the fair
value of any evidences of indebtedness, shares of stock, other securities or
property or warrants or other subscription or purchase rights), specifying the
number of Warrant Shares then issuable hereunder, the Exercise Price after
giving effect to such adjustment and (to the extent applicable) describing the
number and kind of any other shares of stock for which the Warrant is
exercisable. In the event that the Holder shall disagree with any such
adjustment or with the terms of any new agreement to be entered into pursuant to
paragraph 3(c), it shall notify the Company thereof and any disagreement shall
be resolved by an investment banking firm of nationally recognized standing
mutually agreeable to the Company and the Holder, or if the Company and the
Holder are unable to agree upon an investment banking firm, an investment
banking firm selected by an investment banking firm chosen by the Company and an
investment banking firm chosen by the Holder (with the costs of such investment
banking firm shared equally by the Holder and the Company).
(b) Notices of Corporate Action. In the event of any of the
---------------------------
following:
(i) any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of
stock of any class or any other securities or property, or to receive
any other right, which dividend, distribution or other right affects
the rights of the Holder, or
(ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company or any consolidation or merger involving the Company and any
other party or any transfer of all or substantially all the assets of
the Company to any other party, or
13
<PAGE>
(iii) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company will mail to the Holder a notice specifying (1) the date or expected
date on which any such record is to be taken for the purpose of such dividend,
distribution or right and the amount and character of any such dividend,
distribution or right and (2) the date or expected date on which any such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up is to take place and the time,
if any such time is to be fixed, as of which the holders of record of Common
Stock (or other securities) shall be entitled to exchange their shares of Common
Stock (or other securities) for the securities or other property deliverable
upon such reorganization, reclassification, recapitalization, consolidation,
merger, transfer, dissolution, liquidation or winding-up. Such notice shall be
mailed at least twenty days prior to the date herein specified, in the case of
any date referred to in the foregoing subdivision (1), and at least twenty days
prior to the date therein specified, in the case of the date referred to in the
foregoing subdivision (2).
5 Reservation of Warrant Shares. The Company agrees that, upon
-----------------------------
commencement of the Exercise Period and at all times prior to the Termination
Date, the Company will at all times have authorized and in reserve, and will
keep available, solely for issuance or delivery upon the exercise of this
Warrant, the shares of the Common Stock and other securities and properties as
from time to time shall be receivable upon the exercise of this Warrant, free
and clear of all restrictions on sale or transfer and free and clear of all
preemptive rights. The Company shall not by any action including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to protect the
rights of the Holders hereof against impairment. Without limiting the
generality of the foregoing, the Company will (a) not increase the par value of
any shares of Common Stock receivable upon the exercise of this Warrant above
the amount payable therefor upon such exercise immediately prior to such
increase in par value, (b) take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock, free and clear of any liens, claims,
encumbrances and restrictions (other than as provided herein) upon the exercise
of this Warrant, and (c) use its best efforts to obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Company to perform its obligations
under this Warrant.
6 Fully Paid Stock; Taxes. The shares of Common Stock represented
-----------------------
by each and every certificate for Warrant Shares delivered on the exercise of
this Warrant and the payment of the Exercise Price set forth herein shall, at
the time of such delivery, be validly issued and outstanding, fully paid and
nonassessable, and not subject to preemptive rights, and the Company will take
all such actions as may be necessary to assure that the par value or stated
14
<PAGE>
value, if any, per share of the Common Stock is at all times equal to or less
than the then Exercise Price. If the Exercise Price is at any time less than
the par value of the Warrant Shares or if the Warrant at any time is exercisable
by its delivery alone and without payment of any additional consideration, the
Company also covenants and agrees to cause to be taken such action (whether by
decreasing the par value of the Warrant Shares, the conversion of the Warrant
Shares from par value to no par value, or otherwise) as will permit the exercise
of this Warrant without any additional payment by the Holder hereof (other than
payment of the Exercise Price, if any, and applicable transfer taxes, if any)
and the issuance of the Warrant Shares, which Warrant Shares, upon such
issuance, will be fully paid and non-assessable.
The Company further covenants and agrees that it will pay, when due
and payable, any and all federal and state stamp, original issue or similar
taxes which may be payable in respect of the issuance of any Warrant Shares or
certificate therefor and that the Warrant Shares will be otherwise free from all
taxes, liens and charges with respect to issuance.
7 Transferability. (a) Subject to the legend set forth on the
---------------
first page of this Agreement, upon execution and delivery of an assignment
instrument substantially in the form attached hereto, an assignee shall be a
party to this Agreement and shall have the rights and obligations of the Holder,
to the extent of such assignment, and the Holder shall be released from its
obligations hereunder to a corresponding extent; provided, however, that no
partial assignment of this Warrant shall be made unless such partial assignment
is in respect of the right to purchase not less than one-third of the Warrant
Shares (which number shall be adjusted, to the extent appropriate, to take
account of any events described in paragraph 3(a) or paragraph 3(c)). Upon the
consummation of any assignment permitted pursuant to this paragraph, the Holder
and the Company shall make appropriate arrangements so that, if required, new
Warrants shall be issued to the Holder and the assignee. The Holder shall give
the Company prior written notice of the date that any such assignment shall
become effective, which date shall be no less than ten days after the date such
notice is given.
