-----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, DL/gZboyUAkArtHoRAe/qgpWtmk1YuaLrguY0CuQK1Egu0I3sparYo2AsuPC9WyR KaSRFC8vLg5R5zYrw1FdDQ== 0000950123-03-007601.txt : 20030627 0000950123-03-007601.hdr.sgml : 20030627 20030627151401 ACCESSION NUMBER: 0000950123-03-007601 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030627 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27168 FILM NUMBER: 03760942 BUSINESS ADDRESS: STREET 1: 498 SEVENTH AVENUE STREET 2: SUITE 1810 CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 212-201-0800 MAIL ADDRESS: STREET 1: 498 SEVENTH AVENUE STREET 2: SUITE 1810 CITY: NEW YORK STATE: NY ZIP: 10018 FORMER COMPANY: FORMER CONFORMED NAME: METACREATIONS CORP DATE OF NAME CHANGE: 19970529 FORMER COMPANY: FORMER CONFORMED NAME: HSC SOFTWARE CORP DATE OF NAME CHANGE: 19951019 10-K/A 1 y84969a3e10vkza.htm AMENDMENT NO. 3 TO FORM 10-K AMENDMENT NO. 3 TO FORM 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K/A

Amendment No. 3
     
(Mark One)
   
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2002
 
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
For the transition period from           to

Commission file number: 0-27168


Viewpoint Corporation

(Exact name of registrant as specified in its charter)
     
Delaware   95-4102687
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

498 Seventh Avenue, Suite 1810, New York, NY 10018

(Address of principal executive offices and 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 þ          No o

      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.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Act)     Yes þ          No o

         
Aggregate market value of voting stock held by non-affiliates of the registrant as of June 28, 2002
    197,477,449  
Number of shares of common stock outstanding as of April 28, 2003
    45,985,507  




PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
SIGNATURES
SECOND AMENDED AND RESTATED LICENSE AGREEMENT
AGREEMENT FOR CONSULTING SERVICES
SCHEDULE 1 TO AGREEMENT
CONSENT OF PRICEWATERHOUSECOOPERS LLP
CONSENT OF IPSOS-NPD
CERTIFICATION
CERTIFICATION


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TABLE OF CONTENTS

             
Page

PART I
Item 1.
  Business     2  
Item 2.
  Properties     9  
Item 3.
  Legal Proceedings     9  
Item 4.
  Submission of Matters to a Vote of Security Holders     9  
PART II
Item 5.
  Market for Registrant’s Common Stock and Related Stockholder Matters     9  
Item 6.
  Selected Financial Data     11  
Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     13  
Item 7A.
  Quantitative and Qualitative Disclosures About Market Risk     36  
Item 8.
  Financial Statements and Supplementary Data     36  
Item 9.
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     73  
PART III
Item 10.
  Directors and Executive Officers of the Registrant     73  
Item 11.
  Executive Compensation     76  
Item 12.
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     80  
Item 13.
  Certain Relationships and Related Transactions     82  
Item 14.
  Controls and Procedures     83  
PART IV
Item 15.
  Exhibits, Financial Statement Schedules, and Reports on Form 8-K     84  
    Signatures     88  
    Certifications     89  

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PART I

      In addition to historical information, this Annual Report on Form 10-K/A contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from the results implied by the forward-looking statements. 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 2003. 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/A. 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

General

      Viewpoint Corporation provides interactive media technologies and digital content creation services for website marketing, online advertising, and embedded applications. Our graphics operating system has been licensed by Fortune 500 companies and others for use in online, offline and embedded applications serving a wide variety of needs, including: interactive marketing campaigns, rich media advertising and product presentations, and business process visualizations.

      Until December 1999, the Company (which was then known as MetaCreations) was primarily engaged in the development, marketing, and sales of prepackaged software graphics products. Its principal products were computer graphics “painting” tools, photo editing, and 3D graphics software. With its acquisition of Real Time Geometry Corporation in December 1996, the Company became involved, on a limited basis, in the development of technologies designed to make practical the efficient display and deployment of interactive media on the Internet. In June 1999, the Company increased its commitment to the development of interactive Internet technologies and formed Metastream.com Corporation 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. In September 2000, the Company acquired Viewpoint Digital, Inc., a company primarily involved in the licensing of a catalog of three-dimensional digital models and providing digital content creation services. In November 2000, the Company changed its name to Viewpoint Corporation and changed its ticker symbol from MCRE to VWPT.

Viewpoint Experience Technology and the Viewpoint Media Player

      Our technology, which we refer to as Viewpoint Experience Technology, or VET, enables Websites and other media publishers to integrate many interactive graphics media technologies onto regular Web pages or other digital formats. Available media types include: photo-realistic 3D, high-resolution two-dimensional images, text annotations and animations, Macromedia®FlashTM-compatible vector graphics animations, object movies, immersive surround pictures, and digital audio and video. Interactive digital media can add dimension, contextual information, animation, realistic color, shadows and real-time reflections, movement, and robust interactivity to otherwise static digital objects. Our technology enables websites to publish content that mixes the narrative drive of more traditional media with the interaction of the Web. End-users can be invited to rotate and re-position objects, view extended, narrowband-friendly presentations, and configure colors and patterns.

      VET involves the publication of digital content created in the Viewpoint format from a web server or other digital format and the playback of that content by Viewpoint Media Player, our software that operates on the end-user’s computer, i.e., on the “client-side”.

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      Viewpoint’s client-side software exploits the abundant processing power available on the end user’s computer to perform most of the functions of displaying and processing information so that a server need only transmit relatively small files to communicate complex messages. For example, in the absence of client-side software, each end-user interaction with a digital three-dimensional model served from a website would involve a separate communication between the end-user’s computer and the server. In contrast, Viewpoint’s client-side software can process instructions served by a web server to instantaneously assemble a digital three-dimensional model on the end-user’s computer. Once the model is displayed on the end-user’s screen, the user can interact with the model without communicating further with the web server. As computer processing capacities on personal computers 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.

      Unlike many client-server systems, Viewpoint’s technology does not involve special server software.

      Content that is interpreted by Viewpoint Media Player can be created with most graphics industry standard prepackaged software products, such as Adobe’s Photoshop and Autodesk’s 3D Studio Max products. We also make software applications for creating content in the Viewpoint format available for free from our website.

      Viewpoint Media Player software is automatically updateable. As we develop and release new features and functionality of the software, we update an end-user’s existing version when the end user next views a web page which contains content in the Viewpoint format. We do not “ship” new versions of Viewpoint Media Player in the same way that traditional software manufacturers do and, therefore, we avoid the costs and delays associated with the typical software product cycle. Moreover, the ability to update an end user’s copy of a Viewpoint Media Player as it encounters content in the Viewpoint format assures content publishers that their content can exhibit the latest features and improvements without requiring end-users to endure a lengthy download process.

      Like Microsoft’s .NET platform, Viewpoint’s technology employs extensible mark-up language (or “XML”), an increasingly popular language for describing data and enabling it to communicate with other forms of data. Since content in the Viewpoint format is able to instantaneously exchange data with other platforms and programming languages, deep integration between interactive media in our format and other data systems can be achieved.

      Our technology is not dependent on any particular platform; it can be deployed to provide efficient visualization techniques not only on personal computers but also on cable television set-top boxes, in personal digital assistant devices, within and beyond browser environments, and on compact disks, and other media formats. As a method of providing efficient visual communication, we believe the commercial applications of VET are virtually unlimited. However, we are primarily focused at this time on licensing our technology for use in enhancing website offerings. Recently we have begun to focus on licensing our technology for online advertising purposes. We also market our technology, albeit to a lesser extent, for use in custom developed applications.

Viewpoint Professional Services

      We provide 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 VET as well as a spectrum of tools and other technologies to create enhanced rich media solutions for our clients’ particular purposes, whether over the Web, intranet systems or offline media applications. Our professional services groups provide the support our clients need to implement the rich media content, to fully utilize the enhanced softwares and/or to maximize the branding potential of the advertising opportunity.

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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 pre-packaged software products to Internet professionals — a relatively small market — we endeavor 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. Moreover, as described below, we generally license the use of our technology in a way that encourages repetitive payments, instead of the one-time fees associated with prepackaged software tools sales.

      We earn fees by licensing the right to publish or “broadcast” content that can be read by Viewpoint Media Player. We issue to our customers keys that enable their websites to display content in the Viewpoint format. We offer these keys through a variety of broadcast license arrangements tailored to the specific needs of the client. Examples of typical arrangements include:

  •  Licenses which are time-based and generally limited to specific Web site addresses or specific content;
 
  •  Licenses which are perpetual and generally limited to specific types or amounts of content;
 
  •  Licenses which permit a “narrowcast” only to a local area network or intranet; and
 
  •  Licenses that permit the client to distribute content by means of CDs, DVDs and other portable storage media.

      We believe 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.

      To view content in the Viewpoint format, an end-user must have Viewpoint Media Player software installed on their computer. Like most makers of Internet-browsing plug-in software, we do not charge end-users to download or use Viewpoint Media Player. If content in the Viewpoint format is displayed from a web server to an end-user who does not have Viewpoint Media Player installed, the end-user will be afforded the opportunity to download the player. Once the player is installed, the end-user can view and interact with the content.

      Many end-users browsing through the Internet are reluctant to download software, such as Viewpoint Media Player, to view specialized content. Therefore, broad distribution of the Viewpoint Media Player to computers is important to our success. In September 2002, Ipsos-NPD, a world-leading market research firm, conducted a quantitative online study to evaluate the penetration of various media players across the U.S., including Viewpoint Media Player. The survey found that 55.7% of Internet users in the United States have Viewpoint Media Player installed and active on their machines.

      A key aspect of our business model is an “open tools” philosophy. We believe the long-term success of our platform will be fueled by having the most popular content creation tools able to output content in the Viewpoint format, rather than requiring design professionals to use Viewpoint’s own proprietary toolset. This approach 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 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.

      Our professional services groups play an integral role in our 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

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advantages of VET 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. Nonetheless, we are not reliant on our own content creation services. We have cultivated a network of thousands of independent content developers trained to provide those services because we do not want a limited pool of content creators to become an obstacle to expanding the more profitable licensing business.

      In response to encouragement from several customers, we began in 2001, and continued throughout most of 2002, to market 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. Although the Company continues to perform custom engineering services in some cases, we are not actively marketing these services but rather focusing our sales and marketing efforts more narrowly on website marketing and online advertising.

      As of April 30, 2003 and 2002, the Company had services revenues remaining to be recognized under the percentage-of-completion method of approximately $2,435,000 and $322,000, respectively. Future payments due under licensing agreements where extended payment terms were granted, were $1,000,000 and $4,500,000 as of April 30, 2003 and 2002, respectively. The Company will recognize these payments as license revenues when they become due.

Market Opportunity

      The market for interactive media technologies is relatively small. However, the number of Internet users continues to increase rapidly as does the number of commercial applications that are based on digital technology. We believe that these patterns will result in continuing the trend of increasing expenditures for online marketing, advertising, branding, and e-commerce, and that such communications will increasingly utilize interactive media technologies.

      We initially focused our business on Website licensing for marketing and direct selling. We believe our technology meets this market’s demand for:

  •  Effective merchandising to build brand awareness and drive sales.
 
  •  Realistic product presentation and interaction.
 
  •  Interoperability of major media types required for compelling product displays (including, for example, interactive 3D, vector graphics, character animation, object movies, high resolution 2D images, digital sound and video).
 
  •  Compression and streaming delivery at narrowband and broadband data rates.
 
  •  Client-side data logging of the use of downloaded rich media.
 
  •  Ease of deployment and integration into Web, hyper-text mark-up language and IT infrastructures.
 
  •  Continual advancement and “refresh” of features (through the automatic update function of Viewpoint Media Player).
 
  •  Consistent and high quality playback across browser and non-browser environments and all major playback platforms.

      In the third quarter of 2002, the Company began marketing its technology and services for use in online advertising. 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. We

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further believe that our technology enables advertisers to deliver compelling and interactive ads, tapping into a large selection of media types. We also believe that Viewpoint’s potential for providing client-side tracking as well as high playback quality and consistency across advertising platforms should provide strong defensibility in this space.

      In the third and fourth quarters of 2002, a total of three advertisers deployed advertisements using content in the Viewpoint format. Since January 1, 2003, six advertisers have launched advertisements from websites using content in the Viewpoint format. Reports we have received from publishers indicate that end-users are interacting with ads in the Viewpoint format at rates that are more than ten times higher than the average rate at which Internet users interact with or click-through static “banner” ads. Although these higher interactivity rates may be due in part to the novelty of encountering interactive ads in the Viewpoint format, we believe that advertisers utilizing the Viewpoint format will consistently achieve higher recognition than otherwise results from advertisements published in standard formats.

      Viewpoint also provides custom engineering services in the development of enterprise applications of our technology. The Company believes that, as data becomes more complicated and is communicated over wider geographic distances, providing efficient and effective visualization will become critical to publishers’ success and that the market for custom visualization applications will grow. We are currently providing custom engineering services for several clients and expect to continue to perform these services for additional customers. However, we are not currently devoting substantial sales and marketing resources to pursue these opportunities so that we can focus on the more saleable markets for e-commerce, marketing and online advertising.

Major Customer

      America Online, Inc. (“AOL”) was our largest customer in 2002, accounting for 51% of our revenue. We entered into a licensing and services agreement with AOL in July 2001 that provides for a three-year initial term, with three one-year renewal terms. The majority of the license fees for the initial term were received in 2002. In 2002, we entered into a master consulting agreement under which we provide content creation services to AOL from time to time for additional fees which are negotiated at the time the projects to be performed are identified and documented. We expect to continue to perform such services in 2003.

      Under two additional licensing and service agreements we entered into with AOL in 2002, we performed custom engineering services and provided limited license rights on a project basis. We may be entering into similar arrangements with AOL in 2003.

Competition

      The Company’s competitors (and some of their products) include: Macromedia, Inc. (Shockwave and Flash); Kaon (Activate!3D); Cycore AB (Cult3D); and Rich FX (Examine-FX). Some of the Company’s competitors and potential 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 in the market with opportunities to obtain a substantial market share in the Company’s markets.

      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.

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      Most companies that offer enhanced visualization products for use on the Internet target a single media type. For example, Cult 3D provides a client-server based system for predominantly viewing three-dimensional images. Some of our potential customers use the technologies afforded by these companies because their offerings are less expensive.

      Macromedia, Inc. produces and markets “Flash”, a popular pre-packaged software product that enables design professionals to create animated content. Macromedia sells copies of Flash to design professionals, employing a business model that Viewpoint abandoned in early 2000. The prevalence of Flash means that Website publishers seeking to add animated content to their sites are able to tap into a large population of content creators to obtain animated content. This method of obtaining and deploying content is typically less expensive for website publishers than obtaining and deploying content in the Viewpoint format.

      Nonetheless, we believe that VET 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 — VET lets a customer interact with and examine our clients’ products in ways not possible with our competitors’ formats. The variety of media types available in instances of content in the Viewpoint format and the integration of these media types affords end-users an opportunity to interact with content to a degree not available through our competitors’ offerings. 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 compression technology greatly reduces 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 end-user’s computer, 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, FlashÀ 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. Our “browser-less rendering” 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 allow 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 when next viewing a web page containing content in the Viewpoint format. 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, which is inconsistently supported in the current and recent version of Microsoft’s browser, Internet Explorer. In addition, it is not clear whether future versions of Internet Explorer will provide Java support. Some 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 hyper-text mark-up language pages and back end database systems.

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      Viewpoint is currently a leading provider of interactive media technologies and services, as noted by several trade publications. In September 2002, Ipsos-NPD, a world-leading market research firm, conducted a quantitative online study to evaluate the penetration of various media players across the U.S., including Viewpoint Media Player. The survey found that 55.7% of Internet users in the United States have Viewpoint Media Player installed and active on their machines. This was exceeded only by version 5 of Macromedia’s Flash player which had a 98.5% penetration level. Viewpoint Media Player penetration exceeded that of Real Networks RealPlayer (47.7%), Apple QuickTime (52.5%), and version 6 of Macromedia’s Flash player (47.1%) and was on par with Macromedia Shockwave.

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 Viewpoint Experience Technology and other complementary technologies. From time to time, the Company may also acquire rights or licenses to 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.

      The Company’s research and development expenses, exclusive of non-cash stock compensation charges, were approximately $4,836,000, $6,926,000 and $6,366,000, for 2002, 2001, and 2000, 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. We have nine patents that expire on varying dates between 2016 and 2020. 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 28, 2003, Viewpoint had 141 full time employees, including 40 in sales and marketing; 37 in creative services; 49 in research, development and quality assurance; and 15 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.

      In our continuing efforts to achieve efficiencies, we consolidated our U.S. offices and reduced by forty-eight the number of our employees during the first quarter of 2003. Most of these employees were involved in the content-creation process, a function which we have increasingly outsourced to third parties.

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      The continued development, enhancement, and maintenance of our technology is contingent on our ability to attract and retain experienced and talented software engineers. While we do not currently anticipate a short-term need for additional software engineers, recruiting qualified personnel has sometimes been difficult and time-consuming.

 
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 108 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 Los Angeles, California, pursuant to a lease that expires in December 2004. This space houses approximately 17 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 Draper, Utah, pursuant to a sublease agreement that expires in April 2010. This space housed approximately 29 personnel principally engaged in sales and marketing, creative services, and management information systems services. In February 2003 the Company closed this office and is currently in the process of subleasing the property.

 
 
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. None of the proceedings or group of similar proceedings involve a claim for damages that exceeds ten percent of our current assets.

 
 
Item 4.      Submission of Matters to a Vote of Security Holders

      None.

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 28, 2003, there were 318 holders of record of our common stock. Because brokers and other institutions on behalf of stockholders hold many of such shares, we are unable to

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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


2002
               
4th Quarter
  $ 3.30     $ 1.65  
3rd Quarter
    4.83       2.18  
2nd Quarter
    6.25       4.82  
1st Quarter
    6.99       5.09  
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  

      The Nasdaq National Market notified us on March 20, 2003 that our common stock may be delisted from Nasdaq for failure to maintain a minimum bid price of $1.00 and that we will be provided until September 16, 2003 to regain compliance with National Market standards. If we are unable to regain compliance with the minimum bid price we may be eligible to transfer our common stock to listing on The Nasdaq SmallCap Market if we meet applicable listing standards and thereby gain an additional 180 days to regain compliance with the minimum bid price requirement. In response to the potential delisting of our common stock due to the failure to meet the Nasdaq National Market’s minimum bid price requirement, we may ask our stockholders to authorize a reverse stock split at our annual meeting in 2003. If the reverse stock split is approved by our stockholders and we effect the reverse stock split, we would reduce the number of outstanding shares of common stock. With fewer shares outstanding, we would expect our stock price to increase. While a reverse stock split may enable us to cure the minimum bid price deficiency, share prices of companies effecting reverse stock splits often decline and we cannot assure you that our stock price would not decline after a reverse stock split.

      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.

      Information with respect to securities authorized for issuance under equity compensation plans is included in Item 12 on page 82.

      On December 31, 2002, the Company completed a private placement of convertible notes and warrants in which it issued to three institutional investors 4.95% convertible notes in an aggregate principal amount of $7,000,000, and warrants to purchase 726,330 shares of Company common stock. The convertible notes mature on December 31, 2007, unless earlier converted into shares of Company common stock at a price of $2.26 per share. The warrants expire on December 31, 2006, and are exercisable at a price of $2.26 per share. For this transaction, we relied upon the exemptions from registration afforded by Sections 4(2) of the Securities Act and Rule 506 promulgated thereunder based upon (i) representations from each investor that it is an accredited investor as that term is defined in Rule 501(a) under the Securities Act; (ii) that no general solicitation of the securities was made by us; (iii) each investor represented to us that it was acquiring the securities for its own account and not with a view towards further distribution; (iv) the securities issued were “restricted securities” as that term is defined under Rule 144 promulgated under the Securities Act; (v) we placed appropriate restrictive legends on the certificates representing the securities regarding the restricted nature of these securities; and (vi) a Form D was filed with the Commission and in each state where the individual investors reside.

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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/A.

                                           
Years Ended December 31,

2002 2001 2000 1999 1998





(In thousands, except per share data)
Statements of Operations Data
                                       
Revenues:
                                       
 
Licenses
  $ 5,039     $ 8,148     $ 1,421     $ 1,868     $ 3,001  
 
Related party licenses
    7,554       1,533             950        
 
Services
    3,302       3,500       1,659       25        
 
Related party services
    2,244       827       500       250        
     
     
     
     
     
 
Total revenues
    18,139       14,008       3,580       3,093       3,001  
     
     
     
     
     
 
Cost of Revenues:
                                       
 
Licenses
    353       309       76              
 
Services
    3,587       3,283       1,467              
     
     
     
     
     
 
Total cost of revenues
    3,940       3,592       1,543              
     
     
     
     
     
 
Gross profit
    14,199       10,416       2,037       3,093       3,001  
     
     
     
     
     
 
Operating expenses:
                                       
 
Sales and marketing (including non-cash stock-based compensation charges totaling $3,187 in 2002, $2,335 in 2001, and $5,122 in 2000)
    16,682       17,521       18,616       3,000       981  
 
Research and development (including non-cash stock-based compensation charges totaling $712 in 2002, $2,920 in 2001, and $4,193 in 2000)
    5,548       9,846       10,559       5,055       1,434  
 
General and administrative (including non-cash stock-based compensation charges totaling $1,523 in 2002, $1,918 in 2001, and $3,026 in 2000)
    9,134       10,423       9,814       6,993       4,010  
 
Depreciation
    1,962       1,804       801       406       399  
 
Amortization of intangible assets(1)(2)
    664       3,325       1,258       75       150  
 
Amortization of goodwill(1)
          14,128       1,767              
 
Impairment of goodwill and other intangible assets(2)
    6,275       7,925                    
 
Compensation charge related to forgiveness of an officer loan
                2,322              
 
Non-cash sales and marketing charges(3)
                19,998              
 
Acquired in-process research and development costs(1)
                963              
     
     
     
     
     
 
Total operating expenses
    40,265       64,972       66,098       15,529       6,974  
     
     
     
     
     
 
Loss from operations
    (26,066 )     (54,556 )     (64,061 )     (12,436 )     (3,973 )
Other income
    153       1,064       2,180       2,286       2,618  
     
     
     
     
     
 
Loss before provision for income taxes
    (25,913 )     (53,492 )     (61,881 )     (10,150 )     (1,355 )
Provision (benefit) for income taxes
    107                   5,481       (353 )
     
     
     
     
     
 
Loss before minority interest in loss of subsidiary
    (26,020 )     (53,492 )     (61,881 )     (15,631 )     (1,002 )
Minority interest in loss of subsidiary
                4,429       1,048        
     
     
     
     
     
 
Net loss from continuing operations
    (26,020 )     (53,492 )     (57,452 )     (14,583 )     (1,002 )
Discontinued operations:
                                       
 
Loss from discontinued operations
                      (14,811 )     (18,829 )
 
Adjustment to net loss on disposal of discontinued operations
    127       1,122       1,496       (21,260 )      
     
     
     
     
     
 
Net income (loss) from discontinued operations(4)
    127       1,122       1,496       (36,071 )     (18,829 )
     
     
     
     
     
 
Net loss
    (25,893 )     (52,370 )     (55,956 )     (50,654 )     (19,831 )
Accretion of mandatorily redeemable preferred stock of subsidiary
                (438 )            
     
     
     
     
     
 
Net loss applicable to common shareholders
  $ (25,893 )   $ (52,370 )   $ (56,394 )   $ (50,654 )   $ (19,831 )
     
     
     
     
     
 
Basic and diluted net loss per common share:
                                       
 
Net loss per common share from continuing operations
  $ (0.64 )   $ (1.37 )   $ (2.01 )   $ (0.59 )   $ (0.04 )
 
Net income (loss) per common share from discontinued operations
    (0.00 )     0.03       0.05       (1.47 )     (0.79 )
     
     
     
     
     
 
Net loss per common share
  $ (0.64 )   $ (1.34 )   $ (1.96 )   $ (2.06 )   $ (0.83 )
     
     
     
     
     
 
Weighted average number of shares outstanding — basic and diluted
    40,759       39,077       28,718       24,581       23,779  
     
     
     
     
     
 

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December 31,

2002 2001 2000 1999 1998





(In thousands)
Balance Sheet Data
                                       
Cash, cash equivalents and marketable securities
  $ 11,568     $ 15,122     $ 29,033     $ 37,247     $ 46,335  
Working capital
    8,680       11,765       34,313       33,638       55,439  
Total assets(1)
    53,352       61,917       102,349       50,574       79,116  
Convertible notes and warrants(5)
    7,000                          
Stockholders’ equity
    38,352       52,737       96,339       29,901       70,181  


(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.

  In September 2000, the Company purchased all the outstanding capital stock of Viewpoint Digital, Inc. (“Viewpoint Digital”). The total purchase price including contingent consideration was $26,850,000 of which $24,517,000 was recorded as goodwill and other intangible assets.
 
  Effective January 1, 2002, the Company completed the adoption of Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. As required by SFAS No. 142, the Company discontinued amortizing the remaining balances of goodwill as of January 1, 2002. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. All other intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

(2)  During 2002, due to the persistence of unfavorable economic conditions along with lower-than-expected revenues generated to date and reduced estimates of future performance of the Viewpoint Digital assets, the Company performed an additional impairment analysis on the goodwill and other intangible asset balances recorded upon the acquisition of Viewpoint Digital. In accordance with the provisions of SFAS No. 142 and SFAS No. 144, the Company recorded impairment charges totaling $6,275,000.

  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.

(3)  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.
 
(4)  In December 1999, the Board of Directors of the Company approved a plan to focus exclusively on the Company’s interactive media technologies and digital content creation services, and to correspondingly divest itself of all its prepackaged software graphics business. Consequently, the results of operations of the prepackaged software graphics business have been classified as net income (loss) from discontinued operations for the years ended December 31, 1998 through 2002.
 
(5)  On December 31, 2002, the Company completed a private placement of convertible notes and warrants in which it issued to three institutional investors, 4.95% convertible notes having an aggregate principal amount of $7,000,000, and warrants to purchase 726,330 shares of Company common stock.

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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/A contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from the results implied by the forward-looking statements. 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 2003. 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/A. 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 provides interactive media technologies and digital content creation services for website marketing, online advertising, and embedded applications. Our graphics operating system has been licensed by Fortune 500 companies and others for use in online, offline and embedded applications serving a wide variety of needs, including, interactive marketing campaigns, rich media advertising and product presentations, and business process visualization.

      History. Until December 1999, the Company (which was then known as MetaCreations) was primarily engaged in the development, marketing, and sales of prepackaged software graphics products. Its principal products were computer graphics “painting” tools, photo editing software, and 3D graphics software. With its acquisition of Real Time Geometry Corporation in December 1996, the Company became involved, on a limited basis, in the development of technologies designed to make practical the efficient display and deployment of interactive media on the Internet. In June 1999, the Company increased its commitment to the development of interactive Internet technologies and formed Metastream Corporation to increase the pace of development of an internet-based product and a business model to exploit 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. Since then, our primary goal has been to establish the Viewpoint Media Player as the standard platform for the display of interactive media content, particularly on the Internet.

      Business Model. We earn revenues by charging companies a license fee for deploying content in the Viewpoint format. We do not charge end-users to download or use the Viewpoint Media Player.

      We also earn revenues by creating content in the Viewpoint format for our customers. However, we do not desire to be the only source for publishers to obtain content in the Viewpoint format. Indeed, an important underpinning of our business model is to make it easy for content creation professionals to create content in the Viewpoint format, as this provides us with a larger base of customers who require a license to display content in our format, and because revenue earned from licensing is generally higher margin revenue than that earned from content creation services.

      To fuel adoption of our technology by the professional creative community, we provide on our website, free of charge, software tools that enable professional content providers to create digital content in the Viewpoint format and training in their use. We also provide software development kits and support to third party software tools makers to encourage them to produce tools that can create content in our format. Thus, we are not in competition with the graphics software tools providers; rather, we believe that by enabling their products to output to the Viewpoint format, we are increasing the usefulness of their products and the likelihood that content creation professionals will recommend to their clients that content be created and deployed in our format.

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      We believe that performing content creation services ourselves in this, the early stage of our business, rather than depending on third party content creators, helps to expand the market for our technology by providing our customers with a “one stop” solution. As the content creation community becomes more familiar with creating content in our format, our customers will be able to more easily tap into a wide array of options for content creation solutions.

      Growth of the Company. In December 1999, when the Board determined to focus exclusively on the Metastream technologies and to correspondingly divest the Company of its prepackaged software products, only approximately 15 employees of the Company were committed on a full-time basis to the development of both the internet-based product and business model while over 230 employees were committed to the Company’s historical business. By March 2000, we had moved our headquarters from California to New York City, eliminated approximately 210 positions filled by persons dedicated to the historical business, and increased to 55 the number of employees devoted solely to the internet-based business. We launched the first fully-functional version of the Viewpoint Media Player in June 2000 and continued to add personnel in pursuit of exploiting the new business model. By August 2000, we employed approximately 110 people.

      With our acquisition of Viewpoint Digital, Inc., a company primarily engaged in providing digital content creation services and in licensing a catalog of pre-existing 3D models, we added 88 employees, primarily involved in the performance of content creation services. We continued to provide content creation services that did not involve the Viewpoint format to Viewpoint Digital’s customer base in 2000 and 2001.

      In November 2000, we changed our name to Viewpoint Corporation.

      Between September 2000 and December 31, 2002, the number of our employees fluctuated between 185 and 228. As of December 31, 2002, we had 189 employees.

      We had sales of licenses and services in 2000 of $3.6 million. In 2001 and 2002, we had sales of licenses and services of $14.0 million (including $1.5 million from AOL) and $18.1 million (including $9.3 million from AOL), respectively. Revenues have primarily been from the sale of technology licenses and fee-based content creation and software engineering services.

      Since launching our new product and business in June 2000, the overall global economy has been in decline and our target customers have substantially diminished budgets for online marketing and advertising. We believe that these factors have tended to cause a slower rate of growth for our products and services than might otherwise have been achieved.

      Distribution of the Viewpoint Media Player to end users’ computers is important to the success of our business because the presence of the Viewpoint Media Player on an end user’s computer enables the end user to immediately view content in the Viewpoint format without having to wait for a download. As our business has developed since June 2000, we have spent considerable resources pursuing relationships and business arrangements that lead to the distribution of the Viewpoint Media Player. The Viewpoint Media Player is currently distributed along with versions 7 and 8 of AOL’s internet access software and version 5 of AOL’s stand-alone instant messaging software, AIM. We expect distribution of the Viewpoint Media Player to continue in the next versions of both the AOL client and AIM.

      Expense Structure and Current Sales Effort. The majority of our expenditures since launching the new business in 2000 have been compensation related, with a large portion of our employees devoted to performing content creation services. As part of our ongoing efforts to maximize efficiencies, we began in July 2002 to aggressively pursue the development of a network of third-party content creation providers to serve as subcontractors for us. Success in developing this network enabled us to eliminate the need for our facility in Utah and substantially reduce our staff. We currently employ 141 people.

      Throughout 2001 and the first three quarters of 2002, the Company’s sales and marketing efforts were directed at the broad spectrum of businesses with a presence on the internet, including customers in the apparel, real estate, consumer electronics, sporting goods, and luxury goods industries. In addition, early unsolicited success in licensing our technology for use in custom configuration systems and in computer

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assisted design applications encouraged us to broaden the focus of our sales efforts in late-2001 to pursue sales of our technology for such purposes.

      Beginning in the third quarter of 2002, however, we narrowed the focus of our direct sales and marketing efforts to companies in the automotive and consumer electronics industries and we introduced our online advertising product. We believe that by narrowing our focus, we are better able to tailor our offerings to meet the specific desires of customers in fewer sectors which, in turn, increases the likelihood of sale. We have also reduced our efforts to license our technology for custom configuration systems and computer assisted design applications due to the long sales cycles, high level of custom engineering, and relative difficulty of applying customer-specific solutions to other companies.

      Thus, our primary initiatives include:

  •  Licensing technology for web site marketing and e-commerce visualization solutions;
 
  •  Licensing technology for internet advertising purposes;
 
  •  Providing a full range of fee-based digital asset content creation and software engineering services for implementing visualization solutions for marketing
 
  •  Forging technological alliances with leading interactive agencies, Web content providers, major portals and ISPs, tools companies, and computer OEMs; and
 
  •  Maximizing market penetration of the Viewpoint Media Player.

      Long-term success in our business requires us to spend significant resources in several areas that do not directly result in short-term revenues, including: continued development of the Viewpoint Media Player and associated content creation software; development of infrastructure software that allows third parties, such as advertisers, to take full advantage of the functions of the Viewpoint Media Player; support of, and integration with, third party manufacturers of content creation tools; training of content creation professionals; pursuit of appropriate alliances with software tools companies, publishers, advertisers and advertising agencies, and computer OEMs; and general marketing activities. A primary challenge facing management is the proper balance of these expenditures against the desire for near-term profitability: whereas it may be possible to reduce expenditures further to reduce losses and/or achieve profitability in the short term, management has, to date, opted to limit reductions in these areas, believing that it should strive to maximize prospects for long-term profitability. Management will continue to monitor economic and business conditions and constantly re-evaluate these issues.

      In light of the relatively recent change in the Company’s strategic focus from selling prepackaged software, we have a limited operating history upon which an evaluation of our business and our prospects can be based. Our prospects must be considered in light of the risks and difficulties frequently encountered by early stage technology companies. We have had significant quarterly and annual operating losses since our inception, and as of December 31, 2002, had an accumulated deficit of $224,077,000. There can be no assurance that we will achieve or sustain profitability.

      We may, from time to time, provide guidance of certain financial and non-financial expectations and we have done so within this Form 10-K/A. 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.”

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Results of Operations

      The following table sets forth certain selected financial information expressed as a percentage of total revenues for the periods indicated:

                           
Years Ended December 31,

2002 2001 2000



Statements of Operations Data
                       
Revenues:
                       
 
Licenses
    28 %     58 %     40 %
 
Related party licenses
    42       11        —  
 
Services
    18       25       46  
 
Related party services
    12       6       14  
     
     
     
 
Total revenues
    100       100       100  
     
     
     
 
Cost of revenues:
                       
 
Licenses
    2       2       2  
 
Services
    20       24       41  
     
     
     
 
Total cost of revenues
    22       26       43  
     
     
     
 
Gross profit
    78       74       57  
     
     
     
 
Operating expenses:
                       
 
Sales and marketing (including non-cash stock-based compensation charges)
    92       125       520  
 
Research and development (including non-cash stock-based compensation charges)
    30       70       295  
 
General and administrative (including non-cash stock-based compensation charges)
    50       74       274  
 
Depreciation
    11       13       23  
 
Amortization of intangible assets
    4       24       34  
 
Amortization of goodwill
     —       101       49  
 
Impairment of goodwill and other intangible assets
    35       57        —  
 
Compensation charge related to forgiveness of an officer loan
     —        —       65  
 
Non-cash sales and marketing charges
     —        —       559  
 
Acquired in-process research and development costs
     —        —       27  
     
     
     
 
Total operating expenses
    222       464       1,846  
     
     
     
 
Loss from operations
    (144 )     (389 )     (1,789 )
Other income
    1       7       60  
     
     
     
 
Loss before provision for income taxes
    (143 )     (382 )     (1,729 )
Provision for income taxes
    (1 )      —        —  
     
     
     
 
Loss before minority interest in loss of subsidiary
    (144 )     (382 )     (1,729 )
Minority interest in loss of subsidiary
     —        —       124  
     
     
     
 
Net loss from continuing operations
    (144 )     (382 )     (1,605 )
Adjustment to net loss on disposal of discontinued operations
    1       8       42  
     
     
     
 
Net loss
    (143 )     (374 )     (1,563 )
Accretion of mandatorily redeemable preferred stock of subsidiary
     —        —       (12 )
     
     
     
 
Net loss applicable to common shareholders
    (143 )%     (374 )%     (1,575 )%
     
     
     
 

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     Revenues

                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Licenses
  $ 5,039       (38 )%   $ 8,148       473 %   $ 1,421  
Related party licenses
    7,554       393 %     1,533       N/A        —  
Services
    3,302       (6 )%     3,500       111 %     1,659  
Related party services
    2,244       171 %     827       65 %     500  
     
     
     
     
     
 
Total revenues
  $ 18,139       29 %   $ 14,008       291 %   $ 3,580  

      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.” Per SOP 97-2 and SAB No. 101, the Company recognizes revenue when the following criteria are met: (a) persuasive evidence of an arrangement exists, (b) delivery has occurred or services have been rendered, (c) the Company’s fee is fixed or determinable, and (d) collectibility is reasonably assured.

