-----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, N/fGo/zAlpofT4SMVJdYUIGpCXkxX5DdY8n6F3DOe44Fi0pvH5K9JCnnEOndGins g5m5+fu23Ipje7UmwlmqNA== 0000950123-02-003122.txt : 20020415 0000950123-02-003122.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-003122 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 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: 1934 Act SEC FILE NUMBER: 000-27168 FILM NUMBER: 02591563 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: HSC SOFTWARE CORP DATE OF NAME CHANGE: 19951019 FORMER COMPANY: FORMER CONFORMED NAME: METACREATIONS CORP DATE OF NAME CHANGE: 19970529 10-K 1 y58918e10-k.txt VIEWPOINT CORPORATION ================================================================================ 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-27168 --------------- VIEWPOINT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-4102687 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 498 SEVENTH AVENUE, SUITE 1810, NEW YORK, NY 10018 (Address of principal executive offices) (zip code) (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 22, 2002 there were 39,809,611 shares of common stock issued and outstanding. The aggregate market value of such stock held by non-affiliates as of that date, was approximately $250,402,453. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Notice of Annual Meeting of Stockholders to be held on June 12, 2002 are incorporated by reference into Part III. TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business 3 Item 2. Properties 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II Item 5. Market for Registrant's Common Stock and Related 11 Stockholder Matters Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition 14 and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30 Item 8. Financial Statements and Supplementary Data 31 Item 9. Changes in and Disagreements with Accountants on Accounting 58 and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant 59 Item 11. Executive Compensation 59 Item 12. Security Ownership of Certain Beneficial Owners and 59 Management Item 13. Certain Relationships and Related Transactions 59 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 60 8-K Signatures 63
2 PART I In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Future Results of Operations." You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed in 2002. When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. ITEM 1. BUSINESS Viewpoint Corporation ("Viewpoint" or the "Company") is a leading provider of interactive media technologies and services. Its graphics operating system platform, the Viewpoint Media Player, has been licensed by Fortune 500 companies and others for use in online, offline and embedded applications serving a wide variety of needs, including: business process visualizations, marketing campaigns, rich media advertising and product presentations. The Company also provides cross media digital solutions for film, broadcast television and games. 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. In December 1999, the Board of Directors of the Company approved a plan to focus exclusively on the Internet technologies of Metastream and to correspondingly divest the Company of all its prepackaged software business. VIEWPOINT EXPERIENCE TECHNOLOGY AND THE VIEWPOINT MEDIA PLAYER Viewpoint Experience Technology ("VET") allows Websites and other media publishers to integrate a full line of interactive graphics media technologies seamlessly onto regular Web pages or through other digital formats. Available media types include: photo-realistic 3D, ZoomView -- a "data on demand" 2D image that users may pan and drill into, text annotations and animations, Macromedia(R) Flash(TM)-compatible vector graphics animations, object movies, immersive surround pictures, and digital audio and video. These interactive digital media types can add dimension, contextual information, animation, realistic color, shadows and real-time reflections, movement and robust interactivity to static Web objects. VET enables users to better access and interact with images and objects, seamlessly mixing the narrative drive of more traditional media with the interaction of the Web, such that users can rotate objects, view extended, narrowband friendly presentations, configure colors, patterns and other options, all while experiencing extraordinary visual dimension and accuracy. The interaction between the user and VET content can educate users about a particular product, message or brand. The Viewpoint Media Player ("VMP") is the client-side software platform that permits Viewpoint's customers to broadcast VET content through the Internet into end users' browser (primarily Internet Explorer, Netscape, and Gecko/Mozilla) and "non-browser" environments (primarily America Online, Inc.'s "Rainman" and CompuServe clients). Like Sun Microsystem Inc.'s Java or Microsoft Corporation's ("Microsoft") .NET platform, with which VMP can interoperate, VET is a fundamentally extensible "Web services" architecture--a graphics operating system for the Web--focused on high visual quality, multimedia integration and data visualization. The VET media technologies are entirely "serverless," meaning deployment of such content requires only standard HTTP servers on the broadcast end. The key principle behind client-side software is to transmit "coarse," or highly compressed, digital information that is deployed from the server, rather than numerous pictures and text. The client-side software then leverages the user's CPU processing power to decompress, display, 3 and process this information "locally" on that CPU, no longer taxing network bandwidth to examine, configure, interact, and explore digital content. VET content contains instructions interpreted by the VMP components "on the fly" and is continually re-interpreted into pictures and sounds that the browser (or "non-browser") may present to the user. As CPU capacities have grown at a much more rapid rate than that of connection speeds in recent years, the Company believes VET's use of this speed advantage is of significant competitive importance. Additionally, VET employs an extensible mark-up language (or "XML") media "envelope", which enables Viewpoint content to exchange data with back-end servers in real time and to perform dynamic content configuration. This XML media envelope is also the basis for the extensibility of the VMP. Through this XML data description format, VET digital content can seamlessly download and extend new graphics services on the client-side, which in turn may interpret and convert different and new media types and formats that may be referenced or embedded in that digital content. This fundamental extensibility is a key architecture advantage that has allowed the Company to extend the feature set of the VMP continually since its launch in the summer of 2000, providing an "instant upgrade" ability. This design prevents the "lowest common denominator" syndrome that affects Web technologies as they mature - with VET, Web publishers and content authors can be assured that users have the latest features and enhancements of the VMP platform. As a form of efficient visual communication, the Company believes the commercial applications of VET are virtually unlimited. However, the Company has chosen to focus its near-term marketing efforts on several key areas, including: enterprise applications, which entails building new or enhancing existing software applications; media and Internet advertising; and Website deployment into various vertical markets, such as: automotive, retail, and medical. VIEWPOINT PROFESSIONAL SERVICES Viewpoint provides fee-based professional services for implementing visualization solutions. Encompassing both digital content creation and application enhancing services, our strategic, creative and consulting services bring together our teams of experts in rich media, content creation and technology implementation in order to identify the ideal Viewpoint solution for each client's unique needs and to ensure the timely, successful implementation of those solutions. Our professional services groups use Viewpoint Experience Technology, as well as a spectrum of tools and other technologies to create enhanced rich media solutions for the client's particular purpose, whether over the Web, intranet systems or offline media and applications. Our professional services groups provide the support our clients need to implement the rich media content, to fully utilize the enhanced software or to maximize the branding potential of the advertising opportunity. In addition to providing Web services, our professional services groups also develop realistic digital effects and animation for the entertainment and game industries, film producers, major brands, advertising agencies and commercial production houses. Our custom digital assets have had starring and supporting roles in: - numerous feature films, including Black Hawk Down, Driven and ANTZ; - television programs such as the telecasts of The Academy Awards Ceremony and The 2002 Winter Olympics; - television advertisements for Ford, Dodge, Chevy and Seiko; and - VET-enabled Websites for companies such as Ford Motor Company, Nike, Inc., Compaq Computer Corporation, Dell Computer Corporation, and Eddie Bauer. MARKET OPPORTUNITY The number of Internet users has increased rapidly over the past several years. In addition, commercial applications that are based on digital technology, including the Internet, have increased at a rapid pace. The Company believes that these patterns have resulted in increasing expenditures for online marketing, advertising, branding, and e-commerce, and that such communications will increasingly utilize rich media formats. Visualization as a means of communication over wide areas, within and between companies and customers, has become vital in conducting business over the past five years. The Company sees an eventual convergence of the various media types, including: print, broadcast television, the Web, gaming and motion pictures, among others that present a tremendous opportunity for those who utilize or equip digital visualization. 4 The Company's initial focus was on Website licensing for marketing and direct selling. The Company believes that its Viewpoint Experience Technology meets this 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, object movies, 2D, digital sound and video). - Excellent compression and streaming delivery at narrowband and broadband data rates. - Client-side data logging of the use of downloaded rich media. - Low infrastructure impact for deployment, and ease of integration into Web, HTML, and IT infrastructures. - Continual advancement and "refresh" of features through the graphics operating system platform. - Consistent and high quality playback across browser and non-browser environments and all major playback platforms. The Company's focus has recently been broadened to include enterprise applications. Viewpoint's graphics operating platform provides a powerful visualization edge to complement existing enterprise application software. The Company believes that, as data becomes more complicated and is communicated over wider geographic distances, providing visualization becomes critical to success. Examples of enterprise applications include: virtual product design, process workflow and customer service applications. This Company's primary target audience for enterprise applications is Fortune 500 companies who can benefit from improving communication through visualization. The Company's model is to apply its already developed engineering resources to create custom solutions to address those needs. In addition, the Company has developed a new group to penetrate the Internet advertising market as well as digital advertising on a broader scale. The Company believes that the Web lacks compelling advertising formats and that numerous additional digital advertising formats are emerging, such as those for television's new digital set-top boxes. The Company believes it is well-positioned to develop and deliver engaging, interactive advertisements over digital media, including the Internet. It is believed that Viewpoint Experience Technology can deliver compelling and interactive ad formats, tapping into a large selection of technologies. The Company feels that creative talent which may have objected to the limited formats of existing "banner" ads will be drawn to the new formats and therefore bring credibility to the newly enhanced medium. Further, the potential for client-side tracking and logging as well as guaranteed playback quality and consistency across advertising platforms should provide strong defensibility in this space. 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 and content developers, as well as professionals working in-house at e-merchants and other Website owners. Instead of selling tools to Internet professionals -- a relatively small market - the Company has sought primarily to license technology to the audience where the value is created: the much larger market of e-commerce merchants, Website owners and others who can harvest benefits from communicating visually in the digital domain. The Company's licensing strategy focuses on earning fees by providing clients with the ability to broadcast digital 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 document the client's rights under the arrangement. Licenses are tailored to the specific needs of the client. Examples of typical arrangements include: - licenses which are time-based, which are generally limited to specific Web site addresses or specific content; - licenses which are perpetual, which are generally limited to specific types or amounts of content; - licenses which permit a "narrowcast" only to a local area network or intranet; and 5 - licenses which permit the client 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 with the opportunity to scale income substantially as new customers are acquired. 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 Systems Incorporated ("Adobe") and Autodesk Incorporated, have natural incentives to promote the Viewpoint platform. More than 50 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. Another cornerstone of the business model is that the Viewpoint Media Player, representing the required client-side playback engine, is free for users to playback broadcasted content. After downloading the player, users can receive all updates of the media player software for free, seamlessly and without interruption of the playback. The Company's professional services groups play an integral role in 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 groups increase 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 or trust that creation to others. Also, the groups' 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. The Company is not reliant on its own content creation services, however, as it has cultivated a network of thousands of independent content developers trained to provide those services as well. Recently, the Company's professional services have begun to include specific engineering services to enhance existing or create new software applications meant to perform a specific task or set of tasks or assist in communicating through visualization. While content creation services focus on creating interactive digital objects and enhancing Websites, engineering services create or alter software to enable clients to design products, improve process workflow or enhance customer service experiences. The Company's engineering services leverage off of the existing engineering staff and the Company's growing engineering application developers network. COMPETITION The Company's current competitors (and some of their products) include: Kaon (Activate!3D); Cycore AB (Cult3D); IBM Corporation (Hotmedia); Macromedia, Inc. (Shockwave and Flash); Shells Interactive Ltd. (3D Dreams); Pulse Entertainment (Pulse3D); Shout Interactive (Shout 3D); Virtue 3D, Inc. (Virtuoso); and Rich FX (Examine-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 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. 6 The Company believes that Viewpoint Experience Technology offers significant advantages over many of our competitors' products: - GREATER VISUAL REALISM -- We believe that 3D and other digital rich media objects 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, instantly receive key data (e.g. compare pricing). - 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 Viewpoint content quickly and can interact with them in real time. The client-side rendering makes this possible as only a small file of instructions are communicated to the client-side CPU, where the object is actually rendered. Many of the Company's competitors render objects on the server-side which is more taxing on servers and connections and leads to poorer user interoperability. - MANY MEDIA/ONE PLAYER -- Viewpoint includes and integrates seamlessly with many rich media types like IPIX Panoramas, high quality 3D, text annotations, Flash(TM) vector graphics, audio and more, enabling clients to create more compelling Web experiences in a concise and integrated fashion. - 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. The new "browserless rendering" now allows 3D objects and vector graphics animation to play right over open windows. 2D images can "hyper" zoom from traditional thumbnails into images that utilize the entire screen's desktop area. The XML capabilities of the technology allows a seamless and immediately updateable data integration with back-end servers without generating additional windows. - AUTOMATIC UPDATES -- Once users download the Viewpoint Media Player, they can automatically receive all releases and upgrades. Because new releases and additional functionality can be sent automatically, in the background, the user's online experience is never interrupted. - LACK OF DEPENDENCE ON JAVA -- The Company's technology is not based upon the Java software language. It has been announced publicly that Java is not supported in the current version of Microsoft's browser, Internet Explorer 6.0, the latest version of the world's most popular Internet browser. This lack of support for Java requires users to download a plug-in in order to view Java-based media. Many of Viewpoint's competitors base their technology on the Java language and the Company feels its lack of dependence on Java technology is an advantage. - SEAMLESS INTEGRATION -- VET technology requires no special server side software to deploy, and integrates easily with existing HTML pages or back end database systems. PRODUCT DEVELOPMENT Continuous development of new products and enhancements of our existing products is critical to our success. The Company's principal current product development efforts are focused on the development of VET 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, in part, be a function of 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 historically 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. 7 The Company's research and development expenses, exclusive of non-cash stock compensation charges, were approximately $6,633,000, $6,241,000 and $2,515,000, for 2001, 2000 and 1999, respectively. The Company may hire additional engineers in connection with its continued product development efforts, which would 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 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 22, 2002, Viewpoint had 172 full time employees, including 40 in sales and marketing; 66 in creative services; 46 in research, development and quality assurance; and 20 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. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the Company's executive officers as of March 22, 2002:
NAME AGE POSITION ---- ---- -------- Robert E. Rice 47 Chairman, President and Chief Executive Officer David Feldman 35 Executive Vice President and Chief Strategist Christopher Gentile 43 Executive Vice President, Creative Services Paul Kadin 51 Executive Vice President, Business Development Jeffrey J. Kaplan 54 Executive Vice President, Business Affairs Anders Vinberg 52 Executive Vice President, Engineering and Enterprise Solutions Anthony L. Pane 36 Senior Vice President and Chief Financial Officer
Mr. Rice has been President and Chief Executive Officer since March 2000 and Chairman of the Company's Board of Directors since July 2000. At the Company, he served as Vice President of Strategic Affairs until September 1999. He served as the President and a Director of Metastream since its formation in June 1999. Mr. Rice co-founded Real Time Geometry Corporation and served as its chairman until its sale to the Company in 1996. Before founding Real 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. While at Milbank, Mr. Rice also co-founded the Professional Chess Association with World Champion Garry Kasparov and served as its commissioner for two years, organizing World Championships and major televised events around the globe. Mr. Feldman has been Executive Vice President 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 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. 8 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 1996 and where he has served as President; Millennium RUSH, LLC, a software development company that he founded in 1995 and where he served as President; and 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. Kadin has been with the Company since February 2000 and has served as Executive Vice President, Business Development since February 2001. Following an initial focus on Sales, Marketing, and Client Services globally, his current focus is on development of the Company's digital advertising formats for the Web and other media outlets. 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 investment 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 of Business Affairs of the Company since November 2001 and was Executive Vice President and Chief Financial Officer for the period from February 2001 to November 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. Vinberg has been Executive Vice President, Engineering and Information Systems at the Company since September 2000. Before this, Mr. Vinberg was Divisional Senior Vice President at Computer Associates International, Inc., ("Computer Associates") 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. Mr. Pane joined the company in August of 2000 and has served as Senior Vice President and Chief Financial Officer since November 2001. Previously Mr. Pane was the Company's Vice President and Controller. From May 1999 to August 2000, Mr. Pane served as Controller of Computer Generated Solutions, Inc. From July 1997 to March 1999, Mr. Pane was the Vice President and Controller of the American Stock Exchange, Inc. From July 1994 to July 1997, Mr. Pane served in various positions with Alliance Entertainment Corp., including as Chief Financial Officer of its subsidiary, Abbey Road Distributors. Mr. Pane also served in various positions, including Manager, for six years at PricewaterhouseCoopers and Ernst & Young. ITEM 2. PROPERTIES The Company leases approximately 17,000 square feet of space on the 18th floor of a 24-story office building in New York City, New York. This space houses approximately 100 personnel, including 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 primary lease agreement expires in March 2010, if not renewed. The Company believes that this 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 40 personnel principally engaged in sales and marketing, creative services, and management information systems services. 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 23 personnel principally engaged in sales and marketing, creative services, and management information systems services. The Company also leases a small office space in London under a short-term lease. 9 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 in legal actions in which it is the defendant and believes that the ultimate outcome of such actions will not have a material adverse 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 None. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Viewpoint Corporation's ("Viewpoint" or the "Company") common stock, $0.001 par value, began trading over the counter in December 1995. The common stock is traded on The Nasdaq National Market under the symbol "VWPT." On March 22, 2002, there were 304 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The following table sets forth, for the periods indicated, the range of high and low closing sales prices per share of our commons stock:
HIGH LOW 2001 $ 8.50 $ 2.75 4th Quarter 7.11 3.00 3rd Quarter 7.65 2.86 2nd Quarter 8.50 3.94 1st Quarter 7.69 2.75 2000 $ 30.88 $ 4.63 4th Quarter 11.00 4.63 3rd Quarter 14.06 8.00 2nd Quarter 18.50 6.00 1st Quarter 30.88 8.06
The Company has not paid any cash dividends on its common 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 common stock in the foreseeable future. 11 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated 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, -------------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA Revenues: Licenses ............................................... $ 9,681 $ 1,421 $ 2,818 $ 3,001 $ 1,262 Services ............................................... 4,327 2,159 275 -- -- -------- -------- -------- -------- -------- Total revenues ........................................... 14,008 3,580 3,093 3,001 1,262 -------- -------- -------- -------- -------- Cost of Revenues: Licenses ............................................... 309 76 -- -- -- Services ............................................... 3,283 1,467 -- -- -- -------- -------- -------- -------- -------- Total cost of revenues ................................... 3,592 1,543 -- -- -- -------- -------- -------- -------- -------- Gross profit ............................................. 10,416 2,037 3,093 3,001 1,262 -------- -------- -------- -------- -------- Operating expenses: Sales and marketing (including non-cash stock-based compensation charges totaling $2,335 in 2001, $5,122 in 2000, and $675 in 1999)........................... 17,814 18,741 3,000 981 624 Research and development (including non-cash stock-based compensation charges totaling $2,920 in 2001, $4,193 in 2000, and $2,540 in 1999)......................... 9,553 10,434 5,055 1,434 2,207 General and administrative (including non-cash stock-based compensation charges totaling $1,918 in 2001, $3,026 in 2000, and $2,866 in 1999)............ 10,423 9,814 6,993 4,010 3,266 Compensation charge related to forgiveness of an officer loan ................................................ -- 2,322 -- -- -- Amortization of goodwill and other intangibles (1)(2) .. 17,453 3,025 75 150 150 Goodwill impairment (3) ................................ 7,925 -- -- -- -- Depreciation ........................................... 1,804 801 406 399 205 Non-cash sales and marketing charges (4) ............... -- 19,998 -- -- -- Acquired in-process research and development costs (2) . -- 963 -- -- -- -------- -------- -------- -------- -------- Total operating expenses ................................. 64,972 66,098 15,529 6,974 6,452 -------- -------- -------- -------- -------- Loss from operations ..................................... (54,556) (64,061) (12,436) (3,973) (5,190) Other income ............................................. 1,064 2,180 2,286 2,618 3,157 -------- -------- -------- -------- -------- Loss before provision for income taxes ................... (53,492) (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 ...... (53,492) (61,881) (15,631) (1,002) (1,823) Minority interest in loss of subsidiary .................. -- 4,429 1,048 -- -- -------- -------- -------- -------- -------- Net loss from continuing operations ...................... (53,492) (57,452) (14,583) (1,002) (1,823) Discontinued operations: Loss from discontinued operations (5) .................. -- -- (14,811) (18,829) (6,355) Adjustment to net loss on disposal of discontinued operations (5).......................................... 1,122 1,496 (21,260) -- -- -------- -------- -------- -------- -------- Net income (loss) from discontinued operations ........... 1,122 1,496 (36,071) (18,829) (6,355) -------- -------- -------- -------- -------- Net loss ................................................. (52,370) (55,956) (50,654) (19,831) (8,178) Accretion of mandatorily redeemable preferred stock of subsidiary ............................................. -- (438) -- -- -- -------- -------- -------- -------- -------- Net loss applicable to common shareholders ............... $(52,370) $(56,394) $(50,654) $(19,831) $ (8,178) ======== ======== ======== ======== ======== Basic and diluted net loss per common share: Net loss per common share from continuing operations ... $ (1.37) $ (2.01) $ (0.59) $ (0.04) $ (0.08) Net income (loss) per common share from discontinued operations .......................................... 0.03 0.05 (1.47) (0.79) (0.28) -------- -------- -------- -------- -------- Net loss per common share ............................... $ (1.34) $ (1.96) $ (2.06) $ (0.83) $ (0.36) ======== ======== ======== ======== ======== Weighted average number of shares outstanding -- basic and diluted ............................................ 39,077 28,718 24,581 23,779 22,965 ======== ======== ======== ======== ========
12
DECEMBER 31, ---------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA Cash, cash equivalents and marketable securities..... $ 15,413 $ 29,033 $ 37,247 $ 46,335 $ 50,002 Working capital (2) ...... 12,056 34,313 33,638 55,439 77,677 Total assets ............. 61,917 102,349 50,574 79,116 97,257 Stockholders' equity ..... 52,737 96,339 29,901 70,181 87,242
- ---------- (1) In November 2000, the Company consummated a share exchange with Computer Associates International, Inc., ("Computer Associates") and another shareholder of Metastream Corporation ("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. ("Viewpoint Digital") from Computer Associates. 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 consisted 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 March 8, 2002. During 2001, the Company entered into certain agreements with Computer Associates whereby Computer Associates agreed to accept newly-issued shares of Viewpoint common stock having a value of $4,000,000, in partial repayment of the first contingent promissory note due June 8, 2001. In addition Computer Associates agreed to accept, at the Company's election, either cash or newly-issued shares of Viewpoint common stock at an issue price of $4.00 per share in repayment of any additional amounts due under the promissory note due June 8, 2001, and the first $8,943,000 of the $15,000,000 contingent promissory note due April 30, 2002, which amount will be determined by the achievement of certain levels of future operating results and employee retention. The amount due Computer Associates under the promissory note due June 8, 2001 is approximately $4,657,000. In connection with this promissory note, the Company recorded additional goodwill and due to related parties in its consolidated balance sheet. The acquisition of Viewpoint Digital was accounted for under the purchase method of accounting, and goodwill and other intangibles of $21,589,000 were recorded, inclusive of acquired in-process research and development costs of $963,000. (3) During 2001, the Company performed impairment assessments on the goodwill and other intangibles recorded upon the acquisition of Viewpoint Digital and the acquisition of Computer Associates' minority interest in Metastream. As a result of continuing poor economic conditions, which resulted in a decrease in estimated undiscounted future cash flows, the Company recorded a $7,925,000 goodwill impairment charge on the Viewpoint Digital goodwill during the fourth quarter of 2001. The charge was determined based upon the estimated discounted cash flows over the remaining useful life of the goodwill using a discount rate of 15%. The assumptions supporting the cash flows including the discount rate were determined using the Company's best estimates as of the date the impairment was recorded. (4) In connection with the issuance of mandatorily redeemable preferred stock in Metastream to America Online, Inc. ("AOL") and Adobe Systems Incorporated ("Adobe"), the Company recorded one-time non-cash sales and marketing charges of approximately $19,998,000 during the year ended December 31, 2000. These charges represented the difference between the fair market 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 both 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. (5) 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 net income (loss) from discontinued operations for the years ended December 31, 1997 through 2001. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled " Factors That May Affect Future Results of Operations." You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed in 2002. When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. OVERVIEW Viewpoint Corporation is a leading provider of interactive media technologies and services. Its graphics operating system platform, the Viewpoint Media Player, has been licensed by Fortune 500 companies and others for use in online, offline and embedded applications serving a wide variety of needs, including: business process visualizations, marketing campaigns, rich media advertising and product presentations. The Company also provides cross media digital solutions for film, broadcast television and games. 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 to operate a business exploiting these technologies. The Company originally held an 80% equity interest in Metastream with 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 Metastream 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, 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 and e-commerce visualization solutions; - Providing a full range of fee-based digital asset content creation and engineering professional services for implementing visualization solutions for marketing and creating new and enhancing existing enterprise software applications; - Proliferating the Viewpoint format into digital advertisements on various digital media, primarily the Web and digital set-top cable boxes; - Forging technological alliances with leading interactive agencies and Web content providers; and - Maximizing market penetration and name recognition, including distribution of the Company's client-side software graphics operating system, the Viewpoint Media Player Viewpoint believes that its success will depend largely on its ability to proliferate its digital technologies into various media, including broadcast television, games, movies, print, closed intranets, new and existing enterprise applications and television set-top 14 boxes. Accordingly, Viewpoint has and intends to continue to invest 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, including digital content creation services and engineering services to enhance and create new enterprise software applications. In light of its relatively recent change in strategic focus from selling prepackaged software, Viewpoint has a limited operating history upon which an evaluation of the Company and its prospects can be based. Viewpoint's 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, 2001, had an accumulated deficit of $198,184,000. The Company may, from time to time, provide guidance of certain financial and non-financial expectations and has done so within this Form 10-K. We use these expectations to assist us in making decisions about our allocations of resources, not as predictions of future results. The expectations are subject to risks of our business as well as those contained in "Factors That May Affect Future Results of Operations." RESULTS OF OPERATIONS The following table sets forth certain selected financial information expressed as a percentage of net revenues for the periods indicated:
YEARS ENDED DECEMBER 31, ------------------------------- 2001 2000 1999 ------- ------- ------- STATEMENT OF OPERATIONS DATA Revenues: Licenses ........................................... 69.1% 39.7% 91.1% Services ........................................... 30.9 60.3 8.9 ------- ------- ------- Total revenues: ...................................... 100.0 100.0 100.0 ------- ------- ------- Cost of revenues: Licenses ........................................... 2.2 2.1 -- Services ........................................... 23.4 41.0 -- ------- ------- ------- Total cost of revenues ............................... 25.6 43.1 -- ------- ------- ------- Gross profit ......................................... 74.4 56.9 100.0 ------- ------- ------- Operating expenses: Sales and marketing (including non-cash stock-based compensation charges) ........................... 127.2 523.4 97.1 Research and development (including non-cash stock-based compensation charges)................ 68.2 291.5 163.4 General and administrative (including non-cash stock-based compensation charges)................ 74.4 274.1 226.1 Compensation charge related to forgiveness of an officer loan..................................... -- 64.9 -- Amortization of goodwill and other intangibles ..... 124.6 84.5 2.4 Goodwill impairment ................................ 56.6 -- -- Depreciation ....................................... 12.9 22.4 13.1 Non-cash sales and marketing charges ............... -- 558.6 -- Acquired in-process research and development costs . -- 26.9 -- ------- ------- ------- Total operating expenses ............................. 463.9 1,846.3 502.1 ------- ------- ------- Loss from operations ................................. (389.5) (1,789.4) (402.1) Other income ......................................... 7.6 60.9 73.9 ------- ------- ------- Loss before provision for income taxes ............... (381.9) (1,728.5) (328.2) Provision for income taxes ........................... -- -- 177.2 ------- ------- ------- Loss before minority interest in loss of subsidiary .. (381.9) (1,728.5) (505.4) Minority interest in loss of subsidiary .............. -- 123.7 33.9 ------- ------- ------- Net loss from continuing operations .................. (381.9) (1,604.8) (471.5) Discontinued operations: Loss from discontinued operations .................. -- -- (478.9) Adjustment to net loss on disposal of discontinued operations.......................................... 8.0 41.8 (687.3) ------- ------- ------- Net income (loss) from discontinued operations ..... 8.0 41.8 (1,166.2) ------- ------- ------- Net loss ............................................. (373.9) (1,563.0) (1,637.7) Accretion of mandatorily redeemable preferred stock of subsidiary ......................................... -- (12.2) -- ------- ------- ------- Net loss applicable to common shareholders ........... (373.9)% (1,575.2)% (1,637.7)% ======= ======= =======