(b) The Company may treat the registered holder of this Warrant as it
appears on the Company's books at any time as the Holder for all purposes.
8 Loss, etc., of Warrant. Upon receipt of evidence satisfactory to
----------------------
the Company of the loss, theft, destruction or mutilation of this Warrant, and
of indemnity or bond reasonably satisfactory to the Company, if lost, stolen or
destroyed, and upon surrender and cancellation of this Warrant, if mutilated,
the Company shall execute and deliver to the Holder a new Warrant of the like
date, tenor and denomination.
9 Holder Not Shareholder. This Warrant does not confer upon the
----------------------
Holder any right to vote or to consent to or receive notice as a shareholder of
the Company, as such, in respect of any matters whatsoever, or any other rights
or liabilities as a shareholder, prior to the exercise hereof.
15
<PAGE>
10 Surrender. The Holder may at any time surrender all or a portion
---------
of this Warrant for cancellation by transmitting same to the Company at its
address set forth herein accompanied by a written notice setting forth the
Holder's intention to surrender this Warrant (or such portion) for cancellation
and upon such transmittal by the Holder, this Warrant (or such portion) shall
become null and void and of no further force and effect.
11 Notices. All notices, demands, requests, or other communications
-------
which may be or are required to be given or made by any party to any other party
pursuant to this Agreement shall be in writing and shall be hand delivered, or
mailed first-class registered or certified mail, return receipt requested,
postage pre-paid, or delivered by overnight air courier, or transmitted by
facsimile transmission addressed as follows:
If to MCI:
MCI Telecommunications Corporation
1801 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Attn: Chief Financial Officer
Fax: 202-887-2348
with a copy to:
MCI Communications Corporation
1801 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Attn: General Counsel
Fax: 202-887-3353
If to Iterated:
Iterated Systems, Inc.
3525 Piedmont Road
Suite 600
Atlanta, Georgia 30305
Attention: President and CEO
Fax: 404-264-8300
16
<PAGE>
with a copy to:
Morris Manning & Martin, LLP
3343 Peachtree Road, N.E.
Suite 1600
Atlanta, Georgia 30326
Attention: John C. Yates, Esq.
Fax: 404-365-9532
Each party may designate by notice in writing a new address to which any
notice, demand, request or communication may thereafter be given, served or
sent. Each notice, demand, request or communication which shall be mailed,
delivered, or transmitted in the manner described above shall be deemed
sufficiently given, served, sent or received for all purposes as such time
as it is delivered to the addressees (with the return receipt, the
facsimile confirmed receipt, the delivery receipt or affidavit of messenger
being deemed conclusive evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation.
12 Miscellaneous. (a) Remedies. The Company agrees that monetary
------------- --------
damages would not be adequate compensation for any loss incurred by reason
of a breach by it of the provisions of this Warrant and hereby agrees to
waive the defense in any action for specific performance that a remedy at
law would be adequate. Accordingly, it is agreed that the Holder shall be
entitled to an injunction, restraining order or other equitable relief to
prevent breaches of this Agreement and to enforce specifically the terms
and provisions hereof in any court of competent jurisdiction in the United
States or any state thereof. Such remedies shall be cumulative and
nonexclusive and shall be in addition to any other rights and remedies the
parties may have under this Agreement.
(b) No Inconsistent Agreements. The Company will not on or after the
--------------------------
date of this Warrant enter into any agreement with respect to its
Securities which is inconsistent with the rights granted to the Holder in
this Warrant, otherwise conflicts with the provisions hereof or would be
violated by the performance of the Company's obligations hereunder. The
Company represents and warrants that the rights granted to the Holder
hereunder do not in any way conflict with and are not inconsistent with the
rights granted to the holders of the Company's Securities under any such
agreements.
(c) Successors and Assigns. Subject to the provisions of paragraph 7
----------------------
hereof, this Warrant shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties.
(d) Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any
circumstances, is held invalid, illegal or unenforceable, the validity,
legality and enforceability of any such provision in every
17
<PAGE>
other respect and of the remaining provisions contained herein shall not be
affected or impaired thereby.
(e) Amendments and Waivers. The provisions of this Warrant,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions
hereof may not be given unless the Company has obtained the written consent
of the Holder.
(f) Headings. The headings of this Warrant have been inserted as a
--------
matter of convenience and shall not affect the construction hereof.
(g) Applicable Law. This Warrant shall be governed by and construed
--------------
in accordance with the laws of the State of New York.