      Viewpoint generates revenues through two sources: (a) software licenses and (b) services. 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 revenues from direct customers include sales of perpetual and term-based licenses for broadcasting digital content in the Viewpoint format, and licenses for our digital content library. License revenues are recognized over the term of the license in a term-based broadcast license model when the term is less than 15 months, and up-front in a perpetual broadcast license model and term-based broadcast license model when the term is 15 months or longer, providing no further significant obligations exist and the resulting receivable is deemed collectible by management. License revenues for our digital content library are recognized when the license right begins, which is upon contract signing, provided all other revenue recognition criteria are met and no further significant obligations exist. Arrangements with VAR’s require either (i) an upfront, non-refundable payment or (ii) a percentage royalty based on sell through, or both, as consideration for the right to resell our technology. Up-front, non-refundable payments are recognized as license revenues when the VARs right to resell our technology begins and the technology has been delivered to the VAR, which is upon contract signing, provided all other revenue recognition criteria are met and no further significant obligations exist. For arrangements that do not call for an up-front, non-refundable payment, revenues are recognized as the royalties are earned, which is upon notification of sell through, provided all other revenue recognition criteria are met and no further significant obligations exist.

      Fee-based professional services for customized software development are performed on a time-and-material or fixed-fee basis, under separate service arrangements. Revenues for fixed-fee arrangements 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” and SAB No. 101. Percentage-of-completion for service contracts is measured principally by the percentage of costs incurred and accrued to date for each contract, which principally consist of direct labor costs and overhead, 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.

      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.

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      For arrangements involving multiple elements, we defer revenue for the undelivered elements based on their fair value and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of each undelivered element in multiple element arrangements is based on the price charged when the same element is sold separately. For maintenance and technical support elements, we use renewal rates to determine the price when sold separately.

      License revenues decreased approximately $3,109,000, or 38%, for 2002 compared to 2001. The decrease is due to revenues generated by our digital content library decreasing by $3,203,000. The decrease is the direct result of a license agreement entered into during the fourth quarter of 2001, under which the Company perpetually licensed its digital content library to a long-time, leading distributor of 3D animation software for $750,000, which represented a non-refundable minimum license fee of $500,000 in cash due upon signing and $250,000 due within 90 days. As a result of this transaction, the Company significantly reduced its sales efforts relating to its digital content library in return for an expected revenue share. For the period commencing the day following the date on which net revenues, less an $85,000 monthly expense retainer, exceed $500,000, the Company will receive a 50% share in future net revenues derived from sublicenses of its digital content library. During the year ended December 31, 2002, net revenues ($1,005,000) less an $85,000 monthly expense retainer ($1,020,000), did not exceed $500,000, therefore the Company did not receive a revenue share. Because we will not begin to share in this revenue until the $500,000 target is met, it is likely that we will not derive significant revenue, if any, from this arrangement in 2003. Although the amount of revenue share will be based on a number of factors, including overall economic and market conditions, we expect to begin receiving a revenue share in 2004.

      Related party license revenues increased by approximately $6,021,000, or 393%, for 2002 compared to 2001. The increase in related party license revenues is the result of $5,993,000 in increased AOL license revenues and $125,000 in increased Adobe license revenues, which were partially offset by a decrease of $97,000 in Computer Associates license revenues. The increase in AOL license revenues is due to our expanding relationship with AOL which was evidenced by two new licensing arrangements in 2002 in addition to a full year of license revenues in 2002 related to a contract entered into in July of 2001. In addition, in March 2002, the Company amended the July 2001 contract, which resulted in the Company recording revenues when payments are due, as compared to the partial deferral of those payments, which would otherwise have occurred. This amendment resulted in the Company recognizing $5,825,000 in license revenues for this contract as opposed to $2,700,000 if the contract had not been amended.

      Service revenues decreased $198,000, or 6%, for 2002 compared to 2001. The decrease was caused by the persistence of unfavorable economic conditions.

      Related party service revenues increased by approximately $1,417,000, or 171%, for 2002 compared to 2001. The increase is primarily related to our expanding relationship with AOL, which accounted for a $1,837,000 increase in service revenues primarily related to the creation of customized digital content and specific engineering services. This increase was partially offset by a $420,000 decrease in service revenues with Computer Associates primarily due to the expiration, during the year, of an engineering services agreement from 1999.

      Total related party revenues for the year ended December 31, 2002, were $9,337,000, $336,000, and $125,000 related to agreements, including reseller agreements, with AOL, Computer Associates, and Adobe, respectively, all of whom have representatives on the Company’s Board of Directors.

      License revenues increased by approximately $6,727,000, or 473%, and service revenues increased by approximately $1,841,000 or 111%, in 2001 compared to 2000. The increase was primarily attributable to an expansion of our direct sales force and indirect channel partnerships, and incremental sales from the acquisition of Viewpoint Digital.

      Related party license revenues increased by $1,533,000, and related party service revenues increased $327,000, or 65%, in 2001 compared to 2000. The increase was due to the new contract with AOL entered into in July 2001, which accounted for $1,350,000 and $317,000 of the increase in related party license revenues and related party service revenues, respectively.

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      Total related party revenues for the year ended December 31, 2001 were $1,507,000 and $853,000, related to agreements, including reseller arrangements, with AOL and Computer Associates, respectively.

      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 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.

      The increase in license and service revenues in 2002 compared to 2001, and 2001 compared to 2000, were the direct result of increases in the amount of licenses sold and services performed as the Company’s pricing and product offerings did not materially change from 2000 to 2002.

      Revenues in 2000 were related to sales of licenses and fee-based professional services with two customers accounting for 40% of total revenues. Revenues of $2,459,000 were the result of the acquisition of Viewpoint Digital in September 2000. Related party service revenues for 2000 were $500,000 related to an engineering services agreement with Computer Associates.

     Cost of Revenues

                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Licenses
  $ 353       14 %   $ 309       307 %   $ 76  
Services
    3,587       9 %     3,283       124 %     1,467  
     
             
             
 
Total cost of revenues
  $ 3,940       10 %   $ 3,592       133 %   $ 1,543  
Percentage of total revenues
    22 %             26 %             43 %

      Cost of revenues for licenses consist of commissions to VARs for the resale of our technology and license fees to third parties for certain software and digital media that are sublicensed to direct customers. Cost of revenues for services consist primarily of salaries and consulting fees for those who provide fee-based professional services.

      Cost of revenues for licenses increased by $44,000, or 14%, in 2002 compared to 2001 due to an increase in license fees to third parties for certain software and digital media of $203,000 and an increase in commissions to VARs of $107,000. These increases were partially offset by a decrease in royalties to publishers of our digital content library of $266,000, as a result of a license agreement entered into during the fourth quarter of 2001, under which the Company perpetually licensed its digital content library to a long-time leading distributor of 3D animation software. Cost of revenues for services increased by $304,000, or 9%, in 2002 compared to 2001 due to an increase in service revenues, which was partially offset by higher margins related to an increase in engineering professional services.

      Cost of revenues for licenses increased by $233,000, or 307%, in 2001 compared to 2000 which was primarily due to an increase in royalties to publishers of our digital content library of $190,000 due to a full year of digital content library revenues in 2001 compared to four months in 2000. Cost of revenues for services increased by $1,816,000, or 124%, in 2001 compared to 2000 due to an increase in service revenues.

 
      Sales and Marketing (Including Non-Cash Stock-Based Compensation Charges Totaling $3,187 in 2002, $2,335 in 2001, and $5,122 in 2000)
                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Sales and marketing
  $ 16,682       (5 )%   $ 17,521       (6 )%   $ 18,616  
Percentage of total revenues
    92 %             125 %             520 %

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      Sales and marketing expenses include salaries and benefits, sales commissions, non-cash stock-based compensation charges, consulting fees and travel and entertainment 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 $839,000, or 5%, in 2002 compared to 2001 due to a decrease in marketing costs of $662,000, salaries and benefits of $588,000, travel and entertainment expenses of $545,000, and facilities expenses of $388,000, which was partially offset by an increase in non-cash stock-based compensation charges of $852,000 and reserves for officer loans of $612,000. The decrease in marketing costs was attributable to the Company’s overall cost reduction efforts and the elimination of marketing costs related to the Company’s digital content library. Salaries and benefits, and travel and entertainment expenses decreased due to headcount reductions in sales personnel related to the Company’s digital content library and other headcount reductions in marketing and creative service personnel. The decrease in facilities expenses was due to the closure of our Tokyo sales office in December 2001. Non-cash stock-based compensation charges increased as certain personnel who were reflected in research and development during 2001 are now reflected in sales and marketing due to a change in the nature of their duties. The Company loaned a total of $575,000 to two officers of the Company during 2001 in accordance with the contractual terms of the officers’ employment agreements. One loan for $200,000 was secured solely by the proceeds from the sale of Company stock issuable upon exercise of the officer’s stock options and another loan for $375,000 was secured solely by the net, after tax proceeds from the sale of Company stock issuable upon exercise of the officer’s stock options. The Company recorded a reserve against these loans in 2002 as the value of the Company’s stock fell substantially below the exercise price of the options securing the loans. The amounts reserved represent the unsecured portion of the loans and accrued interest. One of the officers resigned from the Company effective December 31, 2002, requiring the loan to be repaid. The officer defaulted on the loan on January 31, 2003, and the Company took possession of the collateral.

      Quarterly savings of approximately $992,000 in sales and marketing costs are expected to be realized beginning in the second quarter of 2003, resulting from the Company’s office consolidation and accompanying workforce reductions in Utah, as well as workforce reductions in New York and California, which occurred during the first quarter of 2003. In accordance with SFAS 146, the Company will record a restructuring charge of approximately $1,400,000 during the first quarter of 2003 related to the closure of its Utah and London facility.

      Sales and marketing expenses decreased $1,095,000, or 6%, in 2001 compared to 2000 primarily due to a decrease in non-cash stock-based compensation charges of $2,787,000, Web development costs of $2,252,000, and marketing and public relations costs of $1,540,000 costs, which was partially offset by an increase in salaries and benefits of $4,813,000. 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. Marketing costs and Web development costs decreased from 2000 to 2001 due to the initial launch costs related to Metastream, which occurred in 2000. Salaries and benefits increased from 2000 to 2001 due to internal growth and the acquisition of Viewpoint Digital.

 
      Research and Development (Including Non-Cash Stock-Based Compensation Charges Totaling $712 in 2002, $2,920 in 2001, and $4,193 in 2000)
                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Research and development
  $ 5,548       (44 )%   $ 9,846       (7 )%   $ 10,559  
Percentage of total revenues
    30 %             70 %             295 %

      Research and development expenses consist primarily of salaries and benefits for software developers, contracted development efforts, and non-cash stock-based compensation charges 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 has substantially

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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 $4,298,000, or 44%, in 2002 compared to 2001 due to a decrease in non-cash stock-based compensation charges of $2,208,000, and salaries and benefits of $1,421,000, and contracted development costs of $1,022,000. Non-cash stock-based compensation charges and salaries and benefits decreased as certain personnel who were reflected in research and development during 2001, are now reflected in sales and marketing due to a change in the nature of their duties. In addition, 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. Salaries and benefits decreased due to specific engineering salaries and benefits being classified as cost of revenues as compared to research and development, as a result of revenue generating customer-specific development work. The decrease in contracted development costs is the direct result of specific projects that were necessary in 2001 and able to be outsourced which were not required in 2002.

      Quarterly savings of approximately $151,000 in research and development costs are expected to be realized beginning in the second quarter of 2003, resulting from the Company’s office consolidation and accompanying workforce reductions in Utah, as well as workforce reductions in New York and California, which occurred in the first quarter of 2003.

      Research and development expenses decreased $713,000, or 7%, in 2001 compared to 2000 primarily due to a decrease in a reserve for notes receivable of $2,106,000, and non-cash stock-based compensation charges of $1,273,000, which was partially offset by an increase in salaries and benefits and contracted development efforts of $2,851,000. The Company loaned $2,000,000 to a former executive of the Company in 1996, in accordance with the contractual terms of the former executive’s employment agreement. The loan, which accrued interest semi-annually at 5.67%, was secured solely by 160,000 shares of Company stock owned by the executive. The decrease in reserve for notes receivable is attributable to a $1,441,000 reserve against the loan in 2000 of which approximately $665,000 was recovered during 2001. The amount reserved in 2000 represents the unsecured portion of the loan and accrued interest. The increase in salaries and benefits and contracted development is the result of an increase in headcount related to research and development.

 
General and Administrative (Including Non-Cash Stock-Based Compensation Charges Totaling $1,523 in 2002, $1,918 in 2001, and $3,026 in 2000)
                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
General and administrative
  $ 9,134       (12 )%   $ 10,423       6 %   $ 9,814  
Percentage of total revenues
    50 %             74 %             274 %

      General and administrative expenses primarily consist of corporate overhead of the Company, which includes salaries and benefits related to finance, human resources, legal, and executive personnel along with other administrative costs such as facilities costs, legal, accounting and investor relation fees, and insurance expense.

      General and administrative expenses decreased $1,289,000, or 12%, in 2002 compared to 2001 due to a decrease in facilities costs of $600,000, non-cash stock-based compensation charges of $395,000, and salaries and benefits of $265,000. Facilities costs decreased due to the closure of the San Francisco office in August 2001 and the consolidation of certain New York office space. Salaries and benefits decreased due to reduction in headcount.

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      Quarterly savings of approximately $210,000 in general and administrative costs are expected to be realized beginning in the second quarter of 2003, resulting from the Company’s office consolidation and accompanying workforce reductions as well as workforce reductions in New York and California, which occurred during the first quarter of 2003.

      General and administrative expenses increased $609,000, or 6%, in 2001 compared to 2000 due to an increase in facilities expense of $727,000, and salaries and benefits of $660,000, which was partially offset by a decrease in non-cash stock-based compensation charges of $1,108,000. Salaries and benefits and facilities expense increased due to an increase in headcount and the acquisition of Viewpoint Digital.

     Depreciation

                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Depreciation
  $ 1,962       9 %   $ 1,804       125 %   $ 801  
Percentage of total revenues
    11 %             13 %             23 %

      Depreciation expense increased $158,000, or 9% in 2002 compared to 2001, and $1,003,000, or 125% in 2001 compared to 2000 due to increases in property and equipment additions.

     Amortization of Intangible Assets

                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Amortization of intangible assets
  $ 664       (80 )%   $ 3,325       164 %   $ 1,258  
Percentage of total revenues
    4 %             24 %             34 %

      Amortization of intangible assets decreased $2,661,000 or 80%, in 2002 compared to 2001 as all intangible assets acquired in the Viewpoint Digital transaction were either fully amortized or written off in accordance with SFAS No. 144 during 2002.

      Amortization of intangible assets increased $2,067,000, or 164%, in 2001 compared to 2000 due to a full year of amortization on the intangible assets recorded as part of the acquisition of Viewpoint Digital.

     Amortization of Goodwill

                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Amortization of goodwill
  $       (100 )%   $ 14,128       700 %   $ 1,767  
Percentage of total revenues
    %             (101 )%             49 %

      Amortization of goodwill decreased $14,128,000 or 100% in 2002 compared to 2001 due to the adoption of SFAS No. 142. As required by SFAS No. 142, the Company discontinued amortizing the remaining balances of goodwill as of January 1, 2002. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach.

      Amortization of goodwill increased $12,361,000 or 700% in 2001 compared to 2000 due to a full year of amortization on goodwill recorded as part of the acquisition of Viewpoint Digital and the acquisition of Computer Associates’ minority interest in Metastream.

     Impairment of Goodwill and Other Intangible Assets

                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Impairment of goodwill and other intangible assets
  $ 6,275       (21 )%   $ 7,925       N/A     $  —  
Percentage of total revenues
    35 %             57 %              — %

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      In conjunction with the implementation of SFAS No. 142, the Company completed a goodwill impairment review as of January 1, 2002 and found no impairment on that date. As of March 31, 2002, due to the persistence of unfavorable economic conditions along with lower-than-expected revenues generated to date and reduced estimates of future performance of the Viewpoint Digital assets, the Company performed an additional impairment analysis on the goodwill and other intangible asset balances recorded upon the acquisition of Viewpoint Digital. In accordance with the provisions of SFAS No. 142 and SFAS No. 144, the Company recorded impairment charges totaling $6,275,000 during the three months ended March 31, 2002. The fair value of the Viewpoint Digital assets was estimated using the expected present value of future cash flows. The assumptions supporting the cash flows, including a discount rate of 20%, were determined using the Company’s best estimates as of the date the impairment was recorded.

      During 2001, the Company assessed 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.

      During 2003 the market value of the Company’s stockholders’ equity fell below its carrying value indicating the existence of a potential goodwill impairment. The Company will assess the carrying value of its goodwill in accordance with the provisions of SFAS No. 142, during the first quarter of 2003.

     Compensation Charge Related to Forgiveness of an Officer Loan

                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Compensation charge related to forgiveness of an officer loan
  $       N/A     $       (100 )%   $ 2,322  
Percentage of total revenues
    %             %             65 %

      The Company loaned $1,000,000 to an officer of the Company in 1996 in accordance with the contractual terms of the officer’s employment agreement. The loan, which accrued interest semi-annually at 5.67%, was secured solely by the net, after tax proceeds from the sale of Company stock issuable upon the exercise of the officer’s stock options. The loan was forgiven in 2000 in accordance with the contractual terms of the officer’s employment agreement, upon the merger of the Company with Metastream. The compensation charge of $2,322,000 included the forgiveness of the loan and the income taxes thereon.

 
      Non-Cash Sales and Marketing Charges
                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Non-cash sales and marketing charges
  $       N/A     $       (100)%     $ 19,998  
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.

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      Acquired In-Process Research and Development Costs
                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Acquired in-process research and development costs
  $       N/A     $       (100)%     $ 963  
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
                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Other income
  $ 153       (86)%     $ 1,064       (51)%     $ 2,180  
Percentage of total revenues
    1 %             7 %             60 %

      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 $911,000 or 86% in 2002 compared to 2001, and $1,116,000 or 51% in 2001 compared to 2000 due to a decrease in average cash, cash equivalents and marketable securities balances as well as a decline in interest rates.

 
      Minority Interest in Loss of Subsidiary
                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Minority interest in loss of subsidiary
  $  —       N/A     $  —       (100)%     $ 4,429  
Percentage of total revenues
     — %              — %             124 %

      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.

     Adjustment to Net Loss on Disposal of Discontinued Operations

                                         
2002 % Change 2001 % Change 2000





(Dollars in thousands)
Adjustment to net loss on disposal of discontinued operations
  $ 127       (89)%     $ 1,122       (25)%     $ 1,496  
Percentage of total revenues
    1 %             8 %             42 %

      In December 1999, the Board of Directors of the Company approved a plan to focus exclusively on its interactive media technologies and digital content creation services and to correspondingly divest itself of its prepackaged software graphics 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

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adjustment to net loss on disposal of discontinued operations of $1,496,000 during the year ended December 31, 2000, primarily as a result of better than expected net revenues during the year from the discontinued business. During the years ended December 31, 2002 and 2001, the Company recorded an adjustment to net loss on disposal of discontinued operations of $127,000 and $1,122,000, respectively, as a result of changes in estimates related to accounts receivable and accounts payable of the discontinued business. Changes in estimates, which are not expected to be significant, will be accounted for prospectively and included in adjustment to net loss on disposal of discontinued operations.

Factors That May Affect Future Results of Operations

 
      We Have a History of Losses and Expect to Incur Losses in the Future, Which May Cause Our Share Price to Decline

      We have had significant quarterly and annual operating losses since our inception, and as of December 31, 2002, we had an accumulated deficit of approximately $224,077,000. We believe that we will continue to incur operating losses in the future, which may cause our share price to decline.

 
      Our Future Revenues May be Unpredictable and May Cause Our Quarterly Results to Fall Below Market Expectations

      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 due to the following factors, the trading price of our common stock will likely drop:

  •  our ability to retain existing customers, attract new customers, and satisfy our customers’ demands;
 
  •  introduction or enhancement of new products, technologies or services by our competitors which may render our technologies and services less attractive or obsolete;
 
  •  varying operating costs and capital expenditures related to the expansion of our business operations and infrastructure; and
 
  •  difficulty integrating our graphics technology with third party software programs.

Based on these factors, we believe our revenues, expenses and operating results could vary significantly in the future and period-to-period comparisons should not be relied upon as indications of future results. Our staffing and other operating expenses are based in large part on anticipated revenues. It may 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 Have to Obtain Financing on Less Favorable Terms, Which Could Dilute Current Stockholders’ Ownership Interests in the Company

      In order to fund our operations and pursue our growth strategy we may seek additional funding through public or private equity financing or from other sources. 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 the Company.

 
      Our Stock Price is Volatile, Which Could Subject Us to Class Action Litigation

      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:

  •  actual or anticipated fluctuations in our operating results;
 
  •  general market and economic conditions affecting Internet companies;

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  •  our announcement of new products, technologies or services; and
 
  •  developments regarding our products, technologies or services, or those of our competitors.

In addition, 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, financial condition, operating results and cash flows.

 
      We May be Delisted From Nasdaq, Which Would Adversely Impact Our Stock Price and the Ability of Our Stockholders to Purchase and Sell Our Shares in an Orderly Manner

      We may be unable to maintain compliance with Nasdaq listing standards.

      The Nasdaq National Market notified us on March 20, 2003 that our common stock may be delisted from Nasdaq for failure to maintain a minimum bid price of $1.00 and that we will be provided until September 16, 2003 to regain compliance with National Market standards. If we are unable to regain compliance with the minimum bid price we may be eligible to transfer our common stock to listing on The Nasdaq SmallCap Market if we meet applicable listing standards and thereby gain an additional 180 days to regain compliance with the minimum bid price requirement. Transitioning to the SmallCap Market or the delisting of our stock could damage our general business reputation and impair our ability to raise additional funds. This may further adversely impact our stock price. Furthermore, if our shares are delisted and are traded on the Nasdaq Small Cap Market, the over-the-counter bulletin board or the “pink sheets”, their value may be negatively impacted because stocks which trade on the over-the-counter bulletin board or the “pink sheets” tend to be less liquid and trade with larger variations between the bid and ask price than stocks on the Nasdaq National Market. Accordingly, any of the foregoing events could have a material adverse effect on our business, financial condition and operating results.

 
      We may effect a reverse stock split and if we do so, our stock price may decline after the reverse stock split

      In response to the potential delisting of our common stock due to the failure to meet the Nasdaq National Market’s minimum bid price requirement discussed above, we may ask our stockholders to authorize a reverse stock split at our annual meeting in 2003. If the reverse stock split is approved by our stockholders and we effect the reverse stock split, we would reduce the number of outstanding shares of common stock. With fewer shares outstanding, we would expect our stock price to increase. While a reverse stock split may enable us to cure the minimum bid price deficiency, share prices of companies effecting reverse stock splits often decline and we cannot assure you that our stock price would not decline after a reverse stock split.

 
      If the Internet Does Not Become a More 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 the computer graphics 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. Licensing of our products and technologies depends in large part on the development of the Internet as a viable commercial marketplace. There are now substantially more users and much more “traffic” over the Internet than ever before, use of the Internet is growing faster than anticipated, and the technological infrastructure of the Internet may be unable to support the demands placed on it by continued growth. Delays in development or adoption of new technological standards and protocols, or increased government regulation, could also affect Internet use. Any of these developments could adversely effect our business because substantially all of our revenues are derived from online services and sales.

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      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 computer graphics 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 our technologies were to occur, our business and financial results would be adversely impacted.

 
Security Risks Could Limit the Growth of E-Commerce Which Would Adversely Impact Our Ability to Increase Sales of Graphics Technology

      E-tailers are less likely to acquire licenses to use our graphics technology and less likely to have a desire for our services if e-commerce activity fails to grow or declines due to Internet security risks. Security risks that may occur are failure of encryption and authentication technologies and third-party circumvention of security measures. These risks may limit the ability of e-tailers to sell their products online due to damage to the e-tailers’ reputations and restrictions by credit card companies of online transactions.

     We May Be Unable to Protect Our Intellectual Property Rights

      Our success and ability to compete substantially depend on the uniqueness or value of our products and technologies. We rely on a combination of copyright, trademark, patent, trade secret laws, and employee and third-party nondisclosure agreements 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.

 
We May Be Liable for Infringing the Intellectual Property Rights of Others

      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.

 
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; and

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  •  impairment of relationships with existing employees, customers and business partners.

We do not currently have plans, nor have we entered into negotiations, to acquire any businesses.

     The Loss of Our Key Engineering or Management Employees Would Harm Our Business

      We depend on the continued employment of our key engineering and management employees. We do not have long-term employment agreements with our key personnel, and we do not have “key person” life insurance policies. If any of our key engineering or management employees leave our company, our business may be adversely affected.

 
  If we Fail to Establish, Maintain, or Expand our Strategic Relationships for the Integration of Our Technology With the Services and Products of Third Parties, the Growth of Our Business May Cease or Decline

      Currently, we have relationships with Adobe Systems Incorporated, Autodesk, Inc., Alias Wavefront (a division of Silicon Graphics Limited), Curious Labs Incorporated, and other makers of leading content creation software products under which we provide the right and ability for their products to output content in our format. Customers who deploy content created in the Viewpoint format with these software products are required to purchase a license from Viewpoint in order to publish the content. We also have a relationship with AOL under which the Viewpoint Media Player is distributed along with AOL’s internet access software product. If Adobe, Autodesk, Caligari, Curious Labs, or AOL do not continue to integrate and support our technology correctly, or if we are unable to enter into successful new strategic relationships with leading software providers that can integrate and support our graphics technology, our revenues and growth may suffer because professionals will less likely offer services involving the creation of content in the Viewpoint format to their customers.

 AOL accounted for 51% of our revenues in 2002, but may not generate similar amounts of revenue in subsequent years

      Our licensing and service arrangements with AOL accounted for 51% of our revenue in 2002. However, AOL is not contractually obligated to renew its licenses with us or retain our services for similar services fees in the future. Any cancellation, deferral or significant reduction in our work performed for AOL would have a material adverse effect on our business, financial condition and results of operations.

 
Our Charter Documents Could Make it More Difficult for an Unsolicited Third Party to Acquire Us

      Our certificate of incorporation and by-laws are designed to make it difficult for an unsolicited third party to acquire control of us, even if a change in control would be beneficial to stockholders. For example, our certificate of incorporation authorizes our board of directors to issue up to 5,000,000 shares of “blank check” preferred stock. Without stockholder approval, the board of directors has the authority to attach special rights, including voting and dividend rights, to this preferred stock. With these rights, preferred stockholders could make it more difficult for an unsolicited 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.

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 principals 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

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goodwill and other intangible 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/A.

      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

      The Company recognizes revenue in accordance with SOP 97-2, “Software Revenue Recognition,” as amended, and SAB No. 101 “Revenue Recognition in Financial Statements.” Per SOP 97-2 and SAB No. 101, the Company recognizes revenue when the following criteria are met: (a) persuasive evidence of an arrangement exists, (b) delivery has occurred or services have been rendered, (c) the Company’s fee is fixed or determinable, and (d) collectibility is reasonably assured.

      Viewpoint generates revenues through two sources: (a) software licenses and (b) services. 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 revenues from direct customers include sales of perpetual and term based licenses for broadcasting digital content in the Viewpoint format, and licenses for our digital content library. License revenues are recognized over the term of the license in a term-based broadcast license model when the term is less than 15 months, and up-front in a perpetual broadcast license model and a term-based broadcast license model when the term is 15 months or longer, providing no further significant obligations exist and the resulting receivable is deemed collectible by management. License revenues for our digital content library are recognized when the license right begins, which is upon contract signing, provided all other revenue recognition criteria are met and no further significant obligations exist. Arrangements with VAR’s require either (i) an upfront, non-refundable payment or (ii) a percentage royalty based on sell through, or both, as consideration for the right to resell our technology. Up-front, non-refundable payments are recognized as license revenues when the VARs right to resell our technology begins and the technology has been delivered to the VAR, which is upon contract signing, provided all other revenue recognition criteria are met and no further significant obligations exist. For arrangements that do not call for an up-front, non-refundable payment, revenues are recognized as the royalties are earned, which is upon notification of sell through, provided all other revenue recognition criteria are met and no further significant obligations exist.

      Fee-based professional services for customized software development are performed on a time-and-material or fixed-fee basis, under separate service arrangements. Revenues for fixed-fee arrangements 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” and SAB No. 101. Percentage-of-completion for service contracts is measured principally by the percentage of costs incurred and accrued to date for each contract, which principally consist of direct labor costs and overhead, 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.

      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.

      For arrangements involving multiple elements, we defer revenue for the undelivered elements based on their fair value and recognize the difference between the total arrangement fee and the amount deferred for the

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undelivered elements as revenue. The determination of fair value of each undelivered element in multiple element arrangements is based on the price charged when the same element is sold separately. For maintenance and technical support elements, we use renewal rates to determine the price when sold separately.

      Standard terms for license and service 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 and/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. 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 customers. Nonmonetary revenues are recognized at the estimated fair value of the services received. Generally, nonmonetary revenues equal nonmonetary expenses, however, due to timing, nonmonetary accounts receivable and accounts payable may result.

     Goodwill and Intangible Assets

      Effective January 1, 2002, the Company completed the adoption of SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. As required by SFAS No. 142, the Company discontinued amortizing the remaining balances of goodwill as of January 1, 2002. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. When evaluating goodwill for potential impairment, the Company first compares the fair value of the reporting unit, based on market values of the reporting unit or on the present value of estimated future cash flows, with its carrying amount. If the estimated fair value of the reporting unit is less than its carrying amount, an impairment loss calculation is prepared. The impairment loss calculation compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. All other intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Recent Accounting Pronouncements

      In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities” which requires the consolidation by primary beneficiaries of variable interest entities (“VIEs”), as defined. Public companies will generally be subject to its provisions effective after January 31, 2003 for newly-acquired VIEs and the first fiscal or interim period beginning after June 15, 2003 for VIE holdings acquired prior to February 1, 2003. The adoption of FIN 46 is not expected to have a material effect on the Company’s financial statements.

      In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This Statement requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan under EITF No. 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The provisions of SFAS No. 146 will be applied to the costs associated with the Company’s consolidation of its workforce into two main facilities, which occurred during the first quarter of 2003.

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      In November 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.” FIN 45 expands on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. It also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002.

      In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” This Statement amends SFAS No. 123, “Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of this Standard are effective for fiscal years ending after December 15, 2002 and have been incorporated into these financial statements and accompanying footnotes.

LIQUIDITY AND CAPITAL RESOURCES

      Cash, cash equivalents, and marketable securities totaled $11,568,000 at December 31, 2002, down from $15,122,000 at December 31, 2001 and $29,033,000 at December 31, 2000.

      Net cash used in operating activities of the Company totaled $10,043,000 for 2002 compared to $15,500,000 for 2001 and $28,745,000 for 2000. Net cash used in operating activities in 2002 primarily resulted from a $26,020,000 net loss from continuing operations offset in part by $6,275,000 in impairment of goodwill and other intangible assets, $5,422,000 in non-cash stock-based compensation charges, $2,626,000 in depreciation and amortization, and $1,353,000 in provisions for bad debt and reserve for notes receivable. Net cash used in operating activities in 2001 primarily resulted from a $53,492,000 net loss from continuing operations offset in part by $19,257,000 in depreciation and amortization, $7,925,000 in goodwill impairment, $7,173,000 in non-cash stock-based compensation charges, and $6,488,000 of net cash provided by discontinued operations. 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 $19,998,000 in non-cash sales and marketing charges, $12,341,000 in non-cash stock-based compensation charges, and $4,789,000 in depreciation and amortization.

      Net cash provided by investing activities totaled $5,142,000, $8,387,000, and $1,584,000 for 2002, 2001, and 2000, respectively. Net cash provided by investing activities in 2002 primarily resulted from $6,127,000 of net proceeds from sales and maturities of marketable securities partially offset by $936,000 for the purchase of property and equipment. Net cash provided by investing activities in 2001 primarily resulted from $8,843,000 of net proceeds from sales and maturities of marketable securities partially offset by $872,000 for the purchase of 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, partially offset by $10,225,000 of cash used to acquire Viewpoint Digital and $4,233,000 for the purchase of property and equipment.

      Net cash provided by financing activities totaled $7,534,000, $1,874,000, and $35,993,000 for 2002, 2001 and 2000, respectively. Net cash provided by financing activities in 2002 primarily resulted from the issuance of convertible notes and warrants of $6,840,000 and $1,387,000 of proceeds from the exercise of stock options by the Company’s employees, partially offset by $693,000 in cash put in a restricted escrow account for interest on the convertible notes. 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, partially 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,

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$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.

      On December 31, 2002, the Company completed a private placement of convertible notes and warrants in which it issued to three institutional investors, 4.95% convertible notes having an aggregate principal amount of $7,000,000, and warrants to purchase 726,330 shares of Company common stock. Interest on the convertible notes is payable quarterly in arrears in cash or, at the option of the Company, in shares of Company common stock, provided the Company satisfies certain financial and other conditions. If interest is paid in shares of Company common stock, the number of shares to be issued shall be calculated by dividing the interest payable by 95% of the arithmetic average of the dollar volume-weighted average price of Company common stock on each of the five consecutive trading days immediately preceding the interest payment date. The convertible notes mature on December 31, 2007, unless earlier converted into shares of Company common stock at a price of $2.26 per share. The warrants expire on December 31, 2006, and are exercisable at a price of $2.26 per share.

      The Company is required to file a registration statement covering the resale of all of the shares of common stock issuable to the investors upon conversion of the convertible notes and exercise of the warrants issued, (including any interest shares under the convertible notes) and have the registration statement declared effective no later than April 30, 2003.

      At any time after June 30, 2004, the investors may cause the Company to redeem up to all of the outstanding convertible notes in cash at par plus accrued and unpaid interest if the dollar volume-weighted average price of Company common stock is less than $2.26 for any 25 consecutive trading days. If the investors redeem their convertible notes, up to 20% of the amount to be redeemed may, at the Company’s option, be paid in shares of Company common stock, and said payment would be at 95% of the arithmetic average of the dollar volume-weighted average price of Company common stock for the 20 consecutive trading days immediately preceding payment. At any time after December 31, 2005, the investors may cause the Company to redeem up to all of the outstanding convertible notes in cash at 83% of par plus accrued and unpaid interest if the dollar volume-weighted average price of Company common stock is less than $2.26 for any 25 consecutive trading days following December 31, 2005.

