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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  
 FORM 10-Q  [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 or [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from
 Commission file
number: 0-27168
   VIEWPOINT CORPORATION  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    95-4102687
(I.R.S. Employer Identification No.)
 498 Seventh Avenue, Suite 1810, New York, NY 10018
(Address of principal executive offices and zip code) (212) 201-0800
(Registrants telephone number, including area code)  
 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 May 10, 2004, 52,380,006 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  March 31, 2004
and December 31, 2003 (unaudited)
    
    
    3Consolidated Statements of Operations  Three months
ended March 31, 2004 and 2003 (unaudited)
    
    
    4Consolidated Statements of Cash Flows  Three months ended
March 31, 2004 and 2003 (unaudited)
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II - OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    
    
    35Signatures
    
    
    36CERTIFICATIONCERTIFICATIONCERTIFICATION
 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)
 March 31,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,065
    
    
    $
    8,530Marketable securities
    
    
    6,263
    
    
    
    958Accounts receivable, net of reserve of
$1,536 and $1,611, respectively
    
    
    396
    
    
    
    650Related party accounts receivable
    
    
    470
    
    
    
    914Prepaid expenses and other current assets
    
    
    576
    
    
    
    694Total current assets
    
    
    12,770
    
    
    
    11,746Restricted cash
    
    
    388
    
    
    
    388Property and equipment, net
    
    
    1,694
    
    
    
    1,859Goodwill, net
    
    
    31,276
    
    
    
    31,276Intangible assets, net
    
    
    221
    
    
    
    186Other assets, net
    
    
    258
    
    
    
    288Total assets
    
    $
    46,607
    
    
    $
    45,743LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    880
    
    
    $
    1,177Accrued expenses
    
    
    966
    
    
    
    1,094Deferred revenues
    
    
    400
    
    
    
    423Related party deferred revenues
    
    
    4,832
    
    
    
    4,952Accrued incentive compensation
    
    
    545
    
    
    
    545Current liabilities related to discontinued
operations
    
    
    231
    
    
    
    231Total current liabilities
    
    
    7,854
    
    
    
    8,422Deferred rent
    
    
    394
    
    
    
    400Related party deferred revenues
    
    
    3,480
    
    
    
    4,706Convertible notes
    
    
    5,787
    
    
    
    2,837Warrants to purchase common stock
    
    
    1,387
    
    
    
    110Subordinated notes
    
    
    1,928
    
    
    
    1,801Total liabilities
    
    
    20,830
    
    
    
    18,276Stockholders equity:Preferred stock, $.001 par value; 5,000
shares authorized - no shares
issued and outstanding at March 31,
2004 and December 31, 2003
    
    
    
    
    
    
    Common stock, $.001 par value; 75,000
shares authorized - 52,466
shares issued and 52,306 shares
outstanding at March 31,
2004, and 49,965 shares issued and
49,805 shares outstanding
at December 31, 2003
    
    
    52
    
    
    
    50Paid-in capital
    
    
    281,109
    
    
    
    274,351Deferred compensation
    
    
    (81
    )
    
    
    (275
    )Treasury stock at cost; 160 at March 31,
2004 and December 31, 2003
    
    
    (1,015
    )
    
    
    (1,015
    )Accumulated other comprehensive loss
    
    
    (75
    )
    
    
    (65
    )Accumulated deficit
    
    
    (254,213
    )
    
    
    (245,579
    )Total stockholders equity
    
    
    25,777
    
    
    
    27,467Total liabilities and stockholders
equity
    
    $
    46,607
    
    
    $
    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 EndedMarch 31,2004
    
    2003Revenues:Licenses
    
    $
    240
    
    
    $
    1,632Related party licenses
    
    
    907
    
    
    
    50Services
    
    
    1,523
    
    
    
    1,355Related party services
    
    
    914
    
    
    
    988Search advertising
    
    
    8
    
    
    
    Total revenues
    
    
    3,592
    
    
    
    4,025Cost of revenues:Licenses
    
    
    1
    
    
    
    47Services
    
    
    751
    
    
    
    1,176Total cost of revenues
    
    
    752
    
    
    
    1,223Gross profit
    
    
    2,840
    
    
    
    2,802Operating expenses:Sales and marketing (including non-cash stock-based compensation
charges totaling $19 and $265 for the three months ended March 31,
2004 and 2003, respectively
    
    
    1,051
    
    
    
    3,647Research and development (including non-cash stock-based compensation
charges totaling $68 and $333 for the three months ended March 31, 2004
and 2003, respectively
    
    
    932
    
    
    
    1,312General and administrative (including non-cash stock-based compensation
charges totaling $139 and$412 for the three months ended March 31, 2004
and 2003, respectively
    
    
    1,863
    
    
    
    2,351Depreciation
    
    
    219
    
    
    
    478Amortization of intangible assets
    
    
    3
    
    
    
    1Restructuring charges (release)
    
    
    (17
    )
    
    
    1,211Total operating expenses
    
    
    4,051
    
    
    
    9,000Loss from operations
    
    
    (1,211
    )
    
    
    (6,198
    )Other income (expense), net:Interest and other income; net
    
    
    19
    
    
    
    23Interest expense
    
    
    (250
    )
    
    
    (163
    )Changes in fair values of warrants to purchase common stock and
conversion options of convertible notes
    
    
    (6,603
    )
    
    
    1,424Loss on early extinguishment of debt
    
    
    
    
    
    
    (1,682
    )Loss on conversion of debt
    
    
    (598
    )
    
    
    Total other income (expense)
    
    
    (7,432
    )
    
    
    (398
    )Loss before provision for income taxes
    
    
    (8,643
    )
    
    
    (6,596
    )Provision for income taxes
    
    
    10
    
    
    
    Net loss from continuing operations
    
    
    (8,653
    )
    
    
    (6,596
    )Adjustment to net loss on disposal of discontinued operations, net of tax
    
    
    19
    
    
    
    90Net loss
    
    $
    (8,634
    )
    
    $
    (6,506
    )Basic and diluted net loss per common share:Net loss per common share from continuing operations
    
    $
    (0.17
    )
    
    $
    (0.16
    )Net loss per common share
    
    $
    (0.17
    )
    
    $
    (0.16
    )Weighted average number of shares outstanding  basic and diluted
    
    
    50,215
    
    
    
    41,365
 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)
 Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (8,634
    )
    
    $
    (6,506
    )Adjustments to reconcile net loss to net cash used in
operating activities:Non-cash stock-based compensation charges
    
    
    226
    
    
    
    1,010Restructuring charges (release)
    
    
    (17
    )
    
    
    1,211Depreciation and amortization
    
    
    222
    
    
    
    479Provision for bad debt
    
    
    3
    
    
    
    (75
    )Changes in fair values of warrants to purchase common stock and
conversion feature of convertible debt
    
    
    6,603
    
    
    
    (1,424
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    1,682Amortization of debt discount and issuance costs
    
    
    150
    
    
    
    79Loss on conversion of debt
    
    
    598
    
    
    
    Changes in operating assets and liabilities, net of
acquisitions:Accounts receivable
    
    
    251
    
    
    
    (77
    )Related party accounts receivable
    
    
    444
    
    
    
