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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004
 or [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-27168
   VIEWPOINT CORPORATION  Delaware
    
    95-4102687(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 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)   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 shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [   ] No [X] As of August 12, 2004,
54,210,955 shares of $0.001 par value common stock were
outstanding.




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TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONItem 1. Consolidated Financial StatementsConsolidated Balance Sheets  June 30, 2004 and December 31, 2003 (unaudited)
    
    
    3Consolidated Statements of Operations  Three and six months ended June 30, 2004 and 2003 (unaudited)
    
    
    4Consolidated Statements of Cash Flows  Six months ended June 30, 2004 and 2003 (unaudited)
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    36PART II  OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    
    
    37Signatures
    
    
    38CERTIFICATIONCERTIFICATIONCERTIFICATIONS
  2




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PART I - FINANCIAL INFORMATION 
 Item 1. Consolidated Financial Statements VIEWPOINT CORPORATION 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share amounts)
 (Unaudited)
 June 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,759
    
    
    $
    8,530Marketable securities
    
    
    6,768
    
    
    
    958Accounts
receivable, net of reserve of $366 and $1,611, respectively
    
    
    969
    
    
    
    650Related party accounts receivable
    
    
    54
    
    
    
    914Prepaid expenses and other current assets
    
    
    416
    
    
    
    694Total current assets
    
    
    9,966
    
    
    
    11,746Restricted cash
    
    
    319
    
    
    
    388Property and equipment, net
    
    
    1,603
    
    
    
    1,859Goodwill, net
    
    
    31,276
    
    
    
    31,276Intangible assets, net
    
    
    220
    
    
    
    186Other assets, net
    
    
    208
    
    
    
    288Total assets
    
    $
    43,592
    
    
    $
    45,743LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    915
    
    
    $
    1,177Accrued expenses
    
    
    843
    
    
    
    1,094Deferred revenues
    
    
    312
    
    
    
    423Related party deferred revenues
    
    
    4,974
    
    
    
    4,952Accrued incentive compensation
    
    
    545
    
    
    
    545Current liabilities related to discontinued operations
    
    
    231
    
    
    
    231Total current liabilities
    
    
    7,820
    
    
    
    8,422Deferred rent
    
    
    388
    
    
    
    400Related party deferred revenues
    
    
    2,253
    
    
    
    4,706Convertible notes
    
    
    
    
    
    
    2,837Warrants to purchase common stock
    
    
    659
    
    
    
    110Subordinated notes
    
    
    2,068
    
    
    
    1,801Total liabilities
    
    
    13,188
    
    
    
    18,276Stockholders equity:Preferred stock, $.001 par value; 5,000 shares authorized - no shares
issued and outstanding at June 30, 2004 and December 31, 2003
    
    
    
    
    
    
    Common stock, $.001 par value; 75,000 shares authorized - 54,356
shares issued and 54,196 shares outstanding at June 30,
2004, and 49,965 shares issued and 49,805 shares outstanding
at December 31, 2003
    
    
    54
    
    
    
    50Paid-in capital
    
    
    284,891
    
    
    
    274,351Deferred compensation
    
    
    (8
    )
    
    
    (275
    )Treasury stock at cost; 160 at June 30, 2004 and December 31, 2003
    
    
    (1,015
    )
    
    
    (1,015
    )Accumulated other comprehensive loss
    
    
    (77
    )
    
    
    (65
    )Accumulated deficit
    
    
    (253,441
    )
    
    
    (245,579
    )Total stockholders equity
    
    
    30,404
    
    
    
    27,467Total liabilities and stockholders equity
    
    $
    43,592
    
    
    $
    45,743
 The accompanying notes are an integral part of these consolidated financial statements. 3




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VIEWPOINT CORPORATION 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Licenses
    
    $
    144
    
    
    $
    217
    
    
    $
    384
    
    
    $
    1,849Related party licenses
    
    
    872
    
    
    
    1,010
    
    
    
    1,779
    
    
    
    1,060Services
    
    
    1,066
    
    
    
    842
    
    
    
    2,589
    
    
    
    2,197Related party services
    
    
    686
    
    
    
    2,405
    
    
    
    1,600
    
    
    
    3,393Search
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    Advertising systems
    
    
    37
    
    
    
    
    
    
    
    37
    
    
    
    Total revenues
    
    
    2,805
    
    
    
    4,474
    
    
    
    6,397
    
    
    
    8,499Cost of revenues:Licenses
    
    
    3
    
    
    
    28
    
    
    
    4
    
    
    
    75Services
    
    
    792
    
    
    
    2,372
    
    
    
    1,543
    
    
    
    3,548Advertising systems
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    Total cost of revenues
    
    
    801
    
    
    
    2,400
    
    
    
    1,553
    
    
    
    3,623Gross profit
    
    
    2,004
    
    
    
    2,074
    
    
    
    4,844
    
    
    
    4,876Operating expenses:Sales and marketing
    
    
    945
    
    
    
    2,341
    
    
    
    1,996
    
    
    
    5,988Research and development
    
    
    860
    
    
    
    999
    
    
    
    1,773
    
    
    
    2,311General and administrative
    
    
    1,845
    
    
    
    3,187
    
    
    
    3,727
    
    
    
    5,538Depreciation
    
    
    205
    
    
    
    444
    
    
    
    424
    
    
    
    922Amortization of intangible assets
    
    
    1
    
    
    
    7
    
    
    
    4
    
    
    
    8Restructuring charges
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    1,211Total operating expenses
    
    
    3,856
    
    
    
    6,978
    
    
    
    7,907
    
    
    
    15,978Loss from operations
    
    
    (1,852
    )
    
    
    (4,904
    )
    
    
    (3,063
    )
    
    
    (11,102
    )Other income (expense), net:Interest and other income; net
    
    
    27
    
    
    
    11
    
    
    
    46
    
    
    
    34Interest expense
    
    
    (236
    )
    
    
    (323
    )
    
    
    (486
    )
    
    
    (486
    )Changes in fair values of warrants to purchase common stock and
conversion feature of convertible debt
    
    
    3,050
    
    
    
    (1,081
    )
    
    
    (3,553
    )
    
    
    343Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,682
    )Loss on conversion of debt
    
    
    (212
    )
    
    
    
    
    
    
    (810
    )
    
    
    Total other income (expense)
    
    
    2,629
    
    
    
    (1,393
    )
    
    
    (4,803
    )
    
    
    (1,791
    )Net income (loss) before provision for income taxes
    
    
    777
    
    
    
    (6,297
    )
    
    
    (7,866
    )
    
    
    (12,893
    )Provision for income taxes
    
    
    25
    
    
    
    13
    
    
    
    35
    
    
    
    13Net income (loss) from continuing operations
    
    
    752
    
    
    
    (6,310
    )
    
    
    (7,901
    )
    
    
    (12,906
    )Adjustment to net income (loss) on disposal of discontinued operations, net of tax
    
    
    20
    
    
    
    26
    
    
    
    39
    
    
    
    116Net income (loss)
    
    $
    772
    
    
    $
    (6,284
    )
    
    $
    (7,862
    )
    
    $
    (12,790
    )Basic net income (loss) per common share:
    
    $
    0.01
    
    
    $
    (0.14
    )
    
    $
    (0.15
    )
    
    $
    (0.29
    )Diluted net income (loss) per common share
    
    $
    0.01
    
    
    $
    (0.14
    )
    
    $
    (0.15
    )
    
    $
    (0.29
    )Weighted average number of shares outstanding
    
    
    52,651
    
    
    
    45,986
    
    
    
    51,433
    
    
    
    43,688Weighted average number of shares outstanding  assuming dilution
    
    
    56,740
    
    
    
    45,986
    
    
    
    51,433
    
    
    
    43,688
 The accompanying notes are an integral part of these consolidated financial statements. 4




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VIEWPOINT CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (Unaudited)
 Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (7,862
    )
    
    $
    (12,790
    )Adjustments to reconcile net loss to net cash used in
operating activities:Non-cash stock-based compensation charges
    
    
    282
    
    
    
    1,868Restructuring charges (release)
    
    
    (17
    )
    
    
    1,211Depreciation and amortization
    
    
    428
    
    
    
    930Provision for bad debt
    
    
    (4
    )
    
    
    734Interest expense paid with common stock
    
    
    18
    
    
    
    Changes in fair values of warrants to purchase common stock and
and conversion feature of convertible debt
    
    
    3,553
    
    
    
    (343
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    1,682Amortization of debt discount and issuance costs
    
    
    310
    
    
    
    196Loss on conversion of debt
    
    
    330
    
    
    
    Issuance of stock below market price on conversion of debt
    
    
    480
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (315
    )
    
    
    918Related party accounts receivable
    
    
    860
    
    
    
    (134
    )Prepaid expenses
    
    
    278
    
    
    
    (333
    )Accounts payable
    
    
    (262
    )
    
    
    838Accrued expenses
    
    
    (246
    )
    
    
    (79
    )Due to/from related parties
    
    
    
    
    
    
    104Deferred revenues
    
    
    (111
    )
    
    
    124Related party deferred revenues
    
    
    (2,431
    )
    
    
    548Net cash used in operating activities
    
    
    (4,709
    )
    
    
    (4,526
    )Cash flows from investing activities:Proceeds from sales and maturities of marketable securities
    
    
    950
    
    
    
    875Purchases of marketable securities
    
    
    (6,771
    )
    
    
    (1,670
    )Net decrease in restricted cash
    
    
    69
    
    
    
    499Purchases of property and equipment
    
    
    (168
    )
    
    
    (396
    )Sale of property and equipment
    
    
    
    
    
    
    7Unrealized
gain on short-term investments
    
    
    2
    
    
    
    Purchases of patents and trademarks
    
    
    (38
    )
    
    
    (3
    )Net cash used in investing activities
    
    
    (5,956
    )
    
    
    (688
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    3,675
    
    
    
    Proceeds from issuance of subordinated notes and common stock
    
    
    
    
    
    
    3,415Repayment of convertible notes
    
    
    
    
    
    
    (3,300
    )Payment of issuance costs on convertible notes
    
    
    
    
    
    
    (508
    )Proceeds from exercise of stock options
    
    
    222
    
    
    
    Net cash provided by (used in) financing activities
    
    
    3,897
    
    
    
    (393
    )Effect of exchange rates changes on cash
    
    
    (3
    )
    
    
    (14
    )Net decrease in cash and cash equivalents
    
    
    (6,771
    )
    
    
    (5,621
    )Cash and cash equivalents at beginning of period
    
    
    8,530
    
    
    
    10,678Cash and cash equivalents at end of the period
    
    $
    1,759
    
    
    $
    5,057
 The accompanying notes are an integral part of these consolidated financial statements. 5




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VIEWPOINT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) Six Months EndedJune 30,2004
    
    2003Supplemental disclosure of cash flow activities:Cash paid during the year for income taxes
    
    $
    35
    
    
    $
    54Cash paid during the year for interest
    
    
    80
    
    
    
    56Supplemental disclosure of non-cash investing
and financing activities:Issuance of common stock in repayment of convertible notes
    
    $
    2,700
    
    
    $
    Cancellation of common stock option awards
    
    
    17
    
    
    
    Deferred compensation recognized related to adjustment
of an option grant
    
    
    32
    
    
    
    Issuance of 1,351,351 shares of common stock as partial repayment
of convertible notes
    
    
    
    
    
    
    1,000Closing costs for convertible notes and subordinated
notes accrued and not yet paid
    
    
    
    
    
    
    150Unrealized gains (losses) on marketable securities
    
    
    (11
)
    