      At any time after April 15, 2004, the Company has the right to require the investors to convert up to all of the outstanding convertible notes at $2.26 if the dollar volume-weighted average price of Company common Stock exceeds $3.39 for any 25 consecutive trading days following April 15, 2004. At any time following the 30 month anniversary of the day the registration statement is declared effective by the Securities and Exchange Commission (“SEC”), the Company has the right to redeem the convertible notes at a price equal to the greater of (i) par plus accrued and unpaid interest and (ii) a value assigned to the convertible notes by an independent investment bank or major financial institution.

      The investors may require the Company to sell additional 4.95% convertible notes having an aggregate principal amount of up to $2,800,000, and warrants to purchase up to 290,533 shares of Company common stock prior to December 31, 2003 or later if the registration statement is not effective by a certain date.

      The Company has the right to sell additional 4.95% convertible notes having an aggregate principal amount of up to $7,000,000 and warrants to purchase up to 726,330 shares of Company common stock prior to June 30, 2003, if the dollar volume-weighted average price of Company common stock exceeds $3.25 on each of not less than 15 trading days in any 20 consecutive trading day period.

      In conjunction with the issuance of convertible notes and warrants on December 31, 2002, there were several covenants with events of default, including but not limited to: i) failure to have the Company’s registration statement declared effective by the SEC, ii) event of delisting from The Nasdaq National Market or other national exchange, iii) change in control, iv) event of conversion default such as lack of authorized capital, v) event of bankruptcy, vi) failure to pay principal and interest on the convertible notes when payments become due, vii) judgements against the Company in excess of $1,000,000 and viii) breach of any

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representation, warranty, covenant or other term. Upon an event of default, the convertible notes will become immediately due and payable, after a grace period to cure the default lapses.

      On February 28, 2003, the Company received a notice of default, from two of the three investors based upon an alleged breach of representation and warranties by the Company.

      On March 25, 2003, the Company entered into Redemption, Amendment and Exchange Agreements with the three institutional investors with whom it had completed a private placement of convertible notes and warrants on December 31, 2002. Pursuant to these agreements, the notice of default was withdrawn and Viewpoint redeemed an aggregate of $3,300,000 principal amount of the outstanding convertible notes, exchanged an aggregate of $1,000,000 principal amount of the outstanding convertible notes for shares of Viewpoint common stock at $0.74 per share, and exchanged the remaining $2,700,000 principal amount of outstanding convertible notes for $2,700,000 principal amount of new convertible notes. The convertible notes were issued in three tranches of $900,000 each. The warrants to purchase 726,330 shares of Company common stock, which were issued to these investors on December 31, 2002, remain outstanding.

      Interest on the new convertible notes is payable quarterly in arrears in cash or, at the option of the Company, in shares of Company common stock, provided the Company satisfies certain financial and other conditions. If interest is paid in shares of Company common stock, the number of shares to be issued shall be calculated by dividing the interest payable by 95% of the arithmetic average of the dollar volume-weighted average price of Company common stock on each of the five consecutive trading days immediately preceding the interest payment date. The new convertible notes mature on December 31, 2007, unless earlier converted into shares of Company common stock. The new convertible notes are initially convertible into Company common stock at a price of $2.26 per share. However, the conversion price may be adjusted as follows: (i) one third of the notes will have a conversion price equal to the arithmetic average of the dollar volume-weighted average price of Company common stock for the ten trading days following May 16, 2003, (ii) one third of the notes will have a conversion price equal to such average for the ten trading days following August 16, 2003, and (iii) one third of the notes will have a conversion price equal to such average for the ten trading days following November 16, 2003, provided, that the conversion price in each case shall not be less than $1.00 nor more than $2.26.

      The Company is required to file a registration statement by April 14, 2003, covering the resale of all of the shares of common stock issued to the investors in exchange for the $1,000,000 principal of convertible notes, and all the shares of common stock issuable to the investors upon the conversion of the new convertible notes and exercise of the warrants issued and to be issued, (including any interest shares under the new convertible notes) and have the registration statement declared effective no later than June 30, 2003. The Company is required to pay cash penalties if the registration statement is not filed or declared effective on time.

      If the Company raises capital after March 31, 2003, up to 20% of the net proceeds will be used, at the investors’ option, to redeem outstanding notes at par plus accrued interest.

      Each tranche of the notes is redeemable by the investors at any time after June 30, 2004 in cash at par plus accrued and unpaid interest if the dollar volume-weighted average price of Company common stock is less than the conversion price applicable to the notes for any 25 consecutive trading days. If the investors redeem their convertible notes, up to 20% of the amount to be redeemed may, at the Company’s option, be paid in shares of Company common stock, and said payment would be at 95% of the dollar volume-weighted average price of Company common stock for the 20 consecutive trading days immediately preceding payment. Each tranche of the notes is redeemable by the investors at any time after December 31, 2005 in cash at 83% of par plus accrued and unpaid interest if the dollar volume-weighted average price of Company common stock is less than the conversion price applicable to the notes for any 25 consecutive trading days following December 31, 2005.

      The Company has the right at any time to redeem up to all of the outstanding notes at par plus accrued and unpaid interest. If the redemption is after April 30, 2003, concurrently with any such redemption, the Company is required to deliver to the investors warrants, with an exercise price of $1.00 and a term equal to

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the remaining term of the notes being redeemed, to subscribe for a number of shares of common stock equal to X% of the principal amount being redeemed divided by the conversion price of the notes then in effect. “X%” means (i) before May 31, 2003, 50% and (ii) after May 31, 2003, 100%.

      Each tranche of the notes is convertible at the Company’s election at any time after April 15, 2004 if the dollar volume-weighted average price of Company common stock exceeds 150% of the conversion price applicable to the notes for any 25 consecutive trading days following April 15, 2004.

      The investors may require the Company to sell additional 4.95% convertible notes having an aggregate principal amount of up to $2,800,000, and warrants to purchase up to 290,533 shares of Company common stock prior to December 31, 2003 or later if the registration statement is not effective by a certain date.

      The Company has the right to sell additional 4.95% convertible notes having an aggregate principal amount of up to $7,000,000 and warrants to purchase up to 726,330 shares of Company common stock prior to June 30, 2003, if the dollar volume-weighted average price of Company common stock exceeds $3.25 on each of not less than 15 trading days in any 20 consecutive trading-day period.

      Under the terms of the amended agreement, certain covenants and events of default were restructured as follows: the failure to have its registration statement declared effective by the SEC and the requirement to remain listed on The Nasdaq National Market or other national exchange, both of which were waived through March 2004, unless the Company receives a going concern or qualified opinion from its auditors. If such a report is received from the Company’s auditors through March 2004, the original events of default remain effective.

      The Nasdaq National Market notified us on March 20, 2003 that our common stock may be delisted from Nasdaq for failure to maintain a minimum bid price of $1.00 and that we will be provided until September 16, 2003 to regain compliance with National Market standards. If we are unable to regain compliance with the minimum bid price we may be eligible to transfer our common stock to listing on The Nasdaq SmallCap Market if we meet applicable listing standards and thereby gain an additional 180 days to regain compliance with the minimum bid price requirement. In response to the potential delisting of our common stock due to the failure to meet the Nasdaq National Market’s minimum bid price requirement, we may ask our stockholders to authorize a reverse stock split at our annual meeting in 2003. If the reverse stock split is approved by our stockholders and we effect the reverse stock split, we would reduce the number of outstanding shares of common stock. With fewer shares outstanding, we would expect our stock price to increase. While a reverse stock split may enable us to cure the minimum bid price deficiency, share prices of companies effecting reverse stock splits often decline and we cannot assure you that our stock price would not decline after a reverse stock split.

      On March 26, 2003, Viewpoint Corporation entered into a Securities Purchase Agreement with three other institutional investors, pursuant to which it received $3,500,000 and issued an aggregate of $3,500,000 principal amount of 4.95% subordinated notes and 3,614,756 shares of Viewpoint common stock.

      Interest on these notes is payable quarterly in arrears in cash. The notes contain certain events of default, including, but not limited to: i) failure to pay principal and interest on the notes when payments become due, ii) judgements against the Company in excess of $1,000,000, iii) event of bankruptcy and iv) breach of any representation, covenant or other term. Upon an event of default, the notes will become immediately due and payable.

      The Company is required to file a registration statement by May 9, 2003, covering the resale of all of the shares of common stock issued and have the registration statement declared effective no later than July 23, 2003. The Company is required to pay cash penalties if the registration statement is not filed or declared effective on time.

      The Company has the right at any time to redeem up to all of the outstanding notes at par plus accrued and unpaid interest.

      Pursuant to the purchase of all of the outstanding capital stock of Viewpoint Digital on September 8, 2000, the Company issued two contingent promissory notes to Computer Associates each in the maximum

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amount of $15,000,000, but subject to reduction on the basis of the performance of the Viewpoint Digital assets. 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.

      In June 2002, Viewpoint issued 909,093 shares of Viewpoint common stock to Computer Associates in full satisfaction of the first contingent promissory note due June 8, 2001. The amount due Computer Associates under the promissory note due April 30, 2002 is approximately $2,928,000 and is reflected in due to related parties in the Company’s consolidated balance sheet at December 31, 2002. The Company expects to make this payment in newly issued shares of Viewpoint common stock.

      As of December 31, 2002, the Company had cash commitments totaling approximately $18,324,000 through 2010, related to long-term convertible notes, current promissory notes related to the Viewpoint Digital acquisition, and future minimum lease payments for office space, equipment, and an executive’s vehicle.

                                         
Payments Due By Period

1 Year More Than
Total or Less 2-3 Years 4-5 Years 5 Years





Long-Term Debt Obligations
  $ 7,000     $     $     $ 7,000     $  
Operating Lease Obligations
    6,663       1,117       2,033       1,917       1,596  
Interest Payments on Long Term-Debt Obligations
    1,733       347       693       693        
Promissory Note due to Computer Associates(1)
    2,928       2,928                    
     
     
     
     
     
 
Total
  $ 18,324     $ 4,392     $ 2,726     $ 9,610     $ 1,596  
     
     
     
     
     
 


(1)  The Company has the option to pay this promissory note in cash or company stock.

      During the first quarter of 2003, the Company consolidated its operations and reduced its workforce by 48 employees to a level of business that would not significantly reduce cash resources while continuing to provide for investment in new initiatives. The office consolidation and accompanying workforce reductions are expected to decrease the amount of cash used in operations by approximately $1,250,000 per quarter beginning in the second quarter of 2003. The Company operates in a dynamic environment and must remain responsive to changes as they occur. The Company has configured its business with a substantial level of variable costs, giving it the flexibility to reduce costs if economic conditions deteriorate. The Company has the ability and intention to reduce or delay these variable costs such that it will have sufficient cash resources through December 31, 2003, however, there can be no assurance that the Company will be able to adjust variable costs in sufficient time to respond to revenue shortfalls should they occur.

      The Company has contingency plans for 2003 if expected revenue targets are not achieved. These plans include further workforce reductions as well as reductions in overhead and capital expenditures.

      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.

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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, 2002. 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.

 
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
    37  
Consolidated Balance Sheets as of December 31, 2002 and 2001
    38  
Consolidated Statement of Operations for each of the three Years in the period ended December 31, 2002
    39  
Consolidated Statement of Stockholders Equity for each of the three years in the period ended December 31, 2002
    40  
Consolidated Statement of Cash Flows for each of the three Years in the period ended December 31, 2002
    41  
Notes to Consolidated Financial Statements
    43  

      2. Index to Financial Statement Schedule

         
Page

Schedule
       
Schedule II — Valuation and Qualifying Accounts
    72  

      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.

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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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 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.

      As discussed in Notes 2 and 6 to the consolidated financial statements, on January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”

  /s/ PRICEWATERHOUSECOOPERS LLP

New York, New York

March 31, 2003

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VIEWPOINT CORPORATION

CONSOLIDATED BALANCE SHEETS

                     
December 31,

2002 2001


(In thousands, except per
share data)
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 10,678     $ 8,054  
 
Marketable securities
    890       7,068  
 
Accounts receivable, net
    2,925       2,959  
 
Related party accounts receivable, net
    838       1,137  
 
Notes receivable, net
    750       750  
 
Prepaid expenses and other current assets
    599       836  
 
Current assets related to discontinued operations
          141  
     
     
 
   
Total current assets
    16,680       20,945  
Restricted cash
    987       291  
Property and equipment, net
    3,591       4,662  
Goodwill, net
    31,276       33,042  
Intangibles assets, net
    165       2,361  
Loans to officers, net
          595  
Other assets
    653       21  
     
     
 
   
Total assets
  $ 53,352     $ 61,917  
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Accounts payable
  $ 2,962     $ 1,314  
 
Accrued expenses
    759       1,304  
 
Due to related parties, net
    2,920       4,764  
 
Deferred revenues
    334       381  
 
Related party deferred revenues
    249       526  
 
Accrued incentive compensation
    545       545  
 
Current liabilities related to discontinued operations
    231       346  
     
     
 
   
Total current liabilities
    8,000       9,180  
Convertible notes
    6,712        
Warrants to purchase common stock
    288        
Commitments and contingencies (footnote 12)
               
Stockholders’ equity:
               
 
Preferred stock, $.001 par value; 5,000 shares authorized — no shares issued and outstanding at December 31, 2002 and 2001
           
 
Common stock, $.001 par value; 75,000 shares authorized — 41,179 shares issued and 41,019 shares outstanding at December 31, 2002, and 39,620 shares issued and 39,460 shares outstanding at December 31, 2001
    41       40  
 
Paid-in capital
    267,569       263,157  
 
Deferred compensation
    (4,130 )     (11,279 )
 
Treasury stock at cost; 160 at December 31, 2002 and 2001
    (1,015 )     (1,015 )
 
Accumulated other comprehensive income (loss)
    (36 )     18  
 
Accumulated deficit
    (224,077 )     (198,184 )
     
     
 
   
Total stockholders’ equity
    38,352       52,737  
     
     
 
   
Total liabilities and stockholders’ equity
  $ 53,352     $ 61,917  
     
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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VIEWPOINT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

                           
Years Ended December 31,

2002 2001 2000



(In thousands, except per share
amounts)
Revenues:
                       
 
Licenses
  $ 5,039     $ 8,148     $ 1,421  
 
Related party licenses
    7,554       1,533        —  
 
Services
    3,302       3,500       1,659  
 
Related party services
    2,244       827       500  
     
     
     
 
Total revenues
    18,139       14,008       3,580  
     
     
     
 
Cost of Revenues:
                       
 
Licenses
    353       309       76  
 
Services
    3,587       3,283       1,467  
     
     
     
 
Total cost of revenues
    3,940       3,592       1,543  
     
     
     
 
Gross profit
    14,199       10,416       2,037  
     
     
     
 
Operating expenses:
                       
 
Sales and marketing (including non-cash stock-based compensation charges totaling $3,187 in 2002, $2,335 in 2001, and $5,122 in 2000)
    16,682       17,521       18,616  
 
Research and development (including non-cash stock-based compensation charges totaling $712 in 2002, $2,920 in 2001, and $4,193 in 2000)
    5,548       9,846       10,559  
 
General and administrative (including non-cash stock-based compensation charges totaling $1,523 in 2002, $1,918 in 2001, and $3,026 in 2000)
    9,134       10,423       9,814  
 
Depreciation
    1,962       1,804       801  
 
Amortization of intangible assets
    664       3,325       1,258  
 
Amortization of goodwill
          14,128       1,767  
 
Impairment of goodwill and other intangible assets
    6,275       7,925        
 
Compensation charge related to forgiveness of an officer loan
                2,322  
 
Non-cash sales and marketing charges
                19,998  
 
Acquired in-process research and development costs
                963  
     
     
     
 
Total operating expenses
    40,265       64,972       66,098  
     
     
     
 
Loss from operations
    (26,066 )     (54,556 )     (64,061 )
Other income
    153       1,064       2,180  
     
     
     
 
Loss before provision for income taxes
    (25,913 )     (53,492 )     (61,881 )
Provision for income taxes
    107              
     
     
     
 
Loss before minority interest in loss of subsidiary
    (26,020 )     (53,492 )     (61,881 )
Minority interest in loss of subsidiary
                4,429  
     
     
     
 
Net loss from continuing operations
    (26,020 )     (53,492 )     (57,452 )
Adjustment to net loss on disposal of discontinued operations
    127       1,122       1,496  
     
     
     
 
Net loss
    (25,893 )     (52,370 )     (55,956 )
Accretion of mandatorily redeemable preferred stock of subsidiary
                (438 )
     
     
     
 
Net loss applicable to common shareholders
  $ (25,893 )   $ (52,370 )   $ (56,394 )
     
     
     
 
Basic and diluted net loss per common share:
                       
 
Net loss per common share from continuing operations
  $ (0.64 )   $ (1.37 )   $ (2.01 )
 
Net income per common share from discontinued operations
          0.03       0.05  
     
     
     
 
Net loss per common share
  $ (0.64 )   $ (1.34 )   $ (1.96 )
     
     
     
 
Weighted average number of shares outstanding — basic and diluted
    40,759       39,077       28,718  
     
     
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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VIEWPOINT CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2002, 2001, and 2000
                                                                 
Series A
Preferred Stock Common Stock Treasury Stock


Paid-In Deferred
Shares Amount Shares Amount Capital Compensation Shares Amount








(In thousands)
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 )            
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 )
     
     
     
     
     
     
     
     
 
Issuance of common stock upon the exercise of stock options
                650             1,387                    
Issuance of common stock in connection with Viewpoint Digital, Inc. acquisition
                909       1       4,752                    
Issuance/cancellation of common stock option awards
                            (2,010 )     2,010              
Amortization of deferred compensation
                                    5,139              
Issuance of common stock options for services
                            283                    
Translation adjustment
                                               
Unrealized loss on marketable securities
                                               
Net loss
                                               
     
     
     
     
     
     
     
     
 
Balances at December 31, 2002
        $       41,179     $ 41     $ 267,569     $ (4,130 )     (160 )   $ (1,015 )
     
     
     
     
     
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]
                                 
Accumulated
Other
Comprehensive Total
Income Accumulated Stockholders Comprehensive
(Loss) Deficit Equity Loss




(In thousands)
Balances at December 31, 1999
  $ (206 )   $ (89,858 )   $ 29,901     $  
     
     
     
     
 
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/cancellatio of common stock option awards
                       
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/cancellatio 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 )
     
     
     
     
 
Issuance of common stock upon the exercise of stock options
                1,387        
Issuance of common stock in connection with Viewpoint Digital, Inc. acquisition
                4,753        
Issuance/cancellatio of common stock option awards
                       
Amortization of deferred compensation
                5,139        
Issuance of common stock options for services
                283        
Translation adjustment
    (9 )           (9 )     (9 )
Unrealized loss on marketable securities
    (45 )           (45 )     (45 )
Net loss
          (25,893 )     (25,893 )     (25,893 )
     
     
     
     
 
Balances at December 31, 2002
  $ (36 )   $ (224,077 )   $ 38,352     $ (25,947 )
     
     
     
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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VIEWPOINT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

                               
Years Ended December 31,

2002 2001 2000



(In thousands)
Cash flows from operating activities:
                       
Net loss
  $ (25,893 )   $ (52,370 )   $ (55,956 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
 
Adjustment to net loss on disposal of discontinued operations
    (127 )     (1,122 )     (1,496 )
 
Non-cash stock-based compensation charges
    5,422       7,173       12,341  
 
Impairment of goodwill and other intangible assets
    6,275       7,925        —  
 
Depreciation and amortization
    2,626       19,257       4,789  
 
Provision for bad debt
    741       544        —  
 
Accrued interest income
    (17 )     (20 )      —  
 
Loss on sale and disposal of equipment
    45       12        —  
 
Loss on sale of marketable securities
    6        —        —  
 
Forgiveness, reserve and recovery of notes receivables
    612       (665 )     3,347  
 
Non-monetary sale of software for marketable securities
     —       (165 )      —  
 
Minority interest in loss of subsidiary
     —        —       (4,429 )
 
Non-cash sales and marketing charges
     —        —       19,998  
 
Changes in operating assets and liabilities, net of acquisitions:
                       
   
Accounts receivable
    (707 )     (1,449 )     (1,285 )
   
Related party accounts receivable
    299       (887 )     137  
   
Prepaid expenses and other assets
    227       917       (367 )
   
Restricted cash
    (3 )     (291 )      —  
   
Accounts payable
    1,186       (2,038 )     2,718  
   
Accrued expenses
    (545 )     443       110  
   
Due to/from related parties
    (19 )     323       (312 )
   
Deferred revenues
    (47 )     (101 )     517  
   
Related party deferred revenues
    (277 )     526       (250 )
   
Net cash provided by (used in) discontinued operations
    153       6,488       (8,607 )
     
     
     
 
     
Net cash used in operating activities
    (10,043 )     (15,500 )     (28,745 )
Cash flows from investing activities:
                       
Proceeds from sales and maturities of marketable securities
    9,634       31,885       59,870  
Purchases of marketable securities
    (3,507 )     (23,042 )     (42,735 )
Purchases of property and equipment
    (936 )     (872 )     (4,233 )
Sale of property and equipment
     —       16        —  
Purchases of patents and trademarks
    (49 )     (120 )      —  
Issuance of notes receivable
     —        —       (1,500 )
Repayment of notes receivable from related parties
     —       520       1,000  
Acquisition of minority interest in subsidiary
     —        —       (507 )
Acquisition of Viewpoint Digital Inc., net of cash acquired
     —        —       (10,225 )
Net cash used in discontinued operations
     —        —       (86 )
     
     
     
 
     
Net cash provided by investing activities
    5,142       8,387       1,584  

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Years Ended December 31,

2002 2001 2000



(In thousands)
Cash flows from financing activities:
                       
Proceeds from issuance of convertible notes, net of issuance costs paid of $160
    6,552        —        —  
Proceeds from issuance of warrants to purchase common stock
    288        —        —  
Restricted cash in escrow for interest on convertible notes
    (693 )      —        —  
Proceeds from exercise of stock options
    1,387       2,449       12,604  
Issuance of loans to officers
     —       (575 )      —  
Collection of subscription receivable related to common stock of subsidiary
     —        —       3,500  
Issuance of mandatorily redeemable preferred stock of subsidiary, net of issuance costs of $161
     —        —       19,839  
Proceeds from exercise of subsidiary stock options
     —        —       50  
     
     
     
 
     
Net cash provided by financing activities
    7,534       1,874       35,993  
Effect of exchange rates changes on cash
    (9 )     (27 )     8  
     
     
     
 
Net increase (decrease) in cash and cash equivalents
    2,624       (5,266 )     8,840  
Cash and cash equivalents at beginning of year
    8,054       13,320       4,480  
     
     
     
 
Cash and cash equivalents at end of year
  $ 10,678     $ 8,054     $ 13,320  
     
     
     
 
Supplemental disclosure of cash flow activities:
                       
Cash paid during the year for income taxes
  $ 153     $ 78     $  
Supplemental disclosure of non-cash investing and financing activities:
                       
Unrealized gains (losses) on marketable securities
  $ (45 )   $ 33     $ 81  
Closing costs for convertible notes accrued and not yet paid
    462              
Issuance of warrants to purchase shares of common stock
          154        
Receipt of treasury stock as forgiveness of notes receivable
          1,015        
Contingent consideration not yet issued in connection with the acquisition of Viewpoint Digital
    2,928       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  
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  

The accompanying notes are an integral part of these consolidated financial statements.

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
1. Business and Organization

      Viewpoint Corporation provides interactive media technologies and digital content creation services for website marketing, online advertising, and embedded applications. Our graphics operating system 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.

      Until December 1999, the Company (which was then known as MetaCreations) was primarily engaged in the development, marketing, and sales of prepackaged software graphics products. Its principal products were computer graphics “painting” tools, photo editing, and 3D graphics software. With its acquisition of Real Time Geometry Corporation in December 1996, the Company became involved, on a limited basis, in the development of technologies designed to make practical the efficient display and deployment of interactive media on the Internet. In June 1999, the Company increased its commitment to the development of interactive Internet technologies and formed Metastream.com Corporation 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. In September 2000, the Company acquired Viewpoint Digital, Inc., a company primarily involved in the licensing of a catalog of three-dimensional digital models and providing digital content creation services. In November 2000, the Company changed its name to Viewpoint Corporation. 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, Viewpoint Media Player

      Viewpoint believes that its success will depend largely on its ability to improve and enhance its interactive media technologies. 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, 2002, had an accumulated deficit of $224,077,000.

      During the first quarter of 2003, the Company consolidated its operations and reduced its workforce to a level of business that would not significantly reduce cash resources while continuing to provide for investment in new initiatives. The Company operates in a dynamic environment and must remain responsive to changes as they occur. The Company has configured its business with a substantial level of variable costs, giving it the flexibility to reduce costs if economic conditions deteriorate. The Company has

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the ability and intention to reduce or delay these variable costs such that it will have sufficient cash resources through December 31, 2003, however, there can be no assurance that the Company will be able to adjust variable costs in sufficient time to respond to revenue shortfalls should they occur.

      The Company has contingency plans for 2003 if expected revenue targets are not achieved. These plans include further workforce reductions as well as reductions in overhead and capital expenditures.

      On December 31, 2002, the Company completed a private placement of convertible notes and warrants in which it issued to three institutional investors, 4.95% convertible notes having an aggregate principal amount of $7,000,000, and warrants to purchase 726,330 shares of Company common stock. The notes mature on December 31, 2007, unless earlier converted into shares of Company common stock at a price of $2.26 per share. The warrants expire on December 31, 2006, and are exercisable at a price of $2.26 per share.

      In conjunction with the issuance of convertible notes and warrants on December 31, 2002, there were several covenants with events of default, including but not limited to: i) failure to have the Company’s registration statement declared effective by the Securities and Exchange Commission (“SEC”), ii) event of delisting from The Nasdaq National Market or other national exchange, iii) change in control, iv) event of conversion default such as lack of authorized capital, v) event of bankruptcy, vi) failure to pay principal and interest on the convertible notes when payments become due, vii) judgements against the Company in excess of $1,000,000 and viii) breach of any representation, warranty, covenant or other term. Upon an event of default, the convertible notes will become immediately due and payable, after a grace period to cure the default lapses.

      On February 28, 2003, the Company received a notice of default, from two of the three investors based upon an alleged breach of representation and warranties by the Company.

      On March 25, 2003, the Company entered into Redemption, Amendment and Exchange Agreements with the three institutional investors with whom it had completed a private placement of convertible notes and warrants on December 31, 2002. Pursuant to these agreements, the notice of default was withdrawn and Viewpoint redeemed an aggregate of $3,300,000 million principal amount of the outstanding convertible notes, exchanged an aggregate of $1,000,000 principal amount of the outstanding convertible notes for shares of Viewpoint common stock at $0.74 per share, and exchanged the remaining $2,700,000 principal amount of outstanding convertible notes for $2,700,000 principal amount of new convertible notes. The warrants to purchase 726,330 shares of Company common stock, which were issued to these investors on December 31, 2002, remain outstanding.

      If the Company raises capital after March 31, 2003, up to 20% of the net proceeds will be used, at the investors’ option, to redeem outstanding notes at par plus accrued interest.

      Under the terms of the amended agreement, certain covenants and events of default were restructured as follows: the failure to have its registration statement declared effective by the SEC and the requirement to remain listed on The Nasdaq National Market or other national exchange, both of which were waived through March 2004, unless the Company receives a going concern or qualified opinion from its auditors. If such a qualified report is received from the Company’s auditors through March 2004, the original events of default remain effective.

      The Nasdaq National Market notified us on March 20, 2003 that our common stock may be delisted from Nasdaq for failure to maintain a minimum bid price of $1.00 and that we will be provided until September 16, 2003 to regain compliance with National Market standards. If we are unable to regain compliance with the minimum bid price we may be eligible to transfer our common stock to listing on The Nasdaq SmallCap Market if we meet applicable listing standards and thereby gain an additional 180 days to regain compliance with the minimum bid price requirement. In response to the potential delisting of our common stock due to the failure to meet the Nasdaq National Market’s minimum bid price requirement, we

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

may ask our stockholders to authorize a reverse stock split at our annual meeting in 2003. If the reverse stock split is approved by our stockholders and we effect the reverse stock split, we would reduce the number of outstanding shares of common stock. With fewer shares outstanding, we would expect our stock price to increase. While a reverse stock split may enable us to cure the minimum bid price deficiency, share prices of companies effecting reverse stock splits often decline and we cannot assure you that our stock price would not decline after a reverse stock split.

      On March 26, 2003, Viewpoint Corporation entered into a Securities Purchase Agreement with three other institutional investors, pursuant to which it received $3,500,000 and issued an aggregate of $3,500,000 principal amount of 4.95% subordinated notes and 3,614,756 shares of Viewpoint common stock.

      The notes contain certain events of default, including, but not limited to: i) failure to pay principal and interest on the notes when payments become due, ii) judgements against the Company in excess of $1,000,000, iii) event of bankruptcy and iv) breach of any representation, covenant or other term. Upon an event of default, the notes will become immediately due and payable.

      The Company believes that its current cash and marketable securities balances and cash provided by future operations, if any, are sufficient to meet its operating cash flow needs and anticipated capital expenditure requirements through at least the next twelve months. 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.

 
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 2002 presentation.

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.

Cash Equivalents and Marketable Securities

      The Company considers all highly liquid investments purchased with an original maturity of three months or less at date of acquisition to be cash equivalents.

      The Company considers its marketable securities portfolio available-for-sale as defined in SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” These available-for-sale securities are accounted for at their fair value, and unrealized gains and losses on these securities are reported as a separate component of stockholders’ equity.

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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.

Restricted Cash

      The convertible notes agreement entered into on December 31, 2002, required the Company to set up an interest escrow account containing the total interest to be paid for the first two years the notes are outstanding. The balance in the interest escrow account as of December 31, 2002 was $693,000. Pursuant to the Redemption, Amendment and Exchange Agreements entered into on March 25, 2003, $377,000 was released from the escrow account to the Company.

      Included in restricted cash at December 31, 2002, is $294,000, which was pledged as collateral to secure a letter of credit used for a security deposit on the Company’s New York facility.

Goodwill and Intangible Assets

      Effective January 1, 2002, the Company completed the adoption of SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. As required by SFAS No. 142, the Company discontinued amortizing the remaining balances of goodwill as of January 1, 2002. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. When evaluating goodwill for potential impairment, the Company first compares the fair value of the reporting unit, based on market values of the reporting unit or on the present value of estimated future cash flows, with its carrying amount. If the estimated fair value of the reporting unit is less than its carrying amount, an impairment loss calculation is prepared. The impairment loss calculation compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. All other intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Property and Equipment

      Property and equipment are stated at cost less accumulated depreciation. 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.

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

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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.

Stock-Based Compensation

      The Company accounts for stock option grants in accordance with Accounting Principals Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock Based Compensation”, as amended by FAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure.” 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;
 
  •  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.

 
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 its Stock Option Plans under the fair value method

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of SFAS No. 123. The fair value of options issued under the Plans was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions:

                         
Years Ended December 31,

2002 2001 2000



Risk-free interest rate
    3.8%       4.6%       6.0%  
Dividend yield
     —        —        —  
Volatility factor
    1.00       1.00       1.00  
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, 2002, 2001 and 2000:

                         
Years Ended December 31,

2002 2001 2000



Exercise price equal to fair value
  $ 5.10     $ 3.28     $ 4.68  
Exercise price greater than fair value
     —       4.30        —  
Exercise price less than fair value
     —       3.30       9.32  

      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, 2002:
               
 
Non-cash stock-based compensation charges
  $ 5,422     $ 11,037  
 
Net loss applicable to common shareholders
    (25,893 )     (31,508 )
 
Net loss per common share
    (0.64 )     (0.77 )
Year Ended December 31, 2001:
               
 
Non-cash stock-based compensation charges
  $ 7,173     $ 12,624  
 
Net loss applicable to common shareholders
    (52,370 )     (57,821 )
 
Net loss per common share
    (1.34 )     (1.48 )
Year Ended December 31, 2000:
               
 
Non-cash stock-based compensation charges
  $ 12,341     $ 21,023  
 
Net loss applicable to common shareholders
    (56,394 )     (65,076 )
 
Net loss per common share
    (1.96 )     (2.27 )

      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.

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. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved, are included in other income in the statements of operations.

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

      The Company recognizes revenue in accordance with SOP 97-2, “Software Revenue Recognition,” as amended, and SAB No. 101 “Revenue Recognition in Financial Statements.” Per SOP 97-2 and SAB No. 101, the Company recognizes revenue when the following criteria are met: (a) persuasive evidence of an arrangement exists, (b) delivery has occurred or services have been performed, (c) the Company’s fee is fixed or determinable, and (d) collectibility is reasonably assured.

      Viewpoint generates revenues through two sources: (a) software licenses and (b) services. 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 revenues from direct customers include sales of perpetual and term based licenses for broadcasting digital content in the Viewpoint format, and licenses for our digital content library. License revenues are recognized over the term of the license in a term-based broadcast license model when the term is less than 15 months, and up-front in a perpetual broadcast license model and a term-based broadcast license model when the term is 15 months or longer, providing no further significant obligations exist and the resulting receivable is deemed collectible by management. License revenues for our digital content library are recognized when the license right begins, which is upon contract signing, provided all other revenue recognition criteria are met and no further significant obligations exist. Arrangements with VAR’s require either (i) an upfront, non-refundable payment or (ii) a percentage royalty based on sell through, or both, as consideration for the right to resell our technology. Up-front, non-refundable payments are recognized as license revenues when the VARs right to resell our technology begins and the technology has been delivered to the VAR, which is upon contract signing, provided all other revenue recognition criteria are met and no further significant obligations exist. For arrangements that do not call for an up-front, non-refundable payment, revenues are recognized as the royalties are earned, which is upon notification of sell through, provided all other revenue recognition criteria are met and no further significant obligations exist.

      Fee-based professional services for customized software development are performed on a time-and-material or fixed-fee basis, under separate service arrangements. Revenues for fixed-fee arrangements 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” and SAB No. 101. Percentage-of-completion for service contracts is measured principally by the percentage of costs incurred and accrued to date for each contract, which principally consist of direct labor costs and overhead, 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.

      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.

      For arrangements involving multiple elements, we defer revenue for the undelivered elements based on their fair value and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of each undelivered element in multiple element arrangements is based on the price charged when the same element is sold separately. For maintenance and technical support elements, we use renewal rates to determine the price when sold separately.

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      Standard terms for license and service 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 and/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. 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 customers. Nonmonetary revenues are recognized at the estimated fair value of the services received. Generally, nonmonetary revenues equal nonmonetary expenses, however, due to timing, nonmonetary accounts receivable and accounts payable may result.

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.

Concentration of Risk

      The Company is subject to concentration of credit risk and interest rate risk related to cash, cash equivalents, marketable securities, accounts receivable, and restricted cash. 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, 2002, and periodically from 2000 through 2001, 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, restricted cash, 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 outstanding and diluted net loss per common share is computed using the weighted average number of shares of common and common equivalent shares outstanding. Common equivalent shares related to stock options and warrants totaling 6,346,000, 8,601,000 and 9,814,000 for the years ended December 31, 2002, 2001, and 2000, respectively, are excluded from the computation of diluted net loss per common share because their effect was antidilutive.