    54Prepaid expenses
    
    
    118
    
    
    
    (183
    )Accounts payable
    
    
    (297
    )
    
    
    (598
    )Accrued expenses
    
    
    (117
    )
    
    
    (246
    )Due to/from related parties
    
    
    
    
    
    
    72Deferred revenues
    
    
    (23
    )
    
    
    49Related party deferred revenues
    
    
    (1,346
    )
    
    
    (130
    )Net cash used in operating activities
    
    
    (1,819
    )
    
    
    (4,603
    )Cash flows from investing activities:Proceeds from sales and maturities of marketable securities
    
    
    950
    
    
    
    875Purchases of marketable securities
    
    
    (6,255
    )
    
    
    (1,366
    )Unrealized loss on short-term investments
    
    
    (7
    )
    
    
    Net decrease in restricted cash
    
    
    
    
    
    
    424Purchases of property and equipment
    
    
    (54
    )
    
    
    (277
    )Sale of property and equipment
    
    
    
    
    
    
    7Purchases of patents and trademarks
    
    
    (38
    )
    
    
    (11
    )Net cash used in investing activities
    
    
    (5,404
    )
    
    
    (348
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    3,675
    
    
    
    Proceeds from issuance of subordinated notes and common stock
    
    
    
    
    
    
    3,500Repayment of convertible notes
    
    
    
    
    
    
    (3,300
    )Payment of issuance costs on convertible notes
    
    
    
    
    
    
    (418
    )Proceeds from exercise of stock options
    
    
    86
    
    
    
    Net cash provided by (used in) financing activities
    
    
    3,761
    
    
    
    (218
    )Effect of exchange rates changes on cash
    
    
    (3
    )
    
    
    (8
    )Net decrease in cash and cash equivalents
    
    
    (3,465
    )
    
    
    (5,177
    )Cash and cash equivalents at beginning of year
    
    
    8,530
    
    
    
    10,678Cash and cash equivalents at end of year
    
    $
    5,065
    
    
    $
    5,501
 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) Three Months EndedMarch, 312004
    
    2003Supplemental disclosure of cash flow activities:Cash paid during the year for income taxes
    
    $
    10
    
    
    $
    13Cash paid during the year for interest
    
    
    10
    
    
    
    Supplemental disclosure of non-cash investing
and financing activities:Issuance of common stock in repayment of convertible notes
    
    $
    926
    
    
    $
    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
    
    
    
    
    
    
    281Unrealized gains (losses) on marketable securities
    
    
    
    
    
    
    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 months ended March
31, 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 $11.3
million at March 31, 2004. During the three months ended March 31, 2004, net
cash used in operations amounted to $1.8 million. Viewpoint has had
significant quarterly and annual operating losses since its inception, and as
of March 31, 2004, had an accumulated deficit of $254.2 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. 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 obtained 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 three sources: (a) software
licenses, (b) services, and (c) search advertising. License revenues are
generated from licensing the rights to use the Companys products directly to customers
and
indirectly through Value Added Resellers (VARs). Service revenues are
generated from fee-based professional services, customer support services
(maintenance arrangements), and 7




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 uses the Viewpoint Toolbar. 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 our 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, we use 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. 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 8




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS evaluate probability of collection. Our 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, net loss and net loss per common
share would approximate the following (in thousands, except per share amounts): Three Months EndedMarch, 312004
    
    2003Net loss, as reported
    
    $
    (8,634
    )
    
    $
    (6,506
    )Add: Non-cash stock-based employee
compensation charges included in reported
net loss, net of related tax effects
    
    
    185
    
    
    
    723Deduct: Non-cash stock-based employee
compensation charges determined under
fair value based method for all awards, net of
related tax effects
    
    
    (858
    )
    
    
    (1,962
    )Pro forma net loss
    
    $
    (9,307
    )
    
    $
    (7,745
    )Net loss per share:Basic and diluted as reported
    
    $
    (0.17
    )
    
    $
    (0.16
    )Basic and diluted pro forma
    
    $
    (0.19
    )
    
    $
    (0.19
    )
 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. Basic and Diluted Net Loss Per Common Share Basic net loss per common share is computed using the weighted average
number of shares outstanding and diluted net loss per common share is computed
using the weighted average number of shares of common and common equivalent
shares outstanding. Common equivalent shares related to stock options and
warrants totaling 7.7 million and 2.1 for the three months ended March 31, 2004
and 2003, respectively, are excluded from the computation of diluted net loss
per common share because their effect was anti-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 placements the institutional investor converted $0.9 million of
outstanding notes and received 0.9 million shares of Company common stock in
the exchange. 9




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Derivatives The Company accounts for the fair values of 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 At its March 31, 2004
meeting, the FASB ratified the consensuses reached by the Emerging
Issues Task Force in EITF Issue No. 03-6 (EITF 03-6),
Participating Securities and the Two-Class Method under FASB
Statement No. 128, Earnings per Share. EITF 03-6
concludes that a forward contract to issue an entitys own shares
that has a provision that reduces the contract price per share when
dividends are declared on the issuing entitys common stock is a
participating security, and therefore, earnings per share must be
calculated using the two-class method under FASB Statement
No. 28. EITF 03-6 must be applied in the first reporting
period beginning after March 31, 2004, by restating previously
reported earnings per share to apply the two-class method to any
participating securities that were outstanding for any period
presented in comparative financial statements. We are currently
assessing the impact of EITF 03-6 on our earnings per share
calculation. SFAS No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits, was revised in December 2003. The provisions of this
statement do not change the measurement and recognition provisions of previous
statements, but adds disclosures about retirement plan assets, employer
obligations, key assumptions in these measurements and the measurement date(s)
used to determine pensions and other postretirement benefit measurements that
make up at least the majority of plan assets and benefit obligations. These
provisions are effective for annual and interim financial statements for
periods beginning after December 15, 2003. The adoption of this statement as
of January 1, 2004 did not have a significant impact on the Companys financial
statements. 2. 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. When evaluating
goodwill for potential impairment, the Company first compares the fair value of
the reporting unit, based on market values of the reporting unit or on the
present value of estimated future cash flows, with its carrying amount. If the
estimated fair value of the reporting unit is less than its carrying amount, an
impairment loss calculation is prepared. The impairment loss calculation
compares the implied fair value of the reporting unit goodwill with the
carrying amount of that goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess. All other intangible assets will
continue to be amortized over their estimated useful lives and assessed for
impairment under SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. During the three months ended March 31, 2004, the market value of the
Companys equity securities did not decline below the Companys book value. During the three months ended March 31, 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 March 31, 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 months ended March 31, 2004, are as follows (in thousands): 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
    
    
    $
    31,497
 The changes in the carrying amounts of goodwill and intangible assets for
the three months ended March 31, 2003, are as follows (in thousands): 10




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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
    
    
    $
    31,451
 As of March 31, 2004 and December 31, 2003, the Companys intangible
assets and related accumulated amortization consisted of the following (in
thousands): March 31, 2004
    
    December 31, 2003Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    Amortization
    
    Net
    
    Gross
    
    Amortization
    
    NetPatents and Trademarks
    
    $
    234
    
    
    $
    (13
    )
    
    $
    221
    
    
    $
    196
    
    
    $
    (10
    )
    
