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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____________ to ____________Commission file number: 0-27168   VIEWPOINT CORPORATION  Delaware
(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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes o No þ As of November 2, 2004, 54,482,930 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  September 30, 2004 and December 31, 2003 (unaudited)
    
    3Consolidated Statements of Operations  Three and nine months ended September 30, 2004 and 2003 (unaudited)
    
    4Consolidated Statements of Cash Flows  Three and nine months ended September 30, 2004 and 2003 (unaudited)
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    7Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    35Item 4.
    
    Controls and Procedures
    
    35PART II  OTHER INFORMATIONItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 6.
    
    Exhibits and Reports on Form 8-K
    
    37Signatures
    
    38
  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)
 September 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,762
    
    
    $
    8,530Marketable securities
    
    
    3,902
    
    
    
    958Accounts
receivable, net of reserve of $372 and $1,611, respectively
    
    
    1,712
    
    
    
    650Related party accounts receivable
    
    
    48
    
    
    
    914Prepaid expenses and other current assets
    
    
    494
    
    
    
    694Total current assets
    
    
    7,918
    
    
    
    11,746Restricted cash
    
    
    319
    
    
    
    388Property and equipment, net
    
    
    1,463
    
    
    
    1,859Goodwill, net
    
    
    31,276
    
    
    
    31,276Intangible assets, net
    
    
    228
    
    
    
    186Other assets, net
    
    
    197
    
    
    
    288Total assets
    
    $
    41,401
    
    
    $
    45,743LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    981
    
    
    $
    1,177Accrued expenses
    
    
    702
    
    
    
    1,094Deferred revenues
    
    
    515
    
    
    
    423Related party deferred revenues
    
    
    4,818
    
    
    
    4,952Accrued incentive compensation
    
    
    545
    
    
    
    545Current liabilities related to discontinued operations
    
    
    231
    
    
    
    231Total current liabilities
    
    
    7,792
    
    
    
    8,422Deferred rent
    
    
    382
    
    
    
    400Related party deferred revenues
    
    
    1,027
    
    
    
    4,706Convertible notes
    
    
    
    
    
    
    2,837Warrants to purchase common stock
    
    
    821
    
    
    
    110Subordinated notes
    
    
    2,221
    
    
    
    1,801Total liabilities
    
    
    12,243
    
    
    
    18,276Stockholders equity:Preferred stock, $.001 par value; 5,000 shares authorized  no shares
issued and outstanding at September 30, 2004 and December 31, 2003
    
    
    
    
    
    
    Common
stock, $.001 par value; 75,000 shares authorized  54,430 shares issued and 54,270 shares outstanding at September 30,
2004, and 49,965 shares issued and 49,805 shares outstanding
at December 31, 2003
    
    
    54
    
    
    
    50Paid-in capital
    
    
    284,939
    
    
    
    274,351Deferred compensation
    
    
    (6
    )
    
    
    (275
    )Treasury stock at cost; 160 shares at September 30, 2004 and December 31, 2003
    
    
    (1,015
    )
    
    
    (1,015
    )Accumulated other comprehensive loss
    
    
    (78
    )
    
    
    (65
    )Accumulated deficit
    
    
    (254,736
    )
    
    
    (245,579
    )Total stockholders equity
    
    
    29,158
    
    
    
    27,467Total liabilities and stockholders equity
    
    $
    41,401
    
    
    $
    45,743
 The accompanying notes are an integral part of these consolidated financial statements. 3




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VIEWPOINT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Licenses
    
    $
    158
    
    
    $
    317
    
    
    $
    542
    
    
    $
    2,166Related party licenses
    
    
    873
    
    
    
    
    
    
    
    2,652
    
    
    
    1,060Services
    
    
    888
    
    
    
    1,508
    
    
    
    3,477
    
    
    
    3,705Related party services
    
    
    497
    
    
    
    693
    
    
    
    2,097
    
    
    
    4,086Search
    
    
    905
    
    
    
    
    
    
    
    913
    
    
    
    Advertising systems
    
    
    46
    
    
    
    
    
    
    
    83
    
    
    
    Total revenues
    
    
    3,367
    
    
    
    2,518
    
    
    
    9,764
    
    
    
    11,017Cost of revenues:Licenses
    
    
    
    
    
    
    21
    
    
    
    4
    
    
    
    96Services
    
    
    736
    
    
    
    1,419
    
    
    
    2,279
    
    
    
    4,967Search
    
    
    10
    
    
    
    
    
    
    
    10
    
    
    
    Advertising systems
    
    
    43
    
    
    
    
    
    
    
    49
    
    
    
    Total cost of revenues
    
    
    789
    
    
    
    1,440
    
    
    
    2,342
    
    
    
    5,063Gross profit
    
    
    2,578
    
    
    
    1,078
    
    
    
    7,422
    
    
    
    5,954Operating expenses:Sales and marketing
    
    
    929
    
    
    
    1,637
    
    
    
    2,925
    
    
    
    7,625Research and development
    
    
    783
    
    
    
    921
    
    
    
    2,556
    
    
    
    3,232General and administrative
    
    
    1,631
    
    
    
    3,413
    
    
    
    5,358
    
    
    
    8,951Depreciation
    
    
    205
    
    
    
    383
    
    
    
    629
    
    
    
    1,305Amortization of intangible assets
    
    
    12
    
    
    
    1
    
    
    
    16
    
    
    
    9Restructuring charges
    
    
    
    
    
    
    674
    
    
    
    (17
    )
    
    
    1,885Total operating expenses
    
    
    3,560
    
    
    
    7,029
    
    
    
    11,467
    
    
    
    23,007Loss from operations
    
    
    (982
    )
    
    
    (5,951
    )
    
    
    (4,045
    )
    
    
    (17,053
    )Other income (expense), net:Interest and other income; net
    
    
    23
    
    
    
    8
    
    
    
    69
    
    
    
    42Interest expense
    
    
    (231
    )
    
    
    (257
    )
    
    
    (717
    )
    
    
    (743
    )Changes in fair values of warrants to purchase common stock and
conversion feature of convertible debt
    
    
    (162
    )
    
    
    667
    
    
    
    (3,715
    )
    
    
    1,010Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,682
    )Loss on conversion of debt
    
    
    
    
    
    
    
    
    
    
    (810
    )
    
    
    Total other income (expense)
    
    
    (370
    )
    
    
    418
    
    
    
    (5,173
    )
    
    
    (1,373
    )Net income (loss) before provision for income taxes
    
    
    (1,352
    )
    
    
    (5,533
    )
    
    
    (9,218
    )
    
    
    (18,426
    )Provision for income taxes
    
    
    33
    
    
    
    26
    
    
    
    68
    
    
    
    39Net income (loss) from continuing operations
    
    
    (1,385
    )
    
    
    (5,559
    )
    
    
    (9,286
    )
    
    
    (18,465
    )Adjustment to net income (loss) on disposal of discontinued operations, net of tax
    
    
    90
    
    
    
    41
    
    
    
    129
    
    
    
    157Net income (loss)
    
    $
    (1,295
    )
    
    $
    (5,518
    )
    
    $
    (9,157
    )
    
    $
    (18,308
    )Basic and
diluted net loss per common share:
    
    $
    (0.02
    )
    
    $
    (0.12
    )
    
    $
    (0.17
    )
    
    $
    (0.41
    )Weighted
average number of shares outstanding  basic and diluted
    
    
    54,205
    
    
    
    45,987
    
    
    
    52,364
    
    
    
    44,463
 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)
 Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (9,157
    )
    
    $
    (18,308
    )Adjustments to reconcile net loss to net cash used in
operating activities:Non-cash stock-based compensation charges
    
    
    284
    
    
    
    2,388Restructuring charges (release)
    
    
    (17
    )
    
    
    1,885Depreciation and amortization
    
    
    645
    
    
    
    1,314Provision for bad debt
    
    
    (84
    )
    
    
    745Interest expense paid with common stock
    
    
    18
    
    
    
    Loss on write-off of notes receivable
    
    
    
    
    
    
    750Loss on sale or disposal of equipment
    
    
    
    
    
    
    226Changes in fair values of warrants to purchase common stock and
conversion feature of convertible debt
    
    
    3,715
    
    
    
    (1,010
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    1,682Amortization of debt discount and issuance costs
    
    
    474
    
    
    
    320Loss on conversion of debt
    
    
    330
    
    
    
    Issuance of stock below market price on conversion of debt
    
    
    480
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (978
    )
    
    
    962Related party accounts receivable
    
    
    866
    
    
    
    552Prepaid expenses
    
    
    200
    
    
    
    (339
    )Accounts payable
    
    
    (196
    )
    
    
    (215
    )Accrued expenses
    
    
    (393
    )
    
    
    (763
    )Due to/from related parties
    
    
    
    
    
    
    8Deferred revenues
    
    
    92
    
    
    
    45Related party deferred revenues
    
    
    (3,813
    )
    
    
    438Net cash used in operating activities
    
    
    (7,534
    )
    
    
    (9,320
    )Cash flows from investing activities:Proceeds from sales and maturities of marketable securities
    
    
    3,750
    
    
    
    1,525Purchases of marketable securities
    
    
    (6,701
    )
    
    
    (1,652
    )Net decrease in restricted cash
    
    
    69
    
    
    
    499Purchases of property and equipment
    
    
    (233
    )
    
    
    (419
    )Sale of property and equipment
    
    
    
    
    
    
    7Unrealized loss on short-term investments
    
    
    (3
    )
    
    
    Purchases of patents and trademarks
    
    
    (58
    )
    
    
    (31
    )Net cash used in investing activities
    
    
    (3,176
    )
    
    
    (71
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    3,675
    
    
    
    Proceeds from issuance of subordinated notes and common stock
    
    
    
    
    
    
    3,311Repayment of convertible notes
    
    
    
    
    
    
    (3,300
    )Payment of issuance costs on convertible notes
    
    
    
    
    
    
    (576
    )Restricted cash used to pay interest on convertible notes
    
    
    
    
    
    
    33Proceeds from exercise of stock options
    
    
    270
    
    
    
    11Net cash provided by (used in) financing activities
    
    
    3,945
    
    
    
    (521
    )Effect of exchange rates changes on cash
    
    
    (3
    )
    
    
    (20
    )Net decrease in cash and cash equivalents
    
    
    (6,768
    )
    
    
    (9,932
    )Cash and cash equivalents at beginning of period
    
    
    8,530
    
    
    
    10,678Cash and cash equivalents at end of the period
    
    $
    1,762
    
    
    $
    746
 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) Nine Months EndedSeptember 30,2004
    
    2003Supplemental disclosure of cash flow activities:Cash paid during the year for income taxes
    
    $
    68
    
    
    $
    79Cash paid during the year for interest
    
    
    169
    
    
    
    161Supplemental disclosure of non-cash investing
and financing activities:Issuance of common stock in repayment of convertible notes
    
    $
    2,700
    
    
    $
    Cancellation of common stock option awards
    
    
    17
    
    
    
    Deferred compensation recognized related to adjustment
of an option grant
    
    
    32
    
    
    
    Issuance of 1,351,351 shares of common stock as partial repayment
of convertible notes
    
    
    
    
    
    
    1,000Issuance cost on convertible notes and subordinated notes
accrued and not yet paid
    
    
    
    
    
    
    12Unrealized gains (losses) on marketable securities
    
    
    (7
    )
    
    
    
 The accompanying notes are an integral part of these consolidated financial statements. 6




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America, consistent in all material respects with those
applied in the Companys Annual Report on Form 10-K/A for the year ended
December 31, 2003. The interim financial information is unaudited, but
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of the financial position and operating results of
Viewpoint Corporation (Viewpoint or the Company) for the interim periods. These unaudited consolidated financial statements have been prepared in
accordance with the instructions to Rule 10-01 of Regulation S-X and,
therefore, do not include all of the information and footnotes normally
provided in annual financial statements. As a result, these unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with managements
discussion and analysis of financial condition and results of operations,
contained in Viewpoints Annual Report on Form 10-K/A for the year ended
December 31, 2003. The results of operations for the three and nine months
ended September 30, 2004 are not necessarily indicative of the results to be
expected for the year ending December 31, 2004 or other future periods. Certain reclassifications have been made to the 2003 consolidated
financial statements to conform to the 2004 presentation. Liquidity The Company had cash, cash equivalents and marketable securities of $5.7
million at September 30, 2004. During the nine months ended September 30, 2004,
net cash used in operations amounted to $7.5 million. Though the Company has
converted $2.7 million in convertible debt to equity during 2004, it has had
significant quarterly and annual operating losses since its inception, and as
of September 30, 2004, had an accumulated deficit of $254.7 million. There can
be no assurance that Viewpoint will achieve or sustain positive cash flows from
operations or profitability. The Company has contingency plans for the remainder of 2004 and through
2005 if expected revenue targets are not achieved. These plans include further
workforce reductions as well as reductions in overhead and capital
expenditures. The Company may seek additional funds when necessary through
public or private equity financing or from other sources to fund operations and
pursue growth, although, there are no assurances that the Company can obtain
such financing with reasonable terms. The Company currently has no commitment for additional financing, and may
experience difficulty in obtaining additional financing on favorable terms, if
at all. Any financing the Company obtains may contain covenants that restrict
the Companys freedom to operate the business or may have rights, preferences
or privileges senior to the Companys common stock and may dilute the Companys
current shareholders ownership interest in Viewpoint. Revenue Recognition The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition, as amended, Emerging Issues Task
Force (EITF) No. 00-21 Revenue Arrangements with Multiple Deliverables, and
Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition in Financial
Statements as amended by SAB No. 104 Revenue Recognition. Per SOP 97-2 and
SAB No. 101, as amended by SAB No. 104, the Company recognizes revenue when the
following criteria are met: (a) persuasive evidence of an arrangement exists,
(b) delivery has occurred or services have been rendered, (c) the Companys fee
is fixed or determinable, and (d) collectibility is reasonably assured. Viewpoint has generated revenues through four sources: (a) software
licenses, (b) services, (c) search advertising, and (d) advertising systems
revenue. License revenues are generated from licensing the rights to use 7




