-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AeW8fHt4AaMIw5bdeKFDrZYIYJ37LX0MDTKSIazefbq7JgCvFHzGG5gDO2RPlZ6c sXxk+ldIhJfy1Wuzmby/cg== 0000950123-01-500428.txt : 20010402 0000950123-01-500428.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950123-01-500428 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIEWPOINT CORP/NY/ CENTRAL INDEX KEY: 0000919794 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 954102687 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27168 FILM NUMBER: 1587413 BUSINESS ADDRESS: STREET 1: 498 SEVENTH AVE CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 8055666200 MAIL ADDRESS: STREET 1: 6303 CARPINTERIA AVE CITY: CARPINTERIA STATE: CA ZIP: 93013 FORMER COMPANY: FORMER CONFORMED NAME: METACREATIONS CORP DATE OF NAME CHANGE: 19970529 10-K 1 y46903e10-k.txt VIEWPOINT CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER 0-27168 VIEWPOINT CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-4102687 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
498 SEVENTH AVENUE, SUITE 1810, NEW YORK, NY 10018 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (212) 201-0800 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE 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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ] As of March 16, 2001, there were outstanding 38,187,658 shares of the registrant's Common Stock, $0.001 par value, which is the only outstanding class of common or voting stock of the registrant. As of that date, the aggregate market value of the shares of Common Stock held by non-affiliates, based upon the last sale price of the shares as reported on the NASDAQ National Market System on such date, was approximately $96,789,384. DOCUMENTS INCORPORATED BY REFERENCE: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 VIEWPOINT CORPORATION FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 12 Item 3. Legal Proceedings........................................... 13 Item 4. Submission of Matters to a Vote of Security Holders......... 13 PART II Item 5. Market for Registrant's Common Equity and Related 14 Stockholder Matters....................................... Item 6. Selected Financial Data..................................... 15 Item Management's Discussion and Analysis of Financial Condition 16 7..... and Results of Operations................................. Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 22 Item 8. Financial Statements and Supplementary Data................. 22 Item 9. Changes in and Disagreements with Accountants on Accounting 49 and Financial Disclosure.................................. PART III Item 10. Directors and Executive Officers of the Registrant.......... 57 Item 11. Executive Compensation...................................... 59 Item 12. Security Ownership of Certain Beneficial Owners and 62 Management................................................ Item 13. Certain Relationships and Related Transactions.............. 63 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 66 8-K.......................................................
1 3 PART I This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially from those expressed or forecasted in any such forward- looking statements as a result of certain factors, including those set forth in "Additional Factors Affecting Future Results." In connection with forward-looking statements which appear in these disclosures, investors should carefully review the factors set forth in this Form 10-K under "Additional Factors Affecting Future Results." ITEM 1. BUSINESS Viewpoint Corporation, a Delaware corporation ("Viewpoint" or the "Company"), provides e-commerce visualization solutions for the World Wide Web (the "web" or the "internet"). Our technology, which we call Viewpoint Experience Technology, is designed to make the use of rich media on the web, particularly photo-realistic 3D, practical and widespread. VIEWPOINT EXPERIENCE TECHNOLOGY Viewpoint Experience Technology allows websites to integrate numerous rich media types seamlessly on regular web pages. These media types, particularly interactive 3D, can add dimension, animation, realistic color, shadows and real-time reflections, movement and robust interactivity to formerly flat web images. It enables users to better access and interact with images, rotate them, change colors and patterns, all while experiencing extraordinary visual dimension and accuracy. Viewpoint Experience Technology serves up these enhanced product images so that every user, even those on narrowband connections, can access and interact with them easily. A key component of the Viewpoint Experience is the Viewpoint Media Player, which allows the seamless integration of all major media types, including Viewpoint Experience Technology, photographic panoramas, audio, object movies, vector text and more. With the Viewpoint Media Player, internet end-users now have easy access to a new, richer yet totally accessible media format. While Viewpoint Experience Technology offers significant advantages to all web users and website operators, we believe its most promising immediate commercial application is as a means to make web marketing, branding and commerce more effective. VIEWPOINT PROFESSIONAL SERVICES Viewpoint provides fee-based professional services for implementing e-commerce visualization solutions. Our strategic, creative and consulting services bring together our team of experts in 3D technology, content creation and technology implementation to identify the ideal Viewpoint solution for each client's unique needs and to ensure the timely, successful implementation of that solution. Our professional services group uses Viewpoint Experience Technology, as well as a spectrum of other tools and technology to create enhanced multimedia 3D images for the web. Our professional services group provides the support our clients need to implement 3D product and brand visualization on their websites or in their advertising. In addition to providing web services, our professional services group also develops realistic digital effects and animation for the entertainment and game industries, for film producers, and for major brands, advertising agencies and commercial production houses. Our custom 3D models have had starring and supporting roles in numerous feature films, including Dungeons & Dragons, What Lies Beneath, The World is Not Enough, 2 4 ANTZ, Star Trek, Insurrection, Independence Day, Air Force One and Godzilla. Viewpoint's work can also be seen in: - game titles such as Danger Girls, Need for Speed, Interstate '82, Pandora's Box and Gauntlet: Dark Legends; - television programs such as Star Trek Voyager and Jonny Quest; - television advertisements for Toyota, Dodge, Taco Bell and Nike; and - Viewpoint Experience Technology-enabled websites for companies such as The Sharper Image, Remington, Sony, eluxury.com and Hewlett-Packard. MARKET OPPORTUNITY The number of internet users has increased rapidly over the past several years. The Company believes that this growth will result in increasing expenditures for online advertising, branding, and e-commerce, and that such communications will increasingly utilize rich media formats. Forrester Research projects that digital marketing campaigns that integrate online advertising, promotions and e-mail strategies will reach $63 billion by 2005, a 42% compound annual growth rate over the $11 billion spent in 2000. Jupiter Communications projects that by 2005, almost 30 percent of online advertising will contain rich media content. Jupiter Communications also estimates that online retail spending will reach $118 billion by 2005, up from $24 billion in 2000. Similarly, Forrester Research estimates that the e-commerce services market will increase from $10.6 billion in 1999 to $64.8 billion in 2003. The Company believes it is well positioned to capitalize on this trend to rich media marketing. Viewpoint Experience Technology helps engage the customer's attention and effectively communicate brand attributes and product features and benefits. The Company believes that its Viewpoint Experience Technology meets the market's requirements for: - Effective merchandising to build brand awareness and drive sales. - Realistic product interaction. - Interoperability of all other media types required for compelling product displays (including, for example, 3D, vector graphics, sound and animation). - Excellent compression and streaming delivery at narrowband and broadband data rates. - Client-side data logging of the use of downloaded rich media. VIEWPOINT'S BUSINESS MODEL The Company's business model differs from that of many other companies that have developed website design and content-creation software for sale or license to a target market of internet professionals -- that is, website developers, interactive agencies, solutions integrators, application service providers (ASPs) and content developers, as well as professionals working in-house at e-merchants and other website owners. Instead of seeking our revenues primarily by selling tools to internet professionals -- a relatively small market -- the Company has sought to primarily target the much larger market of e-commerce merchants and other website owners. The Company's licensing strategy focuses on earning fees by providing content providers with the ability to broadcast web content in the Viewpoint format. Viewpoint's technology is designed so that content in the Viewpoint format that is broadcast or otherwise distributed without a valid "key" will be spoiled by a "watermarking" image. The Company offers these keys through a variety of broadcast license arrangements that are tailored to the specific needs of different clients. Many licenses are time-based and are tied to a specific website address, permitting a client to broadcast unlimited Viewpoint content for a limited period of time and from a single website address. The Company also offers other types of broadcast licenses to clients who wish to broadcast from multiple websites or for an unlimited period of time, to "narrowcast" only to a 3 5 local area network or intranet, or to distribute content by means of CDs, DVDs and other portable storage media. The Company believes that this revenue model, if successful, should produce a recurring stream of revenues from existing clients and the opportunity to scale income substantially as new customers are acquired. A cornerstone of our strategy has been to pursue assignments to design websites for the world's best brand names in each of several important product categories. Success in this effort has the double benefit of driving those companies' competitors to our technology, and of gaining exposure for Viewpoint from these popular, much-marketed sites. The Company has been successful in securing significant licensing transactions with many high-profile companies such as Sony, Nike, Eddie Bauer, The Sharper Image, and others. Another key aspect of our approach is an "open tools" philosophy. The Company believes that the long-term success of its platform will be fueled by having the most popular content creation tools natively output in the Viewpoint format, rather than requiring design professionals to use Viewpoint's own proprietary toolset. This approach also eliminates much of the very large cost associated with development and support of proprietary commercial toolsets. Another advantage of this strategy is that software tools companies that do incorporate Viewpoint functionality, such as Adobe and Autodesk, have natural incentives to promote the Viewpoint platform. More than 30 companies are developing or have developed support for the Viewpoint format within their tools. In addition, we make available on our website, without charge, the core software necessary to develop Viewpoint content, as well as extensive tutorials and related materials. The Company further believes that its professional services group forms an integral part of its overall strategy. Professional services provide a significant revenue opportunity, through the sale of complete solutions comprising technology and content creation services to customers desiring a single vendor solution. At the same time, the group increases our ability to sell broadcast licenses, by enabling us to offer Viewpoint content to clients who are impressed by the advantages of Viewpoint Experience Technology but who do not wish to create Viewpoint content themselves. Also, the group's work keeps us on the cutting-edge of the industry, giving us hands-on experience with the design and development problems faced by our own clients, and enabling us to provide thorough, up-to-date training for other industry professionals. While we believe our strategy of focusing on broadcast licensing fees and professional services is the right one, it is a new business model for the Company. The majority of the Company's revenues from continuing operations have historically been from strategic partners. Specifically, revenues from the National Center for Missing and Exploited Children and Computer Associates accounted for 26% and 14% of total revenues, respectively, in 2000; revenues from Intel and Computer Associates accounted for 49% and 39% of total revenues, respectively, in 1999; and revenues from Intel, Kodak and Minolta accounted for 66%, 15% and 15% of total revenues, respectively, in 1998. The Company's decision to de-emphasize these one-time technology licenses, in favor of implementing the current broadcast licensing model, was made at the end of March 2000, and there can be no assurance that our new strategy will prove to be successful. STRATEGIC ALLIANCES Forging strategic alliances with a wide range of companies in our own and related industries is a principal engine of our expected future growth. These alliances have taken a number of forms. The Company has entered into several marketing, distribution and licensing agreements, with companies such as AOL, Adobe and Computer Associates, to obtain wider distribution of the Viewpoint Media Player and to leverage these companies' large sales forces. The Company will continue to pursue such transactions, especially where distribution and indirect sales leverage can be gained. The Company also aggressively pursues alliances with interactive agencies, internet professionals and traditional advertising agencies, who already have strong relationships with website owners. In this way, the Company believes it can accelerate access to key target markets. As part of a value added reseller (VAR) relationship with these intermediaries, we generally provide them with software tools, including the Company's proprietary 3D capture technologies, as well as with training and support, and with financial 4 6 incentives to evangelize for Viewpoint Experience Technology. Our VAR partners are entitled to a reseller commission for each broadcast license that they place. In effect, these VARs enable us to leverage our strategic partners' relationships as an indirect sales force while minimizing our own sales and marketing expenses. The following table lists some of the internet professionals and Independent Software Vendors (ISVs) with whom we have formed alliances to date: INTERACTIVE AGENCIES Design Media FCBi Fry Multimedia Grey Interactive Impossible, Inc. Organic Rare Medium Razorfish rp interactive Symetri SOLUTIONS INTEGRATORS AND ASPS Computer Associates Cybelius IP Technologies Kusp Limited Reality Buy CONTENT DEVELOPERS e-Vox SIA Sistemas SOFTWARE VENDORS Adobe Systems, Inc. Autodesk, Inc. C3D Imaging Curious Labs egi.sys AG Internet Pictures Corporation INUS Technology Inc. Okino Computer Graphics Raindrop Geomagic Right Hemisphere Softimage SolidWorks Testarossa Think 3 COMPETITION The Company's current competitors include Cycore AB (Cult3D); IBM Corporation (Hotmedia); Macromedia, Inc.; Shells Interactive Ltd. (3D Dreams -- in conjunction with Macromedia, Inc.'s Shockwave); Pulse Entertainment; Shout 3D; Virtue 3D, Inc. (Virtuoso); and Rich FX. Some of the Company's competitors have longer operating histories and significantly greater financial, management, technology, development, sales, marketing and other resources than the Company. As the Company competes with larger competitors across a broader range of products and technologies, the Company may face increasing competition from such companies. If these or other competitors develop products, technologies or solutions that offer significant performance, price or other advantages over those of the Company, the Company's business would be harmed. A variety of other possible actions by the Company's competitors could also have a material adverse effect on the Company's business, including increased promotion or the introduction of new or enhanced products and technologies. Moreover, new personal computer platforms and operating systems may provide new entrants with opportunities to obtain a substantial market share in the Company's markets. The Company's competitors may be able to develop products or technologies comparable or superior to those of the Company, or may be able to develop new products or technologies more quickly. The Company also faces competition from developers of personal computer operating systems such as Microsoft and Apple 5 7 Computer, Inc., as well as from open-source operating systems such as Linux. These operating systems may incorporate functions that could be superior to or incompatible with the Company's products and technologies. Such competition would adversely affect the Company's business. The Company believes that Viewpoint Experience Technology offers significant advantages over many of our competitors' products: - GREATER VISUAL REALISM -- We believe that 3D images created in the Viewpoint format offer higher quality and a more true-to-life online experience than competitors' formats. - INTERACTIVITY -- Viewpoint Experience Technology lets a customer interact with our clients' brands and examine their products in ways not possible with our competitors' formats. Viewpoint lets consumers pick up/put down, zoom in/out, see how parts move, add/remove components, turn products on/off, change colors/fabrics/textures. - NARROWBAND FRIENDLY -- Viewpoint's proprietary compression technology, TrixelsNT, greatly cuts download time of 3D objects to almost what is expected from ordinary 2D images, so that even consumers with slow connections to the internet can see 3D images quickly and can manipulate them in real time. - SEAMLESS INTEGRATION -- Viewpoint integrates seamlessly with other rich media types like IPIX Panoramas, vector text, audio and more, enabling clients to create more compelling web experiences. - NO POP-UP WINDOWS -- Viewpoint's transparent "windowless rendering" allows 3D images to share space on the page with text, graphics, and even buttons and hyperlinks. - AUTOMATIC UPDATES -- Once users download the Viewpoint Media Player, they automatically receive all releases and upgrades. Because new releases and additional functionality are sent automatically, in the background, users' online experience is never interrupted. PRODUCT DEVELOPMENT Continuous development of new products and enhancement of our existing products is critical to our success. The Company's principal current product development efforts are focused on the development of Viewpoint and other complementary technologies. From time to time, the Company may also acquire basic software technologies that it considers complementary to its Viewpoint solution. The Company's growth will be dependent upon the introduction of new products, technologies and services and future enhancements to existing products and technologies. Any such new products, technologies or enhancements may not achieve market acceptance. In addition, the Company has in the past experienced delays in the development of new products, technologies and enhancements, and such delays may occur in the future. If the Company were unable, due to resource constraints or technological or other reasons, to develop and introduce such products, technologies or enhancements in a timely manner, this inability could have a material adverse effect on the Company's business. In particular, the introductions of new products, technologies and enhancements, are subject to the risk of development delays. Any delay in the availability of new products, technologies and enhancements could have a material adverse effect on the Company's business. The Company's research and development expenses were approximately $6.3 million, $2.7 million, and $1.6 million, for 2000, 1999, and 1998, respectively. The Company anticipates the hiring of additional engineers in connection with its continued product development efforts, which will result in increased research and development expenses. INTELLECTUAL PROPERTY The Company regards its patents, copyrights, service marks, trademarks, trade dress, trade secrets, propriety technology and similar intellectual property as critical to its success, and relies on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with its 6 8 employees, partners, customers and others to protect its proprietary rights. The Company has applied for the registration of certain of its trademarks and service marks in the United States and internationally. In addition, the Company has filed U.S. and international patent applications covering certain of its proprietary technology. Effective trademark, service mark, copyright, patent and trade secret protection may not be available in every country in which the Company's products and services are made available online. The Company has licensed in the past, and expects that it may license in the future, certain of its proprietary rights, such as patents, trademarks, technology or copyrighted material, to third parties. EMPLOYEES As of March 15, 2001, Viewpoint Corporation had 228 full time employees, including 62 in sales and marketing; 93 in creative services; 41 in research, development and quality assurance; and 32 in administration. The Company also employs independent contractors. The employees and the Company are not parties to any collective bargaining agreements, and the Company believes that its relationships with its employees are good. ADDITIONAL FACTORS AFFECTING FUTURE RESULTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially from those expressed or forecasted in any such forward- looking statements as a result of certain factors, including those listed below. Shares of the Company's common stock are speculative in nature and involve a high degree of risk. The following risk factors should be considered carefully. The risks described below are not the only ones facing the Company. Many factors could cause our results to be different, including the following risk factors and other risks described in this document. If any of the following risks occur, our business would likely be adversely affected and the trading price of the Company's common stock could decline. This could result in a loss of all or part of your investment. WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS DIFFICULT We have been developing e-commerce visualization solutions for the Web since our acquisition of Real Time Geometry Corp. in December 1996. Additionally, the e-commerce market is relatively new and evolving rapidly. Accordingly, we have a relatively short operating history in this market upon which you can evaluate our business and prospects. You should consider our prospects in light of the risks and difficulties frequently encountered by early stage online companies, including, but not limited to: - We have an evolving and unpredictable business model; - We face intense competition; - We must establish and develop broad market acceptance of our products, technologies and services; - We must continue to develop new products, technologies and enhancements; - We must respond quickly to rapidly changing market developments, customer demands and industry standards; - We must attract, train and retain qualified employees; and - We must effectively manage our growth. If we are not successful in addressing these risks and challenges, we will not be able to grow our business, compete effectively or achieve profitability. 7 9 WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE We have had significant quarterly and annual operating losses since our inception, and as of December 31, 2000, we had an accumulated deficit of approximately $145,814,000. We have recently changed the focus of our business from prepackaged graphics software products to e-commerce visualization solutions. We believe that, despite this change in our strategic focus, we will continue to incur operating losses for the foreseeable future. OUR FUTURE REVENUES MAY BE UNPREDICTABLE AND MAY CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE As a result of our limited operating history and the rapidly changing nature of the markets in which we compete, we may be unable to forecast our quarterly and annual revenues accurately. If our future quarterly operating results fall below the expectations of securities analysts or investors, the trading price of our common stock will likely drop. Our quarterly operating results have fluctuated significantly in the past and may continue to fluctuate in the future as a result of many factors, including: - Ability to retain existing customers, attract new customers, and satisfy our customers' demands; - Market acceptance of our products, technologies and services; - Introduction or enhancement of new products, technologies or services by us or our competitors; - Changes in prices for our products, technologies and services or our competitors' products, technologies and services; - Changes in usage of the Internet and online services and consumer acceptance of the Internet and e-commerce; - Costs of litigation and intellectual property protection; - Growth in Internet use; - Emergence of new competition; - Varying operating costs and capital expenditures related to the expansion of our business operations and infrastructure; and - Technical difficulties with our technologies. Based on these factors, we believe our revenues, expenses and operating results could vary significantly in the future and period-to-period comparisons should not be relied upon as indications of future results. Our staffing and other operating expenses are based in large part on anticipated revenues. It would be difficult for us to adjust our spending to compensate for any unexpected shortfall. If we are unable to reduce our spending following any such shortfall, our results of operations would be adversely affected. WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS We expect that our cash on hand, cash equivalents, marketable securities and short-term investments will meet our working capital and capital expenditure needs for at least the next 12 months. After that time, we may need to raise additional funds and we cannot be certain that we would be able to obtain additional financing on favorable terms, if at all. If we cannot raise funds, if needed, on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could have a material adverse effect on our business, operating results and financial condition. 8 10 OUR STOCK PRICE IS VOLATILE AND MAY CONTINUE TO FLUCTUATE IN THE FUTURE The market price of our common stock has fluctuated significantly in the past. The price at which our common stock will trade in the future will depend on a number of factors including: - Our historical and anticipated operating results; - General market and economic conditions; - Our announcement of new products, technologies or services; - Actual or anticipated fluctuations in our operating results; and - Developments regarding our products, technologies or services, or those of our competitors. In addition, the stock market has experienced extreme price and volume fluctuations in recent months. This volatility has had a substantial effect on our stock price, as well as the stock prices of other software companies, particularly Internet companies. These broad market and industry fluctuations may adversely affect the market price of our common stock. As a result, the market price of our common stock may continue to fluctuate. Also, securities class action litigation has often been brought against companies following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources, which could have a material adverse effect on our business, operating results and financial condition. IF THE INTERNET DOES NOT CONTINUE TO EXPAND AS A WIDESPREAD COMMERCE MEDIUM, DEMAND FOR OUR PRODUCTS AND TECHNOLOGIES MAY DECLINE SIGNIFICANTLY The market for our products, technologies and services is new and evolving rapidly. Growth in this market depends on increased use of the Internet for e-commerce. If the rate of adoption of the Internet as a method for e-commerce slows, the market for our products, technologies and services may not grow, or may develop more slowly than expected. We believe that increased Internet use may depend on the availability of greater bandwidth or data transmission speeds or on other technological improvements, and we are largely dependent on third party companies to provide or facilitate these improvements. Changes in content delivery methods and emergence of new Internet access devices such as TV set-top boxes could dramatically change the market for streaming media products and services if new delivery methods or devices do not use streaming media or if they provide a more efficient method for transferring data than streaming media. The e-commerce market is relatively new and evolving. Licensing of our products and technologies depends in large part on the development of the Internet as a viable commercial marketplace. There are now substantially more users and much more "traffic" over the Internet than ever before, use of the Internet is growing faster than anticipated, and the technological infrastructure of the Internet may be unable to support the demands placed on it by continued growth. Delays in development or adoption of new technological standards and protocols, or increased government regulation, could also affect Internet use. In addition, issues related to use of the Internet, such as security, reliability, cost, ease of use and quality of service, remain unresolved and may affect the amount of business that is conducted over the Internet. OUR MARKET IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGY, AND IF WE DO NOT RESPOND IN A TIMELY MANNER, OUR PRODUCTS AND TECHNOLOGIES MAY NOT SUCCEED IN THE MARKETPLACE The market for e-commerce visualization is characterized by rapidly changing technology. As a result, our success depends substantially upon our ability to continue to enhance our products and technologies and to develop new products and technologies that meet customers' increasing expectations. Additionally, we may not be successful in developing and marketing enhancements to our existing products and technologies or introducing new products and technologies on a timely basis. Our new or enhanced products and technologies may not succeed in the marketplace. 9 11 We expect our research and development expenditures will increase in the future. If our increased research and development spending is not accompanied by increased revenues, our business would be harmed. POTENTIAL DELAYS IN PRODUCT RELEASES COULD HARM OUR BUSINESS We also depend upon internal efforts for the development of new products, technologies and enhancements. In the past, we have had delays in the development of new products, technologies and enhancements. We may experience similar delays in the future, which would harm our business. UNDETECTED ERRORS IN OUR PRODUCTS AND TECHNOLOGIES COULD RESULT IN ADVERSE PUBLICITY, REDUCED MARKET ACCEPTANCE OR LAWSUITS BY CUSTOMERS We offer complex software products and technologies, which may contain undetected errors. If errors are found in our products or technologies after we have commercially released them, we could likely experience adverse publicity, reduced market acceptance or lawsuits by customers. This would adversely affect our business. IN ORDER TO INCREASE MARKET AWARENESS OF OUR PRODUCTS AND GENERATE INCREASED REVENUE WE NEED TO EXPAND OUR SALES AND MARKETING CAPABILITIES We must expand our sales and marketing operations to increase market awareness of our products and generate increased revenue. We cannot be certain that we will be successful in these efforts. In addition, market acceptance of these and future products will depend on continued market development for Internet products and services and the commercial adoption of standards on which our Viewpoint technology products are based. We have recently expanded our sales force and plan to hire additional personnel. Our products and services require a sophisticated sales effort targeted at the senior management of our prospective clients. New hires will require training and take time to achieve full productivity. We cannot be certain that our recent hires will become as productive as necessary or that we will be able to hire enough qualified individuals or retain existing employees in the future. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS Our success and ability to compete partly depend on the uniqueness or value of our products and technologies. We rely on a combination of copyright, trademark, patent, trade secret laws, employee and third-party nondisclosure agreements and exclusive contracts to protect our intellectual and proprietary rights, products, and technologies. Policing unauthorized use of our products and technologies is difficult and the steps we take may not prevent the misappropriation or infringement of technology or proprietary rights. In addition, litigation may be necessary to enforce our intellectual property rights. Such misappropriation or litigation could result in substantial costs and diversion of resources and the potential loss of intellectual property rights, any of which would adversely impair our business. Our products and technologies may be the subject of infringement claims in the future. This could result in costly litigation and could require us to obtain a license to the intellectual property of third parties. We may be unable to obtain licenses from these third parties on favorable terms, if at all. Even if a license is available, we may have to pay substantial royalties to obtain it. If we cannot obtain necessary licenses on reasonable terms, our business would be adversely affected. SECURITY RISKS COULD LIMIT THE GROWTH OF E-COMMERCE AND EXPOSE US TO LITIGATION OR LIABILITY E-commerce depends on the ability to transmit confidential information securely over public networks. Any compromise of our customers' ability to transmit confidential information securely could harm our business. Online transmissions are subject to the following risks, among others: - Encryption and authentication technology may be subject to events or developments that could compromise or breach the security of customer information; 10 12 - A third party could circumvent security measures and misappropriate proprietary information or interrupt operations; - Credit card companies could restrict online credit card transactions; or - Security breaches could damage our or our customers' reputation and expose us to litigation or liability. INCREASING GOVERNMENT REGULATION COULD INCREASE OUR COST OF DOING BUSINESS OR INCREASE OUR LEGAL EXPOSURE In 1999 Congress passed legislation that regulates certain aspects of the Internet, including on-line content, copyright infringement, user privacy, taxation, access charges, liability for third-party activities and jurisdiction. In addition, federal, state, local and foreign governmental organizations have and may continue to enact legislation applicable to the Internet in areas such as content distribution, performance and copying, other copyright issues, network security, encryption, the use of key escrow data, privacy protection, caching of content by server products, electronic authentication or "digital" signatures, illegal or obscene content, access charges and retransmission activities. The applicability to the Internet of existing laws governing issues such as property ownership, content, taxation, defamation and personal privacy is also uncertain. Export or import restrictions, new legislation or regulation or governmental enforcement of existing regulations may limit the growth of the Internet, increase our cost of doing business or increase our legal exposure. In addition, our business may be indirectly affected by our clients who may be subject to such legislation. Increased regulation of the Internet may decrease the growth in the use of the Internet, which could decrease the demand for our services, increase our cost of doing business or otherwise have a material adverse effect on our business, results of operations and financial condition. WE RECENTLY ACQUIRED VIEWPOINT DIGITAL, INC. AND MAY NEED TO ENTER INTO OTHER BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES WHICH COULD BE DIFFICULT TO INTEGRATE AND MAY DISRUPT OUR BUSINESS On September 8, 2000, we acquired Viewpoint Digital, Inc., as described in footnote 1 to the financial statements herein. In addition, we may continue to expand our operations or market presence by entering into other business combinations, investments, joint ventures or other strategic alliances with other companies. These transactions create risks such as: - Difficulty assimilating the operations, technology and personnel of the combined companies; - Disruption of our ongoing business; - Problems retaining key technical and managerial personnel; - Expenses associated with amortization of goodwill and other purchased intangible assets; - Additional operating losses and expenses of acquired businesses; and - Impairment of relationships with existing employees, customers and business partners. If the Viewpoint Digital acquisition or such other business combinations and strategic alliances are not successful in addressing these risks, our business would be adversely affected. THE LOSS OF ANY OF OUR KEY PERSONNEL WOULD HARM OUR BUSINESS We depend on the continued employment of our senior executive officers and other key management personnel. We do not have any long-term employment agreements (other than an employment agreement with Jeffrey Kaplan, CFO, for a term of 3 years) with any of our key personnel, and we do not have "key person" life insurance policies. If any of our senior officers or other key employees leave our company and are not adequately replaced, our business would be adversely affected. 11 13 OUR REVENUES COULD BE NEGATIVELY AFFECTED BY THE LOSS OF STRATEGIC PARTNERS The majority of the Company's revenues have historically been from strategic partners. Specifically, revenues from the National Center for Missing and Exploited Children and Computer Associates accounted for 26% and 14% of total revenues, respectively, 2000; revenues from Intel and Computer Associates accounted for 49% and 39% of total revenues, respectively, in 1999; and revenues from Intel, Kodak and Minolta accounted for 66%, 15% and 15% of total revenues, respectively, in 1998. The loss of any strategic partner could significantly reduce our revenues, which could have a material adverse effect on our financial condition, operating results and business. OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO IDENTIFY, HIRE, TRAIN AND RETAIN HIGHLY QUALIFIED EMPLOYEES Our future success depends on our continuing ability to identify, hire, train and retain other highly qualified technical and managerial employees. The competition for such employees is intense, and we have experienced difficulty in identifying and hiring qualified engineering personnel. If we do not succeed in attracting and retaining necessary technical and managerial employees in the future, our business would be adversely affected. Additionally, in order to attract and retain employees in the past, we have granted options to purchase shares of common stock to employees at an exercise price below the fair value of the common stock on the date of grant. As a result, we have had to record deferred compensation related to the intrinsic value of the option. This deferred compensation is amortized over the vesting period of applicable options, which is generally four years, resulting in a non-cash charge to earnings over the related vesting period. If we have to issue additional options at an exercise price below the fair value of the common stock on the date of grant, our business would be adversely affected. OUR CHARTER DOCUMENTS COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US. Our Certificate of Incorporation and By-laws are designed to make it difficult for a third party to acquire control of us, even if a change in control would be beneficial to stockholders. For example, our Certificate or Incorporation authorizes our Board of Directors to issue up to 5,000,000 shares of "blank check" preferred stock. Without stockholder approval, the Board of Directors has the authority to attach special rights, including voting and dividend rights, to this preferred stock. With these rights, preferred stockholders could make it more difficult for a third party to acquire our company. In addition, we must receive a stockholders' proposal for an annual meeting within a specified period for that proposal to be included on the agenda. Because stockholders do not have the power to call meetings and are subject to timing requirements in submitting stockholder proposals for consideration at an annual or special meeting, any third-party takeover not supported by the Board of Directors would be subject to significant delays and difficulties. OUR BUSINESS IS SUBJECT TO GENERAL ECONOMIC CONDITIONS Our revenues and results of operations will be subject to fluctuations based upon the general economic conditions in the United States and, to a lesser extent, abroad. If there is a general economic downturn or a recession in the United States, we expect that business enterprises, including our customers and potential customers, could substantially and immediately reduce their budgets or delay implementation of Internet-focused business solutions. A deterioration in existing economic conditions could therefore materially and adversely affect our financial condition, operating results and business. ITEM 2. PROPERTIES The Company leases approximately 16,000 square feet of space in a 24-story building in New York City, New York. This space houses substantially all of the Company's general and administrative and research and development personnel as well as a significant portion of the sales and marketing and creative services personnel. The lease agreement expires in February 2010, if not renewed. The Company believes that this 12 14 office space is adequate for its current needs and that additional space is available in the building or in the New York City area to provide for anticipated growth. The Company also leases approximately 12,000 square feet of office space in Draper, Utah, pursuant to a sublease agreement which expires in April 2010. This space houses approximately 55 personnel principally engaged in sales and marketing, creative services, and management information systems services as well as the model catalog licensing operations. The Company also leases approximately 12,000 square feet of office space in Los Angeles, California, pursuant to a lease which expires in December 2004. This space houses approximately 30 personnel principally engaged in sales and marketing, creative services, and management information systems services. The Company also leases approximately 4,700 square feet of office space in San Francisco, California pursuant to a lease which expires in December 2003. This space houses approximately 5 personnel principally engaged in creative services and research and development. The Company also leases small office spaces in London and Tokyo under short-term leases. ITEM 3. LEGAL PROCEEDINGS The Company is engaged in certain legal actions arising in the ordinary course of business. The Company believes it has adequate legal defenses and believes that the ultimate outcome of these actions will not have a material effect on the Company's consolidated financial position, results of operations, or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on November 28, 2000. At the meeting, stockholders voted on: - the election of directors, - the Company's proposal to issue 5,520,000 shares of Company common stock to Computer Associates International, Inc. in exchange for shares of common stock of Metastream owned by Computer Associates, - the Company's proposal to amend its Stock Option Plan to increase the number of shares available for issuance under the plan, and - ratifying the appointment of PricewaterhouseCoopers LLP as independent accountants for the Company for the 2000 fiscal year. Twelve million, nine hundred sixty-one thousand, two hundred twenty-three (12,961,223) shares voted for the proposal to issue shares to Computer Associates in exchange for shares of Metastream, 129,265 shares voted against the exchange, 18,784 shares abstained from voting, and 11,364,293 shares were withheld as broker nonvotes. Twenty-one million, five hundred one thousand, fifty-two (21,501,052) shares voted for the proposal to amend the Company's Stock Option Plan, 2,943,724 shares voted against the amendment, and 28,789 shares abstained from voting. Twenty-four million, three hundred ninety-four thousand, nine hundred six (24,394,906) voted to ratify the appointment of PricewaterhouseCoopers, 66,096 voted against ratifying the appointment, and 12,563 shares abstained from voting. 13 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION FOR COMMON STOCK The Company's common stock, $0.001 par value, which began trading over the counter in December 1995, is quoted on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol "VWPT." The following table sets forth, for the periods indicated, the range of high and low closing sale prices per share as reported on the NASDAQ National Market System:
HIGH LOW ------ ----- 2000 4th Quarter................................................. $11.00 $4.63 3rd Quarter................................................. 14.06 8.00 2nd Quarter................................................. 18.50 6.00 1st Quarter................................................. 30.88 8.06 1999 4th Quarter................................................. $ 8.94 $5.06 3rd Quarter................................................. 7.25 5.13 2nd Quarter................................................. 7.38 4.56 1st Quarter................................................. 8.88 5.75
HOLDERS As of March 16, 2001, there were approximately 335 holders of record and approximately 12,500 beneficial owners of the Company's common stock. DIVIDENDS The Company has not paid any cash dividends on its capital stock to date. The Company currently anticipates that it will retain all future earnings, if any, for use in its business and does not anticipate paying any cash dividends on its capital stock in the foreseeable future. 14 16 ITEM 6. SELECTED FINANCIAL DATA The following selected condensed financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto appearing elsewhere in this Annual Report on Form 10-K.