    $
    186Total Intangible Assets
    
    $
    234
    
    
    $
    (13
    )
    
    $
    221
    
    
    $
    196
    
    
    $
    (10
    )
    
    $
    186
 Amortization of patents and trademarks is estimated to be $10,000 a year
for the next five years. 3. 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.
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 satisfied certain financial and other conditions. 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. The Company was required to provide registration rights under the
Securities Act of 1933 for shares of Company common stock covering (i) the
conversion of $7.0 million in principal, (ii) 0.7 million warrants, and (iii)
any potential payment of interest in the form of common stock. The convertible notes defined several events of default, including but not
limited to: (i) failure of the Companys registration statement to be declared
effective by the Securities and Exchange Commission (SEC), (ii) delisting
from The NASDAQ National Market or other national exchange, (iii) change in
control, (iv) event of conversion default such as lack of authorized capital,
(v) event of bankruptcy, (vi) failure to pay principal and interest on the
convertible notes when payments become due, (vii) judgments against the Company
in excess of $1.0 million and (viii) material breach of any representation,
warranty, covenant or other term. Upon an event of default, the convertible
notes would immediately become due and payable, after a grace period to cure
the default lapsed. Pursuant to SFAS No. 133 Accounting for Derivative Instruments and
Hedging Activities, the Company bifurcated the fair value of the conversion
options from the convertible notes since the conversion options were determined
to not be clearly and closely related to the debt host. In addition, since the
effective registration of the securities underlying the conversion options and
warrants was an event outside of the control of the Company, pursuant to EITF
Issue No. 00-19, the Company recorded the fair value of conversion options and
warrants as long-term liabilities, as it was assumed that the Company will be
required to net-cash settle the underlying securities. The fair values of the
convertible notes, conversion options, and warrants of $5.5 million, $1.1
million, and $0.3 million,
respectively, were determined by the Company using the following
assumptions: a 20% discount on the Companys common stock price, a credit
spread of 20% over LIBOR rates at December 31, 2002, and an annualized stock
volatility of 46%. Debt issuance costs, were recorded as other assets in the
Companys consolidated balance sheets, in accordance with APB Opinion No. 21
Interest on Receivables and Payables. The amortization of discount on the
convertible notes and debt issue costs were accounted for in accordance with
the provisions of APB Opinion No. 21, which requires amortization of the
discount and debt issue costs using the effective interest method. On February 28, 2003, the Company received notices of default from two of
the three investors. The notices alleged that the Company was in default of
the notes because it had breached certain representations and warranties in the
Securities Purchase Agreement. 11




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##### Table of Contents



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Pursuant to these agreements, the notice of default was withdrawn
and Viewpoint redeemed an aggregate of $3.3 million principal amount of the
outstanding convertible notes, exchanged an aggregate of $1.0 million principal
amount of the outstanding convertible notes for shares of Viewpoint common
stock at $0.74 per share, and exchanged the remaining $2.7 million principal
amount of outstanding convertible notes for $2.7 million principal amount of
new convertible notes. The convertible notes were issued in three tranches of
$0.9 million each and are scheduled to mature December 31, 2007. The warrants
to purchase 0.7 million shares of Company common stock, which were issued to these
investors on December 31, 2002, remain outstanding. Based on the provisions of SFAS No. 133 and EITF Issue No. 00-19, the
Company recorded income based on the change in the fair value of the conversion
options of the original convertible notes as of March 24, 2003, which amounted
to $1.1 million, in the Companys consolidated statements of operations for the
three months ended March 31, 2003. In accordance with the provisions of APB Opinion No. 26 Early
Extinguishment of Debt, and EITF Issue No. 96-19 Debtors Accounting for a
Modification or Exchange of Debt Instruments, the Company recorded a loss for
the quarter ended March 31, 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. The Company charged the loss on early extinguishment of debt to operations
as such loss did not qualify for classification as extraordinary based on the
provisions of SFAS No. 145 Rescission of FASB Statements No. 4, 44, and 64,
Amendment of , and Technical Corrections, and APB 30 Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Interest on the new convertible notes is payable quarterly in arrears in
cash or, at the option of the Company, in shares of Company common stock
provided the Company satisfies certain financial and other conditions. If
interest is paid in shares of Company common stock, the number of shares to be
issued shall be calculated by dividing the interest payable by 95% of the
arithmetic average of the dollar volume-weighted average price of Company
common stock on each of the five consecutive trading days immediately preceding
the interest payment date. The new convertible notes mature on December 31,
2007, unless earlier converted into shares of Company common stock. The
conversion price of the first, second, and third tranche were determined on the
basis of the arithmetic average of the dollar volume-weighted average price of
Company common stock for the ten trading days following May 16, 2003, August
16, 2003, and November 16, 2003, respectively, in each case subject to a
minimum conversion price of $1.00 and a maximum conversion price of $2.26. 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. At the noteholders option, up to 20% of the net proceeds from any new
capital raised by the Company may be used to redeem outstanding notes at par
plus accrued interest. Each
tranche of the notes is redeemable by the investors at any time on
or after June 30, 2004 in cash at par plus accrued and unpaid interest if the
dollar volume-weighted average price of Company common stock is less than the
conversion price applicable to the notes for any 25 consecutive trading
days. Each tranche of the notes is redeemable by the investors at any time
after December 31, 2005, in cash at 83% of par plus accrued and unpaid interest
if the dollar volume-weighted average price of Company common stock is less
than the conversion price applicable to the notes for any 25 consecutive
trading days following December 31, 2005. If the investors redeem their
convertible notes, up to 20% of the amount to be redeemed may, at the Companys
option, be paid in shares of Company common stock, and said payment would be at
95% of the dollar volume-weighted average price of Company common stock for the
20 consecutive trading days immediately preceding payment. The Company has the right at any time to redeem up to all of the
outstanding notes at par plus accrued and unpaid interest. Concurrently with
any such redemption, the Company is required to deliver to the investors 12