(h) Registration Provisions. Except as provided in the Registration
-----------------------
Rights Agreement, the Company is not required under the terms hereof to
register any securities issued pursuant hereto, and the subsequent transfer
of any shares issued pursuant hereto may require registration under the
Securities Act as well as under applicable state laws. In the event the
shares issued upon the exercise of this Warrant are not registered, the
Holder acknowledges that any stock certificate evidencing shares acquired
on exercise of this Warrant shall contain a legend restricting
transferability substantially as follows:
THIS SECURITY HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR THE SECURITIES LAWS OF
ANY STATE AND MAY NOT BE OFFERED OR SOLD UNLESS REGISTERED AND/OR
QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF FEDERAL AND STATE
SECURITIES LAWS OR AN EXEMPTION FROM SUCH REGISTRATION OR
QUALIFICATION IS APPLICABLE. THEREFORE, NO SALE OR TRANSFER OF THIS
SECURITY SHALL BE VALID, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE
ANY EFFECT TO ANY SUCH TRANSACTION, UNLESS (A) SUCH TRANSACTION SHALL
HAVE BEEN REGISTERED UNDER THE ACT AND QUALIFIED OR APPROVED UNDER
APPROPRIATE STATE SECURITIES LAWS, OR (B) THE ISSUER SHALL HAVE FIRST
RECEIVED AN OPINION OF COUNSEL (WHO MAY BE INTERNAL COUNSEL OF MCI)
REASONABLY SATISFACTORY TO IT THAT SUCH REGISTRATION, QUALIFICATION OR
APPROVAL IS NOT REQUIRED.
18
<PAGE>
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
in its name by its President or an Executive or Senior Vice President thereunto
duly authorized.
Dated: August 7, 1998
ITERATED SYSTEMS, INC.
By:_____________________
Name:_______________
Title:______________
Attested by:
- -----------------------
Secretary
20
<PAGE>
SUBSCRIPTION
The undersigned, ________________________, pursuant to the provisions
of the foregoing Warrant, hereby agrees to subscribe for and purchase
___________ shares of the Common Stock of Iterated Systems, Inc., covered by
said Warrant, and makes payment therefor in full at the price per share provided
by said Warrant.
Dated:
___________________________
(Signature)
___________________________
(Address)
ASSIGNMENT
FOR VALUE RECEIVED, ____________________ hereby sells, assigns and
transfers unto _______________ the foregoing Warrant and all rights evidenced
thereby and does irrevocably constitute and appoint _______________________,
attorney, to transfer said Warrant on the books of Iterated Systems, Inc.
Dated:
___________________________
(Signature)
___________________________
(Address)
21
<PAGE>
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, ________________________________ hereby assigns
and transfers unto _________________________ the right to purchase [ ] shares
of the Common Stock of Iterated Systems, Inc. by the foregoing Warrant and the
rights evidenced thereby, and does irrevocably constitute and appoint
________________________, attorney, to transfer said Warrant on the books of
Iterated Systems, Inc.
Dated: _______________, _____
___________________________
(Signature)
___________________________
(Address)
22
<PAGE>
EXHIBIT B
FORM OF REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Registration Rights
Agreement"), dated as of August 7, 1998, by and between Iterated Systems, Inc.,
a Georgia corporation (the "Company"), and MCI Telecommunications Corporation,
a Delaware corporation ("MCI").
WHEREAS, MCI and Iterated are parties to that certain Warrant
Agreement (the "Warrant Agreement") dated of even date herewith;
WHEREAS, pursuant to the Warrant Agreement, the Holder (as defined
below) has been issued, warrants (the "Warrants") to purchase shares of the
Company's Common Stock, par value $0.01 per share (the "Common Stock");
WHEREAS, to induce MCI to enter into the Master License Agreement (as
defined in the Warrant Agreement) and the Warrant Agreement, the Company has
agreed to grant the registration and other rights contained in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto hereby agree as follows:
1. Definitions. As used in this Agreement, the following terms have the
-----------
meanings indicated:
(a) the term "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration after the date hereof effected by preparing and filing a
registration statement or similar document in compliance with the Securities Act
of 1933, as amended (the "Act"), and the declaration or ordering of
effectiveness of such registration statement or document;
(b) the term "REGISTRABLE SECURITIES" means the Common Stock and any
other capital stock of the Company, which is part of a series or class of
securities that is (i) publicly traded or (ii) subject to a registration rights
agreement, in each case issued or issuable by the Company upon the exercise of
the Warrants issued or issuable under the Warrant Agreement (including shares
received from the Company with respect to or in replacement of such shares by
reason of splits, dividends, combinations and recapitalizations), and any
capital stock of the Company into which such Common Stock or other capital stock
of the Company may be changed and securities of any successor or acquiring
corporation received by or distributed to the holders of such Common Stock or
other capital stock (such securities, together with the Company's Common Stock,
shall collectively be referred to hereinafter as, the "Common Stock"), but
excluding any securities which at any time may be resold by the Holder owning
such securities without restriction pursuant to Rule 144 or other comparable
provision of the Act
-1-
<PAGE>
("Rule 144"), provided, however, that the Company delivers information
reasonably satisfactory to the Holder to allow the Holder to make a
determination as to the availability of such rules;
(c) the "REGISTRABLE SECURITIES THEN OUTSTANDING" will be determined
by the number of shares outstanding which are, and the number of shares issuable
pursuant to then exercisable Warrants which are, Registrable Securities;
(d) the term "CAPITAL STOCK" means any and all shares, interests,
participations, or other equivalents (however designated) of capital stock, or
any and all equivalent ownership interests;
(e) the term "HOLDER" means MCI, or any assignee thereof in accordance
with SECTION 10;
(f) "MARKET VALUE" as of any date with respect to any security means