      Basic and diluted net loss per common share for the years ended December 31, 2002 and 2001 include the effect of 744,740 shares of common stock issued to Computer Associates on June 24, 2002, as if the shares were issued and outstanding on June 8, 2001.

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

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comprehensive income (loss), are reported net of their related tax effect, to arrive at comprehensive income (loss).

Recent Accounting Pronouncements

      In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities” which requires the consolidation by primary beneficiaries of variable interest entities (“VIEs”), as defined. Public companies will generally be subject to its provisions effective after January 31, 2003 for newly-acquired VIEs and the first fiscal or interim period beginning after June 15, 2003 for VIE holdings acquired prior to February 1, 2003. The adoption of FIN 46 is not expected to have a material effect on the Company’s financial statements.

      In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This Statement requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan under EITF No. 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The provisions of SFAS No. 146 will be applied to the costs associated with the Company’s consolidation of its workforce into two main facilities, which occurred during the first quarter of 2003.

      In November 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.” FIN 45 expands on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. It also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002.

      In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation  — Transition and Disclosure.” This Statement amends SFAS No. 123, “Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of this Standard are effective for fiscal years ending after December 15, 2002 and have been incorporated into these financial statements and accompanying footnotes.

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3. Cash, Cash Equivalents and Marketable Securities

      The cost and fair value of the Company’s cash, cash equivalents and marketable securities as of December 31, 2002, by type of security, contractual maturity, and its classification in the balance sheet, is as follows (in thousands):

                                         
Gross Gross
Amortized Unrealized Unrealized
Cost Gain (Loss) Fair Value Maturity





Type of security:
                                       
Cash
  $ 7,292     $     $     $ 7,292       2003  
Money Market Funds
    1,485                   1,485       2003  
U.S. Government Agencies
    2,790       1             2,791       2003  
     
     
     
     
         
    $ 11,567     $ 1     $     $ 11,568          
     
     
     
     
         
Classification in Balance Sheet:
                                       
Cash and Cash Equivalents
  $ 10,678     $     $     $ 10,678       2003  
Marketable Securities
    889       1             890       2003  
     
     
     
     
         
    $ 11,567     $ 1     $     $ 11,568          
     
     
     
     
         

      The cost and fair value of the Company’s cash, cash equivalents and 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
Cost Gain (Loss) Fair Value Maturity





Type of security:
                                       
Cash
  $ 666     $     $     $ 666          
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  
     
     
     
     
         
    $ 15,077     $ 46     $ (1 )   $ 15,122          
     
     
     
     
         
Classification in Balance Sheet:
                                       
Cash and Cash Equivalents
  $ 8,054     $     $     $ 8,054       2002  
Marketable Securities
    7,023       46       (1 )     7,068       2002  
     
     
     
     
         
    $ 15,077     $ 46     $ (1 )   $ 15,122          
     
     
     
     
         
 
4. Discontinued Operations

      In December 1999, the Board of Directors of the Company approved a plan to focus exclusively on its interactive media technologies and digital content creation services and to correspondingly divest itself of its prepackaged software graphics 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

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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. The Company recorded an adjustment to net loss on disposal of discontinued operations of $1,496,000 during the year ended December 31, 2000, primarily as a result of better than expected net revenues during the year from the discontinued business. During the years ended December 31, 2002 and 2001, the Company recorded adjustments to net loss on disposal of discontinued operations of $127,000 and $1,122,000, respectively, as a result of changes in estimates related to accounts receivable and accounts payable of the discontinued business. Changes in estimates, which are not expected to be significant, will be accounted for prospectively and included in adjustment to net loss on disposal of discontinued operations.

 
5. Property and Equipment

      Property and equipment consist of the following (in thousands):

                 
December 31,

2002 2001


Computer equipment and software
  $ 4,763     $ 3,935  
Office furniture and equipment
    1,754       1,724  
Leasehold improvements
    1,580       1,551  
Other
    170       233  
     
     
 
      8,267       7,443  
Less accumulated depreciation and amortization
    (4,676 )     (2,781 )
     
     
 
    $ 3,591     $ 4,662  
     
     
 

      Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was approximately $1,962,000, $1,804,000 and $801,000, respectively.

 
6. Goodwill and Intangible Assets

      In conjunction with the implementation of SFAS No. 142, the Company completed a goodwill impairment review as of January 1, 2002 and found no impairment on that date.

      Upon the adoption of SFAS No. 141, an assembled workforce no longer met the definition of an identifiable intangible asset. As a result, the net balance of $1,767,000, has been reclassified to goodwill on January 1, 2002.

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      In accordance with SFAS No. 142, the effect of this accounting change is reflected prospectively. Supplemental comparative disclosure as if the change had been retroactively applied to the prior year periods is as follows (in thousands, except per share amounts):

                             
Year Ended December 31,

2002 2001 2000



Net loss:
                       
 
Reported net loss applicable to common shareholders
  $ (25,893 )   $ (52,370 )   $ (56,394 )
 
Goodwill amortization(1)
          14,128       1,767  
     
     
     
 
   
Adjusted net loss
  $ (25,893 )   $ (38,242 )   $ (54,627 )
     
     
     
 
Basic and diluted net loss per share:
                       
 
Reported net loss per share
  $ (0.64 )   $ (1.34 )   $ (1.96 )
 
Goodwill amortization
          0.36       0.06  
     
     
     
 
   
Adjusted basic and diluted net loss per share
  $ (0.64 )   $ (0.98 )   $ (1.90 )
     
     
     
 


(1)  Includes $1,060 and $353 in amortization of an assembled workforce for the years ended December 31, 2001 and 2000, respectively.

      The Company recorded $2,928,000 of additional goodwill during the first quarter of 2002 in connection with a contingent promissory note due Computer Associates on April 30, 2002 for the acquisition of Viewpoint Digital. As of March 31, 2002, due to the persistence of unfavorable economic conditions along with lower-than-expected revenues generated to date and reduced estimates of future performance of the Viewpoint Digital assets, the Company performed an additional impairment analysis on the goodwill and other intangible asset balances recorded upon the acquisition of Viewpoint Digital. In accordance with the provisions of SFAS No. 142 and SFAS No. 144, the Company recorded impairment charges totaling $6,275,000. The fair value of the Viewpoint Digital assets were estimated using the expected present value of future cash flows. The assumptions supporting the cash flows, including a discount rate of 20%, were determined using the Company’s best estimates as of the date the impairment was recorded.

      The changes in the carrying amount of goodwill and intangible assets during the year ended December 31, 2002 are as follows (in thousands):

                           
Goodwill Intangible Assets Total



Balance as of January 1, 2002
  $ 33,042     $ 2,361     $ 35,403  
 
Additions during period
    2,928       49       2,977  
 
Impairment losses
    (4,694 )     (1,581 )     (6,275 )
 
Amortization
     —       (664 )     (664 )
     
     
     
 
Balance as of December 31, 2002
  $ 31,276     $ 165     $ 31,441  
     
     
     
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      As of December 31, 2002 and 2001, the Company’s intangible assets and related accumulated amortization consisted of the following (in thousands):

                                                 
December 31, 2002 December 31, 2001


Accumulated Accumulated
Gross Amortization Net Gross Amortization Net






Viewpoint Digital Technology
  $  —     $  —     $  —     $ 1,558     $ (519 )   $ 1,039  
Viewpoint Digital Customer List
     —        —        —       1,203       (802 )     401  
Viewpoint Digital Trade Name
     —        —        —       643       (214 )     429  
Covenant Not To Compete
     —        —        —       3,253       (2,892 )     361  
Other Intangibles
     —        —        —       18       (6 )     12  
Patents and Trademarks
    168       (3 )     165       119        —       119  
     
     
     
     
     
     
 
Total Intangible Assets
  $ 168     $ (3 )   $ 165     $ 6,794     $ (4,433 )   $ 2,361  
     
     
     
     
     
     
 

      Aggregate amortization expense on intangible assets was approximately $664,000, $3,325,000, and $1,258,000 for the years ended December 31, 2002, 2001, and 2000, respectively. Amortization of intangible assets is estimated to be $2,000 a year for the next five years.

      During 2001, the Company assessed the impairment of goodwill and intangible 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 intangible assets 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.

      During 2003 the market value of the Company’s stockholders’ equity fell below its carrying value indicating the existence of a potential goodwill impairment. The Company will assess the carrying value of its goodwill in accordance with the provisions of SFAS No. 142, during the first quarter of 2003.

 
7. Related Party Transactions

      During 2002, the Company recorded revenues totaling $9,798,000, related to agreements, including reseller arrangements, with AOL, Computer Associates, and Adobe, all of whom have representatives on the Company’s Board of Directors. In March 2002, the Company amended an AOL contract entered into in July 2001, which resulted in the Company recording revenues when payments are due, as compared to the partial deferral of those payments, which would otherwise have occurred. This amendment resulted in the Company recognizing $5,825,000 in license revenues for this contract as opposed to $2,700,000 if the contract had not been amended. As of December 31, 2002, the Company has $838,000 in accounts receivable and $249,000 in deferred revenues relating to transactions entered into with these related parties.

      During 2001, the Company recorded revenues totaling $2,360,000, related to agreements, including reseller arrangements, with AOL and Computer Associates. Accounts receivable and deferred revenues as of December 31, 2001 relating to transactions entered into with these related parties were $1,137,000 and $526,000, respectively. During 2000, the Company recorded revenues totaling $500,000 relating to an engineering services agreement with Computer Associates.

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      On May 31 2001, the Company loaned $200,000 to an officer of the Company, in accordance with the contractual terms of the officer’s employment agreement. The loan, which accrued interest annually at 5.07% and was payable on May 31, 2005, was secured solely by the proceeds from the sale of Company stock issuable upon exercise of the officers’ stock options. The loan was non-recourse to the officer, unless the Company terminated the officer for cause, in which case the loan would have become fully recourse to the officer. During 2002, the Company recorded a reserve of $212,000 against the loan as the value of the Company’s stock fell substantially below the exercise price of the options securing the loan. The amount reserved represents the unsecured portion of the loan and accrued interest as of December 31, 2002. The officer resigned effective December 31, 2002, requiring the loan to be repaid. The officer defaulted on the loan on January 31, 2003, and the Company took possession of the collateral.

      On April 2, 2001, the Company loaned $375,000 to an officer of the Company in accordance with the contractual terms of the officer’s employment agreement. The loan, which accrues interest annually at 4.94% and is payable on April 2, 2005, is secured solely by the net, after tax proceeds from the sale of Company stock issuable upon exercise of the officers’ stock options. The loan 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. During 2002, the Company recorded a reserve of $400,000 against the loan as the value of the Company’s stock fell below the exercise price of the options securing the loan. The amount reserved represents the unsecured portion of the loan and accrued interest as of December 31, 2002.

      During 2000, the Company loaned $1,500,000 to a former officer of the Company. The loan, which was non-interest bearing and was due on May 1, 2004, was collateralized by 200,000 shares of restricted Company stock, as well as options to purchase 790,000 shares of Company 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.

      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 in accordance with the contractual terms of the former executive’s employment agreement. The loan, which accrued interest semi-annually at 5.67% and was payable on January 15, 2001, was collateralized by 160,000 shares of Company stock 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 in accordance with the contractual terms of the officer’s employment agreement. The loan, which accrued interest semi-annually at 5.67% and was payable on December 31, 2002, was secured solely by the net, after tax proceeds from the sale of Company stock issuable upon the exercise of the officer’s stock options. The loan was forgiven in 2000 in accordance with the contractual terms of 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 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.

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8. 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.

 
9. Convertible Notes

      On December 31, 2002, the Company completed a private placement of convertible notes and warrants in which it issued to three institutional investors, 4.95% convertible notes (“Notes”) having an aggregate principal amount of $7,000,000, and warrants to purchase 726,330 shares of Company common stock. Interest on the convertible notes is payable quarterly in arrears in cash or, at the option of the Company, in shares of Company common stock, provided the Company satisfies certain financial and other conditions. If interest is paid in shares of Company common stock, the number of shares to be issued shall be calculated by dividing the interest payable by 95% of the dollar volume-weighted average price of Company common stock on each of the five consecutive trading days immediately preceding the interest payment date. The convertible notes mature on December 31, 2007, unless earlier converted into shares of Company common stock at a price of $2.26 per share. The warrants expire on December 31, 2006, and are exercisable at a price of $2.26 per share,

      The Company is required to file a registration statement covering the resale of all of the shares of common stock issuable to the investors upon conversion of the convertible notes and exercise of the warrants issued, (including any interest shares under the convertible notes) and have the registration statement declared effective no later than April 30, 2003.

      At any time after June 30, 2004, the investors may cause the Company to redeem up to all of the outstanding convertible notes in cash at par plus accrued and unpaid interest if the dollar volume-weighted

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

average price of Company common stock is less than $2.26 for any 25 consecutive trading days. If the investors redeem their convertible notes, up to 20% of the amount to be redeemed may, at the Company’s option, be paid in shares of Company common stock, and said payment would be at 95% of the dollar volume-weighted average price of Company common stock for the 20 consecutive trading days immediately preceding payment. At any time after December 31, 2005, the investors may cause the Company to redeem up to all of the outstanding convertible notes in cash at 83% of par plus accrued and unpaid interest if the dollar volume-weighted average price of Company common stock is less than $2.26 for any 25 consecutive trading days following December 31, 2005.

      At any time after April 15, 2004, the Company has the right to require the investors to convert up to all of the outstanding Notes at $2.26 if the dollar volume-weighted average price of Company common Stock exceeds $3.39 for any 25 consecutive trading days following April 15, 2004. At any time following the 30 month anniversary of the day the registration statement is declared effective by the SEC, the Company has the right to redeem the convertible notes at a price equal to the greater of (i) par plus accrued and unpaid interest and (ii) a value assigned to the convertible notes by an independent investment bank or major financial institution.

      The investors may require the Company to sell additional 4.95% convertible notes having an aggregate principal amount of up to $2,800,000, and warrants to purchase up to 290,533 shares of Company common stock prior to December 31, 2003 or later if the registration statement is not effective by a certain date.

      The Company has the right to sell additional 4.95% convertible notes having an aggregate principal amount of up to $7,000,000 and warrants to purchase up to 726,330 shares of Company common stock prior to June 30, 2003, if the dollar volume-weighted average price of Company common stock exceeds $3.25 on each of not less than 15 trading days in any 20 consecutive trading day period.

      In conjunction with the issuance of convertible notes and warrants on December 31, 2002, there were several covenants with events of default, including but not limited to: i) failure to have the Company’s registration statement declared effective by the SEC, ii) event of delisting from The Nasdaq National Market or other national exchange, iii) change in control, iv) event of conversion default such as lack of authorized capital, v) event of bankruptcy, vi) failure to pay principal and interest on the convertible notes when payments become due, vii) judgements against the Company in excess of $1,000,000 and viii) breach of any representation, warranty, covenant or other term. Upon an event of default, the convertible notes will become immediately due and payable, after a grace period to cure the default lapses.

      Pursuant to SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” the Company bifurcated the fair value of the conversion options from the convertible notes since the conversion options were determined to not be clearly and closely related to the debt host. In addition, since the effective registration of the securities underlying the conversion options and warrants is an event outside of the control of the Company, pursuant to EITF Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” the Company recorded the fair value of conversion options and warrants as long-term liabilities, as it is assumed that the Company will be required to net-cash settle the underlying securities. The fair values of the convertible notes, conversion options, and warrants of $5,535,000, $1,177,000, and $288,000, respectively, were determined by the Company using the following assumptions: a 20% discount on the Company’s Common stock price at December 31, 2002, a credit spread of 20% over five year LIBOR rates at December 31, 2002, and an annualized stock volatility of 46%. The aggregate value of the convertible notes and conversion options of $6,712,000, and the warrants of $288,000 are recorded as long-term liabilities in the Company’s consolidated balance sheets at December 31, 2002. Debt issue costs accrued and paid, which amounted to $614,000, were recorded as other assets in the Company’s consolidated balance sheets as of December 31, 2002, in accordance with APB Opinion No. 21 “Interest on Receivables and Payables.”

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      Based on the provisions of SFAS No. 133 and EITF Issue No. 00-19, the Company will report changes in the fair value of the conversion options and warrants in earnings. The discount on the convertible notes and the debt issue costs will be accounted for in accordance with the provisions of APB Opinion No. 21, which requires amortization of the discount and debt issue costs using the interest method. Since the convertible notes were issued on December 31, 2002, the mark -to-market requirements under SFAS No. 133 and amortization of interest charges under APB Opinion No. 21, did not have any effect on earnings during 2002.

      On February 28, 2003, the Company received a notice of default, from two of the three investors based upon an alleged breach of representation and warranties by the Company.

      On March 25, 2003, the company entered into Redemption, Amendment and Exchange Agreements with the three institutional investors with whom it had completed a private placement of convertible notes and warrants on December 31, 2002. Pursuant to these agreements, the notice of default was withdrawn and Viewpoint redeemed an aggregate of $3,300,000 principal amount of the outstanding convertible notes, exchanged an aggregate of $1,000,000 principal amount of the outstanding convertible notes for shares of Viewpoint common stock at $0.74 per share, and exchanged the remaining $2,700,000 principal amount of outstanding convertible notes for $2,700,000 principal amount of new convertible notes. The warrants to purchase 726,330 shares of Company common stock which were issued to these investors on December 31, 2002 remain outstanding.

      Interest on the new convertible notes is payable quarterly in arrears in cash or, at the option of the Company, in shares of Company common stock, provided the Company satisfies certain financial and other conditions. If interest is paid in shares of Company common stock, the number of shares to be issued shall be calculated by dividing the interest payable by 95% of the arithmetic average of the dollar volume-weighted average price of Company common stock on each of the five consecutive trading days immediately preceding the interest payment date. The new convertible notes mature on December 31, 2007, unless earlier converted into shares of Company common stock. The new convertible notes are initially convertible into Company common stock at a price of $2.26 per share. However, the conversion price may be adjusted as follows: (i) one third of the notes will have a conversion price equal to the arithmetic average of the dollar volume-weighted average price of Company common stock for the ten trading days following May 16, 2003, (ii) one third of the notes will have a conversion price equal to such average for the ten trading days following August 16, 2003, and (iii) one third of the notes will have a conversion price equal to such average for the ten trading days following November 16, 2003, provided, that the conversion price in each case shall not be less than $1.00 nor more than $2.26.

      The Company is required to file a registration statement by April 14, 2003, covering the resale of all of the shares of common stock issued to the investors in exchange for the $1,000,000 principal of convertible notes, and all the shares of common stock issuable to the investors upon the conversion of the new convertible notes and exercise of the warrants issued and to be issued, (including any interest shares under the new convertible notes) and have the registration statement declared effective no later than June 30, 2003. The Company is required to pay cash penalties if the registration statement is not filed or declared effective on time.

      If the Company raises capital after March 31, 2003, up to 20% of the net proceeds will be used, at the investors’ option, to redeem outstanding notes at par plus accrued interest.

      Each tranche of the notes is redeemable by the investors at any time after June 30, 2004 in cash at par plus accrued and unpaid interest if the dollar volume-weighted average price of Company common stock is less than the conversion price applicable to the notes for any 25 consecutive trading days. If the investors redeem their convertible notes, up to 20% of the amount to be redeemed may, at the Company’s option, be paid in shares of Company common stock, and said payment would be at 95% of the dollar volume-weighted average price of Company common stock for the 20 consecutive trading days immediately preceding payment.

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Each tranche of the notes is redeemable by the investors at any time after December 31, 2005 in cash at 83% of par plus accrued and unpaid interest if the dollar volume-weighted average price of Company common stock is less than the conversion price applicable to the notes for any 25 consecutive trading days following December 31, 2005.

      The Company has the right at any time to redeem up to all of the outstanding notes at par plus accrued and unpaid interest. If the redemption is after April 30, 2003, concurrently with any such redemption, the Company is required to deliver to the investors warrants, with an exercise price of $1.00 and a term equal to the remaining term of the notes being redeemed, to subscribe for a number of shares of common stock equal to X% of the principal amount being redeemed divided by the conversion price of the notes then in effect. “X%” means (i) before May 31, 2003, 50% and (ii) after May 31, 2003, 100%.

      Each tranche of the notes is convertible at the Company’s election at any time after April 15, 2004 if the dollar volume-weighted average price of Company common stock exceeds 150% of the conversion price applicable to the notes for any 25 consecutive trading days following April 15, 2004.

      The investors may require the Company to sell additional 4.95% convertible notes having an aggregate principal amount of up to $2,800,000, and warrants to purchase up to 290,533 shares of Company common stock prior to December 31, 2003 or later if the registration statement is not effective by a certain date.

      The Company has the right to sell additional 4.95% convertible notes having an aggregate principal amount of up to $7,000,000 and warrants to purchase up to 726,330 shares of Company common stock prior to June 30, 2003, if the dollar volume-weighted average price of Company common stock exceeds $3.25 on each of not less than 15 trading days in any 20 consecutive trading-day period.

      Under the terms of the amended agreement, certain covenants and events of default were restructured as follows: the failure to have its registration statement declared effective by the SEC and the requirement to remain listed on The Nasdaq National Market or other national exchange, both of which were waived through March 2004, unless the Company receives a going concern or qualified opinion from its auditors. If such a report is received from the Company’s auditors through March 2004, the original events of default remain effective.

      The Nasdaq National Market notified us on March 20, 2003 that our common stock may be delisted from Nasdaq for failure to maintain a minimum bid price of $1.00 and that we will be provided until September 16, 2003 to regain compliance with National Market standards. If we are unable to regain compliance with the minimum bid price we may be eligible to transfer our common stock to listing on The Nasdaq SmallCap Market if we meet applicable listing standards and thereby gain an additional 180 days to regain compliance with the minimum bid price requirement. In response to the potential delisting of our common stock due to the failure to meet the Nasdaq National Market’s minimum bid price requirement, we may ask our stockholders to authorize a reverse stock split at our annual meeting in 2003. If the reverse stock split is approved by our stockholders and we effect the reverse stock split, we would reduce the number of outstanding shares of common stock. With fewer shares outstanding, we would expect our stock price to increase. While a reverse stock split may enable us to cure the minimum bid price deficiency, share prices of companies effecting reverse stock splits often decline and we cannot assure you that our stock price would not decline after a reverse stock split.

      On March 26, 2003, Viewpoint Corporation entered into a Securities Purchase Agreement with three other institutional investors, pursuant to which it received $3,500,000 and issued an aggregate of $3,500,000 principal amount of 4.95% subordinated notes and 3,614,756 shares of Viewpoint common stock.

      Interest on these notes is payable quarterly in arrears in cash. The notes contain certain events of default, including, but not limited to: i) failure to pay principal and interest on the notes when payments become due, ii) judgements against the Company in excess of $1,000,000, iii) event of bankruptcy and iv) breach of any

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representation, covenant or other term. Upon an event of default, the notes will become immediately due and payable.

      The Company is required to file a registration statement by May 9, 2003, covering the resale of all of the shares of common stock issued and have the registration statement declared effective no later than July 24, 2003. The Company is required to pay cash penalties if the registration statement is not filed or declared effective on time.

      The Company has the right at any time to redeem up to all of the outstanding notes at par plus accrued and unpaid interest.

 
10. 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.

      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.

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      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 was 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 acquired was 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. As required by SFAS No. 142, the Company discontinued amortizing the remaining balance of goodwill as of January 1, 2002.

      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 in the maximum amount 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 maximum amount of $15,000,000. Both notes were 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.

      The amount due Computer Associates under the promissory note due June 8, 2001, and the subsequent agreements entered into in 2001, was 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 was 744,740. For repayment of the remaining $657,000, the Company had 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. In June 2002 Viewpoint issued Computer Associates 909,093 shares of common stock in full

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satisfaction of this promissory note. The amount due Computer Associates under the second contingent promissory note due April 30, 2002 is approximately $2,928,000 and the Company recorded additional goodwill and due to related parties in its consolidated balance sheet. The additional goodwill was immediately written off and is included in the $6,275,000 impairment of goodwill and other intangible assets in the consolidated statements of operations.

      The purchase price, in excess of the value of tangible assets and liabilities assumed of $2,333,000, had 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 trade name and $13,717,000 to goodwill. Goodwill and other intangibles, excluding in-process research and development were being amortized over their expected periods of benefit, which ranged 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. As required by SFAS No. 142, the Company discontinued amortizing the remaining balance of goodwill as of January 1, 2002. In-process research and development totaling $963,000, was written off in 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, 2000. 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, 2000, and should not be construed as being representative of future operating results.

         
Year Ended
December 31, 2000

(In thousands, except
Per share amounts)
Revenues
  $ 8,244  
Net loss from continuing operations applicable to common shareholders
  $ (79,207 )
Basic and diluted net loss per common share from continuing operations
  $ (2.30 )
 
11. 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 $85,000, $96,000, and $91,000 to the 401(k) Plan during the years ended December 31, 2002, 2001 and 2000, 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”) provided 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, 2002, options to purchase an aggregate of 17,000 shares of common stock were outstanding under the 1994 Plan. At December 31, 2002, no shares of common stock were reserved for additional grants of options or awards of restricted stock under the 1994 Plan.

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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, 2002, options to purchase an aggregate of 7,677,000 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, 2002, an aggregate of 261,000 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, 2002, 110,000 options were outstanding under the 1995 Director Plan. At December 31, 2002, an aggregate of 10,000 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, 2002, options to purchase an aggregate of 1,701,000 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, 2002, an aggregate of 560,000 shares of common stock were reserved for future issuance under the 1996 Nonstatutory Plan.

 
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.

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Options Issued Under Stock Option Plans

      The following summarizes activity in the Stock Option Plans for the years ended December 31, 2000, 2001 and 2002 (in thousands, except per share data):

                           
Options Outstanding
Options
Available Number Weighted
for of Average
Grant Shares Exercise Price



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
          (1,657 )     1.49  
 
Canceled
    1,566       (1,566 )     4.18  
     
     
     
 
Options outstanding at December 31, 2001
    589       10,397     $ 3.79  
 
Granted — exercise price equal to fair value
    (1,677 )     1,677       5.10  
 
Exercised
          (650 )     2.12  
 
Canceled
    1,919       (1,919 )     5.75  
     
     
     
 
Options outstanding at December 31, 2002
    831       9,505     $ 3.75  
     
     
     
 

      The following summarizes information about the Company’s stock options outstanding at December 31, 2002 (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






$0.87 — $0.87
    2,225       6.97     $ 0.87       1,931     $ 0.87  
$1.87 — $4.18
    2,550       8.48       3.38       738       2.78  
$4.25 — $5.15
    2,740       6.96       4.61       2,109       4.61  
$5.38 — $8.50
    1,825       8.12       5.93       602       6.01  
$8.56 — $12.88
    160       7.04       9.26       149       9.24  
$25.13 — $25.13
    5       3.00       25.13       5       25.13  
     
     
     
     
     
 
Total
    9,505       7.59     $ 3.75       5,534     $ 3.36  
     
     
     
     
     
 


(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 were issued in connection with the RTG

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acquisition in December 1996. At December 31, 2002 and 2001 accrued incentive compensation related to the options, which are fully vested totaled $545,000.

      The following summarizes options exercisable at December 31, 2002, 2001 and 2000, (in thousands):

                         
December 31,

2002 2001 2000



Options exercisable
    5,534       4,605       4,478  

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



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  
 
Cancelled
    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 the 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 non-cash stock-based compensation charges 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 reduced total deferred compensation by approximately $2,010,000, $4,975,000, and $1,818,000 for the years ended December 31, 2002, 2001, and 2000, respectively. Non-cash stock-based compensation charges of $5,139,000, $6,341,000 and $330,000 were recognized during the years ended December 31, 2002, 2001, and 2000 respectively.

      In connection with the issuance of stock options to non-employees for services performed, the Company recorded non-cash stock-based compensation charges of $283,000 and $832,000 during the years ended December 31, 2002 and 2001, respectively. The non-cash stock-based compensation charges recorded for non-employees represents the fair value of options using a Black-Scholes option-pricing model with the following weighted average assumptions, varying with the specifics details for each consultant agreement: risk-free interest rates ranging from 1.19% to 1.83%, contractual life of three months to one year, dividend yield of zero, and expected volatility ranging from 74% to 100%.

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
12. Commitments and Contingencies

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 $1,208,000, $2,202,000 and $2,259,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Sublease income totaled approximately $177,000 for the year ended December 31, 2000.

      Future minimum lease payments under non-cancelable operating leases for each twelve-month period subsequent to December 31, 2002 are as follows (in thousands):

         
2003
  $ 1,117  
2004
    1,125  
2005
    908  
2006
    951  
2007
    966  
Thereafter
    1,596  
     
 
    $ 6,663  
     
 

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.

 
13. 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.

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
14. Income Taxes

      The components of the provision for income taxes for the years ended December 31, 2002, 2001, and 2000 are as follows (in thousands):

                             
Years Ended
December 31,

2002 2001 2000



Current:
                       
 
Federal
  $     $     $  
 
State
    45              
 
Foreign
    62              
     
     
     
 
   
Total current
    107              
Deferred:
                 
 
Federal
                 
 
State
                 
 
Foreign
                 
     
     
     
 
   
Total deferred
                 
     
     
     
 
    $ 107     $     $  
     
     
     
 

      The differences between the statutory rate and the Company’s effective income tax rate are as follows:

                         
Years Ended December 31,

2002 2001 2000



Federal tax benefit at the statutory rate
    (34.00 )%     (34.00 )%     (34.00 )%
State income taxes, net of federal income tax benefit
    (4.44 )     (3.17 )     (3.03 )
Other
    0.95       0.83       (0.75 )
Amortization and impairment of goodwill and other intangibles
    9.13       16.28       2.49  
Prior period adjustment
    (10.20 )     (3.30 )     (6.78 )
Non-cash sales and marketing charges
          (12.06 )     12.06  
Change in valuation reserve
    38.97       35.42       32.68  
Minority interest
                (2.67 )
     
     
     
 
Effective income tax rate
    0.41%       —%       —%  
     
     
     
 

      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

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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,

2002 2001


Deferred tax assets:
               
 
Accrued expenses
  $ 510     $ 542  
 
Tax credit carryforwards
    3,413       3,247  
 
Basis differential
    925       628  
 
Net operating loss carryforwards
    68,243       59,495  
 
Other
    61       455  
     
     
 
      73,152       64,367  
Valuation allowance
    (70,643 )     (60,593 )
     
     
 
 
Net deferred tax assets
    2,509       3,774  
 
Net deferred tax liabilities
    (2,509 )     (3,774 )
     
     
 
 
Net deferred taxes
  $     $  
     
     
 

      The valuation allowance for deferred taxes increased by approximately $10,050,000 and $18,549,000 during 2002 and 2001, 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, 2002, the Company has net operating loss and tax credit carryforwards of approximately $168,236,000 and $3,413,000, 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. 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. Additionally, the Company has net operating loss carryforwards of approximately $1,948,000 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. Comprehensive Loss

      Total comprehensive loss consisted of the following (in thousands):

                         
Years Ended December 31,

2002 2001 2000



Net loss
  $ (25,893 )   $ (52,370 )   $ (55,956 )
Foreign currency translation adjustment
    (9 )     (27 )     137  
Unrealized gain (loss) on marketable securities
    (45 )     33       81  
     
     
     
 
Comprehensive loss
  $ (25,947 )   $ (52,364 )   $ (55,738 )
     
     
     
 

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
16. Segment Information and Enterprise-Wide Disclosures

      The Company’s continuing operations are focused on one business segment, e-commerce visualization. The Company is organized into a single reporting segment, which is evaluated by management for making operating decisions and assessing performance. The Company’s customers consist primarily of companies located in the United States. The Company’s long-lived assets from continuing operations are primarily located in the United States.

Major Customers

      Customers whose revenues represent greater than 10 percent of the Company’s consolidated revenues from continuing operations for the years ended December 31, 2002, 2001 and 2000 are as follows:

                         
Years Ended December 31,

2002 2001 2000



Customer A
    51 %     11 %      — %
Customer B
    %     %     14 %
Customer C
    %     %     26 %

      Customers whose accounts receivable represent greater than 10 percent of the Company’s consolidated net accounts receivable from continuing operations at December 31, 2002 and 2001 are as follows:

                 
December 31,

2002 2001


Customer A
    17 %     %
Customer B
    %     28 %
Customer D
    16 %     %

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
17. Quarterly Results of Operations (Unaudited)

      Summarized quarterly financial information for the years 2002 and 2001 are as follows (in thousands, except per share amounts):

                                   
Quarter Ended

March 31 June 30 September 30 December 31




Fiscal year 2002:
                               
 
Total revenues
  $ 4,858     $ 5,304     $ 5,326     $ 2,651  
 
Gross profit
    3,841       4,254       4,195       1,909  
 
Net loss from continuing operations
    (10,984 )     (3,685 )     (4,009 )     (7,342 )
 
Adjustment to net loss on disposal of discontinued operations
     —       93       9       25  
 
Net loss
    (10,984 )     (3,592 )     (4,000 )     (7,317 )
 
Basic and diluted net loss per share
    (0.27 )     (0.09 )     (0.10 )     (0.18 )
Fiscal year 2001:
                               
 
Total revenues
  $ 2,791     $ 2,751     $ 3,967     $ 4,499  
 
Gross profit
    1,885       2,116       2,998       3,417  
 
Net loss from continuing operations
    (12,049 )     (12,532 )     (11,539 )     (17,372 )
 
Adjustment to net loss on disposal of discontinued operations
     —       730        —       392  
 
Net loss
    (12,049 )     (11,802 )     (11,539 )     (16,980 )
 
Basic and diluted net loss per share
    (0.32 )     (0.31 )     (0.29 )     (0.42 )

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VIEWPOINT CORPORATION

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 2002, 2001 and 2000
                                           
Balance at Charged to Balance at
Beginning Costs and Charged to End of
Description of Period Expenses Other Deductions Period






(In thousands)
Allowance for Accounts Receivable:
                                       
 
Year Ended December 31, 2002
  $ 986     $ 741     $     $ 169     $ 1,558  
 
Year Ended December 31, 2001
    796       544       126 (1)     480       986  
 
Year Ended December 31, 2000
          40       756 (1)           796  
Allowance for Notes Receivable:
                                       
 
Year Ended December 31, 2002
  $ 750     $ 612     $     $     $ 1,362  
 
Year Ended December 31, 2001
    2,192       (665 )           777       750  
 
Year Ended December 31, 2000
          2,192                   2,192  
Allowances related to Discontinued Operations:
                                       
 
Year Ended December 31, 2002
  $ 595     $     $     $ 595     $  
 
Year Ended December 31, 2001
    2,416                   1,821       595  
 
Year Ended December 31, 2000
    14,745                   12,329       2,416  
Valuation Allowance for Deferred Tax Assets:
                                       
 
Year Ended December 31, 2002
  $ 60,593     $ 10,050     $     $     $ 70,643  
 
Year Ended December 31, 2001
    42,044       18,549                   60,593  
 
Year Ended December 31, 2000
    23,611       18,433                   42,044  


(1)  Reserves established in connection with the acquisition of Viewpoint Digital, Inc. (“Viewpoint Digital”).

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Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      Not applicable.