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS warrants, with an exercise price of $2.26 and a term equal to the remaining
term of the notes being redeemed, to subscribe for a number of shares of common
stock equal to 100% of the principal amount being redeemed divided by the
conversion price of the notes then in effect. Each tranche of the notes is 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. The investors could have required the Company to sell to the investors an
additional 4.95% convertible notes having an aggregate principal amount of up
to $2.8 million, and warrants to purchase up to 290,533 shares of Company
common stock. This right expired unexercise on January 14, 2004. The Company was required to file a registration statement by April 14,
2003, covering the resale of the shares of common stock issued to the investors
in exchange for the $1.0 million principal of convertible notes, the shares of
common stock issuable to the investors upon the conversion of the notes, the
shares of common stock underlying the warrants issued and to be issued, and any
shares of common stock that may be issued as payment of interest on the notes.
The Company was required to pay cash penalties if the registration statement
was not declared effective by June 30, 2003. The registration statement was
declared effective July 14, 2003, and the Company was required to pay penalties
of $0.2 million in 2003. 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 is assumed that the Company will be
required to net-cash settle the underlying securities. The fair values of the
new convertible notes and conversion options were determined by the Company
using the following assumptions: the Companys common stock price at March 25,
2003, a credit spread of 30% over LIBOR rates at March 25, 2003, and an
annualized stock volatility of 65%. The value of the new convertible notes and
conversion options of $2.4 million and $0.4 million, respectively were recorded
as long-term liabilities in the Companys consolidated balance sheets at
December 31, 2003. Debt issuance costs, net of amortization, amounted to
$0.1 million and were recorded as other assets in the Companys consolidated balance
sheets, in accordance with APB Opinion No. 21 at December 31, 2003. Based on the provisions of SFAS No. 133 and EITF Issue No. 00-19, 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
totaling $0.1 million 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. The Company recorded a loss of $1.4 million related to
the change in the fair value of the conversion feature at the time of the
conversion. 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
common stock on the day of the sale in the amount of $0.5 million. The remaining noteholders chose not to exercise
their right to redeem their notes in an 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. In
November 2003, the Company sold 3.1 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. Based on the provisions of SFAS No. 133 and EITF Issue No. 00-19, the
Company recorded a loss based on the change in the fair values of the remaining
conversion options and original warrants of $4.0 million and
$1.3 million, respectively, in
the Companys consolidated statements of operations for the period ended March
31, 2004. The amortization of discount on the convertible notes and debt issue
costs were accounted for using the effective interest method. The fair value
of the remaining convertible notes and remaining conversion options of $1.6
million and $4.2 million, respectively, are recorded as long-term liabilities
in the Companys consolidated balance sheets at March 31, 2004. 13




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Debt issuance
costs are recorded as other assets in the Companys consolidated balance sheets
at March 31, 2004 and are being amortized through December 2007. 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 notes
contain certain events of default, including, but not limited to: (i) failure
to pay principal and interest on the notes when payments become due, (ii)
judgments against the Company in excess of $1.0 million, (iii) event of
bankruptcy, and (iv) material breach of representations, covenants or other
terms. Upon an event of default, the notes will become immediately due and
payable. The Company filed a registration statement covering the resale of the
issued shares on May 9, 2003, which was declared effective by the SEC on July
30, 2003. 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 totaling $0.1 million for the period
ended December 31, 2004, were accounted for using the effective interest
method. 4. Related Party Transactions During the three months ended March 31, 2004 the Company recorded revenues
totaling $2.0 million, related to agreements with America
Online, Inc. (AOL) that were entered into
prior to December 31, 2003. Through
December 10, 2003, the date on which the Company held its 2003
annual meeting of stockholders, an employee of AOL served on the
Board of Directors of the Company.
In December 2003, the Directors term expired. Accordingly, revenue
associated with contracts entered into with AOL after December 31, 2003 are
treated as third party revenue. Revenue for the first quarter of 2004 that was
associated with contracts entered into with AOL after December 31, 2003
amounted to $0.2 million, and have been recorded as third party revenue. As
of March 31, 2004, the Company had $0.4 million in accounts receivable
relating to transactions with AOL for contracts entered into with AOL prior to
December 31, 2003, who had a
representative on the Companys Board of Directors at the time the contract was
signed. The Company also had $0.1 million
relating to transactions with Computer Associates Inc.
(CA) who had a representative on the
Companys Board of Directors. In addition the Company had $8.3 million in deferred revenues relating
to transactions with AOL for contracts entered into with AOL prior to December
31, 2003. The Company had no significant accounts receivable or deferred
revenue relating to contracts that were entered into with AOL after 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. License revenues will represent $7.8
million of this $9.0 million portion of the revenue arrangement. Of the
remaining $1.0 million, $0.8 million represents
maintenance on the broadcast license which will be recognized over 12
months beginning in the third quarter of 2004. The remaining $0.2 million
represents pre-payments for services, which will be recognized as the services
are provided. In the first quarter of 2004, the company recognized $0.9
million in related party license revenue and $0.2 million in related party
service revenue relating to this agreement. At March 31, 2004, $8.1 million
remained in related party deferred revenue related to this transaction. 14




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##### Table of Contents



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the three months ended March 31, 2003, the Company recorded related
party revenues totaling $1.0 million 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. 5. 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
our estimate of sublease income in the future as our ability to sublease the
property in Utah is contingent upon real estate and other market conditions in
Utah. The restructuring reserve activity for the first plan for the three months
ended March 31, 2004 was as follows (in thousands): EmployeeSeverance andTermination
    
    Asset
    
    Miscellaneous
    
    RestructuringLease Costs
    
    Benefits
    
    Write-offs
    
    Charges
    
    AccrualRestructuring and impairment charges atDecember 31, 2003
    
    $
    508
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    508Cash paid
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30
    )Restructuring charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-cash charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at March 31, 2004
    
    $
    478
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    478
 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 our 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 is as follows
(in thousands): EmployeeSeverance andTermination
    
    RestructuringBenefits
    
    AccrualRestructuring and impairment charges atDecember 31, 2003
    
    $
    156
    
    
    $
    156Cash paid
    
    
    (140
    )
    
    
    (140
    )Additional restructuring charges
    
    
    
    
    
    
    Non-cash adjustments
    
    
    (16
    )
    
    
    (16
    )Balance at March 31, 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 15




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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.
The third restructuring plan was completed by December 31, 2003. EmployeeSeverance andTermination
    
    RestructuringBenefits
    
    AccrualRestructuring and impairment charge atDecember 31, 2003
    
    $
    52
    
    
    $
    52Cash paid
    
    
    (52
    )
    
    
    (52
    )Balance at March 31, 2004
    
    $
    
    
    
    $
    
 6. Comprehensive Loss Total comprehensive loss for the three months ended March 31, 2004 and
2003 consisted of the following (in thousands): Three Months EndedMarch, 312004
    
    2003Net loss
    
    $
    (8,634
    )
    
    $
    (6,506
    )Foreign currency translation adjustment
    
    
    (3
    )
    
    
    (8
    )Unrealized gain (loss) on marketable securities
    
    
    (7
    )
    
    
    1Comprehensive net loss
    
    $
    (8,644
    )
    
    $
    (6,513
    )
 7. 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. 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. 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 March 31, 2004, the Company did not have employees
dedicated to the Search advertising segment. 16




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##### Table of Contents



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Months EndedMarch 31,2004
    
    2003Revenues:Licenses
    
    $
    240
    
    
    $
    1,632Related party licenses
    
    
    907
    
    
    
    50Services
    
    
    1,523
    
    
    
    1,355Related party services
    
    
    914
    
    
    
    988Search advertising
    
    
    8
    
    
    
    Total revenues
    
    
    3,592
    
    
    
    4,025Cost of Revenues:Licenses
    
    
    1
    
    
    
    47Services
    
    
    751
    
    
    
    1,176Total cost of revenues
    
    
    752
    
    
    
    1,223Gross profit
    
    
    2,840
    
    
    
    2,802Licenses
    
    
    1,146
    
    
    
    1,635Services
    
    
    1,686
    
    
    
    1,167Search advertising
    
    
    8
    
    
    
    Total gross profit
    
    $
    2,840
    
    
    $
    2,802Gross profit marginLicenses
    
    
    100
    %
    
    
    97
    %Services
    
    
    69
    
    
    
    50Search advertising
    
    
    100
    
    
    
    Total gross profit
    
    
    79
    %
    
    
    70
    %
 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 significant in evaluating performance. 17