15 REVENUES
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Total revenues $14,008 291% $ 3,580 16% $ 3,093
The Company recognizes revenue in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended, and Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements." Viewpoint generates revenues through two sources: (a) software license revenues and (b) service revenues. License revenues are generated from licensing the rights to use our products directly to end-users and indirectly through value added resellers ("VARs"). Service revenues are generated from fee based professional services, sales of customer support services (maintenance contracts), and training services performed for customers that license our products. License revenue includes sales of perpetual and term based licenses for broadcasting viewpoint 3D content, and limited licenses for its digital content library. License revenue is recognized over the term of the license in a term-based broadcast license model and up-front in a perpetual broadcast license model, providing that no significant vendor obligations remain and the resulting receivable is deemed collectible by management. Fee-based professional services are performed on a time-and-material basis or on a fixed-fee basis, under separate service arrangements. Revenues related to these services are recognized on a percentage-of-completion basis in accordance with the provisions of SOP 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Percentage-of-completion for service contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated total cost for each contract at completion. Revenues from customer support services are recognized ratably over the term of the contract. Revenues from training services are recognized as services are performed. License revenue increased approximately $8,260,000 or 581% and service revenue increased approximately $2,168,000 or 100% for the year ended December 31, 2001, compared to the year ended December 31, 2000. The increase in revenues is primarily attributable to an increase in sales of licenses and fee-based professional services resulting from increases to our direct sales force, expansion of our indirect channel partnerships, and incremental sales from the acquisition of Viewpoint Digital. The weakening of the U.S. economy, however, continues to negatively impact our revenue growth. The Company's revenues can also be negatively impacted by increased competition in the market, the lack of acceptance of the Company's existing products or the Company's failure to develop new products. During the year ended December 31, 2001, the Company recorded revenues totaling $2,385,000 related to agreements, including reseller arrangements, with two stockholders who have representatives on the Company's Board of Directors. One of the agreements is a multi-year agreement that may significantly impact revenues in the future. In furtherance of the Company's indirect sales strategy, the Company entered into a license agreement under which the Company licensed certain of its products to a long-time, leading distributor of 3D animation software. During the year ended December 31, 2001 the Company recorded revenue of $750,000 for this transaction and, after certain minimum revenue targets are met, the Company will share in future revenues derived from sublicenses of the products. The distributor will bear all marketing and sales costs. The Company expects this type of transaction to lead to higher margins over time. During the year ended December 31, 2001, the Company established a strategic relationship with one of its customers whereby the customer purchased licenses from the Company and the Company agreed to purchase publicly traded equities of the customer's parent. The Company also entered into a license agreement with another customer in exchange for the customer's mass distribution of the Viewpoint Media Player to an important target audience. These transactions effectively include nonmonetary sales of our software for equity securities and services of our customers, and accordingly the Company used the fair value of the equities and services received in determining the amount of revenues and expenses to record. Total revenues and expenses were $429,000 and $264,000, respectively, related to these transactions. Revenues in 2000 were related to sales of licenses, fee-based professional services and 3D digital content with two customers accounting for 40% of total revenues. Fee based professional services and 3D digital content sales of $2,459,000 were the result of the acquisition of Viewpoint Digital. Revenues in 1999 primarily consisted of one-time licenses for Viewpoint and related technologies from a limited number of strategic partners. Specifically, revenues from two customers accounted for 88% of total 16 revenues in 1999. The Company expects its revenue to continue to increase in 2002 based upon the visible increase in the market acceptance of our technology. It is anticipated that the increase in revenues will be derived from both license and service revenues. COST OF REVENUES
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Total cost of revenues ...... $3,592 133% $1,543 N/A $-- Percentage of total revenues 26% 43% -- %
Cost of revenues consist primarily of salaries and consulting fees for those who provide fee-based professional services. The increase in cost of revenues is directly related to an increase in fee-based professional services. As the amount of services revenue is expected to increase in 2002, the Company expects cost of revenues to increase in absolute dollars, while decreasing slightly as a percentage of total revenues, due to improved efficiencies and the mix of license and services revenues. SALES AND MARKETING (INCLUDING NON-CASH STOCK-BASED COMPENSATION CHARGES TOTALING $2,335 IN 2001, $5,122 IN 2000 AND $675 IN 1999)
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Sales and marketing ......... $17,814 (5)% $18,741 525% $ 3,000 Percentage of total revenues 127% 523% 97%
Sales and marketing expenses include salaries and benefits, sales commissions, non-cash stock-based compensation charges, consulting fees and travel expenses for our sales and marketing personnel. Sales and marketing expenses also include the cost of programs aimed at increasing revenue, such as advertising, trade shows and public relations. Sales and marketing expenses decreased $927,000, or 5% in 2001 compared to 2000 primarily due to a decrease in advertising costs, Web development costs and non-cash stock-based compensation charges, which was partially offset by an increase in salaries, benefits, sales commissions, and travel expenses related to an increase in personnel due to internal growth and the acquisition of Viewpoint Digital. Non-cash stock-based compensation charges decreased because the Company generally no longer grants stock options to employees at below fair market value at the date of grant and certain employees who were granted stock options below fair market value have left the Company. Sales and marketing expenses increased $15,741,000, or 525%, in 2000 compared to 1999, primarily due to an increase in salaries and benefits, non-cash stock based compensation charges, recruiting fees, travel expenses, and an increase in advertising and public relation agency fees related to the launch of Viewpoint Experience Technology. The Company does not expect a material increase in sales and marketing expenses in 2002 over that of 2001 as a result of the company's indirect marketing strategy and the increased utilization of creative services personnel, which will increase cost of revenues, rather than sales and marketing expenses. It is expected that these decreases in costs will be partially offset by increases in selling expenses to support the projected higher revenues. As a percentage of total revenues, sales and marketing expenses are expected to decrease. RESEARCH AND DEVELOPMENT (INCLUDING NON-CASH STOCK-BASED COMPENSATION CHARGES TOTALING $2,920 IN 2001, $4,193 IN 2000 AND $2,540 IN 1999)
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Research and development .... $ 9,553 (8)% $10,434 106% $ 5,055 Percentage of total revenues 68% 292% 163%
17 Research and development expenses consist primarily of salaries and benefits for software developers, contracted development efforts, non-cash stock-based compensation charges, and required equipment costs related to the Company's product development efforts. The Company expenses as incurred 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. Research and development expenses decreased $881,000, or 8% in 2001 compared to 2000 primarily due to a decrease in non-cash stock-based compensation charges and a decrease in bad debt expense partially offset by an increase in salaries and benefits and an increase in contracted development efforts. Approximately $2,106,000 of the decrease is attributable to a decrease in bad debt expense resulting from a $1,441,000 reserve against a loan from an executive whose chief responsibilities were research and development in 2000 of which approximately $665,000 was recovered during 2001. Non-cash stock-based compensation charges decreased because the Company generally no longer grants stock options to employees at below fair market value at the date of grant and certain employees who were granted stock options below fair market value have left the Company. Research and development expenses increased $5,379,000, or 106% in 2000 compared to 1999 due to an increase in salaries and benefits, non-cash stock-based compensation charges, and travel related to increased internal development personnel, and contracted development efforts in connection with the further development of Viewpoint Experience Technology. In addition, approximately $1,441,000 of the increase is due to a reserve against a loan from an executive whose chief responsibilities were research and development. The Company expects research and development expenses to remain relatively flat in 2002, as compared to 2001. Anticipated increases in research and development expenditures are expected to be offset by customer-specific engineering efforts in the enterprise applications group, which will be classified as cost of revenues. As a percentage of total revenues, research and development expenses are expected to decrease. GENERAL AND ADMINISTRATIVE (INCLUDING NON-CASH STOCK-BASED COMPENSATION CHARGES TOTALING $1,918 IN 2001, $3,026 IN 2000 AND $2,866 IN 1999)
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- ------ -------- ------- (DOLLARS IN THOUSANDS) General and administrative... $10,423 6% $9,814 40% $6,993 Percentage of total revenues. 74% 274% 226%
General and administrative expenses primarily consist of corporate overhead of the Company, which includes salaries and benefits related to finance and administration personnel along with other administrative costs such as legal, accounting and investor relation fees, and insurance expense. General and administrative expenses increased $609,000 or 6% in 2001 compared to 2000 due to an increase in salaries and benefits, rent expense, insurance and legal costs offset by a decrease in bad debt expense and non-cash stock-based compensation charges. Non-cash stock-based compensation charges decreased because the Company generally no longer grants stock options to employees at below fair market value at the date of grant and certain employees who were granted stock options below fair market value have left the Company. General and administrative expenses increased $2,821,000 or 40% in 2000 compared to 1999 due to a reserve against an officer's loan and an increase in corporate expenses resulting from a full year of operations for Metastream. General and administrative expenses are expected to decrease in absolute dollars and as a percentage of total revenues in 2002 compared to 2001, due to the closing of the Company's Tokyo and San Francisco offices. 18 COMPENSATION CHARGE RELATED TO FORGIVENESS OF AN OFFICER LOAN
2001 % CHANGE 2000 % CHANGE 1999 ---- -------- ------ -------- ---- (DOLLARS IN THOUSANDS) Compensation charge related to forgiveness of an officer loan ......... $ -- (100)% $2,322 N/A $-- Percentage of total revenues.......... -- % 65% -- %
A loan to an officer which accrued interest semi-annually at 5.67%, was forgiven in 2000 in accordance with the contractual terms of the officer's employment agreement, upon the merger of the Company and Metastream. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Amortization of goodwill and other intangibles .......... $17,453 477% $ 3,025 3,933% $ 75 Percentage of total revenues 125% 85% 2%
Amortization of goodwill and other intangibles increased $14,428,000 or 477% in 2001 compared to 2000 due to a full year of amortization of intangibles recorded as part of the acquisition of Viewpoint Digital and the acquisition of Computer Associates' minority interest in Metastream. Amortization of goodwill and other intangibles increased $2,950,000 or 3,933% in 2000 compared to 1999 due to amortization of intangibles recorded as part of the acquisition of Viewpoint Digital in September 2000 and the acquisition of Computer Associates' minority interest in Metastream in November 2000. Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," will be adopted by the Company on January 1, 2002, and as a result, the Company will cease to amortize approximately $33,042,000 of goodwill. The Company recorded approximately $13,068,000 and $1,414,000 of goodwill amortization during 2001 and 2000, respectively. In lieu of amortization, the Company will be required to test goodwill for impairment using the two-step approach prescribed in SFAS No. 142. GOODWILL IMPAIRMENT
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- ------- -------- ------ (DOLLARS IN THOUSANDS) Goodwill impairment.............. $ 7,925 N/A $ -- N/A $ -- Percentage of total revenues..... 57% -- % -- %
The Company assesses the impairment of long-lived assets periodically in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." During 2001, the Company performed impairment assessments on the goodwill and other intangibles recorded upon the acquisition of Viewpoint Digital and the acquisition of Computer Associates' minority interest in Metastream. As a result of continuing poor economic conditions, which resulted in a decrease in estimated undiscounted future cash flows, the Company recorded a $7,925,000 goodwill impairment charge on the Viewpoint Digital goodwill during the fourth quarter of 2001. The charge was determined based upon the estimated discounted cash flows over the remaining useful life of the goodwill using a discount rate of 15%. The assumptions supporting the cash flows including the discount rate were determined using the Company's best estimates as of the date the impairment was recorded. The Company has not completed its impairment analysis of goodwill under SFAS No. 142, but it may need to take additional goodwill impairment charges in 2002. DEPRECIATION
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- ------- -------- ------ (DOLLARS IN THOUSANDS) Depreciation..................... $ 1,804 125% $ 801 97% $ 406 Percentage of total revenues..... 13% 22% 13%
Depreciation expense increased $1,003,000, or 125% in 2001 compared to 2000, and $395,000, or 97% in 2000 compared to 1999 19 due to increases in property and equipment additions. The Company expects that depreciation expense will increase in absolute dollars in 2002 compared to 2001, in conjunction with the anticipated purchasing of depreciable equipment during the year. As a percentage of total revenues, depreciation expense is expected to decrease. NON-CASH SALES AND MARKETING CHARGES
2001 % CHANGE 2000 % CHANGE 1999 ------- --------- ------- -------- ------- (DOLLARS IN THOUSANDS) Non-cash sales and marketing charges.......................... $ -- (100)% $19,998 N/A $ -- Percentage of total 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 $19,998,000 during the year ended December 31, 2000. These charges represented the difference between the fair market 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 both 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. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- ------ -------- ----- (DOLLARS IN THOUSANDS) Acquired in-process research and development costs........ $ -- (100)% $ 963 N/A $ -- Percentage of total revenues. -- % 27% -- %
Acquired in-process research and development costs represent the write-off of research and development costs recorded as part of the Viewpoint Digital acquisition in September 2000. OTHER INCOME
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- -------- -------- ------ (DOLLARS IN THOUSANDS) Other income................. $ 1,064 (51)% $ 2,180 (5)% $2,286 Percentage of total revenues. 8% 61% 74%
Other income primarily consists of interest and investment income on cash, cash equivalents and marketable securities. As a result, other income fluctuates with changes in the Company's cash, cash equivalents and marketable securities balances and market interest rates. Other income decreased $1,116,000 or 51% in 2001 compared to 2000, and $106,000 or 5% in 2000 compared to 1999 due to a decrease in average cash, cash equivalents and marketable securities balances as well as a decline in interest rates. Other income is expected to decrease in absolute dollars and as a percentage of total revenues in 2002 compared to 2001 due to a decline in interest rates and an expected decrease in average cash, cash equivalents and marketable security balances. PROVISION FOR INCOME TAXES
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Provision for income taxes... $ -- N/A $ -- (100)% $5,481 Percentage of total revenues. -- % -- % 177%
In the fourth quarter of 1999, the Company recorded a provision for income taxes in the amount of $5,481,000, 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 20 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 and 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
2001 % CHANGE 2000 % CHANGE 1999 ------- --------- ------- -------- ------- (DOLLARS IN THOUSANDS) Minority interest in loss of subsidiary................... $ -- (100)% $ 4,429 323% $1,048 Percentage of total revenues. -- % 124% 34%
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 combined 20% interest were reported as the minority interest in the Company's consolidated statements of operations. In November 2000, the Company acquired the minority interest by issuing approximately 5,578,000 shares of Company common stock in exchange for 4,850,000 shares of Metastream common stock. NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS
2001 % CHANGE 2000 % CHANGE 1999 ------- -------- ------- -------- ---------- (DOLLARS IN THOUSANDS) Net income (loss) from discontinued operations...... $ 1,122 (25)% $ 1,496 (104)% $ (36,071) Percentage of total revenues. 8% 42% (1,166)%