YEARS ENDED DECEMBER 31, -------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA Net revenues.................................. $ 3,580 $ 3,093 $ 3,001 $ 1,262 $ -- Cost of revenues............................ 1,543 -- -- -- -- -------- -------- -------- ------- ------- Gross profit................................ 2,037 3,093 3,001 1,262 -- -------- -------- -------- ------- ------- Operating expenses: Sales and marketing (excluding non-cash stock-based compensation and non-cash sales and marketing charges totaling $25,120 in 2000 and $675 in 1999)........ 15,877 2,567 981 624 -- Research and development (excluding non-cash stock-based compensation totaling $4,193 in 2000 and $2,540 in 1999).............. 6,283 2,741 1,584 2,357 -- General and administrative (excluding non-cash stock-based compensation totaling $3,026 in 2000 and $2,866 in 1999).................................... 5,289 4,065 4,409 3,471 -- Compensation charge related to forgiveness of an officer loan....................... 2,322 -- -- -- -- Non-cash stock-based compensation charges... 12,341 6,081 -- -- -- Non-cash sales and marketing charges........ 19,998 -- -- -- -- Amortization of goodwill and other intangibles.............................. 3,025 75 -- -- -- Acquired in-process research and development.............................. 963 -- -- -- -- -------- -------- -------- ------- ------- Total operating expenses................. 66,098 (15,529) 6,974 6,452 -- -------- -------- -------- ------- ------- Loss from operations.......................... (64,061) (12,436) (3,973) (5,190) -- Other income.................................. 2,180 2,286 2,618 3,157 -- -------- -------- -------- ------- ------- Loss before provision (benefit) for income taxes....................................... (61,881) (10,150) (1,355) (2,033) -- Provision (benefit) for income taxes.......... -- 5,481 (353) (210) -- -------- -------- -------- ------- ------- Loss before minority interest in loss of subsidiary.................................. (61,881) (15,631) (1,002) (1,823) -- Minority interest in loss of subsidiary....... 4,429 1,048 -- -- -- -------- -------- -------- ------- ------- Net loss from continuing operations........... (57,452) (14,583) (1,002) (1,823) -- Discontinued operations: Loss from discontinued operations........... -- (14,811) (18,829) (6,355) (7,650) Income (loss) on disposal of discontinued operations............................... 1,496 (21,260) -- -- -- -------- -------- -------- ------- ------- Net income (loss) from discontinued operations............................. 1,496 (36,071) (18,829) (6,355) (7,650) -------- -------- -------- ------- ------- Net loss...................................... (55,956) (50,654) (19,831) (8,178) (7,650) Accretion of mandatorily redeemable preferred stock of subsidiary......................... (438) -- -- -- -- -------- -------- -------- ------- ------- Net loss applicable to common shareholders.... $(56,394) $(50,654) $(19,831) $(8,178) $(7,650) ======== ======== ======== ======= ======= Basic and diluted net loss per share: Net loss per common share from continuing operations............................... $ (2.01) $ (0.59) $ (0.04) $ (0.08) $ -- Net income (loss) per common share from discontinued operations.................. 0.05 (1.47) (0.79) (0.28) (0.37) -------- -------- -------- ------- ------- Net loss per common share................ $ (1.96) $ (2.06) $ (0.83) $ (0.36) $ (0.37) ======== ======== ======== ======= ======= Weighted average number of shares outstanding -- basic and diluted........................ 28,718 24,581 23,779 22,965 20,590 ======== ======== ======== ======= =======
15 17
DECEMBER 31, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- ------- ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA Cash, cash equivalents and marketable securities.................................... $ 29,033 $37,247 $46,335 $50,002 $66,293 Working capital................................. 34,313 33,638 55,439 77,677 79,254 Total assets.................................... 102,399 50,574 79,116 97,257 97,935 Stockholders' equity............................ 96,339 29,901 70,181 87,242 86,112
- --------------- (1) In November 2000, the Company consummated a share exchange with Computer Associates International, Inc. and another shareholder of Metastream, pursuant to which the Company issued 1.15 shares of the Company's common stock in exchange for each outstanding share of common stock of Metastream. The share exchanges were accounted for as acquisitions of minority interest under the purchase method of accounting, and goodwill of $42,892,000 was recorded. (2) In September 2000, the Company purchased all the outstanding capital stock of Viewpoint Digital, Inc. The purchase price of $19,169,000, excluding contingent consideration of $30,000,000 in notes payable, consisted of 715,000 shares of common stock valued at $8,938,000, cash consideration of $10,000,000 and $231,000 in direct acquisition costs. The contingent consideration consists of two promissory notes each in the amount of $15,000,000. Both notes are contingent upon the achievement of certain levels of future operating results and employee retention through April 30, 2002. The acquisition was accounted for under the purchase method of accounting, and goodwill and other intangibles of $17,039,000 were recorded, inclusive of acquired in-process research and development costs of $963,000. (3) In December 1999, the Board of Directors of the Company approved a plan to focus exclusively on the Company's 3D and rich media visualization and marketing technologies, and to correspondingly divest itself of all its prepackaged graphics software business. Consequently, the results of operations of the prepackaged graphics software business have been classified as income (loss) from discontinued operations for the years ended December 31, 1996 through 2000. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis below contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially from those expressed or forecasted in any such forward-looking statements as a result of certain factors, including those set forth in "Additional Factors Affecting Future Results." In connection with forward-looking statements which appear in these disclosures, investors should carefully review the factors set forth in this Form 10-K under "Additional Factors Affecting Future Results." 16 18 OVERVIEW Viewpoint Corporation, a Delaware corporation ("Viewpoint" or the "Company") is focused on providing complete end-to-end solutions for creating and deploying virtual products centered on the Company's Viewpoint Experience Technology for e-commerce and the Web environment. Until December 1999, the Company was primarily engaged in the development, marketing, and sales of prepackaged software graphics products. Its principal products were computer graphics "painting" tools and photo imaging software products. With its acquisition of Real Time Geometry Corporation in December 1996, however, the Company became involved, on a limited basis, in the development of technologies designed to make practical the efficient display and deployment of rich media on the Internet. In June 1999, the Company increased its commitment to the development of rich media internet technologies and formed Metastream.com Corporation ("Metastream") to operate a business exploiting these technologies. The Company originally held an 80% equity interest in Metastream with Computer Associates International, Inc. ("Computer Associates") holding the remaining 20% equity interest. In December 1999, the Board of Directors of the Company approved a plan to focus exclusively on the internet technologies of its majority-owned subsidiary and to correspondingly divest the Company of all its prepackaged software business. By April 2000, the Company had sold substantially all of its prepackaged software product lines. In September 2000, the Company acquired Viewpoint Digital, Inc. ("Viewpoint Digital"), a wholly-owned subsidiary of Computer Associates. Viewpoint Digital publishes the world's largest library of 3D digital content and provides creative 3D services to thousands of customers in entertainment, advertising, visual simulation, computer-based training and corporate communications. The Company's primary initiatives include: - Licensing technology for specific marketing visualization solutions; - Providing a full range of fee-based professional services for implementing marketing visualization solutions; - Forging technological alliances with leading interactive agencies and web content providers; and - Maximizing market penetration and name recognition. Viewpoint believes that its success will depend largely on its ability to extend its technology and market leadership in e-commerce visualization. Accordingly, Viewpoint intends to invest heavily in research and development and sales and marketing. Revenues from continuing operations primarily have been from the sale of technology licenses and fee based professional services. In light of its recent change in strategic focus, Viewpoint has a limited operating history upon which an evaluation of the Company and its prospects can be based. Viewpoint prospects must be considered in light of the risks and difficulties frequently encountered by early stage technology companies. There can be no assurance that Viewpoint will achieve or sustain profitability. Viewpoint has had significant quarterly and annual operating losses since its inception, and as of December 31, 2000, had an accumulated deficit of $145,814,000. 17 19 OPERATING RESULTS The following table sets forth certain selected financial information expressed as a percentage of net revenues for the periods indicated:
YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- STATEMENT OF OPERATIONS DATA Net revenues................................................ 100.0% 100.0% 100.0% Cost of revenues............................................ 43.1 -- -- -------- -------- -------- Gross profit.............................................. 56.9 100.0 100.0 -------- -------- -------- Operating expenses: Sales and marketing (excluding non-cash stock-based compensation and non-cash sales and marketing charges)............................................... 443.5 83.0 32.7 Research and development (excluding non-cash stock-based compensation).......................................... 175.5 88.6 52.8 General and administrative (excluding non-cash stock-based compensation).......................................... 147.7 131.4 146.9 Compensation charge related to forgiveness of an officer loan................................................... 64.9 -- -- Non-cash stock-based compensation charges................. 344.7 196.6 -- Non-cash sales and marketing charges...................... 558.6 -- -- Amortization of goodwill and other intangibles............ 84.5 2.5 -- Acquired in-process research and development.............. 26.9 -- -- -------- -------- -------- Total operating expenses.................................... 1,846.3 502.1 232.4 -------- -------- -------- Loss from operations........................................ (1,789.4) (402.1) (132.4) Other income................................................ 60.9 73.9 87.2 -------- -------- -------- Loss before provision (benefit) for income taxes............ (1,728.5) (328.2) (45.2) Provision (benefit) for income taxes........................ -- 177.2 (11.8) -------- -------- -------- Loss before minority interest in loss of subsidiary......... (1,728.5) (505.4) (33.4) Minority interest in loss of subsidiary..................... 123.7 33.9 -- -------- -------- -------- Net loss from continuing operations......................... (1,604.8) (471.5) (33.4) Discontinued operations: Loss from discontinued operations......................... -- (478.9) (627.4) Income (loss) on disposal of discontinued operations...... 41.8 (687.3) -- -------- -------- -------- Net income (loss) from discontinued operations......... 41.8 (1,166.2) (627.4) -------- -------- -------- Net loss.................................................... (1,563.0) (1,637.7) (660.8) -------- -------- -------- Accretion of mandatorily redeemable preferred stock of subsidiary................................................ (12.2) -- -- -------- -------- -------- Net loss applicable to common shareholders.................. (1,575.2)% (1,637.7)% (660.8)% ======== ======== ========
NET REVENUES
2000 % CHANGE 1999 % CHANGE 1998 ------ -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Net revenues............................... $3,580 16% $3,093 3% $3,001
The Company recognizes revenue in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended. Accordingly, revenue from software arrangements involving multiple elements (e.g., software products, upgrades/enhancements, post contract customer support, etc.) is allocated to each element based on the relative fair value of the elements. The determination of fair value is based on objective evidence, which is specific to the Company. 18 20 Service revenue, which consists of fees for professional services, is recognized as the services are performed or, if no pattern of performance is discernible, on a straight-line basis over the period during which the services are performed. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which gives additional guidance in applying generally accepted accounting principles to revenue recognition in the financial statements. The Company was in compliance with the provisions of SAB No. 101. Net revenues in 2000 were related to broadcast licenses, fee-based professional services and 3D digital content sales with the National Center for Missing and Exploited Children and Computer Associates accounting for 26% and 14% of total revenues, respectively. Fee based professional services and 3D digital content sales of $2,459,000 were the result of the acquisition of Viewpoint Digital. Historically, revenues primarily consisted of one-time licenses for Viewpoint and related technologies from a limited number of strategic partners. Specifically, revenues from Intel and Computer Associates accounted for 49% and 39% of total revenues, respectively, in 1999 and revenues from Intel, Kodak and Minolta accounted for 66%, 15% and 15% of total revenues, respectively, in 1998. COST OF REVENUES
2000 % CHANGE 1999 % CHANGE 1998 ------- -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Cost of Revenues.......................... $ 1,543 N/A $ -- N/A $ -- As % of net revenues.................... 43% --% --%
Cost of revenues consist primarily of salaries and consulting fees for those who provide fee-based professional services. The Company did not provide fee-based professional services in 1999 and 1998. SALES AND MARKETING (EXCLUDING NON-CASH STOCK-BASED COMPENSATION AND NON-CASH SALES AND MARKETING CHARGES TOTALING $25,120 IN 2000 AND $675 IN 1999)
2000 % CHANGE 1999 % CHANGE 1998 ------- -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Sales and marketing....................... $15,877 519% $2,567 162% $ 981 As % of net revenues.................... 444% 83% 33%
Sales and marketing expenses consist primarily of salaries and benefits, consulting fees, travel expenses, advertising costs and related facilities costs for sales, marketing, business development and public relations personnel. The 519% increase in sales and marketing in 2000, is primarily due to an increase in salaries and benefits, recruiting fees, travel expenses and facilities costs related to an increase in personnel and consulting fees, and an increase in advertising and public relation agency fees related to the launch of Viewpoint Experience Technology. The 162% increase in sales and marketing expenses in 1999 is primarily due to increased salaries, consulting fees, and related travel and facilities expenses in connection with the expansion of the Company's sales and public relations departments. The Company is continuing to expand its sales and marketing presence and, accordingly, expects sales and marketing expenses to continue to increase in future periods, but such expenses may vary as a percentage of net revenues. RESEARCH AND DEVELOPMENT (EXCLUDING NON-CASH STOCK-BASED COMPENSATION TOTALING $4,193 IN 2000 AND $2,540 IN 1999)
2000 % CHANGE 1999 % CHANGE 1998 ------- -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Research and development.................. $ 6,283 129% $2,741 73% $1,584 As % of net revenues.................... 176% 89% 53%
Research and development expenses consist primarily of salaries, consulting fees, and required equipment and facilities costs related to the Company's product development efforts. The Company expenses as incurred 19 21 research and development costs necessary to establish the technological feasibility of its internally-developed software products and technologies. To date, the establishment of technological feasibility of the Company's products and general release have substantially coincided. As a result, the Company has not capitalized any internal software development costs since costs qualifying for such capitalization have not been significant. Additionally, the Company capitalizes costs of software, consulting services, hardware and payroll-related costs incurred to purchase or develop internal-use software, when technological feasibility has been established, it is probable that the project will be completed and the software will be used as intended. The Company expenses costs incurred during preliminary project assessment, research and development, re- engineering, training and application maintenance. The 129% increase in research and development expenses in 2000 is due to an increase in salaries, travel, and facilities expenses related to increased internal development personnel, in addition to consulting fees in connection with the further development of Viewpoint Experience Technology. In addition, 53% of the increase is due to a reserve against a loan from an executive whose chief responsibilities are research and development. The 73% increase in research and development expenses in 1999 is primarily due to increases in internal development personnel, consulting fees and related travel and facilities expenses in connection with the development of Metastream 3.0. The Company expects research and development expenses to continue to increase in future periods, but such expenses may vary as a percentage of net revenues. GENERAL AND ADMINISTRATIVE (EXCLUDING NON-CASH STOCK-BASED COMPENSATION TOTALING $3,026 IN 2000 AND $2,866 IN 1999)
2000 % CHANGE 1999 % CHANGE 1998 ------- -------- ------ -------- ------ (DOLLARS IN THOUSANDS) General and administrative................ $ 5,289 30% $4,065 (8)% $4,409 As % of net revenues.................... 148% 131% 147%
General and administrative expenses primarily consist of corporate overhead of the Company, which includes compensation costs related to finance and administration personnel along with other administrative costs such as legal, accounting and investor relation fees, and insurance expense. The 30% increase in general and administrative expenses in 2000 is primarily attributable to a reserve against an officer's loan and an increase in corporate expenses resulting from a full year of operations for Metastream. The 8% decrease in general and administrative expenses in 1999 was primarily attributed to one-time expenses in 1998 in connection with the recruiting and relocation of a former chief executive officer in February 1998, as well as consulting costs related to the preparation of the Company's 1998 strategic plan. This decrease in expenses in 1999 was partially offset by increased general and administrative expenses resulting from the formation of Metastream in June 1999. COMPENSATION CHARGE RELATED TO FORGIVENESS OF AN OFFICER LOAN
2000 % CHANGE 1999 % CHANGE 1998 ------- -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Compensation charge related to forgiveness of an officer loan...................... $ 2,322 N/A $ -- N/A $ -- As % of net revenues.................... 65% --% --%
A loan to an officer which accrued interest semi-annually at 5.67%, was forgiven in accordance with the contractual terms of the officer's employment agreement, upon the merger of the Company and Metastream. NON-CASH STOCK-BASED COMPENSATION CHARGES
2000 % CHANGE 1999 % CHANGE 1998 ------- -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Non-cash stock-based compensation charges................................. $12,341 103% $6,081 N/A $ -- As % of net revenues.................... 345% 197% --%
20 22 In connection with the grant of stock options of Metastream to certain employees and non-employee directors, the Company recorded total deferred compensation of approximately $24.2 million in 2000 and $16.8 million in 1999. This deferred compensation represented the difference between the fair value of Metastream's common stock and the exercise price of these options at the date of grant. Stock-based compensation expense of $12.3 million and $6.1 million was recognized during the years ended December 31, 2000 and December 31, 1999, respectively. NON-CASH SALES AND MARKETING CHARGES
2000 % CHANGE 1999 % CHANGE 1998 ------- -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Non-cash sales and marketing charges...... $19,998 N/A $ -- N/A $ -- As % of net revenues.................... 559% --% --%
In connection with the issuance of mandatorily redeemable preferred stock in Metastream to AOL and Adobe, the Company recorded one-time non-cash sales and marketing charges of approximately $20.0 million during the year ended December 31, 2000. These charges represented the difference between the fair value of the Company's common shares into which AOL and Adobe could have converted the Metastream shares on the date of issuance, and the $20,000,000 aggregate cash consideration received from AOL and Adobe. These charges were recorded as sales and marketing, as the incremental value of the equity over the cash consideration received was deemed to be the fair value of the license and distribution agreements simultaneously entered into with AOL and Adobe. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
2000 % CHANGE 1999 % CHANGE 1998 ------- -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Amortization of goodwill and other intangibles............................. $ 3,025 3,933% $ 75 N/A $ -- As % of net revenues.................... 85% 3% --%
Amortization of goodwill and other intangibles is primarily attributable to the amortization of intangibles recorded as part of the acquisition of Viewpoint Digital and the acquisition of Computer Associates' minority interest in Metastream. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
2000 % CHANGE 1999 % CHANGE 1998 ------- -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Acquired in-process research and development............................. $ 963 N/A $ -- N/A $ -- As % of net revenues.................... 27% --% --%
Acquired in-process research and development costs represents the write-off of research and development costs recorded as part of the acquisition of Viewpoint Digital. OTHER INCOME
2000 % CHANGE 1999 % CHANGE 1998 ------- -------- ------ -------- ------ (DOLLARS IN THOUSANDS) Other Income.............................. $ 2,180 (5)% $2,286 (13)% $2,618
Other income primarily consists of interest and investment income on cash and marketable securities. As a result, other income fluctuates with changes in the Company's cash and marketable securities balances and market interest rates. 21 23 PROVISION FOR INCOME TAXES In the fourth quarter of 1999, the Company recorded a provision for income taxes in the amount of $5.5 million, which provided a full valuation allowance against its net deferred tax assets. The Company's net deferred tax assets include substantial amounts of net operating loss carryforwards. Inability to generate taxable income within the carryforward period would affect the ultimate realizability of such assets. Consequently, management determined that sufficient uncertainty exists regarding the realizability of these assets to warrant the establishment of the full valuation allowance. Utilization of the Company's net operating loss carryforwards, which begin to expire in 2011 for federal purposes and 2001 for state purposes, may be subject to certain limitations under Section 382 of the Internal Revenues Code of 1986, as amended. MINORITY INTEREST IN LOSS OF SUBSIDIARY Metastream, originally a joint initiative between the Company and Computer Associates, was formed in June 1999. For financial reporting purposes, the assets, liabilities and operations of Metastream were included in the Company's consolidated financial statements. Computer Associates and another minority shareholder's combined 20% interest in Metastream was recorded as minority interest in the Company's consolidated balance sheets, and the losses attributed to their 20% interest have been reported as minority interest in the Company's consolidated statements of operations. In November 2000, the Company acquired Computer Associates' and the other minority shareholder's minority interests by issuing 5,578,000 shares of Company common stock in exchange for 4,850,000 shares of Metastream common stock. DISCONTINUED OPERATIONS In December 1999, the Board of Directors approved a plan to focus exclusively on its industry-leading, patented e-commerce visualization solution, and to correspondingly divest itself of all its prepackaged graphics software business. Accordingly, these operations are reflected as discontinued operations for all periods presented in the accompanying statements of operations. The loss on disposal of discontinued operations, which totaled approximately $21,260,000 for the year ended December 31, 1999, consisted of the estimated future results of operations of the discontinued business through the estimated date of divestiture, the amounts expected to be realized upon the sale of the discontinued business, severance and related benefits, and asset write-downs (see table below). The Company recorded an adjustment to net loss on disposal of discontinued operations of $1,496,000 during the year ended December 31, 2000 primarily as a result of better than expected net revenues during the year from the discontinued business. During April 2000, the Company completed the sale of a substantial portion of the Company's graphics software product lines. Specifically, Corel Corporation acquired MetaCreations' Painter, Kai's Power Tools, KPT Vector Effects and Bryce product lines; egi.sys AG acquired the Poser product line; and fractal.com Corporation acquired the Headline Studio product line for total consideration of $11,250,000, consisting of cash and promissory notes, plus future royalties. At December 31, 2000, $4,000,000 was still outstanding and is classified as a current asset of discontinued operations in the accompanying consolidated balance sheets. The provision for loss on disposal of discontinued operations is an estimate and subject to change. Changes in estimates will be accounted for prospectively and included in income (loss) from discontinued operations. 22 24 The following table depicts the loss on disposal of discontinued operations activity through December 31, 2000 (in thousands):
LOSS ON DISPOSAL PROVISION AT PROVISION AT OF DISCONTINUED DECEMBER 31, CHARGED TO DECEMBER 31, OPERATIONS DEDUCTIONS 1999 EXPENSES DEDUCTIONS 2000 ---------------- ---------- ------------ ---------- ---------- ------------ Write-down of operating assets.................. $ 18,445 $18,103 $ 342 $ 1,035 $ 1,377 $-- Severance and benefits.... 8,415 504 7,911 26 7,937 -- Estimated loss of discontinued operations through divesture date.................... 5,400 -- 5,400 (2,072) 3,328 -- Estimated net proceeds from divesture.......... (11,000) -- (11,000) (485) (11,485) -- -------- ------- -------- ------- -------- -- $ 21,260 $18,607 $ 2,653 $(1,496) $ 1,157 $-- ======== ======= ======== ======= ======== ==
Operating results from discontinued operations were as follows (in thousands):
DECEMBER 31, ------------------------------- 2000 1999 1998 ------- -------- -------- Net revenues................................................ $ 5,275 $ 33,079 $ 39,842 Cost of revenues............................................ 1,066 6,339 7,007 ------- -------- -------- Gross profit.............................................. 4,209 26,740 32,835 Operating expenses: Sales and marketing....................................... 3,045 25,022 27,699 Research and development.................................. 3,743 13,691 14,207 General and administrative................................ 749 4,758 2,453 Costs associated with mergers, acquisitions and restructurings......................................... -- -- 7,305 ------- -------- -------- Total operating expenses.......................... 7,537 43,471 51,664 ------- -------- -------- Loss before gain on sale of assets.......................... (3,328) (16,731) (18,829) Gain on sale of assets...................................... -- 1,920 -- ------- -------- -------- Loss from discontinued operations........................... $(3,328) $(14,811) $(18,829) ======= ======== ========
LIQUIDITY AND CAPITAL RESOURCES Cash and investments totaled $29.0 million at December 31, 2000, down from $37.2 million at December 31, 1999 and $46.3 million at December 31, 1998. Net cash used in operating activities of the Company totaled $28.7 million for 2000, compared to net cash used in operating activities of $11.9 million for 1999 and net cash provided by operating activities of $.5 million for 1998. Net cash used in operating activities in 2000 primarily resulted from a $57.5 million net loss from continuing operations and $8.6 million of net cash used for discontinued operations, offset in part by $12.3 million in non-cash stock-based compensation charges, $19.9 million in non-cash sales and marketing charges and $4.8 million in depreciation and amortization. Net cash used in operating activities in 1999 primarily resulted from a $14.6 million net loss from continuing operations and $10.2 million of net cash used for discontinued operations, offset in part by $6.1 million in non-cash stock-based compensation charges and a $5.9 million non-cash charge related to the full valuation allowance recorded against the Company's deferred tax assets. Net cash provided by operating activities in 1998 primarily resulted from a $1.0 million net loss from continuing operations and $.8 million of net cash used for discontinued operations, less $1.2 million of depreciation and amortization expense. Net cash provided by (used in) investing activities totaled $1.6 million, $(7.4) million and $5.3 million for 2000, 1999 and 1998, respectively. Net cash provided by investing activities in 2000 primarily resulted from $17.1 million of net proceeds from maturities of marketable securities, net of $10.2 million of cash used to acquire Viewpoint Digital and $4.2 million used to purchase property and equipment. Net cash used in investing 23 25 activities in 1999 primarily resulted from $2.8 million of net purchases of marketable securities and $4.5 million of net cash used for discontinued operations. Net cash provided by investing activities in 1998 primarily resulted from $10.3 million of net proceeds from maturities of marketable securities, net of $3.8 million of net cash used for discontinued operations and the issuance of $1.2 million of notes receivable from related parties. Net cash provided by financing activities totaled $36.0 million, $7.5 million and $.8 million for 2000, 1999 and 1998, respectively. Net cash provided by financing activities in 2000 primarily resulted from $19.8 million received from AOL and Adobe relating to their investment in Metastream, $12.6 million of proceeds from the exercise of stock options and $3.5 million received from Computer Associates related to its investment in Metastream. Cash provided by financing activities in 1999 primarily resulted from $4.0 million of proceeds from the exercise of stock options and $3.5 million received from Computer Associates relating to its investment in Metastream. Cash provided by financing activities in 1998 resulted from $.8 million of proceeds from the exercise of stock options. The Company believes that its current cash and marketable securities balances and cash provided by future operations, if any, are sufficient to meet its operating cash flow needs and anticipated capital expenditure requirements through at least the next twelve months. In addition, the Company may pursue additional debt or equity financing to augment their working capital position; however, there can be no assurance that the Company can obtain financing at terms acceptable to the Company. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which established accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. To date, we have not engaged in derivative and hedging activities. In March 2000, the Financial Accounting Standards Board issued Financial Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving Stock Compensation," which is an interpretation of Accounting Principal Board Option ("APB") No. 25. This interpretation clarifies: - The definition of employee for purposes of applying APB No. 25, which deals with stock compensation issues; - The criteria for determining whether a plan qualifies as a non compensatory plan; - The accounting consequence of various modifications to the terms of a previously fixed stock option or award; and - The accounting for an exchange of stock compensation awards in a business combination. The adoption of FIN No. 44 did not have a material impact on our financial statements. In March 2000, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on EITF Issue 00-02, "Accounting for Web Site Development Costs." This consensus provides guidance on what types of costs incurred to develop web sites should be capitalized or expensed. The Company adopted this consensus on July 1, 2000. The Company's policy for accounting for costs incurred to operate the Company's web site was not impacted by the adoption of the pronouncement. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is subject to concentration of credit risk and interest rate risk related to cash equivalents and marketable securities. The Company does not have any derivative financial instruments as of December 31, 2000. Credit risk is managed by limiting the amount of securities placed with any one issuer, investing in high-quality marketable securities and securities of the U.S. government and limiting the average maturity of the overall portfolio. The majority of the Company's portfolio, which is classified as available-for-sale, is composed of fixed income securities that are subject to the risk of market interest rate fluctuations, and all of 24 26 the Company's securities are subject to risks associated with the ability of the issuers to perform their obligations under the instruments. The Company may suffer losses in principal if forced to sell securities, which have declined in market value due to changes in interest rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 1. Index to Financial Statements The following financial statements are filed as part of this Report:
PAGE ---- AUDITED FINANCIAL STATEMENTS Report of Independent Accountants........................... 26 Consolidated Balance Sheets as of December 31, 2000 and 1999...................................................... 27 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2000............... 28 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2000..... 29 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000............... 31 Notes to Consolidated Financial Statements.................. 33
2. Index to Financial Statement Schedule
PAGE ---- SCHEDULE Schedule II -- Valuation and Qualifying Accounts............ 56
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. 25 27 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Viewpoint Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Viewpoint Corporation and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP New York, New York March 12, 2001 26 28 VIEWPOINT CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, --------------------- 2000 1999 --------- -------- ASSETS Current assets: Cash and cash equivalents (Note 8)........................ $ 13,320 $ 4,480 Marketable securities (Note 8)............................ 15,713 32,767 Accounts receivable, net (Note 16)........................ 2,101 123 Notes receivable from related parties, net (Note 10)...... 1,620 4,467 Prepaid expenses and other current assets................. 1,957 1,139 Current assets related to discontinued operations (Note 3)..................................................... 5,662 4,702 --------- -------- Total current assets.............................. 40,373 47,678 Property and equipment, net (Note 9)........................ 5,622 614 Goodwill and other intangibles (Notes 5 and 7).............. 56,111 150 Other assets................................................ 179 158 Non-current assets related to discontinued operations (Note 3)........................................................ 114 1,974 --------- -------- Total assets...................................... $ 102,399 $ 50,574 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 3,402 $ 224 Accrued expenses.......................................... 861 995 Deferred revenues......................................... 636 369 Accrued incentive compensation (Note 11).................. 546 621 Current liabilities related to discontinued operations (Note 3)............................................... 615 9,178 Provision for loss on disposal of discontinued operations (Note 3)............................................... -- 2,653 --------- -------- Total current liabilities......................... 6,060 14,040 Minority interest (Note 7).................................. -- 6,633 Commitments and contingencies (Notes 14 and 15) Stockholders' equity: Preferred stock, $.001 par value; 5,000 shares authorized -- none issued and outstanding at December 31, 2000 and 1999................................................... -- -- Common stock, $.001 par value; 75,000 shares authorized -- 37,964 and 25,496 shares issued and outstanding at December 31, 2000 and 1999, respectively............... 38 25 Paid-in capital........................................... 264,698 119,940 Deferred compensation (Note 11)........................... (22,595) -- Accumulated other comprehensive income (loss)............. 12 (206) Accumulated deficit....................................... (145,814) (89,858) --------- -------- Total stockholders' equity........................ 96,339 29,901 --------- -------- Total liabilities and stockholders' equity........ $ 102,399 $ 50,574 ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 27 29 VIEWPOINT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- Net revenues (Note 16)..................................... $ 3,580 $ 3,093 $ 3,001 Cost of revenues........................................... 1,543 -- -- -------- -------- -------- Gross profit............................................. 2,037 3,093 3,001 -------- -------- -------- Operating expenses: Sales and marketing (excluding non-cash stock-based compensation and non-cash sales and marketing charges totaling $25,120 in 2000, $675 in 1999, and $0 in 1998)................................................. 15,877 2,567 981 Research and development (excluding non-cash stock-based compensation totaling $4,193 in 2000, $2,540 in 1999, and $0 in 1998)....................................... 6,283 2,741 1,584 General and administrative (excluding non-cash stock-based compensation totaling $3,026 in 2000, $2,866 in 1999, and $0 in 1998)....................... 5,289 4,065 4,409 Compensation charge related to forgiveness of an officer loan (Note 10)........................................ 2,322 -- -- Non-cash stock-based compensation charges (Note 11)...... 12,341 6,081 -- Non-cash sales and marketing charges (Note 6)............ 19,998 -- -- Amortization of goodwill and other intangibles (Notes 5 and 7)................................................ 3,025 75 -- Acquired in-process research and development (Note 5).... 963 -- -- -------- -------- -------- Total operating expenses.............................. 66,098 15,529 6,974 -------- -------- -------- Loss from operations....................................... (64,061) (12,436) (3,973) Other income............................................... 2,180 2,286 2,618 -------- -------- -------- Loss before provision (benefit) for income taxes........... (61,881) (10,150) (1,355) Provision (benefit) for income taxes (Note 12)............. -- 5,481 (353) -------- -------- -------- Loss before minority interest in loss of subsidiary........ (61,881) (15,631) (1,002) Minority interest in loss of subsidiary (Note 7)........... 4,429 1,048 -- -------- -------- -------- Net loss from continuing operations........................ (57,452) (14,583) (1,002) Discontinued operations: (Note 3) Loss from discontinued operations........................ -- (14,811) (18,829) Income (loss) on disposal of discontinued operations..... 1,496 (21,260) -- -------- -------- -------- Net income (loss) from discontinued operations........ 1,496 (36,071) (18,829) -------- -------- -------- Net loss................................................... (55,956) (50,654) (19,831) Accretion of mandatorily redeemable preferred stock of subsidiary (Note 6)...................................... (438) -- -- -------- -------- -------- Net loss applicable to common shareholders................. $(56,394) $(50,654) $(19,831) ======== ======== ======== Basic and diluted net loss per share: Net loss per common share from continuing operations..... $ (2.01) $ (0.59) $ (0.04) Net income (loss) per common share from discontinued operations............................................ 0.05 (1.47) (0.79) -------- -------- -------- Net loss per common share............................. $ (1.96) $ (2.06) $ (0.83) ======== ======== ======== Weighted average number of shares outstanding -- basic and diluted.................................................. 28,718 24,581 23,779 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 28 30 VIEWPOINT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS)
ACCUMULATED SERIES A OTHER PREFERRED STOCK COMMON STOCK COMPREHENSIVE TOTAL --------------- --------------- PAID-IN DEFERRED INCOME ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (LOSS) DEFICIT EQUITY ------ ------ ------ ------ -------- ------------ ------------- ----------- ------------- Balances at December 31, 1997.................. -- $-- 23,606 $24 $109,896 $ -- $(135) $ (19,373) $ 90,412 Issuance of common stock upon the exercise of stock options......... -- -- 233 -- 840 -- -- -- 840 Issuance of common stock in connection with the employee stock purchase plan......... -- -- 104 -- 404 -- -- -- 404 Issuance of common stock in connection with the acquisition of Canoma, Inc. ................. -- -- 300 -- 1,305 -- -- -- 1,305 Tax benefit related to stock options......... -- -- -- -- 376 -- -- -- 376 Conversion of accrued compensation to equity upon exercise of certain options....... -- -- -- -- 8 -- -- -- 8 Translation adjustment............ -- -- -- -- -- -- 7 -- 7 Net loss................ -- -- -- -- -- -- -- (19,831) (19,831) -- -- ------ --- -------- -------- ----- --------- -------- Balances at December 31, 1998.................. -- -- 24,243 24 112,829 -- (128) (39,204) 73,521 Issuance of common stock upon the exercise of stock options......... -- -- 959 1 4,004 -- -- -- 4,005 Issuance of common stock in connection with the employee stock purchase plan......... -- -- 168 -- 584 -- -- -- 584 Issuance of common stock in connection with the acquisition of RAYflect S.A. ........ -- -- 126 -- 597 -- -- -- 597 Conversion of accrued compensation to equity upon exercise of certain options....... -- -- -- -- 26 -- -- -- 26 Change in interest gain related to subsidiary............ -- -- -- -- 1,900 -- -- -- 1,900 Translation adjustment............ -- -- -- -- -- -- (9) -- (9) Unrealized loss on investments........... -- -- -- -- -- -- (69) -- (69) Net loss................ -- -- -- -- -- -- -- (50,654) (50,654) -- -- ------ --- -------- -------- ----- --------- -------- Balances at December 31, 1999.................. -- -- 25,496 25 119,940 -- (206) (89,858) 29,901 Issuance of common stock upon the exercise of stock options......... -- -- 2,678 3 12,601 -- -- -- 12,604 Issuance of common stock in connection with the employee stock purchase plan......... -- -- 47 -- 242 -- -- -- 242 Conversion of accrued compensation to equity upon exercise of certain options....... -- -- -- -- 75 -- -- -- 75 Change in interest gain related to subsidiary............ -- -- -- -- 3,300 -- -- -- 3,300 TOTAL COMPREHENSIVE LOSS ------------- Balances at December 31, 1997.................. Issuance of common stock upon the exercise of stock options......... Issuance of common stock in connection with the employee stock purchase plan......... Issuance of common stock in connection with the acquisition of Canoma, Inc. ................. Tax benefit related to stock options......... Conversion of accrued compensation to equity upon exercise of certain options....... Translation adjustment............ $ 7 Net loss................ (19,831) -------- Balances at December 31, 1998.................. $(19,824) ======== Issuance of common stock upon the exercise of stock options......... Issuance of common stock in connection with the employee stock purchase plan......... Issuance of common stock in connection with the acquisition of RAYflect S.A. ........ Conversion of accrued compensation to equity upon exercise of certain options....... Change in interest gain related to subsidiary............ Translation adjustment............ $ (9) Unrealized loss on investments........... (69) Net loss................ (50,654) -------- Balances at December 31, 1999.................. $(50,732) ======== Issuance of common stock upon the exercise of stock options......... Issuance of common stock in connection with the employee stock purchase plan......... Conversion of accrued compensation to equity upon exercise of certain options....... Change in interest gain related to subsidiary............