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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. 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. Viewpoint also offers an online advertising campaign management and
deployment product known as Creative Innovator. Creative Innovator permits
publishers, advertisers, and their agencies to manage the process of deploying
online advertising campaigns. This process includes creating the advertising
assets, 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. Creative Innovator enables users to manage advertising
campaigns across many sites. In March 2004, Viewpoint announced the
availability of AirTime, an extension of Creative Innovator that permits
users to manage and deploy online video advertising campaigns. Until December 1999, the Company was primarily engaged in the development,
marketing, and sales of pre-packaged software graphics products. Its principal
products were computer graphics painting tools and photo imaging software.
With its acquisition of Real Time Geometry Corporation in December 1996, the
Company became involved, on a limited basis, in the development of technologies
designed to make practical the efficient display and deployment of rich media
on the Internet. In June 1999, the Company formed Metastream Corporation to
operate a business exploiting these technologies. In December 1999, the Board
of Directors of the Company approved a plan to focus exclusively on the
Internet technologies of Metastream and to correspondingly divest the Company
of all its pre-packaged software business. The Company discontinued these
operations in April 2000 and Metastream merged with and into the Company in
November 2000. 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 18




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##### Table of Contents



professional services. 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 March 31,
2004, had an accumulated deficit of $254.2 million. Viewpoints prospects must
be considered in light of the risks and difficulties frequently encountered by
early stage technology companies. There can be no assurance that Viewpoint
will achieve or sustain profitability. 19




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##### Table of Contents



RESULTS OF OPERATIONS The following table sets forth for the three months ended March 31, 2004
and 2003, the Companys consolidated statements of operations expressed as a
percentage of total revenues for the periods indicated: Three Months EndedMarch 31,2004
    
    2003Statements of Operations DataRevenues:Licenses
    
    
    7
    %
    
    
    41
    %Related party licenses
    
    
    26
    
    
    
    1Services
    
    
    42
    
    
    
    34Related party services
    
    
    26
    
    
    
    24Search
    
    
    
    
    
    
    Total revenues
    
    
    100
    
    
    
    100Cost of revenues:Licenses
    
    
    0
    
    
    
    1Services
    
    
    21
    
    
    
    29Total cost of revenues
    
    
    21
    
    
    
    30Gross profit
    
    
    79
    
    
    
    70Operating expenses:Sales and marketing (including non-cash stock-based
compensation charges)
    
    
    29
    
    
    
    91Research and development (including non-cash stock-based
compensation charges)
    
    
    26
    
    
    
    33General and administrative (including non-cash stock-based
compensation charges)
    
    
    53
    
    
    
    59Depreciation
    
    
    6
    
    
    
    12Restructuring charges related to office closure
    
    
    
    
    
    
    31Total operating expenses
    
    
    114
    
    
    
    226Loss from operations
    
    
    (35
    )
    
    
    (156
    )Other income (expense):Interest and other income, net
    
    
    1
    
    
    
    1Interest expense
    
    
    (7
    )
    
    
    (4
    )Changes in fair values of warrants to purchase common stock and
conversion options of convertible notes
    
    
    (183
    )
    
    
    36Loss on early extinguishment
    
    
    
    
    
    
    (41
    )Loss on conversion
    
    
    (17
    )
    
    
    Other income
    
    
    (206
    )
    
    
    (8
    )Loss before provision for income taxes
    
    
    (241
    )
    
    
    (164
    )Provision for income taxes
    
    
    0
    
    
    
    Net loss from continuing operations
    
    
    (241
    )
    
    
    (164
    )Adjustment to net loss on disposal of discontinued operations
    
    
    1
    
    
    
    2Net loss
    
    
    (240
    )%
    
    
    (162
    )%
 20




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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 principals generally accepted in
the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, the Company
evaluates its critical accounting policies and estimates, including those
related to revenue recognition and goodwill and other intangible assets. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances though actual results
may differ from these estimates under different assumptions or conditions. For
a complete description of the Companys accounting policies, see Note 2 to the
consolidated financial statements included in our 2003 Annual Report on Form
10-K/A. Described below are the areas where we believe that the estimates,
judgments or assumptions that we have made, if different, would have yielded
the most significant differences in our financial statements: Percentage of Completion 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. 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 options of convertible notes. Financial Results Viewpoint reported total revenue of $3.6 million for the first quarter
2004 compared to $4.0 million for the first quarter 2003. Operating loss for
the first quarter of 2004 was $1.2 million compared to $6.2 million in the
first quarter of 2003. The improvement in operating loss compared to the first
quarter 2003 resulted principally from the cost controls initiated by
management during 2003, a reduction in restructuring charges of $1.2 million
and a decrease in non-cash stock-based compensation of $0.8 million. 21




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Net loss for the first quarter 2004 was $8.6 million, or $(0.17) per
share, compared to a net loss of $6.5 million, or $(0.16) per share, in the
first quarter of 2003. The net loss in the first quarter of 2004 included
non-cash expenses of $7.2 million to recognize the impact of the Companys
increased stock price on its outstanding convertible debt and warrant
financing, and the expense related to the conversion of $0.9 million of
convertible debt in March 2004. In March, 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 resulting in a non-cash loss on
conversion of share of $0.6 million. Viewpoints cash, cash equivalents, and marketable securities as of March
31, 2004 were $11.3 million. This can be compared to cash, cash equivalents,
and marketable securities of $9.5 million at December 31, 2003. The increase in cash, cash equivalents, and marketable
securities can be attributed to the private placement, which was completed in
March 2004, offset by the Companys operating loss. Revenues Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Revenues:Licenses
    
    $
    240
    
    
    $
    1,632
    
    
    
    (85
    )%Related party licenses
    
    
    907
    
    
    
    50
    
    
    
    1,714Services
    
    
    1,523
    
    
    
    1,355
    
    
    
    12Related party services
    
    
    914
    
    
    
    988
    
    
    
    (7
    )Search
    
    
    8
    
    
    
    
    
    
    
    N/ATotal revenues
    
    $
    3,592
    
    
    $
    4,025
    
    
    
    (11
    )%
 On March 17, 2004 Viewpoint entered the internet search business. The
Company did this by launching its Viewpoint Toolbar on a test basis during
March 2004. While the Company didnt begin to consistently deliver Viewpoint
Toolbar 1.0 until April 2004, Viewpoint Toolbars delivered to customers during
the March testing period generated revenue. 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 rate
advertisers pay for those advertisements. The Company expects this source of
revenue to be more substantial beginning in the second quarter of 2004. Prior to 2004 the Company generated revenues by selling licenses to the
Viewpoint graphical platform principally to internet content publishers.
Licenses were generally at least 15 months in duration, although some licenses
were sold on a project basis. Revenues were usually recognized upon the
completion of the sales and delivery process so long as all other revenue
recognition criteria was satisfied. The Company then supplemented its license
revenue by providing content development services to licensees. The service
revenues were recognized on a percentage of completion basis. During 2004 the Company continues to recognize most license sales upon
delivery so long as all other revenue recognition criteria is satisfied.
Licenses now are generally sold for a 12 month period. The Company adopted a
new
licensing price structure in 2004 whereby larger license sales, that are
made less frequently, contain multiple elements and include post contract
support and product upgrades for a period of 12 months. These license sales
will be separated by element with the residual value being amortized over a 12
month period. Service revenue continues to be recognized on a percentage of
completion 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. 22