PART III

 
Item 10. Directors and Executive Officers

      The following table sets forth certain information regarding the Company’s directors and executive officers as of April 28, 2003:

             
Name Age Position



Robert E. Rice
    48     Chairman, President and Chief Executive Officer
Thomas Bennett
    47     Director
James E. Crabbe
    57     Director
Samuel H. Jones, Jr.
    69     Director
Lennert J. Leader
    48     Director
Mark Gray
    32     Executive Vice President, Sales
Jeffrey J. Kaplan
    54     Executive Vice President, Business Affairs
Sreekant Kotay
    30     Executive Vice President, Technology, Marketing, and Strategy
Thomas Morgan
    44     Executive Vice President, Operations
Brian O’Donoghue
    39     Executive Vice President and General Counsel
Anthony L. Pane
    36     Senior Vice President and Chief Financial Officer

Robert E. Rice, Chairman, President and Chief Executive Officer

      Mr. Rice has been President and Chief Executive Officer since March 2000 and Chairman of the Company’s Board of Directors since November 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.

Thomas Bennett, Director

      Mr. Bennett has been a Director of the Company since November 2000. He has been with Computer Associates International, Inc. since 1988 and has been serving as its Senior Vice President of Business Development since April 1997. On February 8, 2000, he became a director of Metastream Corporation (a subsidiary of the Company from Metastream’s formation in June 1999 until its merger with the Company in November 2000).

James E. Crabbe, Director

      James E. Crabbe became a Director of the Company on March 1, 2003. Mr. Crabbe served as president of the Crabbe Huson Group, Inc., a registered investment advisor, from 1980 until the time of its sale to Liberty Financial Services, Inc. in 1998. Crabbe Huson had over $5.5 billion in assets under management at the time of its sale to Liberty Financial. Mr. Crabbe remained an employee of Liberty until 2000. Mr. Crabbe is currently chairman of the board of directors of VendingData Corporation, a company in the business of designing and manufacturing machines used in the gambling industry.

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Samuel H. Jones, Jr., Director

      Mr. Jones has been a Director of the Company since April 1992. He has been President of S-J Venture Capital Company since 1991. Mr. Jones founded S-J Transportation Company, an industrial waste transportation company, in 1971 and served as its President until 2002. Mr. Jones is a director of Fulton Financial Corp.

Lennert J. Leader, Director

      Mr. Leader has been a Director of the Company since November 2000. Mr. Leader became President of AOL Time Warner Ventures upon the merger of America Online, Inc. and Time Warner Inc. in January 2001. Prior to the merger, Mr. Leader served as President of AOL Investments, a division of America Online, Inc., beginning in February 1998. Mr. Leader served as Senior Vice President, Chief Financial Officer, and Treasurer of AOL from September 1989 until July 1998. Prior to joining AOL, Mr. Leader was Vice President of Finance of LEGENT Corporation, a computer software and services company, from March 1989 to September 1989, and Chief Financial Officer of Morino, Inc., a computer software and services company, from 1986 to March 1989 and Director of Finance from 1984 to 1986. Prior to joining Morino, Inc. in 1984, he was an audit manager of Price Waterhouse. Mr. Leader serves as a director of iVillage Inc.

Mark Gray, Executive Vice President, Sales

      Mr. Gray joined Viewpoint in January 2002 as Vice President of Strategic Marketing. Before coming to Viewpoint, Mr. Gray served as Vice President of Delivery and Integration at Dotglu, a CRM focused agency. Before joining Dotglu, Mr. Gray focused on managing and expanding existing relationships, creating revenue-generating service lines, and forming strategic partnerships and alliances in the positions of Client Partner, Media and Entertainment Practice Lead, and Director of Incubation Services at Viant, a digital professional services provider. Before Viant, Mr. Gray was the co-founder of the New York Metro office of USWeb, a web services provider. Mr. Gray has also held positions at two global advertising agencies, Ammirati Puris Lintas and J. Walter Thompson, and oversaw production at Jersey Cow Software Company, Inc., a producer of educational multimedia CD-ROMs. Mr. Gray became Executive Vice President of Sales in August 2002.

Jeffrey J. Kaplan, Executive Vice President, Business Affairs

      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 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.

Sreekant Kotay, Executive Vice President, Technology, Marketing, and Strategy

      Mr. Kotay joined the Company as a Lead Software Engineer in 1996 following the Company’s acquisition of Intrepid Systems, Inc. With the Company’s acquisition of Real Time Geometry later that year, Mr. Kotay served as Director of Engineering, focusing on the commercialization of RTG’s research. Mr. Kotay became Senior Vice President of Marketing and Strategy in 2001 and Executive Vice President of Technology, Marketing, and Strategy in 2002. Mr. Kotay attended Yale University before founding Intrepid Systems in 1991.

Thomas Morgan, Executive Vice President, Operations

      Mr. Morgan joined Viewpoint in March 2002 as General Manager of Enterprise Solutions. Before joining Viewpoint, Mr. Morgan was a senior partner of Fusion Technologies, Inc., a multi-national IT consulting firm specializing in web application development and integrated offshore software development. In this role, he was

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responsible for all strategic and operational activities of the company. Prior to entering the technology industry, Mr. Morgan served as a corporate and finance attorney in the Boston area. Mr. Morgan holds a Juris Doctorate from Boston College Law School and a BA in Economics from Harvard University.

Brian O’Donoghue, Executive Vice President and General Counsel

      Mr. O’Donoghue was an attorney at Milbank, Tweed, Hadley, and McCloy LLP, specializing in corporate and litigation matters from 1995 until joining the Company as General Counsel in May 2000. Before attending law school, Mr. O’Donoghue taught high school at Monsignor McClancy High School in New York from 1988 through 1990 and served as a New York City firefighter from 1990 through 1992. Mr. O’Donoghue received his Juris Doctorate from Fordham University School of Law and his BA from Queens College of the City University of New York. Mr. O’Donoghue is a member of the New York Bar Association.

Anthony L. Pane, Senior Vice President and Chief Financial Officer

      Mr. Pane joined the Company as Vice President and Controller in August 2000 and has served as Senior Vice President and Chief Financial Officer since November 2001. 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.

      There is no family relationship among any directors or executive officers of the Company.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors, certain officers, and persons who own more than ten percent of a registered class of the Company’s securities, to file with the SEC reports of ownership and changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater-than ten percent stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

      Based solely on a review of the copies of such reports furnished to the Company and representations that no other reports were required, the Company believes that during the year ended December 31, 2002, its officers, directors, and greater than 10% stockholders complied with all Section 16(a) filing requirements.

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Item 11. Executive Compensation

      The following table presents certain information with respect to annual compensation and long-term compensation awarded during fiscal years 2000, 2001, and 2002 to the Company’s Chief Executive Officer and its five other most highly compensated executive officers as of December 31, 2002 (collectively, the “Named Executive Officers”).

Summary Compensation Table

                                                   
Long-term
Compensation
Annual Compensation Securities

Underlying
Other Annual Company All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation







Robert Rice
    2002     $ 330,000           $ 16,564 (1)         $ 12,953(2 )
 
Chairman, President and
    2001       330,000           $ 18,004 (3)     1,200,000        
 
Chief Executive Officer
    2000       275,000       1,309,959 (4)   $ 1,107,160 (5)     287,500        
Paul Kadin
    2002       200,000                          
 
Executive Vice President,
    2001       200,000       35,000                    
 
Business Development
    2000       155,589       30,000             460,000        
Jeff Kaplan
    2002       206,083                          
 
Executive Vice President,
    2001       219,771       50,000             460,000        
 
Business Affairs
                                               
Sreekant Kotay
    2002       200,000                          
 
Executive Vice President, Technology
    2001       200,000                          
 
Marketing & Strategy
    2000       170,000                          
Brian O’Donoghue
    2002       200,000                   200,000        
 
Executive Vice President
    2001       187,499                          
 
and General Counsel
    2000       100,000       30,000             230,000        
Anders Vinberg
    2002       200,000                          
 
Executive Vice President,
    2001       200,000                          
 
Technology, Engineering and
    2000       66,667                   1,185,000        
 
Information Systems
                                               


(1)  Represents auto allowance of $9,660 and reimbursement in 2002 for taxes paid for life insurance premiums for 2000 and 2001 and for period beginning in April 2002 and ending in April 2003 ($12,953).
 
(2)  Represents reimbursement in 2002 for life insurance premiums for 2000 and 2001 and for period beginning in April 2002 and ending in April 2003.
 
(3)  Represents auto allowance.
 
(4)  Represents loan forgiveness of $1,244,959, triggered by contractually specified events which occurred during 2000, and annual bonus of $65,000.
 
(5)  Represents amount reimbursed for the payment of taxes due for the forgiveness of principal and interest on the loan described in footnote (3) and auto allowance of $30,500.

Stock Option Grants

      The following table presents information regarding stock options granted to the Named Executive Officers during 2002. In accordance with the rules of the SEC, also shown below is the potential realizable value over the term of the option (the period from the grant date to the expiration date) based on assumed rates of stock appreciation from the option exercise price of 5% and 10%, compounded annually. These amounts do not represent the Company’s estimate of

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future stock price. Actual gains, if any, on stock option exercises will depend on the future performance of Company common stock.

Company Option Grants in 2002

                                                 
Individual Grants

Potential Realizable Values
Number of Percent of at Assumed Annual Rates
Securities Total Options of Stock Price Appreciation
Underlying Granted to for Option Term
Options Employees in Exercise or Expiration
Name Granted Fiscal Year Base Price Date 5% 10%







Brian O’Donoghue
    200,000 (1)     11.98 %   $ 4.08       08/08/12     $ 513,178     $ 1,300,494  


(1)  Twenty-five percent (25%) of the shares subject to the option vest on the first anniversary of the date of grant and one thirty-sixth vests each month thereafter.

      The following table presents information with respect to options to purchase Company common stock exercised during fiscal year 2002 by the Named Executive Officers, and the value of unexercised options at December 31, 2002.

Company Option Exercises in 2002 and Fiscal Year-End Option Values

                                                 
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 2002 December 31, 2002(1)
Acquired on Value

Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable







Robert E. Rice
                1,431,644       1,328,021     $ 761,875     $ 100,625  
Paul Kadin
                352,667       107,333              
Jeff Kaplan
                210,833       249,167              
Sreekant Kotay
    25,200     $ 124,526       904,154       116,146     $ 702,675     $ 116,146  
Brian O’Donoghue
                164,834       265,166              
Anders Vinberg
                946,875       238,125              


(1)  The value of unexercised, in-the-money options is the difference between the exercise price of the options and the fair market value of Company common stock at December 31, 2002 ($1.87).

Compensation of Directors

      The Company reimburses each of its non-employee directors as follows: each non-employee director is paid (i) $2,500 at the end of each fiscal quarter in which he or she is a director, (ii) $1,000 for each regular Board meeting he or she attends in person, and (iii) $500 for each Board committee meeting he or she attends in person; provided, however, that if more than one committee meeting is held on the same day or a Board meeting and one or more committee meetings are held on the same day, no more than the initial $500 or $1,000, as the case may be, is paid to any director for all such meetings attended by such director on such date.

      Non-employee directors participate in the Company’s 1995 Director Option Plan (the “Director Plan”). Under the Director Plan, each non-employee director who joins the Board is automatically granted a non statutory option to purchase 20,000 shares of Common Stock on the date upon which such person first becomes a director. In addition, each non-employee director automatically receives a non statutory option to purchase 5,000 shares of Common Stock on January 1 of each year, provided the director has been a member of the Board for at least six months. The exercise price of each option granted under the Director Plan is equal to the fair market value of the Common Stock on the date of grant. The 20,000 share grant vests at a rate of one-eighth of the option shares upon the end of the first six-month period after the date of grant and one-forty-eighth of the remaining option shares per month thereafter, provided the optionee remains a director of the Company. The 5,000 share grant vests at the rate of one-half of the option shares upon the end of the first six-month period after the date of grant and one-twelfth of the remaining option shares per month thereafter,

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provided the optionee remains a director of the Company. Options granted under the Director Plan have a term of ten (10) years unless terminated sooner, whether upon termination of the optionee’s status as a director or otherwise pursuant to the Director Plan.

Employment Agreements with Executive Officers

      The Company entered into employment agreements with Messrs. Rice, Kaplan, Vinberg, Kadin, Kotay, and O’Donoghue.

      The Company entered into an employment agreement with Mr. Rice in December 2001 for a two-year term ending December 31, 2003 which provides for an annual base salary of $330,000. In addition, the Company granted Mr. Rice two options to purchase shares of the Company’s common stock at a price of $3.88 per share, the fair market value of the Company’s common stock on the date of grant. One of the stock option grants provides Mr. Rice with the option to acquire 200,000 shares, with 25% of the total grant vesting on the first anniversary of date of grant and the remainder vesting at the rate of 1/36th per month thereafter. The second option grant provides Mr. Rice with the option to acquire 1,000,000 shares (the “Performance-Based Option”). 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 the Company achieves financial goals established by the Board of Directors. If the Company does not achieve such financial goals, the allotted shares will not vest and Mr. Rice will have no right to exercise the option with respect to the allotted shares except in accordance with the following. If there is a change in control of the Company (as defined in the employment agreement), a percentage of the unvested portion of the Performance-Based Option will vest equal to the multiple of the exercise price received by the Company as consideration in the change in control. For example, if the per share consideration received by the Company in the change in control is twice the exercise price of the Performance-Based Option, fifty percent of the unvested portion of the Performance-Based Option will vest.

      Mr. Rice’s employment agreement provides that if his employment is terminated by the Company without cause (as defined in the agreement), or by Mr. Rice for good reason (as defined), he will be entitled to immediate vesting of all of his unvested Company stock options (other than the Performance-Based Option) and severance pay equal to twice his annual base salary.

      The Company’s employment agreement with Mr. Kaplan provides for his employment at a base salary of $200,000 per year. Mr. Kaplan also received a signing bonus of $50,000 upon the commencement of his employment, and a stock option to purchase 460,000 shares of the Company’s common stock at an exercise price of $6.13 per share, which was the closing price of the Company’s common stock on the day before Mr. Kaplan commenced employment. The option vests over a four-year period, with 25% of the shares vesting on February 15, 2002 and the balance vesting at the rate of 1/36th per month.

      Under the employment agreement, the Company loaned $375,000 to Mr. Kaplan. The loan bears interest at 4.94% per year, the applicable Federal rate established by Section 1274(d) of the Internal Revenue Code on the day the loan was made. The loan is secured solely by Mr. Kaplan’s stock options in the Company and is non-recourse to Mr. Kaplan, unless the Company fires Mr. Kaplan for cause (as defined) or Mr. Kaplan quits without good reason (as defined), in which case the loan will become fully recourse to him.

      Mr. Kaplan’s employment agreement provides that if there is a change of control (as defined in the agreement) of the Company, he will be entitled to immediate vesting of the Company stock option described above. In addition, if Mr. Kaplan’s employment is terminated by the Company without cause (as defined) or if he terminates his employment with good reason (as defined), he will be entitled to severance pay equal to his annual base salary.

      The Company’s employment agreement with Mr. Vinberg, who resigned effective December 31, 2002, provided for his employment at a base salary of $200,000 per year. Under the employment agreement, Mr. Vinberg also received a stock option to purchase 1,035,000 shares of the Company’s common stock at an exercise price of $4.35 per share. Twenty percent of the shares subject to the option vested on his hire date, 20% vested on the first anniversary of his hire date, and the balance vested at the rate of 1/36th per month. In recognition of Mr. Vinberg’s service as a director of Metastream, the employment agreement provided that,

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for purposes of vesting of this option, the option would vest as though Mr. Vinberg’s hire date was October 1999 if Mr. Vinberg remained employed by the Company at least until February 28, 2001. Mr. Vinberg satisfied this condition. Mr. Vinberg also received a stock option to purchase 172,500 shares of the Company’s common stock at an exercise price of $8.56 per share. This additional option was scheduled to vest over a four-year period, with 25% vesting on September 6, 2002 and the balance vesting at the rate of 1/36th per month. The employment agreement provided that both stock options would fully vest immediately upon a change of control of the Company (as defined).

      Under the employment agreement, the Company loaned $200,000 to Mr. Vinberg. The loan bore interest at the rate of 5.07% per annum, the applicable Federal rate established by Section 1274(d) of the Internal Revenue Code on the day the loan was made. The loan was secured solely by, and was recourse solely to, Mr. Vinberg’s stock options in the Company unless Mr. Vinberg’s employment was terminated by the Company for cause (as defined), in which case the loan would have been fully recourse to Mr. Vinberg. The loan was due on the earlier of the fourth anniversary of the date the loan was made or within 30 days following the date on which Mr. Vinberg’s employment with the Company terminated. Mr. Vinberg resigned from the Company on December 31, 2002. Under the terms of his note, repayment of the loan was due January 31, 2003. Mr. Vinberg has not satisfied his obligations under the note and the Company has foreclosed on the collateral. The total amount of principal and interest due on the date of foreclosure was $217,292.

      Mr. Vinberg’s employment agreement provided that for the first three years of his employment, if his employment was terminated by the Company after a change of control without cause (as defined), or if he resigned from the Company for good reason (as defined), he would be entitled to base salary continuation, including medical benefits, for six months following his termination.

      Mr. Kadin’s employment agreement with the Company provided for a starting base salary of $185,000 per year, with an anticipated annual bonus of $35,000 for his first year of employment and future bonuses as determined by the Board of Directors. Mr. Kadin also received a signing bonus of $30,000 and a stock option to purchase 460,000 shares of the Company’s common stock at an exercise price of $2.61 per share. This option was scheduled to vest over a four-year period, with 20% vesting on the date of hire, 20% vesting on the first anniversary of his hire date, and the balance vesting at the rate of 1/36th per month. Mr. Kadin’s employment agreement provided that if the Company terminated his employment without cause (as defined), he would be entitled to a severance payment equal to six months of his then-current base salary. Mr. Kadin resigned effective March 20, 2003.

      Mr. Kotay entered into an employment agreement with the Company in 1998 under which Mr. Kotay agreed to serve as a director of engineering and the Company agreed to pay to Mr. Kotay a base salary of $170,000 and to grant to Mr. Kotay an option to acquire 35,000 of the Company’s common stock. Mr. Kotay’s employment agreement provides that any and all options granted to him will vest immediately upon a change of control (as defined) of the Company or if his employment is terminated by the Company without cause (as defined).

      Mr. O’Donoghue entered into an employment agreement with the Company in April 2000 under which Mr. O’Donoghue agreed to serve as General Counsel of the Company and the Company agreed to pay to Mr. O’Donoghue a base salary of $150,000 per year and to grant to Mr. O’Donoghue an option to acquire 200,000 shares of the Company’s common stock. The agreement further provided for a bonus of $30,000 payable to Mr. O’Donoghue before the end of 2000. If, within the first 36 months of his employment, Mr. O’Donoghue’s employment is terminated by the Company without cause (as defined) or is terminated by Mr. O’Donoghue for good reason (as defined), Mr. O’Donoghue will receive base salary continuation and medical benefits for 3 months and all stock options held by Mr. O’Donoghue will immediately vest and become exercisable.

Severance Plan

      The Board of Directors resolved in July 2002 to provide the executive officers of the Company with certain benefits in the event their employment is involuntarily terminated within 12 months following a change in control (as defined) of the Company or the executive officer remains with the Company for 12 months

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following a change in control. Unless superior benefits are otherwise provided in an employment agreement between the Company and the executive officer, the executive officer would be entitled to receive an amount equal to such executive officer’s annual base salary in effect immediately prior to a change in control and the unvested portion of all options granted to such executive officer at any time before the termination of employment will immediately vest and remain exercisable by the executive officer for 6 months following termination of employment.

Compensation Committee Interlocks and Insider Participation

      The Compensation Committee of the Board of Directors consists of Messrs. Bennett, Jones, and Crabbe. None of the members of the Compensation Committee is a former or current officer or employee of the Company. No interlocking relationship exists between any member of the Compensation Committee and any member of any other company’s board of directors or compensation committee.

 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

      The following table sets forth certain information as of April 28, 2003 regarding the only persons known by the Company to own, directly or indirectly, more than five percent of the Company’s Common Stock. Except as otherwise indicated, each person has sole voting and investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable.

                 
Number Percentage of
Name and Address of Beneficial Owner of Shares Class(1)



G. Randall Hecht(2)
    5,466,300       11.8  
RS Management Co. LLC                
RS Investment Management, L.P.                
388 Market Street                
Suite 200                
San Francisco, CA 94111                
Mayer Offman(3)
    4,929,291       10.7  
1270 Ave. of the Americas, 12th Floor                
New York, NY 10020                
Computer Associates
    3,744,093       8.1  
One Computer Associates Plaza                
Islandia, NY 11749                
Kevin S. Moore(4)
    3,703,402       8.0  
The Clark Estates                
One Rockefeller Plaza, 31st Floor                
New York, NY 10020                
James E. Crabbe(5)
    3,055,600       6.6  
1305 SW Myrtle Court                
Portland, OR 97201                


(1)  Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of April 28, 2003 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder’s name. Percentage ownership is based on 45,985,507 shares of Common Stock outstanding on April 28, 2003.
 
(2)  According to information contained in the Schedule 13G filed with the Commission on February 14, 2003 by RS Investment Management Co. LLC, RS Investment Management, L.P., RS Diversified Growth Fund and, these shares of the Company’s Common Stock are beneficially owned by (i) RS Investment Management, L.P., a registered investment advisor, (ii) RS Diversified Growth Fund, a

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registered investment company, and (iii) RS Investment Management Co. LLC. RS Investment Management Co. LLC is the General Partner of RS Investment Management, L.P. G. Randall Hecht is a control person of RS Investment Management Co. LLC and RS Investment Management L.P.
 
(3)  According to information contained in the Schedule 13G filed with the Commission on August 16, 2002 by Mayer Offman, Generic Trading of Philadelphia, LLC, Gabriel Capital, L.P., Ariel Fund Limited and Simaru Associates, LLC, these shares of the Company’s Common Stock were beneficially owned by (i) Mr. Mayer Offman, (ii) Generic Trading of Philadelphia, LLC, of which Mr. Offman has the dispositive power as the authorized trader for the accounts held by Gabriel Capital, LP, Ariel Fund Limited and Simaru Associates, LLC, in which such shares are held and (iii) Gabriel Capital, LP, a Delaware limited liability company with which Mr. Offman serves as Vice-President of the managing member, Shear-Offman, Inc., a Delaware corporation.
 
(4)  According to information contained in the Schedule 13D filed with the Commission on April 7, 2003 by The Clark Estates, Inc., these shares of the Company’s Common Stock are beneficially owned by (i) The Clark Estates, Inc., a New York corporation, and (ii) Federal Partners, L.P., a limited partnership, the general partner of which is Ninth Floor Corporation. The Clark Estates, Inc. has the sole power to vote or to direct the vote and to dispose of or direct the disposition of all the shares. Mr. Moore is the President and a Director of the Clark Estates.
 
(5)  According to information contained in the Schedule 13G filed with the Commission on February 10, 2003 by James E. Crabbe, these shares of the Company’s Common Stock were beneficially owned by (i) the James E. Crabbe Revocable Trust, of which Mr. Crabbe is the trustee, (ii) the Phileo Foundation, of which Mr. Crabbe has investment discretion, and (iii) the James E. Crabbe IRA, of which Mr. Crabbe has investment discretion. Mr. Crabbe does not directly own any shares of the issuer.

Security Ownership of Management

      The following table sets forth information with respect to the beneficial ownership of the Company’s Common Stock, as of April 28, 2003, by the Company’s directors, nominees for election as directors, Named Executive Officers, and all directors and executive officers as a group. Except as otherwise indicated, each person has sole voting and investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable.

                                 
Common
Number Vested Stock and Percentage of
Name of Shares Options(1) Vested Options Class(2)





Samuel H. Jones, Jr. 
    940,055       188,480       1,128,535       2.4  
Thomas Bennett(3)
          16,042       16,042       *  
James E. Crabbe
    3,055,600             3,055,600       6.6  
Lennert J. Leader(4)
          16,042       16,042       *  
Robert Rice
          1,575,289       1,575,289       3.4  
Jeffrey J. Kaplan
          268,333       268,333       *  
Paul Kadin
    3,500             3,500       *  
Anders Vinberg
                      *  
Brian O’Donoghue
          187,834       187,834       *  
Sreekant Kotay
          996,029       996,029       2.2  
All directors and executive officers as a group (10 persons)
    3,999,155       3,248,049       7,247,204       15.7  
All directors and executive officers and Computer Associates International, Inc. and America Online, Inc. 
    9,468,248       8,717,142       12,716,297       27.6  

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  * Percentage of shares beneficially owned is less than one percent of total.

(1)  Represents shares issuable upon exercise of options to purchase Company Common Stock that are exercisable within 60 days of April 28, 2003.
 
(2)  Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within sixty (60) days of April 28, 2003 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder’s name. Percentage ownership is based on 45,985,507 shares of Common Stock outstanding on April 28, 2003.
 
(3)  Mr. Bennett is Senior Vice President of Computer Associates International, Inc., which owns 3,744,093 shares of Company Common Stock. Mr. Bennett disclaims beneficial ownership of the shares owned by Computer Associates.
 
(4)  Mr. Leader is President of AOL Time Warner Ventures, a division of AOL Time Warner Inc. AOL Time Warner Inc. owns 1,725,000 shares of Company Common Stock. Mr. Leader disclaims beneficial ownership of the shares owned by AOL Time Warner Inc.

Equity Compensation Plan Information

      The following table summarizes the Company’s equity compensation plans as of December 31, 2002:

                         
Number of Securities
Number of Securities Weighted Average Remaining Available for
to be Issued Price of Future Issuance under
Upon Exercise of Outstanding Equity Compensation
Outstanding Options, Options, Warrants, Plans (Excluding Securities
Warrants, and Rights and Rights Reflected in Column (a))



Plan category (a) (b) (c)




Equity compensation plans approved by security holders
    9,504,595       3.75       830,858  
Equity compensation plans not approved by security holders
                 
Total
    9,504,595       3.75       830,858  
 
Item 13. Certain Relationships and Related Transactions

      The Company extended loans to certain executive officers in 2000, 2001, and in earlier years. Loans to executive officers were made as part of the initial compensation package offered to such executive officers and were offered as an inducement to the executive officers to accept employment with the Company. The Company’s bylaws permit the Company to extend such loans; however, the Company does not intend to extend loans to officers in the future. Loans made to any executive officer who has served as such in 2002 are described below. The only loan to a current executive officer that is outstanding as of April 28, 2003 is the loan to Mr. Kaplan.

      The Company extended to Mr. Rice a $1,000,000 loan in December 1996, concurrently with the acquisition by the Company of Mr. Rice’s interest in Real Time Geometry Corp. and the execution of an employment agreement between Mr. Rice and the Company covering the period beginning on December 31, 1996 and ending on December 31, 1999. The loan was secured solely by, and was recourse solely to, shares of Company common stock underlying options issued to Mr. Rice. The loan bore interest at the rate of 5.67%, compounding semi-annually.

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      Mr. Rice and the Company entered into a subsequent employment agreement upon Mr. Rice’s retention as the Chief Executive Officer of the Company in early 2000. In recognition of Mr. Rice’s role in forming Metastream and Mr. Rice’s expected contributions in leading the Company, the subsequent employment agreement provided for forgiveness of the loan, including all interest accrued thereon, if the Company merged with any other entity, including Metastream, sold all or substantially all of its assets to a third party, engaged in a primary public offering of its capital stock, or if a third party acquired a majority of the Company’s capital stock. The Company further agreed to reimburse Mr. Rice for Federal and state taxes that Mr. Rice would be required to pay as a result of the forgiveness of the loan.

      The Company and Metastream merged in November 2000 and, accordingly, the Company forgave the principal amount of the loan and accrued interest of $244,959, and made a payment to Mr. Rice of $1,076,660 to reimburse him for payment of Federal and state income taxes.

      The Company extended a loan to Anders Vinberg in the amount of $200,000 in accordance with the employment agreement between Mr. Vinberg and the Company entered into in September 2000. The loan was secured solely by, and was recourse solely to, options issued to Mr. Vinberg. This security arrangement provided Mr. Vinberg with a guaranteed benefit of $200,000 while providing the Company with the opportunity to recoup that amount to the extent the options underlying the options were exercised. The loan bore interest at the rate of 5.07% per annum, the applicable Federal rate established by Section 1274(d) of the Internal Revenue Code on the day the loan was made, and was due on the earlier of the fourth anniversary of the date the loan was made or within 30 days following the date on which Mr. Vinberg’s employment with the Company terminated. Mr. Vinberg resigned from the Company on December 31, 2002. Under the terms of his note, repayment of the loan was due January 31, 2003. Mr. Vinberg has not satisfied his obligations under the note and the Company has foreclosed on the collateral. The total amount of principal and interest due on the date of foreclosure was $217,292.

      The Company extended a loan to Mr. Kaplan in the amount of $375,000 in accordance with the employment agreement between Mr. Kaplan and the Company entered into in January 2001. The loan was secured solely by, and was recourse solely to, options issued to Mr. Kaplan. This security arrangement provided Mr. Kaplan with a guaranteed benefit of $375,000 while providing the Company with the opportunity to recoup that amount to the extent the options underlying the options are exercised. The loan bears interest at the rate of 4.94% per annum, the applicable Federal rate established by Section 1274(d) of the Internal Revenue Code on the day the loan was made, and is due on the earlier of the fourth anniversary of the date the loan was made or within 30 days following the date on which Mr. Kaplan ceases to be an employee of the Company. As of December 31, 2002, the amount due under the loan to Mr. Kaplan was $408,066. As of March 31, 2003, this amount was $412,859.

 
Item 14.      Controls and Procedures

Evaluation of Disclosure Controls and Procedures

      Within 90 days prior to the date of this report (the Evaluation Date), the Company’s President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)). Based on that evaluation, these officers have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and the Company’s consolidated subsidiaries would be made known to them by others within those entities.

Changes in Internal Controls

      There were no significant changes in the Company’s internal controls, or to the Company’s knowledge, in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the Evaluation Date.

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PART IV

 
Item 15.      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 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))

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      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     Promissory Note issued by Jeffery J. Kaplan, dated April 2, 2001 (incorporated by reference from Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2002 filed on April 30, 2003 (File No. 000-27168))
  10.10     Employment Agreement between the Registrant and Robert E. Rice dated December 17, 2001 (incorporated by reference from Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 filed on March 28, 2002 (File No. 000-27168))
  10.11     Letter Agreement between the Registrant and Mark S. Gray dated January 11, 2002 (incorporated by reference from Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 filed on August 14, 2002 (File No. 000-27168))
  10.12     Letter Agreement between the Registrant and Thomas Morgan dated March 22, 2002 (incorporated by reference from Exhibit 10.11 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 filed on August 14, 2002 (File No. 000-27168))

      Other Material Contracts

         
  10.13     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))
  10.14     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))
  10.15     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))
  10.16     Series B Preferred Stock Purchase Agreement and Related Exchange Agreement between the Registrant and Adobe Systems Incorporated dated July 18, 2000 (incorporated by reference from Exhibit 10.2 To the Registrant’s Form 10-Q for the quarter ended September 30, 2000, filed on November 14, 2000 (File No. 000-27168))

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  10.17     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))
  10.18     Securities Purchase Agreement, dated as of December 31, 2002, by and among The Registrant and the Buyers named therein, as amended by the Redemption, Amendment and Exchange Agreement, dated as of March 25, 2003, by and among the Registrant and the Buyers named therein (incorporated by reference from Exhibit 10.1 to Form 8-K filed by the Registrant on January 2, 2003).
  10.19     Form of Replacement 4.95% Convertible Note of The Registrant, (incorporated by reference from Exhibit 10.2 to Form 8-K filed by the Registrant on January 2, 2003).
  10.20     Form of Subsequent/ Additional 4.95% Convertible Note of The Registrant, (incorporated by reference from Exhibit 10.3 to Form 8-K filed by the Registrant on January 2, 2003).
  10.21     Form of Initial Warrant for Common Stock of The Registrant, (incorporated by reference from Exhibit 10.4 to Form 8-K filed by the Registrant on January 2, 2003).
  10.22     Form of Subsequent/ Additional Warrant for Common Stock of The Registrant, (incorporated by reference from Exhibit 10.5 to Form 8-K filed by the Registrant on January 2, 2003).
  10.23     Registration Rights Agreement, dated as of March 25, 2003, by and among The Registrant and the Buyers named therein, as amended by the Redemption, Amendment and Exchange Agreement, dated as of March 25, 2003, by and among the Registrant and the Buyers named therein, (incorporated by reference from Exhibit 10.6 to Form 8-K filed by the Registrant on January 2, 2003).
  10.24     Pledge Agreement, dated as of December 31, 2002, by Viewpoint Corporation as Pledgor, in favor of Smithfield Fiduciary LLC as collateral agent, for the benefit of the holders named therein, (incorporated by reference from Exhibit 10.7 to Form 8-K filed by the Registrant on January 2, 2003).
  10.25     Redemption, Amendment and Exchange Agreement, dated as of March 25, 2003, by and among the Registrant and Smithfield Fiduciary LLC (incorporated by reference from Exhibit 10.1 to Form 8-K filed by the Registrant on March 25, 2003).
  10.26     Redemption, Amendment and Exchange Agreement, dated as of March 25, 2003, by and among The Registrant and Riverview Group, LLC (incorporated by reference from Exhibit 10.2 to Form 8-K filed by the Registrant on March 25, 2003).
  10.27     Redemption, Amendment and Exchange Agreement, dated as of March 25, 2003, by and among The Registrant and Portside Growth & Opportunity Fund (incorporated by reference from Exhibit 10.3 to Form 8-K filed by the Registrant on March 25, 2003).
  10.28     Form of Redemption Warrant for Common Stock of The Registrant (incorporated by reference from Exhibit 10.9 to Form 8-K filed by the Registrant on March 25, 2003).
  10.29 *   Second Amended and Restated License and Services Agreement dated as of September 30, 2002 between the Registrant and America Online, Inc.
  10.30     Agreement for Consulting Services dated as of September 30, 2002 between the Registrant and America Online, Inc.
  10.31 *   Schedule No. 1 dated September 30, 2002 to Agreement for Consulting Services between the Registrant and America Online, Inc.

      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
  23.2     Consent of IPSOS-NPD

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      Exhibit No. 24: Power of Attorney

         
  24.1     Power of Attorney (incorporated by reference from the signature page of the Annual Report on Form 10-K for the year ended December 31, 2002 filed by the Registrant on March 31, 2003).

Confidential treatment requested on certain portions of this exhibit. An unredacted version of this exhibit has been filed separately with the Securities and Exchange Commission.

      Exhibit No. 99: Additional Exhibits

         
  99.1     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  99.2     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

      (b) Reports on Form 8-K

      None.

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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 27th day of June, 2003.

  VIEWPOINT CORPORATION

  By:  /s/ ROBERT E. RICE
 
  Robert E. Rice
  President and Chief Executive Officer

Dated: June 27, 2003

      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.