the average of the Quoted Prices of such security for the twenty (20)
consecutive days such securities are traded ("Trading Days") (or, if such
security is publicly traded but has been so traded for less than twenty (20)
consecutive Trading Days, such shorter period in which such security has been
publicly traded) immediately preceding such date; provided, however, that, if an
event described in clauses (i) through (iii) of SECTION 3(A) of the applicable
Warrant occurs with respect to such security during the period from the first of
such consecutive Trading Days through the last of such consecutive Trading Days,
the computation of Market Value shall be appropriately adjusted to take account
of such event. "Quoted Price" of any security for any date shall be the last
reported sales price of such security as reported by the principal national
securities exchange on which such security is listed or traded, or as reported
by the Nasdaq Stock Market, Inc. ("Nasdaq"), or if such security is neither so
reported nor listed or traded, the average of the last reported bid and ask
prices of such security in the over-the-counter market on such date. If such
security is not listed or traded on any national securities exchange or quoted
on Nasdaq or otherwise in the over-the-counter market, the Market Value shall be
deemed an amount mutually agreed upon between the Company and MCI, and if no
agreement can be reached, then the Market Value of such security as of any date
shall be the fair market value thereof as determined by an independent
nationally recognized investment banking firm selected by investment banking
firms representing each of the Company and MCI. The Company and MCI shall share
equally all costs of all determinations of fair market value by such nationally
recognized investment banking firm.
2. S-3 Demand Registration Rights.
------------------------------
-2-
<PAGE>
(a) In the event that the Company completes an initial registered
public offering (an "IPO") of Registrable Securities then, commencing on the
first anniversary of the closing date of such IPO, the Holders holding at least
a majority of the Registrable Securities then held by all Holders may request in
writing that the Company effect a registration in accordance with the provisions
of the Act of all or a portion of such Holder's Registrable Securities (which
written request by the Holders will specify the aggregate number of shares of
Registrable Securities requested to be registered), and the Company shall, upon
receipt of such request, use its best efforts to file and have declared
effective a registration statement covering such Holder's Registrable Securities
requested to be registered; provided, however, that the Company will not be
-------- -------
required to take any action pursuant to this SECTION 2(A) if the Company has
failed to meet the then-current eligibility requirements for the use of Form
S-3, unless any failure to meet such eligibility requirements results from any
action or inaction on the part of the Company.
provided further, however, that the Company will be permitted to satisfy its
- ---------------- -------
obligations under this SECTION 2(A) by amending (to the extent permitted by
applicable law) any registration statement previously filed by the Company under
the Act so that such registration statement (as amended) will permit the
disposition (in accordance with the intended methods of disposition specified as
aforesaid) of all of the Registrable Securities for which a demand for
registration has been made under this SECTION 2(A). If the Company so amends a
previously filed registration statement, it will be deemed to have effected a
registration for purposes of this SECTION 2(A).
(b) The Holders delivering such request may distribute the Registrable
Securities covered by such request by means of an underwritten offering or any
other means, as reasonably determined by such Holders (the "Selling Holders").
In connection with any underwritten offering pursuant to a registration
statement filed pursuant to a demand made pursuant to SECTION 2(A), the Selling
Holders of a majority in number of the Registrable Securities to be included in
the registration statement will have the right to select a managing underwriter
or underwriters to administer the offering, which managing underwriter or
underwriters will be reasonably satisfactory to the Company. Notwithstanding
any other provision of this SECTION 2, if the Underwriter advises the Selling
Holders and the Company in writing that marketing factors require a limitation
of the number of shares to be underwritten, then the Company will so advise the
Selling Holders, and the number of shares of Registrable Securities that may be
included in the underwriting will be allocated among all requesting Selling
Holders thereof, in proportion (as nearly as practicable) to the amount of
Registrable Securities then outstanding owned by each such Selling Holder;
provided, however, that the number of shares of Registrable Securities to be
included in such underwriting will not be reduced unless all other securities
are first entirely excluded from the underwriting.
(c) Notwithstanding the foregoing, the Company is obligated to effect
only a registration pursuant to this SECTION 2 if in the twelve (12) months
prior to the date of such request the Company shall not have effected a
registration for the Holder; provided, however, a registration shall not count
as a registration pursuant to this SECTION 2 unless (i) the Selling Holders are
able to register all of the Registrable Securities requested to be included in
such
-3-
<PAGE>
registration; and (ii) the registration has become effective and remained
effective in compliance with the provisions of the Act with respect to the
disposition of all Registrable Securities requested to be registered for a
period not to exceed ninety (90) days or such earlier time as all of the
Registrable Securities have been either (A) disposed of by the Holder pursuant
to a registration statement, or (B) sold pursuant to Rule 144 or otherwise
without compliance with the registration requirements of the Act; and, provided
further, that the Company will pay all registration expenses in connection with
any registration initiated at the request of a Holder to the extent provided
below in SECTION 6.