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




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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Viewpoint also offers an online advertising campaign management and
deployment product. This advertising system permits publishers, advertisers,
and their agencies to manage the process of deploying online advertising
campaigns. The Company charges customer on a cost per thousand (CPM)
impression basis, and recognizes revenue when the impressions are served, so
long as all other revenue recognition criteria are satisfied. Standard terms for license arrangements require payment within 90 days of
the contract date, which typically coincides with delivery. Standard terms for
service arrangements, which are typically billed and collected on an
installment basis, require final payment within 90 days of completion of the
services. Probability of collection is based upon the assessment of the
customers financial condition through the review of their current financial
statements and/or credit reports. For follow-on sales to existing customers,
prior payment history is also used to evaluate probability of collection. The
Companys arrangements with customers do not contain product return rights. If
the fee is not fixed or determinable, revenue is recognized as payments become
due or as cash is received from the customer. If a nonstandard acceptance
period is required, revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period. Stock-Based Compensation The Company accounts for stock option grants in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, Financial Accounting Standards Board (FASB) issued Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25 (FIN 44), and complies with the
disclosure provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148
Accounting for Stock-Based Compensation-Transition and Disclosure. Under APB
Opinion No. 25, compensation expense is recognized over the vesting period
based on the difference, if any, at the date of grant between the fair value of
the Companys stock and the exercise price. The Company accounts for stock
issued to non-employees in accordance with SFAS No. 123 and EITF Issue No.
96-18 Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, as amended by SFAS No. 148, and has been determined
as if the Company has accounted for its employee stock option grants under the
fair value method of SFAS No. 123. The fair value of options issued to
employees was estimated at the date of grant using the Black-Scholes
option-pricing model. For purposes of pro forma disclosures, the estimated
fair value of the Companys employee options is amortized to expense over the
options vesting periods. If the Company elected to record stock-based
compensation charges in accordance with SFAS 123, the pro forma non-cash
stock-based employee compensation charges and net income (loss) per common
share would approximate the following (in thousands, except per share amounts): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (1,295
    )
    
    $
    (5,518
    )
    
    $
    (9,157
    )
    
    $
    (18,308
    )Add: Non-cash stock-based employee
compensation charges included in reported
net loss, net of related tax effects
    
    
    3
    
    
    
    520
    
    
    
    284
    
    
    
    2,388Deduct: Non-cash stock-based employee
compensation charges determined under
fair value based method for all awards, net of
related tax effects
    
    
    (661
    )
    
    
    (1,196
    )
    
    
    (2,329
    )
    
    
    (4,990
    )Pro forma net loss
    
    $
    (1,953
    )
    
    $
    (6,194
    )
    
    $
    (11,202
    )
    
    $
    (20,910
    )Net loss per share:Basic and diluted as reported
    
    $
    (0.02
    )
    
    $
    (0.12
    )
    
    $
    (0.17
    )
    
    $
    (0.41
    )Basic and diluted pro forma
    
    $
    (0.04
    )
    
    $
    (0.13
    )
    
    $
    (0.21
    )
    
    $
    (0.47
    )
 The effects of applying SFAS No. 123, as amended by SFAS No. 148, in this
pro forma disclosure are not indicative of future amounts. The Company
anticipates grants of additional awards in future years. 9




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##### 



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Basic and Diluted Net Income (Loss) Per Common Share Basic net income or loss per common share is computed using the weighted
average number of shares outstanding and diluted net income or loss per common
share is computed using the weighted average number of shares of common and
common equivalent shares outstanding. Common equivalent shares related to
stock options and warrants totaling 7.9 million for the three and nine months
ended September 30, 2004, and common equivalent shares related to stock options
and warrants totaling 5.2 million for the three and nine months ended September
30, 2003, 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 placement the
institutional investor converted $0.9 million of outstanding notes and received
0.9 million shares of Company common stock in the exchange. In June 2004, the Company exercised its right to convert the remaining
outstanding convertible notes of $1.8 million and the related outstanding
interest into 1.7 million shares of Viewpoint common stock. Derivatives In 2002 and 2003, the Company issued convertible notes and warrants which
would require Viewpoint to issue registered shares of common stock upon
conversion of these securities. The Company accounts for the fair values of
these outstanding warrants to purchase common stock and conversion options of
its convertible notes in accordance with SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, and EITF Issue No. 00-19
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock, which requires the Company to bifurcate and
separately account for the conversion option and warrants as embedded
derivatives contained in the Companys convertible notes. The Company is
required to carry these
embedded derivatives on its balance sheet at fair value and the unrealized
changes in the value of these embedded derivatives are reflected in net income
as changes in fair values of warrants to purchase common stock and conversion
options of convertible notes. Such changes in fair value are recorded as an
adjustment to reconcile net loss to net cash used in operating activities in
the consolidated statement of cash flows. Recent Accounting Pronouncements In April 2004, the Emerging Issues Task Force issued Statement No. 03-06
Participating Securities and the Two-Class Method Under FASB Statement No.
128, Earnings Per Share (EITF 03-06). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the Company when, and if, it
declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 is effective for fiscal periods beginning after
March 31, 2004. The EITF did not have an effect on the Companys financial
statements. The Emerging Issues Task Force (EITF) has reached a consensus on EITF
Issue No. 04-8, Accounting Issues Related to Certain Features of Contingently
Convertible Debt and the Effect on Diluted Earnings per Share.
This EITF will be effective for reporting periods ending
after December 15, 2004 and will have to be applied retroactively. Contingently
convertible debt instruments are structured financial transactions that combine
the features of contingently issuable shares with a convertible debt
instrument. Contingently convertible debt instruments are convertible into
common shares of the issuer after the common stock price has exceeded a
predetermined threshold for a specified time period (market price
trigger). The Company will adopt EITF 04-8 during the fourth quarter
of 2004. Diluted earnings per share for the three and nine months
ended September 30, 2003 would remain unchanged. The Company does not
expect the adoption of EITF 04-8 to have a significant impact on
earnings (loss) per share in the future. 10




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##### 



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Cash, Cash Equivalents and Marketable Securities The cost and fair value of the Companys cash, cash equivalents, and
marketable securities as of September 30, 2004, by type of security,
contractual maturity, and its classification in the balance sheet, are as
follows (in thousands): Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealisedCost
    
    Gain
    
    (Loss)
    
    Fair Value
    
    MaturityType of security:Cash
    
    $
    82
    
    
    $
    
    
    
    $
    
    
    
    $
    82Money Market Funds
    
    
    535
    
    
    
    
    
    
    
    
    
    
    
    535Corporate Bonds and Notes
    
    
    2,253
    
    
    
    
    
    
    
    
    
    
    
    2,253
    
    
    2004, 2005Equity Securities
    
    
    99
    
    
    
    
    
    
    
    (6
    )
    
    
    93U.S. Government Agencies
    
    
    2,708
    
    
    
    
    
    
    
    (7
    )
    
    
    2,701
    
    
    2004, 2005$
    5,677
    
    
    $
    
    
    
    $
    (13
    )
    
    $
    5,664Classification in Balance Sheet:Cash and Cash Equivalents
    
    $
    1,768
    
    
    $
    
    
    
    $
    (6
    )
    
    $
    1,762
    
    
    2004Marketable Securities
    
    
    3,909
    
    
    
    
    
    
    
    (7
    )
    
    
    3,902
    
    
    2004, 2005$
    5,677
    
    
    $
    
    
    
    $
    (13
    )
    
    $
    5,664
 The cost and fair value of the Companys cash, cash equivalents, and
marketable securities as of December 30, 2003, by type of security, contractual
maturity, and its classification in the balance sheet, are as follows (in
thousands): Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealisedCost
    
    Gain
    
    (Loss)
    
    Fair Value
    
    MaturityType of security:Cash
    
    $
    314
    
    
    $
    
    
    
    $
    
    
    
    $
    314Money Market Funds
    
    
    6,718
    
    
    
    
    
    
    
    
    
    
    
    6,718
    
    
    
    2004Corporate Bonds and Notes
    
    
    1,400
    
    
    
    
    
    
    
    
    
    
    
    1,400
    
    
    
    2004Equity Securities
    
    
    100
    
    
    
    
    
    
    
    (2
    )
    
    
    98U.S. Government Agencies
    
    
    958
    
    
    
    
    
    
    
    
    
    
    
    958
    
    
    
    2004$
    9,490
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    9,488Classification in Balance Sheet:Cash and Cash Equivalents
    
    $
    8,532
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    8,530Marketable Securities
    
    
    958
    
    
    
    
    
    
    
    
    
    
    
    958$
    9,490
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    9,488
 3. Goodwill and Intangible Assets As required by SFAS No. 142, Goodwill and Other Intangible Assets, all
remaining and future acquired goodwill will be subject to impairment tests
annually, or earlier if indicators of potential impairment exist, using a
fair-value-based approach. All other intangible assets will continue to be
amortized over their estimated useful lives and assessed for impairment under
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. During the three months and nine months ended September 30, 2004 there
were no impairments recorded. During the three and nine months ended September 30, 2003, the market
value of the Companys equity securities declined below the Companys carrying
value indicating the existence of a potential goodwill impairment. In
accordance with SFAS No. 142, the Company performed the first step of the
goodwill impairment test as of September 30, 2003. The fair value of the
Company was determined to exceed its carrying value using a market-
based approach with selected multiples ranging from 1.5 to 2.0 times
revenues and 1.8 to 2.5 times gross profit. In 11




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##### 



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS accordance with SFAS No. 142,
the second step of the impairment test was unnecessary, and no goodwill
impairment charges were recorded. The changes in the carrying amounts of goodwill and intangible assets
during the three and nine months ended September 30, 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
    
    
    $
    31,497Additions during period
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Balance as of June 30, 2004
    
    $
    31,276
    
    
    $
    220
    
    
    $
    31,496Additions during period
    
    
    
    
    
    
    20
    
    
    
    20Amortization
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )Balance September 30, 2004
    
    $
    31,276
    
    
    $
    228
    
    
    $
    31,504
 The changes in the carrying amounts of goodwill and intangible assets for
the three and nine months ended September 30, 2003, are as follows (in
thousands): Goodwill
    
    Intangible Assets
    TotalBalance as of December 31, 2002
    
    $
    31,276
    
    
    $
    165
    
    
    $
    31,441Additions during period
    
    
    
    
    
    
    11
    
    
    
    11Amortization
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Balance as of March 31, 2003
    
    $
    31,276
    
    
    $
    175
    
    
    $
    31,451Additions and adjustments during period
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Amortization
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Balance as of June 30, 2003
    
    $
    31,276
    
    
    $
    160
    
    
    $
    31,436Additions and adjustments during period
    
    
    
    
    
    
    28
    
    
    
    28Amortization
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Balance as of September 30, 2003
    
    $
    31,276
    
    
    $
    187
    
    
    $
    31,463
 As of September 30, 2004 and December 31, 2003, the Companys intangible
assets and related accumulated amortization consisted of the following (in
thousands): September 30, 2004
    
    December 31, 2003Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    Amortization
    
    Net
    
    Gross
    
    Amortization
    
    NetPatents and Trademarks
    
    $
    254
    
    
    $
    (26
    )
    
    $
    228
    
    
    $
    196
    
    
    $
    (10
    )
    
    $
    186Total Intangible Assets
    
    $
    254
    
    
    $
    (26
    )
    
    $
    228
    
    
    $
    196
    
    
    $
    (10
    )
    
    $
    186
 Amortization of patents and trademarks is estimated to be $10,000 a year
for the next five years. 4. Long Term Debt Convertible Notes On December 31, 2002, the Company completed a private placement of
convertible notes and warrants in which it issued to three institutional
investors, 4.95% convertible notes having an aggregate principal amount of $7.0
million, and warrants to purchase 0.7 million shares of Company common stock.
The convertible notes were to mature on December 31, 2007, unless earlier
converted into shares of Company common stock at a price of $2.26 per share.
The warrants expire on December 31, 2006, and are exercisable at a price of
$2.26 per share. On March 25, 2003, the Company entered into Redemption, Amendment and
Exchange Agreements with the three institutional investors with whom it had
completed the private placement of convertible notes and warrants on December
31, 2002. The Company recorded a loss for the quarter ended June 30, 2003, on
the early extinguishment of the original convertible notes in the amount of
$1.7 million of which $0.7 related to the write-off of deferred loan costs. In
conjunction with the extinguishment, the Company paid $3.3 million, issued new
convertible notes in the 12