29 31 VIEWPOINT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS)
ACCUMULATED SERIES A OTHER PREFERRED STOCK COMMON STOCK COMPREHENSIVE TOTAL --------------- --------------- PAID-IN DEFERRED INCOME ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (LOSS) DEFICIT EQUITY ------ ------ ------ ------ -------- ------------ ------------- ----------- ------------- Issuance of common stock option awards......... -- -- -- -- 22,925 (22,925) -- -- -- Amortization of deferred compensation.......... -- -- -- -- -- 330 -- -- 330 Issuance of common stock in connection with Viewpoint Digital, Inc. acquisition...... -- -- 715 1 8,937 -- -- -- 8,938 Non-cash sales and marketing charges in connection with strategic alliances... -- -- -- -- 19,998 -- -- -- 19,998 Issuance of common stock in exchange for minority interest in subsidiary............ -- -- 5,578 6 56,844 -- -- -- 56,850 Issuance of common stock in exchange for subsidiary preferred stock................. -- -- 3,450 3 19,836 -- -- -- 19,839 Translation adjustment............ -- -- -- -- -- -- 137 -- 137 Unrealized gain on investment............ -- -- -- -- -- -- 81 -- 81 Net loss................ -- -- -- -- -- -- -- (55,956) (55,956) -- -- ------ --- -------- -------- ----- --------- -------- Balances at December 31, 2000.................. -- $-- 37,964 $38 $264,698 $(22,595) $ 12 $(145,814) $ 96,339 == == ====== === ======== ======== ===== ========= ======== TOTAL COMPREHENSIVE LOSS ------------- Issuance of common stock option awards......... Amortization of deferred compensation.......... Issuance of common stock in connection with Viewpoint Digital, Inc. acquisition...... Non-cash sales and marketing charges in connection with strategic alliances... Issuance of common stock in exchange for minority interest in subsidiary............ Issuance of common stock in exchange for subsidiary preferred stock................. Translation adjustment............ $ 137 Unrealized gain on investment............ 81 Net loss................ (55,956) -------- Balances at December 31, 2000.................. $(55,738) ========
The accompanying notes are an integral part of these consolidated financial statements. 30 32 VIEWPOINT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................... $(55,956) $(50,654) $(19,831) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Net (income) loss of discontinued operations.............. (1,496) 36,071 18,829 Amortization of deferred compensation..................... 12,341 6,081 -- Deferred income taxes..................................... -- 5,913 (760) Depreciation and amortization............................. 4,789 670 1,223 Accrued interest income................................... -- (130) (171) Forgiveness and reserve of notes receivables.............. 3,347 -- -- Minority interest in loss of subsidiary................... (4,429) (1,048) -- Non-cash sales and marketing charges...................... 19,998 -- -- Changes in operating assets and liabilities, net of acquisitions: Accounts receivable.................................... (1,148) 790 109 Prepaid expenses and other assets...................... (729) (466) 1,390 Accounts payable....................................... 2,768 62 (4) Accrued expenses....................................... 110 809 652 Deferred revenue....................................... 267 369 -- Accrued incentive compensation......................... -- (161) (147) Net cash used in discontinued operations............... (8,607) (10,209) (792) -------- -------- -------- Net cash provided by (used in) operating activities.......................................... (28,745) (11,903) 498 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment......................... (4,233) (295) (48) Purchases of marketable securities.......................... (42,735) (79,282) (63,549) Proceeds from maturities of marketable securities........... 59,870 76,484 73,860 Issuance of notes receivable from related parties........... (1,500) (100) (1,150) Repayment of notes receivable from related parties.......... 1,000 254 -- Acquisition of minority interest in subsidiary.............. (507) -- -- Acquisition of Viewpoint Digital, net of cash acquired...... (10,225) -- -- Net cash used in discontinued operations.................... (86) (4,471) (3,814) -------- -------- -------- Net cash provided by (used in) investing activities.......................................... 1,584 (7,410) 5,299 CASH FLOWS FROM FINANCING ACTIVITIES Collection of subscription receivable related to subsidiary common stock.............................................. 3,500 3,500 -- Issuance of mandatorily redeemable preferred stock of subsidiary, net of issuance costs of $161................. 19,839 -- -- Proceeds from exercise of subsidiary stock options.......... 50 -- -- Proceeds from exercise of stock options..................... 12,604 4,005 840 -------- -------- -------- Net cash provided by financing activities............ 35,993 7,505 840 Effect of exchange rates on cash............................ 8 (9) 7 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 8,840 (11,817) 6,644 Cash and cash equivalents at beginning of year.............. 4,480 16,297 9,653 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 13,320 $ 4,480 $ 16,297 ======== ======== ========
31 33 VIEWPOINT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES Cash paid during the year for income taxes.................. $ -- $ 2 $ 147 SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES Net assets acquired in connection with acquisition of Viewpoint Digital: Cash...................................................... $ 6 $ -- $ -- Accounts receivable, net.................................. 830 -- -- Property and equipment.................................... 1,576 -- -- Prepaid expenses and other assets......................... 128 -- -- Accounts payable and accrued expenses..................... (410) -- Tax benefit related to stock options........................ -- -- 376 Conversion of accrued compensation to equity upon exercise of certain options........................................ 75 26 8 Acquisition of minority interest: Goodwill.................................................. 42,892 -- -- Minority interest......................................... 14,465 -- -- Common stock.............................................. (6) -- -- Paid in capital........................................... (56,844) -- -- Issuance of stock in connection with employee stock purchase plan...................................................... 242 584 404 Issuance of common stock in connection with acquisition of RAYflect S.A. ............................................ -- 597 -- Issuance of common stock in connection with acquisition of Canoma, Inc. ............................................. -- -- 1,305 Net assets acquired in connection with acquisition of RAYflect S.A.: Property and equipment.................................... -- 6 -- Prepaid expenses and other assets......................... -- 1,300 -- Accounts payable and accrued expenses..................... -- 20 --
The accompanying notes are an integral part of these consolidated financial statements. 32 34 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION Viewpoint Corporation, a Delaware corporation ("Viewpoint" or the "Company") is focused on providing complete end-to-end solutions for creating and deploying virtual products centered on the Company's Viewpoint Experience Technology for e-commerce and the Web environment. Until December 1999, the Company was primarily engaged in the development, marketing, and sales of prepackaged software graphics products. Its principal products were computer graphics "painting" tools and photo imaging software products. With its acquisition of Real Time Geometry Corporation in December 1996, however, the Company became involved, on a limited basis, in the development of technologies designed to make practical the efficient display and deployment of rich media on the Internet. In June 1999, the Company increased its commitment to the development of rich media internet technologies and formed Metastream.com Corporation ("Metastream") to operate a business exploiting these technologies. The Company originally held an 80% equity interest in Metastream with Computer Associates International, Inc. ("Computer Associates") holding the remaining 20% equity interest. In December 1999, the Board of Directors of the Company approved a plan to focus exclusively on the internet technologies of its majority-owned subsidiary and to correspondingly divest the Company of all its prepackaged software business. By April 2000, the Company had sold substantially all of its prepackaged software product lines. In September 2000, the Company acquired Viewpoint Digital, Inc. ("Viewpoint Digital"), a wholly-owned subsidiary of Computer Associates. Viewpoint Digital publishes the world's largest library of 3D digital content and provides creative 3D services to thousands of customers in entertainment, advertising, visual simulation, computer-based training and corporate communications. Inherent in the Company's business are various risks and uncertainties, including its limited operating history in the e-commerce visualization business and the limited history of commerce on the Web. In addition, the Company has sustained losses from continuing operations for the last four years and has an accumulated deficit at December 31, 2000. The Company's future prospects are highly dependent on its ability to keep pace with its competitors' innovations; to adapt to new operating systems, hardware platforms and emerging industry standards; and to provide additional functionality to the Company's existing products and technologies. The Company's success depends on its ability to develop and introduce such products and technologies in a timely manner, the acceptance of the Company's products and technologies by the marketplace and its ability to generate license and service revenues from the use of its products and technologies on the Web. The Company believes that its current cash and marketable securities balances and cash provided by future operations, if any, are sufficient to meet its operating cash flow needs and anticipated capital expenditure requirements through at least the next twelve months. In addition, the Company may pursue additional debt or equity financing to augment their working capital position; however, there can be no assurance that the Company can obtain financing at terms acceptable to the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Viewpoint and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. REVENUE RECOGNITION The Company recognizes revenue in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended. Accordingly, revenue from software arrangements involving multiple elements (e.g., software products, upgrades/enhancements, post contract customer support, etc.) is allocated 33 35 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to each element based on the relative fair value of the elements. The determination of fair value is based on objective evidence, which is specific to the Company. Service revenue, which consists of fees for professional services, is recognized as the services are performed or, if no pattern of performance is discernible, on a straight-line basis over the period during which the services are performed. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which gives additional guidance in applying generally accepted accounting principles to revenue recognition in the financial statements. The Company was in compliance with the provisions of SAB No. 101. With respect to its discontinued prepackaged graphics software business (Note 3), the Company recognized product revenue when contractual obligations were satisfied, title and risk of loss had been transferred to the customer and collection of the resulting receivable was reasonably assured. The Company provided an allowance for estimated returns at the time of product delivery and adjusted this allowance as needed based on actual return history. Such reserves as a percentage of net revenues varied over recent years, reflecting the Company's experience in product returns as it had significantly expanded the proportion of its sales through third-party distribution channels and increased its product portfolio. The Company's agreements with its distributors provided the distributors with limited rights to return unsold inventories under a stock balancing program. With respect to its discontinued prepackaged graphics software business (Note 3), the Company entered into agreements whereby it licensed products to original equipment manufacturers ("OEM's") and foreign publishers, which provided such customers the right to produce and distribute multiple copies of its software. Nonrefundable fixed fees were recognized as revenue at delivery of the product master to the customer, satisfaction of Company obligations, if any, and reasonable assurance regarding the collectability of the corresponding receivable. Per copy royalties in excess of fixed amounts were recognized as revenue when such amounts exceeded fixed minimum royalties. SOFTWARE DEVELOPMENT COSTS In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the Company provides for capitalization of certain software development costs once technological feasibility is established. The costs capitalized are amortized on a straight-line basis over the estimated product life, or on the ratio of current revenue to total projected product revenues, whichever is greater. To date, the establishment of technological feasibility of the Company's products and general release have substantially coincided. As a result, the Company has not capitalized any internal software development costs since costs qualifying for such capitalization have not been significant. SOFTWARE DEVELOPED FOR INTERNAL USE In accordance with SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," the Company capitalizes costs of software, consulting services, hardware and payroll-related costs incurred to purchase or develop internal-use software, when technological feasibility has been established, it is probable that the project will be completed and the software will be used as intended. The Company expenses costs incurred during preliminary project assessment, research and development, re-engineering, training and application maintenance. In March 2000, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on EITF Issue 00-02, "Accounting for Web Site Development Costs." This consensus provides guidance on what types of costs incurred to develop web sites should be capitalized or expensed. The 34 36 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company adopted this consensus on July 1, 2000. The Company's policy for accounting for costs incurred to operate the Company's web site was not impacted by the adoption of the pronouncement. INCOME TAXES The Company accounts for income taxes using the liability method as required by SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. STOCK-BASED COMPENSATION The Company accounts for stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock Based Compensation." Under APB No. 25, compensation expense is recognized over the vesting period based on the difference, if any, at the date of grant between the fair value of the Company's stock and the exercise price. The Company accounts for stock issued to non-employees in accordance with SFAS No. 123 and EITF Issue No. 96-18 "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." In March 2000, the Financial Accounting Standards Board issued Financial Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving Stock Compensation," which is an interpretation of APB No. 25. This interpretation clarifies: - The definition of employee for purposes of applying APB No. 25, which deals with stock compensation issues; - The criteria for determining whether a plan qualifies as a non compensatory plan; - The accounting consequence of various modifications to the terms of a previously fixed stock option or award; and - The accounting for an exchange of stock compensation awards in a business combination. The adoption of FIN No. 44 did not have a material impact on the accompanying consolidated financial statements. CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company considers all highly liquid investments purchased with an original maturity of three months or less at date of acquisition to be cash equivalents. The Company considers its marketable securities portfolio available-for-sale as defined in SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." These available-for-sale securities are accounted for at their fair value, and unrealized gains and losses on these securities are reported as a separate component of stockholders' equity. At December 31, 2000 and 1999, net unrealized gains and (losses) on available-for-sale securities were approximately $12,000 and $(69,000), respectively. The Company invests its cash in accordance with a policy that seeks to maximize returns while ensuring both liquidity and minimal risk of principal loss. The policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings, and places restrictions on maturities and concentration by type and issuer. The majority of the Company's portfolio is composed of fixed income securities that are subject to the risk of market interest rate fluctuations, and all of the Company's marketable 35 37 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) securities are subject to risks associated with the ability of the issuers to perform their obligations under the instruments. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Assets are depreciated on the straight-line method over their estimated useful lives, which range from 3 to 7 years. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the asset. Upon sale, any gain or loss is included in the consolidated statements of operations. Maintenance and minor replacements are expensed as incurred. LONG-TERM ASSETS The Company continually reviews the carrying value of long-term assets, primarily consisting of property and equipment and goodwill and other intangible assets to determine whether there are any indications of impairment losses. Impairment losses, if any, are recorded when the expected undiscounted future operating cash flows derived from such assets are less than their carrying value. FOREIGN CURRENCY TRANSLATION The functional currency of each of the Company's foreign subsidiaries is its local currency. Financial statements of these foreign subsidiaries are translated to U.S. dollars for consolidation purposes using current rates of exchange for assets and liabilities and average rates of exchange for revenues and expenses. The effects of currency translation adjustments are included as a component of other comprehensive income (loss) in the statement of stockholders' equity. Gains and losses on foreign currency transactions for 2000, 1999 and 1998 were not significant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF RISK The Company is subject to concentration of credit risk and interest rate risk related to cash equivalents and marketable securities. Credit risk is managed by limiting the amount of marketable securities placed with any one issuer, investing in high-quality marketable securities and securities of the U.S. government and limiting the average maturity of the overall portfolio. At December 31, 2000, and periodically from 1998 through 2000, the Company has maintained balances with various financial institutions in excess of the federally insured limits. Carrying amounts of financial instruments held by the Company, which include cash and cash equivalents, marketable securities, accounts receivable, accounts payable, and accrued expenses, approximate fair value. NET LOSS PER COMMON SHARE Basic net loss per common share is computed using the weighted average number of shares of common stock and diluted net loss per common share is computed using the weighted average number of shares of common stock and common equivalent shares outstanding. Common equivalent shares related to stock options are excluded from the computation when their effect is antidilutive. 36 38 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMPREHENSIVE LOSS In accordance with SFAS No. 130, "Reporting Comprehensive Income," all components of comprehensive income, including net income (loss), are reported in the financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss), are reported net of their related tax effect, to arrive at comprehensive income (loss). STOCK SALES BY SUBSIDIARY Gains realized on stock sales by Metastream are recorded in the Company's consolidated statements of operations, except for any transaction which may be credited directly to equity in accordance with the provisions of SAB No. 51, "Accounting for Sales of Stock of a Subsidiary." RECLASSIFICATIONS Certain reclassifications have been made to the 1999 and 1998 consolidated financial statements to conform to the 2000 presentation. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which established accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. To date, the Company has not engaged in derivative and hedging activities. 3. DISCONTINUED OPERATIONS In December 1999, the Board of Directors approved a plan to focus exclusively on its patented e-commerce visualization solutions, and to correspondingly divest itself of all its prepackaged graphics software business. Accordingly, these operations are reflected as discontinued operations for all periods presented in the accompanying consolidated statements of operations. The loss on disposal of discontinued operations, which totaled approximately $21,260,000 for the year ended December 31, 1999, consisted of the estimated future results of operations of the discontinued business through the estimated date of divestiture, the amounts expected to be realized upon the sale of the discontinued business, severance and related benefits, and asset write-downs (see table below). The Company recorded an adjustment to net loss on disposal of discontinued operations of $1,496,000 during the year ended December 31, 2000, primarily as a result of better than expected net revenues during the year from the discontinued business. During April 2000, the Company completed the sale of a substantial portion of the Company's graphics software product lines. Specifically, Corel Corporation acquired MetaCreations' Painter, Kai's Power Tools, KPT Vector Effects and Bryce product lines; egi.sys AG acquired the Poser product line; and fractal.com Corporation acquired the Headline Studio product line for total consideration of $11,250,000, consisting of cash and promissory notes, plus future royalties. At December 31, 2000, $4,000,000 was still outstanding and is classified as a current asset of discontinued operations in the accompanying consolidated balance sheets. The provision for loss on disposal of discontinued operations is an estimate and subject to change. Changes in estimates will be accounted for prospectively and included in income (loss) from discontinued operations. 37 39 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table depicts the loss on disposal of discontinued operations activity through December 31, 2000 (in thousands):
LOSS ON DISPOSAL PROVISION AT PROVISION AT OF DISCONTINUED DECEMBER 31, CHARGED TO DECEMBER 31, OPERATIONS DEDUCTIONS 1999 EXPENSE DEDUCTIONS 2000 ---------------- ---------- ------------ ---------- ---------- ------------ Write-down of operating assets...... $ 18,445 $18,103 $ 342 $ 1,035 $ 1,377 $-- Severance and benefits.............. 8,415 504 7,911 26 7,937 -- Estimated loss of discontinued operations through divesture date.............................. 5,400 -- 5,400 (2,072) 3,328 -- Estimated net proceeds from divesture......................... (11,000) -- (11,000) (485) (11,485) -- -------- ------- -------- ------- -------- -- $ 21,260 $18,607 $ 2,653 $(1,496) $ 1,157 $-- ======== ======= ======== ======= ======== ==
Operating results from discontinued operations were as follows (in thousands):
DECEMBER 31, ------------------------------- 2000 1999 1998 ------- -------- -------- Net revenues................................................ $ 5,275 $ 33,079 $ 39,842 Cost of revenues............................................ 1,066 6,339 7,007 ------- -------- -------- Gross profit.............................................. 4,209 26,740 32,835 Operating expenses: Sales and marketing....................................... 3,045 25,022 27,699 Research and development.................................. 3,743 13,691 14,207 General and administrative................................ 749 4,758 2,453 Costs associated with mergers, acquisitions and restructurings......................................... -- -- 7,305 ------- -------- -------- Total operating expenses.......................... 7,537 43,471 51,664 ------- -------- -------- Loss before gain on sale of assets.......................... (3,328) (16,731) (18,829) Gain on sale of assets...................................... -- 1,920 -- ------- -------- -------- Loss from discontinued operations........................... $(3,328) $(14,811) $(18,829) ======= ======== ========
In June 1999, the Company sold certain of its consumer graphics products and licensed rights to certain of its technologies to a third party for total consideration of $2,600,000. Expenses incurred by the Company in connection with this transaction totaled $680,000. The net gain of $1,920,000 was recorded as gain on sale of assets related to discontinued operations in the accompanying statements of operations. 38 40 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The net assets related to discontinued operations included in the accompanying consolidated balance sheets consist of the following (in thousands):
DECEMBER 31, ---------------- 2000 1999 ------ ------ Current assets related to discontinued operations: Notes receivable.......................................... $4,000 $ -- Accounts receivable, net.................................. 1,581 1,800 Inventories, net.......................................... -- 92 Prepaid expenses and other current assets................. 81 2,810 ------ ------ Current assets related to discontinued operations...... $5,662 $4,702 ====== ====== Non-current assets related to discontinued operations: Property and equipment, net............................... $ -- $1,574 Other assets.............................................. 114 400 ------ ------ Non-current assets related to discontinued operations....... $ 114 $1,974 ====== ====== Current liabilities related to discontinued operations: Accounts payable.......................................... $ 303 $5,631 Accrued expenses.......................................... 312 2,824 Royalties payable......................................... -- 723 ------ ------ Current liabilities related to discontinued operations.... $ 615 $9,178 ====== ======
Property and equipment relating to discontinued operations consist of the following (in thousands):
DECEMBER 31, --------------- 2000 1999 ----- ------ Computer equipment.......................................... $-- $4,218 Office furniture and equipment.............................. -- 2,060 Leasehold improvements...................................... -- 492 --- ------ -- 6,770 Less accumulated depreciation and amortization.............. -- 5,196 --- ------ $-- $1,574 === ======
Accrued expenses relating to discontinued operations consist of the following (in thousands):
DECEMBER 31, -------------- 2000 1999 ---- ------ Other accrued expenses...................................... $312 $1,436 Accrued compensation........................................ -- 1,128 Accrued advertising......................................... -- 260 ---- ------ $312 $2,824 ==== ======
4. RESTRUCTURING On June 30, 1998, the Company announced a restructuring plan aimed at reducing costs and improving competitiveness and efficiency, which was implemented during the third quarter of 1998. In connection with the restructuring, management considered the Company's future operating costs and levels of revenue in 1998 and beyond, and determined that a restructuring charge of approximately $4,955,000 was required to cover the 39 41 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) costs of reducing certain sectors of its workforce and facilities. The restructuring charge included an accrual of approximately $2,208,000 related to severance and benefits associated with the reduction of approximately 75 positions during July 1998, as well as the related reduction of certain of the Company's facilities. Non-cash restructuring costs, which totaled approximately $2,747,000, primarily related to the write-down of non-strategic business assets made redundant or obsolete due to the streamlining of the Company's product lines and/or reduction of facilities. The restructuring plan was completed during the first quarter of 1999. The restructuring charge has been included within discontinued operations in the Company's consolidated statements of operations. The following table depicts the restructuring activity through December 31, 1999 (in thousands):
SPENDING/ SPENDING/ TOTAL CHARGES BALANCE AT CHARGES BALANCE AT RESTRUCTURING DURING DECEMBER 31, DURING DECEMBER 31, CHARGES 1998 1998 1999 1999 ------------- --------- ------------ --------- ------------ Write-down of operating assets... $2,747 $2,747 $ -- $ -- $-- Severance and benefits........... 1,801 1,684 117 117 -- Vacated facilities............... 116 116 -- -- -- Other............................ 291 291 -- -- -- ------ ------ ---- ---- --- $4,955 $4,838 $117 $117 $-- ====== ====== ==== ==== ===
5. ACQUISITIONS VIEWPOINT DIGITAL On September 8, 2000, the Company purchased all the outstanding capital stock of Viewpoint Digital, a wholly-owned subsidiary of Computer Associates. The acquisition was accounted for under the purchase method of accounting. The purchase price of $19,169,000, excluding contingent consideration of $30,000,000 in notes payable, consisted of 715,000 shares of the Company's common stock valued at $8,938,000, cash consideration of $10,000,000 and $231,000 in direct acquisitions costs. The contingent consideration consists of two promissory notes each in the amount of $15,000,000. Both notes are contingent upon the achievement of certain levels of future operating results and employee retention through April 30, 2002. The purchase price in excess of the value of tangible assets and liabilities assumed of $2,130,000, has been allocated as follows: $3,253,000 to a covenant not to compete, $3,180,000 to work force, $1,558,000 to technology, $1,203,000 to customer list, $963,000 to in-process research and development, $643,000 to tradename and $6,239,000 to goodwill. Goodwill and other intangibles, excluding in-process research and development, will be amortized over their expected periods of benefit, which ranges from 1.5 to 4 years. Amortization expense of $1,980,000 was recorded for the year ended December 31, 2000. In-process research and development was written off during the month of September 2000. The operating results of Viewpoint Digital have been included in the accompanying consolidated financial statements from the date of acquisition. RAYFLECT S.A. On June 29, 1999, the Company completed the acquisition of RAYflect S.A. ("RAYflect"), a privately held company based in France that developed and marketed 3D graphic design tools for professionals. The acquisition was accounted for by the Company under the purchase method of accounting. Under the terms of the Purchase Agreement, the stockholders of RAYflect received 125,996 shares of the Company's common stock valued at approximately $597,000 at June 29, 1999, the closing date, and cash consideration totaling $622,000. The purchase price of approximately $1,277,000 was capitalized by the Company as goodwill and was being amortized over 3 years. At December 31, 1999, the Company wrote off the remaining goodwill related to the RAYflect acquisition, to discontinued operations. The operating results of RAYflect have been included in the accompanying consolidated financial statements from the date of acquisition and classified as discontinued operations for all periods presented. 40 42 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CANOMA, INC. On December 31, 1998, the Company completed the acquisition of Canoma, Inc. ("Canoma"), a privately held development-stage software company based in Northern California, that was developing software technology that creates 3D digital images and content from 2D digital images for use primarily over the Internet and in other applications. The acquisition was accounted for by the Company under the purchase method of accounting. Under the terms of the Purchase Agreement, the stockholders of Canoma received 300,000 shares of the Company's common stock valued at approximately $1,305,000 at December 31, 1998, the closing date, and cash consideration totaling $1,750,000. As of December 31, 1998, neither technological feasibility nor commercial viability had been reached with regard to Canoma's technology or potential products. Based upon projected future cash flows, risk-adjusted using a 33% discount rate, Canoma's in-process technology was valued at approximately $2,250,000, which, including acquisition costs totaling approximately $100,000, resulted in a one time charge to earnings of approximately $2,350,000 for the year ended December 31, 1998. The remaining purchase price of approximately $805,000 was capitalized by the Company as goodwill and acquired technology and was being amortized over 5 years. At December 31, 1999, the Company wrote off the remaining goodwill related to the Canoma acquisition, to discontinued operations. The operating results of Canoma have been included in the accompanying consolidated financial statements from the date of acquisition and classified as discontinued operations for all periods presented. 6. MANDATORILY REDEEMABLE PREFERRED STOCK OF SUBSIDIARY In June 2000, Metastream issued 1,500,000 shares of Series A Convertible Preferred Stock to America Online, Inc. ("AOL") for cash consideration totaling $10,000,000. Prior to the merger of the Company and Metastream (Note 7), each share of Series A Convertible Preferred Stock was exchanged by the Company, into 1,725,000 shares of the Company's common stock. In connection with the issuance of the shares of Series A Convertible Preferred Stock to AOL and the simultaneous execution of a licensing and distribution arrangement, the Company recorded a one-time non-cash sales and marketing charge of $5,740,000 related to the difference between the fair value of the Company's common shares into which AOL could have converted the preferred shares on the date of issuance, and the $10,000,000 cash consideration paid by AOL. The Series A Convertible Preferred Stock held by AOL also contained a put right whereby AOL could have required the Company to purchase the preferred shares, unless exchanged, at a price equal to the original purchase price paid by AOL, plus interest. In July 2000, Metastream issued 1,500,000 shares of Series B Convertible Preferred Stock to Adobe Systems Incorporated ("Adobe") for cash consideration totaling $10,000,000. Prior to the merger of the Company and Metastream (Note 7), each share of Series B Convertible Preferred Stock was exchanged by the Company, into 1,725,000 shares of Company common stock. In connection with the issuance of the shares of Series B Convertible Preferred Stock to Adobe and the simultaneous execution of a licensing and distribution arrangement, the Company recorded a one-time non-cash sales and marketing charge of $14,258,000 related to the difference between the fair value of the Company's common shares into which Adobe could have converted the preferred shares on the date of issuance, and the $10,000,000 cash consideration paid by Adobe. The Series B Convertible Preferred Stock held by Adobe also contained a put right whereby Adobe could have required the Company to purchase the preferred shares, unless exchanged, at a price equal to the original purchase price paid by Adobe, plus interest. Accretion for these mandatorily redeemable securities totaled $438,000 prior to the date the preferred stock was exchanged for Company common stock. 7. AGREEMENTS WITH COMPUTER ASSOCIATES AND MINORITY INTEREST Beginning in June 1999, the Company entered into a series of agreements with Computer Associates. The agreements included a non-exclusive limited-use perpetual license to use the Company's 3D related technologies and a 41 43 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) service agreement whereby the Company would provide a defined number of development personnel to Computer Associates on an as needed basis. Concurrent with the license agreement, the Company also granted Computer Associates a 20% equity interest in Metastream, for certain non-monetary support as consideration. The Company concluded that the series of transactions with Computer Associates should be viewed in the aggregate and the monetary consideration allocated to each component based on their fair values. Since the limited-use license of related technologies was a unique, one-time transaction, the Company did not have the requisite evidence of its fair value pursuant to the provisions of SOP No. 97-2. An independent valuation of the 20% interest in Metastream indicated a fair value in excess of the monetary consideration ascribed to Computer Associates limited-use licensing rights; therefore, the Company concluded the appropriate recognition for the transactions was to allocate the committed monetary consideration to the equity component. The Company allocated the consideration received of $7,000,000 between minority interest and "change in interest gain" pursuant to the provisions of SAB No. 51. The "change in interest gain" has been recorded to paid-in capital in the Company's consolidated balance sheets. For financial reporting purposes, the assets, liabilities and earnings of Metastream are included in the Company's consolidated financial statements. Computer Associates' and another minority shareholder's combined 20% interest in Metastream was recorded as minority interest in the Company's consolidated balance sheets, and the losses allocable to their 20% interest have been reported as minority interest in the Company's consolidated statements of operations. In connection with the grant of stock options in Metastream to certain employees and non-employee directors, the Company recorded total deferred compensation of approximately $24,206,000 and $16,811,000 for the years ended December 31, 2000 and 1999, respectively. This deferred compensation represented the difference between the fair value of Metastream common stock and the exercise price of these options at the date of grant. Minority interest in the Company's consolidated balance sheets was credited with its proportionate interest in stock-based compensation expense that was recognized through November 30, 2000. On August 10, 2000, the Company entered into an Exchange Agreement with Computer Associates pursuant to which the Company issued to Computer Associates 1.15 shares of the Company's common stock in exchange for each share of common stock of Metastream held by Computer Associates. On consummation of the share exchange in November 2000, Computer Associates exchanged its 4,800,000 shares of Metastream common stock for 5,520,000 newly issued shares of Company common stock. The consideration paid by the Company in connection with the exchange approximated $57,087,000, consisting of the following: - The issuance of 5,520,000 shares of Company common stock valued at $10.25 per common share, which was the average market price of the Company's common stock for the two trading days before and after August 10, 2000, for equity consideration of $56,580,000; and - Transaction costs of $507,000. The exchange of shares was accounted for as an acquisition of minority interest under the purchase method of accounting. Accordingly, the purchase price was allocated to goodwill, net of the carrying value of Computer Associates' minority interest. The goodwill recorded is being amortized over four years. On completion of the share exchange with Computer Associates and the preferred stock exchanges with AOL and Adobe (Note 6), the Company owned 99.8% of the outstanding capital stock of Metastream. The other shareholder holding an interest in Metastream was a former director of the Company who was issued and subsequently exercised an option to purchase 50,000 shares of Metastream common stock. This shareholder's shares were exchanged for 57,500 newly issued shares of Company common stock, which was accounted for as an acquisition of minority interest under the purchase method of accounting. Accordingly, the purchase price of $270,000 was allocated to goodwill, net of the carrying value of this shareholder's minority interest. The goodwill recorded will be amortized over four years. Amortization expense related to the acquisitions of minority interest totaled $894,000 for the year ended December 31, 2000. 42 44 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Subsequent to the acquisitions of minority interest, the Company merged with Metastream. The following unaudited pro forma consolidated amounts give affect to the Viewpoint Digital acquisition (Note 5) and the minority interest acquisitions, as if they all had taken place on January 1, 1999. In management's opinion, the following unaudited pro forma consolidated information is not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated on January 1, 1999, and should not be construed as being representative of future operating results.