(d) Notwithstanding the foregoing, if the Company furnishes to the
Selling Holders requesting a registration statement pursuant to SECTION 2(B), a
certificate signed by the President of the Company stating that in the good
faith judgment of the Company, it would be materially detrimental to the Company
and its stockholders for a registration statement to be filed or for sales to
occur under an effective registration statement and it is therefore essential to
defer the filing of or sales under such registration statement, the Company will
have the right to (i) defer taking action with respect to such filing, for a
period of not more than one hundred twenty (120) days after receipt of the
request of the Selling Holders; or (ii) if the registration statement is
effective, request each Holder of securities thereunder not to (and upon receipt
of such request each such Holder agrees not to) make any sales pursuant thereto
for a period not to exceed five (5) days following such request; provided,
however, that during either such period, the Company shall not be entitled to
file any other registration statement relating to the Company's securities
pursuant to any other outstanding registration rights agreement or for any other
secondary offering; and provided further, that the Company shall not have the
right to so defer such action more than once in each case in any twelve (12)
month period and the period of effectiveness in paragraph (c) above shall be
extended for each day sales are suspended pursuant to clause (ii) above.
3. Company Registration. If at any time after the IPO (but without any
--------------------
obligation to do so) the Company proposes to register (including for this
purpose a registration effected by the Company for stockholders other than the
Holders) any of its Common Stock under the Act in connection with the public
offering of such securities solely for cash (other than a registration on Form
S-4 or S-5 relating to a reorganization, sale of assets or business combination
transaction, Form S-8 relating solely to the sale of securities to or by
participants in a Company stock option or other employee benefit plan, or a
registration on any other form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company will, at such
time, promptly give each Holder written notice of such registration no less than
forty-five (45) days prior to the proposed effective date of such registration.
Upon the written request of each Holder given within twenty (20) days after the
mailing of such notice by the Company, the Company will, subject to the
provisions of SECTION 7, cause to be registered under the Act all of the
Registrable Securities that each such Holder has requested to be registered.
The registration expenses of the Holders of the Registrable Securities incurred
pursuant to this SECTION 3 shall be paid by the Company to the extent provided
in SECTION 6 below.
-4-
<PAGE>
4. Obligations of the Company. Whenever required under this Agreement to
--------------------------
effect the registration of any Registrable Securities then outstanding, the
Company will, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, subject to applicable law, keep
such registration statement effective until such time as the Company has filed
and there has been declared effective a Form S-3 registration statement covering
such Registrable Securities and the intended disposition thereof, and in the
case of a Form S-3 registration statement filed pursuant to SECTION 2, to keep
such registration statement effective for the period set forth herein, to the
extent permitted by and subject to applicable law.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of the registration
statement, each amendment and supplement thereto, the prospectus included in
such registration statement, including a preliminary prospectus, in conformity
with the requirements of the Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify by no later than the
effective date of the registration statement the securities covered by such
registration statement under such other securities or Blue Sky laws of such
jurisdictions as will be reasonably requested in writing by the Holders, and
take all other actions which may be reasonably necessary or advisable to enable
the disposition of the Registrable Securities of the Holder in such
jurisdictions covered by such registration statement; provided that the Company
will not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions.
(e) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(f) Use its commercially reasonable efforts to obtain all other
approvals, covenants, exemptions or authorizations from such governmental
agencies or authorities as may be necessary to enable the Holder to consummate
the disposition of such Registrable Securities.
-5-
<PAGE>
(g) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting will also enter into and perform its obligations under such
an agreement.
(h) Use its best efforts to furnish, at the request of the Holders
requesting registration of Registrable Securities pursuant to this Agreement, on
the date that such Registrable Securities are delivered to the underwriters for
sale in connection with a registration pursuant to this Agreement, if such
securities are being sold through underwriters, or, in the case of (ii) below,
if such securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in such an underwritten public offering, addressed to the
underwriters, if any, and to the Holders requesting registration of Registrable
Securities, and (ii) a letter dated such date, from the independent certified
public accountants of the Company, in form and substance as is customarily given
by independent certified public accountants to underwriters in such an
underwritten public offering, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities.
(i) Cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed not later than the effective date of such registration statement, or, if
similar securities are reported on Nasdaq, cause all such Registrable Securities
to be reported on Nasdaq. If such Registrable Securities are not then listed on
a national securities exchange or reported on Nasdaq, use reasonable efforts to
facilitate the listing or reporting of such Registrable Securities on a national
securities exchange or Nasdaq, as the case may be.
(j) Provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement.
(k) Make available for reasonable inspection by any Holder
participating in such registration, any underwriter participating in any
disposition pursuant to such registration statement, any accountant or other
agent retained by MCI on behalf of such Holders or any one counsel selected by
MCI on behalf of such Holders as a group, all financial and other records,
pertinent corporate documents and properties of the Company reasonably
requested, and cause the Company's officers, directors, employees and
independent accountants to supply information reasonably requested by any Holder
or any such underwriter, attorney, accountant or agent in connection with such
registration statement; provided that the Company shall be under no obligation
to disclose proprietary or privileged non-public information that the Company,
in the opinion of the Company's counsel, is not required to be disclosed in such
registration statement or in any prospectus in connection therewith.