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##### 



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS principal amount of $2.7 million and issued $1.4
million shares of its common stock with a market value of $0.7 million. The
difference between (i) the carrying value of the outstanding convertible notes
exchanged and (ii) cash paid and the fair value of the common stock and new
convertible notes issued, amounted to $1.0 million and was included in the loss
on early extinguishment of debt. Interest on the convertible notes was payable quarterly in arrears in cash
or, at the option of the Company, in shares of Company common stock provided
the Company satisfies certain financial and other conditions. The new
convertible notes matured on December 31, 2007, unless earlier converted into
shares of Company common stock. The conversion price of the first $0.9 million
tranche of notes is $1.10. The conversion price of the second and third tranche
of notes is $1.00. Each tranche of the notes was convertible at the Companys election at any
time after May 20, 2004 if the dollar volume-weighted average price of Company
common stock exceeds 150% of the conversion price applicable to the notes for
any 25 consecutive trading days following April 15, 2004. Pursuant to SFAS No. 133, the Company bifurcated the fair value of the
conversion options from the new convertible notes since the conversion options
were determined to not be clearly and closely related to the debt host. In
addition, since the effective registration of the securities underlying the
conversion options is an event outside of the control of the Company, pursuant
to EITF Issue No. 00-19, the Company recorded the fair value of the conversion
options as long-term liabilities, as it was assumed that the Company would be
required to net-cash settle the underlying securities. The Company recorded income or loss based on the decrease or increase,
respectively, in the fair values of the new conversion options and original
warrants in the Companys consolidated statements of operations. The
amortization of discount on the new convertible notes and debt issue costs were
accounted for using the effective interest method. On March 17, 2004, one of the institutional investors holding the
convertible notes converted $0.9 million of outstanding notes for shares of the
Companys common stock. In the first quarter of 2004, the Company recorded a
loss of $1.4 million related to the change in the fair value of the conversion
feature from January 1, 2004 through the date of the conversion. For the three
months ended March 31, 2004 the Company also recorded a loss related to a
change in the fair value of the conversion feature and warrants of $3.7 million
and $1.3 million, respectively. In addition, on the same day as the conversion, the Company sold 1.5
million shares of common stock in a private placement to the institutional
investor, for $3.7 million or $2.45 per share. The Company recorded a loss on
conversion of debt in the amount of $0.6 million, which represented the
write-off of unamortized loan discount and debt issuance costs of $0.1 million
and the difference between the proceeds received from the private placement and
the fair value of the common stock issued based upon the closing price of the
Companys stock on the day of the sale of $0.5 million. The remaining
noteholders chose not to exercise their right to redeem their notes in amount
up to 20% of the $3.7 million received by the Company within 10 days of the
Companys public announcement of the closing of the private placement. During the period beginning on April 15, 2004 and May 20, 2004  a period
which covered 25 consecutive trading days  the dollar volume-weighted average
price of the Companys common stock exceeded 150% of the conversion price
applicable to the outstanding convertible notes and the Company determined to
exercise its right to convert the outstanding notes into shares of Company
common stock. Accordingly, on May 20, 2004, the Company informed the
institutional investors holding the outstanding convertible notes that it would
exercise its right to convert that debt. On June 18, 2004, the Company
completed the conversion of the remaining outstanding convertible notes of $1.8
million and the related outstanding interest into 1.7 million shares of
Viewpoint common stock. In the second quarter of 2004, the Company recorded a
gain of $3.0 million related to the change in the fair value of the conversion
feature during the period from April 1, 2004 through June 18, 2004, the date of
the conversion. In addition, the Company recorded a loss on conversion which represented
the difference between the fair value of the common stock issued in exchange
for the notes and the carrying value of the convertible notes on the date of
conversion. This change was primarily comprised of the write-off of
unamortized loan discount and debt issuance costs. 13




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##### 



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company recorded a loss based on the change in the fair values of the
original warrants of $0.2 million resulting from an increase in the fair market
value of the Companys common stock, for the three months ended September 30,
2004. Subordinated Notes On March 26, 2003, Viewpoint Corporation entered into a Securities
Purchase Agreement with three other accredited investors, pursuant to which it
received $3.5 million in exchange for an aggregate of $3.5 million principal
amount of 4.95% subordinated notes and 3,614,756 shares of Viewpoint common
stock. The subordinated notes are scheduled to mature on March 31, 2006.
Interest on these notes is payable quarterly in arrears in cash. The Company
has the right at any time to redeem up to all of the outstanding notes at par
plus accrued and unpaid interest. The $3.5 million of proceeds was allocated to subordinated notes, common
stock, and additional paid in capital based on the market value of the
Companys common stock on March 26, 2003. In accordance with the provisions of
APB Opinion No. 21, the Company recorded a debt discount of $2.0 million. Debt
issuance costs, which amounted to $0.2 million, were recorded as other assets
in the Companys consolidated balance. The amortization of the discount on the
subordinated notes and debt issue costs totaled $0.2 million and $0.4 million
for the three and nine months ended September 30, 2004, respectively, were
accounted for using the effective interest method. 5. Related Party Transactions During the three and nine months ended September 30, 2004 the Company
recorded revenues totaling $1.4 million and $4.7 million, respectively, related
to agreements with America Online, Inc (AOL) that were entered into prior to
December 31, 2003. An employee of AOL served on the Board of Directors of the Company, until
the Directors term expired in December 2003. Accordingly, revenue associated
with contracts entered into with AOL after December 31, 2003 is treated as
third party revenue. As of September 30, 2004, the Company had $5.8 million in deferred
revenues relating to transactions with AOL for contracts entered into with AOL
prior to December 31, 2003. In 2003, the Company entered into an amended license agreement with AOL
which provides for payments by AOL of $10.0 million which were all received
during the fourth quarter of 2003. The agreement contains multiple elements
consisting of a perpetual broadcast license, a perpetual source code license,
quarterly updates to the source code through December 2005, and maintenance and
consulting services. The Company will recognize $9.0 million of revenue from
this agreement ratably as license and services revenue, through December 31,
2005, which represents the duration of the Companys obligation for
post-contract customer support of the source code element including quarterly
upgrades and maintenance requirements. The Company recognized $0.9 million and
$2.6 million in related party license revenue for the three and nine months
ended September 30, 2004, respectively, and $0.4 million and $0.7 million in
related party service revenue for the three and nine months ended September 30,
2004, respectively, relating to this agreement. At September 30, 2004,
related party deferred revenue related to this transaction amounted to $5.9
million. During the three and nine months ended September 30, 2003, the Company
recorded related party revenues totaling $0.7 million and $5.1 million,
respectively, related to agreements with AOL. At December 31, 2003, the Company had $0.9 million in related party
accounts receivable and $9.7 million in related party deferred revenues
relating to transactions entered into with AOL and Computer Associates. 6. Restructuring and Impairment Charges In 2003, the Company implemented three restructuring plans. The first
plan, implemented in February 2003, reduced operating expenses by closing the
Companys Utah office and related to the termination of 28 employees in that
office who were primarily engaged in sales and marketing activities. In
accordance with SFAS No. 146 Accounting for Costs Associated with Exit or
Disposal Activities, the Company recorded restructuring charges of $1.2
million. The restructuring charges represent the fair value of remaining lease
commitments reduced by estimated sublease rentals, employee severance and
termination benefits, the write-off of the net book value of certain fixed
assets used in the Utah office, and other miscellaneous charges. In September
2003, the Company re-evaluated market conditions surrounding its efforts to
sub-lease the Utah office space and adjusted the restructuring 14




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##### 



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS charge by $0.2
million related to the reduction of estimated sublease rentals as of September
30, 2003. The Company believes that it may be necessary to adjust the estimate
of sublease income in the future as the Companys ability to sublease the
property in Utah is contingent upon real estate and other market conditions in
Utah. The restructuring reserve activity for the nine months ended September 30, 2004
for the first plan related to lease costs. The activity in the first plan was
as follows (in thousands): Lease CostsRestructuring and impairment charges at December 31, 2003
    
    $
    508Cash paid
    
    
    (30
    )Balance at March 31, 2004
    
    
    478Cash paid
    
    
    (32
    )Balance at June 30, 2004
    
    
    446Cash paid
    
    
    (34
    )Balance at September 30, 2004
    
    $
    412
 The second plan was implemented in September 2003, and was designed to
streamline the business. Under the plan the Company eliminated 24 sales and
marketing, research and development, and general and administrative positions.
The Company incurred a restructuring charge of $0.5 million related to
severance arrangements. The charge is recorded on the income statement as a
restructuring and impairment charge. The second restructuring plan was
completed by September 30, 2003. In November 2003, however, the Company
increased the restructuring charge by $0.1 million in settlement of an action
brought by one of the terminated employees. In January 2004 the Company
recorded a non-cash adjustment to the restructuring accrual to reflect payments
that were less than originally contemplated under the plan. The restructuring activity for the second restructuring plan related to
employee severance and termination benefits up to March 31, 2004. There was no
activity for the second restructuring plan in the third quarter of 2004. The third plan was implemented in December 2003, and was designed to
consolidate international operations to the New York office. Accordingly, the
Company closed the London, England office, incurring a restructuring charge of
$0.1 million related to severance arrangements. This severance payment was
made in January 2004. As the lease relating to this office terminated in
February 2004 the Company did not incur a charge related to rent expense. The
severance charge is recorded on the income statement as a restructuring charge.
There was no activity for the third restructuring plan in the third quarter of
2004. 7. Comprehensive Loss Total comprehensive loss for the three and nine months ended September 30, 2004
and 2003 consisted of the following (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    (1,295
    )
    
    $
    (5,518
    )
    
    $
    (9,157
    )
    
    $
    (18,308
    )Foreign currency translation adjustment
    
    
    
    
    
    
    (6
    )
    
    
    (3
    )
    
    
    (20
    )Unrealized gain (loss) on marketable securities
    
    
    (1
    )
    
    
    
    
    
    
    (10
    )
    
    
    Comprehensive net income (loss)
    
    $
    (1,296
    )
    
    $
    (5,524
    )
    
    $
    (9,170
    )
    
    $
    (18,328
    )
 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. In 2004, the
Company added Search and Advertising systems as businesses that it managed
separately. The License segment sells software licenses to use the Viewpoint
software platform. Licenses are sold directly by the companys sales employees
and indirectly through VARs, for which the Company pays a commission. The
Service segment 15




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##### 



VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 September 30, 2004, the Company did not have employees dedicated
to the Search advertising segment. Advertising systems revenue is generated by
charging customers to host advertising campaigns based on a cost per thousand
(CPM) impressions. The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company does not currently
evaluate the performance of its segments beyond gross profit. The Company does
not allocate research and development, sales and marketing or general and
administrative costs, specifically, to either segment as it does not use that
information to make key operating decisions and does not believe that
allocating these expenses is necessary in evaluating performance. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands)Revenues:Licenses
    
    $
    158
    
    
    $
    317
    
    
    $
    542
    
    
    $
    2,166Related party licenses
    
    
    873
    
    
    
    
    
    
    
    2,652
    
    
    
    1,060Services
    
    
    888
    
    
    
    1,508
    
    
    
    3,477
    
    
    
    3,705Related party services
    
    
    497
    
    
    
    693
    
    
    
    2,097
    
    
    
    4,086Search advertising
    
    
    905
    
    
    
    
    
    
    
    913
    
    
    
    Advertising systems
    
    
    46
    
    
    
    
    
    
    
    83
    
    
    
    Total revenues
    
    
    3,367
    
    
    
    2,518
    
    
    
    9,764
    
    
    
    11,017Cost of Revenues:Licenses
    
    
    
    
    
    
    21
    
    
    
    4
    
    
    
    96Services
    
    
    736
    
    
    
    1,419
    
    
    
    2,279
    
    
    
    4,967Search
    
    
    10
    
    
    
    
    
    
    
    10
    
    
    
    Advertising systems
    
    
    43
    
    
    
    
    
    
    
    49
    
    
    
    Total cost of revenues
    
    
    789
    
    
    
    1,440
    
    
    
    2,342
    
    
    
    5,063Licenses
    
    
    1,031
    
    
    
    296
    
    
    
    3,190
    
    
    
    3,130Services
    
    
    649
    
    
    
    782
    
    
    
    3,295
    
    
    
    2,824Search advertising
    
    
    895
    
    
    
    
    
    
    
    903
    
    
    
    Advertising systems
    
    
    3
    
    
    
    
    
    
    
    34
    
    
    
    Total gross profit
    
    $
    2,578
    
    
    $
    1,078
    
    
    $
    7,422
    
    
    $
    5,954Gross profit
marginLicenses
    
    
    100
    %
    
    
    93
    %
    
    
    100
    %
    
    
    97
    %Services
    
    
    47
    
    
    
    36
    
    
    
    59
    
    
    
    36Search advertising
    
    
    99
    
    
    
    
    
    
    
    99
    
    
    
    Advertising systems
    
    
    7
    
    
    
    
    
    
    
    41
    
    
    
