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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27168
---------------
VIEWPOINT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4102687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
498 SEVENTH AVENUE, SUITE 1810, NEW YORK, NY 10018
(Address of principal executive offices) (zip code)
(212) 201-0800
(Registrant's telephone number, including area code)
---------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK,$0.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [ ]
As of March 22, 2002 there were 39,809,611 shares of common stock
issued and outstanding. The aggregate market value of such stock held by
non-affiliates as of that date, was approximately $250,402,453.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement to be delivered to
stockholders in connection with the Notice of Annual Meeting of Stockholders to
be held on June 12, 2002 are incorporated by reference into Part III.
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Stock and Related 11
Stockholder Matters
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on Accounting 58
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 59
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial Owners and 59
Management
Item 13. Certain Relationships and Related Transactions 59
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 60
8-K
Signatures 63
2
PART I
In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Future Results of
Operations." You should carefully review the risks described in other documents
we file from time to time with the Securities and Exchange Commission, including
the Quarterly Reports on Form 10-Q to be filed in 2002. When used in this
report, the words "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "targets," "estimates," and similar expressions are generally intended
to identify forward-looking statements. You should not place undue reliance on
the forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K. We undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this document.
ITEM 1. BUSINESS
Viewpoint Corporation ("Viewpoint" or the "Company") is a leading
provider of interactive media technologies and services. Its graphics operating
system platform, the Viewpoint Media Player, has been licensed by Fortune 500
companies and others for use in online, offline and embedded applications
serving a wide variety of needs, including: business process visualizations,
marketing campaigns, rich media advertising and product presentations. The
Company also provides cross media digital solutions for film, broadcast
television and games.
Until December 1999, the Company was primarily engaged in the
development, marketing, and sales of prepackaged software graphics products. Its
principal products were computer graphics "painting" tools and photo imaging
software products. With its acquisition of Real Time Geometry Corporation in
December 1996, however, the Company became involved, on a limited basis, in the
development of technologies designed to make practical the efficient display and
deployment of rich media on the Internet. In June 1999, the Company increased
its commitment to the development of rich media Internet technologies and formed
Metastream.com Corporation ("Metastream") to operate a business exploiting these
technologies. In December 1999, the Board of Directors of the Company approved a
plan to focus exclusively on the Internet technologies of Metastream and to
correspondingly divest the Company of all its prepackaged software business.
VIEWPOINT EXPERIENCE TECHNOLOGY AND THE VIEWPOINT MEDIA PLAYER
Viewpoint Experience Technology ("VET") allows Websites and other media
publishers to integrate a full line of interactive graphics media technologies
seamlessly onto regular Web pages or through other digital formats. Available
media types include: photo-realistic 3D, ZoomView -- a "data on demand" 2D image
that users may pan and drill into, text annotations and animations,
Macromedia(R) Flash(TM)-compatible vector graphics animations, object movies,
immersive surround pictures, and digital audio and video. These interactive
digital media types can add dimension, contextual information, animation,
realistic color, shadows and real-time reflections, movement and robust
interactivity to static Web objects. VET enables users to better access and
interact with images and objects, seamlessly mixing the narrative drive of more
traditional media with the interaction of the Web, such that users can rotate
objects, view extended, narrowband friendly presentations, configure colors,
patterns and other options, all while experiencing extraordinary visual
dimension and accuracy. The interaction between the user and VET content
can educate users about a particular product, message or brand.
The Viewpoint Media Player ("VMP") is the client-side software platform
that permits Viewpoint's customers to broadcast VET content through the
Internet into end users' browser (primarily Internet Explorer, Netscape,
and Gecko/Mozilla) and "non-browser" environments (primarily America Online,
Inc.'s "Rainman" and CompuServe clients).
Like Sun Microsystem Inc.'s Java or Microsoft Corporation's
("Microsoft") .NET platform, with which VMP can interoperate, VET is a
fundamentally extensible "Web services" architecture--a graphics operating
system for the Web--focused on high visual quality, multimedia integration and
data visualization. The VET media technologies are entirely "serverless,"
meaning deployment of such content requires only standard HTTP servers on the
broadcast end.