In December 1999, the Board of Directors of the Company approved a plan to focus exclusively on its digital marketing technologies and services and to correspondingly divest itself of 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. 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. The Company also recorded an adjustment to net loss on disposal of discontinued operations of $1,122,000 during the year ended December 31, 2001, as a result of changes in estimates related to assets and liabilities of the discontinued business. Changes in estimates will be accounted for prospectively and included in net income (loss) from discontinued operations. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS 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; 21 - 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. 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, 2001, we had an accumulated deficit of approximately $198,184,000. 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; - Acceptance of our technology in other digital medium, such as: enterprise applications, digital cable set-top boxes, print, motion pictures and broadcast television; - Costs of litigation and intellectual property protection; - Industry transitions to new business and information delivery models; - 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 and other 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 22 We expect that our cash on hand, cash equivalents, and marketable securities will meet our operating expense, 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. 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 recently. 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, in large part, 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. It may be reasonable to 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 an alternative method for transferring data than streaming media. The e-commerce market is relatively new and evolving. Licensing of our products and technologies depends in 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 and in other digital media. 23 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. In addition, the industry is subject to rapidly changing methods and models of information delivery. If a general market migration to a method of information delivery that is not conforming with the Company's technologies were to occur, the Company's business and financial results would be adversely impacted. 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 on 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 MAY NEED TO EXPAND OUR SALES AND MARKETING CAPABILITIES We expanded our sales force in 2001 and may be required to continue to expand our sales and marketing operations to increase market awareness of our products and generate increased revenue. We cannot be certain that we would 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. Our products and services require a sophisticated sales effort targeted at the senior management of our prospective clients. New hires 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. 24 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; - 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 MAY NEED TO ENTER INTO BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES WHICH COULD BE DIFFICULT TO INTEGRATE AND MAY DISRUPT OUR BUSINESS We may continue to expand our operations or market presence by entering into 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 purchased intangible assets; - Additional operating losses and expenses of acquired businesses; - Impairment of relationships with existing employees, customers and business partners; and - If 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. Other than a very few instances, we do not have long-term employment agreements with our key personnel, and we do not have "key person" life 25 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. OUR REVENUES COULD BE NEGATIVELY AFFECTED BY THE LOSS OF RESELLERS AND STRATEGIC PARTNERS AND IF WE FAIL TO ESTABLISH, MAINTAIN OR EXPAND OUR STRATEGIC RELATIONSHIPS FOR THE INTEGRATION OF OUR TECHNOLOGY WITH THE SERVICES OF THIRD PARTIES, THE GROWTH OF OUR BUSINESS MAY CEASE OR DECLINE For the year ended December 31, 2001, the Company recorded revenues totaling 17% of total 2001 revenues related to certain agreements, including reseller arrangements, with two stockholders who have representatives on the Company's Board of Directors. The loss of any reseller or strategic partner could significantly reduce our revenues, which could have a material adverse effect on our financial condition, operating results and business. In order to expand our business, we must generate, maintain and strengthen strategic relationships with third parties. Currently, we have relationships with AOL and Adobe, through which they integrate our technology into their services. We may need to establish additional strategic relationships in the future. If these parties do not provide sufficient, high-quality service or integrate and support our technology correctly, or if we are unable to enter into successful new strategic relationships, our revenues and growth may suffer. We cannot be assured that the time and effort spent on developing or maintaining strategic relationships will produce significant benefits to us. OUR LENGTHY SALES CYCLE AND PRODUCT IMPLEMENTATION MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS We have a long sales cycle because we generally need to educate potential customers regarding the use and benefits of e-business applications. Our long sales cycle makes it difficult to predict the quarter in which revenues may fall. In addition, since we recognize a portion of our revenue throughout completion of our services, the timing of product implementation could cause significant variability in our license and service revenues and operating results for any particular period. The implementation of our product requires a significant commitment of resources by our customers which makes it difficult to predict the quarter when implementation will be completed. OUR PROJECTS VARY IN SIZE AND SCOPE; THEREFORE, A CLIENT THAT ACCOUNTS FOR A LARGE PORTION OF OUR REVENUES IN ONE PERIOD MAY NOT GENERATE A SIMILAR AMOUNT OF REVENUE IN SUBSEQUENT PERIODS We face a risk because a large amount of our revenues are generated from a small number of clients, and there are no assurances that these clients will retain our services for the same level of work in the future. Any cancellation, deferral or significant reduction in work performed for these principal clients or a significant number of smaller clients could have a material adverse effect on our business, financial condition and results of operations. 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 and creative services 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 market 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. We generally no longer issue options at an exercise price below the fair market value of the common stock on the date of grant, however, if we do so in the future, 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 26 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 AS WELL AS THOSE SPECIFIC TO THE INTERNET AND RELATED INDUSTRIES, WHICH HAVE BECOME LESS CERTAIN FOLLOWING THE TERRORIST ATTACKS OF SEPTEMBER 11, 2001 Our revenues and results of operations have been and 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. The growth and prosperity of the Internet and industries which derive their revenues from Internet will impact the results of the Company. Any downturn in the growth rate of the Internet and related industries' as a business segment would adversely impact the Company's financial condition, operating results and stock price. Terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001 disrupted commerce throughout the United States and other parts of the world. The continued threat of terrorism within the United States and abroad and the potential for military action and heightened security measures in response to such threat may cause significant disruption to commerce throughout the world. To the extent that such disruptions result in delays or cancellations of customer orders, a general decrease in corporate spending on information technology, or our inability to effectively market and sell our licenses and services, our business and results of operations could be materially and adversely affected. We are unable to predict whether the threat of terrorism or the responses thereto will result in any long-term commercial disruptions or if such activities or responses will have a long term material adverse effect on our business, results of operations or financial condition. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Viewpoint's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its critical accounting policies and estimates, including those related to revenue recognition and long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances though actual results may differ from these estimates under different assumptions or conditions. For a complete description of the Company's accounting policies, see Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements: Revenue Recognition Revenue recognition rules for software companies are very complex. We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. The Company recognizes revenue in accordance with SOP 97-2, "Software Revenue Recognition," as amended, and SAB No. 101 "Revenue Recognition in Financial Statements." 27 Viewpoint generates revenues through two sources: (a) software license revenues and (b) service revenues. License revenues are generated from licensing the rights to use our products directly to end-users and indirectly through VARs. Service revenues are generated from fee based professional services, sales of customer support services (maintenance contracts), and training services performed for customers that license our products. License revenue includes sales of perpetual and term based licenses for broadcasting viewpoint 3D content, and limited licenses for its digital content library. License revenue is recognized over the term of the license in a term-based broadcast license model and up-front in a perpetual broadcast license model, providing that no significant vendor obligations remain and the resulting receivable is deemed collectible by management. Fee-based professional services are performed on a time-and-material basis or on a fixed-fee basis, under separate service arrangements. Revenues related to these services are recognized on a percentage-of-completion basis in accordance with the provisions of SOP 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Percentage-of-completion for service contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated total cost for each contract at completion. Revenues from customer support services are recognized ratably over the term of the contract. Revenues from training services are recognized as services are performed. Standard terms for license agreements call for payment within 90 days. Probability of collection is based upon the assessment of the customer's financial condition through the review of their current financial statements or credit reports. For follow-on sales to existing customers, prior payment history is also used to evaluate probability of collection. Our agreements with customers do not contain product return rights. Fees from licenses sold together with fee-based professional services are generally recognized upon delivery of the software, provided that the payment of the license fees are not dependent upon the performance of the services, and the services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the software, or payment of the license fees are dependent upon the performance of the services, both the software license and service fees are recognized on a percentage of completion method of contract accounting. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. If a nonstandard acceptance period is required, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. The Company periodically enters into nonmonetary arrangements whereby the Company's licenses or services are exchanged for services of its customer. Nonmonetary revenue is recognized at the estimate fair value of the services received. Generally, nonmonetary revenues equal nonmonetary expenses; however, due to timing, nonmonetary accounts receivable and accounts payable may result. Long-Lived Assets In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company periodically reviews the carrying value of long-lived assets, primarily consisting of property and equipment, with estimated useful lives that range from 3 to 5 years, and goodwill and other intangible assets, with estimated useful lives that range from 1 to 4 years, to determine whether there are any indications of impairment losses. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of acquired businesses. Impairment losses, if any, are recorded when the expected undiscounted future operating cash flows derived from such assets are less than their carrying value. Beginning in 2002, the methodology for assessing potential impairments of intangibles will change based on new accounting rules issued by the Financial Accounting Standards Board ("FASB"). Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents, and marketable securities totaled $15,413,000 at December 31, 2001, down from $29,033,000 at December 31, 2000 and $37,247,000 at December 31, 1999. Included in cash and cash equivalents at December 31, 2001, is $291,000 of restricted cash which was pledged as collateral to secure a letter of credit used for a security deposit on the Company's New York facility. 28 Net cash used in operating activities of the Company totaled $15,026,000 for 2001 compared to $28,745,000 for 2000 and $11,903,000 for 1999. Net cash used in operating activities in 2001 primarily resulted from a $53,492,000 net loss from continuing operations offset in part by $6,488,000 of net cash provided by discontinued operations, $7,173,000 in non-cash stock-based compensation charges, $19,257,000 in depreciation and amortization and a $7,925,000 goodwill impairment charge. Net cash used in operating activities in 2000 primarily resulted from a $57,452,000 net loss from continuing operations and $8,607,000 of net cash used in discontinued operations, offset in part by $12,341,000 in non-cash stock-based compensation charges, $19,998,000 in non-cash sales and marketing charges and $4,789,000 in depreciation and amortization. Net cash used in operating activities in 1999 primarily resulted from a $14,583,000 net loss from continuing operations and $10,209,000 of net cash used for discontinued operations, offset in part by $6,081,000 in non-cash stock-based compensation charges and a $5,913,000 non-cash charge related to the full valuation allowance recorded against the Company's deferred tax assets. Net cash provided by (used in) investing activities totaled $8,387,000, $1,584,000 and $(7,410,000) for 2001, 2000, and 1999, respectively. Net cash provided by investing activities in 2001 primarily resulted from $8,843,000 of net proceeds from sales and maturities of marketable securities offset by $872,000 used to purchase property and equipment. Net cash provided by investing activities in 2000 primarily resulted from $17,135,000 of net proceeds from sales and maturities of marketable securities, net of $10,225,000 of cash used to acquire Viewpoint Digital and $4,233,000 used to purchase property and equipment. Net cash used in investing activities in 1999 primarily resulted from $2,798,000 of net purchases of marketable securities and $4,471,000 of net cash used in discontinued operations. Net cash provided by financing activities totaled $1,874,000, $35,993,000 and $7,505,000 for 2001, 2000 and 1999, respectively. Net cash provided by financing activities in 2001 primarily resulted from $2,449,000 of proceeds from the exercise of stock options by the Company's employees, offset by $575,000 in loans to two officers of the Company. Net cash provided by financing activities in 2000 primarily resulted from $19,839,000 received from AOL and Adobe relating to their investment in Metastream, $12,604,000 of proceeds from the exercise of stock options by the Company's employees and $3,500,000 received from Computer Associates related to their investment in Metastream. Cash provided by financing activities in 1999 primarily resulted from $4,005,000 of proceeds from the exercise of stock options by the Company's employees and $3,500,000 received from Computer Associates relating to their investment in Metastream. As of December 31, 2001, the Company had cash commitments totaling approximately $7,389,000 through 2010, related to future minimum lease payments for office space, equipment, and an executive's vehicle. See Note 16 to the consolidated financial statements included in this Annual Report on Form 10-K. Pursuant to the purchase of all of the outstanding capital stock of Viewpoint Digital, the Company issued two contingent promissory notes to Computer Associates each in the amount of $15,000,000. During 2001, the Company entered into certain agreements with Computer Associates whereby Computer Associates agreed to accept newly-issued shares of Viewpoint common stock having a value of $4,000,000, in partial repayment of the first contingent promissory note due June 8, 2001. In addition Computer Associates agreed to accept, at the Company's election, either cash or newly-issued shares of Viewpoint common stock at an issue price of $4.00 per share in repayment of any additional amounts due under the promissory note due June 8, 2001, and the first $8,943,000 of the $15,000,000 contingent promissory note due April 30, 2002, which amount will be determined by the achievement of certain levels of future operating results and employee retention. The amount due Computer Associates under the promissory note due June 8, 2001 is approximately $4,657,000. The Company believes that its current cash, cash equivalents, 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. The Company may seek additional funds before that time through public or private equity financing or from other sources to fund our operations and pursue our growth strategy. We have no commitment for additional financing, and we may experience difficulty in obtaining additional financing on favorable terms, if at all. Any financing we obtain may contain covenants that restrict our freedom to operate our business or may have rights, preferences or privileges senior to our common stock and may dilute our current shareholders' ownership interest in Viewpoint. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001 the FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 requires the use of a 29 nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The provisions of each statement, which apply to goodwill and intangible assets acquired prior to July 1, 2001, will be adopted by the Company on January 1, 2002. The Company will reclassify an assembled workforce intangible asset with an unamortized balance of $1,767,000 into goodwill at the date of adoption. This will result in approximately $33,042,000 of goodwill and $2,361,000 of other intangible assets commencing on January 1, 2002. The Company will test goodwill for impairment using the two-step approach prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The Company anticipates it will complete its initial impairment test for the remaining goodwill balance as of January 1, 2002 in the first half of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in 2002. The Company has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". The statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The statement is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of Accounting Principals Board ("APB") Opinion No. 30, "Reporting the Results of Operations." This statement provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. This statement also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The provisions of this statement are not expected to have a material impact on the Company's financial statements. 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, cash equivalents and marketable securities. The Company does not have any derivative financial instruments as of December 31, 2001. 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 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. 30 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................... 32 Consolidated Balance Sheets as of December 31, 2001 and 2000............................................ 33 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001... 34 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2001................................................ 35 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001... 37 Notes to Consolidated Financial Statements.......... 39