    Total gross profit
    
    
    77
    %
    
    
    43
    %
    
    
    76
    %
    
    
    54
    %
 16




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto. In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially from the results implied by the
forward looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in the section
entitled Factors That May Affect Future Results of Operations. You should
carefully review the risks described in other documents we file from time to
time with the Securities and Exchange Commission, including any future reports
to be filed in 2004 and our Annual Report onForm 10-K/Afor 2003. When used
in this report, the words expects, anticipates, intends, plans,
believes, seeks, targets, estimates, and similar expressions are
generally intended to identify forward-looking statements. You should not
place undue reliance on these forward-looking statements, which speak only as
of the date of this Quarterly Report onForm 10-Q. We undertake no obligation
to publicly release any revisions to the forwardlooking statements or reflect
events or circumstances after the date of this document. Overview Viewpoint Corporation (Viewpoint or the Company) is a leading provider
of interactive media technologies and services. Its graphics operating
platform, the Viewpoint Media Player, has been licensed by Fortune 500
companies and others for use in online, offline and embedded applications
serving a wide variety of needs, including: marketing campaigns, rich media
online advertising, product presentations, and business process visualizations.
Since November 2000 the Company has focused on the current business of
licensing the rights to use the Companys products and providing fee-based
professional services. On March 17, 2004, Viewpoint entered the internet search business by
launching a toolbar search product which the Company calls the Viewpoint
Toolbar. The Viewpoint Toolbar attaches to the Internet Explorer browser,
enabling web surfers to conduct internet searches without leaving the web page
they are viewing. When a user enters a term or phrase in the search field of
the Viewpoint Toolbar, search results appear not only as text links listed on a
search results page but also as thumbnail icons of the web pages themselves in
a tray that descends from the Viewpoint Toolbar. Search results delivered to
users of the Viewpoint Toolbar are supplied by Yahoo!/Overture and its
wholly-owned subsidiary, Overture Services, Inc. Under its Agreement with
Yahoo!/Overture, Viewpoint receives a share of the fees advertisers pay to
Yahoo!/Overture to be listed in the search results as a sponsored link. In
April 2004, the Company ended the test phase, and began delivering the
Viewpoint Toolbar Version 1.0. Adding a number of upgrades, including
decreasing the file size of the toolbar and adding text to the image results of
the tray, on July 1, the Company rolled out Viewpoint Toolbar Version 2.0. Viewpoint also offers an online advertising campaign management and
deployment product. Advertising systems permits publishers, advertisers, and
their agencies to manage the process of deploying online advertising campaigns.
This process includes creating the advertising content, selecting the sites on
which the advertisements will be deployed, setting the metrics (ad rotation,
the frequency with which an ad may be deployed, and others) associated with the
campaign, ad deployment, and tracking of campaign results. Advertising systems
product enables users to manage advertising campaigns across many sites. In
March 2004, Viewpoint announced the availability of AirTime, an extension of
advertising systems that permits users to manage and deploy online video
advertising campaigns. Viewpoint has a limited operating history upon which an evaluation of the
Company and its prospects can be based. Viewpoint has had significant
quarterly and annual operating losses since its inception, and, as of September
30, 2004, had an accumulated deficit of $254.7 million. Viewpoints prospects
must be considered in light of the risks and difficulties frequently
encountered in entering new businesses. There can be no assurance that
Viewpoint will achieve or sustain profitability. 17




---



##### 



RESULTS OF OPERATIONS The following table sets forth for the three and nine months ended
September 30, 2004 and 2003, the Companys consolidated statements of
operations expressed as a percentage of total revenues for the periods
indicated: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Statements of Operations DataRevenues:Licenses
    
    
    5
    %
    
    
    13
    %
    
    
    6
    %
    
    
    20
    %Related party licenses
    
    
    26
    
    
    
    
    
    
    
    27
    
    
    
    9Services
    
    
    26
    
    
    
    60
    
    
    
    36
    
    
    
    34Related party services
    
    
    15
    
    
    
    27
    
    
    
    21
    
    
    
    37Search
    
    
    27
    
    
    
    
    
    
    
    9
    
    
    
    Advertising systems
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenues:Licenses
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Services
    
    
    22
    
    
    
    56
    
    
    
    23
    
    
    
    45Search
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Advertising systems
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Total cost of revenues
    
    
    23
    
    
    
    57
    
    
    
    24
    
    
    
    46Gross profit
    
    
    77
    
    
    
    43
    
    
    
    76
    
    
    
    54Operating expenses:Sales and marketing
    
    
    28
    
    
    
    65
    
    
    
    30
    
    
    
    69Research and development
    
    
    23
    
    
    
    36
    
    
    
    26
    
    
    
    29General and administrative
    
    
    49
    
    
    
    136
    
    
    
    55
    
    
    
    81Depreciation
    
    
    6
    
    
    
    15
    
    
    
    6
    
    
    
    12Restructuring charges related to office closure
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    17Total operating expenses
    
    
    106
    
    
    
    279
    
    
    
    117
    
    
    
    208Loss from operations
    
    
    (29
    )
    
    
    (236
    )
    
    
    (41
    )
    
    
    (154
    )Other income (expense):Interest and other income, net
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Interest expense
    
    
    (7
    )
    
    
    (10
    )
    
    
    (7
    )
    
    
    (7
    )Changes in fair values of warrants to purchase
common stock and
conversion options of convertible notes
    
    
    (5
    )
    
    
    26
    
    
    
    (38
    )
    
    
    9Loss on early extinguishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Loss on conversion
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    Other income (loss)
    
    
    (11
    )
    
    
    16
    
    
    
    (53
    )
    
    
    (13
    )Loss before provision for income taxes
    
    
    (40
    )
    
    
    (220
    )
    
    
    (94
    )
    
    
    (167
    )Provision for income taxes
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    Net loss from continuing operations
    
    
    (41
    )
    
    
    (221
    )
    
    
    (95
    )
    
    
    (167
    )Adjustment to net loss on disposal of discontinued operations
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    1Net loss
    
    
    (38
    )%
    
    
    (219
    )%
    
    
    (94
    )%
    
    
    (166
    )%
 18




---



##### 



Critical Accounting Policies And Estimates Viewpoints discussion and analysis of its financial condition and results
of operations are based upon its consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. The Company evaluates its critical
accounting policies and estimates, including those related to revenue
recognition and goodwill and other intangible assets. The Company bases
estimates on historical experience and on various other assumptions that the
Company believes to be reasonable under the circumstances though actual results
may differ from these estimates under different assumptions or conditions. For
a complete description of the Companys accounting policies, see Note 2 to the
consolidated financial statements included in the 2003 Annual Report on Form
10-K/A. Described below are the areas where the Company believes that the
estimates, judgments or assumptions that the Company has made, if different,
would have yielded the most significant differences in the Companys financial
statements: Revenue Recognition The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition, as amended, Emerging Issues Task
Force (EITF) No. 00-21 Revenue Arrangements with Multiple Deliverables, and
Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition in Financial
Statements as amended by SAB No. 104 Revenue Recognition. Per SOP 97-2 and
SAB No. 101, as amended by SAB No. 104, the Company recognizes revenue when the
following criteria are met: (a) persuasive evidence of an arrangement exists,
(b) delivery has occurred or services have been rendered, (c) the Companys fee
is fixed or determinable, and (d) collectibility is reasonably assured. Viewpoint has generated revenues through four sources: (a) software
licenses, (b) services, (c) search advertising, and (d) advertising systems
revenue. License revenues are generated from licensing the rights to use
products directly to customers and indirectly through Value Added Resellers
(VARs). Service revenues are generated from fee-based professional services,
customer support services (maintenance arrangements), and training services
performed for customers that license the companys products. Search revenue,
as explained in more detail below, is derived from a share of the fees charged
by Yahoo!/Overture to advertisers who pay for sponsored links when a customer
clicks on the paid link on the results provided by the Viewpoint Toolbar.
Advertising systems revenue is generated by charging customers to host
advertising campaigns based on a cost per thousand (CPM) impressions. License revenues from direct customers include sales of perpetual and
term-based licenses for broadcasting digital content in the Viewpoint format.
License revenues are recognized up-front provided no further significant
obligations exist and the resulting receivable is deemed collectible by
management. Arrangements with VARs require (i) an up-front, non-refundable
payment, (ii) a percentage royalty based on sell-through, or (iii) both as
consideration for the right to resell the Viewpoint technology. Up-front,
non-refundable payments are recognized as license revenues when the VARs right
to resell the companys technology begins and the technology has been delivered
to the VAR, which is upon contract signing, provided all other revenue
recognition criteria are met and no further significant obligations exist. For
arrangements that do not call for an up-front, non-refundable payment, revenues
are recognized as the royalties are earned, which is upon notification of
sell-through by the VAR, provided all other revenue recognition criteria are
met and no further significant obligations exist. Fee-based professional services for customized software development are
performed on a fixed-fee or time-and-materials basis under separate service
arrangements. Revenues for fixed-fee arrangements are recognized over the
pattern of performance in accordance with the provisions of SAB No. 104. The
pattern of performance for service arrangements is measured by the percentage
of costs incurred and accrued to date for each contract, which primarily
consist of direct labor costs, cost of outsourcing, and overhead, to the
estimated total cost for each contract at completion. The percentage
approximates the percentage of a customers contract that has been completed
and would be available for the customer to use at that point in time. Use of
this method is based on the availability of reasonably dependable estimates.
If reasonably dependable estimates are not available due to the complexity of
the services to be performed, the Company defers recognition of any revenues
for the project until the project is 19




---



##### 



completed, delivered and accepted by the customer, provided all other
revenue recognition criteria are met and no further significant obligations
exist. Revenues from customer support services are recognized ratably over the
term of the contract. Revenues from training services are recognized as
services are performed. Fees from licenses sold together with fee-based professional services are
generally recognized upon delivery of the software, provided that the payment
of the license fees are not dependent upon the performance of the services, and
the services are not essential to the functionality of the licensed software.
If the services are essential to the functionality of the software, or payment
of the license fees are dependent upon the performance of the services, both
the software license and service fees are recognized in accordance with SOP
81-1 Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. The percentage of completion method is used for
those arrangements in which reasonably dependable estimates are available. If
reasonably dependable estimates are not available due to the complexity of the
services to be performed, the Company defers recognition of any revenues for
the project until the project is completed, delivered and accepted by the
customer, provided all other revenue recognition criteria are met and no
further significant obligations exist. For arrangements involving multiple elements, the Company defers revenue
for the undelivered elements based on their relative fair value and recognizes
the difference between the total arrangement fee and the amount deferred for
the undelivered elements as revenue. The determination of fair value of each
undelivered element in multiple element arrangements is based on the price
charged when the same element is sold separately. For maintenance and
technical support elements, the Company uses renewal rates to determine the
price when sold separately. The Company accounts for multiple element
arrangements which involve only fee-based professional services in accordance
with EITF 00-21. For licenses sold that include updates over a period of time
the Company recognizes the license revenue over the period in which updates are
provided. Search revenue is generated when a customer uses the Viewpoint Toolbar to
search the internet, and clicks on a sponsored advertisement included in the
search results. The Viewpoint Toolbars search results are provided by
Yahoo!/Overture, who collects a fee from the advertiser and remits a percentage
of the fee to Viewpoint. Revenue generated is a function of the number of
Viewpoint Toolbars performing searches, the number of searches that are
sponsored by advertisers, the number of advertisements that are clicked on by
Viewpoint Toolbar searchers, the rate advertisers pay for those advertisements,
and the percentage retained by Yahoo!/Overture for providing the results. Viewpoint also offers an online advertising campaign management and
deployment product. This advertising system permits publishers, advertisers,
and their agencies to manage the process of deploying online advertising
campaigns. The Company charges customer on a cost per thousand (CPM)
impression basis, and recognizes revenue when the impressions are served, so
long as all other revenue recognition criteria are satisfied. Standard terms for license arrangements require payment within 90 days of
the contract date, which typically coincides with delivery. Standard terms for
service arrangements, which are typically billed and collected on an
installment basis, require final payment within 90 days of completion of the
services. Probability of collection is based upon the assessment of the
customers financial condition through the review of their current financial
statements and/or credit reports. For follow-on sales to existing customers,
prior payment history is also used to evaluate probability of collection. The
Companys arrangements with customers do not contain product return rights. If
the fee is not fixed or determinable, revenue is recognized as payments become
due or as cash is received from the customer. If a nonstandard acceptance
period is required, revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period. Derivatives In 2002 and 2003, the Company issued convertible notes and warrants which
would require Viewpoint to issue registered shares of common stock upon
conversion of these securities. The Company accounts for the fair values of
these outstanding warrants to purchase common stock and conversion options of
its convertible notes in accordance with SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, and EITF Issue No. 00-19
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock, which requires the Company to bifurcate and
separately account for the conversion option and warrants as embedded
derivatives contained in the Companys convertible notes. The Company is
required to carry these embedded derivatives on its balance sheet at fair value
and the unrealized changes in the value of these embedded derivatives are
reflected in net income as changes in fair values of warrants to purchase
common stock and 20