    
    1
 The accompanying notes are an integral part of these consolidated financial statements. 6




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VIEWPOINT CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America, consistent in all material respects with those
applied in the Companys Annual Report on Form 10-K/A for the year ended
December 31, 2003. The interim financial information is unaudited, but
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of the financial position and operating results of
Viewpoint Corporation (Viewpoint or the Company) for the interim periods. These unaudited consolidated financial statements have been prepared in
accordance with the instructions to Rule 10-01 of Regulation S-X and,
therefore, do not include all of the information and footnotes normally
provided in annual financial statements. As a result, these unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with managements
discussion and analysis of financial condition and results of operations,
contained in Viewpoints Annual Report on Form 10-K/A for the year ended
December 31, 2003. The results of operations for the three and six months
ended June 30, 2004 are not necessarily indicative of the results to be
expected for the year ending December 31, 2004 or other future periods. Certain reclassifications have been made to the 2003 consolidated
financial statements to conform to the 2004 presentation. Liquidity The Company had cash, cash equivalents and marketable securities of $8.5
million at June 30, 2004. During the six months ended June 30, 2004, net cash
used in operations amounted to $4.7 million. Though the Company has converted
$2.7 million in convertible debt to equity during 2004, it has had significant
quarterly and annual operating losses since its inception, and as of June 30,
2004, had an accumulated deficit of $253.4 million. There can be no assurance
that Viewpoint will achieve or sustain positive cash flows from operations or
profitability. The Company believes that its current cash, cash equivalents, and
marketable securities balances will be sufficient to meet its operating cash
flow needs and anticipated capital expenditure requirements through at least
the next twelve months. The Company has contingency plans for 2004 if expected revenue targets are
not achieved. These plans include further workforce reductions as well as
reductions in overhead and capital expenditures. The Company may seek
additional funds when necessary through public or private equity financing or
from other sources to fund operations and pursue growth, although, there are no
assurances that the Company can obtain such financing with reasonable terms. The Company currently has no commitment for additional financing, and may
experience difficulty in obtaining additional financing on favorable terms, if
at all. Any financing the Company obtains may contain covenants that restrict
the Companys freedom to operate the business or may have rights, preferences
or privileges senior to the Companys common stock and may dilute the Companys
current shareholders ownership interest in Viewpoint. Revenue Recognition The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition, as amended, Emerging Issues Task
Force (EITF) No. 00-21 Revenue Arrangements with Multiple Deliverables, and
Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition in Financial
Statements as amended by SAB No. 104 Revenue Recognition. Per SOP 97-2 and
SAB No. 101, as amended by SAB No. 104, 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 has generated revenues through four sources: (a) software
licenses, (b) services, (c) search advertising, and (d) advertising systems
revenue. License revenues are generated from licensing the rights to use
products directly to customers and indirectly through Value Added Resellers
(VARs). Service revenues are 7




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS generated from fee-based professional services,
customer support services (maintenance arrangements), and training services
performed for customers that license the companys products. Search revenue,
as explained in more detail below, is derived from a share of the fees charged
by Yahoo!/Overture to advertisers who pay for sponsored links when a customer
clicks on the paid link on the results provided by the Viewpoint Toolbar.
Advertising systems revenue is generated by charging customers to host
advertising campaigns based on a cost per thousand (CPM) impressions. License revenues from direct customers include sales of perpetual and
term-based licenses for broadcasting digital content in the Viewpoint format.
License revenues are recognized up-front provided no further significant
obligations exist and the resulting receivable is deemed collectible by
management. Arrangements with VARs require (i) an up-front, non-refundable
payment, (ii) a percentage royalty based on sell-through, or (iii) both as
consideration for the right to resell the Viewpoint technology. Up-front,
non-refundable payments are recognized as license revenues when the VARs right
to resell the companys 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 by the VAR, 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 fixed-fee or time-and-materials basis under separate service
arrangements. Revenues for fixed-fee arrangements are recognized over the
pattern of performance in accordance with the provisions of SAB No. 104. The
pattern of performance for service arrangements is measured by the percentage
of costs incurred and accrued to date for each contract, which primarily
consist of direct labor costs, cost of outsourcing, and overhead, to the
estimated total cost for each contract at completion. The percentage
approximates the percentage of a customers contract that has been completed
and would be available for the customer to use at that point in time. Use of
this method is based on the availability of reasonably dependable estimates.
If reasonably dependable estimates are not available due to the complexity of
the services to be performed, the Company defers recognition of any revenues
for the project until the project is completed, delivered and accepted by the
customer, provided all other revenue recognition criteria are met and no
further significant obligations exist. 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 in accordance with SOP
81-1 Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. The percentage of completion method is used for
those arrangements in which reasonably dependable estimates are available. If
reasonably dependable estimates are not available due to the complexity of the
services to be performed, the Company defers recognition of any revenues for
the project until the project is completed, delivered and accepted by the
customer, provided all other revenue recognition criteria are met and no
further significant obligations exist. For arrangements involving multiple elements, the Company defers revenue
for the undelivered elements based on their relative fair value and recognizes
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, the Company uses renewal rates to determine the
price when sold separately. The Company accounts for multiple element
arrangements which involve only fee-based professional services in accordance
with EITF 00-21. For licenses sold that include updates over a period of time
the Company recognizes the license revenue over the period in which updates are
provided. Search revenue is generated when a customer uses the Viewpoint Toolbar to
search the internet, and clicks on a sponsored advertisement included in the
search results. The Viewpoint Toolbars search results are provided by
Yahoo!/Overture, who collects a fee from the advertiser and remits a percentage
of the fee to Viewpoint. Revenue generated is a function of the number of
Viewpoint Toolbars performing searches, the number of searches that are
sponsored by advertisers, the number of advertisements that are clicked on
by Viewpoint Toolbar searchers and the rates that advertisers pay for those
advertisements provided all other revenue recognition criteria are met. 8




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Viewpoint also offers an online advertising campaign management and
deployment product. This advertising system permits publishers, advertisers,
and their agencies to manage the process of deploying online advertising
campaigns. The Company charges customer on a cost per thousand (CPM)
impression basis, and recognizes revenue when the impressions are served, so
long as all other revenue recognition criteria are satisfied. Standard terms for license arrangements require payment within 90 days of
the contract date, which typically coincides with delivery. Standard terms for
service arrangements, which are typically billed and collected on an
installment basis, require final payment within 90 days of completion of the
services. 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. The
Companys arrangements with customers do not contain product return rights. If
the fee is not fixed or determinable, revenue is recognized as payments become
due or as cash is received 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. Stock-Based Compensation The Company accounts for stock option grants in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, Financial Accounting Standards Board (FASB) issued Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25 (FIN 44), and complies with the
disclosure provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, as amended by SFAS 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. Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, as amended by SFAS No. 148, and has been determined
as if the Company has accounted for its employee stock option grants under the
fair value method of SFAS No. 123. The fair value of options issued to
employees was estimated at the date of grant using the Black-Scholes
option-pricing model. For purposes of pro forma disclosures, the estimated
fair value of the Companys employee options is amortized to expense over the
options vesting periods. If the Company elected to record stock-based
compensation charges in accordance with SFAS 123, the pro forma non-cash
stock-based employee compensation charges and net income (loss) per common
share would approximate the following (in thousands, except per share amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    772
    
    
    $
    (6,284
    )
    
    $
    (7,862
    )
    
    $
    (12,790
    )Add: Non-cash stock-based employee
compensation charges included in reported
net income (loss), net of related tax effects
    
    
    55
    
    
    
    858
    
    
    
    281
    
    
    
    1,868Deduct: Non-cash stock-based employee
compensation charges determined under
fair value based method for all awards, net of
related tax effects
    
    
    (743
    )
    
    
    (1,911
    )
    
    
    (1,668
    )
    
    
    (3,885
    )Pro forma net income (loss)
    
    $
    84
    
    
    $
    (7,337
    )
    
    $
    (9,249
    )
    
    $
    (14,807
    )Net income (loss) per share:Basic as reported
    
    $
    0.01
    
    
    $
    (0.14
    )
    
    $
    (0.15
    )
    
    $
    (0.29
    )Diluted as reported
    
    $
    0.01
    
    
    $
    (0.14
    )
    
    $
    (0.15
    )
    
    $
    (0.29
    )Basic pro forma
    
    $
    0.00
    
    
    $
    (0.16
    )
    
    $
    (0.18
    )
    
    $
    (0.34
    )Diluted pro forma
    
    $
    0.00
    
    
    $
    (0.16
    )
    
    $
    (0.18
    )
    
    $
    (0.34
    )
 The effects of applying SFAS No. 123, as amended by SFAS No. 148, in this
pro forma disclosure are not indicative of future amounts. The Company
anticipates grants of additional awards in future years. 9




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Basic and Diluted Net Income (Loss) Per Common Share Basic net income or loss per common share is computed using the weighted
average number of shares outstanding and diluted net income or 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 7.6 million for the six months ended June
30, 2004, and common equivalent shares related to stock options and warrants
totaling 4.5 million and 4.5 million for the three and six months ended June
30, 2003, respectively, are excluded from the computation of diluted net loss
per common share because their effect was anti-dilutive. Common equivalent
shares of 4.1 million for the three months ended June 30, 2004 were included in
the computation of diluted net loss per common share because their effect was
dilutive. In March 2004, the Company sold 1.5 million shares of common stock, in a
private placement to an institutional investor for $3.7 million or $2.45 per
share. The institutional investor was one of the holders of the convertible
notes. Prior to the closing of the March 2004 private placement the
institutional investor converted $0.9 million of outstanding notes and received
0.9 million shares of Company common stock in the exchange. In June 2004, the Company exercised its right to convert the remaining
outstanding convertible notes of $1.8 million and the related outstanding
interest into 1.7 million shares of Viewpoint common stock. Derivatives In 2002 and 2003, the Company issued convertible notes and warrants which
would require Viewpoint to issue registered shares of common stock upon
conversion of these securities. The Company accounts for the fair values of
these outstanding warrants to purchase common stock and conversion options of
its convertible notes in accordance with SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, and EITF Issue No. 00-19
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock, which requires the Company to bifurcate and
separately account for the conversion option and warrants as embedded
derivatives contained in the Companys convertible notes. The Company is
required to carry these embedded derivatives on its balance sheet at fair value
and the unrealized changes in the value of these embedded derivatives are
reflected in net income as changes in fair values of warrants to purchase
common stock and conversion options of convertible notes. Such changes in fair
value are recorded as an adjustment to reconcile net loss to net cash used in
operating activities in the consolidated statement of cash flows. Recent Accounting Pronouncements Statement of Financial Accounting Standards SFAS No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities, and SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, were recently issued. SFAS No. 149 and 150
did not impact the financial statements. In November 2003, the Emerging Issues Task Force (EITF) reached a
consensus on disclosure guidance discussed under EITF 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.
The consensus provides for certain disclosure requirements that were effective
for fiscal years ending after December 15, 2003. In March 2004, the EITF
reached a consensus on recognition and measurement guidance discussed under
EITF 03-01. The consensus clarifies the meaning of other-than-temporary
impairment and its application to investments classified as either
available-for-sale or held-to-maturity under FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and
investments accounted for under the cost method or the equity method. The
recognition and measurement guidance is to be applied to other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004. The
Company does not expect the adoption of this pronouncement to have a material
impact on the Companys business, financial position, cash flows or result of
operations In January 2003, FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). This interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest entities that either
(1) do not have sufficient equity investment at risk to permit the entity to
finance its activities without additional subordinated financial support, or
(2) are owned by equity investors who lack an essential characteristic of a
controlling financial interest. FIN 46 applies immediately to variable interest
entities created after January 31, 2003. With regard to variable interest
entities already in existence prior to February 1, 2003, the implementation of
FIN 46 has been delayed and currently applies to the first fiscal year or interim period beginning after
December 15, 2003. FIN 46 requires disclosure of 10




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS variable interest entities in
financial statements issued after January 31, 2003, if it is reasonably
possible that as of the transition date (1) an entity will be the primary
beneficiary of an existing variable interest entity that will require
consolidation, or (2) an entity will hold a significant variable interest in,
or have significant involvement with, an existing variable interest entity. In
December 2003, the FASB issued Interpretation No. 46R (FIN 46R), a revision
to FIN 46. FIN 46R clarifies some of the provisions of FIN 46 and exempts
certain entities from its requirements. FIN 46R is effective at the end of the
first interim period ending after December 15, 2003. The Company does not have
any entities as of June 30, 2004 that required disclosure or new consolidation
as a result of adopting the provisions of FIN 46 and FIN 46R. In April 2004, the Emerging Issues Task Force issued Statement No. 03-06
Participating Securities and the Two-Class Method Under FASB Statement No.
128, Earnings Per Share (EITF 03-06). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the Company when, and if, it
declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 is effective for fiscal periods beginning after
March 31, 2004. The EITF will not have an effect on the Companys financial
statements. In July 2004, EITF of the FASB reached a tentative conclusion on EITF
Issue No. 04-08, The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share, that would require the shares issuable under contingently
convertible debt to be included in diluted earnings per share computations
regardless of whether the contingency had been met. The current rules under
FASB Statement No. 128, Earnings Per Share, do not require inclusion of such
shares until the contingency has been met. If the EITFs tentative conclusion
is ratified by the FASB, the provisions are expected to be effective for
reporting periods ending after December 15, 2004. All prior period earnings per
share amounts presented would be restated to conform to the provisions of the
final EITF. Since such shares would have been anti-dilutive during the periods
that the convertible debt and warrants were outstanding, the EITF will not have
an effect on the Companys financial statements. 2. Cash, Cash Equivalents
and Marketable Securities The cost and fair value of
the Company's cash, cash equivalents and marketable securities as of
June 30, 2004, by type of security, contractual maturity, and
its classification in the balance sheet, are as follows (in thousands): Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedCost
    
    Gain
    
    (Loss)
    
    Fair Value
    
    MaturityType of
security:Cash
    
    $
    266
    
    
    $
    
    
    
    $
    
    
    
    $
    266Money Market
Funds
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    294Corporate
Bonds and Notes
    
    
    1,024
    
    
    
    
    
    
    
    (1
    )
    
    
    1,023Equity
Securities
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    99U.S.
Government Agencies
    