YEAR ENDED DECEMBER 31, -------------------------- 2000 1999 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.................................................... $ 8,244 $ 11,377 Net loss from continuing operations applicable to common shareholders.............................................. $(79,207) $(35,472) Basic and diluted net loss per common share from continuing operations................................................ $ (2.30) $ (1.15)
8. MARKETABLE SECURITIES The cost and fair value of the Company's marketable securities portfolio as of December 31, 2000, by type of security, contractual maturity, and its classification in the balance sheet, is as follows (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAIN (LOSS) FAIR VALUE MATURITY --------- ---------- ---------- ---------- -------- TYPE OF SECURITY: Money Market Funds.............................. $13,064 $-- $-- $13,064 2001 Corporate Debt Securities....................... 7,947 6 -- 7,953 2001 U.S. Government Agencies........................ 6,697 7 (1) 6,703 2001 Certificates of Deposit......................... 1,057 -- -- 1,057 2001 ------- --- --- ------- $28,765 $13 $(1) $28,777 ======= === === ======= CLASSIFICATION IN BALANCE SHEET: Cash and Cash Equivalents....................... $13,064 $-- $-- $13,064 2001 Marketable Securities........................... 15,701 13 (1) 15,713 2001 ------- --- --- ------- $28,765 $13 $(1) $28,777 ======= === === =======
The cost and fair value of the Company's marketable securities portfolio as of December 31, 1999, by type of security, contractual maturity, and its classification in the balance sheet, is as follows (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAIN (LOSS) FAIR VALUE MATURITY --------- ---------- ---------- ---------- ----------- TYPE OF SECURITY: Money Market Funds.......................... $ 253 $-- $ -- $ 253 2000 Corporate Debt Securities................... 32,016 2 (51) 31,967 2000 - 2001 U.S. Government Agencies.................... 3,048 -- (20) 3,028 2000 - 2001 ------- -- ---- ------- $35,317 $2 $(71) $35,248 ======= == ==== ======= CLASSIFICATION IN BALANCE SHEET: Cash and Cash Equivalents................... $ 2,481 $-- $ -- $ 2,481 2000 Marketable Securities....................... 32,836 2 (71) 32,767 2000 - 2001 ------- -- ---- ------- $35,317 $2 $(71) $35,248 ======= == ==== =======
43 45 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
DECEMBER 31, --------------- 2000 1999 ------ ----- Computer equipment and software............................. $3,432 $ 573 Office furniture and equipment.............................. 1,545 129 Leasehold improvements...................................... 1,405 104 Other....................................................... 233 -- ------ ----- 6,615 806 Less accumulated depreciation and amortization.............. (993) (192) ------ ----- $5,622 $ 614 ====== =====
10. RELATED PARTY TRANSACTIONS During 2000, the Company recorded revenue of $500,000 related to services provided to Computer Associates. In March 1999, the Company recorded revenue from Computer Associates totaling $1,200,000, of which $950,000 related to an agreement granting Computer Associates a license to 3D-related technologies, which date was prior to Computer Associates becoming a minority interest owner in Metastream (Note 7), and $250,000 related to services performed on behalf of Computer Associates during 1999. During 2000, the Company loaned $1,500,000 to an officer of the Company. The loan, which was non-interest bearing and was collateralized by 200,000 shares of restricted Company common stock, as well as options to purchase 790,000 shares of Company common stock, is currently in default. The loan, which was originally due on May 1, 2004, became due 30 days after the officer ceased to be an employee of the Company. As of December 31, 2000, the Company recorded a reserve against the loan in the amount of $750,000. During 1998, the Company loaned $1,000,000 to an officer and director of the Company. The loan, which was non-interest bearing, was repaid in March 2000. The Company also loaned $150,000 to another officer and director of the Company. The loan, which accrued interest semi-annually at 4.47%, was repaid in 1999. In connection with the acquisition of Real Time Geometry Corp. ("RTG") in December 1996, the Company entered into a noncompetition agreement with one of RTG's founders who is an executive of the Company. The agreement, which carries a term of four years, provided for payments to the executive in the amount of $300,000 in 1997 and $150,000 in each of 1998 and 1999. In addition, the Company loaned $2,000,000 to the executive. The loan, which accrued interest semi-annually at 5.67% and was payable on January 15, 2001, is collateralized by shares of common stock of the Company owned by the executive. The loan is currently in default and the Company intends to exercise its rights with respect to the collateral. As of December 31, 2000, the Company recorded a reserve against the loan in the amount of $1,442,000, which represented the unsecured portion of the loan as of December 31, 2000. The Company also loaned $1,000,000 to another of RTG's founders, who is an officer and director of the Company. The loan, which accrued interest semi-annually at 5.67% was contractually forgiven in accordance with the officer's employment agreement, upon the merger of the Company with Metastream (Note 7). The Company recorded a compensation charge of $2,322,000 related to the forgiveness of the loan and the income taxes thereon. 11. EMPLOYEE BENEFIT PLANS EMPLOYEE STOCK PURCHASE PLAN The Company's 1995 Employee Stock Purchase Plan (the "1995 Purchase Plan"), which is qualified under Section 423 of the Internal Revenue Code of 1986, as amended, permitted eligible employees of the Company, via payroll deductions, to purchase shares of the Company's common stock semi-annually at 85 percent of the market price, on either 44 46 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the purchase date or the offering date, whichever was lower. As of December 31, 2000, approximately 281,000 shares of common stock have been issued under the 1995 Purchase Plan. At December 31, 2000, no shares of common stock were reserved for future issuance under the 1995 Purchase Plan. 401(K) PLAN In September 1995, the Company adopted a Defined Contribution Plan (the "401(k) Plan"). Participation in the 401(k) Plan is available to substantially all employees. Employees can contribute up to 15% of their salary, up to the Federal maximum allowable limit, on a before tax basis to the 401(k) Plan. Company contributions to the 401(k) Plan are discretionary. The Company made contributions totaling $121,000, $164,000 and $161,000 to the 401(k) Plan during the years ended December 31, 2000, 1999 and 1998, respectively. STOCK OPTION PLANS 1992 Incentive Stock Option Plan The Company's 1992 Incentive Stock Option Plan (the "1992 Plan") provides for the grant to employees of incentive stock options and nonstatutory stock options and for the sale or award of restricted common stock to employees and consultants of the Company. As of December 31, 2000, options to purchase an aggregate of 25,000 shares of common stock were outstanding under the 1992 Plan, with vesting provisions ranging up to five years. Options granted under the 1992 Plan are exercisable for a period of ten years. At December 31, 2000, no shares of common stock were reserved for additional grants of options or awards of restricted stock under the 1992 Plan. 1994 Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock Purchase Plan The Company's 1994 Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock Purchase Plan (the "1994 Plan") provides for the grant to employees of incentive stock options and nonstatutory stock options and for the sale of restricted common stock to employees and consultants of the Company, with vesting provisions ranging up to five years. Options granted under the 1994 Plan are exercisable for a period of ten years. As of December 31, 2000, options to purchase an aggregate of 47,000 shares of common stock were outstanding under the 1994 Plan. At December 31, 2000, no shares of common stock were reserved for additional grants of options or awards of restricted stock under the 1994 Plan. 1995 Stock Plan The Company's 1995 Stock Plan (the "1995 Plan") provides for the grant to employees (including officers and employee directors) of incentive stock options and for the grant to employees (including officers and employee directors), non employee directors and consultants of nonstatutory stock options and stock purchase rights. Upon the merger of the Company and Metastream, Metastream's Option Plan was merged into the Company's 1995 plan. As of December 31, 2000, options to purchase an aggregate of 9,034,000 shares of common stock were outstanding under the 1995 Plan, with vesting provisions ranging up to four years. Options granted under the 1995 Plan are exercisable for a period of ten years. At December 31, 2000, an aggregate of 1,020,000 shares of common stock were reserved for future issuance under the 1995 Plan. 1995 Director Option Plan The Company's 1995 Director Option Plan (the "Director Plan") provides for an automatic grant of options to purchase shares of common stock to each non-employee director of the Company. Options granted under the 1995 Director Plan vest over one and a half to four and a half years and are exercisable for a period of ten years. As of December 31, 2000, 45,000 options were outstanding under the 1995 Director Plan. At December 31, 2000, an aggregate of 81,000 shares of common stock were reserved for future issuance under the 1995 Director Plan. 45 47 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1996 Nonstatutory Stock Option Plan The Company's 1996 Nonstatutory Stock Option Plan (the "1996 Nonstatutory Plan") provides for the grant to employees (including officers and employee directors) and consultants of nonstatutory stock options and stock purchase rights. As of December 31, 2000, options to purchase an aggregate of 919,000 shares of common stock were outstanding under the 1996 Nonstatutory Plan, with vesting provisions ranging up to four years. Options granted under the 1996 Nonstatutory Plan are exercisable for a period of ten years. At December 31, 2000, an aggregate of 1,484,000 shares of common stock were reserved for future issuance under the 1996 Nonstatutory Plan. Fractal Stock Option Plan In connection with the Company's merger with Fractal Design Corporation ("Fractal"), which became effective on May 30, 1997, the Company assumed all of the options outstanding under the Ray Dream 1992 Stock Option Plan, the Fractal 1993 Stock Option Plan, the Fractal 1995 Stock Option Plan, the Fractal Director Plan and the Fractal Outside Plan (collectively, the "Fractal Plans"). All such options were converted into options to purchase 0.749 shares of Company common stock at an exercise price equal to the exercise price of the converted option divided by 0.749. Options granted under the Fractal Plans generally vest over a four year period and are exercisable for a period of ten years. As of December 31, 2000, options to purchase an aggregate of 65,000 shares of common stock were outstanding under the Fractal Plans. At December 31, 2000, no shares of common stock were reserved for future issuance under the Fractal Plans. Metastream Option Plan Metastream's Stock Plan (the "Metastream Option Plan") provided for the grant to employees (including officers and employee directors), non-employee directors and consultants, of nonstatutory stock options and stock purchase rights. Upon the merger of the Company and Metastream, all outstanding options to purchase Metastream common stock were converted into options to purchase 1.15 shares of Company common stock at an exercise price equal to the exercise price of the converted option divided by 1.15, and the Metastream Option Plan was merged into the 1995 Plan. 46 48 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OPTIONS ISSUED UNDER STOCK OPTION PLANS The following summarizes activity in the Stock Option Plans for the years ended December 31, 1998, 1999, and 2000 (in thousands, except per share data and lives):
OPTIONS OUTSTANDING OPTIONS ------------------------- AVAILABLE NUMBER WEIGHTED FOR OF AVERAGE GRANT SHARES EXERCISE PRICE --------- ------- -------------- Options outstanding at December 31, 1997.................... 464 5,503 $8.66 Shares reserved under new plans........................... 2,700 -- -- Reduction in shares reserved under plans.................. (426) -- -- Granted -- exercise price equal to fair value............. (5,412) 5,412 6.07 Granted -- exercise price greater than fair value......... (1,577) 1,577 5.09 Exercised................................................. -- (233) 3.66 Canceled.................................................. 5,176 (5,176) 9.38 ------ ------- ----- Options outstanding at December 31, 1998.................... 925 7,083 5.53 Shares reserved under new plans........................... 1,225 -- -- Reduction in shares reserved under plans.................. (117) -- -- Granted -- exercise price equal to fair value............. (2,113) 2,113 5.74 Exercised................................................. -- (959) 4.24 Canceled.................................................. 1,778 (1,778) 5.58 ------ ------- ----- Options outstanding at December 31, 1999.................... 1,698 6,459 5.78 Shares reserved under plans............................... 7,250 -- -- Reduction in shares reserved under plans.................. (9) -- -- Granted -- exercise price equal to fair value............. (306) 306 7.77 Exchange of options as part of merger..................... (9,222) 9,222 2.45 Exercised................................................. -- (2,678) 4.69 Canceled.................................................. 3,174 (3,174) 5.54 ------ ------- ----- Options outstanding at December 31, 2000.................... 2,585 10,135 $3.17 ====== ======= =====
47 49 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes information about the Company's stock options outstanding at December 31, 2000 (in thousands, except per share data and lives):
OUTSTANDING EXERCISABLE ----------------------------- ------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE PRICE RANGE SHARES LIFE(A) PRICE SHARES PRICE - -------------------- ------ ------- -------- ------ -------- $0.08 -- $0.87................................. 4,634 8.38 $ 0.87 2,322 $ 0.87 $1.00 -- $3.50................................. 1,159 8.91 2.58 308 2.50 $4.35 -- $4.35................................. 2,010 9.59 4.35 607 4.35 $4.69 -- $8.56................................. 1,828 7.90 5.78 841 5.55 $8.70 -- $25.13................................ 504 6.89 11.57 400 12.22 ------ ----- Total.......................................... 10,135 8.52 $ 3.17 4,478 $ 3.35 ====== =====
- --------------- (a) Average contractual life remaining in years. The Company accrued incentive compensation expense for the difference between the grant price and the deemed fair value of the common stock underlying options, which are fully vested, issued in connection with the RTG acquisition in December 1996. At December 31, 2000 accrued incentive compensation related to the options totaled, $546,000. The following summarizes options exercisable at December 31, 2000, 1999 and 1998, (in thousands):
DECEMBER 31, ----------------------- 2000 1999 1998 ----- ----- ----- Options exercisable......................................... 4,478 3,592 1,847
OPTIONS ISSUED UNDER METASTREAM OPTION PLAN The following summarizes activity in the Metastream Option Plan for the years ended December 31, 1999 and 2000 (in thousands, except per share data and lives):
OPTIONS OUTSTANDING -------------------- OPTIONS WEIGHTED AVAILABLE NUMBER AVERAGE FOR OF EXERCISE GRANT SHARES PRICE --------- ------- --------- Shares reserved under new plan.............................. 6,000 -- $ -- Granted -- exercise price below fair value................ (3,663) 3,663 1.00 Exercised................................................. -- -- -- Canceled.................................................. 40 (40) 1.00 ------ ------ ----- Options outstanding at December 31, 1999.................... 2,377 3,623 1.00 Shares reserved under plan................................ 2,000 -- -- Granted -- exercise price below fair value................ (4,084) 4,084 4.01 Granted -- exercise price equal to fair value............. (421) 421 6.69 Exercised................................................. -- (50) 1.00 Canceled.................................................. 59 (59) 3.01 Exchange of options as part of merger..................... 8,019 (8,019) 2.82 Termination of plan....................................... (7,950) -- -- ------ ------ ----- Options outstanding at December 31, 2000.................... -- -- $ -- ====== ====== =====
48 50 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In connection with the grant of stock options in Metastream to certain employees and non-employee directors, the Company recorded total deferred compensation of approximately $24,206,000 and $16,811,000 for the years ended December 31, 2000 and 1999, respectively. This deferred compensation represented the difference between the fair value of Metastream common stock and the exercise price of these options at the date of grant. Stock based compensation expense of $12,341,000 and $6,081,000 was recognized during the years ended December 31, 2000 and 1999, respectively. PRO FORMA INFORMATION Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company has accounted for the Plans under the fair value method of SFAS No. 123. The fair value of options issued under the Plans was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 1998 ----- ---- ----- Risk-free interest rate..................................... 6.0% 5.8% 5.6% Dividend yield.............................................. -- -- -- Volatility factor........................................... 1.00 .90 1.00 Weighted average expected life in years..................... 4.5 4.5 4.3
The following summarizes the weighted average fair value of options granted during the years ended December 31, 2000, 1999 and 1998:
YEARS ENDED DECEMBER 31, ------------------------- 2000 1999 1998 ----- ----- ----- Exercise price equal to fair value.......................... $4.68 $4.04 $4.46 Exercise price greater than fair value...................... -- -- 2.23 Exercise price less than fair value......................... 9.32 5.14 --
For purposes of pro forma disclosures, the estimated fair value of the Company's options is amortized to expense over the options' vesting period. The Company's pro forma net loss and net loss per common share would approximate the following (in thousands, except per share amounts):
AS REPORTED PRO FORMA ----------- --------- Year Ended December 31, 2000: Net loss applicable to common shareholders................ $(56,394) $(67,231) Net loss per common share................................. (1.96) (2.34) Year Ended December 31, 1999: Net loss applicable to common shareholders................ $(50,654) $(54,600) Net loss per common share................................. (2.06) (2.22) Year Ended December 31, 1998: Net loss applicable to common shareholders................ $(19,831) $(21,732) Net loss per common share................................. (0.83) (0.91)
The effects of applying SFAS No. 123 in this proforma disclosure are not indicative of future amounts. The Company anticipates grants of additional awards in future years. 49 51 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. INCOME TAXES The components of the provision (benefit) for income taxes for the years ended December 31, 2000, 1999 and 1998 are as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 1998 ----- ------ ----- Current: Federal................................................... $-- $ (435) $ 190 State..................................................... -- 3 1 Foreign................................................... -- -- 216 --- ------ ----- Total current..................................... -- (432) 407 Deferred:................................................... -- Federal................................................... -- 3,971 67 State..................................................... -- 1,184 (394) Foreign................................................... -- 758 (433) --- ------ ----- Total deferred.................................... -- 5,913 (760) --- ------ ----- $-- $5,481 $(353) === ====== =====
The differences between the statutory rate and the Company's effective income tax rate are as follows:
YEARS ENDED DECEMBER 31, ------------------------- 2000 1999 1998 ------ ------ ----- Federal tax benefit at the statutory rate................... (34.0)% (34.0)% (34.0)% State income taxes, net of Federal income tax benefit....... (3.03) (4.4) (5.1) Nondeductible acquisition costs............................. -- -- 3.9 Other....................................................... 4.35 3.7 7.7 Change in valuation reserve................................. 32.68 50.3 25.7 ------ ------ ----- Effective income tax rate................................... --% 15.6% (1.8)% ====== ====== =====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, together with net operating loss 50 52 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and tax credit carryforwards. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
DECEMBER 31, -------------------- 2000 1999 -------- -------- Deferred tax assets: Balance sheet reserves.................................... $ 937 $ 3,623 Accrued expenses.......................................... 230 1,057 Tax credit carryforwards.................................. 3,247 3,290 Net operating loss carryforwards.......................... 41,626 15,679 -------- -------- 46,040 23,649 Valuation allowance....................................... (42,044) (23,611) -------- -------- Net deferred tax assets................................ 3,996 38 Net deferred tax liabilities........................... (3,996) (38) -------- -------- Net deferred taxes..................................... $ -- $ -- ======== ========
The valuation allowance for deferred taxes increased by approximately $18,433,000 and $17,509,000 during 2000 and 1999, respectively, providing a full valuation allowance against the Company's net deferred tax assets. The Company's net deferred tax assets include substantial amounts of net operating loss carryforwards. Inability to generate taxable income within the carryforward period would affect the ultimate realizability of such assets. Consequently, management determined that sufficient uncertainty exists regarding the realizability of these assets to warrant the establishment of the full valuation allowance. Management's assessment with respect to the amount of deferred tax assets considered realizable may be revised over the near term based on actual operating results and revised financial statement projections. At December 31, 2000, the Company has net operating loss and tax credit carryforwards of approximately $107,646,000 and $2,175,000, respectively, for federal income tax purposes, which begin expiring in 2011. The Company's federal net operating loss carryforward relates to the Company's acquisitions of RTG and Specular and the net losses incurred by the Company during the years ended December 31, 2000, 1999 and 1998. The Company also has net operating loss and tax credit carryforwards for state income tax purposes, which begin expiring in 2001. The Company's state net operating loss carryforward primarily relates to the net losses incurred by the Company during the years ended December 31, 2000, 1999 and 1998. Additionally, the Company has net operating loss and tax credit carryforwards of approximately $10,690,000 and $211,000, respectively, for foreign income tax purposes, which do not expire. The Company's foreign net operating loss carryforward relates to net losses incurred by the Company's subsidiary in Ireland during the years ended December 31, 1999, 1998 and 1997 which have been included in discontinued operations. The net operating loss carryforwards may be used to offset any future taxable income, subject to potential limitations on the Company's ability to utilize such loss carryforwards pursuant to the ownership rule changes of the Internal Revenue Code, Section 382. 51 53 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. EARNINGS PER SHARE The following table provides a reconciliation of the numerators and denominators of the basic and diluted per-share computations for the years ended December 31, 2000, 1999 and 1998 (in thousands, except per share amounts):
LOSS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- Year Ended December 31, 2000: Basic EPS.............................................. $(56,394) 28,718 $(1.96) Effect of dilutive securities -- stock options......... -- -- -- -------- ------ ------ Diluted EPS............................................ $(56,394) 28,718 $(1.96) ======== ====== ====== Year Ended December 31, 1999: Basic EPS.............................................. $(50,654) 24,581 $(2.06) Effect of dilutive securities -- stock options......... -- -- -- -------- ------ ------ Diluted EPS............................................ $(50,654) 24,581 $(2.06) ======== ====== ====== Year Ended December 31, 1998: Basic EPS.............................................. $(19,831) 23,779 $(0.83) Effect of dilutive securities -- stock options......... -- -- -- -------- ------ ------ Diluted EPS............................................ $(19,831) 23,779 $(0.83) ======== ====== ======
The computation of diluted EPS excluded stock options to purchase approximately 10,135,000, 6,459,000 and 7,083,000 shares of common stock for the years ended December 31, 2000, 1999 and 1998, respectively, because to do so would have been anti-dilutive for the periods presented. 14. COMMITMENTS The Company leases its primary office space in New York City pursuant to various lease agreements with terms through February of 2010. In conjunction with the acquisition of Viewpoint Digital, the Company began leasing office space in Salt Lake City, Utah with a lease term through April of 2010. Also pursuant to the Viewpoint Digital acquisition, the Company began leasing office space in San Francisco and Los Angeles, California, with lease terms through December of 2003 and December of 2004, respectively. The Company also leases certain equipment and a vehicle for an executive in the Company with lease terms of up to three years. Rent expense for office space, equipment, and vehicle totaled approximately $2,259,000, $2,028,000 and $1,552,000 for the years ended December 31, 2000, 1999, and 1998, respectively. Sublease income totaled approximately $177,000, $382,000 and $24,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Future minimum lease payments relating to continuing operations under non-cancelable operating leases for each twelve-month period subsequent to December 31, 2000 are as follows (in thousands): 2001........................................................ $1,372 2002........................................................ 1,187 2003........................................................ 931 2004........................................................ 943 2005........................................................ 743 Thereafter.................................................. 3,133 ------ $8,309 ======
52 54 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. CONTINGENCIES The Company is engaged in certain legal actions arising in the ordinary course of business. On advice of counsel, the Company believes it has adequate legal defenses and that the ultimate outcome of these actions will not have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. 16. SEGMENT INFORMATION AND ENTERPRISE-WIDE DISCLOSURES The Company's continuing operations are focused on one business segment, e-commerce visualization. The Company is organized into a single reporting segment, which is evaluated by management for making operating decisions and assessing performance. The Company's customers consist primarily of companies located in the United States. The Company's long-lived assets from continuing operations are located solely in the United States. MAJOR CUSTOMERS Customers whose net revenues represent greater than 10 percent of the Company's consolidated net revenues from continuing operations for the years ended December 31, 2000, 1999 and 1998 are as follows:
YEARS ENDED DECEMBER 31, ------------------------- 2000 1999 1998 ----- ----- ----- Customer A (Note 10)........................................ 14% 39% --% Customer B.................................................. 26% --% --% Customer C.................................................. --% 49% 66% Customer D.................................................. --% --% 15% Customer E.................................................. --% --% 15%
Customers whose accounts receivable represent greater than 10 percent of the Company's consolidated net accounts receivable from continuing operations at December 31, 2000 and 1999 are as follows:
DECEMBER 31, ------------ 2000 1999 ---- ---- Customer A.................................................. 12% --% Customer B.................................................. 13% --% Customer F.................................................. 14% --% Customer G.................................................. --% 100%
53 55 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Summarized quarterly financial information for the years 2000 and 1999, are as follows (in thousands, except per share amounts):
QUARTER ENDED --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- Fiscal year 2000: Net revenues................................. $ 162 $ 155 $ 1,139 $ 2,124 Net loss from continuing operations.......... (5,887) (10,709) (23,485) (17,371) Net income (loss) from discontinued operations................................ 1,265 -- (593) 824 Net loss applicable to common shareholders... (4,622) (10,709) (24,353) (16,710) Net loss per share (diluted)................. (0.17) (0.39) (0.86) (0.52) Fiscal year 1999: Net revenues................................. $ 2,263 $ 15 $ 646 $ 169 Net income (loss) from continuing operations................................ 855 (1,565) (1,132) (12,741) Net loss from discontinued operations........ (1,947) (1,296) (2,543) (30,285) Net loss applicable to common shareholders... (1,092) (2,861) (3,675) (43,026) Net loss per share (diluted)................. (0.04) (0.12) (0.15) (1.73)
54 56 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) VIEWPOINT CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING REVENUE/ OTHER COSTS AND END OF DESCRIPTION OF PERIOD EXPENSE ADDITIONS DEDUCTIONS PERIOD - ----------- ---------- ---------- --------- ---------- ---------- ALLOWANCE FOR ACCOUNTS RECEIVABLE: Year Ended December 31, 2000.............. $ -- $ 40 $ 756(1) $ -- $ 796 Year Ended December 31, 1999.............. -- -- -- -- -- Year Ended December 31, 1998.............. -- -- -- -- -- ALLOWANCE FOR NOTES RECEIVABLE: Year Ended December 31, 2000.............. $ -- $ 2,192 $ -- $ -- $ 2,192 Year Ended December 31, 1999.............. -- -- -- -- -- Year Ended December 31, 1998.............. -- -- -- -- -- ALLOWANCES RELATED TO DISCONTINUED OPERATIONS: Year Ended December 31, 2000.............. $14,745 $ -- $ -- $12,329 $ 2,416 Year Ended December 31, 1999.............. 3,143 16,254 10,699(2) 15,351 14,745 Year Ended December 31, 1998.............. 3,969 13,079 1,323(3) 15,228 3,143 VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS FROM CONTINUING OPERATIONS: Year Ended December 31, 2000.............. $23,611 $18,433 $ -- $ -- $42,044 Year Ended December 31, 1999.............. 6,102 17,509 -- -- 23,611 Year Ended December 31, 1998.............. 911 5,191 -- -- 6,102
- --------------- (1) Reserve established in connection with the acquisition of Viewpoint Digital in September 2000. (2) Reserves established in connection with the disposal of discontinued operations in December 1999. (3) Reserves established in connection with the restructuring in June 1998. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 55 57 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS OF THE REGISTRANT The following table sets forth certain information regarding the Company's directors as of March 15, 2001:
NAME AGE PRINCIPAL OCCUPATION ---- --- -------------------- Thomas Bennett....................... 44 Senior Vice President, Business Development, Computer Associates International, Inc. Bruce R. Chizen...................... 45 President and Chief Executive Officer of Adobe Systems Incorporated Samuel H. Jones, Jr. ................ 67 President of S-J Transportation Company Lennert J. Leader.................... 44 President of the Venture Group of AOL Time Warner Investments Robert E. Rice....................... 46 Chairman, President and Chief Executive Officer of the Company
Except as set forth below, each nominee has been engaged in his principal occupation described above during the past five years. There is no family relationship among any directors or executive officers of the Company. Mr. Bennett has been a director of the Company since November 2000. He has been with Computer Associates International, Inc. since 1988 and has been serving as its Senior Vice President of Business Development since April 1997. On February 8, 2000, he became a director of Metastream Corporation (a subsidiary of the Company from its formation in June 1999 until its merger with the Company in November 2000). Mr. Bennett currently serves as a member of the board of directors of I-Storm, Inc. and several private companies. Mr. Chizen has been a director of the Company since November 2000. He has been the Chief Executive Officer of Adobe Systems Incorporated since December 2000 and has been the President of Adobe since April 2000. Mr. Chizen joined Adobe in August 1994 as Vice President and General Manager, Consumer Products Division. In December 1997, he was promoted to Senior Vice President and General Manager, Graphic Products Division and in August 1998, Mr. Chizen was promoted to Executive Vice President, Products and Marketing. Mr. Jones has been a director of the Company since April 1992. He has been President of S-J Venture Capital Company since 1991 and President of S-J Transportation Company, an industrial waste transportation company, since 1971. Mr. Jones is a director of Fulton Financial Corp. Mr. Leader has been a director of the Company since November 2000. Mr. Leader became President of the Venture Group of AOL Time Warner Investments upon the merger of America Online, Inc. and Time Warner Inc. in January 2001. Prior to the merger, Mr. Leader served as the President of AOL Investments, a division of America Online, Inc., beginning in February 1998. Mr. Leader served as Senior Vice President, Chief Financial Officer, and Treasurer of AOL from September 1989 until July 1998. Prior to joining AOL, Mr. Leader was a Vice President -- Finance of LEGENT Corporation, a computer software and services company, from March 1989 to September 1989, and Chief Financial Officer of Morino, Inc., a computer software and services company, from 1986 to March 1989 and Director of Finance from 1984 to 1986. Prior to joining Morino, Inc. in 1984, he was an audit manager of Price Waterhouse. Mr. Leader serves as a director of iVillage Inc. and Multex.com, Inc. Mr. Leader graduated with a B.S. in Accounting in 1977 from the University of Baltimore. Mr. Rice has been a director of the Company since April 4, 2000. Mr. Rice co-founded Real Time Geometry Corp. and served as its chairman until its sale to the Company in 1996. At the Company, he served as vice president of strategic affairs until September 1999. He has been the President and a director of Metastream Corporation since its formation in June 1999 and has been President and Chief Executive Officer of the Company since April 7, 2000. Before founding Real 56 58 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Time Geometry, Mr. Rice was a partner at the law firm of Milbank, Tweed, Hadley and McCloy LLP, where he advised on various corporate, tax, and intellectual property issues. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the Company's current executive officers as of March 15, 2001:
NAME AGE POSITION ---- --- -------- Robert E. Rice....................... 46 Chairman, President and Chief Executive Officer Jeffrey J. Kaplan.................... 52 Executive Vice President and Chief Financial Officer David Feldman........................ 34 Executive Vice President, Business Development and Chief Strategist Anders Vinberg....................... 51 Executive Vice President of Technology, Engineering and Information Systems Christopher Gentile.................. 42 Executive Vice President, Creative Services Paul Kadin........................... 47 Executive Vice President, Sales
Mr. Feldman has been Executive Vice President of Marketing and Chief Strategist of the Company since February 2001. Mr. Feldman served as Vice President of Business Development and Chief Strategist of Metastream from its formation in June 1999 through its merger with the Company in November 2000 and served as Vice President and Chief Strategist at the Company from November 2000 until his appointment to Executive Vice President of Marketing in February 2001. Mr. Feldman served as Vice President, Business Development of the Company in 1999 and had served as Director, Business Development, and Director, Princeton Products Group of the Company from 1997 to 1999. Mr. Feldman served both as Chief Strategist and a member of the board of directors of Specular International from 1995 until its acquisition by the Company in 1997. Mr. Kadin has been with the Company since February 2000. His initial responsibilities were Sales, Marketing, and Client Services globally. His current focus is on development of indirect sales channels, key strategic alliances, and international markets for the Company. Prior to joining Viewpoint, Mr. Kadin was President- North America for Customer Dialogue Systems, a Belgian based financial services software provider. During 1996-98, he was Executive Vice President of Dreyfus Corporation in charge of retail investments sales, product management and internet activities. From 1988-1996, Mr. Kadin held senior positions in retail banking at Chase Manhattan. A series of consumer brand management positions from 1975-1987 at Procter and Gamble, Warner Lambert and Sara Lee established Mr. Kadin's marketing background. Mr. Kaplan has been the Executive Vice President and Chief Financial Officer of the Company since February 2001. Mr. Kaplan served as Executive Vice President and Chief Financial Officer of Rare Medium Group, Inc. from September 1999 until joining the Company and served as Executive Vice President, Chief Financial Officer and Director of Safety Components International, Inc., a leading manufacturer of airbag cushions and fabric from February 1997 to August 1999. Safety Components filed for bankruptcy on April 10, 2000 and emerged from bankruptcy on October 11, 2000. From October 1993 to February 1997, Mr. Kaplan served as Executive Vice President, Chief Financial Officer and Director of International Post Limited, a leading provider of post-production services for commercial and advertising markets. Mr. Gentile has been Executive Vice President, Creative Services of the Company since November 2000. Before the merger of Metastream and Viewpoint, Mr. Gentile served at Metastream as Vice-President of Production from July 1999 through February 2000, and as Managing Director of Professional Services from February 2000 through November 2000. Before joining Metastream, Mr. Gentile founded or co-founded several businesses, including MC Squared Incorporated, a wholly owned consulting company that he founded in 1999 and where he has served as President since that date; Millennium RUS, LLC, a software development company that he founded in 1996 and where he served as President; and 57 59 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Abrams Gentile Entertainment, Inc. a developer of consumer products and theme park designs that he co-founded in 1986 and where he served as a partner. Mr. Vinberg has been Executive Vice President of Technology at the Company since September 2000. Before this, Mr. Vinberg was Divisional Senior Vice President at Computer Associates International, Inc., a software company, since 1986. In this position, Mr. Vinberg acted as chief architect and was responsible for the architecture of several of Computer Associates' strategic products. Mr. Vinberg also represented Computer Associates on the board of directors of Metastream from October 1999 until its merger with the Company in November 2000. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's securities, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater-than-10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that during the year ended December 31, 2000, its officers, directors and greater-than-10% stockholders complied with all Section 16(a) filing requirements, with the exception of late filings of Initial Statements of Beneficial Ownership of Securities on Form 3 for each of Computer Associates International, Inc., and Paul Kadin. Such forms were subsequently filed with the SEC. 58 60 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information with respect to annual compensation and long-term compensation awarded during fiscal 1998, 1999 and 2000 to each person who served as the Company's Chief Executive Officer and the Company's four other most highly compensated executive officers as of December 31, 2000 and other executive officers during 2000 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION --------------------------------------- SECURITIES OTHER UNDERLYING ANNUAL COMPANY NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS --------------------------- ---- -------- ---------- ------------ ---------- Robert Rice.................................... 2000 $275,000 $ 65,000 $2,352,132(9) 287,500 Chairman, President and 1999 185,000 65,000(5) -- 887,500 Chief Executive Officer 1998 173,333 100,000(6) -- 297,500 Mark Zimmer(1)................................. 2000 121,201 1,125,000 253,000(10) Former President and Chief 1999 250,000 169,743(7) -- 57,500 Executive Officer 1998 239,375 15,000(6) -- 40,000 James A. Abate(2).............................. 2000 141,670 50,000 70,727(11) 990,000 Former Executive Vice President and Chief Financial Officer Christopher Gentile............................ 2000 145,833 100,000 -- 115,000 Executive Vice President, Creative Services Paul Kadin..................................... 2000 155,589 30,000 -- 460,000 Executive Vice President, Sales Anders Vinberg................................. 2000 66,667 -- -- 1,185,000 Executive Vice President, Technology, Engineering and Information Systems John P. Leddy(3)............................... 2000 87,156 355,000 97,500(10) Former Senior Vice President, 1999 177,500 50,000(8) -- 75,000 Product Development 1998 57,028 25,000 -- 130,000 Jay W. Jennings(4)............................. 2000 135,826 125,000 75,000(10) 85,000 Former Controller 1999 105,833 7,000 -- 22,000 1998 81,990 -- --
- --------------- (1) Mr. Zimmer served as Chief Technical Officer until his promotion to President and Chief Executive Officer on December 14, 1999. Mr. Zimmer resigned as President and Chief Executive Officer effective April 2000. (2) Mr. Abate resigned as Executive Vice President and Chief Financial Officer, effective January 2001. (3) Mr. Leddy resigned as Senior Vice President, Product Development, effective June 2000. (4) Mr. Jennings resigned as Controller, effective September 2000. (5) Represents amount paid in 2000 for services performed in 1999. (6) Represents amount paid in 1999 for services performed in 1998. (7) Includes $125,000 paid in 1999 for services performed in 2000. (8) Includes $15,000 paid in 1999 for services performed in 1998. (9) Represents loan forgiveness of $2,321,632, triggered by contractually specified events which occurred during 2000, auto allowance of $30,500. (10) Represents severance payments. 59 61 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (11) Represents imputed income, based on the applicable Federal rate under Section 1274(d) of the Internal Revenue Code, with respect to an interest-free loan made by the Company in connection with an employment agreement with Mr. Abate. OPTION GRANTS The following tables set forth information regarding stock options granted to the Named Executive Officers during fiscal year 2000. In accordance with the rules of the SEC, also shown below is the potential realizable value over the term of the option (the period from the grant date to the expiration date) based on assumed rates of stock appreciation from the option exercise price of 5% and 10%, compounded annually. These amounts do not represent the Company's estimate of future stock price. Actual gains, if any, on stock option exercises will depend on the future performance of Company common stock. COMPANY OPTION GRANTS IN 2000
INDIVIDUAL GRANTS ----------------------------------------------------- POTENTIAL REALIZABLE VALUES NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES SECURITIES TOTAL OPTIONS OF STOCK PRICE APPRECIATION UNDERLYING GRANTED TO FOR OPTION TERM OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION --------------------------- NAME GRANTED(1) FISCAL YEAR BASE PRICE DATE 5% 10% ---- ---------- ------------- ----------- ---------- ------------ ------------ Robert E. Rice....................... 287,500 5.3% $2.61 6/29/10 $ 471,907 $1,195,904 Mark Zimmer.......................... -- -- -- -- -- John P. Leddy........................ -- -- -- -- -- Jay W. Jennings...................... -- -- -- -- -- James A. Abate....................... 690,000 12.7% $4.35 1,887,627 4,783,618 100,000 1.8% $8.13 510,997 1,294,916 Anders Vinberg....................... 150,000 2.8% $8.54 9/7/10 805,614 2,041,584 1,035,000 19.0% $4.35 9/7/10 2,831,441 7,175,427 Christopher Gentile.................. 115,000 2.1% $5.65 2/22/10 408,624 1,035,534 Paul Kadin........................... 460,000 8.4% $2.61 2/22/10 755,051 1,913,447
- --------------- (1) Generally, 20% of the shares subject to the options vest on the date of grant, 20% vest on the first anniversary of the date of grant and one thirty-sixth vests each month thereafter. COMPENSATION OF DIRECTORS The Company reimburses each of its non-employee directors as follows: each non-employee director is paid (i) $2,500 at the end of each fiscal quarter in which he or she is a director, (ii) $1,000 for each regular Board meeting he or she attends, and (iii) $500 for each Board committee meeting he or she attends; provided, however, that if more than one committee meeting is held on the same day or a Board meeting and one or more committee meetings are held on the same day, no more than the initial $500 or $1,000, as the case may be, is paid to any director for all such meetings attended by such director on such date. Non-employee directors participate in the Company's 1995 Director Option Plan (the "Director Plan"). Under the Director Plan, each non-employee director who joins the Board in the future will automatically be granted a non statutory option to purchase 20,000 shares of Common Stock on the date upon which such person first becomes a director. In addition, each non-employee director, including current non-employee directors, automatically receives a no statutory option to purchase 5,000 shares of Common Stock on January 1 of each year, provided the director has been a member of the Board for at least six months. The exercise price of each option granted under the Director Plan is equal to the fair market value of the Common Stock on the date of grant. The 20,000 share grant vests at a rate of one-eighth of the option shares upon the end of the first six-month period after the date of grant and one-forty-eighth of the remaining option 60 62 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) shares per month thereafter, provided the optionee remains a director of the Company. The 5,000 share grant vests at the rate of one-half of the option shares upon the end of the first six-month period after the date of grant and one-twelfth of the remaining option shares per month thereafter, provided the optionee remains a director of the Company. Options granted under the Director Plan have a term of ten (10) years unless terminated sooner, whether upon termination of the optionee's status as a director or otherwise pursuant to the Director Plan. In January 2000, Messrs. Bert Kolde, Gary Lauer, Jones and Lane were each granted an option to purchase 5,000 shares of Common Stock under the Director Plan at an exercise price of $9.00 per share. For their participation as directors of Metastream Corporation, in January 2000, Mr. Jones and Dr. Morgan were each granted an option to purchase 75,000 shares of Common Stock of Metastream Corporation under the Metastream Stock Option Plan at an exercise price of $1.00 per share. Additionally, for his participation as a director of Metastream Corporation, in February 2000, Mr. Lane was granted an option to purchase 75,000 shares of Common Stock of Metastream Corporation under the Metastream Stock Option Plan at an exercise price of $1.00 per share. The 75,000 share grants vest one-fifth of the option shares on the date of grant, one-fifth of the option shares at the end of the first year and one-thirty-sixth of the option shares per month thereafter. On November 28, 2000, Messrs. Bennett, Chizen and Leader were each granted an option to purchase 20,000 shares of Common Stock under the Director Plan at an exercise price of $5.75 per share. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION From January 1, 2000 through November 28, 2000, the Compensation Committee (the "Committee") of the Board of Directors consisted of Messrs. Jones and Lane. Since November 28, 2000, the Compensation Committee has consisted of Messrs. Bennett, Chizen, and Jones. None of the members of the Compensation Committee was an officer or employee of the Company. No interlocking relationship exists between any member of the Company's Compensation Committee and any member of any other company's board of directors or compensation committee. The following table sets forth information with respect to options to purchase Company common stock exercised during fiscal 2000 by the Named Executive Officers and the value of unexercised options at December 31, 2000. COMPANY OPTION EXERCISES IN 2000 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES DECEMBER 31, 2000 DECEMBER 31, 2000(1) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Robert E. Rice..................... -- -- 827,269 732,396 $2,191,260 $2,691,509 Mark Zimmer........................ 87,734 $373,245 -- -- 262,631 -- John P. Leddy...................... 35,000 419,375 43,333 -- 50,702 -- Jay W. Jennings.................... 18,000 138,161 57,500 -- 262,631 -- James A. Abate..................... -- -- -- -- -- -- Anders Vinberg..................... -- -- 448,500 736,500 487,744 637,819 Christopher Gentile................ -- -- 129,375 208,125 380,815 407,078 Paul Kadin......................... -- -- 92,000 368,000 260,130 1,040,520
- --------------- (1) The value of unexercised, in-the-money options is the difference between the exercise price of the options and the fair market value of Company common stock at December 31, 2000 ($5.44). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to the Company with respect to beneficial ownership of the Company's common stock as of March 15, 2000 by (i) each beneficial owner of more than 5% of the Company's common stock, (ii) each director and each nominee, (iii) each Named Executive Officer and (iv) all directors and executive 61 63 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) officers as a group. Except as otherwise indicated, each person has sole voting and investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable.