---



##### 



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. Financial Results Viewpoint reported total revenue of $3.4 million for the third quarter
2004, compared to $2.5 million for the third quarter 2003. Viewpoint reported
total revenue of $9.8 million for the nine months ended September 30, 2004,
compared to $11.0 million for the nine months ended September 30, 2003. Gross
profit for the third quarter of 2004 was $2.6 million compared to $1.1 million
for the same period of 2003. Gross profit for the nine months ended September
30, 2004 was $7.4 million, compared to $6.0 million for the nine months ended
September 30, 2003. The improvement in gross profit in 2004 compared to 2003
was due to the addition of revenues from our higher margin search products of
$0.9 million, and higher margin services contracts during 2004. Operating loss for the nine months ended September 30, 2004 was $4.0
million compared to $17.1 million for the nine months ended September 30, 2003.
The lower level of operating losses came from a reduction in operating
expenses due to steps management implemented in 2003 to reduce costs, primarily
in payroll. Additionally in 2003 the Company recognized $1.9 million in
restructuring costs that were not recognized in 2004 and experienced a $2.1
million decrease in additional non-cash stock based compensation charges in
2003 compared to 2004. The Company recognized net loss of $1.3 million, or $(0.02) per share, in
the third quarter of 2004, compared to a net loss of
$5.5 million, or $(0.12)
per share for the third quarter of 2003. For the nine months ended September
30, 2004, the Company incurred a net loss of $9.2 million, or $(0.17) per
share, compared to a net loss of $18.3 million, or $(0.41) per share, for the
nine months ended September 30, 2003. The lower level of net loss was
principally due to reduced operating losses, offset by an increase in other
expenses principally due to an increase in the fair value of its obligation to
convertible debt and warrant holder of $3.7 million in the first nine months of
2004 on the cost attributable to its March 2003 financing. In March 2004, the Company completed a private placement whereby it
directly issued 1.5 million shares of common stock to an institutional investor
who had participated in the March 2003 financing. The issuance was for an
aggregate purchase price of $3.7 million and did not require banking placement
fees. Additionally, prior to the completion of the private placement the
institutional investor exercised its right to convert approximately $0.9
million of Viewpoint convertible debt it had acquired in March 2003 into shares
of Viewpoint common stock. This conversion resulted in a non-cash loss on
conversion of debt of $0.6 million. During the period beginning on April 15, 2004 and May 20, 2004  a period
which covered 25 consecutive trading days  the dollar volume-weighted average
price of the Companys common stock exceeded 150% of the conversion price
applicable to the outstanding convertible notes and the Company determined to
exercise its right to convert the outstanding notes into shares of Company
common stock. Accordingly, on May 20, 2004, the Company informed the
institutional investors holding the outstanding convertible notes that it would
exercise its right to convert that debt. On June 18, 2004, the Company
completed the conversion of the remaining outstanding convertible notes of $1.8
million and the related outstanding interest into 1.7 million shares of
Viewpoint common stock. The Company recorded a gain of $3.0 million related to
the change in the fair value of the conversion feature during the three months
ended June 18, 2004 through the date of the conversion. In addition, the
Company recorded a loss on conversion which represented the difference between
the fair value of the common stock issued in exchange for the notes and the
carrying value of the convertible notes on the date of conversion. This change
was primarily comprised of the write-off of unamortized loan discount and debt
issuance costs. Viewpoints cash, cash equivalents, and marketable securities as of
September 30, 2004 were $5.7 million compared to cash, cash equivalents, and
marketable securities of $9.5 million at December 31, 2003. This decrease can
be attributed to the Companys operating loss less the recognition of deferred
revenue, which was a non-cash item during the nine months ended September 30,
2004, offset by the first quarters private placement. 21




---



##### 



Revenues Three Months EndedSeptember 30,
    
    %2004
    
    2003
    
    Change(dollars in thousands)Three months ended:Licenses
    
    $
    158
    
    
    $
    317
    
    
    
    (50
    )%Related party licenses
    
    
    873
    
    
    
    
    
    
    
    N/AServices
    
    
    888
    
    
    
    1,508
    
    
    
    (41
    )Related party services
    
    
    497
    
    
    
    693
    
    
    
    (28
    )Search
    
    
    905
    
    
    
    
    
    
    
    N/AAdvertising systems
    
    
    46
    
    
    
    
    
    
    
    N/ATotal revenues
    
    $
    3,367
    
    
    $
    2,518
    
    
    
    34
    %Nine months ended:Licenses
    
    $
    542
    
    
    $
    2,166
    
    
    
    (75
    )%Related party licenses
    
    
    2,652
    
    
    
    1,060
    
    
    
    150Services
    
    
    3,477
    
    
    
    3,705
    
    
    
    (6
    )Related party services
    
    
    2,097
    
    
    
    4,086
    
    
    
    (49
    )Search
    
    
    913
    
    
    
    
    
    
    
    N/AAdvertising systems
    
    
    83
    
    
    
    
    
    
    
    N/ATotal revenues
    
    $
    9,764
    
    
    $
    11,017
    
    
    
    (11
    )%
 The Company generates revenues by selling licenses to the Viewpoint
graphical platform principally to internet content publishers. Prior to 2004,
licenses were generally 15 months in duration. Revenues were recognized upon
the completion of the sales and delivery process so long as all other revenue
recognition criteria were satisfied. The Company supplemented its license
revenue by providing content development services to licensees. The service
revenues were recognized on a percentage of completion basis as computed by
comparing the incurred costs of the project to the total estimated project cost
and applying this percentage against the total contracted revenue. During 2004 the Company continues to recognize license sales upon delivery
so long as all other revenue recognition criteria are satisfied. Since January
2004, licenses are generally sold for a 12 month term. The Company also adopted
a new licensing price structure in 2004 whereby larger license sales, that are
made less frequently, contain product upgrades when and if available for a
period of 12 months. These license sales will be amortized over a 12 month
period, due to the nature of when and if available upgrades. During October, 2003 the Company entered into an amended license agreement
with America Online, Inc. (AOL) which provided for payments by AOL of $10
million which was received in 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 revenue from this agreement ratably as license and services revenue
through December 2005 which represents the duration of the Companys obligation
for post-contract support of the source code element including quarterly
upgrades and maintenance requirements. Approximately $0.9 million is recognized
each quarter as related party license revenue and $0.1 million as related party
services revenue. During 2003 the Company began to migrate its license and services sales
efforts toward larger customers. The customers the Company began targeting had
longer sales cycles and often elected to procure limited use or project
licenses for the Companys software. This enabled the customers to understand
the softwares capabilities before they committed to larger and longer license
purchases. These limited use projects are generally for services as the
Company develops content for the customers to use with the Companys software.
As the Company has been migrating its sales efforts towards these larger
customers with a longer license sales cycle, the Company has experienced a
decline in the mix of license revenues relative to total revenues. The Company
adopted a consistent license pricing schedule at the beginning of 2004 to help
broaden its potential customer base. If the Company is not able to increase
the number of sales at the entry level, or sell larger and longer term licenses
to larger customers the Company may not be able to reverse the decline in
License revenues relative to total revenues. 22




---



##### 



On March 17, 2004 Viewpoint entered the internet search business, by
launching the Viewpoint Toolbar on a test basis. In April 2004, the Company
ended the test phase, and began delivering the Viewpoint Toolbar Version 1.0.
Search revenue is generated when a customer uses the Viewpoint Toolbar to
search the internet, and clicks on a sponsored advertisement included in the
search results. The Viewpoint Toolbars search results are provided by
Yahoo!/Overture, who collects a fee from the advertiser and remits a percentage
of the fee to Viewpoint. Revenue generated is a function of the number of
Viewpoint Toolbars performing searches, the number of searches that are
sponsored by advertisers, the number of advertisements that are clicked on by
Viewpoint Toolbar searchers, the rate advertisers pay for those advertisements,
and the percentage retained by Yahoo!/Overture for providing the results.
Search revenue reported to the Company by the search results provider in the
second quarter of 2004 did not meet the criteria for fixed and determinable
revenue, and was therefore not recorded as revenue. The Company obtained
satisfactory documentation to meet the fixed and determinable criteria for
Search revenue in the third quarter and recognized revenues of $0.9 million for
the entire third quarter during the three months ended September 30, 2004. Viewpoint also offers an online advertising campaign management and
deployment product. Advertising systems permits publishers, advertisers, and
their agencies to manage the process of deploying online advertising campaigns.
The Company charges customers on a cost per thousand (CPM) impression basis,
and recognizes revenue when the impressions are served, so long as all other
revenue recognition criteria are satisfied. The Company expects revenues from
advertising systems to continue to grow in future quarters. License revenues of $0.2 million decreased approximately $0.2 million or
50% for the three months ended September 30, 2004 compared to the same period
last year. License revenues for the three months ended September 30, 2004
were essentially generated from the sale of three licenses, which were greater
than $50,000, sold during the first nine months of 2004, which provided upgrade
rights, and are therefore being recognized ratably over 12 months. The revenue
related to these contracts amounted to $0.1 million in the third quarter of
2004. In addition, the Company recognized another $0.1 million for license
contracts that were recognized upon delivery of the software, since the Company
did not provide any significant post contract customer support. For the three
months ended September 30, 2003, the Company sold seven licenses totaling more
than $0.3 million, in the aggregate, that were recognized upon delivery of the software, since the
Company did not provide any significant post contract customer support. License revenues of $0.5 million decreased approximately $1.6 million or
75% for the nine months ended September 30, 2004, compared to the same period
last year. License revenues in 2004 were essentially generated from sales to
smaller licensees or were larger licenses, but included upgrades when and if
available, and therefore, are being recognized ratably over 12 months. As
mentioned above, the Company sold three licenses that were greater than $50,000
during the first nine months of 2004, which provided upgrade rights, and are
therefore being recognized ratably over 12 months. Conversely, for the nine
months ending September 30, 2003, the Company sold nine licenses for more then
$50,000, totaling $1.7 million, which did not provide upgrades and were
recognized upon delivery of the software. These licenses included three
licenses purchased by international Value Added Resellers (VARs), two
international sales through its London office and two multi-year licenses. The
Company has ceased pursuing sales through reseller channels and closed the
department that supported this process at its headquarters. It has also closed
its London office in December 2003 due to costs involved in supporting that
location. One of the multi-year licenses remains in place and another was
subsequently modified. Related party license revenues of $0.9 million increased approximately
$0.9 million, or 100%, for the three months ended September 30, 2004 compared
to the same period last year. During 2003 an AOL employee was also a Director
of the Company. This employees term as Director ended in December 2003.
Accordingly, revenue associated with contracts entered into with AOL prior to
December 31, 2003 was recorded as related party revenue. The increase in
related party license revenues was due to AOL, working under a new agreement
that was executed in October 2003, which, based on the terms of the agreement,
require revenue to be recognized ratably through December 2005, as opposed to
the previous agreement which required the Company to recognize revenues when
payments were due. The agreement entered into in October 2003 will be recorded
as related party revenue, as the terms were agreed upon and the contract signed
when AOL was a related party. Related party license revenues increased approximately $1.6 million, or
150% to $2.7 million, for the nine months ended September 30, 2004 compared to
the same period last year. The nine month increase is attributable to the
difference in the agreements AOL was working under, signed in October
2003, as mentioned above. 23




---



##### 



Service revenues of $0.9 million decreased approximately $0.6 million or
41% for the three months ended September 30, 2004 compared to the same period
last year. The decrease is related to a significant non-recurring project that
was largely completed in the third quarter of 2003. Service revenues of $3.5 million decreased approximately $0.2 million or
6% for the nine months ended September 30, 2004 compared to the same period
last year. The Companys revenues during 2004 included $0.5 million from a
service project that was completed in the third quarter of 2003 for which the
Company received a final payment in February 2004. The Company recorded $1.2
million in revenue for this same service project for the same period in 2003.
The decrease was offset by certain service revenues from AOL  which are also included in this category in 2004 as they
ceased being a related party in December 2003. Related party service revenues of $0.5 million and $2.1 million for the
three and nine months ended September 30, 2004, respectively decreased by
approximately $0.2 million or 28%, and $2.0 million or 49%, respectively,
compared to the same period last year. This decrease is due to AOL use of the
Companys engineering professional services extensively in the second and third
quarter of 2003, amounting to $1.5 million in revenue. These services were not
used in 2004. In addition, revenues included in 2004 as related party service
revenues relate to contracts that were entered into prior to December 2003. Search revenues of $0.9 million for the three and nine month periods of
2004 include approximately $0.1 million from the second quarter of 2004 that is
recognized in the third quarter when revenue amounts became fixed or
determinable for the period. Search revenues are generated when users of the
Viewpoint Toolbar are provided search results from advertisers that they click
on to see. These advertisers then pay a fee to Yahoo!/Overture, who remits a
percentage of the fee to Viewpoint. The Company had installed 1.5 million tool
bars through July 2, 2004 and 4.8 million toolbars through September 30, 2004. The Company recognized $46,000 and $83,000 in advertising systems revenue
for the three and nine months ended September 30, 2004. While growth in this
product revenue has been slower than anticipated the Company expects growth to
continue during the fourth quarter which has historically been a
stronger period of advertising, and as more clients use the advertising system. 24




---



##### 



Cost of revenues September 30,
    
    %2004
    
    2003
    
    Change(dollars in thousands)Three months ended:Licenses
    
    $
    
    
    
    $
    21
    
    
    
    (100
    )%Percentage of Licenses Revenues
    
    
    
    %
    
    
    7
    %Nine months ended:Licenses
    
    $
    4
    
    
    $
    96
    
    
    
    (96
    )%Percentage of Licenses Revenues
    
    
    
    %
    
    
    3
    %Three months ended:Services
    
    $
    736
    
    
    $
    1,419
    
    
    
    (48
    )%Percentage of Services Revenues
    
    
    53
    %
    
    
    64
    %Nine months ended:Services
    
    $
    2,279
    
    
    $
    4,967
    
    
    
    (54
    )%Percentage of Services Revenues
    
    
    41
    %
    
    
    64
    %Three months ended:Search
    
    $
    10
    
    
    $
    
    
    
    
    N/APercentage of Search Revenues
    
    
    1
    %
    
    
    
    %Nine months ended:Search
    
    $
    10
    
    
    $
    
    
    
    
    N/APercentage of Search Revenues
    
    
    1
    %
    
    
    
    %Three months ended:Advertising systems
    
    $
    43
    
    
    $
    
    
    
    
    N/APercentage of Advertising Systems Revenues
    
    
    93
    %
    
    
    
    %Nine months ended:Advertising systems
    
    $
    49
    
    
    $
    
    
    
    
    N/APercentage of Advertising Systems Revenues
    
    
    59
    %
    
    
    