         
By:
  /s/ ROBERT E. RICE

Robert E. Rice
Director, President and Chief Executive Officer (Principal Executive Officer)
  Dated: June 27, 2003
 
By:   /s/ ANTHONY L. PANE

Anthony L. Pane
Senior Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
  Dated: June 27, 2003
 
By:   *

Thomas Bennett
Director
  Dated: June 27, 2003
 
By:   *

James Crabbe
Director
  Dated: June 27, 2003
 
By:  

Stephen M. Duff
Director
   
 
By:   *

Samuel H. Jones, Jr.
Director
  Dated: June 27, 2003
 
By:  

Lennert J. Leader
Director
   
 
*By:   /s/ BRIAN J. O’DONOGHUE

Brian J. O’Donoghue
Attorney-in-Fact
  Dated: June 27, 2003

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CERTIFICATIONS

I, Robert E. Rice, certify that:

      1. I have reviewed this annual report on Form 10-K/A of Viewpoint Corporation;

      2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

      3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

      4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
        b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
        c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

      5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

        a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
        b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

      6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

  By:  /s/ ROBERT E. RICE
 
  Robert E. Rice
  President and Chief Executive Officer

Dated: June 27, 2003

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I, Anthony L. Pane, certify that:

      1. I have reviewed this annual report on Form 10-K/A of Viewpoint Corporation;

      2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

      3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

      4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
        b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
        c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

      5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

        a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
        b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

      6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

  By:  /s/ ANTHONY L. PANE
 
  Anthony L. Pane
  Senior Vice President and
  Chief Financial Officer

Dated: June 27, 2003

90 EX-10.29 3 y84969a3exv10w29.htm SECOND AMENDED AND RESTATED LICENSE AGREEMENT SECOND AMENDED AND RESTATED LICENSE AGREEMENT

 

EXHIBIT 10.29

AOL Confidential

Confidential
SECOND AMENDED AND RESTATED LICENSE AND SERVICES AGREEMENT

     This Second Amended and Restated License and Services Agreement (this “Agreement”) dated as of September 30, 2002 (the “Effective Date”) is between America Online, Inc., a Delaware corporation, with offices at 22000 AOL Way, Dulles, Virginia 20166 (“AOL”), and Viewpoint Corporation, a Delaware corporation and successor in interest to MetaStream Corporation, with offices at 498 Seventh Avenue, New York, N.Y. 10018 (“Viewpoint”). AOL and Viewpoint may be referred to individually as a “Party” and collectively as the “Parties.”

INTRODUCTION

     The Parties entered into a License and Services Agreement, dated as of March 28, 2000, and Amendment Number One to the License and Services Agreement between America Online, Inc. and Viewpoint on June 21, 2001, under which, among other things, Viewpoint provided to AOL certain software for AOL’s use, distribution, and sublicensing in connection with the AOL Network. In addition, the Parties entered into an Amended and Restated License and Services Agreement on July 19, 2001, as amended on March 27, 2002. The Parties now wish to amend and restate the agreement and broaden their relationship. The relationship is further described below and is subject to the terms and conditions set forth in this Agreement.

     The Parties have also entered into an Agreement for Consulting Services, dated as of September 30, 2002 (the “Consulting Services Agreement”), under which, among other things, Viewpoint will provide certain technology (the “UI Technology”) and will provide digital content (the “UI Content”) for use by AOL in the user interface for the client software used to access the AOL Service, as well as updates and internationalized versions thereof. The Parties anticipate that Viewpoint, AOL, or a third party (or parties) will create additional UI Content for use by AOL in the user interface for the AOL Client software. Any such UI Content created by Viewpoint will be so created under an additional schedule(s) incorporated into the Consulting Services Agreement and shall be deemed licensed under this Agreement.

     Defined terms used but not defined in the body of the Agreement shall have the meanings ascribed to such terms in Exhibit A hereto.

1.     DELIVERY AND LICENSE OF THE LICENSED SOFTWARE

Viewpoint shall deliver the Licensed Software to AOL in accordance with this Agreement.

2.     GRANT OF RIGHTS

2.1     Licenses.

(a)  Broadcast Licenses.

  (i)   General Broadcast License. Viewpoint hereby grants to AOL and its Affiliates, for the Term (subject to Section 8.6), a worldwide, irrevocable (except as set forth in Section 8.3), non-exclusive and nontransferable (except as set forth in Section 13.9) license (the “Broadcast License”) to use, reproduce, perform, display and transmit (in any medium now known or hereafter devised) Viewpoint Content (and, as necessary to enable this Broadcast License, the Viewpoint Technology) from AOL Servers to any current or future Media Player Software (or Component thereof). The Broadcast License will be enabled by Broadcast Keys issued by Viewpoint that will reside on AOL Servers. Viewpoint represents and warrants that it will provide AOL with Broadcast Keys upon execution of this Agreement that will not expire or “time out” (e.g. no watermarking or degradation) at any time during the Term.

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  (ii)   Perpetual UI License. Viewpoint hereby grants to AOL and its Affiliates a worldwide, perpetual, irrevocable (except as set forth in Section 8.3), exclusive license (the “UI License”) to use, reproduce, perform, display and transmit (in any medium now known or hereafter devised) UI Content (and, as necessary to enable this UI License, the Viewpoint Technology) created during the Term from AOL Servers to any current or future Media Player Software (or component thereof).
 
  (iii)   Viewpoint hereby grants to AOL and its Affiliates a worldwide, non-exclusive and non-transferable license to use Broadcast Keys solely for purposes of using, reproducing, performing, displaying, and transmitting Viewpoint Content in accordance with either the (i) General Broadcast License or (ii) Perpetual UI License, as the case may be. Viewpoint represents and warrants that it will provide AOL with Broadcast Keys upon execution of this Agreement that will not expire or “time out” (e.g. no watermarking or degradation) at any time, even after conclusion of the Term, pursuant to Section 2.1(a)(ii) above. Viewpoint also represents that (A) it has developed a software application (the “Key Generation Application”) that generates Broadcast Keys, (B) that the attached Exhibit C sets forth an explanation of the structure, operation, and functionality of the Broadcast Keys, (C) that the Key Generation Application can be used, without modification or other development work, to generate Broadcast Keys that will allow AOL Servers to broadcast and enjoy the full rights of the Perpetual UI License described above and that at all times the Broadcast Keys will meet all of the requirements of this section (e.g., no “time out,” watermarking or degradation in any manner), and (D) that the Key Generation Application will be deposited in escrow within fifteen (15) days of the Effective Date pursuant to AOL’s Preferred Beneficiary Agreement with DSI, as amended and agreed by Viewpoint and AOL on September 30, 2002, and any Updates to the Key Generation Application will be promptly deposited pursuant to Section 2.3 below. Viewpoint represents and warrants that the Desktop Themes functionality described in Exhibit A, Schedule 1 to the Master Consulting Agreement (dated September 30, 2002) between AOL and Viewpoint shall not use or require the use of Broadcast Keys.

(b)  Authoring Tools. Viewpoint hereby agrees to provide AOL and its Affiliates, for the Term of this Agreement, with a royalty-free, worldwide, non-exclusive license to use the Authoring Tools and to reproduce the Authoring Tools as necessary for use by AOL and its Affiliates. Viewpoint hereby also agrees to provide AOL and its Affiliates, the right to sublicense, for the Term of this Agreement, the Authoring Tools to entities that create and/or distribute content and advertising through the AOL Network.

(c)  Media Player. Viewpoint hereby grants to AOL and its Affiliates a worldwide, perpetual, irrevocable (except as set forth in Section 8.3), non-exclusive, royalty-free, paid-up license to use, reproduce, distribute (subject to Section 2.1(d)), display, perform, transmit, sublicense (e.g., grant AOL End-Users the right to use), and adapt the Media Player Software, as AOL deems necessary in light of its business requirements (collectively, the “Media Player Software License”). Without limiting the generality of the foregoing, Viewpoint agrees that in connection with the foregoing Media Player Software License, AOL shall have the right to distribute the Media Player Software through any manner or means whatsoever, in AOL’s sole discretion, including, without limitation, physical distribution with CD-ROMs containing AOL client software or as a standalone electronic download from the AOL Network, subject to the restrictions in Section 2.1(d) and this Agreement. AOL shall be licensed for an unlimited quantity of licenses of the Media Player Software as necessary to provide the Media Player Software to all AOL End Users extant at the onset and during the Term of this Agreement, as well as for any other usage of the Media Player Software deemed necessary by AOL. No fee shall be due Viewpoint from AOL for the Media Player Software, regardless of the quantity of Media Player Software used or deployed by AOL.

(d)  End User License. Viewpoint grants AOL the right to distribute and sublicense the Media Player Software to AOL End-Users under terms and conditions materially consistent with the terms and conditions contained in AOL’s then current terms of service agreement, or materially consistent with the terms and conditions that apply to such other AOL software that AOL may be licensing an AOL End User contemporaneously with AOL’s sublicense of the Media Player Software, at AOL’s discretion. For the avoidance of doubt, the Parties agree that any rights granted by AOL to AOL End Users shall be perpetual,

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and shall survive the expiration or earlier termination of this Agreement. Alternatively, AOL may, at AOL’s option, sublicense the Media Player Software subject to Viewpoint’s standard end user license agreement, which is available from Viewpoint on request.

(e)  Ownership. Viewpoint retains ownership of all right, title and interest in and to the Licensed Software, and reserves all rights not expressly granted. Viewpoint retains no right, title, and interest in any Viewpoint Content created by Viewpoint for AOL, including but not limited to the UI Content.

(f)  Subcontracting. AOL may use subcontractors to exercise any or all of its rights granted to AOL under this Agreement in its sole discretion; provided, however, that: (a) AOL shall ensure that any subcontractors comply with the provisions of this Agreement and (b) AOL shall be liable for any action by such subcontractors which, if done by AOL, would be a breach of this Agreement.

2.2     Software License Restrictions. The Licensed Software shall be provided to AOL in object code version. Except as permitted pursuant to Section 2.3, AOL shall not reverse engineer, decompile, or disassemble the Licensed Software, except (1) to the extent that the foregoing restriction is void or not enforceable under applicable law despite this restriction, or (2) as permitted by Viewpoint.

2.3     Source Code Escrow. Viewpoint shall deposit a copy of the source code for the Licensed Software with a commercial third party escrowee pursuant to the terms of an escrow agreement among Viewpoint, AOL and the Escrowee in the form of Exhibit E hereto. The escrow agreement shall provide that AOL shall be entitled to receive a copy of the source code for the Licensed Software upon the occurrence of any of the following release conditions: (a) a material breach of this Agreement (including any breach of the support obligations set forth in Exhibit B by Viewpoint) by Viewpoint which has not been timely cured, (b) any bankruptcy filing by Viewpoint, (c) Viewpoint ceases its business operations or (d) a Change of Control of Viewpoint. In any such event, the Escrowee shall deliver the source code for the Licensed Software to AOL or its designee. During the Term, Viewpoint shall deposit the latest version of the source code for the Licensed Software with Escrowee promptly after every material change in such software, including, without limitation, any and all Updates. If the source code for the Media Player Software is released pursuant to this Section 2.3, then the following license to AOL becomes effective immediately upon such release: In addition to the rights granted under Section 2.1 and Section 2.3, AOL and its Affiliates may use the source code version of the Licensed Software and Broadcast-Related Software to provide the support for AOL and AOL End Users of the Media Player Software, as AOL reasonably deems necessary, as well as for such further development as AOL chooses; the license to the source code for the purposes of support as described in the foregoing shall be perpetual. The foregoing license is subject to all of the other restrictions in this Agreement regarding the Licensed Software.

2.4     Trademark License. AOL, its Affiliates and its channels of distribution may use but are not required to use Viewpoint trademarks and logos applicable to the Licensed Software in connection with the activities contemplated under this Agreement. In the event AOL uses Viewpoint trademarks or logos, AOL shall use good faith efforts to adhere to Viewpoint’s reasonable trademark usage guidelines, which shall be provided to AOL after execution of this Agreement, and which shall be subject to AOL’s reasonable approval. Notwithstanding anything in this Agreement or in such trademark usage guidelines, AOL shall be permitted at its sole discretion to co-brand the Licensed Software with AOL trademarks and/or logos in addition to Viewpoint’s trademarks and logos applicable to the Licensed Software; provided that AOL does not (1) remove any trademark or copyright notices from the Licensed Software, (2) attribute ownership or authorship of the Licensed Software to any party other than Viewpoint, or (3) indicate that any party other than Viewpoint is the source of the Licensed Software.

2.5     Distribution. AOL and its Affiliates have included the Media Player Software in version 7.0 of the client software used to access the AOL Service (“AOL 7.0”), the immediately subsequent major release of such client software (the “Subsequent Version”), and shall use good faith efforts to include the Media Player Software in the related internationalized versions of AOL 7.0 and the Subsequent Version; provided however, that AOL and its Affiliates shall not be required to include the Media Player Software in specified internationalized versions for which AOL and its Affiliates reasonably determines that Viewpoint is unable to adequately provide (or has not adequately provided), at Viewpoint’s expense, technical support and local

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training necessary for AOL and its Affiliates to integrate the Media Player Software with such internationalized client software in accordance with AOL’s performance requirements and development deadlines and without the expenditure of substantial additional resources. Thereafter during the Term, AOL and its Affiliates shall use reasonable efforts to promptly distribute Updates to AOL End Users utilizing such versions. Notwithstanding the foregoing, AOL shall have no obligation to distribute the Media Player Software or any Updates, if (i) the Media Player Software or Update does not comply with any term of this Agreement (including, without limitation, Exhibit B), (ii) distribution of the Media Player Software or Update would interfere with, degrade or otherwise negatively impact the experience of AOL End Users using the AOL Network, (iii) any Update contains over 15% more bits than the prior version of the Media Player Software, (iv) the Media Player Software or Update could not be seamlessly integrated into AOL’s client access software without AOL applying substantial development or network resources, (v) the Media Player Software is not comparable in terms of content degradation, transmission speed, scalability and cost, to other generally available, market-leading multimedia formats, or (vi) AOL determines in its sole discretion that such distribution with respect to the Subsequent Version is contrary to the commercial best interests of AOL. In addition, in the event any Update contains any new feature, functionality or content that is competitive with any feature, functionality or content distributed by AOL, AOL shall so notify Viewpoint, and Viewpoint shall promptly thereafter provide AOL with a version of the Update to distribute that excludes such competitive feature, functionality and content. Except as otherwise expressly provided herein, AOL shall decide in its sole discretion any and all placement and means of distribution, if any, of the Licensed Software. AOL shall have the right to remove or disable the Licensed Software or any portion thereof from the AOL Network (including, without limitation, from AOL 7.0 and the Subsequent Version and other client access software), in the event Viewpoint is in breach of any representation, warranty or obligation hereunder or if, in AOL’s view, the Licensed Software (or any portion thereof) adversely impacts the access or use of any AOL Network product or service by AOL End Users.

2.6     AOL Look and Feel. Viewpoint acknowledges and agrees that AOL shall own all right, title and interest in and to the elements of graphics, design, organization, presentation, layout, user interface, navigation and stylistic convention (including the digital implementations thereof), and the total appearance and impression substantially formed by the combination, coordination and interaction of such elements with Viewpoint Content, which are generally associated with online areas contained within the AOL Network. AOL reserves the right to redesign or modify the organization, structure, “look and feel” and other elements of the AOL Network at its sole discretion at any time without prior notice.

2.7     Documentation License. Viewpoint grants AOL a license to use the Documentation (including the right to copy) as necessary to support its license of the Media Player Software hereunder.

2.8     Compatibility. Viewpoint represents and warrants that any Update or new version of the Media Player Software will have the capability of playing back content encoded in any previous versions of Viewpoint’s encoding or decoding formats. Before March 31, 2003, Viewpoint will not distribute any Updates or Components to the Media Player Software in addition to or other than the (i) version 3.11 of the Media Player Software previously delivered to AOL for distribution with AOL Client Version 8.0 (which Viewpoint intends to distribute concurrently under the label of version 3.12 (minus the tags, User Experience Shell and Draw Anywhere)) with AOL’s distribution of the AOL Client software Version 8.0), (ii) any Updates to the Media Player Software that are necessary to address any error in the Media Player Software that causes an important component or function that is commonly used to be unusable, that causes a crash for a commonly used feature or function, in which commonly used features are completely non-functioning, or that results in data loss or corruption on a widespread basis, provided that such Update does not add any new feature or functionality. Viewpoint hereby grants to AOL the right to elect, on or before December 15, 2002, to require Viewpoint to develop a customized, exclusive version of the Media Player Software (“Custom Player”) as further described in Exhibit D hereto. If AOL so elects, (a) AOL shall provide written notice to Viewpoint of its election on or before December 15, 2002, (b) AOL shall pay to Viewpoint $250,000 concurrently upon execution by AOL of a detailed SOW describing the Custom Player to be incorporated into the Consulting Services Agreement, (c) AOL shall pay an additional $250,000 upon acceptance (as defined in such detailed SOW) by AOL of the Custom Player, and (d) Viewpoint will not distribute any Updates to the Media Player Software until such Custom Player is accepted by AOL.

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Viewpoint will ensure that all Updates to and new versions of the Media Player Software are compatible, consistent, and fully interoperable with the version of the Media Player Software that AOL distributes with Version 8.0. Before releasing any Updates to the Viewpoint Media Player during the Term, Viewpoint will provide AOL any Updates to the Viewpoint Media Player thirty (30) days prior to general release thereof in order for AOL to perform compatibility testing. Viewpoint will delay any scheduled distribution of an Update or new version of the Media Player Software if such Update or new version raises significant compatibility problems with Version 8.0.

3     MAINTENANCE AND TECHNICAL SUPPORT. AOL, in its sole discretion, may require Viewpoint to perform the maintenance and support obligations set forth in Sections 3.1, 3.2, and 3.3 over the periods and in exchange for the payments set forth in Section 8.8.

3.1     Support of AOL. Upon AOL’s election as described in the first sentence of this Section 3, Viewpoint shall:

(a)  comply with the Technical Specification attached hereto as Exhibit B;

(b)  provide technical support and training to staff members of AOL and its Affiliates in a level sufficient to assist AOL to perform its obligations and exercise its rights under this Agreement (e.g., encoding and distribution of Viewpoint Content, integration of the Media Player Software with the AOL client access software, distribution of the Media Player Software over the AOL Network, providing customer support to AOL End-Users pursuant to Section 3.2, and (during the first year after the Effective Date) fixing bugs related to the UI Content). Such training shall occur at Viewpoint’s or AOL’s headquarters as mutually determined on a case-by-case basis by the Parties. Viewpoint hereby agrees that it will negotiate in good faith the possibility of providing training to Affiliates at locations other than the Viewpoint’s or AOL’s headquarters, at which time the Parties will agree on an agreeable allocation of reasonable travel, lodging and similar expenses associated with providing training at other locations; and

(c)  provide to AOL all Updates to the Licensed Software at no cost whatsoever to AOL, its Affiliates or AOL End-Users, prior to the time that the Updates are commercially available pursuant to Section 2.8. Viewpoint will use good faith, commercially reasonable effort to release a major Update to the Media Player Software and Authoring Tools at least once every twelve months during the Term.

3.2     End User Support. AOL shall generally provide support to AOL End Users with respect to the Media Player Software, provided that, upon AOL’s election as described in the first sentence of this Section 3, Viewpoint shall provide AOL with second level support as necessary for AOL to provide professional level support to its End-Users. Upon AOL’s election as described in the first sentence of this Section 3, AOL may, on a case by case basis, direct its AOL End Users directly to Viewpoint, and Viewpoint shall provide professional level support to such AOL End Users, provided that AOL is otherwise generally providing first level support to AOL End Users with respect to the Licensed Software.

3.3     Content Creation Services. If AOL makes the election described in the first sentence of this Section 3 above, Viewpoint will grant to AOL the payment credits set forth in Section 8.8 to be applied towards digital content creation services designated by AOL.

3.4     Quality Assurance Testing. AOL may, at its option, perform quality assurance testing on the Licensed Software.

4.     ADDITIONAL TECHNOLOGY

During the Term, in the event AOL elects to license additional Viewpoint technology including, but not limited to, any additional Viewpoint technology relating to the use of Viewpoint Content on any platform (such as AOL TV) not otherwise made available by Viewpoint on a commercial basis (collectively, the “Additional Technology”), the Parties shall mutually agree on the terms and conditions pursuant to which Viewpoint shall provide such Additional Technology to AOL; provided, however, that in the event that any fees are due for such Additional Technology, then any such fees associated with such Additional

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Technology shall be no less favorable than the fees paid by any other Viewpoint customer with respect to technology having a license scope and usage similar to the Additional Technology. If the Additional Technology results in a modification or enhancement to the Media Player Software, the Media Player Software License granted to AOL in Section 2.1(c) shall include the Media Player as so modified or enhanced. Notwithstanding anything to the contrary set forth in this Agreement, if, during the Term, AOL engages Viewpoint to develop and provide to AOL technology which represents an extension of the Media Player Software for use on a PC platform, including but not limited to such extensions comprised of Components to the Media Player Software created solely for the benefit of AOL and not intended for general distribution, license rights thereto shall be deemed to covered by payments made under this Agreement.

5.     Reserved.

6.     Representations and Warranties.

6.1     Mutual. Each Party represents and warrants to the other Party that: (i) such Party has the full corporate right, power and authority to enter into this Agreement, to grant the licenses granted hereunder and to perform the acts required of it hereunder; (ii) the execution of this Agreement by such Party, and the performance by such Party of its obligations and duties hereunder, do not and will not violate any agreement to which such Party is a party or by which it is otherwise bound; and (iii) when executed and delivered by such Party, this Agreement will constitute the legal, valid and binding obligation of such Party, enforceable against such Party in accordance with its terms.

6.2     By Viewpoint. Viewpoint additionally represents and warrants that: (i) use of the Licensed Software in accordance with this Agreement does not and will not infringe on or violate any copyright, trademark, trade secret, patent, rights of publicity, moral rights or any other third party rights; (ii) the Licensed Software shall not violate any applicable law or regulation or include any unlawful matter or material; (iii) Viewpoint has free, good and clear title to all Licensed Software which may be supplied by Viewpoint under this Agreement, which title shall be free and clear of any and all liens, encumbrances, claims or litigation, whether pending or threatened; (iv) Viewpoint has obtained all authorizations, approvals, consents, licenses, permits, certificates and all other rights and permissions necessary for it to perform under this Agreement and grant the licenses and rights hereunder to AOL; (v) the Licensed Software will function, in all material respects, in accordance with the Documentation; (vi) the Licensed Software shall not contain any defects in material, including without limitation, any back door, time bomb, drop dead device or other software routine designed to disable a computer program (either automatically with the passage of time or under the control of a person other than AOL), or any virus, Trojan horse, worm or other software routine designed to permit unauthorized access or to erase or to otherwise harm software, hardware or data; and (vii) the Licensed Software will perform in accordance with the foregoing performance warranty prior to, during and (to the extent permitted by the system clock(s) in the operating system(s) on which the Licensed Software are being run) after the calendar year 2000 A.D., and the Licensed Software shall perform during each such period of time without any material error specifically caused by date functionality in general or date functionality as it relates to data which represents or references different centuries or more than one century. The warranties in subsection (v) and (vi) above apply for twelve (12) months after delivery of the Licensed Software, and shall continue to apply to each delivered Update to each product in the Licensed Software, from the date that such Update is received by AOL. All other warranties specified in this subsection shall be perpetual in nature.

6.3     Remedies. Viewpoint shall promptly repair or replace any nonconforming Licensed Software, and shall bear the expenses associated with such repair or replacement on the AOL Network. Without exclusivity, Viewpoint shall be responsible for the shipping and delivery charges involved in returning Licensed Software to Viewpoint, as well as for such charges in returning repaired or replacement Licensed Software to AOL.

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GENERAL TERMS

7.     LIMITATION OF LIABILITY; DISCLAIMER

7.1     Liability. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), ARISING FROM BREACH OF THIS AGREEMENT OR THE USE OF OR INABILITY TO USE THE AOL NETWORK OR LICENSED SOFTWARE, SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS (COLLECTIVELY, “DISCLAIMED DAMAGES”); PROVIDED THAT VIEWPOINT SHALL REMAIN LIABLE TO AOL TO THE EXTENT ANY DISCLAIMED DAMAGES ARE AWARDED TO A THIRD PARTY OR INCLUDED IN A SETTLEMENT AND ARE SUBJECT TO INDEMNIFICATION BELOW. AOL SHALL NOT BE LIABLE TO VIEWPOINT WITH RESPECT TO THE LICENSED SOFTWARE FOR ANY AMOUNT IN EXCESS OF THE GREATER OF (A) THE AGGREGATE AMOUNTS PAYABLE HEREUNDER IN THE YEAR IN WHICH THE EVENT GIVING RISE TO SUCH LIABILITY OCCURRED OR (B) $100,000.

7.2     No Additional Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE AOL NETWORK OR THE LICENSED SOFTWARE, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, AOL SPECIFICALLY DISCLAIMS ANY WARRANTY REGARDING THE PROFITABILITY OF AOL NETWORK, ANY BENEFIT VIEWPOINT MIGHT OBTAIN FROM INCLUDING THE LICENSED SOFTWARE OR ANY PORTION THEREOF WITHIN THE AOL NETWORK AND (III) THE FUNCTIONALITY, PERFORMANCE OR OPERATION OF THE AOL NETWORK.

8.     ERM, RENEWAL, TERMINATION, FEES

8.1     Term. Unless earlier terminated as set forth herein, the initial term of this Agreement will begin on the Effective Date and continue through July 19, 2004 at 12 p.m. midnight, Eastern Standard Time (the “Initial Term”).

8.2     Renewal. Upon conclusion of the Initial Term of this Agreement, AOL will have the right, in its sole discretion, to renew the Agreement for up to three (3) successive one (1) year renewal terms (each a “Renewal Term” and together with the Initial Term, the “Term”). A Renewal Term shall automatically commence following the expiration of the Initial Term (or prior Renewal Term, as the case may be) unless AOL gives at least thirty (30) days’ written notice to Viewpoint prior to the end of the Initial Term or any Renewal Term, as the case may be, that it has determined in its discretion not to renew the Agreement.

8.3.     Termination for Breach. Except as expressly provided elsewhere in this Agreement, either Party may terminate this Agreement at any time in the event of a material breach of the Agreement by the other Party which remains uncured after thirty (30) days written notice thereof to the other Party. Notwithstanding the foregoing, only if AOL materially breaches and fails to cure its obligations under Section 8.7 or 12 may Viewpoint terminate this Agreement.

8.4.     Termination for Bankruptcy/Insolvency. Either Party may terminate this Agreement immediately following written notice to the other Party if the other Party (i) ceases to do business in the normal course, (ii) becomes or is declared insolvent or bankrupt, (iii) is the subject of any proceeding

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related to its liquidation or insolvency (whether voluntary or involuntary) which is not dismissed within ninety (90) calendar days or (iv) makes an assignment for the benefit of creditors.

8.5     Change of Control. AOL may terminate this Agreement upon thirty (30) days prior written notice to Viewpoint in the event of any Change of Control of Viewpoint.

8.6     Effect of Expiration or Termination. For greater certainty between the Parties, it is understood that the Media Player License and UI License granted hereunder by Viewpoint are perpetual in nature but that the Broadcast License granted hereunder by Viewpoint is only for the Term; provided, however, that if the Agreement is terminated by AOL pursuant to Section 8.3 or 8.4 the Broadcast License hereunder shall also be perpetual. It is also understood that the UI License only extends to UI Content created during the Term. In addition, sublicenses granted to AOL End Users hereunder shall survive cancellation or termination of this Agreement.

8.7     License Fees.

  (a)   (i) The license fee for the period commencing on July 19, 2001 and ending on July 19, 2004 is $8,325,000 (the “License Fee”). The parties acknowledge and agree that AOL has previously paid $6,325,000 of the License Fee. AOL shall pay the remaining $2,000,000 of the Initial Term Fee as follows:

  a.   $500,000 on or before September 30, 2002;
 
  b.   $500,000 on or before December 23, 2002; and
 
  c.   $1,000,000 on or before June 23, 2003.
 
  (ii)   For the license granted to AOL in Section 2.1 (a) for the first one year Renewal Term (if any) commencing on July 20, 2004 and ending on July 19, 2005, AOL shall pay $2,000,000 to Viewpoint on or before June 30, 2004.
 
  (iii)   For the license granted to AOL in Section 2.1(a) for the second one year Renewal Term (if any), AOL shall pay no more than $4,500,000 to Viewpoint on or before June 30, 2005 (subject to reduction pursuant to Section 8.7(b) below).
 
  (iv)   For the license granted to AOL in Section 2.1(a) for the third one year Renewal Term (if any), AOL shall pay no more than $5,500,000 to Viewpoint or before June 30, 2006 (subject to reduction pursuant to Section 8.7(b) below).

  (b)   MFN. The license fees payable by AOL during the second and third Renewal Terms and, if AOL and Viewpoint determine to enter into an extension of this Agreement beyond the third Renewal Term, the license fees payable by AOL for a period of up to two years following the third Renewal Term shall be no greater than the license fees paid to Viewpoint by any third party with respect to a broadcast license having a scope similar to the license granted hereunder and an expected usage by such third party similar to the expected usage by AOL of the Broadcast License.

8.8     Maintenance and Support Fees. The parties acknowledge and agree that AOL has elected to require and has paid $625,000 to Viewpoint for performance of the maintenance and support obligations set forth in Sections 3.1, 3.2, and 3.3 for the period from March 27, 2002 through June 30, 2003. If AOL elects to require Viewpoint to perform the maintenance and support obligations set forth in Section 3.1, 3.2, and 3.3 for any annual period commencing on or after June 30, 2003 and during which the Agreement is in effect (including Renewal Terms (if any)), (x) AOL shall notify Viewpoint of its election to do so by June 20th of the relevant annual period, (y) AOL shall pay to Viewpoint a fee of $500,000 on or before the first day of such annual period, and (z) Viewpoint shall grant to AOL a payment credit of $100,000 for Production Services performed over the relevant annual period.

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     8.8(a).     After July 30, 2003, upon annual election by AOL in its discretion, Viewpoint will perform maintenance, integration support for future versions of the client software distributed under the AOL brand, bug fixes, and/or modifications (“Maintenance”) to the UI Content delivered to AOL by Viewpoint for $300,000 each one-year period so elected by AOL, payable to Viewpoint thirty (30) days after such election.

9.     INDEMNITY

Viewpoint hereby agrees to indemnify, defend and hold harmless AOL and the officers, directors, agents, Affiliates, distributors, franchises and employees of AOL from and against all claims, actions, losses, liabilities, expenses, damages and costs (including, without limitation, reasonable attorneys’ fees) that may at any time be assessed against or incurred by any of them by reason of any third party claims, suits or proceedings: (a) for libel, defamation, violation of right of privacy or publicity, patent infringement, copyright infringement, trademark infringement or other infringement of any third party right, fraud, false advertising, misrepresentation, product liability or violation of any law, statute, ordinance, rule or regulation throughout the world in connection with the Licensed Software; (b) arising out of any material breach by Viewpoint of any duty, representation, or warranty under this Agreement; or (c) relating to any contaminated file, virus, worm or Trojan horse originating from the Licensed Software. AOL will notify Viewpoint of any claim, action or demand (an “Action”) for which indemnity is claimed within ten (10) days of receipt of written notice of such Action, and will give Viewpoint control of the defense and settlement of the claim, action or allegation. Viewpoint’s counsel defending such Action shall be subject to AOL’s prior written approval. AOL reserves the right to participate fully in and assume joint control of the defense of any Action, at its own cost and expense. Settlement of any Action shall be subject to AOL’s prior written approval.

10.     SOLICITATION

During the Term of the Agreement, Viewpoint will not use the AOL Network (including, without limitation, the e-mail networks contained therein) to solicit AOL Members on behalf of another Interactive Service. More generally, Viewpoint will not send unsolicited, commercial e-mail (i.e., “spam”) or other online communications through or into AOL’s products or services, absent a Prior Business Relationship. For purposes of this Agreement, a “Prior Business Relationship” will mean that the AOL Member to whom commercial e-mail or other online communication is being sent has voluntarily either (i) engaged in a transaction with Viewpoint or (ii) provided information to Viewpoint through a contest, registration, or other communication, which included clear notice to the AOL Member that the information provided could result in commercial e-mail or other online communication being sent to that AOL Member by Viewpoint or its agents. Any commercial e-mail or other online communications to AOL Members which are otherwise permitted hereunder, will (a) include a prominent and easy means to “opt-out” of receiving any future commercial communications from Viewpoint, and (b) shall also be subject to AOL’s then-standard restrictions on distribution of bulk e-mail (e.g., related to the time and manner in which such e-mail can be distributed through or into the AOL product or service in question).

11.     PROMOTIONAL MATERIALS/PRESS RELEASES

Neither party shall publish or release any press releases, public announcement or other promotional materials related to the transactions contemplated hereunder and/or referencing this Agreement, the other Party and/or its trade names, trademarks, or service marks without the prior written consent of the other party. Notwithstanding the foregoing, (a) AOL may, in its sole discretion, include Viewpoint in an initial press release and/or make other public announcements or include Viewpoint in other activities concerning the features and functionality of the AOL Network, and (b) Viewpoint may issue a press release as reasonably required to comply with the laws, regulations, and rules of the U.S. Securities and Exchange Commission, upon prior approval by AOL, which shall not be unreasonably withheld or delayed.

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12.     CONFIDENTIAL INFORMATION

Each Party acknowledges that Confidential Information may be disclosed to the other Party during the course of this Agreement. Each Party agrees that it will take reasonable steps, at least substantially equivalent to the steps it takes to protect its own proprietary information, during the term of this Agreement, and for a period of three years following expiration or termination of this Agreement, to prevent the duplication or disclosure of Confidential Information of the other Party, other than by or to its employees or agents who must have access to such Confidential Information to perform such Party’s obligations hereunder, who will each agree to comply with this Section. Notwithstanding the foregoing, either Party may issue a press release or other disclosure containing Confidential Information without the consent of the other Party, to the extent such disclosure is required by law, rule, regulation or government or court order. In such event, the disclosing Party will provide, if reasonably possible, at least five (5) business days prior written notice of such proposed disclosure to the other Party. Further, in the event such disclosure is required of either Party under the laws, rules or regulations of the Securities and Exchange Commission or any other applicable governing body, such Party will (i) redact mutually agreed-upon portions of this Agreement to the fullest extent permitted under applicable laws, rules and regulations and (ii) submit a request to such governing body that such portions and other provisions of this Agreement receive confidential treatment under the laws, rules and regulations of the Securities and Exchange Commission or otherwise be held in the strictest confidence to the fullest extent permitted under the laws, rules or regulations of any other applicable governing body. For purposes of this Agreement, “Confidential Information” shall mean: any information relating to or disclosed in the course of the Agreement, which is or should be reasonably understood to be confidential or proprietary to the disclosing Party, including, but not limited to, the material terms of this Agreement, information about AOL Members, AOL End-Users, AOL Broadband Service registration information, technical processes and formulas, source codes, product designs, sales, cost and other unpublished financial information, product and business plans, projections, and marketing data. “Confidential Information” will not include information (a) already lawfully known to or independently developed by the receiving Party, (b) disclosed in published materials, (c) generally known to the public, or (d) lawfully obtained from any third party.

13.     PRIVACY. Viewpoint will not directly or indirectly gather, use, or deliver any data from the AOL Network and/or AOL End Users during the Initial Term or any Renewal Term of this Agreement. Viewpoint shall not deliver to AOL any data in contravention of any applicable law or any applicable user privacy policy, including but not limited to an AOL privacy policy.

14.     GENERAL

14.1     Excuse. Neither Party will be liable for, or be considered in breach of or default under this Agreement on account of, any delay or failure to perform as required by this Agreement as a result of any causes or conditions which are beyond such Party’s reasonable control and which such Party is unable to overcome by the exercise of reasonable diligence.