2. Index to Financial Statement Schedule
PAGE ---- SCHEDULE Schedule II -- Valuation and Qualifying Accounts..... 58
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. 31 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 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 February 8, 2002 32 VIEWPOINT CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ---------------------- 2001 2000 ---------- ---------- ASSETS Current assets: Cash and cash equivalents ................................. $ 8,345 $ 13,320 Marketable securities ..................................... 7,068 15,713 Accounts receivable, net .................................. 4,096 2,101 Notes receivable from related parties, net ................ -- 870 Notes receivable, net...................................... 750 750 Due from related parties, net.............................. -- 312 Prepaid expenses and other current assets.................. 836 1,595 Current assets related to discontinued operations ......... 141 5,662 ---------- ---------- Total current assets............................... 21,236 40,323 Property and equipment, net ................................. 4,662 5,622 Goodwill and other intangibles .............................. 35,403 56,111 Loans to officers............................................ 595 -- Other assets................................................. 21 179 Non-current assets related to discontinued operations ....... -- 114 ---------- ---------- Total assets....................................... $ 61,917 $ 102,349 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................... $ 1,314 $ 3,352 Accrued expenses........................................... 1,304 861 Due to related parties, net................................ 4,764 -- Deferred revenues.......................................... 907 636 Accrued incentive compensation ............................ 545 546 Current liabilities related to discontinued operations .... 346 615 ---------- ---------- Total current liabilities.......................... 9,180 6,010 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value; 5,000 shares authorized - no shares issued and outstanding at December 31, 2001 and 2000 -- -- Common stock, $.001 par value; 75,000 shares authorized - 39,620 shares issued and 39,460 shares outstanding at December 31, 2001, and 37,964 shares issued and outstanding at December 31, 2000......................... 40 38 Paid-in capital............................................ 263,157 264,698 Deferred compensation ..................................... (11,279) (22,595) Treasury stock at cost; 160 and no shares at December 31, 2001 and 2000, respectively............................. (1,015) -- Accumulated other comprehensive income..................... 18 12 Accumulated deficit........................................ (198,184) (145,814) ---------- ---------- Total stockholders' equity......................... 52,737 96,339 ---------- ---------- Total liabilities and stockholders' equity......... $ 61,917 $ 102,349 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 33 VIEWPOINT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 ---------- ----------- -------- Revenues: Licenses........................................... $ 9,681 $ 1,421 $ 2,818 Services........................................... 4,327 2,159 275 ---------- -------- -------- Total revenues ...................................... 14,008 3,580 3,093 ---------- -------- -------- Cost of Revenues: Licenses........................................... 309 76 -- Services........................................... 3,283 1,467 -- ---------- -------- -------- Total cost of revenues............................... 3,592 1,543 -- ---------- -------- -------- Gross profit......................................... 10,416 2,037 3,093 ---------- -------- -------- Operating expenses: Sales and marketing (including non-cash stock-based compensation charges totaling $2,335 in 2001, $5,122 in 2000, and $675 in 1999)............... 17,814 18,741 3,000 Research and development (including non-cash stock -based compensation charges totaling $2,920 in 2001, $4,193 in 2000, and $2,540 in 1999)....... 9,553 10,434 5,055 General and administrative (including non-cash stock-based compensation charges totaling $1,918 in 2001, $3,026 in 2000, and $2,866 in 1999).... 10,423 9,814 6,993 Compensation charge related to forgiveness of an officer loan ................................... -- 2,322 -- Amortization of goodwill and other intangibles .... 17,453 3,025 75 Goodwill impairment................................ 7,925 -- -- Depreciation....................................... 1,804 801 406 Non-cash sales and marketing charges .............. -- 19,998 -- Acquired in-process research and development costs. -- 963 -- ---------- -------- ------ Total operating expenses............................. 64,972 66,098 15,529 ---------- -------- -------- Loss from operations................................. (54,556) (64,061) (12,436) Other income......................................... 1,064 2,180 2,286 ---------- -------- -------- Loss before provision for income taxes............... (53,492) (61,881) (10,150) Provision for income taxes .......................... -- -- 5,481 ---------- -------- -------- Loss before minority interest in loss of subsidiary.. (53,492) (61,881) (15,631) Minority interest in loss of subsidiary ............. -- 4,429 1,048 ---------- -------- -------- Net loss from continuing operations.................. (53,492) (57,452) (14,583) Discontinued operations: Loss from discontinued operations.................. -- -- (14,811) Adjustment to net loss on disposal of discontinued 1,122 1,496 (21,260) operations.................................. ---------- -------- -------- Net income (loss) from discontinued operations....... 1,122 1,496 (36,071) ---------- -------- -------- Net loss............................................. (52,370) (55,956) (50,654) Accretion of mandatorily redeemable preferred stock of subsidiary ........................................ -- (438) -- ---------- -------- ------- Net loss applicable to common shareholders........... $ (52,370) $(56,394) $(50,654) ========== ======== ======== Basic and diluted net loss per common share: Net loss per common share from continuing operations $ (1.37) $ (2.01) $ (0.59) Net income (loss) per common share from discontinued operations........................................ 0.03 0.05 (1.47) ---------- -------- -------- Net loss per common share............................ $ (1.34) $ (1.96) $ (2.06) ========== ======== ======== Weighted average number of shares outstanding -- basic and diluted........................................ 39,077 28,718 24,581 ========== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 34 VIEWPOINT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS)
SERIES A PREFERRED STOCK COMMON STOCK TREASURY STOCK ----------------- -------------------- ------------------- PAID-IN DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION SHARES AMOUNT ------- ------- -------- -------- ------------- ------------ -------- -------- Balances at December 31, 1998 .................. -- $ -- 24,243 $ 24 $ 112,829 $ -- -- $ -- Issuance of common stock upon the exercise of stock options ......... -- -- 959 1 4,004 -- -- -- Issuance of common stock in connection with the employee stock purchase plan ......... -- -- 168 -- 584 -- -- -- Issuance of common stock in connection with the acquisition of RAYflect S.A .......... -- -- 126 -- 597 -- -- -- Conversion of accrued compensation to equity upon exercise of certain options ....... -- -- -- -- 26 -- -- -- Change in interest gain related to subsidiary ............ -- -- -- -- 1,900 -- -- -- Translation adjustment ............ -- -- -- -- -- -- -- -- Unrealized loss on marketable securities . -- -- -- -- -- -- -- -- Net loss ................ -- -- -- -- -- -- -- -- ------- ------- -------- -------- ------------- ------------ -------- -------- Balances at December 31, 1999 .................. -- -- 25,496 25 119,940 -- -- -- Issuance of common stock upon the exercise of stock options ......... -- -- 2,678 3 12,601 -- -- -- Issuance of common stock in connection with the employee stock purchase plan ......... -- -- 47 -- 242 -- -- -- Conversion of accrued compensation to equity upon exercise of certain options ....... -- -- -- -- 75 -- -- -- Change in interest gain related to subsidiary ............ -- -- -- -- 3,300 -- -- -- Issuance/cancellation of common stock option awards ................ -- -- -- -- 22,925 (22,925) -- --
ACCUMULATED OTHER TOTAL TOTAL COMPREHENSIVE INCOME ACCUMULATED STOCKHOLDERS' COMPREHENSIVE (LOSS) DEFICIT EQUITY LOSS ----------- ----------- ------------- ------------- Balances at December 31, 1998 .................. $ (117) $ (39,204) $ 73,532 $ -- Issuance of common stock upon the exercise of stock options ......... -- -- 4,005 -- Issuance of common stock in connection with the employee stock purchase plan ......... -- -- 584 -- Issuance of common stock in connection with the acquisition of RAYflect S.A .......... -- -- 597 -- Conversion of accrued compensation to equity upon exercise of certain options ....... -- -- 26 -- Change in interest gain related to subsidiary ............ -- -- 1,900 -- Translation adjustment ............ (9) -- (9) $ (9) Unrealized loss on marketable securities . (80) -- (80) (80) Net loss ................ -- (50,654) (50,654) (50,654) ----------- ----------- ------------- ------------- Balances at December 31, 1999 .................. (206) (89,858) 29,901 $ (50,743) ============= Issuance of common stock upon the exercise of stock options ......... -- -- 12,604 -- Issuance of common stock in connection with the employee stock purchase plan ......... -- -- 242 -- Conversion of accrued compensation to equity upon exercise of certain options ....... -- -- 75 -- Change in interest gain related to subsidiary ............ -- -- 3,300 -- Issuance/cancellation of common stock option awards ................ -- -- -- --
35 Amortization of deferred compensation .......... -- -- -- -- -- 330 -- -- Issuance of common stock in connection with Viewpoint Digital, Inc. acquisition ...... -- -- 715 1 8,937 -- -- -- Non-cash sales and marketing charges in connection with strategic alliances ... -- -- -- -- 19,998 -- -- -- Issuance of common stock in exchange for minority interest in subsidiary ............ -- -- 5,578 6 56,844 -- -- -- Issuance of common stock in exchange for subsidiary preferred stock ................. -- -- 3,450 3 19,836 -- -- -- Translation adjustment ............ -- -- -- -- -- -- -- -- Unrealized gain on marketable securities . -- -- -- -- -- -- -- -- Net loss ................ -- -- -- -- -- -- -- -- ------- ------- -------- -------- ------------- ------------ -------- -------- Balances at December 31, 2000 .................. -- -- 37,964 38 264,698 (22,595) -- -- Issuance of common stock upon the exercise of stock options ........... -- -- 1,656 2 2,447 -- -- -- Issuance/cancellation of common stock option awards ................ -- -- -- -- (4,975) 4,975 -- -- Amortization of deferred compensation .......... -- -- -- -- -- 6,341 -- -- Issuance of common stock options for services .. -- -- -- -- 832 -- -- -- Conversion of accrued compensation to equity upon exercise of certain options ...... -- -- -- -- 1 -- -- -- Issuance of warrants to purchase shares of common stock ......... -- -- -- -- 154 -- -- -- Receipt of common stock upon default of notes receivable ........... -- -- -- -- -- -- (160) (1,015) Translation adjustment ............ -- -- -- -- -- -- -- -- Unrealized gain on marketable securities . -- -- -- -- -- -- -- -- Net loss ................ -- -- -- -- -- -- -- -- ------- ------- -------- -------- ------------- ------------ -------- -------- Balances at December 31, 2001 .................. -- $ -- 39,620 $ 40 $ 263,157 $ (11,279) (160) $ (1,015) ======= ======= ======== ======== ============= ============ ======== ========
Amortization of deferred compensation .......... -- -- 330 -- Issuance of common stock in connection with Viewpoint Digital, Inc. acquisition ...... -- -- 8,938 -- Non-cash sales and marketing charges in connection with strategic alliances ... -- -- 19,998 -- Issuance of common stock in exchange for minority interest in subsidiary ............ -- -- 56,850 -- Issuance of common stock in exchange for subsidiary preferred stock ................. -- -- 19,839 -- Translation adjustment ............ 137 -- 137 $ 137 Unrealized gain on marketable securities . 81 -- 81 81 Net loss ................ -- (55,956) (55,956) (55,956) ----------- ----------- ------------- ------------- Balances at December 31, 2000 .................. 12 (145,814) 96,339 $ (55,738) ============= Issuance of common stock upon the exercise of stock options ......... -- -- 2,449 -- Issuance/cancellation of common stock option awards ................ -- -- -- -- Amortization of deferred compensation .......... -- -- 6,341 -- Issuance of common stock options for services .. -- -- 832 -- Conversion of accrued compensation to equity upon exercise of certain options ...... -- -- 1 -- Issuance of warrants to purchase shares of common stock ......... -- -- 154 -- Receipt of common stock upon default of notes receivable ........... -- -- (1,015) -- Translation adjustment ............ (27) -- (27) (27) Unrealized gain on marketable securities . 33 -- 33 33 Net loss ................ -- (52,370) (52,370) (52,370) ----------- ----------- ------------- ------------- Balances at December 31, 2001 .................. $ 18 $ (198,184) $ 52,737 $ (52,364) =========== =========== ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 36 VIEWPOINT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- -------- -------- Cash flows from operating activities: Net loss ............................................. $(52,370) $(55,956) $(50,654) Adjustments to reconcile net loss to net cash used in operating activities: Net (income) loss of discontinued operations ....... (1,122) (1,496) 36,071 Non-cash stock-based compensation charges .......... 7,173 12,341 6,081 Deferred income taxes .............................. -- -- 5,913 Depreciation and amortization ...................... 19,257 4,789 670 Goodwill impairment ................................ 7,925 -- -- Provision for bad debt ............................. 544 -- -- Non-monetary sale of software for marketable securities...................................... (165) -- -- Loss on sale of equipment .......................... 12 -- -- Accrued interest income ............................ (20) -- (130) Forgiveness, reserve and recovery of notes ......... receivables.................................... (665) 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 ............................. (2,336) (1,148) 790 Prepaid expenses and other assets ............... 917 (367) (466) Accounts payable ................................ (2,038) 2,718 62 Accrued expenses ................................ 443 110 809 Due to/from related parties ..................... 323 (312) -- Deferred revenues ............................... 425 267 369 Accrued incentive compensation .................. -- -- (161) Net cash provided by (used in) discontinued operations....................................... 6,488 (8,607) (10,209) -------- -------- -------- Net cash used in operating activities ........ (15,209) (28,745) (11,903) Cash flows from investing activities: Purchases of property and equipment .................. (872) (4,233) (295) Sale of property and equipment ....................... 16 -- -- Purchases of patents and trademarks .................. (120) -- -- Purchases of marketable securities ................... (23,042) (42,735) (79,282) Proceeds from sales and maturities of marketable securities.......................................... 31,885 59,870 76,484 Issuance of notes receivable ......................... -- (1,500) -- Issuance of notes receivable from related parties .... -- -- (100) Repayment of notes receivable from related parties ... 520 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) -------- -------- -------- Net cash provided by (used in) investing activities..................................... 8,387 1,584 (7,410) Cash flows from financing activities: Collection of subscription receivable related to common stock of subsidiary.......................... -- 3,500 3,500 Issuance of loans to officers ........................ (575) -- -- 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 .............. 2,449 12,604 4,005 -------- -------- -------- Net cash provided by financing activities ..... 1,874 35,993 7,505 Effect of exchange rates changes on cash ............. (27) 8 (9) -------- -------- -------- Net increase (decrease) in cash and cash equivalents . (4,975) 8,840 (11,817) Cash and cash equivalents at beginning of year ....... 13,320 4,480 16,297 -------- -------- -------- Cash and cash equivalents at end of year ............. $ 8,345 $ 13,320 $ 4,480 ======== ======== ========