    %
 Cost of revenues for licenses consists primarily of commissions to VARs.
The decrease in cost of license revenues for the three and nine months ended
September 30, 2004 is attributable to a decrease in sales to VARs that require
commission payments, as compared to the same periods last year. Cost of revenues for services consists primarily of salaries, consulting
fees and overhead for those who provide fee-based content creation and
engineering professional services. Cost of revenues decreased by $0.7 million
for the three months ended September 30, 2004 as compared to the same period
last year, due to the overall decrease in services revenues as well as the
Companys cost controls, including a reduced reliance on outside contractors in
the services group. Cost of revenues for services decreased by $2.7 million
for the nine months ended September 30, 2004 as compared to the same period
last year. The decrease in cost of revenues for services is attributable to
the decrease in service revenues. Services expenses as a percentage of
services revenues decreased because of the $0.5 million payment made in
February 2004, which was recognized as revenue in 2004 against which the cost
had been recognized in cost of revenues in 2003, and due to more effective cost
controls, including a reduced reliance on outside contractors, by the services
group. The Company incurs cost of revenues related to Search revenue for the
hosting services associated with providing search results. Bandwidth costs
utilized in providing results has been minimal. As Search revenue increases
the hosting services associated with this revenue will increase. Cost of revenues from advertising systems consists of the web-hosting fees
associated with serving advertising content and costs of developing certain
advertisements in contracts that included a combined price for developing
creative material and delivering that material. The Company is continually
evaluating pricing for hosting services in order to reduce the delivery
expenses to the greatest extent practicable. The Company has recently separated
creative 25




---



##### 



development from delivery contracts which will separate the creative
development revenues and costs into services revenues and costs in future
quarters. Sales and marketing September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Sales and Marketing
    
    $
    929
    
    
    $
    1,637
    
    
    
    (43
    )%Percentage of total revenues
    
    
    28
    %
    
    
    65
    %Nine months ended:Sales and Marketing
    
    $
    2,925
    
    
    
    7,625
    
    
    
    (62
    )%Percentage of total revenues
    
    
    30
    %
    
    
    69
    %
 Sales and marketing expenses include salaries and benefits, sales
commissions, non-cash stock-based compensation charges, consulting fees, and
travel and entertainment expenses for sales and marketing personnel. Sales and
marketing expenses also include the cost of programs aimed at increasing
revenue, such as advertising, trade shows, and public relations. Sales and marketing expenses decreased by $0.7 million or 43% for the
three months ended September 30, 2004 compared to the same period last year due
to a decrease in personnel in the sales and marketing area. Personnel costs
decreased by $0.8 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 $0.1 million due to a reduction in
sales staff. These decreases were offset by an increase in marketing expense
related to the Companys search business of $0.3 million. Sales and marketing expenses decreased by $4.7 million or 62% for the nine
months ended September 30, 2004 compared to the same period last year due to a
decrease in personnel in the sales and marketing area. Personnel costs
decreased by $3.7 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 $0.4 million due to a reduction in
sales staff and a decrease in the number of trade events attended by the
Company. Consulting expenses, including marketing expenses such as trade
shows, decreased by $0.9 million related to decreases in marketing efforts for
certain products compared to the same period last year. Non-cash stock-based
compensation charges decreased $0.4 million due to headcount reductions in
sales and marketing personnel who had received option grants in the past where
the exercise price was lower than the market value of the Companys common
stock on the date of grant, or whose options became fully vested. Currently the
Company issues stock options to new personnel with an exercise price equal to
the market value of the common stock on the date of grant. These decreases
were offset by an increase in marketing expense related to the Companys search
business of $0.8 million. Research and development September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Research and development
    
    $
    783
    
    
    $
    921
    
    
    
    (15
    )%Percentage of total revenues
    
    
    23
    %
    
    
    36
    %Nine months ended:Research and development
    
    $
    2,556
    
    
    $
    3,232
    
    
    
    (21
    )%Percentage of total revenues
    
    
    26
    %
    
    
    29
    %
 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 26




---



##### 



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 developed significant enhancements to the video playback
functionality of Viewpoint Media Player (which the Company made available in
September 2003), an authoring tool for clients publishing advertising content,
Computer Aided Design (CAD) workflow solutions and technology for converting
CAD data into Viewpoint content, expanded capability of the Video Media Player
onto new platforms, developed new configuration capabilities for user
interfaces, and enhancements to the Viewpoint Media Player that allow print
quality images to be generated from interactive online content. Additionally,
the Company built an ad serving system, which is capable of deploying
advertising on internet websites. Beginning in 2004 the Company expanded its
efforts to build the Viewpoint Toolbar for searching and related advertising
efforts. It also developed a creative assembly capability for the advertising
systems product that is used to deploy advertising to publisher sites on the
internet. Additionally it developed the capability of delivering video
advertising using its advertising system. The Company has also been building a
software development kit that will simplify the creation of graphical content
to be deployed on the Viewpoint platform that should be available to the market
in 2005. Research and development expenses decreased by $0.1 million or 15% for the
three months ended September 30, 2004 compared to the same period last year.
The most significant decrease came in non-cash stock-based compensation which
decreased $0.1 million due to headcount reductions in research and development
personnel who had received option grants in the past where the exercise price
was lower than the market value of the Companys common stock on the date of
grant, or whose options became fully vested. Travel and entertainment costs
associated with a small reduction in staff size of the research and development
department and consulting expenses resulted in $0.1 million decrease compared
to the same period last year. These decreases were off-set by an increase in
salary expenses $0.1 million. Salary expenses increased due to specific
engineering salaries that were classified as cost of revenues as a result of
revenue generating customer specific development work in the third quarter of
2003. Such contracts did not exist in the third quarter of 2004. Research and development expenses decreased by $0.7 million or 21% for the
nine months ended September 30, 2004 compared to the same period last year. The
most significant decrease came in non-cash stock-based compensation which
decreased $0.8 million due to headcount reductions in research and development
personnel who had received option grants in the past where the exercise price
was lower than the market value of the Companys common stock on the date of
grant, or whose options became fully vested. These decreases were off-set by
an increase in salaries and benefits of $0.2 million. Salaries and benefits
increased due to specific engineering salaries and benefits that were
classified as cost of revenues as a result of revenue generating customer
specific development work during the first three quarters of 2003. Such
contracts did not exist in the same period of 2004. 27




---



##### 



General and administrative September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:General and Administrative
    
    $
    1,631
    
    
    $
    3,413
    
    
    
    (52
    )%Percentage of total revenues
    
    
    49
    %
    
    
    136
    %Nine months ended:General and Administrative
    
    $
    5,358
    
    
    $
    8,951
    
    
    
    (40
    )%Percentage of total revenues
    
    
    55
    %
    
    
    81
    %
 General and administrative expenses primarily consist of corporate
overhead of the Company, which includes salaries and benefits related to
finance, human resources, legal, and executive personnel along with other
administrative costs such as facilities costs, legal, accounting and investor
relations fees, insurance expense, and bad debt expense. General and administrative expenses decreased by $1.8 million or 52% for
the three months ended September 30, 2004 compared to the same period last
year. Salary costs decreased by $0.7 million associated with the reduction in
executive staff associated with the cost reduction programs implemented by
management in 2003. Non-cash stock-based compensation decreased by $0.3 million
due to headcount reductions in general and administrative personnel who had
received option grants in the past where the exercise price was lower than the
market value of the Companys common stock on the date of grant, or whose
options became fully vested. Corporate costs were also $0.2 million higher in
the third quarter of 2003 due to the SEC review of the companys financial
statements. In addition, the Company wrote off $0.2 million of internally
developed software costs in 2003 that was determined to be obsolete in
September 2003. Lastly, the Company received $0.1 million of a receivable that
had been written off in the second quarter of 2003. General
and administrative expenses decreased by $3.6 million or 40% for
the nine months ended September 30, 2004 compared to the same period last year.
Bad debt expense decreased by $0.7 million, and non-cash stock-based
compensation decreased by $0.9 million due to headcount reductions in general
and administrative personnel who had received option grants in the past where
the exercise price was lower than the market value of the Companys common
stock on the date of grant, or whose options became fully vested. Facility
costs decreased by $0.4 million associated with the closing of a facility in
Utah in a restructuring completed in 2003. Salary costs decreased by $0.5
million associated with the reduction in executive staff associated with the
cost reduction programs implemented by management in 2003. Corporate costs were
also higher by $0.6 million in 2003 due to the SEC review of the Companys
financial statements. Depreciation expense September 30,2004
    
    2003
    
    % Change(dollars in thousands)}Three months ended:Depreciation
    
    $
    205
    
    
    $
    383
    
    
    
    (46
    )%Percentage of total revenues
    
    
    6
    %
    
    
    15
    %Nine months ended:Depreciation
    
    $
    629
    
    
    $
    1,305
    
    
    
    (52
    )%Percentage of total revenues
    
    
    6
    %
    
    
    12
    %
 Depreciation expense decreased $0.2 million, or 46%, for the three months
ended September 30, 2004, compared to the same period last year, and $0.7
million, or 52%, for the nine months ended September 30, 2004, respectively.
The decreases were due to the write-off of certain fixed assets related to the
closure of the Companys Utah office in 2003, and the overall reduction of
assets used in business due to the restructurings. 28




---



##### 



Amortization of intangible assets September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Amortization of intangible assets
    
    $
    12
    
    
    $
    1
    
    
    
    1,100
    %Percentage of total revenues
    
    
    
    %
    
    
    
    %Nine months ended:Amortization of intangible assets
    
    $
    16
    
    
    $
    9
    
    
    
    78
    %Percentage of total revenues
    
    
    
    %
    
    
    
    %
 Amortization of intangible assets relates to the amortization of patents
and trademarks. Restructuring and impairment charges September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Restructuring charges
    
    $
    
    
    
    $
    674
    
    
    
    (100
    )%Percentage of total revenues
    
    
    
    %
    
    
    27
    %Nine months ended:Restructuring charges
    
    $
    (17
    )
    
    $
    1,885
    
    
    
    (101
    )%Percentage of total revenues
    
    
    
    %
    
    
    17
    %
 In 2003, the Company implemented three restructuring plans. The first
plan, implemented in February 2003, reduced operating expenses by closing the
Companys Utah office and related to the termination of 28 employees in that
office who were primarily engaged in sales and marketing activities. In
accordance with SFAS No. 146 Accounting for Costs Associated with Exit or
Disposal Activities, the Company recorded restructuring charges of $1.2
million. The restructuring charges represent the fair value of remaining lease
commitments reduced by estimated sublease rentals, employee severance and
termination benefits, the write-off of the net book value of certain fixed
assets used in the Utah office, and other miscellaneous charges. In September
2003, the Company re-evaluated market conditions surrounding its efforts to
sub-lease the Utah office space and increased the restructuring charge by $0.2
million related to the reduction of estimated sublease rentals. The second plan was implemented in September 2003, and was designed to
streamline the business. Under the plan the Company eliminated 24 sales and
marketing, research and development, and general and administrative positions.
The Company incurred a restructuring charge of $0.5 million related to
severance arrangements. The second restructuring plan was completed by
September 30, 2003. In November 2003, the Company increased the
restructuring charge by $0.1 million in settlement of an action brought by
one of the terminated employees. In January 2004 the Company recorded a
non-cash adjustment to the restructuring accrual to reflect payments that were
less then originally contemplated under the plan. The third plan was implemented in December 2003 and was designed to
consolidate international operations to the New York office. Accordingly the
Company closed the London, England office incurring a restructuring charge of
$0.1 million primarily related to severance. The charge is recorded on the
income statement as a restructuring charge. The third restructuring plan was
completed by December 31, 2003. Certain adjustments relating to termination benefits were recorded against
the remaining restructuring accruals in 2004. 29




---



##### 



Interest and other income, net September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Interest and other income, net
    
    $
    23
    
    
    $
    8
    
    
    
    188
    %Percentage of total revenues
    
    
    1
    %
    
    
    
    %Nine months ended:Interest and other income, net
    
    $
    69
    
    
    $
    42
    
    
    
    64
    %Percentage of total revenues
    
    
    1
    %
    
    
    
    %
 Interest and other income, net, primarily consists of interest and
investment income on cash, cash equivalents and marketable securities. As a
result, interest and other income, net, fluctuates with changes in the
Companys cash, cash equivalents and marketable securities balances and market
interest rates. Interest and other income, net, increased for the three and nine months
ended September 30, 2004 compared to the same periods last year due to an
increase in average cash, cash equivalents, and marketable securities balances
due to the private placements in March 2004 and November 2003. Interest expense September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Interest expense
    
    $
    (231
    )
    
    $
    (257
    )
    
    
    (10
    )%Percentage of total revenues
    
    
    (7
    )%
    
    
    (10
    )%Nine months ended:Interest expense
    
    $
    (717
    )
    
    $
    (743
    )
    
    
    (3
    )%Percentage of total revenues
    
    
    (7
    )%
    
    
    (7
    )%
 Interest expense consists of interest paid and accrued, and amortization
of debt discount and debt issue costs on the Companys outstanding convertible
and subordinated notes. The notes were executed and funded during the first
quarter of 2003. In March 2004, $0.9 million of convertible notes were
exchanged for common stock by the note-holder. In June 2004, the remaining
$1.8 million of convertible notes were exchanged for common stock by the
note-holders. Interest expense decreased for the three months ended September 30, 2004
due to the conversion of debt in March and June of 2004. Loss on early extinguishment of debt September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Loss on early extinguishment of debt
    
    $
    
    
    
    $
    
    
    
    
    N/A
    %Percentage of total revenues
    
    
    
    %
    
    
    