14.2     Notice. Any notice, approval, request, authorization, direction or other communication under this Agreement will be given in writing and will be deemed to have been delivered and given for all purposes (i) on the delivery date if delivered by confirmed facsimile; (ii) on the delivery date if delivered personally to the Party to whom the same is directed; (iii) one business day after deposit with a commercial overnight carrier, with written verification of receipt; or (iv) five business days after the mailing date, whether or not actually received, if sent by U.S. mail, return receipt requested, postage and charges prepaid, or any other means of rapid mail delivery for which a receipt is available. In the case of AOL, such notice will be provided to both the Senior Vice President for Business Affairs (fax no. 703-265-1206) and the Deputy General Counsel (fax no. 703-265-1105), each at the address of AOL set forth in the first paragraph of this Agreement. In the case of Viewpoint, such notice will be provided to both the Chief Executive Officer (fax no. 212-201-0846) and the General Counsel (fax no. 212-201-0801) each at the address of Viewpoint set forth in the first paragraph of this Agreement.

14.3     Waiver. The failure of either Party to insist upon or enforce strict performance by the other Party of any provision of this Agreement or to exercise any right under this Agreement will not be construed as a

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waiver or relinquishment to any extent of such Party’s right to assert or rely upon any such provision or right in that or any other instance; rather, the same will be and remain in full force and effect.

14.4     Return of Information. Upon the expiration or termination of this Agreement, each Party will, upon the written request of the other Party, return or destroy (at the option of the Party receiving the request) all Confidential Information specified by the other Party.

14.5     Survival. Sections 2.1(a)(ii and iii), 2.1(c)-(e) (unless termination is due to breach by AOL in accordance with Section 8.3), 2.2, 2.3, 6, 7, 8.6, 9, 10, 12, 13 and 14 of the Agreement will survive the completion, expiration, termination or cancellation of this Agreement.

14.6     Entire Agreement. This Agreement sets forth the entire agreement and supersedes any and all prior agreements of the Parties with respect to the transactions set forth herein. Neither Party will be bound by, and each Party specifically objects to, any term, condition or other provision which is different from or in addition to the provisions of this Agreement (whether or not it would materially alter this Agreement) and which is proffered by the other Party in any correspondence or other document, unless the Party to be bound thereby specifically agrees to such provision in writing.

14.7     Amendment. No change, amendment or modification of any provision of this Agreement will be valid unless set forth in a written instrument signed by each Party, by an executive or officer authorized to bind such Party.

14.8     Further Assurances. Each Party will take such action (including, but not limited to, the execution, acknowledgment and delivery of documents) as may reasonably be requested by the other Party for the implementation or continuing performance of this Agreement.

14.9     Assignment. Viewpoint will not assign this Agreement or any right, interest or benefit under this Agreement without the prior written consent of AOL. Notwithstanding the foregoing, but subject to Section 8.5, this Agreement may be assumed by any entity that succeeds Viewpoint as a result of a Change of Control. Subject to the foregoing, this Agreement will be fully binding upon, inure to the benefit of and be enforceable by the Parties hereto and their respective successors and assigns.

14.10     Construction; Severability. In the event that any provision of this Agreement conflicts with the law under which this Agreement is to be construed or if any such provision is held invalid by a court with jurisdiction over the Parties to this Agreement, (i) such provision will be deemed to be restated to reflect as nearly as possible the original intentions of the Parties in accordance with applicable law, and (ii) the remaining terms, provisions, covenants and restrictions of this Agreement will remain in full force and effect.

14.11     Remedies. Except where otherwise specified, the rights and remedies granted to a Party under this Agreement are cumulative and in addition to, and not in lieu of, any other rights or remedies which the Party may possess at law or in equity; provided that, in connection with any dispute hereunder, Viewpoint will be not entitled to offset any amounts that it claims to be due and payable from AOL against amounts otherwise payable by Viewpoint to AOL.

14.12     Governing Law. This Agreement will be interpreted, construed and enforced in all respects in accordance with the laws of the Commonwealth of Virginia except for its conflicts of laws principles.

14.13     Export Controls. Viewpoint shall be solely responsible for obtaining any and all necessary approvals, registrations, certifications and other necessary documentation for the international sale and export/import of the Licensed Software. Viewpoint shall keep AOL informed at all times during the term of this Agreement as to the export/import status of the Licensed Software.

14.14     Headings. The captions and headings used in this Agreement are inserted for convenience only and will not affect the meaning or interpretation of this Agreement.

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14.15     Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original and all of which together will constitute one and the same document.

14.16     Insolvency. All rights and licenses granted under or pursuant to this Agreement by Viewpoint to AOL with respect to the Licensed Software and related Documentation are, and shall otherwise be deemed to be, for purposes of § 365(n) of Title 11 of the United States Code (the “Bankruptcy Code”), licenses of rights to “intellectual property” as defined under § 101 of the Bankruptcy Code. The parties agree that if AOL does not terminate this Agreement pursuant to Section 8 and its subparts (“Term, Renewal, Termination, Fees”), AOL, as a licensee of such rights and licenses, shall retain and may fully exercise, provided it abides by the terms of this Agreement, all of its rights and elections under the Bankruptcy Code, including without limitation any and all rights to Updates to the Licensed Software and whether such Updates arise prior or subsequent to the commencement of a case under the Bankruptcy Code. The parties further agree that, in the event that any proceeding shall be instituted by or against Viewpoint seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking an entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property, or Viewpoint shall take any action to authorize any of the foregoing actions (each a “Proceeding”), AOL shall have the right, in the event it has not terminated this Agreement pursuant hereto, to retain and enforce its rights under this Agreement including, but not limited to, the following rights (provided it abides by the terms of this Agreement): the right to continue to use the Licensed Software and all Updates and all related Documentation and other supporting material related thereto, where so provided and in accordance with the terms and conditions of this Agreement.

     IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.

         
AMERICA ONLINE, INC   VIEWPOINT CORPORATION
 
By:           /s/  Gio Hunt   By:           /s/  Robert E. Rice
 
   
 
Print Name: Gio Hunt   Print Name: Robert E. Rice
 
Title: SVP, Technology Business Development   Title: President and CEO
 
Date: September 30, 2002   Date: September 30, 2002

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  EXHIBIT A
 
  Definitions

Affiliate. (a) Any agent, distributor or franchisee of AOL, (b) an entity that directly or indirectly controls, is controlled by or is under common control with AOL, including for the sake of clarity (but not limited to) any entity under the direct or indirect control of AOL Time Warner Inc. (“Affiliate”), or (c) an entity in which AOL owns directly or indirectly at least twenty percent (20%) of the voting, equity or equivalent interest and in which AOL exercises some other indicia of control. For purposes of this provision, “control” means ownership directly or indirectly of more than fifty percent (50%) of the voting, equity or equivalent interest in an entity; and “other indicia of control” means that an entity (i) operates principally under a brand (trademark or trade name) owned or controlled by AOL or a Affiliate or (ii) has obtained a technology license from AOL or a Affiliate to provide a substantial portion of the infrastructure or functionality of such entity’s services.

AOL Client. Any client software (in a client/server software model) owned, distributed, or authorized to be distributed by AOL or its Affiliates worldwide under the AOL, Netscape, or Compuserve brands (as set forth in Exhibit B, Section 3.9) and any new versions, upgrades, or updates thereto.

AOL End User. Any user of any AOL Network product or service.

AOL Network. (i) The America Online branded US narrowband service (“AOL Service”) and (ii) any other product or service owned, operated, distributed or authorized to be distributed by AOL or its Affiliates worldwide in which content, communications services and/or transactions are provided to members, subscribers and/or registrants through the use of any protocols, standards, platforms, media or other methodology now or hereafter existing (including the Internet and similar protocols, standards and platforms) from host server computers or otherwise, including, without limitation, via telephone, ISDN, DSL, cable, fiber optics, satellite, wireless, television or other type of public or private network or other device.

AOL Rainman Environment. AOL’s proprietary technology for publishing content on and through the AOL Network, and any updates, upgrades, new versions, or successor technology.

AOL Server. The servers or host complexes (or any portion thereof) owned or operated by or on behalf of AOL or its Affiliates (or third parties serving advertising or promotions for AOL on the AOL Network) in order to provide AOL Network services to AOL End Users.

Authoring Tools. The Viewpoint software used to package, encode and/or create Viewpoint and/or UI Content in a format that can be viewed using the Media Player Software.

Broadcast Key. As defined more completely in Exhibit C hereto, a Viewpoint broadcast key file for the platforms hereto which authenticates Viewpoint Content in such manner that Viewpoint Content can be viewed by Media Player Software without image degradation due to watermarking or other digital rights management mechanism.

Broadcast-Related Software. All software, databases and documentation necessary to ensure that the Broadcast Keys remain valid and enable AOL to fully exercise its Broadcast License and UI License rights hereunder.

Change of Control. (a) The consummation of a merger or consolidation or sale or other disposition of substantially all of the assets of a party or (b) the acquisition through one or more related transactions by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1933, as amended) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under such Act) of more than 50% of either (i) the then outstanding shares of common stock

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of such party; or (ii) the combined voting power of the then outstanding voting securities of such party entitled to vote generally in the election of directors.

[*]

Documentation. Viewpoint’s manuals and other documentation for the Licensed Software (or portion thereof) as provided by Viewpoint to AOL (e.g., administrative guides and data sheets), whether in print or electronic form. References to the Licensed Software in the Agreement shall be deemed to generally include the Documentation, as applicable.

[*]

GPF (General Protection Fault). The name of an event, or crash, due to hardware error, software error, divide by zero error or invalid operation code, which causes a third party application, AOL client, or operating system to abnormally terminate or produce an error message indicating that the system is generally unable to continue normal operation.

Interactive Service. An entity offering one or more of the following: (i) online or Internet connectivity services (e.g., an Internet service provider); (ii) an interactive site or service featuring a broad selection of aggregated third party interactive content (or navigation thereto) (e.g., an online service or search and directory service) and/or marketing a broad selection of products and/or services across numerous interactive commerce categories (e.g., an online mall or other leading online commerce site); (iii) a persistent desktop client; or (iv) communications software capable of serving as the principal means through which a user creates, sends or receives electronic mail or real time or “instant” online messages (whether by telephone, computer or other means), including without limitation, greeting cards.

Licensed Software. The Media Player Software, Broadcast Keys, Broadcast-Related Software and Authoring Tools. Licensed Software shall include, without limitation, the Documentation for such software, and any and all Updates thereto.

Media Player Software. The Viewpoint media player plug-in software that interprets and interactively displays digital content in the Viewpoint format for the platforms described in Section 3.9 of Exhibit B hereto, in object code format that Viewpoint makes commercially available, in any version and including all Updates thereto. The Media Player Software consists of the Viewpoint Hub and several Components and all Updates thereto.

Narrowband Speech Codec. An Update to the Media Player Software that Viewpoint intends to make commercially available and that enables the playback of spoken voice and simple sound effects.

Updates. Any and all updates, bug fixes, error corrections, enhancements, upgrades, modifications or new versions or releases of the Licensed Software (or portions thereof) that are made available during the Term. “Updates” excludes any Additional Technology (as defined in Section 4).

[*]

*   Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

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[*]

Term. The period of the Initial Term and any Renewal Term.

UI Content. Any Viewpoint Content that appears as part of the AOL Client or AOL Client features existing now or hereafter created during the Term of the Agreement or any extension thereof, excluding third-party advertising. For the sake of clarity, all Broadcast Keys provided to AOL for UI Content will not expire or “time out” (e.g. no watermarking or degradation) at any time, even after conclusion of the Term.

Viewpoint Technology. Any technology in existence now (including technology licensed under previous iterations of this Agreement) or created during the Term of the Agreement or any extension thereof which is necessary for AOL to enjoy the full benefit of the licenses granted in this Agreement.

Viewpoint Content. Any content that has been packaged and/or encoded in the Viewpoint format so that, when displayed and transmitted from a server on which a Broadcast Key has been installed, it can be viewed with the Media Player Software without image degradation due to watermarking or other digital rights management mechanism. For the sake of clarity, all Broadcast Keys provided to AOL for UI Content will not expire or “time out” (e.g. no watermarking or degradation) at any time.

Viewpoint Hub. The Viewpoint software that manages the authentication, retrieval, installation and automatic update of other software, including the Viewpoint Hub itself and Components, within a cross-platform, cross-browser framework. When deployed, the Viewpoint Hub is configured with a list of trusted servers and Broadcast Keys.

*   Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

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EXHIBIT B

Technical Specification

1.   Scope
 
    This document provides detailed technical requirements for an AOL client-hosted multimedia player that utilizes future versions of the SDK and ActiveX control, and bug reporting and response requirements relating to this Agreement.
 
2.   Applicable Documents
 
    The following documents are applicable to the extent specified herein:
 
3.   Performance
 
3.1   Backward compatibility of SDK’s and ActiveX interfaces
 
    With respect to operating systems supported by Media Player Software at any point during the Term, all API’s and ActiveX interfaces shall be maintained for backward compatibility with respect to any such Media Player Software supported operating systems.
 
3.2   [*]
 
3.3   File size of the Installer
 
    Viewpoint shall provide a basic installer package to AOL that maintains a consistent feature set across versions. The initial Viewpoint installer package shall be no larger than 2.25 MB. In the event that a new installer package exceeds the size of the previous installer package by 5%, Viewpoint will notify AOL as to this fact as soon as Viewpoint becomes reasonably aware of the increase in size, and shall discuss with AOL the implications of such size increase and manner in which to address any negative impacts associated with such size increase. Any installer and contents produced by Viewpoint will include this basic installer package and be backwards compatible.
 
3.4   [*]
 
3.5   Abnormal Disconnect Rate
 
    An Update of the Media Player Software SDK/Client integrated with AOL client shall not cause an increase in the abnormal disconnect rate.
 
3.6   [*]
 
3.7   Internationalization
 
    Viewpoint shall provide an installer of their client software and SDK in all languages supported by current and anticipated versions of AOL. The Media Player Software software and SDK shall be designed and implemented so as to be easily localized to any language and locale.

* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

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3.8   [*]
 
3.9   [*]
 
3.10   User Interface
 
    Media Player Software client/SDK shall not preclude the use of an AOL-supplied user interface.
 
3.11   [*]
 
3.12   [*]
 
3.13   [*]
 
4.0   Dedicated Support
 
    Viewpoint will provide a dedicated account/product/project manager to AOL. This person will be accountable for ensuring that all products and bug fixes are delivered to AOL in accordance with AOL’s product development schedule.
 
4.1   Bug Reporting Process
 
    AOL and Viewpoint agree to utilize a standardized spreadsheet to notify, update and close bugs. The companies will review this spreadsheet via conference call on a weekly basis at minimum.
 
4.2   Resolution Process
 
    Viewpoint will use commercial best efforts with respect to Viewpoint Technology to adhere to the resolution process provided in the table below for any GPFs, bugs, problems, or any other errors inherent in or caused by the Licensed Software as such Types of Error are reasonably classified by AOL.

                 
    Viewpoint to assign            
    engineer to            
    investigate Error   Temporary   Software patch or    
Type of Error   within:   Work-around within:   bug fix within:   Upgrade within:

 
 
 
 
GM stopper
(pre-release)High
Level Error
(post-release)
  Five (5) minutes from having been alerted   Continuous effort to minimize impact of Error until patch available   Two (2) hours from assignment of technician   30 days

* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

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Beta stopper
(pre-release)
Medium Level Error
(post-release)
  Fifteen (15)
minutes from having
been alerted
  Continuous effort
during normal
business hours
  Five (5) hours from assignment of technician   60 days
 
Alpha stopper
(pre-release)
Low-Level Error
(post-release)
  Fifteen (15) minutes to forty-five (45) minutes from having been alerted (or, in the case of technical personnel requiring assistance or information, Viewpoint to provide such assistance or information within eight (8) business hours   Consultative effort
during normal
business hours
  10 business days from assignment of technician   the next scheduled
Upgrade
 
AOL acknowledges that the use of commercial best efforts with respect to Viewpoint Technology may not necessarily mean that Viewpoint meets the specified timeframes in all cases, provided that it does mean that in all cases, and without limitation, Viewpoint shall immediately, upon notification by AOL as to an Error, begin work to rectify such Error. Furthermore, the intent of the specified timeframes is to establish that the Viewpoint responses (as outlined above) which can be provided to AOL within the specified timeframes will be provided within such timeframes.

4.3   Reporting
 
    Viewpoint will provide a report on a bimonthly basis that denotes headcount and hours per department dedicated to developing software of repairing bugs on behalf of AOL.
 
4.4   “GM Stopper” or “High-Level Error” means a catastrophic error in the Licensed Software for which no work-around has been made available to AOL and (i) that causes an important component or function that is commonly used to be unusable, (ii) that causes a crash for a commonly used feature or function, (iii) in which commonly used features are completely non-functioning, or (iv) that results in data loss or corruption.
 
4.4   “Beta Stopper” or “Medium-Level Error” means a non-catastrophic error for which no work-around has been made available to AOL and (i) for which a commonly used or important feature or function is partially non-functioning or malfunctioning, or (ii) that is otherwise neither a High-Level Error nor a Low-Level Error.
 
4.5   “Alpha Stopper” or “Low-Level Error” means any Error (i) that has minimal impact on the end user, (ii) that is rare in occurrence, regardless of severity, (iii) that causes a malfunction of a non-essential feature or function, or (iv) for which a work-around is available.

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EXHIBIT C

Structure, Operation, and Functionality of Broadcast Keys

The Broadcast Key controls the display of content served from a website and played through the VMP. The broadcast key is used to validate that the content is being served from an appropriate site, and within an appropriate timeframe, as was designated by the content author through the generation of the key in which such information is contained. By inspection of the key, the VMP will determine if content is being broadcast by an inappropriate website, or over an inappropriate timeframe, in which case the content will not be displayed.

The Viewpoint Media Player (“VMP”) is configured to search for two inputs: a file(s) in the Viewpoint format (i.e., with the .mtx or .mtz extension) and a Broadcast Key. If a Broadcast Key is not valid (or not present), the VMP will display a watermark over the content.

The Key Generation Application is Windows-based. It generates a Broadcast Key which is embodied in a text file with the “.mtx” extension. The Broadcast Key is comprised of a string of characters which identify the broadcasting (or publishing) location and the expiration date of the Broadcast Key. The string of characters is the result of a sparse hash function performed on the URL of the location from which the content is intended to be published.

The Viewpoint Media Player will not display a watermark if the Broadcast Key contains the correct hash value for the broadcasting location and the date has not been exceeded.

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Exhibit D. Functions of the Custom Player

The Custom Player will have the same functionality as the then current Media Player Software and will also support the operating system platforms identified in Section 3.9 of Exhibit B to the Agreement. It will be installed on the computers of AOL subscribers in such a way as to be unaffected by installations of other versions of the Viewpoint Media Player that are made before or after the installation of the custom version.

[*]

Within 30 days after Viewpoint releases modifications to its standard Viewpoint Media Player, those modifications will also be made to the Custom Player after being fully tested and accepted. This process will help to ensure that the feature set in the standard player and the Custom Player remain equal during the term of the Agreement. and that content published by AOL or other web publishers will be supported by the Custom Player. In addition, the Custom Player will have the capability of playing back content encoded in any previous versions of Viewpoint’s encoding or decoding formats. [*]

The details of the technical approach, the deliverable milestones, and the division of responsibilities will be established in good faith through discussions between the Viewpoint and AOL engineering teams, (it being understood that Viewpoint will have the primary role in modifying the Viewpoint Media Player Software and developing the Custom Player). The parties will document the approach in a a detailed statement of work to be performed under the Consulting Services Agreement, dated September 30, 2002, between the Parties. The parties expect that all coding, integration, and testing for the custom Viewpoint Media Player will take no more than twelve weeks from the date that the parties agree on the detailed statement of work.

* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

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Exhibit E

Escrow Acceptance

21 EX-10.30 4 y84969a3exv10w30.htm AGREEMENT FOR CONSULTING SERVICES AGREEMENT FOR CONSULTING SERVICES

 

EXHIBIT 10.30

AOL Confidential

CONFIDENTIAL
AGREEMENT FOR CONSULTING SERVICES

     THIS AGREEMENT FOR CONSULTING SERVICES is made and entered into as of September 30, 2002 (the “Effective Date”), by and between America Online, Inc., a Delaware corporation, with offices at 22000 AOL Way, Dulles, Virginia 20166 (hereinafter referred to as “AOL”), and Viewpoint Corporation, a Delaware corporation, with principal offices at 498 7th Avenue, New, York, New York 10018 (hereinafter referred to as “Consultant”) (each a “Party” and collectively the “Parties”).

     AOL, operates the America Online® brand service, an interactive computer communications, information and transactions service. Consultant is familiar with the America Online® brand service. AOL desires to engage the services of Consultant and Consultant desires to accept such engagement upon the terms and conditions set forth herein.

     NOW, THEREFORE, in consideration of the mutual promises set forth herein, AOL and Consultant hereby agree as follows:

1.   Services and Scope of Work

  1.1   Services. Consultant agrees to provide to AOL consulting, software engineering, and digital content production services (collectively, “Consulting Services”) as they are described on Schedule 1 attached hereto as Exhibit A and on such schedules as are executed from time to time by both Parties to this Agreement (the “Schedules”). Each Schedule shall be consecutively numbered and annexed hereto. Consulting Services shall be provided in accordance with the provisions of this Agreement and the applicable Schedule.
 
  1.2   Scope of Work. Each Schedule shall contain a description of the tasks to be performed by Consultant, the deliverables and documentation, if any, to be produced by Consultant (collectively, “Deliverables”), acceptance criteria for each Deliverable (for technical services or if otherwise applicable), a schedule of performance, a schedule of payments and a statement of Consultant’s then-current rates, if applicable. The Parties acknowledge and agree that each Schedule is subject to specific timeframes and the Parties shall use good faith efforts to execute each Schedule in a timely manner; provided that each Schedule shall be reviewed by the appropriate legal personnel of both Parties prior to execution by either Party. Without limiting the foregoing, prior to the execution of any Schedule or statement of work involving non-recurring engineering services (“NRE Services”), Consultant and AOL shall work together to prepare a detailed proposal for NRE Services, which proposal shall include, without limitation, all major assumptions on which the NRE Services are based (e.g., pricing, use and applicability of NRE Services, etc.).
 
  1.3   Performance of Services. Unless otherwise specified by AOL, Consultant has the right to (i) control and direct the means, manner and method by which the Consulting Services are performed, and (ii) perform the Consulting Services at any place or location and at such time as Consultant may reasonably determine. Unless otherwise agreed to by the Parties in writing or on a Schedule, Consultant shall (i) observe the


 

AOL Confidential

      working hours, working rules and polices of AOL while working on AOL’s premises, and (ii) furnish all equipment and materials used to perform the Consulting Services, including but not limited to telephone lines, personal computers and modems.

1.4   Other Work.

  (a)   Consultant has the right to perform services for others during the term of this Agreement as long as Consultant performs the Consulting Services with not less than the level of diligence with which Consultant performs services for any other party. The Parties understand and agree that in the course of performing the Consulting Services, Consultant shall have access to AOL’s proprietary information. In order to ensure compliance with the confidentiality provisions of this Agreement and to adequately protect such proprietary information, Consultant shall implement and enforce appropriate “Chinese wall” procedures; such procedures are set forth on Exhibit E attached hereto. Notwithstanding and without limiting the foregoing, Consultant shall not perform services for an AOL Competitor that are substantially similar to services Consultant is then performing for AOL. “Substantially similar” means that (i) the services involve the same Viewpoint technology (e.g., ZoomView); and (ii) the services make use of the same promotional theme (e.g., a board game theme). For the avoidance of doubt, however, Consultant’s performance of services involving general product modeling with animations, advertisements, and other general digital content production services shall not constitute substantially similar services to the Consulting Services hereunder. As used herein, “AOL Competitor” shall mean any entity listed on Exhibit D hereto; provided that AOL may update such list no more often than once per quarter, upon written notice to Consultant. In the event that Consultant violates any provision of this Section 1.4, AOL shall have the right to terminate this Agreement immediately upon written notice to Consultant, without regard to any cure period set forth in this Agreement.
 
  1.5   Compliance with Applicable Law. Consultant shall ensure that Consultant complies with all applicable local, state and federal law and AOL’s then-current Terms of Service in performing the Consulting Services.

2.   Consultant Personnel

  2.1   Consultant Project Manager. Consultant will appoint for each Schedule a qualified member of its staff to act as project manager (the “Consultant Project Manager”), whose duties shall be to act as liaison between AOL and Consultant.
 
  2.2   Independent Contractor; No Agency. Consultant is an independent contractor. Consultant shall not be deemed for any purpose to be an employee of AOL. AOL shall not be responsible to Consultant or any governing body for any payroll-related taxes related to the performance of the services, including but not limited to, withholding or other taxes related to federal or state income tax, social security benefits or unemployment compensation. Consultant further represents and warrants that Consultant qualifies as an independent contractor under the provisions of the Internal Revenue Code and its common law rules and, as such, Consultant is filing all required forms and necessary payments appropriate to the Consultant’s tax status. Neither Party is an agent, representative or partner of the other Party. Neither Party shall have any right, power or authority to enter into any agreement for or on behalf of, or incur


 

AOL Confidential

      any obligation or liability on behalf of, or to otherwise bind, the other Party. This Agreement shall not be interpreted or construed to create an employment relationship, an association, agency, joint venture or partnership between the Parties or to impose any liability attributable to such a relationship upon either Party.
 
  2.3   Consultant’s Employees and Assistants. From time to time, Consultant may, subject to the terms and conditions set forth in this Agreement, engage employees, independent contractors, consultants, volunteer assistants or other persons or entities (collectively, “Assistants”) to aid Consultant in performing Consultant’s duties under this Agreement. AOL has no relationship with or to such Assistants and such Assistants are not employees, agents, consultants, representatives, assistants or independent contractors of AOL. Consultant shall be fully and solely responsible for the supervision and payment of such Assistants and for all work performed by such Assistants and any third party subcontractors approved by AOL as provided in this Agreement.

3.   Project Management

  3.1   AOL Project Manager. AOL shall designate a project manager for each Schedule (the “AOL Project Manager”) who shall act as a liaison between AOL and Consultant.
 
  3.2   Progress Reports and Meetings. If requested by AOL, Consultant shall submit a detailed progress report (“Progress Report”) to the AOL Project Manager during the term of each Schedule as more fully set forth in the individual Schedule. Progress Reports shall detail work performed to date and estimated time and cost to complete. If AOL so requests, Consultant shall hold status meetings with the AOL Project Manager, at which the AOL Project Manager and Consultant’s designated representative shall review the status of the Consulting Services. In the event that as a result of any such meeting, either Party requires changes to any Deliverable that has already been accepted by AOL, such changes shall be subject to a change order and potentially additional fees as mutually agreed by the Parties. With respect to Consulting Services performed on a time and materials basis, AOL acknowledges that preparation of a Progress Report(s) may result in increased fees.
 
  3.3   Accounts. If deemed necessary by AOL, Consultant may be given an account(s) for the America Online® brand service for the exclusive purpose of enabling it and its agents to perform Consultant’s duties under this Agreement. The account(s) shall be of the type determined by AOL to be necessary for Consultant to perform its duties hereunder. Consultant shall be responsible for any premium charges, transaction charges, communication surcharges or other charges incurred by any such account(s), other than AOL’s standard monthly subscription charge. Consultant shall be responsible for the actions taken under or through its account(s), which actions shall be subject to AOL’s then-applicable Terms of Service. Upon termination of this Agreement, the account(s), and any associated usage credits and related screen names or similar rights, shall automatically terminate. AOL shall have no liability for loss of data or content related to termination of any account.
 
  3.4   Software Tools. AOL shall determine in its sole discretion, which of its proprietary software tools (each a “Tool”) shall be made available to Consultant in order for Consultant to perform its duties hereunder. Consultant shall be granted a


 

AOL Confidential

      nonexclusive license to use any such Tool, which license shall be subject to: (i) Consultant’s compliance with all rules and regulations relating to use of the Tools, as published from time to time by AOL, (ii) AOL’s right to withdraw or modify such license at any time, and (iii) Consultant’s express recognition that AOL provides all Tools on an “as is” basis, without warranties of any kind.

4.   Fees, Expenses, Records, and Taxes

  4.1   Fees. Each Schedule shall set forth the fee due for the Consulting Services to be provided pursuant to the Schedule and Consultant agrees to invoice AOL as set forth in the Schedule. All Consulting Services to be performed on a time and materials basis shall be invoiced in arrears. Any fees to be paid by AOL hereunder for digital content production services may be reduced pursuant to Section 8.7(b)(ii) of the License Agreement (as defined in Section 9 of this Agreement), so long as AOL makes the appropriate elections under the License Agreement. The Parties shall designate on each Schedule the amount (if any) by which the fees for such Schedule are reduced. Consultant’s hourly rates for digital content production services performed for the first twelve (12) month period during the Term (the “First Agreement Year”) will be as set forth on Exhibit F attached hereto. Following the First Agreement Year, Consultant shall provide AOL with a discount of fifteen percent (15%) from its standard rates for digital content production services performed during the Term; provided that in no event shall the rates charged by Consultant to AOL for digital content production services increase by more than five percent (5%) per successive 12-month period during the Term.
 
  4.2   Expenses. Consultant shall be entitled to reimbursement of the categories of expenses set forth on the applicable Schedule. Consultant shall invoice AOL on a monthly basis for expenses incurred as a result of performing Consulting Services in accordance with the Schedule. Such expenses shall be limited to reasonable out-of-pocket expenses necessarily and actually incurred by the Consultant in the performance of its services hereunder, provided that: (i) AOL has given its prior written consent for any such expenses, including without limitation, travel expenses; (ii) the expenses have been detailed on a form acceptable to AOL and submitted to the appropriate AOL Project Manager for review and approval; and (iii) if requested by AOL, the Consultant submits supporting documentation in addition to the approved expense form. Monthly expenses shall not exceed the amount set forth in the relevant Schedule without the prior written approval of the AOL Project Manager. Any travel expenses shall comply with AOL’s travel policy, a copy of which has been provided to Consultant, and AOL may, at AOL’s sole discretion, require Consultant to make travel arrangements through an AOL-approved travel agency.
 
  4.3   Review of Fees and Expenses. Consultant will submit the charges and/or expenses to be invoiced for services performed and the applicable time reports or documentation under any Schedule and Acceptance Certificate in the form attached hereto as Exhibit C to the AOL Project Manager for approval prior to actual invoicing. The charges and/or expenses invoiced in accordance with this Section 4, except for any amounts disputed by AOL, shall be payable by AOL within thirty (30) days of AOL’s receipt of each invoice, accompanied by an Acceptance Certificate executed by the AOL Project Manager.


 

AOL Confidential

  4.4   Maximum Dollar Amount. Notwithstanding anything to the contrary contained herein, AOL shall not be liable for any charges and/or expenses under any Schedule for work in excess of the Maximum Dollar Amount specified on such Schedule.
 
  4.5   Records. Consultant shall maintain complete and accurate accounting records, in a form in accordance with generally accepted accounting principles, to substantiate Consultant’s charges and expenses hereunder and Consultant shall retain such records for a period of four (4) years from the date of final payment under any Schedule.
 
  4.6   Taxes. Consultant shall be responsible for determining the applicability of any sales, use, excise, or similar taxes which may be applicable to the performance of the Consulting Services, if any. Consultant shall clearly and separately state any applicable taxes on Consultant’s invoice to AOL for corresponding Consulting Services. AOL shall pay applicable taxes on the invoice or, in lieu of the payment of any such taxes, AOL may provide Consultant with a certificate acceptable to the taxing authorities exempting AOL from payment of these taxes. Consultant shall pay all taxes collected from AOL to the appropriate taxing authority. Consultant, and not AOL, shall be obligated to pay any applicable taxes not invoiced to AOL on the invoice for corresponding Consulting Services, including without limitation, any and all interest, penalties and attorneys’ fees. Consultant shall bear any and all costs, and shall indemnify AOL for any and all costs, of or associated with any determination of applicable taxes, the collection of such taxes and the payment of such taxes to the taxing authority (except to the extent AOL has wrongfully failed to pay such taxes or provide a certificate(s) as provided above), including, without limitation, penalties, interest and attorneys’ fees.

5.   Acceptance of Services

       All Consulting Services and Deliverables delivered by the Consultant pursuant to the Agreement and the attached Schedules shall be subject to acceptance by AOL. Acceptance criteria shall be fully set forth in the applicable Schedule. AOL shall provide Consultant with the information, data, drawings, designs, or other materials and resources listed and described in the Scope of Work that are reasonably necessary for Consultant to perform the Services (the “Reference Materials”). If Consultant is delayed in completing the Deliverables set forth in any Schedule primarily due to a failure by AOL to perform its obligations under such Schedule, including delivery of any Reference Materials, and Consultant notifies AOL in writing of such failure and the resulting delay, then the time for performance/delivery dates referenced in the Schedule shall each be extended by the amount of time of Consultant’s delay directly attributable to such failure by AOL.

6.   Term and Termination

  6.1   Term. This Agreement shall commence on the Effective Date and shall continue in full force and effect thereafter unless and until it is terminated or expires in accordance with the provisions of this Agreement or any Schedule or, if it is not terminated and no expiration is provided in any applicable Schedule, until satisfactory completion of the services provided for herein and in all Schedules and acceptance thereof by AOL (“Project Completion”). The Parties understand and agree that certain rights and


 

AOL Confidential

      obligations hereunder are dependent upon the continuation in force of the License Agreement (as defined in Section 9) and that in the event that the License Agreement expires or terminates prior to the expiration or termination of this Agreement, the Parties will promptly review the status of any Schedules hereunder.
 
  6.2   Termination For Breach. Either Party may terminate this Agreement at any time in the event of a material breach by the other Party which remains uncured after thirty (30) days written notice thereof (or such shorter period as may be specified in this Agreement or in any applicable Schedule).
 
  6.3   Termination Upon Notice. Notwithstanding anything to the contrary herein or in any Schedule, AOL may terminate this Agreement or any Schedule hereunder for any reason by giving the Consultant two weeks’ prior written notice of its election to terminate said Agreement or Schedule.
 
  6.4   Termination for Bankruptcy/Insolvency. Either Party may terminate this Agreement immediately following written notice to the other Party if the other Party (i) ceases to do business in the normal course, (ii) becomes or is declared insolvent or bankrupt, (iii) is the subject of any proceeding related to its liquidation or insolvency (whether voluntary or involuntary) which is not dismissed within ninety (90) calendar days or (iv) makes an assignment for the benefit of creditors.
 
  6.5   AOL Rights and Payment Upon Termination. If either Party terminates the Agreement, AOL agrees to pay Consultant for all expenses incurred by the Consultant with AOL’s approval up to the effective date of termination. In the event AOL terminates this Agreement or any Schedule under Section 6.3 prior to the completion of the services rendered under each Schedule, (a) Consultant shall be compensated a pro-rata share of the fee due to Consultant under this Agreement and the applicable Schedule, and (b) if applicable, AOL shall pay Consultant for all Progress Milestones (as set forth in the applicable Schedule) completed and accepted by AOL and a pro-rata share of the Progress Milestone Consultant is working to complete at the time the applicable schedule is terminated. Termination under this Agreement shall not affect AOL’s rights in and to all Deliverables, Materials (as defined in Exhibit B) and work product created by Consultant pursuant to this Agreement prior to such termination.

7.   Terms and Conditions. The terms and conditions set forth on Exhibit B attached hereto are hereby made a part of this Agreement.
 