NUMBER OF SHARES ------------------------------------------------- COMMON STOCK AND PERCENTAGE OF NAME OF BENEFICIAL OWNER COMMON STOCK VESTED OPTIONS(1) VESTED OPTIONS TOTAL(2) ------------------------ ------------ ----------------- -------------- ------------- Computer Associates............................. 6,235,000 -- 6,235,000 11.3 James Crabbe.................................... 3,300,000 3,300,000 8.6 West Highland Capital, Inc. (3)................. 3,200,000 -- 3,200,000 8.4 RS Management Co. LLC (4)....................... 1,895,000 -- 1,895,000 5.0 Samuel H. Jones, Jr............................. 980,055 141,500 1,121,555 2.9 Robert Rice..................................... -- 982,060 982,060 2.2 Thomas Bennett (5).............................. -- -- -- -- Bruce R. Chizen (6)............................. -- -- -- -- Lennert J. Leader (7)........................... -- -- -- -- Mark Zimmer..................................... -- -- -- * John P. Leddy................................... -- 43,333 43,333 * Jay W. Jennings................................. -- 57,500 57,500 * David Feldman................................... -- 229,541 229,541 * Anders Vinberg.................................. -- 534,750 534,750 * Christopher Gentile............................. -- 157,500 157,500 * Paul Kadin...................................... -- 199,333 199,333 * All directors and executive officers as a group (13 persons).................................. 980,055 2,345,517 3,325,572 8.2%
- --------------- * Percentage of shares beneficially owned is less than one percent of total. (1) Represents shares issuable upon exercise of options to purchase Company common stock that are exercisable within 60 days of March 15, 2001. (2) Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within sixty (60) days of March 15, 2001 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder's name. Percentage ownership is based on 38,187,658 shares of Common Stock outstanding on March 15, 2001. (3) According to information contained in a Schedule 13G/A filing dated as of January 30, 2001, West Highland Capital, Inc., a registered investment advisor, beneficially own 3,200,000 shares of the Company's common stock, and has the shared power to vote or to direct the vote of 3,200,000 shares of the Company's common stock; West Highland Partners, L.P., an investment limited partnership, beneficially owns 2,477,996 shares of the Company's common stock, and has the shared power to vote or to direct the vote of 2,447,996 shares of the Company's common stock; Estero Partners, LLC, which is a general partner in West Highland Partners, L.P. (along with West Highland Capital, Inc.), beneficially owns 2,991,988 shares of the Company's common stock, and has the shared power to vote or direct the vote of 2,991,988 shares of the Company's common stock; and Lang H. Gerhard, the sole shareholder of West Highland Capital, Inc. and the manager of Estero Partners, LLC , beneficially owns 3,200,000 shares of the Company's common stock, and has the shared power to vote or to direct the vote of 3,200,000 shares of the Company's stock. 62 64 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) According to information contained in a Schedule 13G filing dated as of February 15, 2001, R.S. Investment Management, L.P., a registered investment advisor, beneficially owns 1,895,000 shares of the Company's common stock and has shared power to vote or to direct the vote of 1,895,000 shares of the Company's common stock; and RS Investment Management Co. LLC, a holding company, beneficially owns 1,895,000 shares of the Company's common stock, and has the shared power to vote or to direct the vote 1,895,000 of the Company's common stock. (5) Mr. Bennett is Senior Vice President, Computer Associates International, Inc., which owns 6,235,000 shares of Company common stock. Mr. Bennett disclaims beneficial ownership of the shares owned by Computer Associates. (6) Mr. Chizen is the President and Chief Executive Officer of Adobe Systems Incorporated which owns 1,725,000 shares of Company common stock. Mr. Chizen disclaims beneficial ownership of the shares owned by Adobe Systems. (7) Mr. Leader is President of the Venture Group of AOL Time Warner Investments, a division of AOL Time Warner Inc. AOL Time Warner Inc. owns 1,725,000 shares of Company common stock. Mr. Leader disclaims beneficial ownership of the shares owned by AOL Time Warner Inc. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has employment agreements with Messrs. Rice, Kaplan, Vinberg, Kadin and Gentile. The Company's employment agreement with Mr. Rice provides for his employment through December 31, 2001 at an annual base salary of $275,000. In addition, under the agreement, the Company has granted Mr. Rice a stock option to purchase 287,500 shares of the Company's common stock at a price of $2.61 per share. Twenty percent (20%) of the option vests over a four-year period, with 20% of the total grant vesting on the date of grant, 20% vesting on the first anniversary of the date of grant and the remainder vesting at the rate of 1/36th per month thereafter. Mr. Rice obtained a $1,000,000 non-recourse loan from the Company MetaCreations in 1996 concurrently with the acquisition by the Company of Mr. Rice's interest in Real Time Geometry Corp. Pursuant to the terms of Mr. Rice's employment contract, in connection with the merger of the Company and Metastream, the Company forgave the loan and accrued interest thereon and paid to Mr. Rice a "gross-up" payment in the amount of $1,077,000 to reimburse him for any Federal or state taxes that he may be required to pay as a result of the forgiveness of the loan or as a result of the "gross-up" payment. Mr. Rice's employment agreement provides that if his employment is terminated by the Company without cause (as defined in the agreement), or by Mr. Rice for good reason (as defined), he will be entitled to (1) immediate vesting of all of his unvested Company stock options, (2) severance pay equal to his annual base salary and annual bonus through December 31, 2001, and (3) continuation of medical and certain other benefits. The Company's employment agreement with Mr. Kaplan provides for his employment, beginning February 15, 2001 and continuing for three years after that date, at a base salary of $250,000 per year. Mr. Kaplan is entitled to participate in the Company's Executive Incentive Compensation plan and is guaranteed a bonus of at least $100,000 under that Plan at the end of his first year of employment. Under the employment agreement, upon the commencement of his employment, Mr. Kaplan also received a signing bonus of $50,000 and a stock option to purchase 500,000 shares of the Company's common stock. The stock option has an exercise price of $6.12 per share, which was the closing price of the Company's common stock on the day before Mr. Kaplan commenced employment, and vests over a four-year period, with 25% of the shares vesting on February 15, 2002 and the balance vesting at the rate of 1/36th per month. The employment agreement also entitles Mr. Kaplan to two loans of $375,000 each from the Company. Mr. Kaplan is entitled to the first loan at any time after commencing employment but has not yet requested the Company make that loan. Mr. Kaplan will be entitled to request the second loan at any time after February 15, 2002. Each loan will bear interest at the applicable Federal rate established by Section 1274(d) of the Internal Revenue Code on the day it is made. The loans will be secured solely by Mr. Kaplan's stock options in the Company and are non-recourse to Mr. Kaplan, unless the Company fires Mr. Kaplan for cause (as defined) or Mr. Kaplan quits without good reason (as defined), in which case the loans will become fully recourse to him. 63 65 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Mr. Kaplan's employment agreement provides that if there is a change of control (as defined in the agreement) of the Company, or if he is fired without cause (as defined) or quits his job for good reason (as defined), he will be entitled to (1) immediate vesting of the Company stock option described above, (2) forgiveness of the two loans described above (and if the second loan has not yet been made at that time, he will be entitled to a special bonus in the amount of $375,000) and (3) severance pay equal to two times his annual base salary. The Company's employment agreement with Mr. Vinberg provides for his employment at a base salary of $200,000 per year. Under the employment agreement, Mr. Vinberg also received a stock option to purchase 1,035,000 shares of the Company's common stock at an exercise price of $4.35 per share. Twenty percent (20%) of the shares subject to the option vest on his hire date, 20% vest on the first anniversary of his hire date, and the balance vesting at the rate of 1/36th per month. In recognition of Mr. Vinberg's service as a director of Metastream, the Company has agreed that, for purposes of vesting of this option, the option will vest as though Mr. Vinberg's hire date was October 5, 1999 if Mr. Vinberg remains employed by the Company at least until February 28, 2001. Mr. Vinberg also received an additional stock option to purchase 172,500 shares of the Company's common stock at an exercise price of $8.56 per share. This additional option vests over a four-year period, with 25% vesting on September 6, 2002 and the balance vesting at the rate of 1/36th per month. In the event of a change of control of the Company (as defined), both of these stock options will vest immediately. The employment agreement also entitles Mr. Vinberg to a non-recourse loan of $200,000, although Mr. Vinberg has not yet requested the Company to make that loan. The loan, if made, will bear interest at the applicable Federal rate established by Section 1274(d) of the Internal Revenue Code on the day the loan is made. The loan will be secured solely by Mr. Vinberg's stock options in the Company and will be non-recourse to Mr. Vinberg. Mr. Vinberg's employment agreement provides that for the first three years of his employment, if he is fired by the Company after a change of control (as defined) or without cause (as defined), or if he quits for good reason (as defined), he will be entitled to base salary continuation, including medical benefits, for six months following his termination. Mr. Kadin's employment agreement with the Company calls for his employment at a starting base salary of $185,000 per year, along with an anticipated annual bonus of $35,000 for his first year of employment and future bonuses as determined by the Board of Directors. Mr. Kadin also received a signing bonus of $30,000 and a stock option to purchase 460,000 shares of the Company's common stock at an exercise price of $2.61 per share. This option vests over a four-year period, with 20% vesting on the date of hire, 20% vesting on the first anniversary of his hire date and the balance vesting at the rate of 1/36th per month. Mr. Kadin's employment agreement provides that if the Company fires him without cause (as defined), he will be entitled to a severance payment equal to six months of his then-current base salary. Mr. Gentile's employment agreement with the Company provides for a starting base salary of $125,000 per year. In addition, pursuant to the employment agreement, Mr. Gentile received a stock option to purchase 50,000 shares of the Company's common stock at an exercise price of $5.75 per share. This stock option vests over a four-year period, with 25% of the total grant vesting on the first anniversary of the date of grant and the remainder vesting at the rate of 1/36th per month. In lieu of bonuses to which Mr. Gentile was entitled under the terms of the employment agreement, the Company issued to Mr. Gentile in September 2000 an additional stock option to purchase 115,000 additional shares of the Company's common stock at an exercise price of $5.65 per share. This additional option also vests over a four-year period, with 20% of the total grant vesting on the date of grant, 20% vesting on the first anniversary of the date of grant and the remainder vesting at the rate of 1/36th per month. Mr. Gentile also received a stock option to purchase 172,500 shares of the Company's common stock at an exercise price of $0.87 per share. Prior to Mr. Abate's resignation, the Company had an employment agreement with him. That employment agreement called for his employment at a base salary of $200,000 per year, along with a targeted annual bonus of $50,000 for his first year of employment and future bonuses as determined by the Board of Directors. Mr. Abate also received 200,000 restricted shares of the Company's common stock, a stock option to purchase 690,000 shares of the Company's common stock at an exercise price of $4.35 per share, and an additional stock option to purchase 100,000 shares of the Company's common stock at an exercise price of $8.12 per share. Mr. Abate forfeited his restricted stock and his stock options upon his resignation. 64 66 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition, under his employment agreement, Mr. Abate received an interest-free loan of $1,500,000 from the Company. This loan was secured by Mr. Abate's restricted stock and stock options and was repayable at the Company's demand upon the termination of Mr. Abate's employment. The Company has demanded repayment of this loan by Mr. Abate. Mr. Abate, however, has refused to repay the loan, asserting that the loan was non-recourse to him and was secured solely by his restricted stock and stock options. The Company believes that Mr. Abate's assertion is entirely without merit, and that the loan is fully recourse to Mr. Abate and the Company intends to enforce repayment by Mr. Abate using all available legal means. 65 67 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements and Financial Statement Schedule. See Index to Financial Statements at Item 8 on page 25 of this Report. 2. Exhibits. Exhibit No. 2: Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession 2.1 Form of Agreement and Plan of Merger by and between the Registrant and MetaTools, Inc., a California corporation (incorporated by reference from Exhibit 2.1 to the Registrant's Registration Statement on Form SB-2, filed on December 11, 1995, as amended (File No. 33-98628LA)) 2.2 Stock Purchase Agreement between the Registrant and Real Time Geometry Corp. dated December 23, 1996 (incorporated by reference from Exhibits 2.2, 10.22, 10.23, 10.24 and 10.25 to the Registrant's Current Report on Form 8-K, filed on January 15, 1997 (File No. 000-27168)) 2.3 Agreement and Plan of Reorganization, dated as of February 11, 1997, among MetaTools, Inc., a Delaware corporation, Fractal Design Corporation, a Delaware corporation, and Rook Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of MetaTools (incorporated by reference from Annex A to the Registrant's Registration Statement on Form S-4, filed on April 28, 1997 (File No. 333-25939)) 2.4 Agreement and Plan of Merger among Fractal Design Corporation, a California corporation, and Rook Acquisition Corp., a Delaware corporation, dated as of May 29, 1997 (incorporated by reference from Exhibit 2.2 to the Registrant's Form 8-K, filed on June 13, 1997 (File No. 000-27168)) 2.5 Stock Purchase Agreement, dated as of August 23, 2000, by And between the Registrant and Computer Associates International, Inc. (incorporated by reference from Exhibit 2.1 to the Registrant's Current Report on form 8-K, filed on September 8, 2000 (File No. 000-27168))
Exhibit No. 3: Articles of Incorporation and Bylaws 3.1 Restated Certificate of Incorporation of Registrant (incorporated by reference from Exhibit 3.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed on March 30, 1996 (File No. 000-27168)) 3.2 Certificate of Amendment of Restated Certificate of Incorporation of Registrant (incorporated by reference from Exhibit 2.3 to the Registrant's Form 8-K, filed on June 13, 1997 (File No. 000-27168)) 3.3 Bylaws of Registrant, as amended on July 24, 1998 (incorporated by reference from Exhibit 3.6 to the Registrant's Form 10-Q for the quarter ended June 30, 1998, filed on August 14, 1998 (File No. 000-27168))
Exhibit No. 4: Instruments Defining the Rights of Security Holders 4.1 Specimen of Common Stock Certificate of Registrant (incorporated by reference from Exhibit 2.4 to the Registrant's Form 8-K, filed on June 13, 1997 (File No. 000-27168))
66 68 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4.2 Amended and Restated Rights Agreement, dated as of June 24, 1999 between the Registrant and BankBoston, N.A., including form of Certificate of Designations, Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B, and C respectively (incorporated by reference from Exhibit 4 to the Registrant's Form 8-A/A, filed on October 29, 1999 (File No. 000-27168)) 4.3 Amendment No. 1 to Amended and Restated Rights Agreement, dated as of June 24, 1999 between the Registrant and BankBoston, N.A. (incorporated by reference from Exhibit 5 to the Registrant's Form 8-A/A, filed on December 5, 2000 (File No. 000-27168))
Exhibit No. 10: Material Contracts Executive Compensation Plans and Agreements 10.1 1992 Incentive Stock Plan (incorporated by reference from Exhibit 10.3 to the Registrant's Registration Statement on Form SB-2, filed on December 11, 1995, as amended (File No. 33-98628LA)) 10.2 1994 Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock Purchase Plan (incorporated by reference from Exhibit 10.4 to the Registrant's Registration Statement on Form SB-2, filed on December 11, 1995, as amended (File No. 33-98628LA)) 10.3 1995 Stock Plan, as amended on November 28, 2000 10.4 1995 Director Option Plan (incorporated by reference from Exhibit 10.7 to the Registrant's Registration Statement on Form SB-2, filed on December 11, 1995, as amended (File No. 33-98628LA)) 10.5 1996 Dive Option Plan (incorporated by reference from Exhibit 10.23 to the Registrant's Registration Statement on Form S-8, filed on December 3, 1996 (File No. 333-17209)) 10.6 1996 Nonstatutory Stock Option Plan, as amended on June 29, 1999 (incorporated by reference from Exhibit 4.2 to the Registrant's Registration Statement on Form S-8, filed on September 9, 1999 (File No. 333-86817)) 10.7 Letter Agreement between the Registrant and Mark Zimmer, dated December 10, 1999 (incorporated by reference from Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, filed on March 30, 2000 (File No. 000-27168)) 10.8 Letter Agreement between the Registrant and Terance Kinninger, dated December 10, 1999 (incorporated by reference from Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, filed on March 30, 2000 (File No. 000-27168)) 10.9 Letter Agreement between the Registrant and John Leddy, dated December 12, 1999 (incorporated by reference from Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, filed on March 30, 2000 (File No. 000-27168)) 10.10 Employment Agreement between the Registrant and Gary L. Lauer dated February 20, 1998 (incorporated by reference from Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, filed on March 31, 1998 (File No. 000-27168)) 10.11 Amendment to Employment Agreement between the Registrant and Gary L. Lauer dated July 16, 1998 (incorporated by reference from Exhibit 10.39 to the Registrant's Form 10-Q for the quarter ended June 30, 1998, filed on August 14, 1998 (File No. 000-27168))
67 69 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10.12 Letter Agreement between the Registrant and Gary Lauer, dated December 31, 1999 (incorporated by reference from Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, filed on March 30, 2000 (File No. 000-27168)) 10.13 Severance Agreement and Release between the Registrant and Kai Krause, dated May 1, 1999 (incorporated by reference from Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, filed on March 30, 2000 (File No. 000-27168)) 10.14 Amended Employment Agreement between the Registrant and Robert E. Rice dated June 29, 2000 (incorporated by reference from Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended June 30, 2000, filed on August 21, 2000 (File No. 000-27168)) 10.15 Letter Agreement between the Registrant and James A. Abate, dated March 28, 2000 (incorporated by reference from Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended June 30, 2000, filed on August 21, 2000 (File No. 000-27168)) 10.16 Letter Agreement between the Registrant and Anders Vinberg, dated September 6, 2000 (incorporated by reference from the Registrant's Form 10-Q for the quarter ended September 30, 2000, filed on November 14, 2000 (File No. 000-27168)) 10.17 Letter Agreement between the Registrant and Jeffrey J. Kaplan, dated January 29, 2001 10.18 Letter Agreement between the Registrant and Paul J. Kadin, dated February 17, 2000 10.19 Letter Agreement between the Registrant and Christopher Gentile, dated June 25, 1999
Other Material Contracts 10.20 Form of Indemnification Agreement for Executive Officers and Directors (incorporated by reference from Exhibit 10.1 to the Registrant's Registration Statement on Form SB-2, filed on December 11, 1995, as amended (File No. 33-98628LA)) 10.21 Licensing and Services Agreement dated June 30, 1999 by and among MetaStream.com Corporation, Computer Associates International, Inc. and Registrant (incorporated by reference from Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, filed on March 30, 2000 (File No. 000-27168)) 10.22 Licensing and Services Agreement dated September 30, 1999 by and among MetaStream.com Corporation, Computer Associates International, Inc. and Registrant (incorporated by reference from Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, filed on March 30, 2000 (File No. 000-27168)) 10.23 Agreement for Purchase and Sale of Assets, dated March 24, 2000, by and among the Registrant, Corel Corporation and Corel Corporation Limited 10.24 Series A Preferred Stock Purchase Agreement and Related Exchange Agreement between the Registrant and American Online, Inc., dated June 12, 2000 (incorporated by reference from Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed on August 21, 2000 (File No. 000-27168))
68 70 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10.25 Series B Preferred Stock Purchase Agreement and Related Exchange Agreement between the Registrant and Adobe Systems Incorporated dated July 18, 2000 (incorporated by reference from Exhibit 10.2 To the Registrant's Form 10-Q for the quarter ended September 30, 2000, filed on November 14, 2000 (File No. 000-27168)) 10.26 Exchange Agreement, dated as of August 10, 2000, by and between the Registrant and Computer Associates International, Inc. (incorporated by reference from Annex A to the Registrant's Proxy Statement filed on October 31, 2000 (File No. 000-27168))
Exhibit No. 21: Subsidiaries of the Registrant 21.1 Listing of Registrant's Subsidiaries
Exhibit No. 23: Consents of Experts and Counsel 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
Exhibit No. 24: Power of Attorney 24.1 Power of Attorney (included on the signature pages of this Annual Report on Form 10-K)
(b) Reports on Form 8-K On November 1, 2000, the Registrant filed a report on Form 8-K to file copies of the promissory notes issued by the Registrant to Computer Associates International, Inc. as partial consideration for the acquisition by the Registrant of all the outstanding capital stock of Viewpoint Digital, Inc. On November 22, 2000, the Registrant filed a report on Form 8-K to file financial information and pro forma financial information relating to the acquisition of Viewpoint Digital, Inc. (c) Exhibits See Item 14(a)(2) above. (d) Financial Statement Schedule See Item 14(a)(1) above. 69 71 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of New York, State of New York, on the 30th day of March, 2001. VIEWPOINT CORPORATION By: /s/ ROBERT E. RICE ---------------------------------------- Robert E. Rice President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey J. Kaplan and Brian J. O'Donoghue, his attorneys-in-fact, with the power of substitution, for him and any and all capacities, to sign any amendments to this Report on Form 10-K, and to file same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof. 70 72 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT E. RICE Director, President and March 30, 2001 - --------------------------------------------------- Chief Executive Officer Robert E. Rice (Principal Executive Officer) /s/ JEFFREY J. KAPLAN Executive Vice President and March 30, 2001 - --------------------------------------------------- Chief Financial Officer Jeffrey J. Kaplan (Principal Financial Officer) /s/ ANTHONY PANE Vice President and Controller March 30, 2001 - --------------------------------------------------- (Principal Accounting Officer) Anthony Pane /s/ THOMAS BENNETT Director March 30, 2001 - --------------------------------------------------- Thomas Bennett /s/ BRUCE R. CHIZEN Director March 30, 2001 - --------------------------------------------------- Bruce R. Chizen /s/ SAMUEL H. JONES, JR. Director March 30, 2001 - --------------------------------------------------- Samuel H. Jones, Jr. Director - --------------------------------------------------- Lennert J. Leader
71 EX-10.3 2 y46903ex10-3.txt 1995 STOCK PLAN, AS AMENDED ON NOVEMBER 28, 2000 1 EXHIBIT 10.3 As amended on November 28, 2000 VIEWPOINT CORPORATION (FORMERLY KNOWN AS METACREATIONS CORPORATION) 1995 NONSTATUTORY STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this Stock Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the legal requirements relating to the administration of stock option plans under state corporate and securities laws and the Code. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a Committee appointed by the Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" means MetaCreations Corporation, a Delaware corporation formerly known as MetaTools, Inc. (h) "Consultant" means any person, including a Director or an advisor, engaged by the Company or a Parent or Subsidiary to render services and who is compensated for such services. (i) "Continuous Status as an Employee or Consultant" means that the employment or consulting relationship with the Company, any Parent, or Subsidiary, is not interrupted or terminated. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. A leave of absence approved by the Company shall include sick leave, military leave, or any other personal leave approved by an 2 authorized representative of the Company. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. (j) "Director" means a member of the Board. (k) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (l) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the Nasdaq National Market thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (o) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (q) "Notice of Grant" means a written notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. 3 (r) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" means a stock option granted pursuant to the Plan. (t) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (u) "Option Exchange Program" means a program whereby outstanding options are surrendered in exchange for options with a lower exercise price. (v) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (w) "Optionee" means an Employee or Consultant who holds an outstanding Option or Stock Purchase Right. (x) "Parent" means a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (y) "Plan" means this 1995 Stock Plan. (z) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 below. (aa) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (cc) "Section 16(b)" means Section 16(b) of the Securities Exchange Act of 1934, as amended. (dd) "Share" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (ee) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (ff) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 11,750,000 which number includes 426,300 Shares that were previously authorized but unissued under the Company's 1994 Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock Purchase Plan. The Shares may be authorized, but unissued, or reacquired Common Stock. 4 If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, and the original purchaser of such Shares did not receive any benefits of ownership of such Shares, such Shares shall become available for future grant under the Plan. For purposes of the preceding sentence, voting rights shall not be considered a benefit of Share ownership. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to Directors, Officers who are not Directors, and Employees who are neither Directors nor Officers. (ii) Administration With Respect to Directors and Officers Subject to Section 16(b). With respect to Option or Stock Purchase Right grants made to Employees who are also Officers or Directors subject to Section 16(b) of the Exchange Act, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in a manner complying with the rules under Rule 16b-3 relating to the disinterested administration of employee benefit plans under which Section 16(b) exempt discretionary grants and awards of equity securities are to be made, or (B) a committee designated by the Board to administer the Plan, which committee shall be constituted to comply with the rules under Rule 16b-3 relating to the disinterested administration of employee benefit plans under which Section 16(b) exempt discretionary grants and awards of equity securities are to be made. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the rules under Rule 16b-3 relating to the disinterested administration of employee benefit plans under which Section 16(b) exempt discretionary grants and awards of equity securities are to be made. (iii) Administration With Respect to Other Persons. With respect to Option or Stock Purchase Right grants made to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a committee designated by the Board, which committee shall be constituted to satisfy Applicable Laws. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: 5 (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(n) of the Plan; (ii) to select the Consultants and Employees to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof, are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xii) to institute an Option Exchange Program; (xiii) to determine the terms and restrictions applicable to Options and Stock Purchase Rights and any Restricted Stock; and (xiv) to make all other determinations deemed necessary or advisable for administering the Plan. 6 (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. If otherwise eligible, an Employee or Consultant who has been granted an Option or Stock Purchase Right may be granted additional Options or Stock Purchase Rights. 6. Limitations. (a) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's employment or consulting relationship with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such employment or consulting relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options and Stock Purchase Rights to Employees: (i) No Employee shall be granted, in any fiscal year of the Company, Options and Stock Purchase Rights to purchase more than 300,000 Shares. (ii) In connection with his or her initial employment, an Employee may be granted Options and Stock Purchase Rights to purchase up to an additional 150,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. (iv) If an Option or Stock Purchase Right is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option or Stock Purchase Right will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option or Stock Purchase Right is reduced, the transaction will be treated as a cancellation of the Option or Stock Purchase Right and the grant of a new Option or Stock Purchase Right. 7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 19 of the Plan. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 15 of the Plan. 7 8. Term of Option. The term of each Option shall be stated in the Notice of Grant; provided, however, that in the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Notice of Grant. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. In so doing, the Administrator may specify that an Option may not be exercised until the completion of a service period. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; 8 (v) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment or Consulting Relationship. Upon termination of an Optionee's Continuous Status as an Employee or Consultant, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option, but only within such period of time as is specified in the Notice of Grant, and only to the extent that the Optionee was entitled to exercise it at the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). In the absence of a specified time in the Notice of Grant, the Option shall remain exercisable for three (3) months following the Optionee's termination. In the case of an Incentive Stock Option, such period of time for exercise shall not exceed three (3) months from the date of termination. If, on the date of termination, the Optionee is not entitled to exercise the Optionee's entire Option, the Shares covered by the unexercisable 9 portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. Notwithstanding the above, in the event of an Optionee's change in status from Consultant to Employee or Employee to Consultant, an Optionee's Continuous Status as an Employee or Consultant shall not automatically terminate solely as a result of such change in status. However, in such event, an Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option three months and one day following such change of status. (c) Disability of Optionee. In the event that an Optionee's Continuous Status as an Employee or Consultant terminates as a result of the Optionee's Disability, the Optionee may exercise his or her Option at any time within twelve (12) months from the date of such termination, but only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. In the event of the death of an Optionee, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall immediately revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Rule 16b-3. Options granted to individuals subject to Section 16 of the Exchange Act ("Insiders") must comply with the applicable provisions of Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer, which shall in no event exceed six (6) months from the date upon which the Administrator made the determination to grant the Stock Purchase Right. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. 10 (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Rule 16b-3. Stock Purchase Rights granted to Insiders, and Shares purchased by Insiders in connection with Stock Purchase Rights, shall be subject to any restrictions applicable thereto in compliance with Rule 16b-3. An Insider may only purchase Shares pursuant to the grant of a Stock Purchase Right, and may only sell Shares purchased pursuant to the grant of a Stock Purchase Right, during such time or times as are permitted by Rule 16b-3. (d) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock Purchase Agreements need not be the same with respect to each purchaser. (e) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Non-Transferability of Options and Stock Purchase Rights. Unless otherwise specified by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11 13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option or Stock Purchase Right has not been previously exercised, it will terminate immediately prior to the consummation of such proposed action. The Board may, in the exercise of its sole discretion in such instances, declare that any Option or Stock Purchase Right shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his or her Option or Stock Purchase Right as to all or any part of the Optioned Stock, including Shares as to which the Option or Stock Purchase Right would not otherwise be exercisable. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be exercisable. If an Option or Stock Purchase Right is exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option or Stock Purchase Right shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its Parent, the Administrator may, with the 12 consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 14. Date of Grant. The date of grant of an Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of the Code (or any successor rule or statute or other applicable law, rule or regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted). Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. 16. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 13 17. Liability of Company. (a) Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. (b) Grants Exceeding Allotted Shares. If the Optioned Stock covered by an Option or Stock Purchase Right exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Option or Stock Purchase Right shall be void with respect to such excess Optioned Stock, unless shareholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 15(b) of the Plan. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. Stockholder Approval. Continuance of the Plan shall be subject to approval by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such stockholder approval shall be obtained in the manner and to the degree required under applicable federal and state law. EX-10.17 3 y46903ex10-17.txt LETTER AGREEMENT: KAPLAN 1 EXHIBIT 10.17 [VIEWPOINT CORPORATION LETTERHEAD] January 29, 2001 Mr. Jeffrey J. Kaplan 310 River Road Grandview, NY 10960 Dear Jeffrey: We are pleased to offer to you the full time, regular position of Executive Vice President and Chief Financial Officer with Viewpoint Corporation (the "Company"). You will work in our New York City headquarters and will report to and work under the direction of Robert E. Rice, Chief Executive Officer. 1. Term. The initial term of your employment will commence on or before February 15, 2001 (the "Commencement Date") and, unless earlier terminated in accordance with this letter agreement, will continue until the close of business on the day immediately preceding the third anniversary of the Commencement Date. The term of your employment will automatically be extended for successive one-year periods if neither party notifies the other in writing at least 3 months prior to the then current term of employment that such term of employment will not be extended for an additional one year term. In the event that the Company elects not to renew this Agreement for an additional one-year term to begin upon the third anniversary of your employment, or any subsequent anniversary if the term has been extended, the Company will pay to you a one-time severance payment equal to your then-current Base Salary (as defined below). 2. Compensation. (a) Salary. You will be an exempt, salaried employee. Your base salary will be $250,000 per year, earned and payable according to the Company's standard payroll practices and subject to annual review ("Base Salary"). (b) Annual Bonus. You will also participate in the Company's Executive Incentive Compensation Plan as it exists from time to time. You will receive at least $100,000 under the Company's Executive Incentive Compensation Plan at the end of your first year of employment. 2 (c) Signing Bonus. In addition to the Base Salary and the annual bonus, the Company will pay you a one-time signing bonus of $50,000 upon commencement of employment. 3. Benefits. All benefits which the Company may now or hereafter make available to employees of comparable status to you, will be made available to you as well, on all of the same terms and conditions. You shall be entitled to four weeks of paid vacation per annum. 4. Stock Option. You will be granted a stock option entitling you to purchase 500,000 shares of Company common stock at an exercise price per share equal to the closing price of Company common stock on the business day immediately prior to your first day of employment (the "Stock Option"). Twenty-five percent of the shares subject to the Stock Option will vest on the first anniversary of your hire date and, thereafter, the balance will vest at the rate of 1/36th per month. The options shall expire 10 years from the date of grant (the "Stock Option Expiration Date"). The Stock Option will be subject to the Viewpoint Corporation 1996 Nonstatutory Stock Option Plan. Upon (a) a Change in Control of the Company, (b) termination of your employment by the Company without Cause, or (c) termination of your employment by you with Good Reason, the shares subject to the Stock Option will become fully vested and will remain exercisable until the earlier of five (5) years from the date of such event and the Stock Option Expiration Date. 5. Certain Defined Terms. In addition to certain terms defined elsewhere in this letter agreement, the following terms have the following respective meanings: "Change in Control of the Company" means and includes each of the following: (i) the acquisition, in one or more transactions, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) by any person or any group of persons who constitute a group (within the meaning of Section 13d-3 of the Exchange Act) of any securities of the Company such that, as a result of such acquisition, such person or group beneficially owns (within the meaning of Rule 13d-3 of the Exchange Act), directly or indirectly, more than fifty percent (50%) of the Company's outstanding voting securities entitled to vote on a regular basis for a majority of the members of the Board; (ii) a change in the composition of the Board such that, during any 24-month period, persons who were directors at the beginning of such period (each an "Incumbent Director") cease for any reason (other than death) to constitute the majority of the Board; provided, however that any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director was nominated for election or elected to the Board with the affirmative vote of a majority of the directors who then qualified as Incumbent Directors; (iii) the consummation of any merger or 2 3 any other business combination (in one or more transactions, including, but not limited to a sale of all or substantially all of the assets) of the Company other than a transaction immediately following which the shareholders of the Company who own shares immediately prior to the transaction own, by virtue of their prior ownership of Company shares, at least 50% of the voting power, directly or indirectly, of the surviving corporation in any such merger or business combination; or (iv) the consummation of a plan of complete liquidation of the Company. "Cause" means (a) a willful and continuing refusal by you to follow lawful directives of the Chief Executive Officer or Board of Directors of the Company, (b) conduct that is intentional and known by you to be harmful to the Company's best interests, or (c) your conviction for a felony or any crime involving dishonesty. "Good Reason" means a breach by the Company of its obligations under this letter agreement, including any effective diminution of your duties 6. Loans/Special Bonus. (a) Date of Issuance; Interest Rates; Security; Recourse. The Company will provide you with a loan in the amount of $375,000 upon your request at any time after the Commencement Date (the "First Loan") and an additional loan in the amount of $375,000 on the first anniversary of the Commencement Date (the "Second Loan"). Each loan will bear interest at the Applicable Federal Rate under Section 1274(d) of the Internal Revenue Code on the date the loan is made. The First Loan and the Second Loan will be secured solely by the net, after-tax proceeds from the sale of the shares subject to the Stock Option and any subsequent options to purchase Company common stock or stock of any subsidiary or affiliate of the Company that may be granted to you in the future. Unless you resign without Good Reason or are terminated by the Company for Cause during the term of this letter agreement, the Company's recourse to repayment of the First Loan and the Second Loan will be limited to the Stock Option and any subsequent options that may be granted to you in the future. If you resign without Good Reason or your employment is terminated by the Company for Cause during the term of this letter agreement, the First Loan and Second Loan will become fully recourse to you. (b) Maturity Dates. The entire principal and interest of the First Loan will be due on the fourth anniversary of the date the First Loan is made. The entire principal and interest of the Second Loan will be due on the fourth anniversary of the date the Second Loan is made. (c) Forgiveness. The Company will forgive repayment of the First Loan and the Second Loan if, during the initial term or any additional term, (a) there is a Change in Control of the Company, (b) the Company completes a Qualifying Equity Financing (as defined below), or 3 4 (c) the Company completes a Qualifying Acquisition (as defined below). In the event that, before the date that the Second Loan is disbursed, (a) there is a Change in Control of the Company, (b) the Company completes a Qualifying Equity Financing, or (c) the Company completes a Qualifying Acquisition, the Company will not extend the Second Loan to you but will instead provide you with a one-time special bonus of $375,000. In the Event any loans have been repaid and (a), (b) or (c) occur during the initial term or any additional term, then a special bonus equal to the repayment amount will be paid to you. For purposes of this letter agreement, "Qualifying Equity Financing" means private or public offerings of capital stock and/or securities convertible into capital stock of the Company that result in greater than $25 million in aggregate gross proceeds received by the Company; provided, however, that any capital stock of the Company sold pursuant to a transaction under discussion prior to the Commencement Date shall not be included in calculating the amount of proceeds received by the Company. "Qualifying Acquisition" means an acquisition by the Company of the business and operations of another company in which the aggregate purchase price paid by the Company to the seller of such business is greater than $50 million. 7. Consequences of a Change in Control. Upon a Change in Control of the Company during the initial term or any additional term of this letter agreement, the Company will (a) pay to you a lump sum payment equal to two times your then current Base Salary, (b) the Stock Option will become fully vested and exercisable until the earlier of five (5) years from the date of such Change in Control and the Stock Option Expiration Date, (c) the First Loan and the Second Loan (if made before such Change in Control) will be forgiven, and (d) if the Second Loan had not been made before such Change in Control, the Company will pay to you a one-time special bonus payment of $375,000. 8. Termination Without Cause or For Good Reason. If your employment is terminated by the Company without Cause or terminated by you for Good Reason before the expiration of the initial term or any additional term of this letter agreement, (a) the Company will pay to you a lump sum payment equal to two times your then current Base Salary, (b) the Stock Option will become fully vested and exercisable until the earlier of five (5) years from the date of such termination and the Stock Option Expiration Date, (c) the First Loan and the Second Loan (if made before such termination) will be forgiven, and (d) if the Second Loan had not been made before such termination, the Company will pay to you a one-time special bonus payment of $375,000. 