    
    6,855
    
    
    
    
    
    
    
    (10
    )
    
    
    6,845
    
    
    
    2005$
    8,538
    
    
    $
    
    
    
    $
    (11
    )
    
    $
    8,527Classification
in Balance Sheet:Cash and Cash
Equivalents
    
    $
    1,759
    
    
    $
    
    
    
    $
    
    
    
    $
    1,759Marketable
Securities
    
    
    6,779
    
    
    
    
    
    
    
    (11
    )
    
    $
    6,768$
    8,538
    
    
    $
    
    
    
    $
    (11
    )
    
    $
    8,527
 The
cost and fair value of the Company's cash, cash equivalents and
marketable securities as of December 31, 2003, by type of security,
contractual maturity, and its classification in the balance sheet, is
as follows (in thousands): Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedCost
    
    Gain
    
    (Loss)
    
    Fair Value
    
    MaturityType of
security:Cash
    
    $
    314
    
    
    $
    
    
    
    $
    
    
    
    $
    314Money Market
Funds
    
    
    6,718
    
    
    
    
    
    
    
    
    
    
    
    6,718
    
    
    2004Corporate
Bonds and Notes
    
    
    1,400
    
    
    
    
    
    
    
    
    
    
    
    1,400
    
    
    2004Equity
Securities
    
    
    99
    
    
    
    
    
    
    
    (1
    )
    
    
    98U.S.
Government Agencies
    
    
    958
    
    
    
    
    
    
    
    
    
    
    
    958
    
    
    2004$
    9,489
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    9,488Classification
in Balance Sheet:Cash and Cash
Equivalents
    
    $
    8,531
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    8,530Marketable
Securities
    
    
    958
    
    
    
    
    
    
    
    
    
    
    $
    958$
    9,489
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    9,488
 3. Goodwill and Intangible Assets As required by SFAS No. 142, Goodwill and Other Intangible Assets, 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. During the three months and six months ended June 30, 2004, the market
value of the Companys equity securities did not decline below the Companys
book value. During the three and six months ended June 30, 2003, the market value of
the Companys equity securities declined below the Companys carrying value
indicating the existence of a potential goodwill impairment. In accordance
with SFAS No. 142, the Company performed the first step of the goodwill
impairment test as of June 30, 2003. The fair value of the Company was
determined to exceed its carrying value using a market-based approach with
selected multiples ranging from 1.5 to 2.0 times revenues and 1.8 to 2.5 times
gross profit. In accordance with SFAS No. 142, the second step of the
impairment test was unnecessary, and no goodwill impairment charges were
recorded. The changes in the carrying amounts of goodwill and intangible assets
during the three and six months ended June 30, 2004, are as follows (in thousands): 11




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill
    
    Intangible Assets
    
    TotalBalance as of December 31, 2003
    
    $
    31,276
    
    
    $
    186
    
    
    $
    31,462Additions during period
    
    
    
    
    
    
    38
    
    
    
    38Amortization
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Balance as of March 31, 2004
    
    $
    31,276
    
    
    $
    221
    
    
    $
    31,497Additions during period
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Balance as of June 30, 2004
    
    $
    31,276
    
    
    $
    220
    
    
    $
    31,496
 The changes in the carrying amounts of goodwill and intangible assets for
the three and six months ended June 30, 2003, are as follows (in thousands): Goodwill
    
    Intangible Assets
    
    TotalBalance as of December 31, 2002
    
    $
    31,276
    
    
    $
    165
    
    
    $
    31,441Additions during period
    
    
    
    
    
    
    11
    
    
    
    11Amortization
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Balance as of March 31, 2003
    
    $
    31,276
    
    
    $
    175
    
    
    $
    31,451Additions and adjustments during period
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Amortization
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Balance as of June 30, 2003
    
    $
    31,276
    
    
    $
    160
    
    
    $
    31,436
 As of June 30, 2004 and December 31, 2003, the Companys intangible assets
and related accumulated amortization consisted of the following (in thousands): June 30, 2004
    
    December 31, 2003Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    Amortization
    
    Net
    
    Gross
    
    Amortization
    
    NetPatents and Trademarks
    
    $
    234
    
    
    $
    (14
    )
    
    $
    220
    
    
    $
    196
    
    
    $
    (10
    )
    
    $
    186Total Intangible Assets
    
    $
    234
    
    
    $
    (14
    )
    
    $
    220
    
    
    $
    196
    
    
    $
    (10
    )
    
    $
    186
 Amortization of patents and trademarks is estimated to be $10,000 a year
for the next five years. 4. Long Term Debt 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 having an aggregate principal amount of $7.0
million, and warrants to purchase 0.7 million shares of Company common stock.
The convertible notes were to 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. On March 25, 2003, the Company entered into Redemption, Amendment and
Exchange Agreements with the three institutional investors with whom it had
completed the private placement of convertible notes and warrants on December
31, 2002. The Company recorded a loss for the quarter ended June 30, 2003, on
the early extinguishment of the original convertible notes in the amount of
$1.7 million of which $0.7 related to the write-off of deferred loan costs. In
conjunction with the extinguishment, the Company paid $3.3 million, issued new
convertible notes in the principal amount of $2.7 million and issued $1.4
million shares of its common stock with a market value of $0.7 million. The
difference between (i) the carrying value of the outstanding convertible notes
exchanged and (ii) cash paid and the fair value of the common stock and new
convertible notes issued, amounted to $1.0 million and was included in the loss
on early extinguishment of debt. Interest on the convertible notes was 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. The new
convertible notes matured on December 31, 2007, unless earlier converted into
shares of Company common stock. The conversion price of the first $0.9 million
tranche of notes is $1.10. The conversion price of the second and third tranche
of notes is $1.00. 12




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Each tranche of the notes was convertible at the Companys election at any
time after May 20, 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. Pursuant to SFAS No. 133, the Company bifurcated the fair value of the
conversion options from the new 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 is an event outside of the control of the Company, pursuant
to EITF Issue No. 00-19, the Company recorded the fair value of the conversion
options as long-term liabilities, as it was assumed that the Company would be
required to net-cash settle the underlying securities. The Company recorded income or loss based on the decrease or increase,
respectively, in the fair values of the new conversion options and original
warrants in the Companys consolidated statements of operations. The
amortization of discount on the new convertible notes and debt issue costs were
accounted for using the effective interest method. On March 17, 2004, one of the institutional investors holding the
convertible notes converted $0.9 million of outstanding notes for shares of the
Companys common stock. In the first quarter of 2004, the Company recorded a
loss of $1.4 million related to the change in the fair value of the conversion
feature from January 1, 2004 through the date of the conversion. For the three
months ended March 31, 2004 the Company also recorded a loss related to a
change in the fair value of the conversion feature and warrants of $3.7 million
and $1.3 million, respectively. In addition, on the same day as the conversion, the Company sold 1.5
million shares of common stock in a private placement to the institutional
investor, for $3.7 million or $2.45 per share. The Company recorded a loss on
conversion of debt in the amount of $0.6 million, which represented the
write-off of unamortized loan discount and debt issuance costs of $0.1 million
and the difference between the proceeds received from the private placement and
the fair value of the common stock issued based upon the closing price of the
Companys stock on the day of the sale of $0.5 million. The remaining
noteholders chose not to exercise their right to redeem their notes in amount
up to 20% of the $3.7 million received by the Company within 10 days of the
Companys public announcement of the closing of the private placement. During the period beginning on April 15, 2004 through May 20, 2004  a period
which covered 25 consecutive trading days  the dollar volume-weighted average
price of the Companys common stock exceeded 150% of the conversion price
applicable to the outstanding convertible notes and the Company determined to
exercise its right to convert the outstanding notes into shares of Company
common stock. Accordingly, on May 20, 2004, the Company informed the
institutional investors holding the outstanding convertible notes that it would
exercise its right to convert that debt. On June 18, 2004, the Company
completed the conversion of the remaining outstanding convertible notes of $1.8
million and the related outstanding interest into 1.7 million shares of
Viewpoint common stock. In the second quarter of 2004, the Company recorded a
gain of $2.3 million related to the change in the fair value of the conversion
feature during the period from April 1, 2004 through June 18, 2004, the date of
the conversion. The Company recorded a gain based on the change in the fair
values of the original warrants of $0.7 million, in the Companys consolidated
statements of operations for the three months ended June 30, 2004. In addition, the Company recorded a loss on conversion which represented
the difference between the fair value of the common stock issued in exchange
for the notes and the carrying value of the convertible notes on the date of
conversion. This change was primarily comprised of the write-off of
unamortized loan discount and debt issuance costs. Subordinated Notes On March 26, 2003, Viewpoint Corporation entered into a Securities
Purchase Agreement with three other accredited investors, pursuant to which it
received $3.5 million in exchange for an aggregate of $3.5 million principal
amount of 4.95% subordinated notes and 3,614,756 shares of Viewpoint common
stock. The subordinated notes are scheduled to mature on March 31, 2006.
Interest on these notes is payable quarterly in arrears in cash. The Company
has the right at any time to redeem up to all of the outstanding notes at par
plus accrued and unpaid interest. The $3.5 million of proceeds was allocated to subordinated notes, common
stock, and additional paid in capital based on the market value of the
Companys common stock on March 26, 2003. In accordance with the provisions of
APB Opinion No. 21, the Company recorded a debt discount of $2.0 million. Debt
issuance costs, which 13




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS amounted to $0.2 million, were recorded as other assets in the Companys
consolidated balance. The amortization of the discount on the subordinated
notes and debt issue costs totaled $0.1 million and $0.3 million for the three
and six months ended June 30, 2004, respectively, were accounted for using the
effective interest method. 5. Related Party Transactions During the three and six months ended June 30, 2004 the Company recorded
revenues totaling $1.6 million and $3.4 million, respectively, related to
agreements with America Online, Inc (AOL) that were entered into prior to
December 31, 2003. An employee of AOL served on the Board of Directors of the Company, until
the Directors term expired in December 2003. Accordingly, revenue associated
with contracts entered into with AOL after December 31, 2003 is treated as
third party revenue. As of June 30, 2004, the Company had $0.1 million in accounts receivable
relating to transactions with AOL for contracts entered into with AOL prior to
December 31, 2003. In addition the Company had $7.2 million in deferred
revenues relating to transactions with AOL for contracts entered into with AOL
prior to December 31, 2003. In 2003, the Company entered into an amended license agreement with AOL
which provides for payments by AOL of $10.0 million which were all received
during the fourth quarter of 2003. The agreement contains multiple elements
consisting of a perpetual broadcast license, a perpetual source code license,
quarterly updates to the source code through December 2005, and maintenance and
consulting services. The Company will recognize $9.0 million of revenue from
this agreement ratably as license and services revenue, through December 31,
2005, which represents the duration of the Companys obligation for
post-contract customer support of the source code element including quarterly
upgrades and maintenance requirements. The Company recognized $0.9 million and
$1.8 million in related party license revenue for the three and six months
ended June 30, 2004, respectively, and $0.2 million and $0.4 million in related
party service revenue for the three and six months ended June 30, 2004,
respectively, relating to this agreement. At June 30, 2004, related party
deferred revenue related to this transaction amounted to $7.0 million. During the three and six months ended June 30, 2003, the Company recorded
related party revenues totaling $3.4 million and $4.5 million, respectively,
related to agreements with AOL. At December 31, 2003, the Company had $0.9 million in related party
accounts receivable and $9.7 million in related party deferred revenues
relating to transactions entered into with AOL and Computer Associates. 6. Restructuring and Impairment Charges In 2003, the Company implemented three restructuring plans. The first
plan, implemented in February 2003, reduced operating expenses by closing the
Companys Utah office and related to the termination of 28 employees in that
office who were primarily engaged in sales and marketing activities. In
accordance with SFAS No. 146 Accounting for Costs Associated with Exit or
Disposal Activities, the Company recorded restructuring charges of $1.2
million. The restructuring charges represent the fair value of remaining lease
commitments reduced by estimated sublease rentals, employee severance and
termination benefits, the write-off of the net book value of certain fixed
assets used in the Utah office, and other miscellaneous charges. In September
2003, the Company re-evaluated market conditions surrounding its efforts to
sub-lease the Utah office space and adjusted the restructuring charge by $0.2
million related to the reduction of estimated sublease rentals as of September
30, 2003. The Company believes that it may be necessary to adjust the estimate
of sublease income in the future as the Companys ability to sublease the
property in Utah is contingent upon real estate and other market conditions in
Utah. The restructuring reserve activity for the six months ended June 30, 2004 for
the first plan related to lease costs. The activity in the first plan was as
follows (in thousands): 14




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##### Table of Contents



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lease CostsRestructuring and impairment charges atDecember 31, 2003
    