(l) Advise the Holders participating in such registration after it
shall receive notice or obtain knowledge thereof, of the issuance of any stop
order by the SEC suspending the
-6-
<PAGE>
effectiveness of such registration statement or the initiation or threatening of
any proceeding for such purpose and promptly use all reasonable efforts to
prevent the issuance of any stop order or to obtain its withdrawal if such stop
order should be issued.
(m) Within a reasonable period prior to the filing of any registration
statement or prospectus, or any amendment or supplement to such registration
statement or prospectus, furnish a copy thereof to the Holders participating in
such registration and, except with respect to any registration pursuant to
SECTION 3, refrain from filing any such registration statement, prospectus,
amendment or supplement to which one counsel, selected by MCI on behalf of such
Holders as a group, shall have reasonably objected to on the grounds that such
document does not comply in all material respects with the requirements of the
Act or the rules and regulations thereunder, unless, in the case of an amendment
or supplement, in the opinion of counsel for the Company the filing of such
amendment or supplement is reasonably necessary to protect the Company from any
liabilities under the applicable federal or state law and such filing will not
violate applicable laws.
(n) Otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve (12) months beginning with the first day of the
Company's first full fiscal quarter after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of SECTION
11(A) of the Act and Rule 158 thereunder.
5. Furnishing of Information. It will be a condition precedent to the
-------------------------
obligations of the Company to take any action pursuant to this Agreement with
respect to the Registrable Securities of any Selling Holder that such Holder
will furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as will be required to effect the registration of such Holder's Registrable
Securities.
6. Expenses of Registration. The Company shall bear all expenses other
------------------------
than Selling Holder Expenses (as defined below) incurred in any Registration,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the NASD), messenger and delivery expenses,
fees and expenses of complying with federal and state securities and Blue Sky
laws, printing expenses and fees and disbursements of the independent certified
public accountants (including for any special audits) and fees for the Company's
counsel. Each Selling Holder shall bear his or her equitable share of any
Selling Holder Expenses. "Selling Holder Expenses" shall consist of (i) Selling
Holder's legal, accounting, consulting and advisory fees and costs and (ii) any
proportionate share of brokerage or underwriting fees, expenses or commissions.
7. Underwriting Requirements. In connection with any offering involving
-------------------------
an underwriting of shares of the Company's Capital Stock, the Company will not
be required under SECTION 3 to include any of the Holders' securities in such
underwriting unless they accept the
-7-
<PAGE>
terms of the underwriting as agreed upon between the Company and the
underwriters selected by the Company (or by other persons entitled to select the
underwriters). If the underwriter delivers a written opinion to the Selling
Holders and the Company that the total amount of securities, including
Registrable Securities, requested by such Selling Holders to be included in such
offering exceeds the amount of securities to be sold other than by the Company
that the underwriters determine in their sole reasonable discretion is
compatible with the success of the offering, then the Company will be required
to include in the offering only that number of Registrable Securities, if any,
and securities of other stockholders which the underwriters determine in their
sole reasonable discretion will not jeopardize the success of the offering (the
securities so included to be apportioned pro rata among all selling stockholders
according to the total number of registrable securities owned by each selling
stockholder or in such other proportions as will mutually be agreed to by such
selling stockholders); provided, however, no shares being sold by a stockholder
exercising a demand registration right similar to that granted in SECTION 2
shall be required to be excluded from such offering unless all other securities
are first entirely excluded from the underwriting.
8. Indemnification. If any Registrable Securities are included in a
---------------
registration statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, their respective partners, officers, employees,
directors and agents, any underwriter (as defined in the Act) for such Holder
and each person, if any, who controls such Holder or underwriter ("Controlling
Person") within the meaning of the Act or the Securities Exchange Act of 1934,
as amended (the "1934 Act"), against any losses, claims, damages, or liabilities
(joint or several) to which they may become subject under the Act, or the 1934
Act, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in (A) such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, or (B) any
application or other document, or amendment or supplement thereto, executed by
the Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify the Registrable Securities
under the Blue Sky or securities thereof or filed with the SEC or any securities
association or securities exchange (each an "Application"), or (ii) the omission
or alleged omission to state in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, or any Application a material fact required to be stated
therein, or necessary to make the statements therein not misleading; and the
Company will pay to each such Holder, underwriter or Controlling Person, any
legal or other expenses reasonably incurred by them (as incurred) in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
SUBSECTION 8(A) will not apply to amounts paid in settlement of any such loss,
claim, damage, liability, or action if such settlement is effected without the
consent of the Company (which consent will not be unreasonably withheld or
delayed), nor will the Company be liable in any such case to any Holder for any
such loss, claim,
-8-
<PAGE>
damage, liability, or action to the extent that it arises out of or is based
upon a Violation (other than alleged violations) as ultimately determined by a
final judgment of a court of competent jurisdiction which occurs in reliance
upon and in conformity with written information furnished expressly for use in
connection with such registration by such Holder.