37 VIEWPOINT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) (IN THOUSANDS) Supplemental disclosure of cash flow activities: Cash paid during the year for income taxes ................ $ 78 $ -- $ 2 Supplemental disclosure of non-cash investing and financing activities: Unrealized gains (losses) on marketable securities ........ $ 33 $ 81 $ (80) Issuance of warrants to purchase shares of common stock ... 154 -- -- Receipt of treasury stock as forgiveness of loan receivable............................................. 1,015 -- -- Contingent consideration not yet issued in connection with the acquisition of Viewpoint Digital.............. 4,753 -- -- Non-monetary purchase of marketable securities ............ 165 -- -- Net assets acquired in connection with acquisition of Viewpoint Digital: Cash .................................................. -- 6 -- Accounts receivable, net .............................. 203 830 -- Property and equipment ................................ -- 1,576 -- Prepaid expenses and other assets ..................... -- 128 -- Accounts payable and accrued expenses ................. -- (410) Conversion of accrued compensation to equity upon exercise of certain options............................ 1 75 26 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 Issuance of common stock in connection with acquisition of RAYflect S.A............................ -- -- 597 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. 38 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION Viewpoint Corporation is a leading provider of interactive media technologies and services. Its graphics operating system platform, the Viewpoint Media Player, has been licensed by Fortune 500 companies and others for use in online, offline and embedded applications serving a wide variety of needs, including: business process visualizations, marketing campaigns, rich advertising and product presentations. The Company also provides cross media digital solutions for film, broadcast television and games. 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 to operate a business exploiting these technologies. The Company originally held an 80% equity interest in Metastream with 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 Metastream 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, 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 and e-commerce visualization solutions; - Providing a full range of fee-based digital asset content creation and engineering professional services for implementing visualization solutions for marketing and creating new and enhancing existing enterprise software applications; - Proliferating the Viewpoint format into digital advertisements on various digital media, primarily the Web and digital set-top cable boxes; - Forging technological alliances with leading interactive agencies and Web content providers; and - Maximizing market penetration and name recognition, including distribution of the Company's client-side software graphics operating system, the Viewpoint Media Player Viewpoint believes that its success will depend largely on its ability to proliferate its digital technologies into various media, including broadcast television, games, movies, print, closed intranets, new and existing enterprise applications and television set-top boxes. Accordingly, Viewpoint has and intends to continue to invest 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, including digital content creation service and engineering services to enhance and create new enterprise software applications. In light of its relatively recent change in strategic focus from selling prepackaged software, Viewpoint has a limited operating history upon which an evaluation of the Company and its prospects can be based. Viewpoint's 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, 2001, had an accumulated deficit of $198,184,000. 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 39 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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. Certain reclassifications have been made to the prior years consolidated financial statements to conform to the 2001 presentation. REVENUE RECOGNITION Revenue recognition rules for software companies are very complex. We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. The Company recognizes revenue in accordance with SOP 97-2, "Software Revenue Recognition," as amended, and SAB No. 101 "Revenue Recognition in Financial Statements." Viewpoint generates revenues through two sources: (a) software license revenues and (b) service revenues. License revenues are generated from licensing the rights to use our products directly to end-users and indirectly through VAR's. Service revenues are generated from fee based professional services, sales of customer support services (maintenance contracts), and training services performed for customers that license our products. License revenue includes sales of perpetual and term based licenses for broadcasting Viewpoint 3D content, and limited licenses for its digital content library. License revenue is recognized over the term of the license in a term-based broadcast license model and up-front in a perpetual broadcast license model, providing that no significant vendor obligations remain and the resulting receivable is deemed collectible by management. Fee-based professional services are performed on a time-and-material basis or on a fixed-fee basis, under separate service arrangements. Revenues related to these services are recognized on a percentage-of-completion basis in accordance with the provisions of SOP 81-1 "Accounting For Performance of Construction-Type and Certain Production-Type Contracts." Percentage-of-completion for service contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated total cost for each contract at completion. Revenues from customer support services are recognized ratably over the term of the contract. Revenues from training services are recognized as services are performed. Standard terms for license agreements call for payment within 90 days. Probability of collection is based upon the assessment of the customer's financial condition through the review of their current financial statements or credit reports. For follow-on sales to existing customers, prior payment history is also used to evaluate probability of collection. Our agreements with customers do not contain product return rights. Fees from licenses sold together with fee-based professional services are generally recognized upon delivery of the software, provided that the payment of the license fees are not dependent upon the performance of the services, and the services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the software, or payment of the license fees are dependent upon the performance of the services, both the software license and service fees are recognized under the percentage of completion method of contract accounting. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. If a nonstandard acceptance period is required, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. The Company periodically enters into nonmonetary arrangements whereby the Company's licenses or services are exchanged for services of its customer. Nonmonetary revenue is recognized at the estimated fair value of the services received. Generally, 40 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) nonmonetary revenues equal nonmonetary expenses; however, due to timing, nonmonetary accounts receivable and accounts payable may result. SOFTWARE DEVELOPMENT COSTS In accordance with 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 FASB 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. 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 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 Opinion 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 FASB issued Financial Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving Stock Compensation," which is an interpretation of APB Opinion No. 25. This interpretation clarifies: - The definition of employee for purposes of applying APB Opinion 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. 41 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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. Included in cash and cash equivalents at December 31, 2001, is restricted cash amounting to $291,000, which was pledged as collateral to secure a letter of credit used for a security deposit on the Company's New York facility. 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, 2001 and 2000, net unrealized gains on available-for-sale securities were approximately $45,000 and $12,000, 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 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 5 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-LIVED ASSETS In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company periodically reviews the carrying value of long-lived assets, primarily consisting of property and equipment, with estimated useful lives that range from 3 to 5 years, and goodwill and other intangible assets, with estimated useful lives that range from 1 to 4 years, to determine whether there are any indications of impairment losses. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of acquired businesses. Impairment losses, if any, are recorded when the expected undiscounted future operating cash flows derived from such assets are less than their carrying value. Beginning in 2002, the methodology for assessing potential impairments of intangibles will change based on new accounting rules issued by the FASB. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. 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 accumulated other comprehensive income (loss) in the statements of stockholders' equity. Gains and losses on foreign currency transactions for 2001, 2000 and 1999 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. 42 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) CONCENTRATION OF RISK The Company is subject to concentration of credit risk and interest rate risk related to cash, 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, 2001, and periodically from 1999 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 and warrants are excluded from the computation when their effect is antidilutive. COMPREHENSIVE LOSS In accordance with SFAS No. 130, "Reporting Comprehensive Income," all components of comprehensive income (loss), 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). RECENT ACCOUNTING PRONOUNCEMENTS In July 2001 the FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The provisions of each statement, which apply to goodwill and intangible assets acquired prior to July 1, 2001, will be adopted by the Company on January 1, 2002. The Company will reclassify an assembled workforce intangible asset with an unamortized balance of $1,767,000 into goodwill at the date of adoption. This will result in approximately $33,042,000 of goodwill and $2,361,000 of other intangible assets commencing on January 1, 2002. The Company will test goodwill for impairment using the two-step approach prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The Company anticipates it will complete its initial impairment test for the remaining goodwill balance as of January 1, 2002 in the first half of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in 2002. The Company has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The statement is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of APB Opinion No. 30, "Reporting the Results of Operations." This statement provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an 43 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. This statement also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The provisions of this statement are not expected to have a material impact on the Company's financial statements. 3. DISCONTINUED OPERATIONS In December 1999, the Board of Directors of the Company approved a plan to focus exclusively on its digital marketing technologies and services and to correspondingly divest itself of 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. 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 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. The Company also recorded an adjustment to net loss on disposal of discontinued operations of $1,122,000 during the year ended December 31, 2001, as a result of changes in estimates related to assets and liabilities of the discontinued business. Changes in estimates will be accounted for prospectively and included in net income (loss) from discontinued operations. 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 -------- -------- Net revenues ..................... $ 5,275 $ 33,079 Cost of revenues ................. 1,066 6,339 -------- -------- Gross profit ................... 4,209 26,740 Operating expenses: Sales and marketing ............ 3,045 25,022 Research and development ....... 3,743 13,691 General and administrative ..... 749 4,758 Costs associated with mergers, acquisitions and restructurings. -- -- -------- -------- Total operating expenses 7,537 43,471 -------- -------- Loss before gain on sale of assets (3,328) (16,731) Gain on sale of assets ........... -- 1,920 -------- -------- Loss from discontinued operations $ (3,328) $(14,811) ======== ========
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 44 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) $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. The net assets related to discontinued operations included in the accompanying consolidated balance sheets consist of the following (in thousands):
DECEMBER 31, --------------- 2001 2000 ------ ------ Current assets related to discontinued operations: Notes receivable ........................ $ -- $4,000 Accounts receivable, net ................ 114 1,581 Prepaid expenses and other current assets 27 81 ------ ------ Current assets related to discontinued operations .............................. $ 141 $5,662 ====== ====== Non-current assets related to discontinued operations: Other assets ............................ -- 114 ------ ------ Non-current assets related to discontinued operations .............................. $ -- $ 114 ====== ====== Current liabilities related to discontinued operations: Accounts payable ........................ $ 249 $ 303 Accrued expenses ........................ 97 312 ------ ------ Current liabilities related to discontinued operations .............................. $ 346 $ 615 ====== ======
4. COMPREHENSIVE LOSS Total comprehensive loss consisted of the following (in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- -------- -------- Net loss ....................................... $(52,370) $(55,956) $(50,654) Foreign currency translation adjustment ........ (27) 137 (9) Unrealized gain (loss) on marketable securities 33 81 (80) -------- -------- -------- Comprehensive loss ............................. $(52,364) $(55,738) $(50,743) ======== ======== ========
5. ACQUISITIONS 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. 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 45 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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 AOL for cash consideration totaling $10,000,000. Prior to the merger of the Company and Metastream, each share of Series A Convertible Preferred Stock was exchanged by the Company, into a total of 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 for the year ended December 31, 2000 related to the difference between the fair market 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 for cash consideration totaling $10,000,000. Prior to the merger of the Company and Metastream, each share of Series B Convertible Preferred Stock was exchanged by the Company, into a total of 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 for the year ended December 31, 2000 related to the difference between the fair market 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 in November 2000. 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 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. 46 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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 (the "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, 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 is being amortized over four years. Amortization expense related to the acquisitions of minority interest totaled $10,723,000 and $894,000 for the years ended December 31, 2001 and 2000, respectively. Subsequent to the acquisitions of minority interest, the Company merged with Metastream. 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 consisted 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 March 8, 2002. On April 19, 2001, the Company entered into an agreement with Computer Associates regarding, among other things, the waiver of transfer restrictions applicable to shares received by Computer Associates under the Exchange Agreement to enable Computer Associates to sell 1,000,000 shares of Viewpoint common stock to a third party in a private transaction. The Company agreed to register the 1,000,000 shares under the Securities Act of 1933. Under the agreement entered into on April 19, 2001, Computer Associates agreed to accept newly-issued shares of Viewpoint common stock having a value of $4,000,000, in partial repayment of a 47 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) promissory note due June 8, 2001 and issued by the Company in connection with its acquisition of all of the outstanding capital stock of Viewpoint Digital. On May 9, 2001, the Company and Computer Associates entered into a subsequent agreement under which, among other things: - The Company agreed to waive transfer restrictions applicable to an additional 2,400,000 unregistered shares of the Company's common stock received by Computer Associates in accordance with the Exchange Agreement to enable Computer Associates to transfer the shares to third parties in private transactions; - The Company agreed to register the shares under the Securities Act of 1933; and - Computer Associates agreed to accept, at the Company's election, either cash or newly-issued, unregistered shares of Viewpoint common stock at an issue price of $4.00 per share in repayment of (a) any additional amounts due under the promissory note due June 8, 2001, (b) $100,000 due under the agreement entered into on April 19, 2001, and (c) the first $8,943,000 of the $15,000,000 contingent promissory note due April 30, 2002, which amount will be determined by the achievement of certain levels of future operating results and employee retention. Pursuant to the April 19, 2001 and May 9, 2001 agreements, the Company registered 3,400,000 shares of the Company's common stock under the Securities Act of 1933. The amount due Computer Associates under the promissory note due June 8, 2001, and the agreement dated April 19, 2001, is approximately $4,657,000. For repayment of the first $4,000,000, the number of common shares to be issued was calculated on the basis of the average closing price of Viewpoint common stock over the ten-day trading period ending on and including June 8, 2001. The number of shares to be issued to Computer Associates is 744,740. For repayment of the remaining $657,000, the Company has the option of paying cash or issuing unregistered shares of Viewpoint common stock valued at $4.00 per share. In connection with this promissory note, the Company recorded $4,753,000 of additional goodwill and due to related parties in its consolidated balance sheet based on the closing price of Viewpoint common stock on June 8, 2001. The purchase price including the first contingent promissory note due June 8, 2001, in excess of the value of tangible assets and liabilities assumed of $2,333,000, 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 $10,789,000 to goodwill. Goodwill and other intangibles, excluding in-process research and development, are amortized over their expected periods of benefit, which ranges from 1.5 to 4 years. Amortization expense of $6,730,000 and $1,980,000 was recorded for the years ended December 31, 2001 and 2000, respectively. 