    $
    508Cash paid
    
    $
    (30
    )Balance at March 31, 2004
    
    $
    478Cash paid
    
    $
    (32
    )Balance at June 30, 2004
    
    $
    446
 The second plan was implemented in September 2003, and was designed to
streamline the business. Under the plan the Company eliminated 24 sales and
marketing, research and development, and general and administrative positions.
The Company incurred a restructuring charge of $0.5 million related to
severance arrangements. The charge is recorded on the income statement as a
restructuring and impairment charge. The second restructuring plan was
completed by September 30, 2003. In November 2003, however, the Company
increased the restructuring charge by $0.1 million in settlement of an action
brought by one of the terminated employees. In January 2004 the Company
recorded a non-cash adjustment to the restructuring accrual to reflect payments
that were less than originally contemplated under the plan. The restructuring activity for the second restructuring plan related to
employee severance and termination benefits up to March 31, 2004. There was no
activity for the second restructuring plan in the second quarter of 2004. The third plan was implemented in December 2003, and was designed to
consolidate international operations to the New York office. Accordingly, the
Company closed the London, England office, incurring a restructuring charge of
$0.1 million related to severance arrangements. This severance payment was
made in January 2004. As the lease relating to this office terminated in
February 2004 the Company did not incur a charge related to rent expense. The
severance charge is recorded on the income statement as a restructuring charge.
There was no activity for the third restructuring plan in the second quarter
of 2004. 7. Comprehensive Loss Total comprehensive loss for the three and six months ended June 30, 2004 and
2003 consisted of the following (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    772
    
    
    $
    (6,284
    )
    
    $
    (7,862
    )
    
    $
    (12,790
    )Foreign currency translation adjustment
    
    
    
    
    
    
    (6
    )
    
    
    (3
    )
    
    
    (14
    )Unrealized gain (loss) on marketable securities
    
    
    (2
    )
    
    
    
    
    
    
    (9
    )
    
    
    1Comprehensive net income (loss)
    
    $
    770
    
    
    $
    (6,290
    )
    
    $
    (7,874
    )
    
    $
    (12,803
    )
 8. Segment Reporting In 2003, the Company began to manage and analyze the business in segments.
In 2003, sales and production employees became dedicated to its License or
Service business and each business was managed separately. In 2004, the
Company added Search and Advertising systems as businesses that it managed
separately. The License segment sells software licenses to use the Viewpoint
software platform. Licenses are sold directly by the companys sales employees
and indirectly through VARs, for which the Company pays a commission. The
Service segment provides creative and support services to customers who
generally have purchased or received licenses to use the Viewpoint software
platform. Services are generally sold directly by the companys sales team and
occasionally by VARs. Services revenues are generally earned by the delivery
of product created or provided by Company employees or third parties that the
Company has contracted to perform services under the guidance of the Company.
Advertising systems revenue is generated by charging customers to host
advertising campaigns based on a cost per thousand (CPM) impressions. Search
revenue is generated when a customer uses the Viewpoint Toolbar to search the
internet, and clicks on a sponsored advertisement included in the search
results. The Viewpoint Toolbars search results are provided by
Yahoo!/Overture, who collects a fee from the advertiser and remits a percentage
of the fee to Viewpoint. Due to the nature of the business, for the three
months ended June 30, 2004, the Company did not have employees dedicated to the
Search advertising segment. 15




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##### Table of Contents



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company does not currently
evaluate the performance of its segments beyond gross profit. The Company does
not allocate research and development, sales and marketing or general and
administrative costs, specifically, to either segment as it does not use that
information to make key operating decisions and does not believe that
allocating these expenses is necessary in evaluating performance. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands)Revenues:Licenses
    
    $
    144
    
    
    $
    217
    
    
    $
    384
    
    
    $
    1,849Related party licenses
    
    
    872
    
    
    
    1,010
    
    
    
    1,779
    
    
    
    1,060Services
    
    
    1,066
    
    
    
    842
    
    
    
    2,589
    
    
    
    2,197Related party services
    
    
    686
    
    
    
    2,405
    
    
    
    1,600
    
    
    
    3,393Search advertising
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    Advertising systems
    
    
    37
    
    
    
    
    
    
    
    37
    
    
    
    Total revenues
    
    
    2,805
    
    
    
    4,474
    
    
    
    6,397
    
    
    
    8,499Cost of Revenues:Licenses
    
    
    3
    
    
    
    28
    
    
    
    4
    
    
    
    75Services
    
    
    792
    
    
    
    2,372
    
    
    
    1,543
    
    
    
    3,548Advertising systems
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    Total cost of revenues
    
    
    801
    
    
    
    2,400
    
    
    
    1,553
    
    
    
    3,623Licenses
    
    
    1,013
    
    
    
    1,199
    
    
    
    2,159
    
    
    
    2,834Services
    
    
    960
    
    
    
    875
    
    
    
    2,646
    
    
    
    2,042Search advertising
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    Advertising systems
    
    
    31
    
    
    
    
    
    
    
    31
    
    
    
    Total gross profit
    
    $
    2,004
    
    
    $
    2,074
    
    
    $
    4,844
    
    
    $
    4,876Gross profit marginLicenses
    
    
    100
    %
    
    
    98
    %
    
    
    100
    %
    
    
    97
    %Services
    
    
    55
    
    
    
    27
    
    
    
    63
    
    
    
    37Search advertising
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    Advertising systems
    
    
    84
    
    
    
    
    
    
    
    84
    
    
    
    Total gross profit
    
    
    71
    %
    
    
    46
    %
    
    
    76
    %
    
    
    57
    %
 16




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##### Table of Contents



Item 2. 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 Quarterly Report on Form 10-Q
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 any future reports
to be filed in 2004 and our Annual Report onForm 10-K/Afor 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 these forward-looking statements, which speak only as
of the date of this Quarterly Report onForm 10-Q. 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 (Viewpoint or the Company) is a leading provider
of interactive media technologies and services. Its graphics operating
platform, the Viewpoint Media Player, has been licensed by Fortune 500
companies and others for use in online, offline and embedded applications
serving a wide variety of needs, including: marketing campaigns, rich media
online advertising, product presentations, and business process visualizations.
Since November 2000 the Company has focused on the current business of
licensing the rights to use the Companys products and providing fee-based
professional services. On March 17, 2004, Viewpoint entered the internet search business by
launching a toolbar search product which the Company calls the Viewpoint
Toolbar. The Viewpoint Toolbar attaches to the Internet Explorer browser,
enabling web surfers to conduct internet searches without leaving the web page
they are viewing. When a user enters a term or phrase in the search field of
the Viewpoint Toolbar, search results appear not only as text links listed on a
search results page but also as thumbnail icons of the web pages themselves in
a tray that descends from the Viewpoint Toolbar. Search results delivered to
users of the Viewpoint Toolbar are supplied by Yahoo!/Overture and its
wholly-owned subsidiary, Overture Services, Inc. Under its Agreement with
Yahoo!/Overture, Viewpoint receives a share of the fees advertisers pay to
Yahoo!/Overture to be listed in the search results as a sponsored link. In
April 2004, the Company ended the test phase, and began delivering the
Viewpoint Toolbar Version 1.0. Adding a number of upgrades, including
decreasing the file size of the toolbar and adding text to the image results of
the tray, on July 1, the Company rolled out Viewpoint Toolbar Version 2.0.
Search revenue reported to the Company by search results provider in the second
quarter of 2004 did not meet the criteria for fixed and determinable revenue,
and was therefore not recorded as revenue. The Company is in the process of
obtaining documentation in order to meet the fixed and determinable criteria
for Search revenue during the second quarter and future quarters. Viewpoint also offers an online advertising campaign management and
deployment product. Advertising systems permits publishers, advertisers, and
their agencies to manage the process of deploying online advertising campaigns.
This process includes creating the advertising content, selecting the sites on
which the advertisements will be deployed, setting the metrics (ad rotation,
the frequency with which an ad may be deployed, and others) associated with the
campaign, ad deployment, and tracking of campaign results. Advertising systems
product enables users to manage advertising campaigns across many sites. In
March 2004, Viewpoint announced the availability of AirTime, an extension of
advertising systems that permits users to manage and deploy online video
advertising campaigns. Viewpoint has a limited operating history upon which an evaluation of the
Company and its prospects can be based. Viewpoint has had significant
quarterly and annual operating losses since its inception, and, as of June 30,
2004, had an accumulated deficit of $253.4 million. Viewpoints prospects must
be considered in light of the risks and difficulties frequently encountered in
entering new businesses. There can be no assurance that Viewpoint will 17




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##### Table of Contents



achieve or sustain profitability. RESULTS OF OPERATIONS The
following table sets forth for the three and six months ended June 30, 2004
and 2003, the Companys consolidated statements of operations expressed as a
percentage of total revenues for the periods indicated: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Statements of Operations DataRevenues:Licenses
    
    
    5
    %
    
    
    5
    %
    
    
    6
    %
    
    
    22
    %Related party licenses
    
    
    31
    
    
    
    23
    
    
    
    28
    
    
    
    12Services
    
    
    39
    
    
    
    18
    
    
    
    40
    
    
    
    26Related party services
    
    
    24
    
    
    
    54
    
    
    
    25
    
    
    
    40Search
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Advertising systems
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenues:Licenses
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Services
    
    
    28
    
    
    
    53
    
    
    
    24
    
    
    
    42Advertising systems
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total cost of revenues
    
    
    28
    
    
    
    54
    
    
    
    24
    
    
    
    43Gross profit
    
    
    72
    
    
    
    46
    
    
    
    76
    
    
    
    57Operating expenses:Sales and marketing
    
    
    34
    
    
    
    52
    
    
    
    31
    
    
    
    70Research and development
    
    
    31
    
    
    
    22
    
    
    
    28
    
    
    
    27General and administrative
    
    
    66
    
    
    
    71
    
    
    
    58
    
    
    
    65Depreciation
    
    
    7
    
    
    
    10
    
    
    
    7
    
    
    
    11Restructuring charges related to office closure
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    14Total operating expenses
    
    
    138
    
    
    
    155
    
    
    
    124
    
    
    
    187Loss from operations
    
    
    (66
    )
    
    
    (109
    )
    
    
    (48
    )
    
    
    (130
    )Other income (expense):Interest and other income, net
    
    
    1
    
    
    
    0
    
    
    
    1
    
    
    
    Interest expense
    
    
    (8
    )
    
    
    (7
    )
    
    
    (8
    )
    
    
    (6
    )Changes in fair values of warrants to purchase common stock and
conversion options of convertible notes
    
    
    109
    
    
    
    (24
    )
    
    
    (56
    )
    
    
    4Loss on early extinguishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )Loss on conversion
    
    
    (8
    )
    
    
    
    
    
    
    (13
    )
    
    
    Other income (loss)
    
    
    94
    
    
    
    (31
    )
    
    
    (76
    )
    
    
    (22
    )Income (loss) before provision for income taxes
    
    
    28
    
    
    
    (140
    )
    
    
    (124
    )
    
    
    (152
    )Provision for income taxes
    
    
    1
    
    
    
    0
    
    
    
    1
    
    
    
    Net loss from continuing operations
    
    
    27
    
    
    
    (140
    )
    
    
    (125
    )
    
    
    (152
    )Adjustment to net loss on disposal of discontinued operations
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Net income (loss)
    
    
    28
    %
    
    
    (139
    )%
    
    
    (124
    )%
    
    
    (151
    )%
 18




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##### Table of Contents



Critical Accounting Policies And Estimates Viewpoints discussion and analysis of its financial condition and results
of operations are based upon its consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. The Company evaluates its critical
accounting policies and estimates, including those related to revenue
recognition and goodwill and other intangible assets. The Company bases
estimates on historical experience and on various other assumptions that the
Company believes 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 the 2003 Annual Report on Form
10-K/A. Described below are the areas where the Company believes that the
estimates, judgments or assumptions that the Company has made, if different,
would have yielded the most significant differences in the Companys financial
statements: Revenue Recognition The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition, as amended, Emerging Issues Task
Force (EITF) Issue No. 00-21 Revenue Arrangements with Multiple
Deliverables, and Staff Accounting Bulletin (SAB) No. 101 Revenue
Recognition in Financial Statements as amended by SAB No. 104 Revenue
Recognition. 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. Fee-based professional services for customized software development are
performed on a fixed-fee or time-and-materials basis under separate service
arrangements. Revenues for fixed-fee arrangements are recognized over the
pattern of performance in accordance with the provisions of SAB No. 101 as
amended by SAB 104. The pattern of performance for service arrangements is
measured by the percentage of costs incurred and accrued to date for each
contract, which primarily consist of direct labor costs, cost of outsourcing,
and overhead, to the estimated total cost for each contract at completion. The
percentage approximates the percentage of a customers contract that has been
completed and would be available for the customer to use at that point in time.
Use of this method is based on the availability of reasonably dependable
estimates. If reasonably dependable estimates are not available due to the
complexity of the services to be performed, the Company defers recognition of
any revenues for the project until the project is completed, delivered and
accepted by the customer, provided all other revenue recognition criteria are
met and no further significant obligations exist. For arrangements involving multiple elements, the Company defers revenue
for the undelivered elements based on their relative fair value and recognizes
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, the Company uses renewal rates to determine the
price when sold separately. The Company accounts for multiple element
arrangements which involve only fee-based professional services in accordance
with EITF 00-21. For licenses sold that include updates over a period of time
the Company recognizes the license revenue over the period in which updates are
provided. Derivatives The Company accounts for the fair values of warrants to purchase common
stock and conversion options of its convertible notes in accordance with SFAS
No. 133 Accounting for Derivative Instruments and Hedging Activities, and
EITF Issue No. 00-19 Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock, which requires the
Company to bifurcate and separately account for its embedded derivatives
contained in the Companys convertible notes. The Company is required to carry
these embedded derivatives on its balance sheet at fair value and the
unrealized changes in the value of these embedded derivatives are reflected in
net loss as changes in fair values of warrants to purchase common stock and
conversion 19