(b) To the extent permitted by law, each Selling Holder will indemnify
and hold harmless the Company, each of its directors, each of its officers and
agents who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act or the 1934 Act, any
underwriter, any other Holder selling securities in such registration statement
and any Controlling Person of any such underwriter or other Holder, against any
losses, claims, damages or liabilities (joint or several) to which any of the
foregoing persons may become subject under the Act, or the 1934 Act, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any Violation (other than alleged violations), in
each case to the extent (and only to the extent) that such Violation consists of
omission of material facts or material falsity in reliance upon and in
conformity with written information furnished by such Holder expressly for use
in such registration statement as ultimately determined by a final judgment of a
court of competent jurisdiction; and each such Holder will pay any legal or
other expenses reasonably incurred by any person intended to be indemnified
pursuant to this SUBSECTION 8(B) (as incurred), in connection with investigating
or defending any such loss, claim, damage, liability, or action; provided,
however, that the indemnity agreement contained in this SUBSECTION 8(B) will not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the Holder,
which consent will not be unreasonably withheld or delayed; and, provided
further, that in no event will any indemnity under this SUBSECTION 8(B) exceed
the net proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this SECTION
8 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this SECTION 8, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party will have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) will have the right to retain one separate counsel,
with the reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party is inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, will relieve such
indemnifying party of any liability to the indemnified party under this SECTION
8, but the omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified party
otherwise than under this SECTION 8. The payments required by this SECTION 8
-9-
<PAGE>
will be made periodically throughout the course of investigation or defense, as
and when bills are received or expenses incurred, provided that the indemnified
party seeking reimbursement of expenses hereunder undertakes in a writing
reasonably satisfactory to the indemnifying party, to repay all amounts
previously paid over to the indemnified party if it is ultimately determined (by
a final judgment of a court of competent jurisdiction) that such party is not
entitled to indemnification hereunder.
(d) If the indemnification provided for in this SECTION 8 is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the indemnifying party, in lieu of indemnifying such indemnified party to
this Agreement, will contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party will be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement will
control.
(f) The obligations of the Company and Holders under this SECTION 8
will survive the completion of any offering of Registrable Securities in a
registration statement under this Agreement, and otherwise.
9. Reports Under Securities Exchange Act of 1934. With a view to making
---------------------------------------------
available to the Holders the benefits of Rule 144 promulgated under the Act and
any other rule or regulation of the SEC that may at any time permit a Holder to
sell securities of the Company to the public without registration or pursuant to
a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times after ninety (90) days after
the effective date of the first registration statement filed by the Company for
the offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934 Act; and
-10-
<PAGE>
(c) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon written request (i) a written statement by the
Company that it has complied in all material respects with the reporting
requirements of Rule 144 (at any time after ninety (90) days after the effective
date of the first registration statement filed by the Company), the Act and the
1934 Act (at any time after it has become subject to such reporting
requirements), or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of
the most recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company with the SEC, and (iii) such other
information as may be reasonably requested in availing any Holder of any rule or
regulation of the SEC which permits the selling of any such securities without
registration or pursuant to such form.
10. Assignment of Registration Rights. The rights to cause the Company to
---------------------------------
register Registrable Securities pursuant to this Agreement may be assigned (but
only with all related obligations) by a Holder to transferee(s) or assignee(s)
of such securities. The Holder shall furnish the Company within a reasonable
time after such transfer, with written notice of the name and address of such
transferee(s) or assignee(s) and the securities with respect to which such
registration rights are being assigned. Notwithstanding any assignment by a
Holder of its registration and other rights hereunder in connection with its
transfer of Registrable Securities, such Holder shall retain all such
registration and other rights under this Agreement in respect of those
Registrable Securities that it continues to hold.
11. No Inconsistent Agreements; Limitations on Subsequent Registration
-------------------------- --------------------------------------
Rights.
- ------
(a) The Company represents and warranties to MCI that it is not a
party to any agreement with respect to its securities which would prohibit it
from fully performing its obligations hereunder.
(b) From and after the date of this Agreement, if the Company enters
into any agreement granting any person rights (i) to demand that the Company
register securities of the Company under the Act or (ii) to have securities of
the Company included in a registration statement, which are more favorable than
these registration rights provisions in any regard (including, without
limitation, those relating to the expenses to be borne by the Company), the
rights granted herein shall be deemed to be amended to include such particular
more favorable rights in lieu of the corresponding rights set forth herein.