The key principle behind client-side software is to transmit "coarse,"
or highly compressed, digital information that is deployed from the server,
rather than numerous pictures and text. The client-side software then leverages
the user's CPU processing power to decompress, display,
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and process this information "locally" on that CPU, no longer taxing network
bandwidth to examine, configure, interact, and explore digital content. VET
content contains instructions interpreted by the VMP components "on the fly"
and is continually re-interpreted into pictures and sounds that the browser (or
"non-browser") may present to the user. As CPU capacities have grown at a much
more rapid rate than that of connection speeds in recent years, the Company
believes VET's use of this speed advantage is of significant competitive
importance.
Additionally, VET employs an extensible mark-up language (or "XML")
media "envelope", which enables Viewpoint content to exchange data with back-end
servers in real time and to perform dynamic content configuration. This XML
media envelope is also the basis for the extensibility of the VMP. Through this
XML data description format, VET digital content can seamlessly download and
extend new graphics services on the client-side, which in turn may interpret and
convert different and new media types and formats that may be referenced or
embedded in that digital content. This fundamental extensibility is a key
architecture advantage that has allowed the Company to extend the feature set of
the VMP continually since its launch in the summer of 2000, providing an
"instant upgrade" ability. This design prevents the "lowest common denominator"
syndrome that affects Web technologies as they mature - with VET, Web publishers
and content authors can be assured that users have the latest features and
enhancements of the VMP platform.
As a form of efficient visual communication, the Company believes the
commercial applications of VET are virtually unlimited. However, the Company
has chosen to focus its near-term marketing efforts on several key areas,
including: enterprise applications, which entails building new or enhancing
existing software applications; media and Internet advertising; and Website
deployment into various vertical markets, such as: automotive, retail, and
medical.
VIEWPOINT PROFESSIONAL SERVICES
Viewpoint provides fee-based professional services for implementing
visualization solutions. Encompassing both digital content creation and
application enhancing services, our strategic, creative and consulting services
bring together our teams of experts in rich media, content creation and
technology implementation in order to identify the ideal Viewpoint solution for
each client's unique needs and to ensure the timely, successful implementation
of those solutions. Our professional services groups use Viewpoint Experience
Technology, as well as a spectrum of tools and other technologies to create
enhanced rich media solutions for the client's particular purpose, whether over
the Web, intranet systems or offline media and applications. Our professional
services groups provide the support our clients need to implement the rich media
content, to fully utilize the enhanced software or to maximize the branding
potential of the advertising opportunity.
In addition to providing Web services, our professional services groups
also develop realistic digital effects and animation for the entertainment and
game industries, film producers, major brands, advertising agencies and
commercial production houses. Our custom digital assets have had starring and
supporting roles in:
- numerous feature films, including Black Hawk Down, Driven and
ANTZ;
- television programs such as the telecasts of The Academy
Awards Ceremony and The 2002 Winter Olympics;
- television advertisements for Ford, Dodge, Chevy and Seiko;
and
- VET-enabled Websites for companies such as Ford Motor
Company, Nike, Inc., Compaq Computer Corporation, Dell
Computer Corporation, and Eddie Bauer.
MARKET OPPORTUNITY
The number of Internet users has increased rapidly over the past
several years. In addition, commercial applications that are based on digital
technology, including the Internet, have increased at a rapid pace. The Company
believes that these patterns have resulted in increasing expenditures for online
marketing, advertising, branding, and e-commerce, and that such communications
will increasingly utilize rich media formats. Visualization as a means of
communication over wide areas, within and between companies and customers, has
become vital in conducting business over the past five years. The Company sees
an eventual convergence of the various media types, including: print, broadcast
television, the Web, gaming and motion pictures, among others that present a
tremendous opportunity for those who utilize or equip digital visualization.
4
The Company's initial focus was on Website licensing for marketing and
direct selling. The Company believes that its Viewpoint Experience Technology
meets this market's requirements for:
- Effective merchandising to build brand awareness and drive
sales.
- Realistic product interaction.