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##### Table of Contents



options of convertible notes. Financial Results Viewpoint reported total revenue of $2.8 million for the second quarter
2004, compared to $4.5 million for the second quarter 2003. Viewpoint reported
total revenue of $6.4 million for the six months ended June 30, 2004, compared
to $8.5 million for the six months ended 2003. Gross profit for the second
quarter of 2004 was $2.0 million compared to $2.1 million for the same period
of 2003. Gross profit for the six months ended June 2004 was $4.8 million,
compared to $4.9 million for the six months ended June, 2003. The comparatively
consistent level of gross profit in 2004 compared to 2003, despite lower
revenues, stemmed from higher margin services contracts in 2004. Operating loss for the six months ended June 30, 2004 was $3.1 million
compared to $11.1 million for the six months ended June 30, 2003. The lower
level of operating losses came from a reduction in operating expenses due to
steps management implemented in 2003 to reduce costs. Additionally in 2003 the
Company recognized $1.2 million in restructuring costs that were not recognized
in 2004. The Company recognized net income of $0.8 million, or $0.01 per share, in
the second quarter of 2004, compared to a net loss of $6.3 million, or $(0.14)
per share for the second quarter of 2003. The net income in the second quarter
of 2004 was primarily due to a non-cash gain of $3.1 million to recognize the
impact of the Companys decreased stock price attributable to its March, 2003
convertible debt and warrant financing. During the second quarter of 2003 the
Company recognized a comparable non cash loss of $1.1 million attributable to
increases in the companys stock price. For the six months ended June 30, 2004, the Company incurred a net loss of
$7.9 million, or $(0.15) per share, compared to a net loss of $12.8 million, or
$(0.29) per share, for the six months ended June 30, 2003. The lower level of
net income was principally due to improved operating losses, offset by an
increase in other expenses principally due to the impact of an increase in the
companys stock in the first six months of 2004 on the cost attributable to its
March 2003 financing. In March 2004, the Company completed a private placement whereby it
directly issued 1.5 million shares of common stock to an institutional investor
who had participated in the March 2003 financing. The issuance was for an
aggregate purchase price of $3.7 million and did not require banking placement
fees. Additionally, prior to the completion of the private placement the
institutional investor exercised its right to convert approximately $0.9
million of Viewpoint convertible debt it had acquired in March 2003 into shares
of Viewpoint common stock. This conversion resulted in a non-cash loss on
conversion of share of $0.6 million. During
the period beginning on April 15, 2004 through May 20, 2004  a period
which covered 25 consecutive trading days  the dollar volume-weighted average
price of the Companys common stock exceeded 150% of the conversion price
applicable to the outstanding convertible notes and the Company determined to
exercise its right to convert the outstanding notes into shares of Company
common stock. Accordingly, on May 20, 2004, the Company informed the
institutional investors holding the outstanding convertible notes that it would
exercise its right to convert that debt. On June 18, 2004, the Company
completed the conversion of the remaining outstanding convertible notes of $1.8
million and the related outstanding interest into 1.7 million shares of
Viewpoint common stock. The Company recorded a gain of $3.0 million related to
the change in the fair value of the conversion feature during the three months
ended June 18, 2004 through the date of the conversion. In addition, the
Company recorded a loss on conversion which represented the difference between
the fair value of the common stock issued in exchange for the notes and the
carrying value of the convertible notes on the date of conversion. This change
was primarily comprised of the write-off of unamortized loan discount and debt
issuance costs. Viewpoints cash, cash equivalents, and marketable securities as of June
30, 2004 were $8.5 million compared to cash, cash equivalents, and marketable
securities of $9.5 million at December 31, 2003. This decrease can be
attributed to the Companys operating loss less the recognition of deferred
revenue, which was a non-cash item during the six months ended June 30, 2004,
offset by the first quarters private placement. 20




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##### Table of Contents



Revenues June 30,
    
    %2004
    
    2003
    
    Change(dollars in thousands)Three months ended:Licenses
    
    $
    144
    
    
    $
    217
    
    
    
    (34
    )%Related party licenses
    
    
    872
    
    
    
    1,010
    
    
    
    (14
    )Services
    
    
    1,066
    
    
    
    842
    
    
    
    27Related party services
    
    
    686
    
    
    
    2,405
    
    
    
    (71
    )Search
    
    
    
    
    
    
    
    
    
    
    N/AAdvertising systems
    
    
    37
    
    
    
    
    
    
    
    N/ATotal revenues
    
    $
    2,805
    
    
    $
    4,474
    
    
    
    (37
    )%Six months ended:Licenses
    
    $
    384
    
    
    $
    1,849
    
    
    
    (79
    )%Related party licenses
    
    
    1,779
    
    
    
    1,060
    
    
    
    68Services
    
    
    2,589
    
    
    
    2,197
    
    
    
    18Related party services
    
    
    1,600
    
    
    
    3,393
    
    
    
    (53
    )Search
    
    
    8
    
    
    
    
    
    
    
    N/AAdvertising systems
    
    
    37
    
    
    
    
    
    
    
    N/ATotal revenues
    
    $
    6,397
    
    
    $
    8,499
    
    
    
    (25
    )%
 The Company generates revenues by selling licenses to the Viewpoint
graphical platform principally to internet content publishers. Prior to 2004,
licenses were generally 15 months in duration. Revenues were recognized upon
the completion of the sales and delivery process so long as all other revenue
recognition criteria were satisfied. The Company supplemented its license
revenue by providing content development services to licensees. The service
revenues were recognized on a percentage of completion basis as computed by
comparing the incurred costs of the project to the total estimated project cost
and applying this percentage against the total contracted revenue. During 2004 the Company continues to recognize license sales upon delivery
so long as all other revenue recognition criteria are satisfied. Since January
2004, licenses are generally sold for a 12 month period. The Company also
adopted a new licensing price structure in 2004 whereby larger license sales,
that are made less frequently, contain product upgrades when and if available
for a period of 12 months. These license sales will be amortized over a 12
month period, due to the nature of when and if available upgrades. During 2003 the Company began to migrate its license and services sales
efforts toward larger customers. The customers the Company began targeting had
longer sales cycles and often elected to procure limited use or project
licenses for the Companys software. This enabled the customers to understand
the softwares capabilities before they committed to larger and longer license
purchases. These limited use projects are generally for services as the
Company develops content for the customers to use with the Companys software.
As the Company has been migrating its sales efforts towards these larger
customers with a longer license sales cycle, the Company has experienced a
decline in the mix of license revenues relative to total revenues. We believe
that this mix will change in the future as the customers who are currently
using the software in these limited use projects purchase larger and longer use
licenses, which will help increase the mix of license revenues relative to
total revenues. The Company adopted a consistent license pricing schedule at
the beginning of 2004 to help broaden its potential customer base. If the
Company is not able to increase the number of sales at the entry level, or sell
larger and longer licenses to larger customers the Company may not be able to
reverse the decline in License revenues. On March 17, 2004 Viewpoint entered the internet search business, by
launching the Viewpoint Toolbar on a test basis. In April 2004, the Company
ended the test phase, and began delivering the Viewpoint Toolbar Version 1.0.
Search revenue is generated when a customer uses the Viewpoint Toolbar to
search the internet, and clicks on a sponsored advertisement included in the
search results. The Viewpoint Toolbars search results are provided by
Yahoo!/Overture, who collects a fee from the advertiser and remits a percentage
of the fee to Viewpoint. Revenue generated is a function of the number of
Viewpoint Toolbars performing searches, the number of searches that are
sponsored by advertisers, the number of advertisements that are clicked on by
Viewpoint Toolbar searchers and the 21




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##### Table of Contents



rate advertisers pay for those
advertisements. Search revenue reported to the Company by the search results
provider in the second quarter of 2004 did not meet the criteria for fixed and
determinable revenue, and was therefore not recorded as revenue. The Company is in the process of
obtaining documentation in order to meet the fixed and determinable criteria
for Search revenue in the second quarter of 2004 and future quarters. Viewpoint also offers an online advertising campaign management and
deployment product. Advertising systems permits publishers, advertisers, and
their agencies to manage the process of deploying online advertising campaigns.
The Company charges customer on a cost per thousand (CPM) impression basis,
and recognizes revenue when the impressions are served, so long as all other
revenue recognition criteria are satisfied. The Company expects revenues from
advertising systems to continue to grow in future quarters. License revenues of $0.1 million decreased approximately $0.1 million or
34% for the three months ended June 30, 2004 compared to the same period last
year. License revenues in 2004 were essentially generated from sales to smaller
licensees or were larger licenses, but included upgrades when and if available,
and therefore, are being recognized ratably over 12 months. The Company sold
two licenses that were greater than $50,000 during the first six months of
2004, which provided upgrade rights, and are therefore being recognized ratably
over 12 months. For the same period last year, the Company sold seven licenses
totaling more than $0.1 million that were recognized upon delivery of the
software, since the Company did not provide any significant post contract
customer support. License revenues of $0.4 million decreased approximately $1.5 million or
79% for the six months ended June 30, 2004, compared to the same period last
year. License revenues in 2004 were essentially generated from sales to smaller
licensees or were larger licenses, but included upgrades when and if available,
and therefore, are being recognized ratably over 12 months. Conversely, for the
six months ending June 30, 2003, the Company sold eight licenses for more
$50,000, totaling $1.6 million, which did not provide upgrades and were
recognized upon delivery of the software. These licenses included two
purchased by international Value Added Resellers (VARs), two international
sales through its London office and two multi-year licenses. The Company has
ceased its emphasis of sales through reseller channels and closed the
department that supported this process at its headquarters. It has also closed
its London office in December 2003 due to costs involved in supporting that
location. One of the multi-year licenses remains in place and another was
subsequently modified. Related party license revenues of $0.9 million decreased approximately
$0.1 million, or 14%, for the three months ended June 30, 2004 compared to the
same period last year. During the first quarter of 2003 an America Online, Inc.
(AOL) employee was also a Director of the Company. This employees term as
Director ended in December 2003. Accordingly, revenue associated with contracts
entered into with AOL prior to December 31, 2003 was recorded as related party
revenue. The decrease in related party license revenues was due to AOL,
working under a new agreement that was executed in October 2003, which, based
on the terms of the agreement, require revenue to be recognized ratably through
December 2005, as opposed to the previous agreement which required the Company
to recognize revenues when payments were due. The agreement entered into in
October 2003 will be recorded as related party revenue, as the terms were
agreed upon and the contract signed when AOL was a related party. Related party license revenues of $1.8 million increased approximately
$0.7 million, or 68%, for the six months ended June 30, 2004 compared to the
same period last year. The six month increase is also attributable to the
difference in the agreements AOL was working under, and was caused by a payment
being due for the previous contract in the second quarter of 2003, but no
payments became due in the first quarter of 2003. Service revenues of $1.1 million increased approximately $0.2 million or
27% for the three months ended June 30, 2004 compared to the same period last
year. The increase is related to $0.2 million of service revenues from AOL,
where the contract was executed after December 2003, and thus recorded as a
non-related party revenue. Service revenues of $2.6 million increased approximately $0.4 million or
18% for the six months ended June 30, 2004 compared to the same period last
year. The Companys revenues during 2004 included $0.5 million from a service
project that was completed in the third quarter of 2003 for which the Company
received a final payment in February 2004. Certain service revenues from AOL
are also included in this category as America Online ceased being a related
party in December 2003. 22




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Related party service revenues of $0.7 million and $1.6 million for the
three and six months ended June 30, 2004, respectively decreased by
approximately $1.7 million or 71%, and $1.8 million or 53%, respectively,
compared to the same period last year. Revenues included in 2004 as related
party service revenues relate to contracts that were entered into prior to December 2003. In addition, in
the second quarter of 2003 AOL used the Companys engineering professional
services extensively, amounting to $1.5 million in revenue. These services
were not used in 2004. The Company recognized its first advertising systems revenue in the
second quarter of 2004. The Company expects this revenue to grow in future
quarters. Cost of revenues June 30,
    