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##### Table of Contents



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 our software. This enabled the customers to understand the
softwares capabilities before they committed to larger and longer license
purchase. These limited use projects are generally for services as the Company
develops content for the customers to use with our software. As the Company
has been migrating its sales efforts towards these larger customers with a
longer license sales cycle, we have 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 our 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 we make at the entry level, or sell larger and longer
licenses to our larger customers we may not be able to reverse our decline in
License revenues. License revenues of $0.2 million decreased approximately $1.4 million or
85% for the three months ended March 31, 2004 compared to the same period last
year. License revenues in 2004 were essentially generated from sales to smaller
licensees using the new licensing pricing schedule that the Company adopted in
January 2004. The Company sold one license that was greater than $50,000 during
the first quarter of 2004. Conversely, the Company sold seven licenses for more
than $50,000 totaling $1.5 million during the first quarter of 2003. 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 our
headquarters. It also has 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 increased approximately
$0.9 million, or 1,714%, for the three months ended March 31, 2004 compared to
the same period last year. During the first quarter of 2003 an AOL employee was
also a Director of our 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 are treated as related party revenue. The
increase in related party license revenues stems from the Companys contract
with America Online, Inc. (AOL) executed in October 2003, In October 2003,
the Company entered into an amended license agreement with AOL which provided
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. License revenues will represent $7.7 million of this
$9.0 million portion of the revenue arrangement. No payments were due from AOL
under the previous license agreement in accordance with the contract in effect
during the three months ended March 31, 2003. Service revenues of $1.5 million increased approximately $0.2 million or
12% for the three months ended March 31, 2003 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
America Online are also included in this category as America Online ceased
being a related party in December 2003. Revenues for contracts with AOL
executed after December 2003 are treated as non-related party revenue. Related party service revenues of $0.9 million decreased by approximately
$0.1 million or 7% for the three months ended March 31, 2004 compared to the
same period last year. During the first quarter of 2003 an AOL employee was
also a Director of our Company. This employees term as Director ended in
December 2003.
Accordingly, revenue associated with contracts entered into prior to January
2004 are treated as related party revenue. Revenue increased principally due to
additional support services provided to AOL associated with the October 2003
contract. The Company continues to perform certain content development services
for AOL on contracts signed prior to January 2004. 23




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##### Table of Contents



Cost of revenues Three Months EndedMarch 31,2004
    

2003
    
    % Change(dollars in thousands)Cost of Revenues:Licenses
    
    $
    1
    
    
    $
    47
    
    
    
    (98
    )%Percentage of Licenses Revenues
    
    
    
    %
    
    
    3
    %Services
    
    $
    751
    
    
    $
    1,176
    
    
    
    (36
    )%Percentage of Services Revenues
    
    
    31
    %
    
    
    50
    %
 Cost of revenues consists primarily of commissions to VARs for licenses
and salaries, consulting fees and overhead for those who provide fee-based
content creation and engineering professional services for services. The
decrease in cost of license revenues is attributable to a decrease in sales to
VARs that require commission payments. The decrease in cost of services
revenues 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.
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, in our services group. The reduction in cost
of revenues attributable to licenses was due to the reduction in sales made by
VARs during 2003. Sales and marketing (including non-cash stock-based compensation charges
totaling $19 and $265 for the three months ended March 31, 2004 and 2003,
respectively) Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Sales and Marketing
    
    $
    1,051
    
    
    $
    3,647
    
    
    
    (71
    )Percentage of total revenues
    
    
    29
    %
    
    
    91
    %
 Sales and marketing expenses include salaries and benefits, sales
commissions, non-cash stock-based compensation charges, consulting fees, and
travel and entertainment expenses for our sales and marketing personnel. Sales
and marketing expenses also include the cost of programs aimed at increasing
revenue, such as advertising, trade shows, and public relations. Sales and marketing expenses decreased by $2.6 million or 71% for the
three months ended March 31, 2004 compared to the same period last year due to
a decrease in personnel in the sales and marketing area. Personnel costs
decreased by $1.6 million due to a reduction in sales staff associated with
slower license sales, and a change in marketing emphasis and support. Travel
and entertainment expenses decreased by $0.2 million due to the decrease in
sales staff and consulting expenses associated with supporting the sales and
marketing area decreased by $0.5 million due to slower license sales activity.
Finally, non-cash stock-based compensation charges decreased $0.2 million due
to headcount reductions in marketing and creative service 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. 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. Research and development (including non-cash stock-based compensation charges
totaling $68 and $333 for the three months ended March 31, 2004 and 2003,
respectively) Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Research and development
    
    $
    932
    
    
    $
    1,312
    
    
    
    (29
    )%Percentage of total revenues
    
    
    26
    %
    
    
    33
    %
 24




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##### Table of Contents



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 called Creative Innovator,
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 Creative
Innovator product that is used to deploy advertising to publisher sites on the
internet. Research and development expenses decreased by $0.4 million or 29% for the
three months ended March 31, 2004 compared to the same period last year. The
most significant decrease came in non-cash stock-based compensation which
decreased $0.3 million. Salary and fringe costs associated with a small
reduction in staff size of the research and development department contributed
to the remainder of the decrease. General and administrative (including non-cash stock-based compensation charges
totaling $139 and $412 for the three months ended March 31, 2004 and 2003,
respectively) Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)General and
Administrative
    
    $
    1,863
    
    
    $
    2,351
    
    
    
    (21
    )%Percentage of total revenues
    
    
    53
    %
    
    
    59
    %
 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 $0.5 million or 21% for
the three months ended March 31, 2004 compared to the same period last year.
Non-cash stock-based compensation decreased by $0.3 million. Facility costs
decreased by $0.2 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. 25




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##### Table of Contents



Depreciation expense Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Depreciation
    
    $
    219
    
    
    $
    478
    
    
    
    (54
    )%Percentage of total revenues
    
    
    6
    %
    
    
    12
    %
 Depreciation expense decreased $0.3 million, or 54%, for the three months
ended March 31, 2004, compared to the same period last year 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 our
restructurings. Amortization of intangible assets Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Amortization of intangible assets
    
    $
    3
    
    
    $
    1
    
    
    
    200
    %Percentage of total revenues
    
    
    0
    %
    
    
    0
    %
 Amortization of intangible assets relates to the amortization of patents
and trademarks. Restructuring and impairment charges Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Restructuring charges
    
    $
    (17
    )
    
    $
    1,211
    
    
    
    (101)
    %Percentage of total revenues
    
    
    (0)
    %
    
    
    31
    %
 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 than 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 our
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. 26




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Interest and other income, net Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Interest and other income, net
    
    $
    19
    
    
    $
    23
    
    
    
    (17)
    %Percentage of total revenues
    
    
    1
    %
    
    
    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, decreased slightly for the three months
ended March 31, 2004 compared to the same period last year due to a decrease in
average cash, cash equivalents, and marketable securities balances as well as a
decline in market interest rates. Interest expense Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Interest expense
    
    $
    (250
    )
    
    $
    (163
    )
    