9. Permanent Disability or Death. If you become Permanently Disabled (as defined below) or you die during the initial term or any additional term of your employment, (a) the Stock Option will become fully vested and exercisable until the earlier of five (5) years from the date of such Change in Control and the Stock Option Expiration Date, (b) the First Loan and the Second Loan (if made before such Permanent Disability or death) will be forgiven, (c) if the 4 5 Second Loan had not been made before such Permanent Disability or death, the Company will pay to you or your estate (as the case may be) a one-time special bonus payment of $375,000, and (d) the Company shall pay to you or your estate (as the case may be) an amount equal to any unpaid Base Salary you would have earned had you performed your duties for any then unexpired term of this letter agreement. "Permanently Disabled" and "Permanent Disability" means a mental, emotional or physical condition which has rendered you for a period of 180 consecutive days unable or incompetent to carry out, on a substantial full time basis, your duties 10. General. This offer is expressly contingent upon your supplying proof of your ability to work in the United States in compliance with the Immigration Reform and Control Act of 1986, within three days of your commencement date. In acceptance of this position, please sign and return a copy of this letter, together with a signed copy of the enclosed Viewpoint Corporation Employee Invention, Copyright and Secrecy Agreement. We are delighted that you will be joining the Company. I know I speak for the rest of the team in saying that we are looking forward to working with you as you bring your unique and significant skills to the Company. If you have any questions, please feel free to call me. Sincerely, VIEWPOINT CORPORATION By ----------------------------- Robert E. Rice Viewpoint Corporation AGREED AND ACCEPTED - ---------------------------- Jeffrey J. Kaplan 5 EX-10.18 4 y46903ex10-18.txt LETTER AGREEMENT: KADIN 1 Exhibit 10.18 [METASTREAM CORPORATION LETTERHEAD] 2/17/2000 Paul J. Kadin 8 Wyndham Road Short Hills, NJ 07078 Dear Paul: We are pleased to offer to you the full time, regular position of Chief Marketing Officer with MetaStream.com no later than February 28, 2000. You will work in our New York City office. Our team is excited that you will be joining us. You will be an exempt, salaried employee and your starting base compensation shall be $15,416.66 per month, earned and payable according to the Company's standard payroll practices. This compensation will be re-considered post IPO and may be reviewed annually. You will be eligible for any benefit programs which are generally available to all employees. In addition, you will receive 4 weeks vacation per year. You will also be eligible for a $30,000 signing bonus payable within 10 days of your commencing employment or the first regularly scheduled payroll, whichever is later. We furthermore anticipate a $35,000 annual performance bonus payable in January based on achievement of mutually agreed criteria. In subsequent years, you will be eligible for an annual performance bonus based on an amount and criteria that will be determined prior to the end of this year. Additionally, MetaStream.com has recommended to the Board of Directors that you be granted a stock option entitling you to purchase 400,000 shares of the common stock of the Company at the exercise price of $3.00 per share. Options granted will vest 20% upon the date of grant, 20% on the first anniversary of your hire date, and, thereafter, the balance shall vest at the rate of 1/36th per month. Said options shall be subject to the Company's then operative Stock Option Plan. Nothing in the grant of options or otherwise in this offer of employment should be construed as a guarantee of continued employment for any set period of time. As with all MetaStream.com employees, either party may end the employment relationship at any time, with or without cause. Employment at MetaStream.com is strictly at the will of each of the parties. This offer, and the Confidentiality Agreement, represent the entire agreement between you and MetaStream.com regarding your employment with the Company, and supersede any previous oral or written agreements. This offer is expressly contingent upon your supplying proof of your ability to work in the United States in compliance with the Immigration Reform and Control Act of 1986, within three days of your commencement date. If you are terminated without Cause (defined as gross negligence or fraud) at any time during your employment with MetaStream.com, you will receive a severance payment equal to six months of your then-current salary. In acceptance of this position, please sign and return, prior to your proposed start date, a copy of this letter, together with a signed copy of the enclosed MetaStream.com standard Employee Invention, Copyright and Secrecy Agreement. You should send these documents to Yvonne LeCroy, 6303 Carpinteria Avenue, Carpinteria, California 93013. We are delighted that you will be joining MetaStream.com. I know I speak for the rest of the team in saying that we are looking forward to working with you as you bring your unique and significant skills to the Company. If you have any questions, please feel free to call me. Sincerely, Accepted: Bob Rice President, MetaStream.com Paul J. Kadin EX-10.19 5 y46903ex10-19.txt LETTER AGREEMENT: GENTILE 1 EXHIBIT 10.19 [METACREATIONS CORPORATION LETTERHEAD] June 25,1999 Chris Gentile 17 Harbourton-Ridge Drive Pennington, New Jersey 08534 Via Federal Express Re: Director of Metastream.com Productions with MetaCreations Dear Chris: We are pleased to offer you the full time, regular position of Director of MetaStream.com Productions with MetaCreations Corporation, commencing on or about June 29, 1999, in our Princeton office. In this capacity you will be responsible for the management and production of all MetaStream.com productions that are client specific. You will report to and work under the direction of Bob Rice, Vice President of Business Development. You will be based in our Princeton office until such time as MetaCreations opens an office in the New York area, at which time you will transfer to that office. Our team is excited that you will be joining us. You will be an exempt, salaried employee and your starting base compensation shall be $10,416.67 per month, earned semi-monthly and payable on the 15th and last day of each month. This compensation will be reviewed annually. Your status will be that of an introductory employee during the first ninety (90) days of your employment with MetaCreations. You will be eligible for any benefit programs which are generally available to all employees, including health insurance and our 401(k) plan. You will also be eligible to accrue vacation at the rate of three (3) weeks annually, beginning on your first day of employment. Additionally, you will be set up to participate in the AT&T One Rate plan for your cellular phone, at the Company rate of $90 dollars per month, which amount shall be reimbursed to you each month. Corporate Headquarters 498 Seventh Avenue, Ste. 1810 New York, NY, 10018 212-201-0800 2 In addition, you will be eligible to receive a bonus based on new production business you generate and on new Metastream licensing deals that are negotiated and entered, after you commence employment. The bonus will be structured as: - Two and one-half percent (2.5%) of any new production business you bring in during the first year of your employment. New business is clients that are not existing MetaCreations' clients or target types of business. and, - Two and one-half percent (2.5%) of any MetaStream licensing agreements that begin negotiations and are executed following the commencement of your employment, after such agreement reach an aggregate net revenue to the Company of three million dollars ($3,000,000) each year. MetaStream licensing agreements include agreements for content creation and custom engineering, with related licensing income. This bonus will be capped at one hundred thousand dollars ($100,000) annually and will be paid upon the Company's collection of amounts owed to it under agreements entered that are subject to this bonus. Any questions regarding which agreements are subject to this bonus should be forwarded to your direct supervisor, Bob Rice, and will be finally resolved by the Chief Financial Officer of MetaCreations. Additionally, MetaCreations will recommend to the Board of Directors that you be granted a stock option entitling you to purchase 50,000 shares of the common stock of the Company at the fair market value on the date of the grant as determined by the Board. Options granted will vest at 25%of the total grant one year from the date of any grant and, thereafter, the balance shall vest at a rate of 1/36th of the balance per month. Said options shall be subject to the Company 's then operative Stock Option Plans. The Company is aware of and acknowledges that you maintain an outside business called MC Squared Incorporated (MC2). While employed by MetaCreations, the Company expects that you will devote your full time and attention, and best efforts to the business of MetaCreations. In accepting employment with MetaCreations, you acknowledge and warrant that MC2 will not compete, directly or indirectly, or interfere with the business of MetaCreations, and that your involvement with MC2 will not interfere with your duties to the Company. All questions regarding potential conflicts or interference will be directed to the General Counsel of MetaCreations, who will review each matter and respond in writing as to whether the Company considers such matter to be competitive or likely to cause interference. Nothing in the grant of options or otherwise in this offer of employment should be construed as a guarantee of continued employment for any set period of time. As with all MetaCreations employees, either party may end the employment relationship at any time, with or without cause. Employment at MetaCreations is strictly at the will of each of the parties. 3 This offer, and the Confidentiality Agreement, represent the entire agreement between you and MetaCreations regarding your employment with the Company, and supersede any previous oral and written agreements. This offer is expressly contingent upon your supplying proof of your ability to work in the United States in compliance with the Immigration Reform and Control Act of 1986, within three days of your commencement date. In acceptance of this position, please sign and return a copy of this letter, together with a signed copy of Metacreations' standard Employee Invention, Copyright and Secrecy Agreement. We are delighted that you will be joining MetaCreations Corporation. I know I speak for the rest of the team in saying that we are looking forward to working with you as your bring your unique and significant skills to the Company. If you have any questions, please feel free to call me. Sincerely, Accepted: Kari Zeni ------------------ Director of Human Resources Chris Gentile EX-10.23 6 y46903ex10-23.txt AGREEMENT FOR PURCHASE AND SALE OF ASSETS 1 EXHIBIT 10.24 AGREEMENT FOR PURCHASE AND SALE OF ASSETS BY AND AMONG METACREATIONS CORPORATION, COREL CORPORATION AND COREL CORPORATION LIMITED MARCH 24, 2000 2 AGREEMENT FOR PURCHASE AND SALE OF ASSETS THIS AGREEMENT FOR PURCHASE AND SALE OF ASSETS (the "AGREEMENT") is made as of March 24, 2000, (the "EFFECTIVE DATE") by and among: MetaCreations Corporation, a Delaware corporation, with its principal offices at 6303 Carpinteria Ave., Carpinteria, California 93013 ("SELLER"); Corel Corporation Limited, a wholly-owned subsidiary of Corel (as defined below) incorporated under the laws of Ireland with its registered office c/o Arthur Cox, Earlsfort Center, Earlsfort Terrance, Dublin 2, Ireland ("CCL"); and Corel Corporation, a corporation continued under the laws of Canada with its principal offices at The Corel Building, 1600 Carling Avenue, Ottawa, Canada K1Z 8R7 ("COREL"); Corel and CCL are sometimes referred to herein collectively as "BUYER." R E C I T A L S A. Seller develops and markets computer graphics software, including its painting tool, "Painter", its plug-in applications, "KPT(R)", and its three dimensional landscape and object creation software, "Bryce(R)". B. CCL is in the business of developing, localizing, manufacturing, marketing, distributing and providing technical and customer support on a worldwide basis, excluding Canada, for, among other purposes, computer graphics and other software owned by or licensed to it for such purposes. C. Corel is in the business of developing, manufacturing, marketing and distributing software and providing technical and customer support within Canada, for, among other purposes, computer graphics and other software owned by or licensed to it for such purposes. D. Seller is willing to sell and license all of its assets relating to Painter, KPT and Bryce, and Buyer is willing to purchase and accept a license to such assets and to assume Seller's liabilities as described herein, as further described in this Agreement. E. Capitalized terms shall have the definitions specified herein. 3 AGREEMENT NOW, THEREFORE, in consideration of the above recitals and the mutual covenants hereinafter set forth, it is agreed as follows: 1. CERTAIN DEFINITIONS Capitalized terms shall have the definitions specified herein. The following terms shall have the following meanings: 1.1 "ACQUIRED SOFTWARE" means all right, title and interest in the software programs listed on SCHEDULE 1.1, including, without limitation, all source code and object code (including manufacturing-ready masters), related flow charts, program descriptions, program listings, layouts, schematics, engineering and design drawings, technical support information, diagrams and other documentation depicting or specifying the designs and components of all the software programs, libraries, reports, drafts, models, prototypes, test and other data and programs, and all related documentation and information, comprising and related to the versions of the software programs existing as of the Closing Date and all preceding versions of and works in progress and future releases of such software programs under development as of the Closing Date in any media or format and for all language versions and hardware platforms, software platforms and operating environments whether sold separately or bundled with other applications. Acquired Software does not include the Excluded Software. 1.2 "ACQUIRED PATENT RIGHTS" means all right, title and interest in and to all patents, patent applications and invention disclosures which relate substantially to the Purchased Assets and which are set forth on SCHEDULE 1.2, including, without limitation, any patents, reissues, divisionals, continuations, continuation-in-part, extensions, filing priorities and related patent rights based on the patents, patent applications and invention disclosures set forth on Schedule 1.2. 1.3 "AFFILIATE" means, with respect to any Person, any other Person who directly or indirectly controls, is controlled by, or is under direct or indirect common control with, such Person, and includes any Person in like relation to an Affiliate. A Person shall be deemed to control a Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the term "controlled" shall have a similar meaning. 1.4 "ASSUMED OBLIGATIONS" shall have the meaning set forth in SECTION 4.1. 1.5 "BUSINESS" means the business carried on by the Seller in connection with the development, acquisition, marketing, licensing, sublicensing and distribution of the Acquired Software, as such business has been conducted by the Seller. 1.6 "BUSINESS RECORDS" means all business, accounting and financial records and any -3- 4 of Seller's analysis, logs, books, records, files, summaries or descriptions of contracts, agreements or rights, supplier lists and files, product component lists, and all sales literature and sales aids, pictures, negatives, camera ready proofs, product catalogs, product sheets and documentation, product displays, advertising, marketing and promotional materials, manuals (in hard copy, electronic format and film), computer and electronic data processing materials and correspondence relating to the Business, and any of Seller's copies of sales and customer records relating to the Business. 1.7 "BUYER CLOSING DOCUMENT(s)" shall have the meaning set forth in SECTION 12.3 1.8 "BUYER INDEMNITEES" means the following Persons: (a) Buyer; (b) Buyer's current and future Affiliates; (c) the respective Representatives of the Persons referred to in clauses (a) and (b) above; and (d) the respective successors and assigns of the Persons referred to in clauses (a) and (b) and (c) above. 1.9 "CLOSING" and "CLOSING DATE" shall have the meanings set forth in ARTICLE 5. 1.10 "CONTRACTS" means all contracts, agreements, engagements, licenses and open purchase orders placed with Seller relating to the Acquired Software, all warranties extended and representations made to Seller by third parties, and all rights, remedies, setoffs, allowances, rebates, discounts and credits granted to Seller by third parties relating to the Acquired Software, together with all claims, causes of action and rights of Seller now existing or hereafter arising out of such contracts or the performance thereof, all warranties and representations made to Seller by third parties under such contracts, and all rights, remedies, setoffs, allowances, rebates, discounts and credits granted to Seller by third parties in relation to such contracts. To the extent that such Contracts relate to other software programs as well as Acquired Software, the parties will cooperate with each other to accord each other the rights under such contracts that relate to the appropriate products. 1.11 "CONTENT CONTRACTS" means any and all agreements entered into between the Seller and one or more third parties relating to the development of, sale or license to Seller or acquisition by Seller, of Acquired Software or Third Party Materials, as listed in SCHEDULE 1.11. 1.12 "CUSTOMER LIST ASSETS" means all of Seller's data bases, customer lists, registration cards (whether current or prior) and customer account histories for customers or prospective customers of the Business, including, without limitation, all currently existing data regarding such customers and all other marketing, promotional and sales information, whether stored in written form, magnetic or electronic media or in any other form, that have been or now are related to the Business or that have been or now are used, developed or purchased in connection with the Business. -4- 5 1.13 "DERIVATIVE WORK" means any translation, incorporation into other products, materials or application, adaptation, modification, extension, upgrade, improvement, compilation, abridgment or other form in which the Acquired Software may be recast, transformed or adapted where such Derivative Work would infringe any intellectual, proprietary, moral, privacy, publicity, or industrial property rights, including, without limitation, audiovisual copyrights, in the Acquired Software. 1.14 "DOMAIN NAMES"means the domain names listed in SCHEDULE 1.14. 1.15 "EMPLOYEES" shall have the meaning set out in SECTION 7.24. 1.16 "ENCUMBRANCES" shall have the meaning set forth in SECTION 2.1. 1.17 "ENTITY" means any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity. 1.18 "EXCLUDED ASSETS" shall have the meaning set forth in SECTION 2.3. 1.19 "EXCLUDED SOFTWARE" means the computer software listed on SCHEDULE 1.19 and all right, title and interest therein. 1.20 "GOVERNMENTAL BODY" means any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, provincial, local, municipal, foreign or other government; or (c) governmental or quasi-governmental authority of any nature (including, without limitation, any governmental division, department, agency, commission, instrumentality, official, organization, unit, body, or Entity and any court or other tribunal). 1.21 "INDEMNIFIED PARTY" means any Buyer Indemnitee or Seller Indemnitee. 1.22 "INTELLECTUAL PROPERTY ASSETS" means all right, title and interest, including, without limitation, worldwide intellectual and industrial property rights, and all moral rights and rights of publicity, of Seller constituting, embodied in or pertaining to the Acquired Software, Acquired Patent Rights, Trademarks and Domain Names, including without limitation, copyrights (whether registered or unregistered) (including audiovisual copyrights), copyright applications, trademark rights, trademark applications, service marks and names, logos or slogans (together with the goodwill related thereto), domain name applications, Trade Secrets, patents, patent applications, inventions and the right to seek patents with respect thereto, moral rights, mask works, designs and design rights, technologies (including without limitation, all registrations, rights to register or apply for registration, renewals, reissues, divisions, continuations, continuations-in-part, modifications, extensions, reversions, moral rights, mask works and design -5- 6 rights and any registrations or applications therefor), all waivers and assignments of moral rights, all rights of privacy or publicity and all rights to enforce such rights or interests in any work, and all other proprietary rights or other intellectual property or intangible assets and any rights to use or exploit the foregoing. 1.23 "LEGAL PROCEEDING" means any action, suit, litigation, arbitration proceeding (including, without limitation, any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving any court or other Governmental Body or any arbitrator or arbitration panel. 1.24 " LOSS" means and includes any and all liability, loss, provable lost profit, damage, claim, expense, cost, fine, fee, penalty, obligation or injury including, without limitation, those resulting from any and all actions, suits, proceedings, demands, assessments, judgments, award or arbitration, together with reasonable costs and expenses including, without limitation, the reasonable attorneys' fees and other legal costs and expenses relating thereto less any proceeds from insurance payable to the party as a result of the occurrence of such Loss. 1.25 "NET RECEIPTS" means amounts invoiced by Buyer in connection with the licensing, sale or other commercial exploitation of the Acquired Software, less (i) volume rebates, sales returns, and price protection credits against amounts invoiced (ii) returns (iii) any federal, provincial, state or foreign sales, excise or other taxes or tariffs imposed on the Products (not including any tax based on Buyer's net income), and (iv) royalties or other license fees paid to third parties in connection with the use or commercial exploitation of the Acquired Software (excluding royalties or licensing fees paid to Seller under this Agreement). Net Receipts shall not include amounts invoiced in connection with the licensing, sale or other commercial exploitation of Buyer's "CorelDRAW" or "Corel Photo-Paint" products that include all, or portions of, the Acquired Software. 1.26 "NON-TRANSFERABLE THIRD PARTY AGREEMENTS" shall have the meaning set out in sub-paragraph 2.5(d)(ii). 1.27 "PERMITS" means all permits, approvals, certifications, licenses, variances and waivers held or owned, or required to be held or owned, by Seller related to the Purchased Assets (other than in connection with the Permitted Encumbrances), the lack of which would reasonably be expected to materially and adversely affect the business, properties or financial condition of the Business. 1.28 "PERSON" means any individual, Entity or Governmental Body. 1.29 "PROPRIETARY RIGHTS AGREEMENTS" means all of Seller's rights (including, without limitation, rights relating to past infringement) to enforce for the protection of the Intellectual Property Assets any and all agreements or licenses (i) entered into for the protection of rights associated with the Intellectual Property Assets, or (ii) between Seller and its consultants (or the -6- 7 third party persons or entities from whom it has assigned or obtained any of the Intellectual Property Assets), developers or other third parties relating to the Intellectual Property Assets, including, without limitation, any such rights assigned to or obtained by Seller in connection with Seller's direct or indirect acquisition (whether by purchase, license or otherwise) of any of the Intellectual Property Assets (to the extent that such agreements or licenses relate to the Intellectual Property Assets). 1.30 "PURCHASED ASSETS" shall have the meaning set forth in SECTION 2.2. 1.31 "REPRESENTATIVES" means officers, directors, employees, legal counsel, and accountants. 1.32 "SELLER CLOSING DOCUMENT(s)" shall have the meaning set forth in SECTION 12.1. 1.33 "SELLER INDEMNITEES" shall mean the following Persons: (a) Seller; (b) Seller's current and future Affiliates; (c) the respective Representatives of the Persons referred to in clauses (a) and ( b) above; and (d) the respective successors and assigns of the Persons referred to in clauses (a) and (b) and (c) above. 1.34 "SHARED USE" means currently used or necessary to the continued operation of both (i) the business associated with the Purchased Assets and the Acquired Software and (ii) the business to be retained by Seller. 1.35 "THIRD PARTY AGREEMENTS" shall have the meaning set forth in SECTION 2.5. 1.36 "THIRD PARTY MATERIALS" means the specific third party owned or controlled software or content used and/or distributed by Seller in connection with the Acquired Software, as listed on SCHEDULE 1.36. 1.37 "TRADEMARKS" means all right, title and interest of Seller in and to the trademarks, in both word and graphic design form (whether registered or unregistered) and trademark applications each as specified on SCHEDULE 1.37, and the goodwill associated therewith. 1.38 "TRADE SECRETS" means all non-public information, trade secret rights and know-how of Seller used in connection with the Business, including, without limitation, business plans, customer lists, pricing, and sales information relating to the Business. 1.39 "WARRANTY CLAIM" means a claim made by either the Seller, Corel or CCL based on or with respect to the inaccuracy or non-performance or non-fulfillment or breach of any representation, covenant or warranty made by the other party contained in this Agreement, or -7- 8 contained in any document or certificate given in order to carry out the transactions contemplated hereby. 2. PURCHASE AND SALE OF ASSETS. 2.1 AGREEMENT TO SELL AND PURCHASE ASSETS. Subject to the terms and conditions of this Agreement, and in reliance on the representations, warranties and covenants set forth in this Agreement, (a) Seller agrees to sell, assign, transfer and convey to CCL at the Closing, and CCL agrees to purchase and acquire from Seller at the Closing, all of Seller's right, title and interest in and to all of the Purchased Assets, excluding the rights thereto in and for Ireland (the island of Ireland excluding the six northern counties) ("IRELAND") and Canada; (b) Seller agrees to sell, assign, transfer and convey to CCL at the Closing, and CCL agrees to purchase and acquire from Seller at the Closing, all of Seller's right, title and interest in and to all of the Purchased Assets as they relate to the rights thereto in and for Ireland; and (c) Seller agrees to sell, assign, transfer and convey to Corel at the Closing and Corel agrees to purchase and acquire from Seller at the Closing all of Seller's right, title and interest in and to all of the Purchased Assets as they relate to the rights thereto in and for Canada. The Purchased Assets will be sold, assigned, transferred and conveyed to CCL and Corel (as the case may be) on the Closing Date, free and clear of all mortgages, pledges, liens, security interests, encumbrances, charges, title retention, conditional sale or other security arrangements or similar claims ("ENCUMBRANCES"), except for the following (which are individually and collectively referred to as the "PERMITTED ENCUMBRANCES"): the Encumbrances listed on SCHEDULE 2.1 hereto; Encumbrances comprised of or related to the Required Consents; Encumbrances not substantial in amount and that do not detract in any significant respect from or interfere with the present use of any of the Purchased Assets; and Encumbrances either created by Buyer after the Closing or created by third parties after the Closing (which were not in existence as of the Closing Date) and allowed to be suffered after the Closing by Buyer. 2.2 PURCHASED ASSETS. For purposes of this Agreement, "PURCHASED ASSETS" means, collectively, All Acquired Software, Acquired Patent Rights, Intellectual Property Assets, Content Contracts (except as listed in SCHEDULE 2.2(d)), Contracts listed in Schedule 2.2 (excluding those contracts that Buyer notifies Seller in writing Buyer does not wish to acquire (the "EXCLUDED CONTRACTS")), Business Records, Customer List Assets, Permits, Proprietary Rights Agreements and other assets listed in Schedule 2.2 for worldwide purposes excluding Ireland and Canada. All Acquired Software, Acquired Patent Rights, Intellectual Property Assets, Content -8- 9 Contracts (except as listed in SCHEDULE 2.2), Contracts (excluding the Excluded Contracts), Business Records, Customer List Assets, Permits, Proprietary Rights Agreements and other assets listed in SCHEDULE 2.2, with respect to Ireland. All Acquired Software, Acquired Patent Rights, Intellectual Property Assets, Content Contracts (except as listed in SCHEDULE 2.2), Contracts (excluding the Excluded Contracts), Business Records, Customer List Assets, Permits, Proprietary Rights Agreements and other assets listed in SCHEDULE 2.2, with respect to Canada. Notwithstanding anything to the contrary contained herein, the Purchased Assets shall not include the Excluded Assets. 2.3 EXCLUDED ASSETS. For the purposes of this Agreement, "EXCLUDED ASSETS" means, collectively, those assets and rights of Seller listed on SCHEDULE 2.3 . Excluded Assets will include, without limitation, all sales and distribution Contracts that are not solely for the distribution of the Acquired Software. With respect to sales and distribution Contracts that relate both to Acquired Software and other products of Seller, Buyer will, as subcontractor to Seller, assume the obligation to fulfill product orders for, and other obligations related to, the Acquired Software under such Contracts, including but not limited to technical and customer support and upgrade obligations, with product purchases and support at the pricing, if any, specified in such Contracts (if not priced separately, Seller and Buyer will agree on a price for product purchases based on an allocation among the products such Contract covers based on the suggested retail purchase price of the products) and Buyer will be entitled to the revenue generated from the sale of such Acquired Software after the Closing. If any such Contracts provide for payments for support, upgrade or other similar obligations after the Closing Date, Seller and Buyer shall agree on the amount of such payments to be made to Buyer based on an appropriate allocation among the products such Contract covers. Seller and Buyer will cooperate to transition to Buyer that portion of such Contracts that relates to the Acquired Software as promptly as practicable following the Closing. 2.4 ASSET TRANSFER; PASSAGE OF TITLE; DELIVERY. (a) Title Passage and Delivery. Upon Closing, title to the Purchased Assets shall pass as follows and the Purchased Assets shall be delivered to Buyer as follows: (i) Title to and possession of the Purchased Assets which are for use everywhere in the world except Canada and Ireland shall be delivered to CCL by electronic transfer. (ii) Title to and possession of the Purchased Assets which are for use solely in Ireland shall be delivered to CCL by electronic transfer. (iii) Title to and possession of the Purchased Assets which are for use solely in Canada shall be delivered to Corel by electronic transfer. -9- 10 (b) Instruments of Conveyance. The execution of this Agreement shall not operate as an effective conveyance, assignment and transfer of the Purchased Assets and the Assumed Obligations at the Closing as contemplated herein. In order to effectuate the assignment, transfer and conveyance of the Purchased Assets and assumption of the Assumed Obligations pursuant to the terms and conditions hereof, each party shall at the Closing deliver or cause to be delivered to the other parties such bills of sale, assignments, assumptions and instruments of conveyance as reasonably requested by such other parties, as well as such other instruments of conveyance as counsel for Buyer or Seller may reasonably deem necessary or desirable (both at and after Closing) to effect or evidence the transfers contemplated hereby. 2.5 ASSIGNMENT OF THIRD PARTY AGREEMENTS. (a) Assignment. Upon the Closing, Seller shall assign to Buyer (to the extent required by this Agreement) Seller's rights, and Buyer shall assume from Seller, Seller's obligations under the Contracts, Proprietary Rights Agreements and other third party agreements listed in SCHEDULE 2.5 (the "THIRD PARTY AGREEMENTS") or shall make such other arrangements as are provided in SECTION 2.5 OR 9.1. Before the Closing, unless waived in writing by Buyer, Seller shall obtain the consent of each third party whose consent is required or shall make the notice to each third party whose notice is required as a condition to Closing as designated in SCHEDULE 2.5 (the "REQUIRED CONSENTS"). Seller and Buyer shall cooperate and work together to obtain such consents by, among other things, taking the actions set forth in SCHEDULE 2.5B. (b) Reasonable Efforts to Obtain Other Consents; Cooperation. Seller shall use its commercially reasonable efforts to obtain the consent of all third parties whose consent is required in connection with the assignment to Buyer of Third Party Agreements but is not a Required Consent. Seller hereby consents to Buyer, during the period prior to Closing, contacting the other party to each Third Party Agreement to seek consent to the assignment of such agreement or to negotiate a new agreement directly between such third party and Buyer. If the consent to assignment to all other Third Party Agreements has not been obtained by Closing, Seller and Buyer shall cooperate and work together to obtain such consents. (c) Sharing of Costs. Seller and Buyer shall each pay one-half of any incremental cost associated with obtaining assignment to Buyer of the Third Party Agreements. For purposes of this Section 2.5(c), "cost" shall mean (i) any aggregate incremental cost incurred by Buyer under each Third Party Agreement through the remaining term thereof minus (ii) any aggregate incremental savings to Buyer under each Third Party Agreement through the remaining term thereof. Notwithstanding the foregoing, in no event shall Buyer be required to pay more than One Hundred Thousand US Dollars ($100,000.00 USD) for any such incremental costs. (d) No Deemed Assignment. Nothing in this Agreement shall be construed as an assignment, license, transfer or conveyance of, or an attempt to assign, license, transfer or convey, any Third Party Agreement if: -10- 11 (i) such Third Party Agreement is not assignable, licensable, transferable or conveyable without the consent of a third party (if such consent has not been obtained) and such assignment, license, transfer or conveyance or attempted assignment, license, transfer or conveyance would constitute a breach of such Third Party Agreement (the "NON-TRANSFERABLE THIRD PARTY AGREEMENTS"); or (ii) the remedies for the enforcement of such Third Party Agreement available to Seller would not pass to Buyer (also the "NON-TRANSFERABLE THIRD PARTY AGREEMENTS"). Seller, to the extent permitted by applicable laws, shall be deemed to have promised to assign, license, transfer or convey all Non-Transferable Third Party Agreements to Buyer as of the Closing Date and shall complete the assignment, license, transfer and conveyance of all Non-Transferable Third Party Agreements immediately upon, but only upon, obtaining, if ever, the required third party consent. Nothing in this Agreement shall be construed as the assignment, assumption, license, transfer, conveyance, novation or delivery of any Non-Transferable Third Party Agreement until such time as delivery and assumption is actually consummated, whether by execution of an assignment in relation thereto or by manifest and clear expression of delivery. To the extent an attempted assignment or assumption of any Non-Transferable Third Party Agreements would be ineffective or would adversely affect the rights or increase the obligations of Seller or Buyer with respect to any such Non-Transferable Third Party Agreements so that Buyer would not, in fact, receive all such rights, or assume the obligations of Seller with respect thereto as they exist prior to such attempted assignment or assumption, then Seller shall promptly pay over to Buyer any monies collected by or paid to or for Seller in respect of any Non-Transferable Third Party Agreement, net of any royalties, payment obligations to third parties, or similar expenses paid or incurred by Seller relating to such Non-Transferable Third Party Agreement, and Seller and Buyer shall cooperate with each other in creating reasonable alternate arrangements that provide Buyer, to the extent reasonably practicable, the same net economic benefit that Buyer would have received if the Non-Transferable Third Party Agreements had been assigned, assumed, licensed, transferred or conveyed on the Closing Date (which arrangements may include, without limitation, sublease, agency, management, indemnity or payment arrangements and enforcement at the cost and for the benefit of Buyer of any and all rights of Seller against an involved third party), to provide for or impose upon Buyer the benefits of such Non-Transferable Third Party Agreements or the obligations of such Non-Transferable Third Party Agreements, as the case may be, and any transfer or assignment to Buyer by Seller of any such asset, or any assumption by Buyer of any such Assumed Obligation, which shall require such consent or authorization of a third party that is not obtained, shall be made subject to such consent or authorization being obtained. In no event shall the foregoing be construed to constitute an assignment, assumption, license, transfer, conveyance or novation of the Non-Transferable Third Party Agreements where such an assignment, assumption, license, transfer or conveyance would constitute a breach or result in the loss or diminution of the Non-Transferable Third Party Agreement. Seller shall not dissolve, wind-up or otherwise cease existence as a corporation until the earliest of the completion of the assignment, assumption, license, transfer and conveyance of all Non-Transferable Third Party Agreements to Buyer or until Seller and Buyer agree to alternative arrangements for such Non-Transferable Third Party Agreements. (e) Buyer shall indemnify and save Seller harmless from and against all losses, expenses, -11- 12 costs or damages of every nature and kind whatsoever (including attorneys fees and costs) which Seller or its officers, employees or agents may suffer as a direct result of any claims, actions or proceedings ("CLAIMS") brought by a party to any such Non-Transferable Third Party Agreement arising out of Seller's performance after the Closing Date of such Non-Transferable Third Party Agreement pursuant to the provisions of Section 2.5(d)(ii), except for Claims arising out of the negligence or fraud of, or actions not authorized by the provisions of Section 2.5(d)(ii) by, Seller or any of its officers, employees or agents; provided, however, that in no event shall the amounts paid by Buyer pursuant to the foregoing, together with any indemnification payments made by Buyer pursuant to Section 13, exceed the Cap as defined in Section 13.2. Seller shall indemnify and save Buyer harmless from and against all losses, expenses, costs or damages of every nature and kind whatsoever (including attorneys fees and costs) which Buyer or its officers, employees or agents may suffer as a direct result of any Claims brought by a party to any such Non-Transferable Third Party Agreement arising out of the negligence or fraud of, or actions not authorized by the provisions of Section 2.5(d)(ii) by, Seller or any of its officers, employees or agents in connection with performance after the Closing Date of any such Non-Transferable Third Party Agreement; provided, however, that in no event shall the amounts paid by Seller pursuant to the foregoing, together with any indemnification payments by Seller pursuant to Section 13, exceed the Cap as defined in Section 13.3. 2.6 INTENTIONALLY LEFT BLANK 2.7 SHARED ACCESS AND RIGHTS. On the terms and conditions of this Section 2.7, the parties shall have the following rights to certain Purchased Assets, subject to the non-competition obligations set forth in SECTION 9.12: (a) Business Records and Customer List Assets. Both Buyer and Seller shall be entitled to copy and use, subject to the terms and conditions of this Agreement, those Business Records and Customer List Assets that are Shared Use. Seller and Buyer shall cooperate in good faith to determine which party shall retain the original and which party shall receive a copy of the Business Records and Customer Lists Assets, provided that, in general, original Business Records and Customer List Assets shall be delivered to the party to whom such Business Records and/or Customer List Assets primarily relate and provided further that each party shall have access to all original Business Records to the extent reasonably required for purposes of compliance with law. To the extent that either Buyer or Seller requires access to an original Business Record or Customer List Asset that is Shared Use which has been delivered to the other party, Buyer and Seller agree to allow such party and its representatives reasonable access to the original. 2.8 GRANT OF LICENSE. Seller shall enter into software license agreements regarding the Excluded Software and substantially in the forms attached hereto as EXHIBITS D-1, D-2 AND D-3 with each of Corel and CLL (the "COREL LICENSE" and "CCL LICENSEs", respectively) . -12- 13 PURCHASE PRICE. In consideration of the sale, transfer, conveyance and assignment of the Purchased Assets to CCL and Corel, CCL and Corel shall pay Seller the aggregate purchase price (the "PURCHASE PRICE") paid as follows: 3.1 DELIVERIES ON CLOSING DATE. (a) Delivery to Seller. On the Closing Date Buyer shall pay Seller US$2,000,000 (the "INITIAL CASH PAYMENT"), by wire transfer of funds to Seller. Seller shall provide Buyer with wire transfer instructions on or before such date. 3.2 DELIVERY ON JUNE 30, 2000. On June 30, 2000, or such earlier date as may be agreed upon by the parties, Buyer shall pay Seller US$2,000,000 by wire transfer of funds to Seller. Seller shall provide Buyer with wire transfer instructions on or before such date. 3.3 DELIVERY ON SEPTEMBER 30, 2000. On September 30, 2000, or such earlier date as may be agreed upon by the parties, Buyer shall pay Seller US$2,000,000 by wire transfer of funds to Seller. Seller shall provide Buyer with wire transfer instructions on or before such date. 3.4 DELIVERY ON DECEMBER 31, 2000. On December 31, 2000, or such earlier date as may be agreed upon by the parties, Buyer shall pay Seller US$2,000,000 by wire transfer of funds to Seller. Seller shall provide Buyer with wire transfer instructions on or before such date. 3.5 DELIVERY ON JANUARY 31, 2001. On January 31, 2001, or such earlier date as may be agreed upon by the parties, Buyer shall pay Seller US$2,000,000 by wire transfer of funds to Seller. Seller shall provide Buyer with wire transfer instructions on or before such date. 3.6 ROYALTY PAYMENTS. (a) In addition to the payments set out above, for a period of two (2) years from the Closing Date, Buyer shall pay to Seller an amount equal to five (5%) percent of Net Receipts, up to a maximum of US$2,500,000 in aggregate. (b) Buyer shall pay royalties to Seller on a quarterly basis within forty-five (45) days following the end of each calendar quarter and shall include, with each payment of royalties, a report specifying the aggregate royalties earned during the period. (c) Buyer will maintain, in accordance with generally accepted accounting principles, complete and accurate books and records in respect of its marketing and distribution of the Acquired Software and the fees and other amounts received therefor. (d) For a period of three (3) years from the Closing Date, Seller shall have the right no more often than once per twelve (12) month period, upon reasonable notice to Buyer, to appoint an independent third party to examine Buyer's relevant books and records in order to verify Buyer's compliance with the terms of this Agreement. Any such audit shall be at the expense of -13- 14 Seller unless the audit reveals an underpayment by Buyer of greater than 5%, in which case Buyer shall reimburse Seller for the reasonable costs of the audit. (e) Seller shall not release version 6.03 of the Painter software product in the interim period between the date of execution of this Agreement and the Closing Date; provided that the Closing Date is on or before March 31, 2000 . 3.7 RESPONSIBILITY FOR PAYMENT. Notwithstanding anything to the contrary contained herein, the parties acknowledge and agree that pursuant to internal arrangements between CCL and Corel, CCL and Corel have agreed that CCL shall pay 94% of the Purchase Price and Corel shall pay 6% of the Purchase Price; provided, however, that as between Buyer and Seller, CCL and Corel shall be jointly and severally liable for Buyer's obligations under this Agreement. 3.8 LATE PAYMENT. Any late payments shall bear interest as and from the date of default at the rate of 1.5% per month. 4.0 OBLIGATIONS ASSUMED. 4.1 ASSUMPTION OF OBLIGATIONS. Buyer agrees, upon consummation of, and effective as of, the Closing Date, to assume those, and only those, obligations of Seller expressly listed on SCHEDULE 4.1 attached hereto (the "ASSUMED OBLIGATIONS"). 