    %2004
    
    2003
    
    Change(dollars in thousands)Three months ended:Licenses
    
    $
    3
    
    
    $
    28
    
    
    
    (89
    )%Percentage of Licenses Revenues
    
    
    
    %
    
    
    3
    %Six months ended:Licenses
    
    $
    4
    
    
    $
    75
    
    
    
    (95
    )%Percentage of Licenses Revenues
    
    
    
    %
    
    
    3
    %Three months ended:Services
    
    $
    792
    
    
    $
    2,372
    
    
    
    (67
    )%Percentage of Services Revenues
    
    
    45
    %
    
    
    73
    %Six months ended:Services
    
    $
    1,543
    
    
    $
    3,548
    
    
    
    (57
    )%Percentage of Services Revenues
    
    
    37
    %
    
    
    63
    %Three months ended:Advertising systems
    
    $
    6
    
    
    $
    
    
    
    
    N/APercentage of Advertising Systems Revenues
    
    
    16
    %
    
    
    
    %Six months ended:Advertising systems
    
    $
    6
    
    
    $
    
    
    
    
    N/APercentage of Advertising Systems Revenues
    
    
    16
    %
    
    
    
    %
 Cost of revenues for licenses consists primarily of commissions to VARs.
The decrease in cost of license revenues for the three and six months ended
June 30, 2004 is attributable to a decrease in sales to VARs that require
commission payments, as compared to the same periods last year. Cost of revenues for services consists primarily of salaries, consulting
fees and overhead for those who provide fee-based content creation and
engineering professional services. Cost of revenues decreased by $1.6 million
for the three months ended June 30, 2004 as compared to the same period last
year, due to the overall decrease in services revenues as well as the Companys
cost controls, including a reduced reliance on outside contractors in the
services group. Cost of revenues for services decreased by $2.0 million for
the six months ended June 30, 2004 as compared to the same period last year.
The decrease in cost of revenues for services is attributable to the decrease
in service revenues after excluding the impact on revenues of the $0.5 million
payment for services performed in 2003 for which the Company received the final
payment in February 2004. Costs associated with that project were recorded in
2003, but due to collectibility concerns the revenue was not recognized until
cash was received. Services expenses as a percentage of services revenues
decreased because of this payment, and due to more effective cost controls,
including a reduced reliance on outside contractors, by the services group. Cost of revenues from advertising systems consists of the web-hosting fees
associated with serving advertising content. The Company is continually
evaluating pricing for hosting services in order to reduce these
expenses to the greatest extent practicable. The Company incurs cost of revenues related to Search revenue for the
hosting services associated with 23




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##### Table of Contents



providing search results. Bandwidth costs
utilized in providing results has been minimal. As Search revenue increases
the hosting services associated with this revenue will increase. Sales and marketing June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Sales and Marketing
    
    $
    945
    
    
    $
    2,341
    
    
    
    (60
    )%Percentage of total revenues
    
    
    34
    %
    
    
    52
    %Six months ended:Sales and Marketing
    
    $
    1,996
    
    
    
    5,988
    
    
    
    (67
    )%Percentage of total revenues
    
    
    31
    %
    
    
    70
    %
 Sales and marketing expenses include salaries and benefits, sales
commissions, non-cash stock-based compensation charges, consulting fees, and
travel and entertainment expenses for 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 by $1.4 million or 60% for the
three months ended June 30, 2004 compared to the same period last year due to a
decrease in personnel in the sales and marketing area. Personnel costs,
including travel and entertainment expenses, decreased by $1.3 million due to a
reduction in sales staff associated with slower license sales, and a change in
marketing emphasis and support. Consulting expenses decreased by $0.2 million
related to decreases in marketing efforts for certain products that required
consulting services in the second quarter of 2003. Non-cash stock-based
compensation charges decreased $0.1 million due to headcount reductions in
sales and marketing personnel who had received option grants in the past where
the exercise price was lower than the market value of the Companys common
stock on the dates of grant, or whose options became fully vested. Currently
the Company issues stock options to new personnel with an exercise price equal
to the market value of the common stock on the date of grant. These decreases
were offset by an increase in marketing expense related to the Companys search
business of $0.3 million. Sales and marketing expenses decreased by $4.0 million or 67% for the six
months ended June 30, 2004 compared to the same period last year due to a
decrease in personnel in the sales and marketing area. Personnel costs,
including travel and entertainment expenses, decreased by $3.2 million due to a
reduction in sales staff associated with slower license sales, and a change in
marketing emphasis and support. Consulting expenses, and marketing expenses,
such as trade show expenses and public relations costs, decreased by $0.8
million related to decreases in marketing efforts for certain products compared
to the same period last year. Non-cash stock-based compensation charges
decreased $0.4 million due to headcount reductions in sales and marketing
personnel who had received option grants in the past where the exercise price
was lower than the market value of the Companys common stock on the date of
grant, or whose options became fully vested. Currently the Company issues stock
options to new personnel with an exercise price equal to the market value of
the common stock on the date of grant. These decreases were offset by an
increase in marketing expense related to the Companys search business of $0.5
million. Research and development 24




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June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Research and development
    
    $
    860
    
    
    $
    999
    
    
    
    (14
    )%Percentage of total revenues
    
    
    31
    %
    
    
    22
    %Six months ended:Research and development
    
    $
    1,773
    
    
    $
    2,311
    
    
    
    (23
    )%Percentage of total revenues
    
    
    28
    %
    
    
    27
    %
 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 coincided. As a result, the Company has not capitalized any
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, if technological feasibility has been
established, it is probable that the project will be completed and the software
will be used as intended. The Company expenses costs incurred during
preliminary project assessment, research and development, re-engineering,
training and application maintenance. The Companys research and development efforts have historically been
primarily directed at improving the overall quality of the Viewpoint Media
Player and its proprietary software tools for creating digital content. During
2003, the Company had been developing significant enhancements to the video
playback functionality of Viewpoint Media Player (which the Company made
available in June 2003), an authoring tool for clients publishing advertising
content, Computer Aided Design (CAD) workflow solutions and technology for
converting CAD data into Viewpoint content, expanded capability of the Video
Media Player onto new platforms, developed new configuration capabilities for
user interfaces, and enhancements to the Viewpoint Media Player that allow
print quality images to be generated from interactive online content.
Additionally, the Company built an ad serving system, which is capable of
deploying advertising on internet websites. Beginning in 2004 the Company
expanded its efforts to build the Viewpoint Toolbar for searching and expanded
the creative assembly capability of the advertising systems product that is
used to deploy advertising to publisher sites on the internet. Research and development expenses decreased by $0.1 million or 14% for the
three months ended June 30, 2004 compared to the same period last year. The
most significant decrease came in non-cash stock-based compensation which
decreased $0.3 million due to headcount reductions in research and development
personnel who had received option grants in the past where the exercise price
was lower than the market value of the Companys common stock on the date of
grant, or whose options became fully vested. Travel and expense costs
associated with a small reduction in staff size of the research and development
department resulted in $0.1 million decrease compared to the same period last
year. These decreases were off-set by an increase in salaries and benefits of
$0.2 million and consulting costs of $0.1 million. Salaries and benefits
increased due to specific engineering salaries and benefits that were
classified as cost of revenues as a result of revenue generating customer
specific development work in the second quarter of 2003. Such contracts did
not exist in the second quarter of 2004. Research and development expenses decreased by $0.5 million or 23% for the
three months ended June 30, 2004 compared to the same period last year. The
most significant decrease came in non-cash stock-based compensation which
decreased $0.6 million due to headcount reductions in research and development
personnel who had received option grants in the past where the exercise price
was lower than the market value of the Companys common stock on the date of
grant, or whose options became fully vested. These decreases were off-set by
an increase in salaries and benefits of $0.1 million. Salaries and benefits
increased due to specific engineering salaries and benefits that were
classified as cost of revenues as a result of revenue generating customer
specific development work in the second quarter of 2003. Such contracts did
not exist in the second quarter of 2004. 25




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General and administrative June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:General and Administsrative
    
    $
    1,845
    
    
    $
    3,187
    
    
    
    (42
    )%Percentage of total revenues
    
    
    66
    %
    
    
    71
    %Six months ended:General and Administsrative
    
    $
    3,727
    
    
    $
    5,538
    
    
    
    (33
    )%Percentage of total revenues
    
    
    58
    %
    
    
    65
    %
 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
relations fees, insurance expense, and bad debt expense. General and administrative expenses decreased by $1.3 million or 42% for
the three months ended June 30, 2004 compared to the same period last year.
Bad debt expense decreased by $0.8 million, and non-cash stock-based
compensation decreased by $0.4 million due to headcount reductions in general
and administrative personnel who had received option grants in the past where
the exercise price was lower than the market value of the Companys common
stock on the date of grant, or whose options became fully vested. Facility
costs decreased by $0.1 million associated with the closing of a facility in
Utah in a restructuring completed in 2003. A smaller decrease in networking
costs due to a smaller total Company staff were offset by increases in costs
for staff size due to the reclassification of certain employees to the general
and administrative area during 2004. General and administrative expenses decreased by $1.8 million or 33% for
the three months ended June 30, 2004 compared to the same period last year.
Bad debt expense decreased by $0.7 million, and non-cash stock-based
compensation decreased by $0.6 million due to headcount reductions in general
and administrative personnel who had received option grants in the past where
the exercise price was lower than the market value of the Companys common
stock on the date of grant, or whose options became fully vested. Facility
costs decreased by $0.3 million associated with the closing of a facility in
Utah in a restructuring completed in 2003. A smaller decrease in networking
costs due to a smaller total Company staff were offset by increases in costs
for staff size due to the reclass of certain employees to the general and
administrative area during 2004. Depreciation expense June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Depreciation
    
    $
    205
    
    
    $
    444
    
    
    
    (54
    )%Percentage of total revenues
    
    
    7
    %
    
    
    10
    %Six months ended:Depreciation
    
    $
    424
    
    
    $
    922
    
    
    
    (54
    )%Percentage of total revenues
    
    
    7
    %
    
    
    11
    %
 Depreciation expense decreased $0.2 million, or 54%, for the three months
ended June 30, 2004, compared to the same period last year, and $0.5 million,
or 54%, for the six months ended June 30, 2004, respectively. The decreases
were due to the write-off of certain fixed assets related to the closure of the
Companys Utah office in 2003, and the overall reduction of assets used in
business due to the restructurings. 26




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Amortization of intangible assets June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Amortization of intangible assets
    
    $
    1
    
    
    $
    7
    
    
    
    (86
    )%Percentage of total revenues
    
    
    
    %
    
    
    
    %Six months ended:Amortization of intangible assets
    
    $
    4
    
    
    $
    8
    
    
    
    (50
    )%Percentage of total revenues
    
    
    
    %
    
    
    
    %
 Amortization of intangible assets relates to the amortization of patents
and trademarks. Restructuring and impairment charges June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Restructuring charges
    
    $
    
    
    
    $
    
    
    
    
    N/A
    %Percentage of total revenues
    
    
    0
    %
    
    
    0
    %Six months ended:Restructuring charges
    
    $
    (17
    )
    
    $
    1,211
    
    
    
    (101
    )%Percentage of total revenues
    
    
    
    %
    
    
    14
    %
 In 2003, the Company implemented three restructuring plans. The first
plan, implemented in February 2003, reduced operating expenses by closing the
Companys Utah office and related to the termination of 28 employees in that
office who were primarily engaged in sales and marketing activities. In
accordance with SFAS No. 146 Accounting for Costs Associated with Exit or
Disposal Activities, the Company recorded restructuring charges of $1.2
million. The restructuring charges represent the fair value of remaining lease
commitments reduced by estimated sublease rentals, employee severance and
termination benefits, the write-off of the net book value of certain fixed
assets used in the Utah office, and other miscellaneous charges. In September
2003, the Company re-evaluated market conditions surrounding its efforts to
sub-lease the Utah office space and increased the restructuring charge by $0.2
million related to the reduction of estimated sublease rentals. The second plan was implemented in September 2003, and was designed to
streamline the business. Under the plan the Company eliminated 24 sales and
marketing, research and development, and general and administrative positions.
The Company incurred a restructuring charge of $0.5 million related to
severance arrangements. The second restructuring plan was completed by
September 30, 2003. In November 2003, the Company increased the restructuring
charge by $0.1 million in settlement of an action brought by one of the
terminated employees. In January 2004 the Company recorded a non-cash
adjustment to the restructuring accrual to reflect payments that were less then
originally contemplated under the plan. The third plan was implemented in December 2003 and was designed to
consolidate international operations to the New York office. Accordingly the
Company closed the London, England office incurring a restructuring charge of
$0.1 million primarily related to severance. The charge is recorded on the
income statement as a restructuring charge. The third restructuring plan was
completed by December 31, 2003. Certain adjustments relating to termination benefits were recorded against
the remaining restructuring accruals in 2004. 27