12. "Market Stand-Off" Agreement. Each Holder hereby agrees that if an
---------------------------
offering is made by means of a proposed underwriting, during the period of
duration specified by the Company and an underwriter of the Common Stock or
other securities of the Company, following the effective date of a registration
statement of the Company filed under the Act, it will not, to the extent
requested by such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of any securities of the
Company held by it at any time during such period (except the Registrable
Securities included in such registration) not to exceed one hundred eighty
-11-
<PAGE>
(180) days in the case of the Company's IPO and not to exceed ninety (90) days
in the case of all subsequent registration statements for underwritten
offerings; provided, however, that all officers and directors of the Company and
all other persons with registration rights (whether or not pursuant to this
Agreement) enter into similar agreements; and provided further, however, that
notwithstanding the foregoing provision, the Holders shall be afforded at least
ninety (90) days during a twelve (12) month period in which they shall not be
subject to the restrictions of this SECTION 12, and in any event, the Holders
may sell, transfer or otherwise dispose of the Warrants if the purchaser or
donee thereof agrees to be bound by this SECTION 12 in respect of securities
issuable upon exercise of the Warrants.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
13. Adjustments Affecting Registrable Securities. The Company will not
--------------------------------------------
take any action, or permit any change to occur, with respect to its securities
which would adversely affect the ability of the Holders to include Registrable
Securities in a registration undertaken pursuant hereto. However, nothing in
this Agreement shall limit the Company's ability to register, offer and sell
securities.
14. Amendments. The approval by each of (i) the Company and (ii) Holders
----------
of a majority of the Registrable Securities then outstanding hereunder shall be
required to amend, modify or waive the provisions of this Agreement.
15. Notices. All notices, demands, requests, or other communications
-------
which may be or are required to be given or made by any party to any other party
pursuant to this Agreement shall be in writing and shall be hand delivered, or
mailed first-class registered or certified mail, return receipt requested,
postage pre-paid, or delivered by overnight air courier, or transmitted by
facsimile transmission addressed as follows:
If to MCI:
MCI Telecommunications Corporation
1801 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Attn: Chief Financial Officer
Fax: 202-887-2348
with a copy to:
MCI Communications Corporation
1801 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
-12-
<PAGE>
Attn: General Counsel
Fax: 202-887-3353
If to Iterated:
Iterated Systems, Inc.
3525 Piedmont Road
Suite 600
Atlanta, Georgia 30305
Attention: President and CEO
Fax: 404-264-8300
with a copy to:
Morris Manning & Martin, LLP
3343 Peachtree Road, N.E.
Suite 1600
Atlanta, Georgia 30326
Attention: John C. Yates, Esq.
Fax: 404-365-9532
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be given, served or sent. Each
notice, demand, request or communication which shall be mailed, delivered, or
transmitted in the manner described above shall be deemed sufficiently given,
served, sent or received for all purposes as such time as it is delivered to the
addressees (with the return receipt, the facsimile confirmed receipt, the
delivery receipt or affidavit of messenger being deemed conclusive evidence of
such delivery) or at such time as delivery is refused by the addressee upon
presentation.
17. Waiver. Any term or condition of this Agreement may be waived at any
------
time by the party that is entitled to the benefit thereof, but no such waiver
shall be effective unless set forth in a written instrument duly executed by or
on behalf of the party waiving such term or condition. No waiver by any party
of any term or condition of this Agreement, in any one or more instances, shall
be deemed to be or construed as a waiver of the same or any other term or
condition of this Agreement on any future occasion. All remedies, either under
this Agreement or by law or otherwise afforded, will be cumulative and not
alternative.
18. Headings. The headings used in this Agreement have been inserted for
--------
convenience of reference only and do not define or limit the provisions hereof.
19. Severability; Reformation. Should any one or more of the provisions
-------------------------
of this Agreement or of any agreement entered into pursuant to this Agreement be
determined by an arbitrator or court of proper jurisdiction to be illegal or
unenforceable, then such illegal or unenforceable provision shall be modified by
the proper court or arbitrator to the extent
-13-
<PAGE>
necessary and possible to make such provision enforceable, and such modified
provision and all other provisions of this Agreement and of each other agreement
entered into pursuant to this Agreement
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
-14-
<PAGE>
shall be given effect separately from the provision or portion thereof
determined to be illegal or unenforceable and shall not be affected thereby.
20. Governing Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New York, without giving effect to the
conflict of laws provisions thereof.
21. Counterparts. To facilitate execution, this Agreement may be executed
-------------
in counterparts; and it shall not be necessary that the signatures of, or on
behalf of, each party, or the signatures of all persons required to bind a
party, appear on each counterpart; but it shall be sufficient that the signature
of, or on behalf of, each party, or the signatures of the persons required to
bind any party, appear on the counterparts. All counterparts shall collectively
constitute a single agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
ITERATED SYSTEMS, INC.
By:__________________________
Name:
Title:
MCI TELECOMMUNICATIONS CORPORATION
By:__________________________
Name:
Title:
-15-
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,547,429
<SECURITIES> 8,640,000
<RECEIVABLES> 222,393
<ALLOWANCES> (3,668)
<INVENTORY> 5,309
<CURRENT-ASSETS> 10,614,878
<PP&E> 4,600,372
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<CURRENT-LIABILITIES> 877,715
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0
0
<COMMON> 130,731
<OTHER-SE> 10,558,287
<TOTAL-LIABILITY-AND-EQUITY> 11,460,346
<SALES> 904
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<INCOME-TAX> 4,000
<INCOME-CONTINUING> (7,982,960)
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