    %Nine months ended:Loss on early extinguishment of debt
    
    $
    
    
    
    $
    (1,682
    )
    
    
    (100
    )%Percentage of total revenues
    
    
    
    %
    
    
    (15
    )%
 On December 31, 2002, the Company completed a private placement of
convertible notes and warrants in which it issued to three institutional
investors, 4.95% convertible notes having an aggregate principal amount of $7.0
million, and warrants to purchase 0.7 million shares of Company common stock.
The convertible notes were to mature on December 31, 2007, unless earlier
converted into shares of Company common stock at a price of $2.26 per share. 30




---



##### 



On March 25, 2003, the Company entered into Redemption, Amendment and
Exchange Agreements with the three institutional investors with whom it had
completed the private placement of convertible notes and warrants on December
31, 2002. The Company recorded a loss for the quarter ended September 30,
2003, on the early extinguishment of the original convertible notes in the
amount of $1.7 million of which $0.7 million related to the write-off of
deferred loan costs. In conjunction with the extinguishment, the Company paid
$3.3 million, issued new convertible notes in the principal amount of $2.7
million and issued 1,351,351 shares of its common stock with a market value of
$0.7 million. The difference between (i) the carrying value of the outstanding
convertible notes exchanged and (ii) cash paid and the fair value of the common
stock and new convertible notes issued, amounted to $1.0 million and was
included in the loss on early extinguishment of debt. The Company charged the loss on early extinguishment of debt to operations
as such loss did not qualify for classification as extraordinary. Loss on conversion of debt September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Loss on conversion of debt
    
    $
    
    
    
    $
    
    
    
    
    N/APercentage of total revenues
    
    
    
    %
    
    
    
    %Nine months ended:Loss on conversion of debt
    
    $
    (810
    )
    
    $
    
    
    
    
    N/APercentage of total revenues
    
    
    (9
    )%
    
    
    
    %
 On March 17, 2004, one of the institutional investors holding the
convertible notes converted $0.9 million of outstanding notes for shares of the
Companys common stock. In the first quarter of 2004, the Company recorded a
loss of $1.4 million related to the change in the fair value of the conversion
feature from January 1, 2004 through the date of the conversion. For the three
months ended March 31, 2004 the Company also recorded a loss related to a
change in the fair value of the conversion feature and warrants of $3.7 million
and $1.3 million, respectively. In addition, on the same day as the conversion, the Company sold 1.5
million shares of common stock in a private placement to the institutional
investor, for $3.7 million or $2.45 per share. The Company recorded a loss on
conversion of debt in the amount of $0.6 million, which represented the
write-off of unamortized loan discount and debt issuance costs of $0.1 million
and the difference between the proceeds received from the private placement and
the fair value of the common stock issued based upon the closing price of the
Companys stock on the day of the sale of $0.5 million. The remaining
noteholders chose not to exercise their right to redeem their notes in amount
up to 20% of the $3.7 million received by the Company within 10 days of the
Companys public announcement of the closing of the private placement. During the period beginning on April 15, 2004 and ending on May 20, 2004,
a period which covered 25 consecutive trading days, the dollar volume-weighted
average price of the Companys common stock exceeded 150% of the conversion
price applicable to the outstanding convertible notes and the Company
determined to exercise its right to convert the outstanding notes into shares
of Company common stock. Accordingly, on May 20, 2004, the Company informed
the institutional investors holding the outstanding convertible notes that it
would exercise its right to convert that debt. On June 18, 2004, the Company
completed the conversion of the remaining outstanding convertible notes of $1.8
million and the related outstanding interest into 1.7 million shares of
Viewpoint common stock. In addition, the Company recorded a loss on conversion
which represented the difference between the fair value of the common stock
issued in exchange for the notes and the carrying value of the convertible
notes on the date of conversion. This change was primarily comprised of the
write-off of unamortized loan discount and debt issuance costs. 31




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##### 



Changes in fair value of warrants to purchase common stock and conversion
options of convertible notes September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Changes in fair value of warrants to
purchase common stock and conversion
options of convertible notes
    
    $
    (162
    )
    
    $
    667
    
    
    
    (124
    )%Percentage of total revenues
    
    
    (5
    )%
    
    
    26
    %Nine months ended:Changes in fair value of warrants to
purchase common stock and conversion
options of convertible notes
    
    $
    (3,715
    )
    
    $
    1,010
    
    
    
    (468
    )%Percentage of total revenues
    
    
    (38
    )%
    
    
    9
    %
 Based on the provisions of SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, and EITF Issue No. 00-19 Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock, the Company records either income or expense based on a
decrease or increase, respectively, of the Company share price. The Company
recorded a loss for the three months ended September 30, 2004 based on the
increase in fair values of the warrants of $0.2 million. For the nine months
ended September 30, 2004, the Company recorded a loss based on the increase in
fair values of the conversion options of its convertible notes of $3 million
and warrants of $0.7 million. Provision for income taxes September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Provision for income taxes
    
    $
    33
    
    
    $
    26
    
    
    
    27
    %Percentage of total revenues
    
    
    1
    %
    
    
    1
    %Nine months ended:Provision for income taxes
    
    $
    68
    
    
    $
    39
    
    
    
    74
    %Percentage of total revenues
    
    
    1
    %
    
    
    
    %
 Provision for income taxes consists primarily of certain minimum state
income taxes as well as foreign tax withholdings. Adjustment to net loss on disposal of discontinued operations September 30,2004
    
    2003
    
    % Change(dollars in thousands)Three months ended:Adjustment to net loss on disposal
of discontinued operations, net of tax
    
    $
    90
    
    
    $
    41
    
    
    
    120
    %Percentage of total revenues
    
    
    3
    %
    
    
    2
    %Nine months ended:Adjustment to net loss on disposal
of discontinued operations, net of tax
    
    $
    129
    
    
    $
    157
    
    
    
    (18
    )%Percentage of total revenues
    
    
    1
    %
    
    
    1
    %
 In December 1999, the Board of Directors of the Company approved a plan to
focus exclusively on its interactive media technologies and digital content
creation services and to correspondingly divest itself of its prepackaged 32




---



##### 



software graphics business. Accordingly, these operations are reflected as
discontinued operations for all periods presented in the accompanying
consolidated statements of operations. The adjustment to net loss on disposal of discontinued operations for the
three and nine months ended September 30, 2004, represents royalty payments
received for certain prepackaged software. Factors That May Affect Future Results of Operations We believe that in the future our results of operations could be affected
by various factors including:  
    
    We have a history of losses and expect to incur losses in the
future, which may cause our share price to decline.
    
    We may have to obtain financing on less favorable terms, which
could dilute current stockholders ownership interests in the company.
    
    Our business is difficult to evaluate because we have a limited
operating history and have only recently launched our search toolbar
and advertising systems products.
    
    Our competitors in the search business include much larger
companies like Google, Microsoft, Yahoo! and others that have
significantly greater resources than we do to build a business.
    
    The success of our graphically enhanced search operations depends
on users satisfaction with search results supplied by Yahoo!/Overture.
    
    Our business may not grow if the internet advertising market does
not continue to develop or if we are unable to successfully implement
our business model.
    
    Our failure to successfully compete may hinder our growth.
    
    Our revenues will be subject to seasonal fluctuations.
    
    Our financial performance and reduction of our workforce may affect
the morale and performance of our personnel.
    
    We may need to enter into business combinations and strategic
alliances which could be difficult to integrate and may disrupt our
business.
    
    We may need to develop new products or other untested methods of
increasing sales with our existing products or distribution network to
generate sales and if we are unsuccessful the growth of our business
may cease or decline.
    
    We will need to keep pace with rapid technological change in the
internet search and advertising industries.
    
    Our ad campaign management and deployment solution may not be
successful at attracting and retaining customers.
    
    We might experience significant defects in our products.
    
    Our technical systems are vulnerable to interruption and damage.
    
    Our stock price is volatile, which could subject us to class action
litigation or make future financing difficult.
    
    Our charter documents could make it more difficult for an unsolicited third party to acquire us.
    
    We may be unable to protect our intellectual property rights.
    
    We may be liable for infringing the intellectual property rights of others.
    
    Internet security poses risks to our entire business.
    
    If we fail to maintain an effective system of internal
controls, we may not be able to accurately report our financial
results or prevent fraud, which could result in a negative market
reaction. We are now in the process of complying with requirements
resulting from the Sarbanes-Oxley Act of 2002 (SOX), including
those provisions of Section 404 of SOX that establish requirements
for both management and independent registered public accounting
firms with respect to reporting on internal control over financial
reporting. In 2004, we have devoted significant
financial and other resources to review and strengthen our internal
controls in advance of complying with the Section 404 requirements.
The requirements and processes associated with Section 404 are new and
untested and we cannot be certain that the measures we have taken
will be sufficient to meet the Section 404 requirements or that we
will be able to implement and maintain adequate controls over our
financial processes and reporting in the future. If we are unable to
comply with the requirements imposed by Section 404 of SOX in a
timely manner, we cannot predict how the market or regulators will
react. Recent Accounting Pronouncements In April 2004, the Emerging Issues Task Force issued Statement No. 03-06
Participating Securities and the Two-Class Method Under FASB Statement No.
128, Earnings Per Share (EITF 03-06). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the Company 33




---



##### 



when, and if, it
declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 is effective for fiscal periods beginning after
March 31, 2004. The EITF did not have an effect on the Companys financial
statements. The Emerging Issues Task Force (EITF) has reached a consensus on EITF
Issue No. 04-8, Accounting Issues Related to Certain Features of Contingently
Convertible Debt and the Effect on Diluted Earnings per Share. The effective
date for this consensus will be the same as the effective date for the revised
version of FASB Statement No. 128, Earnings per Share",yet to be issued by
the Board. The Boards most recent discussion on the effective date for
Statement 128R indicates that it will be effective for reporting periods ending
after December 15, 2004 and will have to be applied retroactively. Contingently
convertible debt instruments are structured financial transactions that combine
the features of contingently issuable shares with a convertible debt
instrument. Contingently convertible debt instruments are convertible into
common shares of the issuer after the common stock price has exceeded a
predetermined threshold for a specified time period (market price trigger).
After the final language has been published, the Company will determine if EITF
Issue No. 04-8 is applicable to its Senior Notes. If EITF Issue No. 04-8 is
applicable, the Company will have to include the number of shares to be issued
upon conversion in its calculation of diluted earnings per share for prior
periods, as the debt instruments were converted by the third quarter,
regardless of whether the market price triggers have been met. This will result
in a small decrease in the Companys diluted earnings per share for those prior
periods. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Capital Resources Cash, cash equivalents, and marketable securities totaled $5.7 million at
September 30, 2004, down from $9.5 million at December 31, 2003. September 30,2004
    
    2003(dollars in millions)Cash used in operating activities
    
    $
    (7.5
    )
    
    $
    (9.3
    )Cash used by investing activities
    
    
    (3.2
    )
    
    
    (0.1
    )Cash provided by (used in) financing activities
    
    
    3.9
    
    
    
    (0.5
    )
 Operating activities In the nine months ended September 30, 2004, cash used in operating
activities was $7.5 million, a decrease of $1.8 million compared to the nine
months ended September 30, 2003. The use of cash was caused by $9.2 million in
net loss increased by the recognition of $3.8 million in revenue that was
classified as deferred revenue. Since the cash was received in the fourth
quarter of 2003, the recognition of revenue did not effect the operating cash
balance. Several non-cash expenses impacted the net loss including the $3.7
million non-cash loss related to the change in fair value of warrants to
purchase common stock and conversion feature of the convertible debt caused by
the increase in the Companys share price. Additionally non-cash stock based
compensation, depreciation and amortization, amortization and write-off of debt
discount and issuance cost, and the loss related to the conversion of debt and
issuance of stock below fair market value related to the private placement in
March 2004 totaled $2.2 million decreasing the use of cash by operating
activities. In the nine months ended September 30, 2003, cash used by operating
activities was $9.3 million. Use of cash stemmed principally from an operating
loss of $18.3 million offset by non-cash charges including the $2.4 million
loss related to non-cash stock-based compensation charges, $1.7 million related
to loss on early extinguishment of debt, $1.9 million restructuring charge,
$1.3 million in depreciation and amortization, $0.7 million related to the
write-off of a note receivable and $0.7 million related to bad debt expense. 34