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Interest and other income, net June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Interest and other income, net
    
    $
    27
    
    
    $
    11
    
    
    
    145
    %Percentage of total revenues
    
    
    1
    %
    
    
    
    %Six months ended:Interest and other income, net
    
    $
    46
    
    
    $
    34
    
    
    
    35
    %Percentage of total revenues
    
    
    1
    %
    
    
    
    %
 Interest and other income, net, primarily consists of interest and
investment income on cash, cash equivalents and marketable securities. As a
result, interest and other income, net, fluctuates with changes in the
Companys cash, cash equivalents and marketable securities balances and market
interest rates. Interest and other income, net, increased for the three and six months
ended June 30, 2004 compared to the same periods last year due to an increase
in average cash, cash equivalents, and marketable securities balances due to
the private placements in March 2004 and November 2003. Interest expense June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Interest expense
    
    $
    (236
    )
    
    $
    (323
    )
    
    
    (27
    )%Percentage of total revenues
    
    
    (8
    )%
    
    
    (7
    )%Six months ended:Interest expense
    
    $
    (486
    )
    
    $
    (486
    )
    
    
    
    %Percentage of total revenues
    
    
    (8
    )%
    
    
    (6
    )%
 Interest expense consists of interest paid and accrued, and amortization
of debt discount and debt issue costs on the Companys outstanding convertible
and subordinated notes. The notes were executed and funded during the first
quarter of 2003. In March 2004, $0.9 million of convertible notes were
exchanged for common stock by the note-holder. In June 2004, the remaining
$1.8 million of convertible notes were exchanged for common stock by the
note-holders. Interest expense decreased for the three months ended June 30, 2004 due to
the conversion of debt in March and June of 2004. These decreases were offset
by the charge to interest expense resulting from the discounted cash flow from
the restructuring in 2003. Loss on early extinguishment of debt June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Loss on early extinguishment of debt
    
    $
    
    
    
    $
    
    
    
    
    N/A
    %Percentage of total revenues
    
    
    
    %
    
    
    
    %Six months ended:Loss on early extinguishment of debt
    
    $
    
    
    
    $
    (1,682
    )
    
    
    (100
    )%Percentage of total revenues
    
    
    
    %
    
    
    (20
    )%
 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 $7.0
million, and warrants to purchase 0.7 million shares of Company common stock.
The convertible notes were to 28




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##### Table of Contents



mature on December 31, 2007, unless earlier
converted into shares of Company common stock at a price of $2.26 per share. On March 25, 2003, the Company entered into Redemption, Amendment and
Exchange Agreements with the three institutional investors with whom it had
completed the private placement of convertible notes and warrants on December
31, 2002. The Company recorded a loss for the quarter ended June 30, 2003, on
the early extinguishment of the original convertible notes in the amount of
$1.7 million of which $0.7 million related to the write-off of deferred loan
costs. In conjunction with the extinguishment, the Company paid $3.3 million,
issued new convertible notes in the principal amount of $2.7 million and issued
1,351,351 shares of its common stock with a market value of $0.7 million. The
difference between (i) the carrying value of the outstanding convertible notes
exchanged and (ii) cash paid and the fair value of the common stock and new convertible
notes issued, amounted to $1.0 million and was included in the loss on early
extinguishment of debt. The Company charged the loss on early extinguishment of debt to operations
as such loss did not qualify for classification as extraordinary. Loss on conversion of debt June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Loss on conversion of debt
    
    $
    (212
    )
    
    $
    
    
    
    
    N/APercentage of total revenues
    
    
    (8
    )%
    
    
    
    %Six months ended:Loss on conversion of debt
    
    $
    (810
    )
    
    $
    
    
    
    
    N/APercentage of total revenues
    
    
    (13
    )%
    
    
    
    %
 On March 17, 2004, one of the institutional investors holding the
convertible notes converted $0.9 million of outstanding notes for shares of the
Companys common stock. In the first quarter of 2004, the Company recorded a
loss of $1.4 million related to the change in the fair value of the conversion
feature from January 1, 2004 through the date of the conversion. For the three
months ended March 31, 2004 the Company also recorded a loss related to a
change in the fair value of the conversion feature and warrants of $3.7 million
and $1.3 million, respectively. In addition, on the same day as the conversion, the Company sold 1.5
million shares of common stock in a private placement to the institutional
investor, for $3.7 million or $2.45 per share. The Company recorded a loss on
conversion of debt in the amount of $0.6 million, which represented the
write-off of unamortized loan discount and debt issuance costs of $0.1 million
and the difference between the proceeds received from the private placement and
the fair value of the common stock issued based upon the closing price of the
Companys stock on the day of the sale of $0.5 million. The remaining
noteholders chose not to exercise their right to redeem their notes in amount
up to 20% of the $3.7 million received by the Company within 10 days of the
Companys public announcement of the closing of the private placement. During
the period beginning on April 15, 2004 through May 20, 2004  a period
which covered 25 consecutive trading days  the dollar volume-weighted average
price of the Companys common stock exceeded 150% of the conversion price
applicable to the outstanding convertible notes and the Company determined to
exercise its right to convert the outstanding notes into shares of Company
common stock. Accordingly, on May 20, 2004, the Company informed the
institutional investors holding the outstanding convertible notes that it would
exercise its right to convert that debt. On June 18, 2004, the Company
completed the conversion of the remaining outstanding convertible notes of $1.8
million and the related outstanding interest into 1.7 million shares of
Viewpoint common stock. In addition, the Company recorded a loss on conversion
which represented the difference between the fair value of the common stock
issued in exchange for the notes and the carrying value of the convertible
notes on the date of conversion. This change was primarily comprised of the
write-off of unamortized loan discount and debt issuance costs. 29




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Changes in fair value of warrants to purchase common stock and conversion
options of convertible notes June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Changes in fair value of warrants to
purchase common stock and conversion
options of convertible notes
    
    $
    3,050
    
    
    $
    (1,081
    )
    
    
    (382
    )%Percentage of total revenues
    
    
    109
    %
    
    
    (24
    )%Six months ended:Changes in fair value of warrants to
purchase common stock and conversion
options of convertible notes
    
    $
    (3,553
    )
    
    $
    343
    
    
    
    (1,136
    )%Percentage of total revenues
    
    
    (56
    )%
    
    
    4
    %
 Based on the provisions of SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, and EITF Issue No. 00-19 Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock, the Company records either income or expense based on a
decrease or increase, respectively, of the Company share price. The Company
recorded income for the three months ended June 30, 2004 based on the decrease
in fair values of the conversion options of its convertible notes of $2.3
million and warrants of $0.7 million. For the six months ended June 30, 2004,
the Company recorded a loss based on the increase in fair values of the
conversion options of its convertible notes of $3.0 million and warrants of $0.6
million. Provision for income taxes June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Provision for income taxes
    
    $
    25
    
    
    $
    13
    
    
    
    92
    %Percentage of total revenues
    
    
    1
    %
    
    
    
    %Six months ended:Provision for income taxes
    
    $
    35
    
    
    $
    13
    
    
    
    169
    %Percentage of total revenues
    
    
    1
    %
    
    
    
    %
 Provision for income taxes consists primarily of certain minimum state
income taxes as well as foreign tax withholdings. Adjustment to net loss on disposal of discontinued operations June 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Adjustment to net loss on disposal
of discontinued operations, net of tax
    
    $
    20
    
    
    $
    26
    
    
    
    (23
    )%Percentage of total revenues
    
    
    1
    %
    
    
    1
    %Six months ended:Adjustment to net loss on disposal
of discontinued operations, net of tax
    
    $
    39
    
    
    $
    116
    
    
    
    (66
    )%Percentage of total revenues
    
    
    1
    %
    
    
    1
    %
 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 30




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software graphics business. Accordingly, these operations are reflected as
discontinued operations for all periods presented in the accompanying
consolidated statements of operations. The adjustment to net loss on disposal of discontinued operations for the
three and six months ended June 30, 2004, represents royalty payments received
for certain prepackaged software. Factors That May Affect Future Results of Operations We believe that in the future our results of operations could be affected
by various factors including:  
    
    We have a history of losses and expect to incur losses in the
future, which may cause our share price to decline.  
    
    We may have to obtain financing on less favorable terms, which
could dilute current stockholders ownership interests in the company.  
    
    Our business is difficult to evaluate because we have a limited
operating history and have only recently launched our search toolbar
and advertising systems products.  
    
    Our competitors in the search business include much larger
companies like Google, Microsoft, Yahoo! and others that have
significantly greater resources than we do to build a business.  
    
    The success of our graphically enhanced search operations depends
on users satisfaction with search results supplied by Yahoo!/Overture.  
    
    Our business may not grow if the internet advertising market does
not continue to develop or if we are unable to successfully implement
our business model.  
    
    Our failure to successfully compete may hinder our growth.  
    
    Our revenues will be subject to seasonal fluctuations.  
    
    Our financial performance and reduction of our workforce may affect
the morale and performance of our personnel.  
    
    We may need to enter into business combinations and strategic
alliances which could be difficult to integrate and may disrupt our
business.  
    
    We may need to develop new products or other untested methods of
increasing sales with our existing products or distribution network to
generate sales and if we are unsuccessful the growth of our business
may cease or decline.  
    
    We will need to keep pace with rapid technological change in the
internet search and advertising industries.  
    
    Our ad campaign management and deployment solution may not be
successful at attracting and retaining customers.  
    
    We might experience significant defects in our products.  
    
    Our technical systems are vulnerable to interruption and damage.  
    
    Our stock price is volatile, which could subject us to class action
litigation or make future financing difficult.  
    
    Our charter documents could make it more difficult for an unsolicited third party to acquire us.  
    
    We may be unable to protect our intellectual property rights.  
    
    We may be liable for infringing the intellectual property rights of others.  
    
    Regulatory and legal uncertainties could harm our business.  
    
    Internet security poses risks to our entire business. Recent Accounting Pronouncements Statement of Financial Accounting Standards SFAS No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities, and SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, were recently issued. SFAS No. 149 and 150
did not impact the financial statements. In November 2003, the Emerging Issues Task Force (EITF) reached a
consensus on disclosure guidance discussed under EITF 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.
The consensus provides for certain disclosure requirements that were effective
for fiscal years ending 31




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after December 15, 2003. In March 2004, the EITF
reached a consensus on recognition and measurement guidance discussed under
EITF 03-01. The consensus clarifies the meaning of other-than-temporary
impairment and its application to investments classified as either
available-for-sale or held-to-maturity under FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and
investments accounted for under the cost method or the equity method. The
recognition and measurement guidance is to be applied to other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004. The
Company does not expect the adoption of this pronouncement to have a material impact on the Companys
business, financial position, cash flows or result of operations In January 2003, FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). This interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest entities that either
(1) do not have sufficient equity investment at risk to permit the entity to
finance its activities without additional subordinated financial support, or
(2) are owned by equity investors who lack an essential characteristic of a
controlling financial interest. FIN 46 applies immediately to variable interest
entities created after January 31, 2003. With regard to variable interest
entities already in existence prior to February 1, 2003, the implementation of
FIN 46 has been delayed and currently applies to the first fiscal year or
interim period beginning after December 15, 2003. FIN 46 requires disclosure of
variable interest entities in financial statements issued after January 31,
2003, if it is reasonably possible that as of the transition date (1) an entity
will be the primary beneficiary of an existing variable interest entity that
will require consolidation, or (2) an entity will hold a significant variable
interest in, or have significant involvement with, an existing variable
interest entity. In December 2003, the FASB issued Interpretation No. 46R (FIN
46R), a revision to FIN 46. FIN 46R clarifies some of the provisions of FIN 46
and exempts certain entities from its requirements. FIN 46R is effective at the
end of the first interim period ending after December 15, 2003. The Company
does not have any entities as of June 30, 2004 that required disclosure or new
consolidation as a result of adopting the provisions of FIN 46 and FIN 46R. In April 2004, the Emerging Issues Task Force issued Statement No. 03-06
Participating Securities and the Two-Class Method Under FASB Statement No.
128, Earnings Per Share (EITF 03-06). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the Company when, and if, it
declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 is effective for fiscal periods beginning after
March 31, 2004. The EITF will not have an effect on the Companys financial
statements. In July 2004, EITF of the FASB reached a tentative conclusion on EITF
Issue No. 04-08, The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share, that would require the shares issuable under contingently
convertible debt to be included in diluted earnings per share computations
regardless of whether the contingency had been met. The current rules under
FASB Statement No. 128, Earnings Per Share, do not require inclusion of such
shares until the contingency has been met. If the EITFs tentative conclusion
is ratified by the FASB, the provisions are expected to be effective for
reporting periods ending after December 15, 2004. All prior period earnings per
share amounts presented would be restated to conform to the provisions of the
final EITF. Since such shares would have been anti-dilutive during the periods
that the convertible debt and warrants were outstanding, the EITF will not have
an effect on the Companys financial statements. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Capital Resources Cash, cash equivalents, and marketable securities totaled $8.5 million at
June 30, 2004, down from $9.5 million at December 31, 2003. 32