    
    53
    %Percentage of total revenues
    
    
    (7
    )%
    
    
    (4
    )%
 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. Loss on early extinguishment of debt Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Loss on early extinguishment of debt
    
    $
    
    
    
    $
    (1,682
    )
    
    
    (100
    )%Percentage of total revenues
    
    
    
    %
    
    
    (41
    )%
 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 726,330 shares of Company common stock.
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 satisfied certain financial and other conditions. 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 February 28, 2003, the Company received notices of default from two of
the three investors. The notices alleged that the Company was in default of
the notes because it had breached certain representations and warranties in the
Securities Purchase Agreement. 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. Pursuant to these agreements, the notice of default was withdrawn
and Viewpoint redeemed an aggregate of $3.3 million principal amount of the
outstanding convertible notes, exchanged an aggregate of $1.0 million principal
amount of the outstanding convertible notes for shares of Viewpoint common
stock at $0.74 per share, and exchanged the remaining $2.7 million principal
amount of outstanding convertible notes for $2.7 million principal amount of
new convertible notes. The convertible notes were issued in three tranches of
$0.9 million each 27




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and are scheduled to mature December 31, 2007. The warrants
to purchase 726,330 shares of Company common stock, which were issued to these
investors on December 31, 2002, remain outstanding. In accordance with the provisions of APB Opinion No. 26 Early
Extinguishment of Debt, and EITF Issue No. 96-19 Debtors Accounting for a
Modification or Exchange of Debt Instruments, the Company recorded a loss for
the quarter ended March 31, 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 based on the
provisions of SFAS No. 145 Rescission of FASB Statements No. 4, 44, and 64,
Amendment of , and Technical Corrections, and APB 30 Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Loss on conversion of debt Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Loss on conversion of debt
    
    $
    (598
    )
    
    $
    
    
    
    
    N/APercentage of total revenues
    
    
    (17
    )%
    
    
    
    %
 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. The Company recorded a loss of $1.4 million related to
the change in the fair value of the conversion feature at the time of the
conversion. 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 upon the closing price of the
Companys common stock on the
day of the sale in the amount of $0.5 million. The remaining noteholders chose
not to exercise their right to redeem their notes in an 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. Changes in fair value of warrants to purchase common stock and conversion
options of convertible notes Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Changes in fair value of warrants to
purchase common stock and conversion
options of convertible notes
    
    $
    (6,603
    )
    
    $
    1,424
    
    
    
    (564
    )%Percentage of total revenues
    
    
    (184)
    %
    
    
    36
    %
 As noted above, in March 2004, one of the institutional investors holding
the convertible notes converted $0.9 million of outstanding notes with Company
common stock. Based on the provisions of SFAS No. 133 and EITF Issue No.
00-19, the Company recorded a loss of $1.4 million related to the change in the
fair value of the conversion feature at the time of the conversion. For the three months ended March 31, 2004, the Company recorded a loss
based on the change in the fair values 28




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of the remaining conversion options and
original warrants of $3.9 million and $1.3 million,
respectively, in the Companys
consolidated statements of operations. For the three months ended March 2003,
the Company recorded income based on the decrease in fair values of the
conversion options of its convertible notes of $1.2 million and warrants of
$0.2 million. Provision for income taxes Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Provision for income taxes
    
    $
    10
    
    
    $
    
    
    
    
    N/A
    
    
    
    %Percentage of total revenues
    
    
    
    %
    
    
    
    %
 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 Three Months EndedMarch 31,2004
    
    2003
    
    % Change(dollars in thousands)Adjustment to net loss on disposal
of discontinued operations, net of tax
    
    $
    19
    
    
    $
    90
    
    
    
    (79)
    %Percentage of total revenues
    
    
    1
    %
    
    
    2
    %
 In December 1999, the Board of Directors of the Company approved a plan to
focus exclusively on its interactive media technologies and digital content
creation services and to correspondingly divest itself of its prepackaged
software graphics business. Accordingly, these operations are reflected as
discontinued operations for all periods presented in the accompanying
consolidated statements of operations. The adjustment to net loss on disposal of discontinued operations for the
three months ended March 31, 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 be required to redeem $1.8 million in outstanding
convertible debt as early as June 2004 and doing so could adversely
affect our ability to fund operations.
    
    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 creative innovator 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. 29




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##### Table of Contents




    
    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 and may cause business disruption.
    
    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.
    
    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 At its March 31, 2004
meeting, the FASB ratified the consensuses reached by the Emerging
Issues Task Force in EITF Issue No. 03-6 (EITF 03-6),
Participating Securities and the Two-Class Method under FASB
Statement No. 128, Earnings per Share. EITF 03-6
concludes that a forward contract to issue an entitys own shares
that has a provision that reduces the contract price per share when
dividends are declared on the issuing entitys common stock is a
participating security, and therefore, earnings per share must be
calculated using the two-class method under FASB Statement
No. 28. EITF 03-6 must be applied in the first reporting
period beginning after March 31, 2004, by restating previously
reported earnings per share to apply the two-class method to any
participating securities that were outstanding for any period
presented in comparative financial statements. We are currently
assessing the impact of EITF 03-6 on our earnings per share
calculation. SFAS No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits, was revised in December 2003. The provisions of this
statement do not change the measurement and recognition provisions of previous
statements, but adds disclosures about retirement plan assets, employer
obligations, key assumptions in these measurements and the measurement date(s)
used to determine pensions and other postretirement benefit measurements that
make up at least the majority of plan assets and benefit obligations. These
provisions are effective for annual and interim financial statements for
periods beginning after December 15, 2003. The adoption of this statement as
of January 1, 2004 did not have a significant impact on the Companys financial
statements. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Capital Resources Cash, cash equivalents, and marketable securities totaled $11.3 million at
March 31, 2004, down from $9.5 million at December 31, 2003. 30




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March 31,2004
    
    2003(dollars in millions)Cash used in operating activities
    
    $
    (1.8
    )
    
    $
    (4.6
    )Cash used by investing activities
    
    
    (5.4
    )
    
    
    (0.3
    )Cash provided by (used in) financing activities
    
    
    3.8
    
    
    
    (0.2
    )
 Operating activities In the three months ended March 31, 2004, cash used in operating
activities was $1.8 million, a decrease of $2.8 million compared to the three
months ended March 31, 2003. The decrease is primarily due to an overall
reduction in our net loss, less the change in fair value of the conversion
feature and warrants. The decrease in the net loss number was due to our
restructurings that resulted in a decrease in expenses related to sales and
marketing, research and development, and general and administrative. In the three months ended March 31, 2003, cash used by operating
activities was $4.6 million. Use of cash stemmed principally from an operating
loss of $6.5 million offset by a charge of $1.7 million related to loss on
early extinguishment of debt. Investing activities In the three months ended March 31, 2004, cash used by investing
activities was $5.4 million, primarily due to net purchases of marketable
securities of $5.3. Capital expenditures were $ 0.1 million. In the three months ended March 31, 2003, cash used by investing
activities was $0.3 million. The decrease was primarily due to a net purchase
of marketable securities of $0.5 million. Financing activities In the three months ended March 31, 2004, net cash provided by financing
activities was $3.8 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 three months ended March 31, 2003, net cash used by financing
activities was $0.2 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.
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 satisfied certain financial and other conditions. 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. The Company was required to provide registration rights under the
Securities Act of 1933 for shares of Company common stock covering (i) the
conversion of $7.0 million in principal, (ii) 0.7 million warrants, and (iii)
any potential payment of interest in the form of common stock. The convertible notes defined several events of default, including but not
limited to: (i) failure of the Companys registration statement to be declared
effective by the Securities and Exchange Commission (SEC), (ii) delisting
from The NASDAQ National Market or other national exchange, (iii) change in
control, (iv) event of conversion default such as lack of authorized capital,
(v) event of bankruptcy, (vi) failure to pay principal and interest on the
convertible notes when payments become due, (vii) judgments against the Company
in excess of $1.0 million and 31