---



##### 



Investing activities In the nine months ended September 30, 2004, cash used by investing
activities was $3.2 million, primarily due to net purchases of short-term
marketable securities of $3.0 million. Capital expenditures were $ 0.2
million. In the nine months ended September 30, 2003, cash used by investing
activities was $0.1 million. The decrease was primarily due to a net purchase
of short-term marketable securities of $0.1 million. Capital expenditures were
$0.4 million and the Company sourced cash from a reduction in Restricted cash. Financing activities In the nine months ended September 30, 2004, net cash provided by
financing activities was $3.9 million. This resulted from the issuance of 1.5
million shares of common stock to an institutional investor on March 17, 2004
for $3.7 million. Proceeds from the exercise of stock options was $0.3 million. In the nine months ended September 30, 2003, net cash used by financing
activities was $0.5 million. This primarily resulted from the payment of costs
associated with two financings completed on March 25 and March 26, 2003. On December 31, 2002, the Company completed a private placement of
convertible notes and warrants in which it issued to three institutional
investors, 4.95% convertible notes having an aggregate principal amount of $7.0
million, and warrants to purchase 0.7 million shares of Company common stock.
The convertible notes were to mature on December 31, 2007, unless earlier
converted into shares of Company common stock at a price of $2.26 per share.
The warrants expire on December 31, 2006, and are exercisable at a price of
$2.26 per share. On March 25, 2003, the Company entered into Redemption, Amendment and
Exchange Agreements with the three institutional investors with whom it had
completed the private placement of convertible notes and warrants on December
31, 2002. The Company recorded a loss for the quarter ended September 30,
2003, on the early extinguishment of the original convertible notes in the
amount of $1.7 million of which $0.7 related to the write-off of deferred loan
costs. In conjunction with the extinguishment, the Company paid $3.3 million,
issued new convertible notes in the principal amount of $2.7 million and issued
$1.4 million shares of its common stock with a market value of $0.7 million.
The difference between (i) the carrying value of the outstanding convertible
notes exchanged and (ii) cash paid and the fair value of the common stock and
new convertible notes issued, amounted to $1.0 million and was included in the
loss on early extinguishment of debt. On March 26, 2003, Viewpoint Corporation entered into a Securities
Purchase Agreement with three other accredited investors, pursuant to which it
received $3.5 million in exchange for an aggregate of $3.5 million principal
amount of 4.95% subordinated notes and 3,614,756 shares of Viewpoint common
stock. The subordinated notes are scheduled to mature on March 31, 2006.
Interest on these notes is payable quarterly in arrears in cash.
The Company has the right at any time to redeem up to all of the
outstanding notes at par plus accrued and unpaid interest. The $3.5 million of proceeds was allocated to subordinated notes, common
stock, and additional paid in capital based on the market value of the
Companys common stock on March 26, 2003. In accordance with the provisions of
APB Opinion No. 21, the Company recorded a debt discount of $2.0 million. Debt
issuance costs, which amounted to $0.2 million, were recorded as other assets
in the Companys consolidated balance. The amortization of the discount on the
subordinated notes and debt issue costs totaled $0.1 million and $0.3 million
for the three and nine months ended September 30, 2004, respectively, were
accounted for using the effective interest method. Interest on the convertible notes was payable quarterly in arrears in cash
or, at the option of the Company, in shares of Company common stock provided
the Company satisfies certain financial and other conditions. The new
convertible notes matured on December 31, 2007, unless earlier converted into
shares of Company common stock. The conversion price of the first $0.9 million
tranche of notes is $1.10. The conversion price of the second and third tranche
of notes is $1.00. 35




---



##### 



Each tranche of the notes was convertible at the Companys election at any
time after May 20, 2004 if the dollar volume-weighted average price of Company
common stock exceeds 150% of the conversion price applicable to the notes for
any 25 consecutive trading days following April 15, 2004. Pursuant to SFAS No. 133, the Company bifurcated the fair value of the
conversion options from the new convertible notes since the conversion options
were determined to not be clearly and closely related to the debt host. In
addition, since the effective registration of the securities underlying the
conversion options is an event outside of the control of the Company, pursuant
to EITF Issue No. 00-19, the Company recorded the fair value of the conversion
options as long-term liabilities, as it was assumed that the Company would be
required to net-cash settle the underlying securities. The Company recorded income or loss based on the decrease or increase,
respectively, in the fair values of the new conversion options and original
warrants in the Companys consolidated statements of operations. The
amortization of discount on the new convertible notes and debt issue costs were
accounted for using the effective interest method. On March 17, 2004, one of the institutional investors holding the
convertible notes converted $0.9 million of outstanding notes for shares of the
Companys common stock. In the first quarter of 2004, the Company recorded a
loss of $1.4 million related to the change in the fair value of the conversion
feature from January 1, 2004 through the date of the conversion. For the three
months ended March 31, 2004 the Company also recorded a loss related to a
change in the fair value of the conversion feature and warrants of $3.7 million
and $1.3 million, respectively. In addition, on the same day as the conversion, the Company sold 1.5
million shares of common stock in a private placement to the institutional
investor, for $3.7 million or $2.45 per share. The Company recorded a loss on
conversion of debt in the amount of $0.6 million, which represented the
write-off of unamortized loan discount and debt issuance costs of $0.1 million
and the difference between the proceeds received from the private placement and
the fair value of the common stock issued based upon the closing price of the
Companys stock on the day of the sale of $0.5 million. The remaining
noteholders chose not to exercise their right to redeem their notes in amount
up to 20% of the $3.7 million received by the Company within 10 days of the
Companys public announcement of the closing of the private placement. During the period beginning on April 15, 2004 and May 20, 2004  a period
which covered 25 consecutive trading days  the dollar volume-weighted average
price of the Companys common stock exceeded 150% of the conversion price
applicable to the outstanding convertible notes and the Company determined to
exercise its right to convert the outstanding notes into shares of Company
common stock. Accordingly, on May 20, 2004, the Company informed the
institutional investors holding the outstanding convertible notes that it would
exercise its right to convert that debt. On June 18, 2004, the Company
completed the conversion of the remaining outstanding convertible notes of $1.8
million and the related outstanding interest into 1.7 million shares of
Viewpoint common stock. In the second quarter of 2004, the Company recorded a
gain of $2.3 million related to the change in the fair value of the conversion
feature during the period from April 1, 2004 through September 18, 2004, the
date of the
conversion. The Company recorded a gain based on the change in the fair
values of the original warrants of $0.7 million, in the Companys consolidated
statements of operations for the three months ended September 30, 2004. In addition, the Company recorded a loss on conversion which represented
the difference between the fair value of the common stock issued in exchange
for the notes and the carrying value of the convertible notes on the date of
conversion. This change was primarily comprised of the write-off of
unamortized loan discount and debt issuance costs. In November 2003, the Company sold 3.0 million shares of common stock in a
private placement to Federal Partners, L.P., an affiliate of The Clark Estates,
Inc. for $2.5 million, or $0.80 per share. The noteholders chose not to
exercise their right to redeem their notes in an amount up to 20% of the $2.5
million received by the Company within 10 days of the Companys public
announcement of the closing of the private placement. In March 2004, the Company completed a private placement whereby it
directly issued 1.5 million shares of common stock to an institutional investor
who had participated in the March 2003 financing. The issuance was for an
aggregate purchase price of $3.7 million and did not require banking placement
fees. Additionally, prior to the completion of the private placement the
institutional investor exercised its right to convert approximately $0.9 36




---



##### 



million of Viewpoint convertible debt it had acquired in March 2003 into shares
of Viewpoint common stock. This conversion resulted in a non-cash loss on
conversion of share of $0.6 million. In May 2004, 25 consecutive trading days following April 15, 2004 where
the dollar volume-weighted average price of Company common stock exceeded 150%
of the conversion price applicable to the notes, the Company exercised its
right to convert the remaining outstanding convertible notes of $1.8 million
into shares of Viewpoint common stock. This conversion resulting in a non-cash
gain of $2.3 million related to the change in fair value of the conversion
feature caused by the decrease in the Companys stock price. The Company also
recognized a loss on conversion of $0.2 million related to the undiscounted
value of the note and the unamortized issuance cost. In October 2003, the Company entered into an amended license agreement
with AOL which provided for payments by AOL of $10.0 million. The agreement
contains multiple elements consisting of a perpetual broadcast license, a
perpetual source code license, quarterly updates to the source code through
December 2005, and maintenance and consulting services. The Company will
recognize revenue from this agreement ratably, through December 31, 2005, which
represents the duration of the Companys obligation for post-contract customer
support including quarterly upgrades and maintenance requirements. The Company implemented three restructuring plans in 2003. The first
plan, implemented in February 2003, reduced operating expenses by closing the
Companys Utah office and terminating 28 employees in that office who were
primarily engaged in sales and marketing activities. In accordance with SFAS
No. 146 Accounting for Costs Associated with Exit or Disposal Activities, the
Company recorded restructuring charges of $1.2 million on the income statement.
The restructuring charges represent the fair value of remaining lease
commitments reduced by estimated sublease rental income, employee severance and
termination benefits, the write-off of the net book value of certain fixed
assets used in the Utah office, and other miscellaneous charges. Subsequent to
the restructuring, the Company re-evaluated market conditions surrounding its
efforts to sub-lease the Utah office space and increased the restructuring
charge by $0.2 million related to the fair value of remaining lease commitments
reduced by estimated sublease rental income. The Company believes that it may
be necessary to adjust the estimate of sublease income in the future as the
ability to sublease the property is contingent upon real estate and other
market conditions in Utah. The second plan was implemented in September 2003, and was designed to
streamline the business. Under the plan the Company eliminated 24 research and
development, sales and marketing, and general and administrative positions.
The Company incurred a restructuring charge of $0.4 million related to
severance. The charge is recorded on the income statement as a restructuring
charge. The second restructuring plan was completed by September 30, 2003. 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 has
contingency plans for the remainder of 2004 and through 2005 if expected
revenue targets are not achieved. These plans include further workforce
reductions as well as reductions in overhead and capital expenditures. The
Company may seek additional funds before that time through public or private
equity financing or from other sources to fund operations and pursue a growth
strategy. The Company has no commitment for additional financing, and may
experience difficulty in obtaining additional financing on favorable terms, if
at all. Any financing the Company obtains may contain covenants that restrict
freedom to operate the business or may have rights, preferences or privileges
senior to the Companys common stock and may dilute the current shareholders
ownership interest in Viewpoint. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to concentration of credit risk and interest rate
risk related to cash, cash equivalents and marketable securities. Credit risk
is managed by limiting the amount of securities placed with any one issuer,
investing in high-quality marketable securities and securities of the U.S.
government and limiting the average maturity of the overall portfolio. The
majority of the Companys portfolio, which is classified as available-for-sale, 37




---



##### 



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 The Sarbanes-Oxley Act of 2002 (SOX) and specifically Section 404 of SOX
(Section 404) and subsequent rules as promulgated by the Securities and
Exchange Commission (SEC) have created requirements for managements periodic
assessment of the Companys effectiveness of our internal controls over
financial reporting as of the end of the fiscal year and whether or not our
internal control over financial reporting is effective. This assessment must
include disclosure of any material weaknesses in our internal control over
financial reporting identified by management. The Company remains committed to conducting a thorough review of its
internal controls as part of the Companys preparation for compliance with the
requirements of Section 404. In addition, it has made a significant investment
in resources and time in support of the Section 404 activities and is committed
to maintaining a strong internal control environment. If our management identifies one or more material weaknesses in our
internal control over financial reporting, we will be unable to assert that our
internal control is effective. If we are unable to assert that our internal
control over financial reporting is effective, this may impact the reliability
of our internal controls over financial reporting until such time as the proper
controls can be implemented. Although we are undertaking substantial efforts with regard to the
assessment of internal controls as required by Section 404, our evaluation of
internal controls may not be completed in time for our external auditors to
complete their assessment in a timely basis. If this were to occur, we may be
unable to assert that the internal controls over financial reporting are
effective, or our independent registered public accountants may not be able to
render the required attestation concerning our effectiveness of the internal
controls over financial reporting in a timely manner. Our management, including the Chief Executive Officer and the Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures, pursuant to Exchange
Act Rule 13a-15(e) and 15d-15(e) as of September 30, 2004. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures are effective in ensuring
that all material information required to be disclosed in this quarterly report
has been made known to them in a timely fashion and no changes are required at
this time. In connection with the evaluation by our management, including the Chief
Executive Officer and Chief Financial Officer, of our internal control over
financial reporting, no changes during the quarter ended September 30, 2004
were identified that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting. 38




---



##### 



PART II  OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of Viewpoint Corporation was held on August
5, 2004. A proposal to elect seven (7) members of the Board of Directors to
serve for a one-year term expiring at the annual meeting of stockholders in
2005 was approved by the stockholders with the nominees receiving the following
votes: For
    
    WithheldJerry Amato
    
    
    47,099,515
    
    
    
    817,884Thomas Bennett
    
    
    47,063,883
    
    
    
    853,516James Crabbe
    
    
    46,035,185
    
    
    
    1,882,214Stephen Duff
    
    
    47,094,814
    
    
    
    822,585Samuel Jones
    
    
    46,018,108
    
    
    
    1,899,291Dennis Raney
    
    
    47,057,942
    
    
    
    859,457Robert Rice
    
    
    44,642,432
    
    
    
    3,274,967
 Stockholders also approved a proposed amendment to the Companys certificate of
incorporation increasing the authorized shares of common stock from 75,000,000
shares to 100,000,000 shares. This proposal received 44,983,856 votes in favor
and 2,882,471 against, with 51,702 abstaining. Finally, stockholders ratified the appointment of PricewaterhouseCoopers LLP as
independent public accountants of the Company for the 2004 fiscal year. This
proposal received 44,776,643 votes in favor and 2,771,047 against, with 369,709
abstaining. 
 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 On October 26, 2004, the Registrant filed a report on Form 8-K reporting
that the Board of Directors of Viewpoint Corporation elected Patrick Vogt to
the Board effective October 26, 2004. The
Company filed a report on Form 8-K on November 15, 2004, to furnish
its press release concerning its results of operations for the quarterly period
ending on June 30, 2004. 39




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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. VIEWPOINT CORPORATIONDated: November 15, 2004
    
    By:
    
    /s/ JAY S. AMATOJay S. Amato
President and Chief Executive OfficerDated: November 15, 2004
    
    By:
    
    /s/ WILLIAM H. MITCHELLWilliam H. Mitchell
Chief Financial OfficerDated: November 15, 2004
    
    By:
    
    /s/ CHRISTOPHER C. DUIGNANChristopher C. Duignan
Chief Accounting Officer
 40