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. The following unaudited pro forma consolidated amounts give affect to the Viewpoint Digital acquisition 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. GOODWILL IMPAIRMENT CHARGE The Company assesses the impairment of long-lived assets periodically in accordance with the provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." During 2001, the Company performed impairment assessments on the goodwill and other intangibles recorded upon the acquisition of Viewpoint Digital and the 48 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) acquisition of Computer Associates' minority interest in Metastream. As a result of continuing poor economic conditions, which resulted in a decrease in estimated undiscounted future cash flows, the Company recorded a $7,925,000 goodwill impairment charge on the Viewpoint Digital goodwill during the fourth quarter of 2001. The charge was determined based upon the estimated discounted cash flows over the remaining useful life of the goodwill using a discount rate of 15%. The assumptions supporting the cash flows including the discount rate were determined using the Company's best estimates as of the date the impairment was recorded. 9. CONCURRENT TRANSACTIONS During the year ended December 31, 2001, the Company established a strategic relationship with one of its customers whereby the customer purchased licenses from the Company and the Company agreed to purchase publicly traded equities of the customer's parent. The Company also entered into a license agreement with another customer in exchange for the customer's mass distribution of the Viewpoint Media Player to an important target audience. The above transactions effectively include nonmonetary sales of our software for equity securities and services of our customers, and accordingly the Company used the fair market value of the equities and services received in determining the amount of revenues and expenses to record. Total revenues and expenses for the year ended December 31, 2001 were $429,000 and $264,000, respectively, related to these transactions. 10. MARKETABLE SECURITIES The cost and fair value of the Company's marketable securities portfolio as of December 31, 2001, by type of security, contractual maturity, and its classification in the balance sheet, is as follows (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN (LOSS) VALUE MATURITY -------- -------- -------- ------- -------- TYPE OF SECURITY: Money Market Funds ............. $ 4,486 $ -- $ -- $ 4,486 2002 U.S. Government Agencies ....... 9,760 15 (1) 9,774 2002 Equity Securities .............. 165 31 -- 196 2002 -------- -------- -------- ------- $ 14,411 $ 46 $ (1) $14,456 ======== ======== ======== ======= CLASSIFICATION IN BALANCE SHEET: Cash and Cash Equivalents ...... $ 8,345 $ -- $ -- $ 8,345 2002 Marketable Securities .......... 7,023 46 (1) 7,068 2002 -------- -------- ------- ------- 15,368 46 (1) 15,413 Less cash ...................... 957 -- -- 957 -------- -------- -------- ------- $ 14,411 $ 46 $ (1) $14,456 ======== ======== ======== =======
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 FAIR COST GAIN (LOSS) 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 ...... $ 13,320 $ -- $ -- $13,320 2001 Marketable Securities .......... 15,701 13 (1) 15,713 2001 -------- -------- -------- ------- 29,021 13 (1) 29,033 Less cash ...................... 256 -- -- 256 -------- -------- -------- ------- $ 28,765 $ 13 $ (1) $28,777 ======== ======== ======== =======
49 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
DECEMBER 31, ---------------- 2001 2000 ------ ------ Computer equipment and software.......... $3,935 $3,432 Office furniture and equipment........... 1,724 1,545 Leasehold improvements................... 1,551 1,405 Other.................................... 233 233 ------ ------ 7,443 6,615 Less accumulated depreciation and amortization........................... (2,781) (993) ------ ------ $4,662 $5,622 ====== ======
Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was approximately $1,804,000, $801,000 and $406,000, respectively. 12. RELATED PARTY TRANSACTIONS On May 31, 2001, the Company loaned $200,000 to an officer of the Company. The loan, which bears interest at 5.07% per annum, compounding annually, is secured solely by the officer's stock options in the Company and is non-recourse to the officer, unless the Company terminates the officer for cause. On April 2, 2001, the Company loaned $375,000 to an officer of the Company. The loan, which bears interest at 4.94% per annum, compounding annually, is secured solely by the officer's stock options in the Company and is non-recourse to the officer, unless the Company terminates the officer for cause or the officer resigns without good reason, in which case the loan will become fully recourse to the officer. 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 was a former executive of the Company. In addition, the Company loaned $2,000,000 to the former executive. The loan, which accrued interest semi-annually at 5.67% and was payable on January 15, 2001, was collateralized by shares of common stock of the Company owned by the former executive. The former executive defaulted on the loan and the Company took possession of the collateral on January 16, 2001. As a result, the Company recorded treasury stock based on the closing price of the Company's common stock on January 16, 2001. The former executive and the Company entered into a consulting agreement under which, among other things, the former executive agreed to pay the Company $520,000 in outstanding obligations under the loan. In July 2001, the Company received the $520,000 from the former executive. 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. The Company recorded a compensation charge of $2,322,000 during 2000 related to the forgiveness of the loan and the income taxes thereon. 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. The Company has commenced litigation to pursue recovery of the full loan amount, statutory interest accruing thereon since the date of default, as well as the cost of litigation. 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. During 2001 and 2000, the Company recorded revenues totaling $2,385,000 and $500,000 respectively, related to agreements, including reseller arrangements, with two stockholders who have representatives on the Company's Board of Directors. In March 1999, the Company recorded revenue from one of these related parties totaling $1,200,000, of which $950,000 was related to an 50 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) agreement granting the related party a license to 3D-related technologies, which date was prior to the related party becoming a stockholder of the Company. Accounts receivable relating to transactions entered into with these related parties was $1,129,000 and $250,000 as of December 31, 2001 and 2000, respectively. Deferred revenue relating to these transactions was $526,000 as of December 31, 2001. 13. EMPLOYEE BENEFIT PLANS 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 20% 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 $96,000, $91,000 and $118,000 to the 401(k) Plan during the years ended December 31, 2001, 2000 and 1999, respectively. STOCK OPTION PLANS 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, 2001, options to purchase an aggregate of 17,000 shares of common stock were outstanding under the 1994 Plan. At December 31, 2001, 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, 2001, options to purchase an aggregate of 8,319,000 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, 2001, an aggregate of 162,000 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, 2001, 90,000 options were outstanding under the 1995 Director Plan. At December 31, 2001, an aggregate of 30,000 shares of common stock were reserved for future issuance under the 1995 Director Plan. 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, 2001, options to purchase an aggregate of 1,972,000 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, 2001, an aggregate of 397,000 shares of common stock were reserved for future issuance under the 1996 Nonstatutory Plan. 51 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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. OPTIONS ISSUED UNDER STOCK OPTION PLANS The following summarizes activity in the Stock Option Plans for the years ended December 31, 1999, 2000, and 2001 (in thousands, except per share data):
OPTIONS OUTSTANDING OPTIONS ---------------------- AVAILABLE NUMBER WEIGHTED FOR OF AVERAGE GRANT SHARES EXERCISE PRICE ------- ------- -------------- 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 Reduction in shares reserved under plans (77) -- -- Granted -- exercise price equal to fair value ................................. (2,887) 2,887 4.42 Granted -- exercise price greater than fair value ............................ (572) 572 6.07 Granted -- exercise price less than fair value ................................. (26) 26 2.83 Exercised ............................... -- (1,656) 1.49 Canceled ................................ 1,566 (1,566) 4.18 ------- ------- -------- Options outstanding at December 31, 2001 .. 589 10,398 $ 3.79 ======= ======= ========
The following summarizes information about the Company's stock options outstanding at December 31, 2001 (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....... 2,911 7.26 $ 0.87 1,893 $ 0.87 $2.61 -- $3.88....... 2,129 9.15 3.37 502 2.67 $4.00 -- $4.47....... 2,325 7.95 4.37 984 4.35 $4.69 -- $6.13....... 2,369 7.79 5.33 766 5.15 $6.63 -- $25.13...... 664 6.73 10.48 460 11.43 ------ ------- -------- ----- -------- Total................ 10,398 7.89 $ 3.79 4,605 $ 3.58 ====== ======= ======== ===== ========
- ---------- (a) Average contractual remaining life 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, 2001 and 2000 accrued incentive compensation related to the options totaled, $545,000 and $546,000, respectively. 52 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following summarizes options exercisable at December 31, 2001, 2000 and 1999, (in thousands):
DECEMBER 31, ----------------------- 2001 2000 1999 ----- ---- ----- Options exercisable 4,605 4,478 3,592
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):
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 -- -- $ -- ====== ====== =====
DEFERRED COMPENSATION 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 $26,024,000 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 for $12,011,000 and $6,081,000 for the years ended December 31, 2000 and 1999, respectively, which represented stock-based compensation expense related to Metastream stock options. In connection with the grant and cancellation of stock options to certain employees and non-employee directors subsequent to the merger of the Company and Metastream, the Company recorded total deferred compensation of approximately $(4,975,000) and $(1,818,000) for the years ended December 31, 2001 and 2000, respectively. This deferred compensation represented the difference between the fair market value of Company common stock and the exercise price of these options at the date of grant and was offset by reductions for cancellations during each period. Stock based compensation expense of $6,341,000 and $330,000 was recognized during the years ended December 31, 2001, and 2000, respectively. In connection with the issuance of stock options to non-employees for services performed, the Company recorded stock based compensation expense of $832,000 during the year ended December 31, 2001. The stock based compensation recorded for non-employees represents the fair value of options using a Black-Scholes option pricing model. The Company measures and records the fair value of options as services are performed on a monthly basis. 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: 53 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ---- ---- ---- Risk-free interest rate ......... 4.6% 6.0% 5.8% Dividend yield .................. -- -- -- Volatility factor ............... 1.00 1.00 .90 Weighted average expected life in years ...................... 4.5 4.5 4.5
The following summarizes the weighted average fair value of options granted during the years ended December 31, 2001, 2000 and 1999:
YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- -------- -------- Exercise price equal to fair value ... $ 3.28 $ 4.68 $ 4.04 Exercise price greater than fair value 4.30 -- -- Exercise price less than fair value .. 3.30 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, 2001: Net loss applicable to common shareholders $ (52,370) $ (55,380) Net loss per common share ................ (1.34) (1.42) Year Ended December 31, 2000: Net loss applicable to common shareholders $ (56,394) $ (61,888) Net loss per common share ................ (1.96) (2.16) Year Ended December 31, 1999: Net loss applicable to common shareholders $ (50,654) $ (53,405) Net loss per common share ................ (2.06) (2.17)
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. 14. INCOME TAXES The components of the provision for income taxes for the years ended December 31, 2001, 2000 and 1999 are as follows (in thousands):
YEARS ENDED DECEMBER 31, -------------------------- 2001 2000 1999 ------ ------- ------- Current: Federal .............. $ -- $ -- $ (435) State ................ -- -- 3 Foreign .............. -- -- -- ------ ------- ------- Total current -- -- (432) Deferred: .............. -- -- Federal .............. -- -- 3,971 State ................ -- -- 1,184 Foreign .............. -- -- 758 ------ ------- ------- Total deferred -- -- 5,913 ------ ------- ------- $ -- $ -- $ 5,481 ====== ======= =======
The differences between the statutory rate and the Company's effective income tax rate are as follows:
YEARS ENDED DECEMBER 31, -------------------------- 2001 2000 1999 ------- ------ ------ Federal tax benefit at the statutory rate ........... (34.00)% (34.00)% (34.00)% State income taxes, net of Federal income tax benefit (3.17) (3.03) (4.40) Other ............................................... 1.75 4.35 3.70 Change in valuation reserve ......................... 35.42 32.68 50.30 ------- ----- ------ Effective income tax rate ........................... -- % -- % 15.60% ======= ===== ======
54 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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 and tax credit carryforwards. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
DECEMBER 31, -------------------- 2001 2000 -------- -------- Deferred tax assets: Balance sheet reserves ......... $ 1,083 $ 937 Accrued expenses ............... 542 230 Tax credit carryforwards ....... 3,247 3,247 Net operating loss carryforwards 59,495 41,626 -------- -------- 64,367 46,040 Valuation allowance ............ (60,593) (42,044) -------- -------- Net deferred tax assets ..... 3,774 3,996 Net deferred tax liabilities (3,774) (3,996) -------- -------- Net deferred taxes .......... $ -- $ -- ======== ========
The valuation allowance for deferred taxes increased by approximately $18,549,000 and $18,433,000 during 2001 and 2000, 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, 2001, the Company has net operating loss and tax credit carryforwards of approximately $147,302,000 and $3,247,000, respectively, for federal income tax purposes, which begin to expire 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, 2001, 2000, 1999 and 1998. The Company also has net operating loss and tax credit carryforwards for state income tax purposes, which begin to expire in 2011. The Company's state net operating loss carryforward primarily relates to the net losses incurred by the Company during the years ended December 31, 2001, 2000, 1999 and 1998. Additionally, the Company has net operating loss carryforwards of approximately $1,225,000 for foreign income tax purposes, which begin to expire in 2006. 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. 15. NET LOSS PER COMMON 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, 2001, 2000 and 1999 (in thousands, except per share amounts):
LOSS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT --------- ----------- -------- Year Ended December 31, 2001: Basic EPS .................................... $(52,370) 39,077 $ (1.34) Effect of dilutive securities -- stock options -- -- -- -------- -------- -------- Diluted EPS .................................. $(52,370) 39,077 $ (1.34) ======== ======== ======== 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) ======== ======== ========
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 and warrants totaling 8,601,000, 9,814,000 and 5,355,000 for the years ended December 31, 2001, 2000, and 1999 respectively, are excluded from the computation of diluted net loss per common share because their effect was antidilutive. 55 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Basic and diluted net loss per common share for the year ended December 31, 2001 include the effect of the 744,740 shares to be issued to Computer Associates, as if the shares were issued and outstanding on June 8, 2001. 16. 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 in 2000, the Company also leases office space in Salt Lake City, Utah and Los Angeles, California, with lease terms through April of 2010 and December of 2004, respectively. The Company also leases certain equipment and a vehicle for an executive of the Company with lease terms of up to three years. Rent expense for office space, equipment, and the executive's vehicle totaled approximately $2,202,000, $2,259,000 and $2,028,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Sublease income totaled approximately $177,000 and $382,000 for the years ended December 31, 2000, and 1999, respectively. The Company did not have any sublease income for the year ended December 31, 2001. Future minimum lease payments relating to continuing operations under non-cancelable operating leases for each twelve-month period subsequent to December 31, 2001 are as follows (in thousands): 2002...... $1,061 2003...... 1,032 2004...... 1,046 2005...... 848 2006...... 891 Thereafter 2,511 -------- $7,389
17. CONTINGENCIES The Company is engaged in certain legal actions arising in the ordinary course of business. The Company believes it has adequate legal defenses in legal actions in which it is the defendant and believes that the ultimate outcome of such actions will not have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. 18. 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 primarily located 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, 2001, 2000 and 1999 are as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ---- ---- ---- Customer A 11% --% --% Customer B --% 14% 39% Customer C --% 26% --% Customer D --% --% 49%
56 VIEWPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Customers whose accounts receivable represent greater than 10 percent of the Company's consolidated net accounts receivable from continuing operations at December 31, 2001 and 2000 are as follows:
DECEMBER 31, -------------- 2001 2000 ---- ---- Customer B.. 28% 12% Customer C.. --% 13% Customer E.. --% 14%
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Summarized quarterly financial information for the years 2001 and 2000, are as follows (in thousands, except per share amounts):
QUARTER ENDED ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- -------- ----------- Fiscal year 2001: Net revenues ................................. $ 2,791 $ 2,751 $ 3,967 $ 4,499 Net loss from continuing operations .......... (12,049) (12,532) (11,539) (17,372) Net income from discontinued operations ...... -- 730 -- 392 Net loss applicable to common shareholders ... (12,049) (11,802) (11,539) (16,980) Net loss per share (diluted) ................. (0.32) (0.31) (0.29) (0.42) 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)
57 VIEWPOINT CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND CHARGED TO END OF DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD - ----------- --------- -------- ----- ---------- ------ ALLOWANCE FOR ACCOUNTS RECEIVABLE: Year Ended December 31, 2001 ..... $ 796 $ 544 $ 126(1) $ 480 $ 986 Year Ended December 31, 2000 ..... -- 40 756(1) -- 796 Year Ended December 31, 1999 ..... -- -- -- -- -- ALLOWANCE FOR NOTES RECEIVABLE: Year Ended December 31, 2001 ..... $ 2,192 $ (665) $ -- $ 777 $ 750 Year Ended December 31, 2000 ..... -- 2,192 -- -- 2,192 Year Ended December 31, 1999 ..... -- -- -- -- -- ALLOWANCES RELATED TO DISCONTINUED OPERATIONS: Year Ended December 31, 2001 ..... $ 2,416 $ -- $ -- $ 1,821 $ 595 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 VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS FROM CONTINUING OPERATIONS: Year Ended December 31, 2001 ..... $ 42,044 $ 18,549 $ -- $ -- $ 60,593 Year Ended December 31, 2000 ..... 23,611 18,433 -- -- 42,044 Year Ended December 31, 1999 ..... 6,102 17,509 -- -- 23,611
- ---------- (1) Reserves established in connection with the acquisition of Viewpoint Digital. (2) Reserves established in connection with the disposal of discontinued operations in December 1999. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 58 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information regarding our Directors and compliance with Section 16(a) of the Securities Exchange Act of 1934, we direct you to the sections entitled "Proposal 1 - Election of Directors," and "Section 16(a) Beneficial Ownership Reporting Compliance," respectively, in the Proxy Statement we will deliver to our stockholders in connection with our 2002 Annual Meeting of Stockholders. Information regarding our Executive Officers is contained in Item 1 - Business of this report. We are incorporating the information contained in those sections of our Proxy Statement here by reference. ITEM 11. EXECUTIVE COMPENSATION For information regarding our Executive Compensation, we direct you to the section entitled "Executive Compensation" in the Proxy Statement we will deliver to our stockholders in connection with our 2002 Annual Meeting of Stockholders. We are incorporating the information contained in that section of our Proxy Statement here by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT You will find this information in the section captioned "Security Ownership of Certain Beneficial Owners and Management," which will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2002 Annual Meeting of Stockholders. We are incorporating the information contained in that section of our Proxy Statement here by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS You will find this information in the section captioned " Certain Relationships and Related Transactions," which will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2002 Annual Meeting of Stockholders. We are incorporating the information contained in that section of our Proxy Statement here by reference. 59 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. See Index to Financial Statements at Item 8 on page 31 of this Report. 2. Financial Statement Schedule. See Index to Financial Statements at Item 8 on page 31 of this Report. 3. 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)) 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 60 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 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)) 10.2 1995 Stock Plan, as amended on November 28, 2000 (incorporated by reference from Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 filed on March 30, 2001 (File No. 000-27168) 10.3 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)) 10.4 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)) 10.5 Letter Agreement between the Registrant and Christopher Gentile, dated June 25, 1999 (incorporated by reference from Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 filed on March 30, 2001 (File No. 000-27168)) 10.6 Letter Agreement between the Registrant and Paul J. Kadin, dated February 17, 2000 (incorporated by reference from Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 filed on March 30, 2001 (File No. 000-27168)) 10.7 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)) 10.8 Letter Agreement between the Registrant and Jeffrey J. Kaplan, dated January 29, 2001 (incorporated by reference from Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 filed on March 30, 2001 (File No. 000-27168)) 10.9 Employment Agreement between the Registrant and Robert E. Rice dated December 17, 2001 Other Material Contracts 10.10 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)) 10.11 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)) 10.12 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)) 10.13 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 61 (File No. 000-27168)) 10.14 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 (incorporated by reference from Exhibit 21.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000, filed on March 30, 2001 (File No. 000-27168)) 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 None. (c) Exhibits See Item 14(a)(3) above. 62 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 28th day of March, 2002. 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 Anthony Pane 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. 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 28, 2002 ------------------------------------- Chief Executive Officer Robert E. Rice (Principal Executive Officer) /s/ ANTHONY L. PANE Senior Vice President and March 28, 2002 ------------------------------------- Chief Financial Officer Anthony L. Pane (Principal Financial and Accounting Officer) /s/ THOMAS BENNETT Director March 28, 2002 ------------------------------------- Thomas Bennett /s/ BRUCE R. CHIZEN Director March 28, 2002 ------------------------------------- Bruce R. Chizen /s/ SAMUEL H. JONES, JR. Director March 28, 2002 ------------------------------------- Samuel H. Jones, Jr. Director ------------------------------------- Lennert J. Leader
63 EX-10.9 3 y58918ex10-9.txt EMPLOYMENT AGREEMENT EXHIBIT 10.9 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement"), dated as of December 17, 2001, is entered into between Viewpoint Corporation, a Delaware Corporation with its principal office at 498 Seventh Avenue, New York, N.Y. 10018 ("Viewpoint"), and Robert E. Rice ("Executive"). WHEREAS, Executive currently serves as President, Chief Executive Officer and Chairman of the Board of Directors of Viewpoint and has, since December 31, 1996, served as an officer of Viewpoint; WHEREAS, Executive and Viewpoint are parties to an employment agreement that expires on December 31, 2001; and WHEREAS, Viewpoint desires to retain Executive's services as Chief Executive Officer and President, and Executive desires to be retained by Viewpoint to serve as Chief Executive Officer and President of Viewpoint. NOW THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged by the parties, the parties hereto hereby agrees as follows: 1. EMPLOYMENT; TERM. Subject to the terms and conditions of this Agreement, Viewpoint hereby employs Executive, and Executive hereby accepts employment with Viewpoint, as President and Chief Executive Officer. Executive shall devote his full time and attention to the business and affairs of Viewpoint and its subsidiaries, and shall use his best efforts, skills and abilities to promote the Company's interests and will perform these duties faithfully and competently in such manner as Viewpoint's Board of Directors (the "Board") may from time to time reasonably direct. Executive's principal place of employment shall be at Viewpoint's headquarters in New York, New York, or at such other location as shall be mutually acceptable to the Executive and the Board. Executive's employment hereunder shall commence on January 1, 2002 and terminate on December 31, 2003, unless terminated earlier pursuant to Section 3 below (the "Term of Employment"). 2. COMPENSATION AND BENEFITS. Viewpoint shall pay the following compensation and provide the following benefits to Executive during the Term of Employment: (a) Base Salary. Executive shall receive a base salary of $330,000 per annum ("Base Salary"), payable in approximately equal installments in accordance with the customary payroll practices of Viewpoint. If the rate of base salary per annum paid to Executive is increased during the Term of Employment, such increased rate shall thereafter constitute the Base Salary for all purposes of this Agreement. (b) Options to Acquire Viewpoint Common Stock. (i) Annualized Option Grant. Viewpoint will make a one (1) time grant to Executive of an option to acquire 200,000 shares of Viewpoint common stock at an exercise price equal to the closing price of Viewpoint's common stock at the close of business on the date of grant (the "Annualized Option"). Twenty-five percent (25%) of the shares subject to the Annualized Option Grant will vest on the first (1st) anniversary of the date of grant and one-thirty-sixth (1/36th) of the remaining shares will vest monthly thereafter. (ii) Performance-Based Option Grant. Viewpoint will grant to Executive an option to acquire 1,000,000 shares of Viewpoint common stock at an exercise price equal to the closing price of Viewpoint's common stock at the close of business on the date of grant (the "Performance-Based Option"), the vesting of which shall be subject to the following performance-based criteria: (A) Financial Performance. Six and three-tenths percent (6.3%) of the shares subject to the Performance-Based Option will vest at the end of each fiscal quarter in which Viewpoint achieves the financial goals established by the Board in connection with Viewpoint's business plan. If Viewpoint does not achieve such 1 financial goals for any particular fiscal quarter(s), six and three-tenths percent (6.3%) of the shares subject to the Performance-Based Option will not be subject to further vesting, and Executive will have no right to exercise the Performance-Based Option with respect to such unvested shares, except as described in the following subparagraph. (B) Strategic Performance. If there is a Change in Control, an unvested portion of the Performance-Based Option (including those shares that did not vest at the end of fiscal quarters in which Viewpoint did not achieve its financial goals as described in the preceding subparagraph) will vest in accordance with the following sentence. Twenty-five percent (25%) of the unvested portion will vest if the value of the consideration received by Viewpoint in the Change in Control transaction is equivalent to the exercise price or greater up to a value equal to twice the exercise price, fifty percent (50%) of the unvested portion will vest if the value of the consideration received by Viewpoint in the Change in Control transaction is the equivalent of twice the exercise price or greater up to a value equal to three times the exercise price; seventy five percent (75%) of the unvested portion will vest if the value of the consideration received by Viewpoint in the Change in Control transaction is the equivalent of three times the exercise price or greater up to four times the exercise price; and one hundred percent (100%) of the unvested portion will vest if the consideration received by Viewpoint in the Change in Control transaction is the equivalent of four times the exercise price or greater. (iii) Application of Employee Stock Option Plan. Unless otherwise provided herein, Executive's rights with respect to the Annualized Option and the Performance-Based Option shall be determined in accordance with the terms of the Viewpoint Stock Option Plan and by applicable law. (c) Life Insurance. During the Term of Employment, Viewpoint will reimburse Executive for the cost of acquiring a term life insurance policy with a death benefit of $5,000,000 payable to Executive's beneficiaries. (d) Automobile. Viewpoint will provide Executive with the use of an automobile, leased in Viewpoint's name, primarily for corporate purposes, throughout the Term of Employment. (e) Benefit Plan; Vacation. Executive shall be entitled to participate in all benefit plans maintained for Viewpoint employees and shall be entitled to four (4) weeks of paid vacation per annum. 3. TERMINATION; SEVERANCE. (a) Termination Without Cause or With Good Reason. If Viewpoint terminates Executive's employment without Cause (as defined below), or if Executive terminates his employment with Viewpoint for Good Reason (as defined below), Viewpoint will pay to Executive an amount equal to two (2) times Executive's then current Base Salary and the unvested portion of all options (other than the Performance-Based Option) granted to Executive at any time before such termination will immediately vest and will remain exercisable by Executive for six (6) months following termination of employment. (b) Termination With Cause or Without Good Reason. If Viewpoint terminates Executive's employment with Cause, or if Executive terminates his employment with Viewpoint without Good Reason, Viewpoint will have no obligation to make any payments to Executive under this Agreement, and the unvested portion of any options granted to Executive at any time before such termination will not vest and will not be exercisable at any time by Executive. (c) Non-Duplication of Benefits. In the event of the termination of Executive's employment, his rights under any benefit plans in which he is a participant shall be determined in accordance with the terms of the plans and by applicable law. Notwithstanding any other provision in this Agreement, nothing in this Agreement shall result in a duplication of payments or benefits provided under this Section 3, nor shall anything in this Agreement require Viewpoint to make any payment or to provide any benefit to Executive that Viewpoint is otherwise required to provide under any other contract, agreement or arrangement. (d) General Release. No payments or benefits payable to Executive upon the termination of his employment pursuant to this Section 3 shall be made to Executive unless and until he executes a general release in a form satisfactory to Viewpoint and such general release becomes effective pursuant to its terms. 2 4. DEFINITIONS. In addition to certain terms defined elsewhere in this Agreement, the following terms will have the following respective meanings: (a) "Cause" means the occurrence of any of the following: (i) the willful and continuing refusal of Executive to follow the lawful directives of the Board, (ii) conduct that is intentional and known by Executive to be harmful to Viewpoint's best interest, or (iii) Executive's conviction of any felony or any crime involving dishonesty. (b) "Good Reason" means the occurrence of any of the following: (i) any material breach by Viewpoint of its obligations under this Agreement, (ii) a significant diminution of Executive's duties as set forth in Section 1 without Executive's consent, or (iii) a failure by Viewpoint to obtain a written agreement from any successor or assign of Viewpoint to assume the obligations under this Agreement upon a Change in Control. (c) "Change in Control of Viewpoint" 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 Viewpoint 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 Viewpoint's outstanding voting securities entitled to vote on a regular basis for a majority of the members of the Board; (ii) the consummation of any merger or 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 Viewpoint, other than a transaction immediately following which the shareholders of Viewpoint who owned shares immediately prior to the transaction continue to own, by virtue of their prior ownership of Company shares, at least fifty percent (50%) of the voting power, directly or indirectly, of the surviving corporation in any such merger or business combination; or (iii) the consummation of a plan of complete liquidation of Viewpoint. 5. MISCELLANEOUS. (a) Non-Assignability. Neither this Agreement nor any right or interest hereunder shall be assignable by Executive, his beneficiaries, or legal representatives without Viewpoint's prior written consent. (b) Binding Effect. Without limiting or diminishing the effect of Section 5(a) hereof, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and assigns. (c) Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. (d) Entire Agreement; Modifications. This Agreement constitutes the entire and final expression of the agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and written, between the parties hereto with respect to the subject matter hereof. This Agreement may be modified or amended only by an instrument in writing signed by both parties hereto. 3 (e) Relevant Law. This Agreement shall be construed and enforced in accordance with the internal laws of the State of New York, without regard to the conflicts of law principles thereof. (f) Counterparts. 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. ACKNOWLEDGEMENT. Executive represents and acknowledges the following: (a) He has carefully read this Agreement in its entirety; (b) He understands the terms and conditions contained herein; (c) He has had the opportunity to review this Agreement with legal counsel of his own choosing and has not relied on any statements made by Viewpoint or its legal counsel as to the meaning of any term or condition contained herein or in deciding whether to enter into this Agreement; and (d) He is entering into this Agreement knowingly and voluntarily. IN WITNESS WHEREOF, Executive and the authorized representative of the Board of Viewpoint execute and enter into this Agreement as of the date first above written. Robert E. Rice VIEWPOINT CORPORATION /s/ Robert E. Rice By: /s/ Samuel H. Jones - ------------------ --------------------------------------- Samuel H. Jones Chairman, Compensation Committee of the Board of Directors 4 EX-23.1 4 y58918ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-64176) and Form S-8 (No.'s 333-3070, 333-17209, 333-20939, 333-26557, 333-28403, 333-67233 and 333-86817) of Viewpoint Corporation of our report dated February 8, 2002 relating to the consolidated financial statements and financial statement schedule which is incorporated in this Annual Report on Form 10-K. New York, New York March 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----