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June 30,2004
    
    2003(dollars in millions)Cash used in operating activities
    
    $
    (4.7
    )
    
    $
    (4.5
    )Cash used by investing activities
    
    
    (6.0
    )
    
    
    (0.7
    )Cash provided by (used in) financing activities
    
    
    3.9
    
    
    
    (0.4
    )
 Operating activities In the six months ended June 30, 2004, cash used in operating activities
was $4.7 million, an increase of $0.2 million compared to the six months ended
June 30, 2003. The use of cash was caused by $7.8 million in net loss and the
recognition of $2.4 million in revenue that was classified as deferred revenue,
off-set by a $3.6 million non-cash gain related to the change in fair value of
warrants to purchase common stock and conversion feature of the convertible
debt caused by the increase in the Companys share price. In addition non-cash
stock based compensation, depreciation and amortization, amortization and
write-off of debt discount and issuance cost, and the loss related to the
issuance of stock below fair market value related to the private placement in
March 2004 totaled $1.8 million increasing cash available from operations. In the six months ended June 30, 2003, cash used by operating activities
was $4.5 million. Use of cash stemmed principally from an operating loss of
$12.8 million offset by non-cash charges including the $1.9 million loss
related to non-cash stock-based compensation charges, $1.7 million related to
loss on early extinguishment of debt, $1.2 million restructuring charge, $0.9
million in depreciation and amortization, and $0.7 million related to bad debt
expense. Investing activities In the six months ended June 30, 2004, cash used by investing activities
was $6.0 million, primarily due to net purchases of short-term marketable
securities of $5.8 million. Capital expenditures were $ 0.2 million. In the six months ended June 30, 2003, cash used by investing activities
was $0.7 million. The decrease was primarily due to a net purchase of
short-term marketable securities of $0.8 million. Financing activities In the six months ended June 30, 2004, net cash provided by financing
activities was $3.9 million. This resulted from the issuance of 1.5 million
shares of common stock to an institutional investor on March 17, 2004 for $3.7
million. In the six months ended June 30, 2003, net cash used by financing
activities was $0.4 million. This primarily resulted from the payment of costs
associated with two financings completed on March 25 and March 26, 2003. 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 $7.0
million, and warrants to purchase 0.7 million shares of Company common stock.
The convertible notes were to 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. On March 25, 2003, the Company entered into Redemption, Amendment and
Exchange Agreements with the three institutional investors with whom it had
completed the private placement of convertible notes and warrants on December
31, 2002. The Company recorded a loss for the quarter ended June 30, 2003, on
the early extinguishment of the original convertible notes in the amount of
$1.7 million of which $0.7 related to the write-off of deferred loan costs. In
conjunction with the extinguishment, the Company paid $3.3 million, issued new
convertible notes in the principal amount of $2.7 million and issued $1.4
million shares of its common stock with a market value of $0.7 million. The
difference between (i) the carrying value of the outstanding convertible notes
exchanged and (ii) cash 33




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paid and the fair value of the common stock and new
convertible notes issued, amounted to $1.0 million and was included in the loss
on early extinguishment of debt. On March 26, 2003, Viewpoint Corporation entered into a Securities
Purchase Agreement with three other accredited investors, pursuant to which it
received $3.5 million in exchange for an aggregate of $3.5 million principal
amount of 4.95% subordinated notes and 3,614,756 shares of Viewpoint common
stock. The subordinated notes are scheduled to mature on March 31, 2006.
Interest on these notes is payable quarterly in arrears in cash. The Company
has the right at any time to redeem up to all of the outstanding notes at par
plus accrued and unpaid interest. The $3.5 million of proceeds was allocated to subordinated notes, common
stock, and additional paid in capital based on the market value of the
Companys common stock on March 26, 2003. In accordance with the provisions of
APB Opinion No. 21, the Company recorded a debt discount of $2.0 million. Debt
issuance costs, which amounted to $0.2 million, were recorded as other assets
in the Companys consolidated balance. The amortization of the discount on the
subordinated notes and debt issue costs totaled $0.1 million and $0.3 million
for the three and six months ended June 30, 2004, respectively, were accounted
for using the effective interest method. Interest on the convertible notes was 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. The new
convertible notes matured on December 31, 2007, unless earlier converted into
shares of Company common stock. The conversion price of the first $0.9 million
tranche of notes is $1.10. The conversion price of the second and third tranche
of notes is $1.00. Each tranche of the notes was convertible at the Companys election at any
time after May 20, 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. Pursuant to SFAS No. 133, the Company bifurcated the fair value of the
conversion options from the new 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 is an event outside of the control of the Company, pursuant
to EITF Issue No. 00-19, the Company recorded the fair value of the conversion
options as long-term liabilities, as it was assumed that the Company would be
required to net-cash settle the underlying securities. The Company recorded income or loss based on the decrease or increase,
respectively, in the fair values of the new conversion options and original
warrants in the Companys consolidated statements of operations. The
amortization of discount on the new convertible notes and debt issue costs were
accounted for using the effective interest method. On March 17, 2004, one of the institutional investors holding the
convertible notes converted $0.9 million of outstanding notes for shares of the
Companys common stock. In the first quarter of 2004, the Company recorded a
loss of $1.4 million related to the change in the fair value of the conversion
feature from January 1, 2004 through the date of the conversion. For the three
months ended March 31, 2004 the Company also recorded a loss related to a
change in the fair value of the conversion feature and warrants of $3.7 million
and $1.3 million, respectively. In addition, on the same day as the conversion, the Company sold 1.5
million shares of common stock in a private placement to the institutional
investor, for $3.7 million or $2.45 per share. The Company recorded a loss on
conversion of debt in the amount of $0.6 million, which represented the
write-off of unamortized loan discount and debt issuance costs of $0.1 million
and the difference between the proceeds received from the private placement and
the fair value of the common stock issued based upon the closing price of the
Companys stock on the day of the sale of $0.5 million. The remaining
noteholders chose not to exercise their right to redeem their notes in amount
up to 20% of the $3.7 million received by the Company within 10 days of the
Companys public announcement of the closing of the private placement. During
the period beginning on April 15, 2004 through May 20, 2004  a period
which covered 25 consecutive trading days  the dollar volume-weighted average
price of the Companys common stock exceeded 150% of the conversion price
applicable to the outstanding convertible notes and the Company determined to
exercise its right to convert the outstanding notes into shares of Company
common stock. Accordingly, on May 20, 2004, the Company 34




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informed the
institutional investors holding the outstanding convertible notes that it would
exercise its right to convert that debt. On June 18, 2004, the Company
completed the conversion of the remaining outstanding convertible notes of $1.8
million and the related outstanding interest into 1.7 million shares of
Viewpoint common stock. In the second quarter of 2004, the Company recorded a
gain of $2.3 million related to the change in the fair value of the conversion
feature during the period from April 1, 2004 through June 18, 2004, the date of
the conversion. The Company recorded a gain based on the change in the fair
values of the original warrants of $0.7 million, in the Companys consolidated
statements of operations for the three months ended June 30, 2004. In addition, the Company recorded a loss on conversion which represented
the difference between the fair value of the common stock issued in exchange
for the notes and the carrying value of the convertible notes on the date of
conversion. This change was primarily comprised of the write-off of
unamortized loan discount and debt issuance costs. In November 2003, the Company sold 3.0 million shares of common stock in a
private placement to Federal Partners, L.P., an affiliate of The Clark Estates,
Inc. for $2.5 million, or $0.80 per share. The noteholders chose not to
exercise their right to redeem their notes in an amount up to 20% of the $2.5
million received by the Company within 10 days of the Companys public
announcement of the closing of the private placement. In March 2004, the Company completed a private placement whereby it
directly issued 1.5 million shares of common stock to an institutional investor
who had participated in the March 2003 financing. The issuance was for an
aggregate purchase price of $3.7 million and did not require banking placement
fees. Additionally, prior to the completion of the private placement the
institutional investor exercised its right to convert approximately $0.9
million of Viewpoint convertible debt it had acquired in March 2003 into shares
of Viewpoint common stock. This conversion resulted in a non-cash loss on
conversion of share of $0.6 million. In May 2004, 25 consecutive trading days following April 15, 2004 where
the dollar volume-weighted average price of Company common stock exceeded 150%
of the conversion price applicable to the notes, the Company exercised its
right to convert the remaining outstanding convertible notes of $1.8 million
into shares of Viewpoint common stock. This conversion resulting in a non-cash
gain of $2.3 million related to the change in fair value of the conversion
feature caused by the decrease in the Companys stock price. The Company also
recognized a loss on conversion of $0.2 million related to the undiscounted
value of the note and the unamortized issuance cost. In October 2003, the Company entered into an amended license agreement
with AOL which provided for payments by AOL of $10.0 million. The agreement
contains multiple elements consisting of a perpetual broadcast license, a
perpetual source code license, quarterly updates to the source code through
December 2005, and maintenance and consulting services. The Company will
recognize revenue from this agreement ratably, through December 31, 2005, which
represents the duration of the Companys obligation for post-contract customer
support including quarterly upgrades and maintenance requirements. The Company implemented three restructuring plans in 2003. The first
plan, implemented in February 2003, reduced operating expenses by closing the
Companys Utah office and terminating 28 employees in that office who were
primarily engaged in sales and marketing activities. In accordance with SFAS
No. 146 Accounting for Costs Associated with Exit or Disposal Activities, the
Company recorded restructuring charges of $1.2 million on the income statement.
The restructuring charges represent the fair value of remaining lease
commitments reduced by estimated sublease rental income, employee severance and
termination benefits, the write-off of the net book value of certain fixed
assets used in the Utah office, and other miscellaneous charges. Subsequent to
the restructuring, the Company re-evaluated market conditions surrounding its
efforts to sub-lease the Utah office space and increased the restructuring
charge by $0.2 million related to the fair value of remaining lease commitments
reduced by estimated sublease rental income. The Company believes that it may
be necessary to adjust the estimate of sublease income in the future as the
ability to sublease the property is contingent upon real estate and other
market conditions in Utah. The second plan was implemented in September 2003, and was designed to
streamline the business. Under the plan the Company eliminated 24 research and
development, sales and marketing, and general and administrative positions.
The Company incurred a restructuring charge of $0.4 million related to
severance. The charge is recorded on the income statement as a restructuring
charge. The second restructuring plan was completed by September 30, 2003. 35




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The third plan was implemented in December 2003 and was designed to
consolidate international operations to the New York office. Accordingly the
Company closed the London, England office incurring a restructuring charge of
$0.1 million primarily related to severance. The charge is recorded on the
income statement as a restructuring charge. The third restructuring plan was
completed by December 31, 2003. 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
has contingency plans for 2004 if expected revenue targets are not achieved. These plans include further
workforce reductions as well as reductions in overhead and capital
expenditures. The Company may seek additional funds before that time through
public or private equity financing or from other sources to fund operations and
pursue a growth strategy. The Company has no commitment for additional
financing, and may experience difficulty in obtaining additional financing on
favorable terms, if at all. Any financing the Company obtains may contain
covenants that restrict freedom to operate the business or may have rights,
preferences or privileges senior to the Companys common stock and may dilute
the current shareholders ownership interest in Viewpoint. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to concentration of credit risk and interest rate
risk related to cash, cash equivalents and marketable securities. Credit risk
is managed by limiting the amount of 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 comprised 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 4. Controls and Procedures As required by Rule 13a-15(b), Viewpoint management, including the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation as of
the end of the period covered by this report, of the effectiveness of the
Companys disclosure controls and procedures as defined in Exchange Act Rule
13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures were effective as of the end of the period covered by this report.
As required by Rule 13a-15(d), Viewpoint management, including the Chief
Executive Officer and Chief Financial Officer, also conducted an evaluation of
the Companys internal control over financial reporting to determine whether
any changes occurred during the quarter covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. Based on that evaluation,
there has been no such change during the quarter covered by this report. 36




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PART II  OTHER INFORMATION 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number
    
    Exhibit Title31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1
    
    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 The Company filed a report on Form 8-K on May 5, 2004, to furnish its
press release concerning its results of operations for the quarterly period
ending on March 31, 2004. On June 23, 2004, the Registrant filed a report on Form 8-K reporting that
it exercised its right to convert the remaining outstanding convertible notes
of into shares of Viewpoint common stock, effective June 18, 2004. 37




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. VIEWPOINT CORPORATIONDated: August 13, 2004
    By:
    /s/ JAY S. AMATOJay S. AmatoPresident and Chief Executive Officer Dated: August 13, 2004
    By:
    /s/ WILLIAM H. MITCHELLWilliam H. MitchellChief Financial Officer Dated: August 13, 2004
    By:
    /s/ CHRISTOPHER C. DUIGNANChristopher C. DuignanChief Accounting Officer 38