8.   Prior Agreements. This Agreement supercedes the Consulting Services Agreement between the Parties dated March 21, 2002 and the services performed thereunder including, but not limited to, services performed in accordance with the following:

          •   Viewpoint Ad Format Sales CD Statement of Work dated January 29, 2002;
 
          •   Channel Content Statement of Work dated March 12, 2002 (NASCAR Project) and Change Order dated April 9, 2002;
 
          •   Scope of Work dated March 21, 2002 (Scooby Doo Project);
 
          •   Scope of Work dated May 9, 2002 (Shop@AOL Project);
 
          •   Scope of Work dated June 19, 2002 (NBC project);
 
          •   Scope of Work dated June 28, 2002 (AIM 8-Legged Freaks project);
 
          •   Scope of Work dated July 29, 2002 (Old Navy Project);


 

AOL Confidential

          •   Scope of Work dated August 12, 2002 (Teens/CDC project); and
 
          •   Scope of Work dated August 14, 2002 (Gateway desktop project).

       The Production Services Agreement dated January 25, 2002 and the Statement of Work dated February 4, 2002 (entitled “3D Navigation User Interface Design and Implementation”) shall continue in force.

9.   Affiliates. To the extent any of AOL’s Affiliates wish to engage Consultant to perform Consulting Services upon the terms set forth hereunder, such Affiliate shall execute a Schedule hereunder (an “Affiliate Schedule”). Such action shall have the same effect as if such AOL Affiliate entered into this Agreement separately with Consultant and all references to AOL therein were to such AOL Affiliate. Such Affiliate Schedule shall be subject to all terms and conditions of this Agreement and the Affiliate executing such Schedule shall be solely responsible for any payment or other obligations incurred under such Schedule. Similarly, all obligations of Consultant under any Affiliate Schedule shall be solely to the Affiliate executing such Schedule and not to AOL. As used herein, “Affiliate” shall have the meaning set forth in the Amended and Restated License and Services Agreement by and between AOL and Consultant, dated as of July 19, 2001, as amended (the “License Agreement”).

     IN WITNESS WHEREOF, the Parties hereto, each acting under due and proper authority, have executed this Agreement as of the date first written above.

     
AMERICA ONLINE, INC   CONSULTANT
By:        /s/  Geo Hunt
Print Name: Geo Hunt
  By:        /s/  Robert E. Rice
Print Name: Robert E. Rice
Title: SVP, Technology Business Development   Title: President and CEO
Date: September 30, 2002   Date: September 30, 2002


 

AOL Confidential

EXHIBIT B

Terms and Conditions

I.   NO RIGHTS IN AOL PROPERTY/TRADEMARKS

No Ownership or License. Nothing in this Agreement shall convey to Consultant any right, license, title, interest in and to the Work (as defined below), the AOL” look and feel”, or any other AOL property, property interest, license or right.

No Right to Post Content. Unless specifically directed to do so by AOL, Consultant shall have no right to post or display content or other materials in any area of the AOL Network. As used in this Agreement, AOL Network shall mean (i) the America Online® brand service, (ii) any international versions of the America Online service, and (iii) any other product or service owned, operated, distributed or authorized to be distributed by or through AOL or its affiliates worldwide (which may include, without limitation, Internet sites promoting AOL products and services and any “offline” information browsing products of AOL or its Affiliates).

No Right to Use Trademarks. Consultant shall have no right to use any AOL trade name, trademark or service mark without AOL’s prior written consent or as specifically set forth in a Schedule.

II.   CONFIDENTIALITY/PROPRIETARY RIGHTS/ /NON-SOLICITATION

Confidentiality. Each Party acknowledges that Confidential Information may be disclosed to the other Party during the course of this Agreement. Each Party agrees that it will take reasonable steps, at least substantially equivalent to the steps it takes to protect its own proprietary information, during the term of this Agreement, and for a period of three years following expiration or termination of this Agreement, to prevent the duplication or disclosure of Confidential Information of the other Party, other than by or to its employees or agents who must have access to such Confidential Information to perform such Party’s obligations hereunder, who will each agree to comply with this Section. Notwithstanding the foregoing, either Party may issue a press release or other disclosure containing Confidential Information without the consent of the other Party, to the extent such disclosure is required by law, rule, regulation or government or court order. In such event, the disclosing Party will provide, if reasonably possible, at least five (5) business days prior written notice of such proposed disclosure to the other Party. Further, in the event such disclosure is required of either Party under the laws, rules or regulations of the Securities and Exchange Commission or any other applicable governing body, such Party will (i) redact mutually agreed-upon portions of this Agreement to the fullest extent permitted under applicable laws, rules and regulations and (ii) submit a request to such governing body that such portions and other provisions of this Agreement receive confidential treatment under the laws, rules and regulations of the Securities and Exchange Commission or otherwise be held in the strictest confidence to the fullest extent permitted under the laws, rules or regulations of any other applicable governing body. For purposes of this Agreement, “Confidential Information” shall mean any information relating to or disclosed in the course of the Agreement, which is or should be reasonably understood to be confidential or proprietary to the disclosing Party, including, but not limited to, the material terms of this Agreement, information about AOL Members, AOL end-users, AOL broadband service registration information, technical processes and formulas, source codes, product designs, sales, cost and other unpublished financial information, product and business plans, projections, and marketing data. “Confidential Information” will not include information (a) already lawfully known to or independently developed by the receiving Party, (b) disclosed in published materials, (c) generally known to the public, or (d) lawfully obtained from any third party.

Without limiting the generality of the foregoing, Consultant shall not collect AOL Member screennames from public or private areas of the AOL Network and shall comply with AOL’s bulk e-mail policy.

Injunctive Relief. The Parties acknowledge that disclosure of either Party’s Confidential Information by the other Party will give rise to irreparable injury to the disclosing Party, its subsidiaries and/or affiliated companies or the owner of such information, inadequately compensable in damages. Accordingly, the disclosing Party may seek and obtain injunctive relief against the breach or threatened breach of the foregoing undertakings, in addition to any other legal remedies which may be available.

Proprietary Rights. Upon acceptance of the Deliverables in accordance with this Agreement, Consultant shall be deemed to have assigned to AOL and AOL shall acquire (i) all of Consultant’s copyrights to the digital images comprising each Deliverable, (ii) all of Consultant’s right, title, and interest in the object code version of any files included as part of any Deliverable, and (iii) any and all other IP rights in and versions of all Deliverables (except as specifically set forth herein with respect to the Non-AOL Content Elements) (the “Content Elements,” “Work” or “Materials”) that are created by Consultant for the specific purpose of composing the Deliverables (“AOL Elements”). To the extent that Content Elements that are not created by Consultant for the specific purpose of composing the Deliverables (“Non-AOL Elements”) are included in the Deliverables, Consultant hereby grants to AOL a non-exclusive, worldwide, perpetual right and license to use, display, reproduce, distribute, perform or modify the Non-AOL Elements. However, such Deliverable shall not be considered a derivative work (as defined by U.S. copyright law) and AOL shall own any customized enhancement(s) or addition(s) to the Non-AOL Elements so incorporated, including the intellectual property rights therein. The Parties hereby acknowledge and agree that all Non-AOL Elements and all of Consultant’s proprietary methodologies for delivery of its services (“Consultant Tools”), including but not limited to Consultant’s proprietary software tools and design concepts, process guidelines and methodologies, which are used by Consultant in performing the Services, are and shall remain the exclusive property of Consultant.

Consultant grants to AOL at no additional cost a perpetual, worldwide, non-exclusive, non-transferable license to use the Consultant Tools. AOL acknowledges that as part of Consultant’s performance of Services, Consultant may develop or modify software tools, programming aids,

 


 

AOL Confidential

algorithms, code libraries, translators, diagnostic aids, and other software (“Consultant Modifications”). Such Consultant Modifications and all intellectual property related thereto shall remain the sole and exclusive property of Consultant, except as set forth below regarding AOL Customization. To the extent AOL requires a Broadcast License in connection with any Deliverable(s), the Parties agree and acknowledge that Consultant has granted such Broadcast License under the License Agreement (as defined in Section 9 of this Agreement). Notwithstanding the foregoing, in the event that providing the Deliverables hereunder, including without limitation Consultant’s ZoomView technology, requires the development, modification, enhancement, customization or creation of material based upon AOL Confidential Information (the “AOL Customization”), any and all AOL Customization is the property of AOL and all title and interest therein shall vest in AOL and shall be deemed to be a work made for hire. “AOL Customization” shall not be deemed to include any Consultant Confidential Information. To the extent that title to any such AOL Customization may not, by operation of law, vest in AOL or such works may not be considered works made for hire, Consultant hereby irrevocably assigns to AOL all rights, title and interest in and to such AOL Customization. All AOL Customization shall belong exclusively to AOL, and AOL shall have the right to obtain and to hold in its own name, copyrights, registrations, patents, or such other protection as may be appropriate to the subject matter, and any extensions and renewals thereof, provided that such protections do not conflict with copyrights, registrations, patents, or such legal protection in such non-customized materials as may already be owned by Consultant. Consultant agrees to give AOL and any person designated by AOL such reasonable assistance, at AOL’s expense, as is required to perfect, secure, and protect AOL’s intellectual property and other rights set forth in this Paragraph.

Unless otherwise requested by AOL, upon the completion of the services to be performed under each Schedule or upon the earlier termination of such Schedule, Consultant shall immediately turn over to AOL all Work, including without limitation, any and all Materials, developed pursuant to such Schedule.

Securities Trading Policy. Consultant agrees, for the term of this Agreement and for as long thereafter as Consultant has access to material, non-public information of AOL, to comply with terms of AOL’s securities trading policy (the “Securities Policy”), a copy of which has been provided to Consultant, as revised from time to time, to the same extent as employees of AOL are obligated to comply with the Securities Policy.

Non-Solicitation. During the term of this Agreement, AOL shall not hire or attempt to hire any Restricted Employee (as defined below) to join the Product Content group within the Product Marketing department or the Client Engineering Group within the AOL Technology department. Notwithstanding the foregoing, AOL may employ any person who (a) initially contacts AOL without solicitation, directly or indirectly, by AOL or (b) responds to any general media solicitation of employment or engagement by AOL or to any solicitation or inquiry from a recruiter retained by AOL provided that such person is not specifically identified or targeted by AOL for such solicitation or inquiry. The following individuals shall be deemed Restricted Employees: Sree Kotay, Executive Vice President and Chief Technology Officer; Ales Holecek, Senior Vice President, Technology; Javier Roca, Senior Design Manager; and Jeffrey Jouppi, Technical Designer.

III.   REPRESENTATIONS AND WARRANTIES

Representations and Warranties. Consultant represents and warrants that: (a) Consultant is or will promptly and prior to the Effective Date become familiar with AOL’s current or then-current Terms of Service Agreement; (b) Consultant has or shall have the proper skill, training, and background so as to be able to perform in a competent and professional manner and that all work will be performed in accordance with applicable standards; (c) provided AOL has free, good and clear title to the information provided to Consultant in connection with the performance of this Agreement (“AOL Originals”), AOL shall receive free, good and clear title to all Work which may be developed by Consultant under this Agreement or which is provided or delivered to AOL by Consultant or Consultant’s Assistants, agents or representatives pursuant to this Agreement; including without limitation the Materials, which title shall be free and clear of any and all liens, encumbrances, claims or litigation, whether pending or threatened, (d) provided the AOL Originals do not infringe or violate (i) any copyright, trademark, patent, (ii) any other proprietary or other right of any third party, including but not limited to any third party right to privacy, (iii) any applicable law or regulation, or (iv) any AOL current or then-current standards and guidelines made available to Consultant by AOL, no Work, Deliverable or other materials delivered by Consultant to AOL hereunder, including without limitation Materials, shall infringe on or violate (i) any copyright, trademark, patent, any music performance or other music related right, (ii) any other proprietary or other right of any third party, including but not limited to any third party right to privacy, (iii) any applicable law or regulation, or (iv) AOL’s Terms of Service or any AOL service guidelines or standards made available to Consultant by AOL, and (e) provided the AOL Originals do not contain any scandalous, libelous or unlawful matter or material, no Work, Deliverable or other materials delivered by Consultant to AOL hereunder, including without limitation, Materials, shall contain any scandalous, libelous or unlawful matter or material.

Each Party represents and warrants to the other Party that: (i) such Party has the full corporate right, power and authority to enter into this Agreement, to grant the licenses granted hereunder and to perform the acts required of it hereunder; (ii) the execution of this Agreement by such Party, and the performance by such Party of its obligations and duties hereunder, do not and will not violate any agreement to which such Party is a party or by which it is otherwise bound; (iii) when executed and delivered by such Party, this Agreement will constitute the legal, valid and binding obligation of such Party, enforceable against such Party in accordance with its terms; and (iv) such Party acknowledges that the other Party makes no representations, warranties or agreements related to the subject matter hereof which are not expressly provided for in this Agreement.

IV.   INDEMNITY

Indemnity. Consultant shall defend, indemnify and hold harmless AOL, its officers, directors, agents, Affiliates (as defined in the License Agreement), distributors, franchisees and employees from any and all loss and third party claims, demands, liabilities, costs or expenses, including without limitation reasonable attorneys’ fees and expenses (“Liabilities”) resulting from (a) claims of libel, defamation, violation of right of copyright infringement trademark infringement or other infringement or any third party right, fraud, false advertising, misrepresentation, product liability or violation of any law,

 


 

AOL Confidential

statute, ordinance, rule or regulation throughout the world based on any software, program, service and or other materials furnished to AOL by Consultant pursuant to the terms of this Agreement, including without limitation, the Work or Materials, or the use thereof by AOL, and (b) Consultant’s material breach of any obligation, duty, representation or warranty contained in this Agreement or in any Schedule attached hereto. AOL will notify Consultant of any claim, demand or action (an “Action”) for which indemnity is claimed within ten (10) days of receipt of written notice of such Action, and will give Consultant control of the defense and of the claim, action or allegation. Consultant’s counsel defending such Action shall be subject to AOL’s prior written approval. AOL reserves the right to participate fully in and assume joint control of the defense of any Action, at its cost and expense. Settlement of any Action shall be subject to AOL’s prior written approval.

Consultant agrees, should AOL’s use of any service, program, and/or other material furnished to AOL by Consultant be enjoined by any court, to promptly obtain, at no expense to AOL, the right to continue to use the items so enjoined or, at no expense to AOL, provide AOL promptly with substitute items that are functionally equivalent to the enjoined products. If Consultant can not secure AOL’s right to continue using such items or substitute such items as provided herein, Consultant agrees to refund all sums earned under this Agreement relating to the provision of such items.

AOL shall defend, indemnify and hold harmless Consultant, its officers, directors, agents, distributors, franchisees and employees from any and all Liabilities solely resulting from Consultant’s authorized use of any materials provided by AOL to Consultant to perform Consultant’s obligations hereunder.

V.   GENERAL

Excuse. Neither Party shall be liable for, or be considered in breach of or default under this Agreement on account of, any delay or failure to perform as required by this Agreement as a result of any causes or conditions which are beyond such Party’s reasonable control and which such Party is unable to overcome by the exercise of reasonable diligence.

Notice. Any notice, approval, request, authorization, direction or other communication under this Agreement will be given in writing and will be deemed to have been delivered and given for all purposes (i) on the delivery date if delivered by confirmed facsimile; (ii) on the delivery date if delivered personally to the Party to whom the same is directed; (iii) one business day after deposit with a commercial overnight carrier, with written verification of receipt; or (iv) five business days after the mailing date, whether or not actually received, if sent by U.S. mail, return receipt requested, postage and charges prepaid, or any other means of rapid mail delivery for which a receipt is available. In the case of AOL, such notice will be provided to both the AOL Project Manger and the Deputy General Counsel (fax no. 703-265-1105), each at the address of AOL set forth in the first paragraph of this Agreement. In the case of Consultant, except as otherwise specified herein, the notice address shall be the address for Consultant set forth in the first paragraph of this Agreement, with the other relevant notice information, including the recipient for notice and, as applicable, such recipient’s fax number to be as reasonably identified by AOL.

No Waiver. The failure of either Party to insist upon or enforce strict performance by the other Party of any provision of this Agreement or to exercise any right under this Agreement shall not be construed as a waiver or relinquishment to any extent of such Party’s right to assert or rely upon any such provision or right in that or any other instance; rather, the same shall be and remain in full force and effect.

Entire Agreement. This Agreement sets forth the entire agreement and supersedes any and all prior agreements of the Parties with respect to the transactions set forth herein. Neither Party shall be bound by, and each Party specifically objects to, any term, condition or other provision which is different from or in addition to the provisions of this Agreement (whether or not it would materially alter this Agreement) and which is proffered by the other Party in any correspondence or other document, unless the Party to be bound thereby specifically agrees to such provision in writing.

Amendment. No change, amendment or modification of any provision of this Agreement shall be valid unless set forth in a written instrument signed by the Party subject to enforcement of such amendment.

Further Assurances. Consultant shall take such action (including, but not limited to, the execution, acknowledgment and delivery of documents) as may reasonably be requested by AOL for the implementation or continuing performance of this Agreement.

Assignment. Consultant shall not assign this Agreement or any right, interest or benefit under this Agreement without the prior written consent of AOL. Assumption of the Agreement by any successor to Consultant (including, without limitation, by way of merger, consolidation or sale of all or substantially all of Consultant’s stock or assets) shall be subject to AOL’s prior written approval. Subject to the foregoing, this Agreement shall be fully binding upon, inure to the benefit of and be enforceable by the Parties hereto and their respective successors and assigns.

Subcontract. No work or services to be performed by Consultant hereunder shall be subcontracted to or performed on behalf of Consultant by any third party, except upon written permission by AOL, or as set forth in any Schedule.

Construction; Severability. In the event that any provision of this Agreement conflicts with the law under which this Agreement is to be construed or if any such provision is held invalid by a court with jurisdiction over the Parties to this Agreement, (i) such provision shall be deemed to be restated to reflect as nearly as possible the original intentions of the Parties in accordance with applicable law, and (ii) the remaining terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect.

Remedies. Except where otherwise specified, the rights and remedies granted to a Party under this Agreement are cumulative and in addition to, and not in lieu of, any other rights or remedies which the Party may possess at law or in equity.

Applicable Law. This Agreement shall be interpreted, construed and enforced in all respects in accordance with the laws of the State of New York except for its conflicts of laws principles. Each Party irrevocably consents to

 


 

AOL Confidential

the exclusive jurisdiction of the state courts and federal courts situated in New York City in connection with any action to enforce the provisions of this Agreement to recover damages or other relief for breach or default under this Agreement or otherwise arising under or by reason of this Agreement. Notwithstanding the foregoing, any judgments entered into in an action under this Agreement may be enforced in any court of competent jurisdiction.

Export Controls. Both Parties shall adhere to all applicable laws, regulations and rules relating to the export of technical data and shall not export or re-export any technical data, any products received from the other Party or the direct product of such technical data to any proscribed country listed in such applicable laws, regulations and rules unless properly authorized.

Publicity. Consultant agrees that it will not, without prior written consent of AOL, use in advertising, publicity, or otherwise the name of AOL, or refer to the existence of this Agreement in press releases, advertising, or materials distributed to prospective customers.

Duty to Inform. Consultant shall promptly inform AOL of any information related to the Consulting Services, including without limitation the Work, Materials, and Deliverables, which could reasonably lead to a claim, demand or liability of or against AOL and/or its Affiliates by any third party.

Limitations. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGE OF ANY KIND OR NATURE, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT (INCLUDING, WITHOUT LIMITATION, THE BREACH OF THIS AGREEMENT OR ANY TERMINATION OF THIS AGREEMENT), TORT (INCLUDING WITHOUT LIMITATION NEGLIGENCE OR STRICT LIABILITY) OR OTHERWISE, EVEN IF ANY OTHER PARTY HAS BEEN WARNED OF THE POSSIBILITY OF ANY SUCH LOSS OR DAMAGE IN ADVANCE; PROVIDED THAT CONSULTANT SHALL REMAIN LIABLE TO AOL AND/OR ITS AFFILIATES TO THE EXTENT ANY DISCLAIMED DAMAGES ARE AWARDED TO A THIRD PARTY OR INCLUDED IN A SETTLEMENT AND ARE SUBJECT TO INDEMNIFICATION AS SET FORTH ABOVE.

Workers’ Compensation Insurance. No workers’ compensation insurance shall be obtained by AOL concerning Consultant. Consultant shall comply with the applicable workers’ compensation law concerning Consultant and shall provide to AOL a certificate of workers’ compensation insurance upon request.

Comprehensive General Liability Insurance. Consultant further agrees to secure and maintain, at Consultant’s sole cost and expense, Comprehensive General Liability Insurance for damage claims due to bodily injury (including death), or property damage caused by or arising from acts or omissions of Consultant. The minimum limits of such insurance will be one million dollars ($1,000,000.00). Maintenance of the foregoing insurance will in no way be interpreted as relieving Consultant of any responsibility whatsoever.

Headings. The captions and headings used in this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement.

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

Surviving Sections. The following sections shall survive the termination of this Agreement: 2.2 (“Independent Contractor”); 2.3 (“Consultant’s Employees and Assistants”); 4.6 (“Taxes”) of this Agreement and this Exhibit B.

 


 

AOL Confidential

EXHIBIT C

ACCEPTANCE CERTIFICATE
SCHEDULE NO. ___ DATED___[insert Schedule date]_____TO
AGREEMENT FOR CONSULTING SERVICES
BETWEEN
AMERICA ONLINE, INC. AND _____________
DATED AS OF __[insert main agreement date]___(the “Agreement”)

     
1.        Deliverables and documentation to be produced by Consultant:   AOL Approval
          2A:    
   
          2B:    
   
          2C:    
   
          2D:    
   
2.       Time for Performance/Delivery   AOL Approval
          2A:    
   
          2B:    
   
          2C:    
   
          2D:    
   
3.       Acceptance testing criteria for each Deliverable:   AOL Approval
             
          Applicable as described below     Not Applicable      


 
     
         Item 2A:    
   
         Item 2B:    
   
         Item 2C:    
   
         Item 2D:    
   
4.       Payments approved by AOL:   AOL Approval
             
    Monthly      
 
         
    Upon Completion        
           
 
         
    Other (describe: )      
   
     
 
         
    Progress Payments as follows:        
 
         

 


 

AOL Confidential

             
    Progress Payments   Progress Milestones   AOL Approval
   
 
 
Item 2A:   $                     
   
 
 
Item 2B:   $                     
   
 
 
Item 2C:   $                     
   
 
 
Item 2D:   $                     
   
 
 

Payment for Partial Performance.

If AOL terminates this Agreement or any Schedule under Section 6.3 of the Agreement, AOL shall pay Consultant through the Progress Milestone accepted and approved above; and the amount set forth above for the Progress Milestone Consultant is working to complete at the time the Agreement or Schedule is terminated.

 


 

AOL Confidential

EXHIBIT D

List of AOL Competitors

Yahoo!

Microsoft Networks and brands (e.g., Hotmail; MSN; MSN Messenger, etc.)

Earthlink

United Online (Net Zero and Juno)

Amazon

Ebay

USA Interactive

Comcast

Lycos

AT&T Broadband

Cox Communications

Charter Communications

Cablevision

 


 

AOL Confidential

EXHIBIT E

Chinese Wall Protection of AOL Confidential and Proprietary Information

In order to protect the vital confidential and proprietary interests of AOL, Consultant shall be responsible for implementing the following security measures with respect to Consultant’s employees and Assistants, as well as to any aspect relating to Consultant’s performance of the Consulting Services. Consultant is committed to protecting the confidentiality of all AOL confidential and proprietary information. Consultant shall also implement any other security measures reasonably requested by AOL.

1) Notification. Consultant shall notify and distribute copies of this Exhibit E to all people working on this matter including, without limitation, the employees listed herein, clerks, and administrative and other staff and instruct such people to follow the procedures required to adhere to the requirements and procedures set forth in this Exhibit E.

2) Assignment of project code name. Consultant shall assign a project “code name” to the Consulting Services. All references to the Consulting Services shall be under this project code name and only those employees and Assistants working on the project shall know that the project is for AOL. All Code Names shall mirror the name of the project as reflected on the applicable Schedule.

3) Consultant Team Members. Consultant shall provide to AOL in writing a list of employees that are assigned to provide Consulting Services (the “Consulting Services Team”) and shall update such list in writing within three (3) business days of any change in the Consulting Services Team. In addition to the restrictions set forth in Section 1.4 of the Agreement, during the term of any Schedule and for two (2) months (the “Buffer Period”) after the earliest of (i) AOL’s deployment of deliverables set forth in any such Schedule; (ii) AOL’s final acceptance of all deliverables set forth in any such Schedule; or (iii) the expiration or termination of such Schedule, no member of the Consulting Services Team shall perform services for any AOL Competitor which are substantially similar to services Consultant is then performing for AOL. Notwithstanding anything to the contrary in this Agreement or any Exhibit hereto, the expiration of the Buffer Period does not relieve Consultant or its employees or agents of any confidentiality obligations under the Agreement.

4) No internal references to the AOL project. Consultant employees assigned to perform Consulting Services, including those who have worked or will work on any aspect relating to the Consulting Services shall not discuss, exchange documents, or communicate (including, without limitation, email, intranet, and all other means of communications) with any other non AOL team member or Consultant’s other employees in any manner regarding the Consulting Services.

5) Confidentiality Agreements executed by all Consultant team members. Consultant shall require that the members of the Consulting Services Team shall execute Consultant’s standard confidentiality agreement, a copy of which has been provided by AOL.

6) Restricted Access to Paper Files: The files and documents relating to the Consulting Services shall be kept in a secure place and will not be part of any central filing system; instead, they will be maintained in separate file cabinets which will bear the following legend:

RESTRICTED ACCESS

THESE FILES ARE SUBJECT TO AN ETHICAL WALL PURSUANT TO AN AGREEMENT DATED      , 2002. IMPORTANT: DO NOT DISCUSS THIS MATTER OR PROVIDE ACCESS TO THIS FILE OR ANY DOCUMENTS RELATING TO THIS MATTER.

A copy of this Exhibit E shall be prominently placed in each of the paper files relating to the Consulting Services.

 


 

AOL Confidential

EXHIBIT F
CONSULTANT HOURLY RATES

Digital Content Production Services

                         
Category   Type   Viewpoint Rate Card   AOL Rate Card

 
 
 
Models
  Models   $ 167     $ 142  
Digitizing
  Digitizing   $ 123     $ 105  
Animations
  Camera & Object Animations   $ 208     $ 177  
 
  Animated Textures   $ 187     $ 159  
 
  Text Annotations   $ 170     $ 145  
 
  Bit-Map Annotations   $ 332     $ 282  
Photo Studio
  Photographic Time   $ 221     $ 188  
Web Integration
  Web Integration   $ 217     $ 185  
Web Design
  Web Design   $ 234     $ 199  
                         

  EX-10.31 5 y84969a3exv10w31.htm SCHEDULE 1 TO AGREEMENT SCHEDULE 1 TO AGREEMENT

 

EXHIBIT 10.31

AOL Confidential Page 1

EXHIBIT A

SCHEDULE NO. 1 DATED SEPT. 30, 2002 TO
AGREEMENT FOR CONSULTING SERVICES
BETWEEN
AMERICA ONLINE, INC. AND VIEWPOINT CORPORATION
DATED SEPTEMBER 30, 2002 (the “Agreement”)

SCOPE OF WORK (“SOW”)

This SOW describes the production, engineering, and support services to be provided by Viewpoint Corporation (“VWPT”) to America Online, Inc. (“AOL”) with respect to AOL’s “Desktop Themes” product and the “Did You Know (“DYK”) and Show Me” product (the “Project”).

Definitions

“Desktop Themes” are member-selected “skins” that alter the appearance of the AOL Client desktop.

“Did You Know” is a pop-up form which describes a feature or content area of the AOL service and from which members can initiate a “Show Me” animation.

“Show Me” is a 3-dimensional animation that introduces a feature or content area of the AOL service.

“Themes Chooser” is an FDO form which allows members to view thumbnail representations of available themes, select the theme of their choice, or set their Desktop Theme to None.

“Viewpoint Experience Technology (VET)” is a suite of technology that permits websites and other media publishers to integrate, synchronize, deliver, and display a full line of interactive graphics media technologies onto regular Web pages or through other digital container formats such as the AOL client forms.


 

AOL Confidential Page 2

1. Technology and Service Deliverables
a. Desktop Themes

i. Example of How it works

Once connected to the AOL service, a member may change his AOL Desktop, reset to the default theme, or set to no theme, from the Master Themes Selector.

(AOL THEMES WINDOW)

The member highlights the thumbnail of his choice in the Theme Chooser and clicks OK.

(AOL DESKTOP THEMES - SYMBOLS & TRENDS WINDOW)


 

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The selected theme then appears in the Master Themes Selector as the new thumbnail. The user then clicks “save” to apply the selected theme the client’s desktop background

(AMERICA ONLINE WINDOW)

ii.     Detailed description of services and deliverables:

Viewpoint will provide the following deliverables and all related code and consulting services to AOL by September 30, 2002.

    [*]
   

*  Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


 

AOL Confidential Page 4

    [*]

Desktop Themes Content and Support
All Desktop Themes are to be delivered to AOL by September 30, 2002.

  Provide a “Null” theme that does not skin the client desktop
 
  Implement 40 Desktop Themes and matching Themes Chooser thumbnails as specified by AOL
 
  Provide a configuration file and art file(s) for each Desktop Theme implemented.
 
  Publish all necessary art files to the Rainman server.
 
  Develop and document a process for publishing into AOL’s back end systems.

Desktop Themes Authoring Tools and Training
Authoring Tools are to be delivered to AOL by October 30, 2002. Training is to
be completed at a mutually agreeable time but no later than November 15, 2002.

  Provide Authoring tools, templates, utilities, and documentation to enable AOL or its designees to create Desktop Themes and matching thumbnails.
 
  Train AOL or its designees how to use Authoring tools to create Desktop Themes and matching thumbnails.

*  Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


 

AOL Confidential Page 5

b.     “Did You Know (“DYK”) and Show Me"

i.     Example of How it works

  A member selects an FDO form that has been enabled with DYK, for example, the Read Mail form.
 
  After the form opens, it triggers the DYK pop-up, an FDO form with an oval VET Overlay that appears in the lower right corner of the member’s screen.
 
    (AMERICA ONLINE MAILBOX WINDOW)
 
  If the member clicks the SHOW ME! Button, the Did You Know animation (generally 8-14 seconds) begins in the mail form. The animation ends when the character dissolves into the targeted feature drawing the member’s attention to a targeted feature or link.
 
    (ONLINE MAILBOX WINDOW)


 

AOL Confidential Page 6

ii.     Detailed description of services and deliverables:

Concept and Model Development
All DYK forms and Show Me animations are to be delivered to AOL by October 15,
2002 according to the schedule outlined below.

  Provide multiple DYK concepts and modeled characters for testing, and modify as directed by AOL.
 
  [*]
 
  Provide VMP support for triggering Show Me animations.
 
  Create and deliver 15 animation sequences, with each sequence to include:
 
    1 DYK oval containing AOL supplied scripts and
 
    1 Show Me animation, as specified by AOL storyboards, to be delivered in VET and OBJ format.
 
  Each animation will be subject to approval by AOL and of animation quality at least as good as the Stock Quotes animation delivered by Viewpoint to AOL prior to 9/28/02 in terms of resolution, fluidity of movement, and other visible aspects of animation to the AOL End User. • [*]
 
  [*]
 
  [*]
 
  [*]
 
    All deliverables under this SOW are deemed to be UI Content under the Second Amended and Restated License Agreement between Viewpoint and AOL dated September 30, 2002.

iii.     DYK and Show Me Delivery Schedule
     
Animation   Delivery Date
Welcome Screen (Customize)   9/21/02
8.0 Welcome Area   9/23/02
Music   9/25/02
Email: Spam Tools   9/27/02
Stock Quotes   9/29/02
Search   10/1/02
Games   10/3/02
Parental Controls   10/5/02
Sports Scores   10/7/02
Reminders   10/8/02
Match Chat   10/9/02
Access Numbers   10/10/02
Member Directory   10/11/02
Entertainment   10/12/02
Share/Navigation   10/13/02

*  Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


 

AOL Confidential Page 7

2.   Payments:

  (a)   Fees:

     $2MM for the software engineering, the Perpetual UI License set forth under Section 2.1(a)(ii) of the License Agreement, 15 Character Animations and 40 Desktop Themes described above.

  (b)   Payment Schedule

     AOL will pay two million dollars ($2,000,000) to Viewpoint on or before September 30, 2002.

3.   Consultant Project Manager:

  Name: Sree Kotay
Fax #: 212 201-0846

4.   AOL Project Manager:

  Name: Julie McCool
Fax #: 703-265-3842

5.   Term of this Schedule:

  N/A

6.   Other Terms:

  From time to time during the term, AOL may request Viewpoint to create additional Desktop Themes or Character Animations. Subject to execution of a mutually agreeable schedule to the Agreement, Viewpoint agrees to perform such work at the following rates:

a. Rates Per Desktop Themes


 

AOL Confidential Page 8

(RATES PER DESKTOP THEMES TABLE)

b. Hourly Rates For Character Animation Production
             
Category   Type   Hourly Rate

 
 
Pre-Production   Planning/Storyboards   $ 147  
Models   Models   $ 142  
Digitizing   Digitizing   $ 105  
Animations   Camera and Object Animations   $ 177  
    Animated Textures   $ 159  
    Text Annotations   $ 145  
    Bit-Map Annotations   $ 282  
Photo Studio   Photographic Time   $ 188  
Web Integration   Web Integration   $ 185  
Web Design   Web Design   $ 199  
Post-Production   QA   $ 172  


 

AOL Confidential Page 9

         
AMERICA ONLINE, INC   VIEWPOINT CORP
 
By:            /s/ Gio Hunt   By:            /s/ Robert E. Rice
 
   
 
Print Name:   Gio Hunt   Print Name:   Robert E. Rice
 
   
 
Title:   SVP, Technology Business Development   Title:   President and CEO
 
   
 
Date:  September 30, 2002   Date:   September 30, 2002
 
   
EX-23.1 6 y84969a3exv23w1.htm CONSENT OF PRICEWATERHOUSECOOPERS LLP 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.’s 333-64176, 333-102829 and 333-105127)) 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 March 31, 2003 relating to the consolidated financial statements and financial statement schedule which appears in this Form 10-K/A.

/s/ PRICEWATERHOUSECOOPERS LLP

New York, New York

June 27, 2003
EX-23.2 7 y84969a3exv23w2.htm CONSENT OF IPSOS-NPD CONSENT OF IPSOS-NPD
 

Exhibit 23.2

CONSENT

      We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-102829) of Viewpoint Corporation the summarization of our penetration study dated September 11, 2002 relating to the penetration level of various media players.

  /s/ IPSOS-NPD

New York, New York

June 27, 2003
EX-99.1 8 y84969a3exv99w1.htm CERTIFICATION CERTIFICATION
 

Exhibit 99.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the Annual Report of Viewpoint Corporation (the “Company”) on Form 10-K/A for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert E. Rice, President and Chief Executive Officer of the Company, certify, in accordance with 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

        (1) The Report to which this certification is attached as an exhibit, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
        (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

  By:  /s/ ROBERT E. RICE
 
  Robert E. Rice
  President and Chief Executive Officer

Dated: June 27, 2003 EX-99.2 9 y84969a3exv99w2.htm CERTIFICATION CERTIFICATION

 

Exhibit 99.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the Annual Report of Viewpoint Corporation (the “Company”) on Form 10-K/A for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony L. Pane, Senior Vice President and Chief Financial Officer of the Company, certify, in accordance with 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

        (1) The Report to which this certification is attached as an exhibit, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
        (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

  By:  /s/ ANTHONY L. PANE
 
  Anthony L. Pane
  Senior Vice President and
  Chief Financial Officer

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