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(viii) material breach of any representation,
warranty, covenant or other term. Upon an event of default, the convertible
notes would immediately become due and payable, after a grace period to cure
the default lapsed. On February 28, 2003, the Company received notices of default from two of
the three investors. The notices alleged that the Company was in default of
the notes because it had breached certain representations and warranties in the
Securities Purchase Agreement. 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. Pursuant to these agreements, the notice of default was withdrawn
and Viewpoint redeemed an aggregate of $3.3 million principal amount of the
outstanding convertible notes, exchanged an aggregate of $1.0 million principal
amount of the outstanding convertible notes for shares of Viewpoint common
stock at $0.74 per share, and exchanged the remaining $2.7 million principal
amount of outstanding convertible notes for $2.7 million principal amount of
new convertible notes. The convertible notes were issued in three tranches of
$0.9 million each and are scheduled to mature December 31, 2007. The warrants
to purchase 726,330 shares of Company common stock, which were issued to these
investors on December 31, 2002, remain outstanding. Interest on the new convertible notes is payable quarterly in arrears in
cash or, at the option of the Company, in shares of Company common stock,
provided the Company satisfies certain financial and other conditions. If
interest
is paid in shares of Company common stock, the number of shares to be
issued shall be calculated by dividing the interest payable by 95% of the
arithmetic average of the dollar volume-weighted average price of Company
common stock on each of the five consecutive trading days immediately preceding
the interest payment date. The new convertible notes mature on December 31,
2007, unless earlier converted into shares of Company common stock. The
conversion price of the first, second, and third tranche were determined on the
basis of the arithmetic average of the dollar volume-weighted average price of
Company common stock for the ten trading days following May 16, 2003, August
16, 2003, and November 16, 2003, respectively, in each case subject to a
minimum conversion price of $1.00 and a maximum conversion price of $2.26. 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. At the noteholders option, up to 20% of the net proceeds from any new
capital raised by the Company may be used to redeem outstanding notes at par
plus accrued interest. Each
tranche of the notes is redeemable by the investors at any time on
or after June 30, 2004 in cash at par plus accrued and unpaid interest if the
dollar volume-weighted average price of Company common stock is less than the
conversion price applicable to the notes for any 25 consecutive trading days.
Each tranche of the notes is redeemable by the investors at any time after
December 31, 2005, in cash at 83% of par plus accrued and unpaid interest if
the dollar volume-weighted average price of Company common stock is less than
the conversion price applicable to the notes for any 25 consecutive trading
days following December 31, 2005. If the investors redeem their convertible
notes, up to 20% of the amount to be redeemed may, at the Companys option, be
paid in shares of Company common stock, and said payment would be at 95% of the
dollar volume-weighted average price of Company common stock for the 20
consecutive trading days immediately preceding payment. The Company has the right at any time to redeem up to all of the
outstanding notes at par plus accrued and unpaid interest. Concurrently with
any such redemption, the Company is required to deliver to the investors
warrants, with an exercise price of $2.26 and a term equal to the remaining
term of the notes being redeemed, to subscribe for a number of shares of common
stock equal to 100% of the principal amount being redeemed divided by the
conversion price of the notes then in effect. Each tranche of the notes is 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. The investors could have required the Company to sell to the investors an
additional 4.95% convertible notes having an aggregate principal amount of up
to $2.8 million, and warrants to purchase up to 290,533 shares of Company
common stock. This right expired unexercised on January 14, 2004. 32




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The Company had the right to sell additional 4.95% convertible notes
having an aggregate principal amount of up to $7.0 million and warrants to
purchase up to 726,330 shares of Company common stock prior to June 30, 2003,
if the dollar volume-weighted average price of Company common stock exceeded
$3.25 on each of not less than 15 trading days in any 20 consecutive
trading-day period. This right expired unexercised on June 30, 2003. The Company was required to file a registration statement by April 14,
2003, covering the resale of the shares of common stock issued to the investors
in exchange for the $1.0 million principal of convertible notes, the shares of
common stock issuable to the investors upon the conversion of the notes, the
shares of common stock underlying the warrants issued and to be issued, and any
shares of common stock that may be issued as payment of interest on the notes.
The Company was required to pay cash penalties if the registration statement
was not declared effective by June 30, 2003. The registration statement was
declared effective July 14, 2003, and the Company was required to pay penalties
of $0.2 million, of which $0.1 million was charged to interest expense in the
second quarter of 2003 and $0.1 million was charged to interest expense in the
third quarter of 2003. 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. The Company recorded a loss of $1.4 million related to
the change in the fair value of the conversion feature at the time of the
conversion. 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 common stock on the day of the
sale in the amount of $0.5 million. The
remaining noteholders chose not to exercise their right to redeem their notes
in an 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. 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. 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 3.6 million 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 notes
contain certain events of default, including, but not limited to: (i) failure
to pay principal and interest on the notes when payments become due, (ii)
judgments against the Company in excess of $1.0 million, (iii) event of
bankruptcy, and (iv) material breach of representations, covenants or other
terms. Upon an event of default, the notes will become immediately due and
payable. The Company filed a registration statement covering the resale of the
issued shares on May 9, 2003, which was declared effective by the SEC on July
30, 2003. 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 totaling $0.1 million for the period
ended December 31, 2004, were accounted for using the effective interest
method. 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 33




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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 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 our estimate of sublease income in the future as our 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 our income statement as a restructuring
charge. The second restructuring plan was completed by September 30, 2003. 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 our operations and pursue our growth strategy. We have no
commitment for additional financing, and we may experience difficulty in
obtaining additional financing on favorable terms, if at all. Any financing we
obtain may contain covenants that restrict our freedom to operate our business
or may have rights, preferences or privileges senior to our common stock and
may dilute our current shareholders ownership interest in Viewpoint. 
 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. 34




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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 March 2, 2004, to furnish its
press release concerining its results of operations for the quarterly and
annual period ending on December 31, 2003. On March 18, 2004, the Registrant filed a report on Form 8-K reporting
that it closed a private placement of common stock with an institutional
investor on March 17, 2004. 35




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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.   Dated: May 14, 2004
    By:
    /s/ JAY S. AMATOJay S. AmatoPresident and Chief Executive Officer Dated: May 14, 2004
    By:
    /s/ WILLIAM H. MITCHELLWilliam H. MitchellChief Financial Officer Dated: May 14, 2004
    By:
    /s/ CHRISTOPHER C. DUIGNANChristopher C. DuignanChief Accounting Officer 36