4.2 LIABILITIES AND OBLIGATIONS NOT ASSUMED. Except as expressly set forth in Schedule 4.1, Buyer shall not assume or become obligated in any way to pay any liabilities, debts or obligations of Seller or its business. All liabilities, debts and obligations of Seller not expressly assumed by Buyer hereunder are hereinafter referred to as the "NONASSUMED LIABILITIES." Non-Assumed Liabilities shall include, without limitation, the following: (i) obligations or liabilities of Seller to the extent they relate to Excluded Assets; (ii) any liabilities or obligations of Seller or its affiliates now or hereafter arising from or with respect to (a) the termination by Seller of the employment of any current or future employees of Seller or any of its affiliates, (b) any other claims brought against Seller arising from Seller's employment of any person, (c) any existing or future employee benefit plans of Seller or any of its affiliates whether or not under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (d) any present or future obligations or liabilities of Seller or any of its affiliates to existing or future employees of Seller or any of its affiliates under applicable laws respecting employment and employment practices, terms and conditions of employment, and wages and hours, including without limitation, state unemployment or disability laws or regulations, the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), or the Federal Worker Adjustment and Retraining Act ("WARN"), Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act, Older Workers' Benefit Protection Act, the Equal Pay Act of 1963, as amended, the Americans with Disabilities Act, the Family and Medical Leave Act, the National Labor Relations Act, the Fair Labor Standards Act, (e) any overtime pay, wages, salary, vacation or severance pay obligations of Seller or any of its affiliates, and (f) any contracts, agreements or arrangements between Seller or its affiliates and any contractor, consultant, or sales -14- 15 representative which are not Assumed Obligations; (iii) all trade accounts and operating costs payable and accrued liabilities of the Business incurred in the ordinary course of the routine daily affairs of the Business, which shall be paid by Seller; (iv) any obligations relating to Seller's real estate leases; and (v) any insurance premiums under any insurance policy of Seller relating to the Business. 4.3 NO OBLIGATIONS TO THIRD PARTIES. Assumption by Buyer of any liabilities or obligations of Seller pursuant to this Agreement or any Buyer Closing Document (as defined in SECTION 12.3 below) shall in no way expand the rights or remedies of third parties against Buyer as compared to the rights and remedies such parties would have against Seller if the Closing were not consummated. 5. CLOSING. The consummation of the purchase and sale of the Purchased Assets and the assumption of the Assumed Obligations contemplated hereby (the "CLOSING") will take place at the offices of the Seller in Scotts Valley, California, at the earliest practicable date after all of the conditions to closing set forth in this Agreement have been satisfied or waived in writing, or at such other time or date, and at such other place, of such other means of exchanging documents, as may be agreed to by the parties hereto (the date of the Closing referred to herein as the "CLOSING DATE"). 6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and warrants to Seller that, except as set forth in the Schedules to this Agreement, all of the following statements are true, accurate and correct: 6.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Corel and CCL are each corporations duly organized and validly existing under the laws of Canada and Ireland, respectively; Corel is in good standing under the laws of Ontario; and each such corporation has all requisite corporate power and authority to carry on its business as now conducted and to enter into this Agreement and the transactions contemplated hereby. Each of Corel and CCL is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have an adverse effect on Buyer's ability to consummate the transactions contemplated by this Agreement. 6.2 AUTHORIZATION. All corporate action on the part of each of Corel and CCL and their respective officers and directors necessary for the authorization, execution and delivery of this Agreement and the Buyer Closing Documents, the performance of all obligations of Buyer hereunder and thereunder, has been taken, and this Agreement and the Buyer Closing Documents constitute the valid and legally binding obligations of Corel and/or CCL as the case may be, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. Buyer's Boards -15- 16 of Directors have approved the transactions contemplated by this Agreement and the Buyer Closing Documents. No approval of Corel's shareholders is required to effect the transactions contemplated by this Agreement or by the Buyer Closing Documents. 6.3 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of Buyer is required in connection with the consummation of the transactions contemplated by this Agreement. 6.4 LITIGATION. There is no action, suit, proceeding or investigation pending or currently threatened against the Buyer that questions or affects the validity of this Agreement or the Buyer Closing Documents, or the right or ability of the Buyer to enter into this Agreement or the Buyer Closing Documents or to consummate the transactions contemplated hereby or thereby. Buyer is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality that could reasonably be expected to have a material adverse effect on Buyer's business or ability to consummate the transactions contemplated hereby. There is no action, suit, proceeding or investigation by Buyer currently pending or threatened or that Buyer intends to initiate related to the transactions contemplated hereby. 6.5 COMPLIANCE WITH OTHER INSTRUMENTS. The execution, delivery and performance of this Agreement and the Buyer Closing Documents and the consummation of the transactions contemplated hereby and thereby will not result in any violation or default of any provision of Buyer's charter documents, or of any instrument, judgment, order, writ or decree that could reasonably be expected to have a material adverse effect on Buyer's business or ability to consummate the transactions contemplated hereby or, to the best of Buyer's knowledge, any violation or default of any provision of any federal or state statute, rule or regulation applicable to Buyer that could reasonably be expected to have a material adverse effect on Seller or on Buyer's business or ability to consummate the transactions contemplated hereby. 6.6 BROKERAGE AND FINDER'S FEES. Neither Buyer nor any of its affiliates has employed any broker, finder or agent, or agreed to pay or incurred any brokerage fee, finder's fee or commission with respect to the transactions contemplated by this Agreement, or dealt with anyone purporting to act in the capacity of a broker, finder or agent with respect thereto as a result of which any claim for a fee can be asserted against Seller. 6.7 DISCLOSURE. To Seller's knowledge, this Agreement, the Seller Closing Documents and other information delivered in connection herewith or therewith, taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact required to be stated herein or therein or necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. 7. REPRESENTATIONS AND WARRANTIES OF SELLER. -16- 17 Seller hereby represents and warrants to Buyer that, except as set forth in the Schedules to this Agreement, all of the following statements are true, accurate and correct. 7.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and use its assets, to carry on its business as now conducted and to enter into this Agreement and the transactions contemplated hereby. Seller is duly qualified to transact business and is in good standing in the State of California and each other jurisdiction in which the failure to so qualify would have a material adverse effect on the Purchased Assets. 7.2 AUTHORIZATION. All corporate action on the part of Seller, its officers and directors necessary for the authorization, execution and delivery of this Agreement and the Seller Closing Documents, and the performance of all obligations of Seller hereunder and thereunder, has been taken, and this Agreement and the Seller Closing Documents constitute valid and legally binding obligations of Seller, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. Seller's Board of Directors has approved the transactions contemplated by this Agreement and the Seller Closing Documents. No approval of Seller's stockholders is required to effect the transactions contemplated by this Agreement or the Seller Closing Documents. 7.3 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of Seller is required in connection with the consummation of the transactions contemplated by this Agreement. 7.4 LITIGATION. Except as set forth on SCHEDULE 7.4 hereto, there is no action, suit, proceeding or investigation pending, or to the knowledge of Seller, currently threatened against Seller. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending, or to the knowledge of Seller, threatened against Seller (or any reasonable basis therefor known to Seller for any such action, suit, proceeding or investigation to be initiated within the foreseeable future) involving the employment or prior employment of any of Seller's employees, their use in connection with Seller's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. Seller is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality that could reasonably be expected to have a material adverse effect on the Purchased Assets. There is no action, suit, proceeding or investigation by Seller currently pending or that Seller intends to initiate. 7.5 COMPLIANCE WITH OTHER INSTRUMENTS. Seller is not in violation or default of any provision of its Certificate of Incorporation or Bylaws, or of any instrument, judgment, order, writ or decree to which it is a party or by which it is bound and, to its knowledge, of any -17- 18 provision of any federal or state statute, rule or regulation applicable to Seller. The execution, delivery and performance of this Agreement and the Seller Closing Documents and the consummation of the transactions contemplated hereby and thereby will not (other than in connection with any Permitted Encumbrances) (i) result in any such violation or default, (ii) result in a violation or breach of, or permit any third party to rescind any term or provision of, or constitute a default under, any material loan, note, indenture, mortgage, deed of trust, security agreement, lease, contract, license or other agreement to which Seller is a party or by which Seller or any of the Purchased Assets is bound, (iii) to the best of Seller's knowledge, violate any laws, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or government body, or (iv) result in the creation of any Encumbrance upon the Purchased Assets or the suspension, revocation, impairment, forfeiture, or nonrenewal of any Permit. 7.6 PROPRIETARY INFORMATION. It is Seller's standard practice to require that every employee and contractor execute a proprietary information and inventions agreement. Each employee and contractor involved with the development of the Acquired Software, or Purchased Assets whose failure to execute a proprietary information and inventions agreement could reasonably be expected to have a material adverse effect on the Purchased Assets or Buyer's ability to commercially exploit the Purchased Assets has a executed a proprietary information and inventions disclosure agreement substantially in the form attached hereto as SCHEDULE 7.6. 7.7 RELATED-PARTY TRANSACTIONS. Except to set forth on SCHEDULE 7.7, no officer or director of Seller, member of his or her immediate family or affiliate thereof is a party to or has an interest in any contract or agreement included in the Purchased Assets or Assumed Obligations. 7.8 PERMITS. Seller has all Permits necessary for the commercial exploitation of the Acquired Software worldwide, the lack of which could reasonably be expected to materially and adversely affect the business, properties, prospects or financial condition of the Purchased Assets, each of which is described in SCHEDULE 7.8 hereto. The Permits described in Schedule 7.8 include all franchises, permits, licenses and similar authority related to the Purchased Assets and all Permits necessary to transfer the Purchased Assets to CCL and Corel as contemplated by this Agreement. Seller is not in default in any material respect under any of such permits. 7.9 ENVIRONMENTAL AND SAFETY LAWS. To Seller's knowledge, neither Seller nor any of the office space currently occupied by Seller (the "FACILITIES") has violated, or is in violation of, any federal, state or local law, ordinance or regulation relating to industrial hygiene, occupational health and safety, disposal of Hazardous Materials (as defined below) or the environmental conditions on the Facilities, including but not limited to, soil and ground water conditions that could reasonably be expected to have a material adverse effect on the Purchased Assets. Seller has not used, generated, manufactured or stored on or under any part of the Facilities, or transported to or from any part of the Facilities, any Hazardous Materials in violation of CERCLA (as defined below) or any other applicable state or federal environmental law. Seller has no knowledge of any presence, disposals, releases or threatened releases of any -18- 19 Hazardous Materials on, from or under any part of the Facilities. For purposes of this Section, "HAZARDOUS MATERIALS" means any hazardous or toxic substance, material or waste that is regulated or defined as a "hazardous substance," "pollutant," "contaminant," "toxic chemical," "hazardous material," "toxic substance" or "hazardous chemical" or similar hazardous substance under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), or any other similar state or federal law, statute, ordinance, rule or regulation having a scope of purpose similar to that of CERCLA. 7.10 PURCHASED ASSETS. Seller has good and marketable title to all of the Purchased Assets, free and clear of all Encumbrances, except for Permitted Encumbrances. Subject to restrictions related to the Permitted Encumbrances, title to all the Purchased Assets is freely transferable from Seller to CCL or Corel, as applicable, without obtaining the consent or approval of any person or party. Seller is not restricted by any Seller Agreement (as defined in SECTION 7.18) from licensing, sublicensing or redistributing the Acquired Software anywhere in the world in any media or by any means. Except for failure to obtain consent to assignments under the Non-Transferable Third Party Agreements, the validity and effectiveness of each Seller Agreement will not be affected by the transfer thereof to Buyer under this Agreement, and all such Seller Agreements are assignable to Buyer without a consent from any third party, except for the Non-Transferable Third Party Agreements. There is no element necessary for the commercial exploitation of the Acquired Software that is not included in the Purchased Assets or that has not been otherwise licensed to Buyer by Seller. 7.11 TAX RETURNS, PAYMENTS AND ELECTIONS. At the Closing, there will be no federal, state, or local tax liens against or any unsatisfied liability for taxes of any kind imposed on or levied with respect to any of the Purchased Assets to be transferred hereunder other than liens for any such taxes which have not become due and payable. Seller has paid or will pay, when due, any federal, state or local taxes accruing prior to the Closing Date with respect to the Purchased Assets or Seller's business which, if unpaid, may result in a liability of Buyer or an Encumbrance against any of the Purchased Assets. As a result of the consummation of the transactions contemplated by this Agreement, Buyer shall not become liable for any parachute payments, as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "CODE"). All documents to which Seller is a party, which relate to the Purchased Assets and which are subject to stamp duty in Ireland (other than documents deliverable pursuant to this Agreement or in connection with the transactions contemplated by this Agreement), have been duly stamped and the appropriate stamp duty paid. 7.12 SALES LEVELS; RETURNS AND COMPLAINTS. The written information Seller has provided to Buyer regarding the Acquired Software sales levels for the past twenty-four (24) months is true and accurate in all material respects. Seller has not received any material written complaints (other than such complaints as have been resolved prior to the date of this Agreement) from customers concerning the Acquired Software or related services, nor has it had any returns of Acquired Software since January 1, 2000 in excess of Seller's reserves established as of December 31, 1999, nor does Seller know of any reasonable basis for a specific customer complaint or a product return that could reasonably be expected to have a material adverse effect -19- 20 on the Purchased Assets taken as a whole. Seller has not received written notice, and has no specific reason to believe (other than as the result of announcement or consummation of the transactions contemplated by this Agreement) that any customer will terminate its relationship, decrease the volume of purchases or stop purchasing or licensing the Acquired Software after the Closing. 7.13 PRODUCTS IN CHANNEL. SCHEDULE 7.13 sets forth a report compiled from third party sources and used by Seller in the ordinary course of business to estimate channel inventories, setting forth the month-end aggregate dollar volume of Acquired Software in the distribution channel for December 1999, January 2000, February 2000 and through March 6, 2000. 7.14 FINANCIAL CONDITION. Seller is now, and after Closing will be, solvent and able to pay its obligations as they become due. The audited financial statements of Seller for the year ended December 31, 1998, and the unaudited financial statements for the fiscal quarters ending March 31, 1999, June 30, 1999 and September 30, 1999 (the "SELLER FINANCIAL STATEMENTS") provided to Buyer as SCHEDULE 7.14 are true and accurate and fairly present the financial condition of Seller as of such dates and the results of operations of Seller for such period. The financial records relating to the Business have been provided to Buyer and have been prepared in a manner that is consistent with Seller's internal business and financial accounting methods, which internal business and financial accounting methods are in accordance with generally accepted accounting principles. 7.15 INTELLECTUAL PROPERTY. SCHEDULES 1.1, 1.2, 1.14 AND 1.37 are collectively an accurate and complete list of all the Intellectual Property Assets owned or under development by Seller that are related to the Acquired Software, Acquired Patents, Trademarks and Domain Names and with respect to patents, trademarks, domain names, service marks, copyrights, and mask work registrations, lists the application and registration number, date of application or date of registration and country of filing for each such right, if any. Seller has, and at Closing will transfer or cause to be transferred to Buyer, sufficient title and ownership of all right, title and interest necessary for or used in the commercial exploitation of the Purchased Assets worldwide without conflict with or infringement of the rights of others which conflict or infringement could reasonably be expected to have a material adverse effect on the Purchased Assets. (a) Except as specified on SCHEDULE 7.15, Seller is the sole and exclusive owner of the Intellectual Property Assets, except for Permitted Encumbrances, and to the best of its knowledge, is the sole and exclusive owner of the Acquired Patent Rights. There are no outstanding options, licenses, or agreements of any kind to which Seller is a party relating to the Intellectual Property Assets, nor is Seller bound by or a party to any options, licenses or agreements of any kind with respect to the Intellectual Property of any other person or entity, other than the Contracts. Seller has not received any written or, to its knowledge, oral communications alleging that Seller has violated, or that the transactions contemplated by this Agreement could violate, any of the intellectual property rights of any other person or entity. (b) Seller is not aware that any of its employees is obligated under any contract (including, without limitation, licenses, covenants or commitments of any nature) or other -20- 21 agreement, or subject to any judgment, decree or order of any court or administrative agency, that would conflict with the use by Buyer of the Intellectual Property Assets, or that would interfere with the ability of Buyer to use, license or sell the Intellectual Property Assets. Each employee of Seller has executed a confidentiality agreement with Seller agreeing to maintain the confidentiality of confidential or proprietary information of Seller and the confidential or proprietary information of third parties received by Seller. Neither the execution nor delivery of this Agreement or the Seller Closing Documents will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. To Seller's knowledge, the operation of the Business does not require the use of any inventions of any of Seller's past or present employees or consultants made prior to their employment by Seller. 7.16 INTENTIONALLY LEFT BLANK. 7.17 INTENTIONALLY LEFT BLANK. 7.18 AGREEMENTS. SCHEDULE 7.18 hereto lists all material Proprietary Rights Agreements, Contracts and all other agreements, understandings and commitments of Seller related to the Purchased Assets, whether written or oral (other than oral agreements to employ employees of Seller) ("SELLER AGREEMENTS"). Seller is not in violation, breach or default of any contract or agreement included in the Assumed Obligations or any other material Seller Agreements listed in SCHEDULE 7.18. Seller has delivered or made available to Buyer for review a true and correct copy of each written contract or agreement included in the Purchased Assets and has provided a written summary of any material verbal contracts and agreements relating to the Purchased Assets. 7.19 SOFTWARE. SCHEDULE 1.1 is an accurate and complete listing of all software programs included in the Acquired Software, including the language in which they are written and the type of operating systems and hardware platform(s) on which they run. Seller has sole ownership of the Acquired Software, free and clear of any Encumbrance, except for Permitted Encumbrances. No rights or waiver of rights (including moral rights) of any third party are necessary to market, license, sell, modify, update and/or create Derivative Works with respect to, and otherwise to conduct the Business with respect to, the Acquired Software. Except for general business third party software which is readily and currently commercially available and which is not embedded in or necessary to run any of the Acquired Software, no other software is required to operate the Acquired Software. (a) Seller maintains machine-readable master-reproducible copies, properly documented source code and source code listings, technical documentation and user manuals for the most current releases or versions of each software program included in the Acquired Software and for all earlier releases or versions thereof currently being supported by Seller; in each case, the machine-readable copy substantially conforms to the corresponding source code listing; such software program is written in the programming language set forth on SCHEDULE 1.1, for use on the operating system(s) and hardware set forth in SCHEDULE 1.1; such software program can be -21- 22 maintained and modified by reasonably competent programmers familiar with such language, hardware and operating systems; and in each case, the software program operates substantially in accordance with the user manual and product specifications therefor without material operating defects. The documentation, manuals flow charts and other materials which Seller is transferring or licensing hereunder documents in reasonable detail all of the functions of the Acquired Software and are sufficient and adequate to provide for their use by end-users. Buyer acknowledges that Seller has given Buyer full opportunity to carefully review and examine the source code and other technological information relating to the Acquired Software; and Buyer acknowledges and agrees that it is comfortable with the documentation contained in such source code. (b) Seller has used reasonably diligent efforts to obtain and maintain its ownership of the Acquired Software, including, without limitation, registration of the Acquired Software with the appropriate governmental authorities. Seller has not disclosed the source code for any of the Acquired Software or other confidential or proprietary information constituting, embodied in or pertaining to the Acquired Software to any person and has used reasonably diligent efforts to prevent such disclosure, other than disclosure of such source code to employees or independent contractors of Seller, in each case pursuant to valid and binding agreements with such persons or entities reasonably designed to protect the confidentiality of, and Seller's intellectual property rights in, the Acquired Software; which agreements are in full force and effect. Seller has not distributed, received or made available Acquired Software except pursuant to the Contracts. No licensees of Seller are permitted to use or distribute the Acquired Software except pursuant to valid written license agreement, a form of which has been provided to Buyer. 7.20 BREACHES AND DEFAULTS. Each Seller Agreement is a valid and binding agreement of Seller, enforceable by Seller in accordance with its terms in all material respects, except as such enforceability may be limited by general principles of equity or applicable bankruptcy insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies, and Seller does not have any knowledge that any Seller Agreement is not a valid and binding agreement of the other party or parties thereto. Seller has fulfilled all material obligations required pursuant to the Seller Agreements to have been performed by Seller on its part prior to the date hereof. Seller is not in material violation or breach of, or default under any Seller Agreement. To the knowledge of Seller, there is no existing breach or default by any other party to any Seller Agreement which could entitle Seller to terminate the Seller Agreement, and no event has occurred which with the passage of time or giving of notice or both could constitute a default by such other party, result in a loss of rights or result in the creation of any lien, charge or Encumbrance (other than Permitted Encumbrances) thereunder or pursuant thereto. The validity and effectiveness of each Seller Agreement will not be affected by the transfer thereof to Buyer under this Agreement and all such Agreements are assignable to Buyer without consent, except as indicated on Schedule 2.5. True, correct and complete copies of all Seller Agreements have previously been delivered or made available by Seller to Buyer. 7.21 INFRINGEMENT. None of the Purchased Assets has materially violated or -22- 23 infringed upon, or is materially violating or infringing upon, any software, copyright, patent, trade secret or other intellectual or proprietary right (other than patent rights) of any third party. SCHEDULE 7.21 contains a complete list of all written correspondence, communications, notices, claims and proceedings by third parties alleging any right, title or interest in or to the Purchased Assets, or asserting that the Purchased Assets violate or infringe in any respect the proprietary rights of others. There are no claims pending or, to the knowledge of Seller, threatened by any third party against Seller (i) alleging that Seller's ownership, sale, licensing, possession or use of, or disclosure or transfer to Buyer of, the Purchased Assets infringes upon or constitutes an unauthorized use of the intellectual property rights of any third party or (ii) challenging or questioning Seller's ownership of, or the validity or effectiveness of, Seller's ownership of, the Purchased Assets, nor, to the knowledge of Seller, is there any basis for, any such claim. Seller has no disputes with or claims against any third party for infringement by such third party of any Intellectual Property Assets (except for disputes against third party software distributors that may be infringing one or more of the Patents described in SCHEDULE 1.2). Seller has taken reasonable and commercially prudent steps to protect its right, title and interest in and to or its right to use (as applicable) such Intellectual Property Assets. To the best knowledge of Seller, no third party is violating or infringing upon, or has violated or infringed upon at any time, any of the Intellectual Property Assets (except for disputes against third party software distributors that may be infringing one or more of the Patents described in SCHEDULE 1.2). Except as otherwise disclosed in SCHEDULE 2.1, none of the Intellectual Property Assets is owned by or registered in the name of any current or former owner, shareholder, partner, director, executive, officer, employee, salesperson, agent, customer, representative or contractor of Seller nor does any such person have any interest therein or right thereto, including but not limited to the right to royalty payments. SCHEDULES 1.1, 1.2, 1.14, 1.36, 7.15, 7.18 list all Intellectual Property Assets, Domain Names, Seller Agreements and the Acquired Software necessary or important for Buyer to commercially exploit the Purchased Assets. 7.22 CUSTOMER CONTRACTS. Seller has not entered into any contractual obligation to release any additional version or upgrade of the Acquired Software. 7.23 ADVANCES AND DEPOSITS. SCHEDULE 7.23 sets forth all advances or deposits from customers for Acquired Software to be shipped, or services to be performed related to the Acquired Software, after the Closing Date which have been received by Seller as of the date hereof. 7.24 EMPLOYEE MATTERS. Seller will deliver to Buyer at Closing a list of the names and titles of all persons currently and directly employed in the Business (the "EMPLOYEES"), together with the amount of their current compensation and their service date. 7.25 LABOR AND EMPLOYEE RELATIONS. Seller is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to Seller's knowledge, has sought to represent any of the employees, representatives or agents of its business. There is no strike or other labor dispute involving Seller, pending, or to Seller's knowledge, -23- 24 threatened, that could have a material adverse effect on Seller's assets, properties, financial condition, operating results, or business, nor is Seller aware of any labor organization activity involving its employees. 7.26 BROKERAGE AND FINDER'S FEES. Neither Seller nor any of its affiliates has employed any broker, finder or agent, or agreed to pay or incurred any brokerage fee, finder's fee or commission with respect to the transactions contemplated by this Agreement, or dealt with anyone purporting to act in the capacity of a broker, finder or agent with respect thereto as a result of which any claim for a fee can be asserted against Buyer or the Purchased Assets, except for Alliant Partners, whose fees and expenses shall be paid by Seller pursuant to an agreement between Seller and Alliant Partners. 7.27 DISCLOSURE. To Seller's knowledge, this Agreement, the Seller Closing Documents and other information delivered in connection herewith or therewith, taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact required to be stated herein or therein or necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. 7.28 YEAR 2000 COMPLIANCE. Without limiting any other warranty or obligation specified in this Agreement, Seller expressly warrants to Buyer that the Purchased Assets are and at all times will be Year 2000 Compliant. "Year 2000 Compliant" means that the Purchased Assets will not, as a result of processing data containing dates in the year 2000 and any preceding and following years, fail to initiate and operate and to correctly store, represent and process (including sort) all dates (including single and multi-century formulas and leap year calculations) when the date being used is in the year 2000, or in a year preceding or following the year 2000; nor cause or result in an abnormal termination or ending of operations. 8. COVENANTS OF BUYER. 8.1 SELLER CONFIDENTIAL INFORMATION. For the purposes of this Agreement, "CONFIDENTIAL INFORMATION" means all copies of financial information, marketing and sales information, pricing, marketing plans, business plans, financial and business projections, manufacturing processes and procedures, formulae, methodologies, inventions, product designs, product specifications, source code, customer lists, customer data, drawings, and other confidential and/or proprietary information. Confidential information of Seller disclosed to Buyer in the course of negotiating or performing the transaction contemplated by this Agreement ("SELLER CONFIDENTIAL INFORMATION") will be held in confidence and not used or disclosed by Buyer until the expiration of five (5) years after the Closing Date and will be promptly destroyed by Buyer or returned to Seller upon Seller's written request to Buyer; provided, however, that from and after the Closing, Seller Confidential Information shall not include any information or assets included in or related to the Purchased Assets. Buyer's employees, affiliates and shareholders will not be given access to Seller Confidential Information except on a "need to know" basis. Buyer shall take reasonable precautions to protect the Seller Confidential Information from disclosure, including such measures as Buyer take with respect to their own confidential information. It is -24- 25 agreed that Seller Confidential Information will not include information that: (a) (with respect to information received from Seller) Buyer can demonstrate was known to Buyer, as the case may be, prior to receipt of such information from Seller; (b) is disclosed to Buyer by a third party having the legal right to disclose such information and who owes no obligation of confidence to the Seller; (c) is now, or later becomes part of the general public or industry knowledge, other than as a result of a breach of this Agreement by Buyer; or (d) Buyer can demonstrate was independently developed by Buyer without the use of any Seller Confidential Information. 8.2 TRANSFER TAXES. The Buyer shall bear the burden of any stamp duty tax or any other non-U.S. sales, use or other tax (except for taxes based on Seller's income) imposed in connection with the consummation of the transactions contemplated by this Agreement. Buyer and Seller shall each bear the burden of any other U.S. sales, use and other taxes (except for taxes based on Seller's income) imposed in connection with the consummation of the transactions contemplated by this Agreement, in the manner imposed on each of them by law, as the case may be. The Seller and the Buyer agree to cooperate in good faith with each other, and to use their commercially reasonable efforts, to minimize the taxes described in this SECTION 8.2. 8.3 FURTHER ASSURANCES. From and after the Closing Date, Buyer shall promptly execute and deliver such further assignments, assumptions, endorsements and other documents as Seller may reasonably request for the purpose of effecting the transfer of Seller's title to or right to use the Purchased Assets to CCL and Corel and/or carrying out the provisions and intent of this Agreement and the Buyer Closing Documents. 8.4 COOPERATION IN LITIGATION. In the event of any litigation against Seller that relates to any Assumed Obligation or the Business, Buyer agrees to cooperate at Seller's sole cost and expense in Seller's defense of such litigation as required by law or as otherwise reasonably requested by Seller, including making Buyer's retained employees reasonably available to the extent that doing so would not unduly interfere with Buyer's business. 8.5 UPDATING AND DISTRIBUTION OF PRODUCT. Buyer agrees to produce at least one full upgrade of the Bryce and KPT products during the eighteen (18) month period from Closing. Buyer shall also use commercially reasonable efforts to produce at least one full upgrade of the Painter product during the same time period. For the purposes of this Section 8.5, a "full upgrade" means a change to the left of the decimal place in the version number of the product. 8.6 SURVIVAL OF COVENANTS. The covenant set forth in Section 8.1 shall survive the termination of this Agreement for any reason. Each of the covenants set forth in Sections 8.2 to 8.6, inclusive, or otherwise made by Buyer in this Agreement shall survive the Closing. 9. COVENANTS OF SELLER. Seller covenants and agrees with Buyer as follows: 9.1 CARRY ON BUSINESS IN ORDINARY COURSE. From the Effective Date to the Closing -25- 26 Date, Seller will carry on its business related to the Purchased Assets in the ordinary course consistent with Seller's past practices. Seller agrees to use reasonable efforts to protect and preserve the Purchased Assets and to preserve the goodwill of its customers, suppliers and others having business relations with its Business. Without limiting the generality of the foregoing, without Buyer's prior written consent, Seller shall not: (a) engage in any transaction that is inconsistent with any representation or warranty of Seller set forth herein, or the transactions contemplated hereby, or could reasonably be expected to cause a material breach of any representation or warranty that would have a material adverse effect on the Purchased Assets taken as a whole; (b) sell, transfer, convey, assign, lease, license or otherwise dispose of any of the Purchased Assets, or cancel, rescind, waive, release, fail to renew or forgive any material contracts or claims of Seller except, in each case, in the ordinary course of its Business consistent with Seller's past practices, prior to December, 1999; (c) mortgage, pledge, subject to a lien, or grant a security interest in, or otherwise encumber, any of the Purchased Assets; or (d) ship units of Acquired Software into its distribution channel at a rate in excess of US$ 300,000 per month without Buyer's consent, which will not be unreasonably withheld so long as such shipments will not significantly increase the inventory of Acquired Software in the channel at Closing. 9.2 ACCESS TO INFORMATION. From the Effective Date to the Closing Date, Seller will afford to the representatives of Buyer, including, without limitation, its counsel and auditors, access, at the Seller's offices in Scotts Valley, CA, to any and all of the Purchased Assets and information with respect thereto (except for attorney-client privileged information) to the end that Buyer may have a reasonable opportunity to make such a full investigation of the Purchased Assets and of the Acquired Software in advance of the Closing Date as Buyer shall reasonably desire, and the officers of Seller will confer with representatives of Buyer and will furnish to Buyer, either orally or by means of such records, documents and memoranda as are available or reasonably capable of preparation, such information as Buyer may reasonably request, and Seller will furnish to Buyer's auditors all consents and authority that they may reasonably request in connection with any examination of Buyer. 9.3 CONSENT OF THIRD PARTIES. Prior to and after the Closing Date, Seller shall take the actions set forth in SECTION 2.5 to obtain the consent in writing of all persons necessary to permit Seller to assign and transfer all of the Purchased Assets (including but not limited to the Third Party Agreements) to Buyer, free and clear of all Encumbrances (other than the Assumed Obligations) and to perform its obligations under, and to conclude the transactions contemplated by, this Agreement. 9.4 ERIC WENGER. Prior to the Closing Date, Seller shall take all commercially -26- 27 reasonable action to obtain the waiver in writing of Eric Wegner of his right to terminate the software license agreement between him and Seller (as successor in interest), dated July 1, 1994. 9.5 FURTHER ASSURANCES. From and after the Closing Date, Seller shall promptly execute and deliver to Buyer any and all such further assignments, endorsements and other documents as Buyer may reasonably request for the purpose of effecting the transfer of Seller's title to or, as applicable, right to use, the Purchased Assets to CCL and Corel and/or carrying out the provisions and intent of this Agreement and the Seller Closing Documents. 9.6 CONFIDENTIAL INFORMATION. (a) Buyer Confidential Information. Confidential information of Buyer disclosed to Seller in the course of negotiating or performing the transaction contemplated by this Agreement ("BUYER CONFIDENTIAL INFORMATION") will be held in confidence and not used or disclosed by Seller until the expiration of five (5) years after the Closing Date and will be promptly destroyed by Seller or returned to Buyer upon Buyer's written request to Seller. Seller's employees, affiliates and shareholders will not be given access to Buyer Confidential Information except on a "need to know" basis. Seller shall take reasonable precautions to protect the Buyer Confidential Information from disclosure, including, without limitation, such measures as Seller take with respect to their own confidential information. It is agreed that Buyer Confidential Information will not include information that: (a) (with respect to information received from Buyer) Seller can demonstrate was known to Seller, as the case may be, prior to receipt of such information from Buyer; (b) is disclosed to Seller by a third party having the legal right to disclose such information and who owes no obligation of confidence to the Buyer; (c) is now, or later becomes part of the general public or industry knowledge, other than as a result of a breach of this Agreement by Seller; or (d) Seller can demonstrate was independently developed by Seller without the use of any Buyer Confidential Information. (b) Confidential Information Related to Purchased Assets. From and after the Closing, Seller will not retain, use or disclose any Confidential Information included in or relating to the Purchased Assets, and Seller shall take reasonable actions and precautions to ensure that such Confidential Information is not retained, used or disclosed by Seller's employees, affiliates or shareholders. 9.7 COOPERATION IN LITIGATION. In the event of any litigation against Buyer that relates to any Assumed Obligation or the Business conducted before the Closing Date, Seller agrees to cooperate at Buyer's sole cost and expense in Buyer's defense of such litigation as required by law or as otherwise reasonably requested by Buyer, including making Seller's retained employees reasonably available to the extent that doing so would not unduly interfere with Seller's business. 9.8 MAIL AND COMMUNICATIONS. Seller will promptly deliver to Buyer the original of any mail or other communication received by Seller pertaining to the Purchased Assets, including, without limitation, orders from customers for items of Acquired Software. -27- 28 9.9 INTENTIONALLY LEFT BLANK. 9.10 TRANSFER TAXES. Seller shall pay and promptly discharge, and Buyer harmless from any loss or expense associated with, any Irish stamp tax imposed on any licenses or sublicenses between Seller and CCL. 9.11 NON-SOLICITATION. (a) From and after the Effective Date for a period of five (5) business days, or the termination of this Agreement in accordance with its terms, Seller shall not, and shall use its best efforts to see that its directors do not, and shall not permit its officers, employees, representatives, investment bankers, agents and affiliates to, directly or indirectly, (i) solicit, initiate or engage in discussions or negotiations with any Person, encourage submission of any inquiries, proposals or offers by, or take any other action intended or designed to facilitate the efforts of any Person, other than Buyer, relating to the possible acquisition of the Acquired Software or the Purchased Assets (or any material portion thereof) (with any such efforts by any such person referred to as an "ACQUISITION PROPOSAL"),(ii) provide any non-public information with respect to Seller, or afford any access to the properties, books or records of Seller, to any Person other than Buyer, relating to a possible Acquisition Proposal by any Person other than Buyer, (iii) make or authorize any statement, recommendation or solicitation in support of any possible Acquisition Proposal by any person, other than by Buyer, or (iv) enter into an agreement with any Person, other than Buyer, providing for a possible Acquisition Proposal. Notwithstanding the foregoing, if contacted by a Person who expresses interest in purchasing all, or a portion of, the Acquired Software or Purchased Assets, Seller may, during the five (5) business day period set out above, inform such Person that Seller has entered into a conditional asset purchase agreement with respect to the Acquired Software and Purchased Assets and that Seller may be interested to engaging in further discussions with such person once the five (5) business day period has expired. (b) Seller shall be responsible for any breach of this Section by any of its subsidiaries or affiliated entities and its and their directors, officers, employees, representatives, investment bankers, agents and affiliates. 9.12 NON-COMPETITION. From the Closing Date until December 31, 2003, Seller shall not release, market, sell or distribute any product that competes, in any significant way, with any of the Purchased Assets; provided, however, that as to any company into which Seller merges or which otherwise succeeds to Seller's obligation pursuant to this section ("Acquiring Company"), this shall only restrict the Acquiring Company from using any of Seller's assets or technology from competing, in any significant way, with any of the Purchased Assets. 9.13 SURVIVAL OF COVENANTS. Each of the covenants set forth in Sections 9.3 through 9.10, inclusive, or otherwise made by Seller in this Agreement shall survive the Closing. The covenants set forth in Section 9.6 above shall, in addition, survive the termination of this Agreement for any reason. -28- 29 10. COVENANTS AND AGREEMENTS RELATED TO EMPLOYEES. 10.1 OFFERS OF EMPLOYMENT. At any time after the Closing, Buyer shall be entitled to make written offers of employment to Employees currently involved in the commercial exploitation of the Purchased Assets. Those Employees who accept such offers and report to work for Buyer shall hereinafter collectively be referred to as the "TRANSFERRED Employees." Seller hereby consents to the hiring of such Transferred Employees by Buyer and waives, with respect to the employment by Buyer of such Transferred Employees, any claims or rights Seller may have against Buyer or any such Transferred Employee under any non-competition agreement that relates to the Purchased Assets, any confidentiality agreement that relates to the Purchased Assets or any employment agreement in effect at the Closing Date. 10.2 EMPLOYMENT TAXES. Seller shall be responsible for any withholding or employment taxes with respect to all Seller's Employees attributable to periods of service ending on or before such Employee's termination of employment with Seller ("TERMINATION Date") and shall be responsible for filing all federal, state and local employment tax returns with respect to such Employees attributable to periods of service ending on or before such Employees' Termination Date. 10.3 WARN COMPLIANCE. In the event that Seller effects a reduction or cessation of the operations or workforce that exists to service or support Purchased Assets prior to or subsequent to the Closing, Seller shall perform and undertake all acts as may be necessary to comply with the applicable provisions of Federal Worker Adjustment and Retraining Act ("WARN") and other laws. 10.4 CONTRACT OBLIGATIONS. Seller shall be responsible for any liability for any employment contract or employment contractual obligations (including, without limitation, responsibility for any bonuses accrued or payable with respect to any period ending on or before a Transferred Employee's Termination Date) to Transferred Employees entered into prior to such Transferred Employee's Termination Date that accrue or become payable on or before such Transferred Employee's Termination Date. Seller shall be responsible for any liability with respect to any claims of discrimination under state or federal law that accrue or arise on or before such Transferred Employee's Termination Date. For purposes of this ARTICLE 10, "HIRE DATE" shall mean the date upon which a Transferred Employee reports to Buyer for work as an employee of Buyer. Buyer shall be responsible for any liability for any employment contract or employment contractual obligations to Transferred Employees entered into on or after such Transferred Employee's Hire Date. 10.5 SEVERANCE PAYMENTS. Seller is responsible for the severance liability, if any, with respect to any Employees who do not become Transferred Employees. Seller is also responsible for the severance liability, if any, arising by virtue of Transferred Employees leaving the employment of Seller to become employees of Buyer. 10.6 NO SOLICITATION OF FORMER EMPLOYEES. Except as provided by law and except for general solicitation, for a period of one year after the Closing Date, Seller shall not solicit any -29- 30 Transferred Employee to terminate his employment with Buyer or to become an employee of Seller, without the prior written consent of Buyer. 10.7 NO RIGHTS CONFERRED UPON EMPLOYEES. Nothing in this ARTICLE 10 shall confer any rights or remedies on any Employee and no Employee shall be a third party beneficiary with respect to any covenant in this Agreement. 11. CONDITIONS OF CLOSING. 11.1 CONDITIONS OF BUYER OBLIGATIONS. The obligations of Buyer hereunder shall be subject to the satisfaction and fulfillment of each of the following conditions, except that Buyer may expressly waive any or all of the conditions in writing: (a) No Seller Fundamental Impairment. Between the date hereof and the Closing Date, there shall not have occurred any "Seller Fundamental Impairment". For purposes of this subsection, "Seller Fundamental Impairment" shall mean a fundamental impairment to the Assets hereunder resulting from any breach of any representation or warranty of Seller between the date hereof and the Closing Date of such severity that it is likely to fundamentally impair the Assets and result in a Damages of US$ 1 million or more. Impairments to the value of the Assets resulting from (A) general changes in economic conditions, (B) conduct of Buyer, or (C) announcement of the transactions contemplated by this Agreement or statements or announcements made by Seller or Buyer pursuant to this Agreement, shall not be deemed to constitute a Seller Fundamental Impairment. (b) Compliance. As of the Closing Date, Seller shall have complied in all material respects with, and shall have fully performed, in all material respects, all conditions, covenants and obligations of this Agreement imposed on Seller and required to be performed or complied with by Seller at, or prior to, the Closing Date except where such failure will not have a Material Adverse Effect on the Assets taken as a whole. (c) Closing Deliveries. Seller shall have delivered, and Buyer shall have received, the deliveries described in SECTION 12.1. (d) Consents. Seller shall have received all consents from third parties required under the Required Consents listed on SCHEDULE 2.5 or shall have made alternative arrangements acceptable to Buyer, which shall not unreasonably withhold its acceptance. (e) No Litigation. There shall not be an injunction, judgment, order, decree, ruling or charge in effect preventing or delaying consummation of any of the transactions contemplated by this Agreement or the other Transaction Documents. (f) Eric Wegner. Seller shall have obtained a written waiver from Eric Wegner ("Wegner") waiving Wegner's right to terminate the license agreement between Wegner and Seller (as a successor in interest) dated July 1, 1994, or shall have made alternative arrangements acceptable to Buyer, which shall not unreasonably withhold it acceptance. -30- 31 (g) Consultant Agreements. Buyer shall have received the consultant agreements substantially in the form of EXHIBITS C-1, C-2 AND C-3 hereto executed by each of Mark Zimmer, Tom Hedges and John Derry 11.2 CONDITIONS TO SELLER'S OBLIGATIONS. The obligations of Seller hereunder shall be subject to the satisfaction and fulfillment of each of the following conditions, except that Seller may expressly waive any or all of the conditions in writing: (a) Compliance. As of the Closing Date, Buyer shall have complied in all material respects with, and shall have fully performed, the terms, conditions, covenants and obligations of this Agreement imposed on Buyer to be performed or complied with by Buyer at, or prior to, the Closing Date. (b) Closing Deliveries. Buyer shall have delivered, and Seller shall have received, the deliveries described in SECTION 12.3 hereof. (c) No Litigation. There shall not be an injunction, judgment, order, decree, ruling, or charge in effect preventing or delaying consummation of any of the transactions contemplated by this Agreement or the other related documents. (d) Acceptance by Buyer. Buyer has accepted fulfillment of the Conditions of Closing of Seller as set out in SECTION 11.1 herein on or before April 10, 2000. 12. CLOSING DELIVERIES. 12.1 DELIVERY OF SELLER'S CLOSING DOCUMENTS. At the Closing, Seller shall execute and deliver to Buyer the following documents (the "SELLER CLOSING DOCUMENTS") signed by an authorized officer of Seller on behalf of Seller: (a) Assignment Agreements. Corel Assignment Agreements in the form of EXHIBIT A-1 and CCL Assignment Agreements in the form of EXHIBITS A-2 AND A-3 attached hereto; (b) License Agreements. The Corel License in the form of EXHIBIT D-1 and the CCL License in the form of EXHIBIT D-2, D-3. (c) Instruments of Conveyance. Such specific assignments and other instruments of conveyance as Buyer or Buyer's counsel may reasonably request prior to the execution of this Agreement. (d) Board Resolutions. A certified copy of the resolutions of the board of directors of Seller authorizing the execution and delivery by Seller of this Agreement, and all related agreements, and the consummation of the transactions contemplated hereby and thereby. -31- 32 (e) Officer's Certificate. A certificate executed by an authorized officer of Seller certifying that the representations and warranties contained in Article 7 are true and correct in all material respects as of the Closing Date and that Seller has fully performed in all material respects all of its pre-closing commitments hereunder. 12.2 ADDITIONAL CLOSING DELIVERIES. At the Closing, in addition to the Seller Closing Documents, Seller shall deliver or cause to be delivered to Corel or CCL, as appropriate, the following: (a) Purchased Assets. The Purchased Assets; (b) Good Standing Certificates. Good standing certificates for Seller from the Secretary of State and taxing authorities of the State of California. (c) Employees. List of Seller's Employees as set out in SECTION 7.24. 12.3 DELIVERY OF BUYER CLOSING DOCUMENTS. At the Closing, Corel or CCL, as appropriate, shall cause to be delivered to Seller the following documents (the "BUYER CLOSING DOCUMENTS") signed by an authorized officer of the applicable entity: (a) Assumption Agreements. The Corel and CCL Assumption Agreements in substantially the form attached hereto as EXHIBITS B-1, B-2 AND B-3 (the "ASSUMPTION AGREEMENT"); (b) License Agreements. The Corel License in the form of EXHIBIT D-1 and the CCL Licenses in the form of EXHIBIT D-2, D-3; (c) Board Resolutions. A certified copy of the resolutions of the board of directors of each of Corel and CCL authorizing the execution and delivery by such entity of this Agreement, and all related agreements, and the consummation of the transactions contemplated hereby and thereby; (d) Officer's Certificate. A certificate executed by an authorized officer of each of Corel and CCL certifying that the representations and warranties contained in Article 6 are true and correct in all material respects as of the Closing Date and that Buyer has fully performed in all material respects all of its pre-closing commitments hereunder; and 12.4 ADDITIONAL BUYER CLOSING DELIVERIES. At the Closing, in addition to the Buyer Closing Documents, Corel or CCL, as appropriate, shall cause to be delivered to Seller the following: (a) Cash. The Initial Cash Payment. 13 SURVIVAL OF WARRANTIES, WARRANTY CLAIMS AND INDEMNIFICATION. -32- 33 13.1 SURVIVAL OF WARRANTIES. Subject to SECTION 14.3, all representations and warranties made by Seller, or Buyer, herein, or in any certificate, schedule or exhibit delivered pursuant hereto, shall survive the Closing for a period of twenty-four (24) months after the Closing Date; provided that all representations and covenants relating to taxes or tax liens in SECTIONS 7.11 shall survive until the expiration of the applicable statute of limitations (including extensions). 13.2 LIMITATION ON WARRANTY CLAIM(S) BY SELLER. (a) The Seller shall not be entitled to make a Warranty Claim if the Seller has been advised in writing or otherwise has actual knowledge prior to Closing of the inaccuracy, nonperformance, nonfulfilment or breach which is the basis for such Warranty Claim and the Seller completes the transactions hereunder notwithstanding such inaccuracy, nonperformance, nonfulfilment or breach. (b) The amount of any Losses which may be claimed by the Seller pursuant to a Warranty Claim shall be calculated to be the cost or loss to the Seller after giving effect to: (i) any insurance proceeds available to the Seller in relation to the matter which is the subject of the Warranty Claim, and (ii) the value of any related, determinable tax benefits realized, or to be realized within a two (2) year period following the date of incurring such cost or loss, by the Seller in relation to the matter which is the subject of the Warranty Claim. (c) Seller shall not be entitled to make any Warranty Claim until such time as the total amount of all Losses (including, without limitation, the Losses directly arising from such inaccuracy or breach and all other Losses arising from any other inaccuracies in or breaches of any representations, warranties, covenants or obligations) that have been directly suffered or incurred by the Seller exceeds One Hundred Thousand Dollars ($100,000). Notwithstanding the foregoing, in the event the total amount of all such Losses exceed One Hundred Thousand Dollars ($100.000), Buyer's liability shall not include the initial One Hundred Thousand Dollar ($100,000) amount. Except in the event of a breach by Buyer of the confidentially provisions set out in Section 8.1 (to which the limitation in this Section 13.2 shall not apply), the maximum aggregate liability of the Buyer in respect of all Warranty Claims by the Seller will be limited to $2,000,000. 13.3 LIMITATION ON WARRANTY CLAIM(S) BY BUYER (a) The Buyer shall not be entitled to make a Warranty Claim if the Buyer has been advised in writing or otherwise has actual knowledge prior to Closing of the inaccuracy, nonperformance, nonfulfilment or breach which is the basis for such Warranty Claim and the Buyer completes the transactions hereunder notwithstanding such inaccuracy, nonperformance, -33- 34 nonfulfilment or breach. (b) The amount of any Losses which may be claimed by the Buyer pursuant to a Warranty Claim shall be calculated to be the cost or loss to the Buyer after giving effect to: (i) any insurance proceeds available to the Buyer in relation to the matter which is the subject of the Warranty Claim, and (ii) the value of any related, determinable tax benefits realized, or to be realized within a two (2) year period following the date of incurring such cost or loss, by the Buyer in relation to the matter which is the subject of the Warranty Claim. (c) Buyer shall not be entitled to make any Warranty Claim until such time as the total amount of all Losses (including, without limitation, the Losses directly arising from such inaccuracy or breach and all other Losses arising from any other inaccuracies in or breaches of any representations, warranties, covenants or obligations) that have been directly suffered or incurred by the Buyer exceeds One Hundred Thousand Dollars ($100,000). Notwithstanding the foregoing, in the event the total amount of all such Losses exceed One Hundred Thousand Dollars ($100,000), Seller's liability shall not include the initial One Hundred Thousand Dollar ($100,000) amount. Except in the event of a breach by Seller of the confidentially provisions set out in SECTION 9.6 (to which the limitation in this SECTION 13.3 shall not apply), the maximum aggregate liability of the Seller in respect of all Warranty Claims by the Buyer will be limited to $2,000,000. 13.4 INDEMNIFICATION BY SELLER. (a) Subject to the provisions and limitations set forth in this Article 13, Seller shall hold harmless, defend, indemnify and pay for the defense of each of the Buyer Indemnitees from and against, and shall compensate and reimburse each of the Buyer Indemnitees for, any Losses which are suffered or incurred by any of the Buyer Indemnitees, or to which any of the Buyer Indemnitees may otherwise become subject (regardless of whether or not such Losses relate to any third-party claim) and which arise from or as a result of, or are connected with: (i) any breach of any covenant of Seller contained in Articles 2, 9, 10, 12, 13, or 16 or in the Seller Closing Documents; (ii) any inaccuracy or untruth of any representation or warranty of Seller made herein or in the Seller Closing Documents; (iii) the Non-Assumed Liabilities; (iv) the operations and business of Seller after the Closing (other than such operations that are for the benefit or account of Buyer, are contemplated by this Agreement, or are requested by Buyer) -34- 35 (v) any demand, claim, debt, suit, cause of action or proceeding made or asserted by a shareholder, creditor, receiver, or trustee in bankruptcy of Seller asserting that the transfer of the Purchased Assets to Buyer hereunder constitutes an improper bulk sale or bulk transfer or that Seller or Buyer did not comply with applicable bulk sale or bulk transfer laws; (vi) any matter arising out of or relating to any matter disclosed or required to be disclosed on SCHEDULE 7.4 or SCHEDULE 7.18, except for any such Losses that arise out of or result from any claim, action or proceeding by a third party (other than Seller or its affiliates) against Buyer arising out of or resulting from Buyer's conduct after the Closing (and not conduct before the Closing by any Seller Indemnitee) relating to such matters; (vii) any violation by Seller of, or failure by Seller to comply with, any law, ruling, order, decree, regulation or zoning, environmental or permit requirement applicable to Seller or the Purchased Assets, whether or not any such violation or failure to comply has been disclosed to Buyer; (viii) any product liability claim relating to the Acquired Software products manufactured or sold by or on behalf of Seller prior to the Closing Date; (ix) any tax liabilities or obligations of Seller which are not otherwise covered by sections 8.2 and 9.10; (x) any claims against, or liabilities or obligations of, Seller with respect to (i) any employee benefit plan (as defined in ERISA) offered by Seller or (ii) violations of law relating to any Employee's services with the Seller. (b) The obligations of indemnification by the Seller pursuant to Section 13.4(a) are: (i) subject to the limitations referred to in Section 13.1 with respect to the survival of the representations and warranties by the Seller; (ii) subject to the limitations referred to in Section 13.3 ; and (iii) subject to the provisions of Sections 13.6, 13.7, 13.8 and 13.9. 13.5 INDEMNIFICATION BY BUYER. (a) Subject to the provisions and limitations set forth in this Article 13, Corel and CCL shall jointly and severally hold harmless, defend, indemnify and pay for the defense of each of the Seller Indemnitees from and against, and shall compensate and reimburse each of the Seller Indemnitees for, any Losses which are suffered or incurred by any of the Seller Indemnitees or to which any of the Seller Indemnitees may otherwise become subject (regardless of whether or not -35- 36 such Losses relate to any third-party claim) and which arise from or as a result of, or are connected with: (i) any breach by Buyer of any covenant made herein or in any Buyer Closing Documents; (ii) any inaccuracy or untruth of any representation or warranty of Buyer made herein or in the Buyer Closing Documents; (iii) the failure of Buyer to timely pay or perform any of the Assumed Obligations; or (iv) Buyer's distribution or other use, after the Closing, of the Acquired Software, except to the extent the Loss arises out of a breach of a representation and warranty of Seller; PROVIDED HOWEVER, that nothing in this SECTION 13 shall impose on Buyer any duty to indemnify Seller for any of the Non-Assumed Liabilities. (b) The obligations of indemnification by the Buyer pursuant to Section 13.5(a) are: (i) subject to the limitations referred to in Section 13.1 with respect to the survival of the representations and warranties by the Buyer; (ii) subject to the limitations referred to in Section 13.2; and(iii) subject to the provisions of Sections 13.6, 13.7, 13.8 and 13.9. 13.6 NOTICE OF CLAIM. If an Indemnified Party becomes aware of a claim or Legal Proceeding in respect of which indemnification is provided for pursuant to either of Section 13.4 or 13.5, as the case may be, the Indemnified Party shall promptly give written notice of the claim or Legal Proceeding to the Indemnifying Party. Such notice shall specify whether the claim or Legal Proceeding arises as a result of a claim by a Person against the Indemnified Party (a "THIRD PARTY CLAIM") or whether the claim does not so arise (a "DIRECT CLAIM"), and shall also specify with reasonable particularity (to the extent that the information is available): (a) the factual basis for the claim; and (b) the amount of the claim, if known, the basis thereof and documentation supporting the same. If, through the fault of the Indemnified Party, the Indemnifying Party does not receive notice of any claim or Legal Proceeding in time effectively to contest the determination of any liability susceptible of being contested, then the liability of the Indemnifying Party to the Indemnified Party under this Article shall be reduced by the amount of any Losses incurred by the Indemnifying Party resulting from the Indemnified Party's failure to give such notice on a timely basis. -36- 37 13.7 DIRECT CLAIMS. In the case of a Direct Claim, the Indemnifying Party shall have 30 days from receipt of notice of the claim within which to make such investigation of the claim as the Indemnifying Party considers necessary or desirable. For the purpose of such investigation, the Indemnified Party shall make available to the Indemnifying Party the information relied upon by the Indemnified Party to substantiate the claim, together with all such other information as the Indemnifying Party may reasonably request, provided, however, that the Indemnifying Party agrees at all times to maintain the confidentiality of such information. If both parties agree at or before the expiration of such 60 day period (or any mutually agreed upon extension thereof) to the validity and amount of such claim, the Indemnifying Party shall immediately pay to the Indemnified Party the full agreed upon amount of the claim, failing which the matter shall be referred to binding arbitration in accordance with Article 15. 13.8 THIRD PARTY CLAIMS. In the case of a Third Party Claim, the Indemnifying Party shall have the right, at its expense, to participate in or assume control of the negotiation, settlement or defense of the claim or Legal Proceeding and, in such event, the Indemnifying Party shall reimburse the Indemnified Party for all of the Indemnified Party's out-of-pocket expenses as a result of such participation or assumption. If the Indemnifying Party elects to assume such control, the Indemnified Party shall have the right to participate in the negotiation, settlement or defense of such Third Party Claim and to retain counsel to act on its behalf, provided that the fees and disbursements of such counsel shall be paid by the Indemnified Party unless the Indemnifying Party consents to the retention of such counsel at its expense. If the Indemnifying Party, having elected to assume such control, thereafter fails to defend the Third Party Claim within a reasonable time, the Indemnified Party shall be entitled to assume such control and the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to such Third Party Claim and shall solely bear all reasonable expenses associated with the defense of such Third Party Claim. If either Party makes a payment, resulting in settlement of the Third Party Claim, which precludes a final determination of the merits of the Third Party Claim and the Indemnified Party and the Indemnifying Party are unable to agree whether such payment was unreasonable in the circumstances having regard to the amount and merits of the Third Party Claim, then such dispute shall be referred to and finally settled by binding arbitration in accordance with Article 15. 13.9 SETTLEMENT OF THIRD PARTY CLAIMS. If the Indemnifying Party fails to assume control of the defense of any Third Party Claim, the Indemnified Party shall have the exclusive right to contest, settle or pay the amount claimed and the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to such Third Party Claim and shall solely bear all reasonable expenses associated with the defense of such Third Party Claim. Whether or not the Indemnifying Party assumes control of the negotiation, settlement or defense of any Third Party Claim, neither party shall settle any Third Party Claim without the written consent of the other party, which consent shall not be unreasonably withheld or delayed; provided, however, that the liability of such party shall be limited to the proposed settlement amount if any such consent is not obtained for any reason within a reasonable time after the request therefor. -37- 38 13.10 PERIOD FOR MAKING CLAIMS. A claim for indemnification under this ARTICLE 13: (a) must be brought, if at all, at any time within twenty-four (24) months after the Closing Date, with respect to any claim or claims for indemnification under Section 13.4(a)(ii) or 13.5(a)(ii) except that a claim for indemnification may be brought at any time up to thirty (30) days after the expiration of the applicable statute of limitations period (including extensions) with respect to any claim for indemnification relating to or based upon the provisions of Section 7.11 (Taxes); (b) may be brought at any time within any applicable statute of limitations with respect to any claims or claims for indemnifications under the provisions of this Article 13 other than Sections 13.4(a)(ii) or 13.5(a)(ii); and (c) may be brought at any time within five (5) years after the Closing for breach of Seller's covenants regarding Confidential Information under Section 9.6 and for breach of Buyer's covenants regarding Confidential Information under Section 8.1. 13.11 EXCLUSION. The limitations set forth in SECTIONS 13.2(c), 13.3(c) AND 13.10 shall not apply to any claim for indemnification based on this ARTICLE 13 which arises out of or results from the fraud of Buyer or Seller. 14. TERMINATION. 14.1 MUTUAL AGREEMENT. This Agreement may be terminated prior to Closing at any time on or prior to the Closing Date, by mutual written consent of the Buyer and Seller. If this Agreement so terminates, it shall become null and void and have no further force or effect, except as provided in Section 14.3. 14.2 TERMINATION BY REASON OF BREACH. This Agreement may be terminated by any party if any time prior to Closing there shall occur a material breach of any of the representations, warranties or covenants of the other party or the failure by the other party to perform any condition or obligation hereunder of such severity as would excuse the non-breaching party's obligation to close under Article 12 (conditions to closing), and such breach or failure is not remedied within fifteen (15) days after delivery of written notice thereof to the breaching party. 14.3 SURVIVAL. If this Agreement is terminated and the transactions contemplated hereby are not consummated, this Agreement shall become void and of not further force and effect; except for the provisions of Article 1, this Section 14.3 and the confidentiality provisions set out in Sections 8.1 and 9.6; and provided, further, that none of the parties hereto shall have any liability for speculative, indirect, unforeseeable or consequential damages resulting from any legal action relating to this Agreement or any termination of this Agreement. 15. ARBITRATION. -38- 39 15.1 ARBITRATION. Except for Buyer's or Seller's right to seek injunctive relief in order to prevent unauthorized use or disclosure of Buyer or Seller Confidential Information, any dispute hereunder ("Dispute") shall be settled by means of the procedures set forth in this ARTICLE 15. Each party shall give notice to the other party of any Dispute. Promptly upon delivery of such notice, a designated senior officer for each of Buyer and Seller (which representative may be changed by a party by means of a notice delivered to the other party) shall meet and attempt in good faith to resolve the Dispute on a mutually satisfactory basis. If such the parties are unable to resolve the Dispute within 60 days after delivery of the notice of a Dispute, then the Dispute shall be settled by arbitration in Palo Alto, California, and, except as herein specifically stated, in accordance with the Commercial Dispute Resolution Procedures of the American Arbitration Association ("AAA Rules") then in effect. However, in all events, these arbitration provisions shall govern over any conflicting rules which may now or hereafter be contained in the AAA Rules. Any judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction over the subject matter thereof. The arbitrator shall have the authority to grant any equitable and legal remedies that could be available in any judicial proceeding instituted to resolve a Dispute. The parties shall use their best efforts to select an arbitrator within 30 days and to resolve the Dispute within 60 days. 15.2 COMPENSATION OF ARBITRATOR. Any such arbitration will be conducted before a single arbitrator who will be compensated for his or her services at a rate to be determined by the parties or by the American Arbitration Association, but based upon reasonable hourly or daily consulting rates for the arbitrator in the event the parties are not able to agree upon his or her rate of compensation. 15.3 SELECTION OF ARBITRATOR. In the absence of agreement by the parties, the American Arbitration Association will have the authority to select an arbitrator from a list of arbitrators who are lawyers familiar with contract law and with the software industry; provided, however, that such lawyers cannot work for a firm then performing services for either party. (a) Payment of Costs. Seller and Buyer will each pay 50% of the initial compensation to be paid to the arbitrator in any such arbitration and 50% of the costs of transcripts and other normal and regular expenses of the arbitration proceedings; provided, however, that the prevailing party in any arbitration will be entitled to an award of reasonable attorneys' fees and costs, and all costs of arbitration, including those provided for above, will be paid by the losing party, and the arbitrator will be authorized to make such determinations. (b) Burden of Proof. For any Dispute submitted to arbitration, the burden of proof will be as it could be if the claim were litigated in a judicial proceeding. (c) Award. Upon the conclusion of any arbitration proceedings hereunder, the arbitrator will render findings of fact and conclusions of law and a written opinion setting forth the basis and reasons for any decision reached and will deliver such documents to each party to this Agreement along with a signed copy of the award. -39- 40 (d) Terms of Arbitration. The arbitrator chosen in accordance with these provisions will not have the power to alter, amend or otherwise affect the terms of these arbitration provisions or the provisions of this Agreement. (e) Exclusive Procedures. Except as specifically otherwise provided in this Agreement, arbitration will be the sole and exclusive dispute resolution procedure of the parties for any Dispute arising out of this Agreement. 16. TRANSITION ISSUES 16.1 TRANSITION SERVICES. Seller agrees to provide certain technical support, customer service, manufacturing or production assistance to Buyer as described herein (the "Transition Services") in order to facilitate the orderly transition of the marketing and distribution of the Acquired Software from Seller to Buyer. This Article 16 sets out the scope of the Transition Services to be provided by Seller and the terms and conditions under which such services shall be provided. Each party will work in good faith to facilitate a smooth and successful transition as soon as practicable, with the expectation that in most or many cases transition to Buyer will not take the entire transition period. However, Seller will make transition support available to Buyer for the full period of time set out below. Seller and Buyer shall each appoint one designated representative who shall act as the point of contact with respect to Transition Services. (a) Customer Service. (i) Until June 30, 2000, Seller shall continue to respond to first level customer service inquires in the United States and Canada for the Acquired Software. Seller shall have the discretion to use any employee or contractor to perform such services; provided that the level of service is at least equivalent to the current level of service offered by Seller. For the purposes of this Section 16.1(a)(i), "first level customer service inquires" shall mean all of the customer services currently provided by Modus Media, including, without limitation, order and delivery inquiries. Seller shall provide these services to Buyer at no cost. (ii) Up to and including April 30, 2000, Seller shall continue to respond to second level customer service inquires in the United States and Canada for the Acquired Software. Seller shall have the discretion to use any employee or contractor to perform such services; provided that the level of service is at least equivalent to the current level of service offered by Seller. For the purposes of this Section 16.1(a)(ii), "second level customer service inquires" shall mean all of the customer services currently provided by MetaCreations' Customer Services Department in Scotts Valley, California, including, without limitation, responding to questions regarding rebates, missing product, faulty product and the like. Seller shall also use commercially reasonable efforts to respond to customer service requests from authorized distributors that originate outside of the United States and Canada, and that are forwarded to MetaCreations' Scotts Valley Office (either telephonically or e-mail). Seller shall provide these services to Buyer at no cost. (b) Technical Support. Up to and including May 19, 2000 Seller shall continue to -40- 41 respond to all first and second level technical support inquires in the United States, Canada, Germany, Austria and Switzerland for the Acquired Software in accordance with its existing practices and policies. In addition, up to and including June 30, 2000, Seller shall continue to respond to all technical support inquiries from customers who have entered into annual support agreements with Seller. Seller shall have the discretion to use any employee or contractor to perform such services; provided that the level of service is at least equivalent to the current level of service offered by Seller. For the purposes of this Section 16.1(b) "first level technical support" and "second level technical support" shall mean all of the technical support services currently provided by MetaCreations' Support Department in Scotts Valley, California and by Software Spectrum in Dublin, Ireland, including, without limitation, technical product inquiries. Seller shall also use commercially reasonable efforts to respond to technical support questions from authorized distributors that originate outside of the United States and Canada, and that are forwarded to MetaCreations' Scotts Valley Office (either telephonically or e-mail). Seller shall provide these services to Buyer at no cost. (c) Toll and Toll-Free Phone Numbers and E-mail. Up to and including June 30, 2000, all customer support and technical support toll and toll-free phone numbers and e-mail addresses will remain active and be maintained by Seller. During such period of time, Buyer and Seller shall cooperate to re-direct such phone numbers and e-mail addresses as necessary. On or about June 30, 2000 all such toll and toll-free phone numbers and e-mail addresses will be re-directed to Buyer's customer service and technical support centres, or will provide customers with a voice or e-mail message indicating how they can contact Buyer customer or technical support personnel. (d) On-line Sales. Up to and including April 30, 2000, Seller shall continue to receive and process on-line web orders for the Acquired Software. After such time, and up to and including June 30, 2000, Seller shall continue to publish product descriptions and other marketing material for the Acquired Software and provide contact information for Modus Media, from whom customers can order copies of the Acquired Software. (e) Sales Revenue. All revenue associated with the sale of Acquired Software, whether by Vendor or its contractors, following the Closing Date, will be for the account of Seller. Within thirty (30) days after the end of each month in which sales are made by Vendor or its contractors, Seller will send to Buyer a written summary of the number of copies of the Acquired Software shipped to customers and a check for the revenues generated from such sales. Buyer and Seller will cooperate to ensure that each copy of Acquired Software sold after the Closing Date includes some type of identifier indicating that the product is being marketed and published by Buyer. (f) Engineering Support. Up to and including April 20, 2000, Seller shall provide Buyer with reasonable engineering technical support in respect of the Acquired Software to assist Buyer in the implementation of the Acquired Software for Buyer's purposes. Between April 21 and April 30, 2000, Seller shall provide Buyer with a minimum of two (2) days of engineering technical support for such purposes. In the event that Buyer requests any of Seller's personnel to -41- 42 travel to Buyer's headquarters in Ottawa, Canada, Buyer shall reimburse Seller for all reasonable travel and accommodation expenses incurred by such personnel. (g) Seller Web Sites. From July 1, 2000 until one (1) year after the Closing Date, Seller shall provide the following items on www.metacreations.com or any successor web site thereto: (i) product descriptions for the Acquired Software; (ii) notice to the customer of the acquisition by Buyer of the Acquired Software; (iii) contact information for Seller; and (iv) implement and maintain a link to a web site to be designated by Buyer where customers can order copies of the Acquired Software. 16.2 Distribution Channel. Buyer and Seller agree that it is intended that channel inventory of Acquired Product at the Closing Date will sell through and be absorbed by customers at the earliest possible time. To facilitate the transition in the distribution channel, Seller and Buyer agree to cooperate as follows: (a) Product Position Announcement. Buyer will publicly announce concurrently with the announcement of the closing of this Agreement that if a customer buys a current version of Acquired Software from Seller, Buyer will, subject to proof of purchase and applicable time limits, provide the same upgrade privileges has currently a exist in accordance with their terms has set forth in section 16 and will honor Seller's support commitments as described in SCHEDULE 16. (b) Exchanges with Seller. If a distributor of Seller, under the terms of its distribution contract with Seller, returns units of Acquired Software to Seller after the Closing in exchange for units of other Acquired Software, Buyer will provide Seller without charge with requested units to satisfy Seller's obligation to exchange such units. (c) Exchanges. If a distributor that has a distribution contract with Seller returns to Buyer units of Acquired Software purchased prior to Closing in exchange for other Acquired Software or in exchange for Buyer labeled Acquired Software, Buyer will, after notice to and approval by Seller, not to be unreasonably delayed, provide such replacement units provided they are not in excess of the return/exchange rate specified in such distributor's contract. (d) Alternate Product. If a distributor of Seller, under the terms of its distribution contract with Seller, returns Acquired Software to either Seller or Buyer and does not desire to exchange such Acquired Software for other Acquired Software, then Seller shall provide such distributor with some other Seller product and Buyer shall have no obligation with respect thereto. (e) Returns for Credit. If a distributor of Seller, under the terms of its distribution contract with Seller, returns Acquired Software to Seller for credit and will not accept any other product in exchange for such Acquired Software, then upon receipt of the returned Acquired Software, Buyer shall reimburse Seller for its costs of goods sold for such Acquired Software, up to a maximum, in aggregate of US$1,000,000. Seller shall invoice Buyer for such amounts on a calendar quarterly basis and Buyer shall make such payments within thirty (30) days -42- 43 of receiving such invoices. 17. MISCELLANEOUS. 17.1 ANNOUNCEMENTS; PUBLICITY. As soon as possible after the Closing Date, Seller and Buyer shall issue a joint press release acceptable to both with respect to the transactions contemplated by this Agreement. Without the prior written consent of the other, which consent shall not be unreasonably withheld, prior to the Closing, neither Seller nor Buyer shall make any other public announcement regarding the transactions; and with respect to any announcement that any of the parties is required by the Securities Act or regulations thereunder, the Ontario Securities Act, the Toronto Stock Exchange or the Nasdaq Stock Market - National Market to issue, such party shall, to the extent possible under the circumstances, review the necessity for and the timing and content of, the announcement with the other party before issuing the announcement. 17.2 RELIANCE BY BUYER. Notwithstanding the right of Buyer or Seller to investigate each other, and notwithstanding any knowledge determined or determinable by Buyer or Seller, as applicable, as a result of such investigation, each party shall have the unqualified right to rely upon, and have relied upon, each of the representations and warranties made by the other Party in this Agreement or pursuant hereto. 17.3 EXPENSES. Whether or not the transactions contemplated by this Agreement are consummated, each of the parties hereto shall bear its own expenses (including without limitation attorneys' fees) in connection with the negotiation and consummation of the transaction contemplated hereby. 17.4 NOTICES. Any notice required or permitted to be given under this Agreement shall be in writing and hand delivered, sent by facsimile, sent by certified first class mail, postage pre-paid, or sent by nationally recognized express courier service. Such notices and other communications will be effective: (a) upon receipt if hand delivered; (b) five (5) days after mailing if sent by mail; and (c) one (1) day after dispatch if sent by facsimile (with electronic acknowledgment of successful transmission) or express courier, addressed as follows: (a) to Seller: MetaCreations Corporation 6303 Carpinteria Ave. P.O. Box 1324Carpinteria, California 93014-1324 Attention: Bruce A. Telkamp : Telephone: 805-566-6223 Facsimile: 805-566-6384 (b) If to Buyer, to each of: -43- 44 Corel Corporation Limited c/o Arthur Cox Earlsfort Center, Earlsfort Terrance Dublin 2, Ireland Attention: Managing Partner Telephone: 011-353-1-618-0000 Facsimile: 011-353-1-618-0618 Corel Corporation The Corel Building 1600 Carling Avenue Ottawa, Canada K1Z 8R7 Attention: General Counsel Telephone: (613) 728-8200 Facsimile: (613) 761-1057 17.5 ENTIRE AGREEMENT; CAPTIONS. This Agreement, the Exhibits and Schedules hereto (which are incorporated herein by reference) and the agreements to be executed and delivered in connection herewith on the date hereof or on the Closing Date, together constitute the entire agreement and understanding between the parties and there are no other agreements or commitments with respect to the transactions contemplated herein. This Agreement supersedes any term sheet, prior offer, agreement or understanding between the parties with respect to the transactions contemplated hereby, including the Non-Disclosure Agreement between Seller and Corel dated January 20, 2000 which the parties shall deem terminated as of the Closing Date. The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. 17.6 AMENDMENT; WAIVER. Any term or provision of this Agreement may be amended only by a writing signed by Seller and Buyer. The observance of any term or provision of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be bound by such waiver. No waiver by a party of any breach of this Agreement will be deemed to constitute a waiver of any other breach or any succeeding breach. 17.7 NO THIRD PARTY BENEFICIARIES. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or to give any person, firm or corporation, other than the parties hereto, any rights or remedies under or by reason of this Agreement. 17.8 ASSIGNMENT. This Agreement may not be assigned by any party hereto without the prior written consent of each other party; except that Corel, CCL or MetaCreations each may assign in whole or in part this Agreement (and/or all related agreements) to one or more parent, subsidiary or affiliate entities, or by operation of law or in connection with any merger, -44- 45 consolidation or sale of all or substantially all Buyer's assets, or, as to Corel and CCL, in connection with any sale or transfer of any portion or all of the Purchased Assets, or any similar transaction and Seller may, prior to the Closing, designate an entity controlled by or under common control with Seller to be the recipient of the consideration to be delivered to Seller under SECTION 3 hereof; provided, that in each case the assignee agrees in writing to assume the assignor's obligations relating to the agreement (or portion thereof) being assigned. 17.9 BENEFIT AND BURDEN. This Agreement shall be binding upon, shall inure to the benefit of, and be enforceable by and against, the parties hereto and their respective successors and permitted assigns. 17.10 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California (excluding application of any choice of law doctrines that could make applicable the law of any other state or jurisdiction) and, where appropriate, applicable federal law. 17.11 SEVERABILITY. If any provision of this Agreement is for any reason and to any extent deemed to be invalid or unenforceable, then such provision shall not be voided but rather shall be enforced to the maximum extent then permissible under then applicable law and so as to reasonably effect the intent of the parties hereto, and the remainder of this Agreement will remain in full force and effect. 17.12 CONSTRUCTION. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event of an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring of disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 17.13 EXECUTION. For the convenience of the parties, this Agreement may be executed in counterparts, each of which shall be deemed an original but both of which together shall constitute one and the same instrument, and this Agreement may be executed and delivered by facsimile. 17.14 CURRENCY. Unless otherwise indicated, all references in this Agreement to "$" or "dollars" shall mean United States dollars. 17.15 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated among the Purchased Assets in the manner provided in SCHEDULE 17.15 (the "ALLOCATION STATEMENT"). The Seller and the Buyer shall prepare and file all appropriate forms and documents in accordance with the allocations reflected in the Allocation Statement. 17.16 TIME OF ESSENCE. The parties agree that time is of the essence in the performance of the parties' respective obligations under this Agreement. -45- 46 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -46- 47 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement by their duly authorized representatives as of the date first set forth above. SELLER: BUYER:METACREATIONS CORPORATION "COREL" COREL CORPORATION Signature: Signature: -------------------------- --------------------------- Name: Name: ------------------------------- -------------------------------- Title: Title: ------------------------------ ------------------------------- Signature: --------------------------- Name: -------------------------------- Title: ------------------------------- "CCL" COREL CORPORATION LIMITED Signature: --------------------------- Name: -------------------------------- Title: ------------------------------- SIGNATURE PAGE TO AGREEMENT FOR PURCHASE AND SALE OF ASSETS 48
EXHIBITS A-1 Corel Assignment Agreement A-2 CCL Assignment Agreement - excluding Ireland and Canada A-3 CCL Assignment Agreement - Ireland B-1 Corel Assumption Agreement B-2 CCL Assumption Agreement - excluding Ireland and Canada B-3 CCL Assumption Agreement - Ireland C-1 Consultant Agreement - Mark Zimmer C-2 Consultant Agreement - Tom Hedges C-3 Consultant Agreement - John Derry D-1 Corel License D-2 CCL License - excluding Ireland and Canada D-3 CCL License - Ireland SCHEDULES 1.1 Acquired Software 1.2 Acquired Patent Rights 1.11 Content Contracts 1.14 Domain Names 1.19 Excluded Software 1.36 Third Party Materials 1.37 Trademarks 2.1 Permitted Encumbrances 2.2 Purchased Assets 2.3 Excluded Assets 2.5 Third Party Agreements and Required Consents 4.1 Assumed Obligations 7.4 Litigation 7.6 Proprietary Information and Inventions Agreement 7.7 Related-Party Transactions 7.8 Permits 7.13 Products in Channel 7.14 Seller Financial Statements 7.15 Intellectual Property 7.18 Seller Agreements 7.21 Infringement 7.23 Advances and Deposits 16 Seller's Support Commitments 17.15 Allocation Statement
EX-21.1 7 y46903ex21-1.txt LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF VIEWPOINT CORPORATION Viewpoint Digital, Inc. Canoma Inc. MetaTools Barbados FSC MetaCreations Holding Corp. EX-23.1 8 y46903ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.'s 333-3070, 333-17209, 333-20939, 333-26557, 333-28403, 333-67223 and 333-86817) of our report dated March 12, 2001, related to the consolidated financial statements and consolidated financial statement schedule of Viewpoint Corporation, appearing in this Annual Report on Form 10K. /s/ PricewaterhouseCoopers LLP New York, New York March 28, 2001 72 -----END PRIVACY-ENHANCED MESSAGE-----