- Interoperability of all other media types required for
compelling product displays (including, for example, 3D,
vector graphics, object movies, 2D, digital sound and video).
- Excellent compression and streaming delivery at narrowband and
broadband data rates.
- Client-side data logging of the use of downloaded rich media.
- Low infrastructure impact for deployment, and ease of
integration into Web, HTML, and IT infrastructures.
- Continual advancement and "refresh" of features through the
graphics operating system platform.
- Consistent and high quality playback across browser and
non-browser environments and all major playback platforms.
The Company's focus has recently been broadened to include enterprise
applications. Viewpoint's graphics operating platform provides a powerful
visualization edge to complement existing enterprise application software. The
Company believes that, as data becomes more complicated and is communicated over
wider geographic distances, providing visualization becomes critical to success.
Examples of enterprise applications include: virtual product design, process
workflow and customer service applications. This Company's primary target
audience for enterprise applications is Fortune 500 companies who can benefit
from improving communication through visualization. The Company's model is to
apply its already developed engineering resources to create custom solutions to
address those needs.
In addition, the Company has developed a new group to penetrate the
Internet advertising market as well as digital advertising on a broader scale.
The Company believes that the Web lacks compelling advertising formats and
that numerous additional digital advertising formats are emerging, such as those
for television's new digital set-top boxes. The Company believes it is
well-positioned to develop and deliver engaging, interactive advertisements
over digital media, including the Internet. It is believed that Viewpoint
Experience Technology can deliver compelling and interactive ad formats,
tapping into a large selection of technologies. The Company feels that creative
talent which may have objected to the limited formats of existing "banner" ads
will be drawn to the new formats and therefore bring credibility to the newly
enhanced medium. Further, the potential for client-side tracking and logging as
well as guaranteed playback quality and consistency across advertising
platforms should provide strong defensibility in this space.
VIEWPOINT'S BUSINESS MODEL
The Company's business model differs from that of many other companies
that have developed Website design and content-creation software for sale or
license to a target market of Internet professionals -- that is, Website
developers, interactive agencies, solutions integrators, application service
providers and content developers, as well as professionals working in-house at
e-merchants and other Website owners. Instead of selling tools to Internet
professionals -- a relatively small market - the Company has sought primarily
to license technology to the audience where the value is created: the much
larger market of e-commerce merchants, Website owners and others who can
harvest benefits from communicating visually in the digital domain.
The Company's licensing strategy focuses on earning fees by providing
clients with the ability to broadcast digital content in the Viewpoint format.
Viewpoint's technology is designed so that content in the Viewpoint format that
is broadcast or otherwise distributed without a valid "key" will be spoiled by a
"watermarking" image. The Company offers these keys through a variety of
broadcast license arrangements that document the client's rights under the
arrangement. Licenses are tailored to the specific needs of the client. Examples
of typical arrangements include:
- licenses which are time-based, which are generally limited to
specific Web site addresses or specific content;
- licenses which are perpetual, which are generally limited to
specific types or amounts of content;
- licenses which permit a "narrowcast" only to a local area
network or intranet; and
5
- licenses which permit the client to distribute content by
means of CDs, DVDs and other portable storage media.
The Company believes that this revenue model, if successful, should produce a
recurring stream of revenues from existing clients with the opportunity to scale
income substantially as new customers are acquired.
Another key aspect of our approach is an "open tools" philosophy. The
Company believes that the long-term success of its platform will be fueled by
having the most popular content creation tools natively output in the Viewpoint
format, rather than requiring design professionals to use Viewpoint's own
proprietary toolset. This approach also eliminates much of the very large cost
associated with development and support of proprietary commercial toolsets.
Another advantage of this strategy is that software tools companies that do
incorporate Viewpoint functionality, such as Adobe Systems Incorporated
("Adobe") and Autodesk Incorporated, have natural incentives to promote the
Viewpoint platform. More than 50 companies are developing or have developed
support for the Viewpoint format within their tools. In addition, we make
available on our Website, without charge, the core software necessary to develop
Viewpoint content, as well as extensive tutorials and related materials.
Another cornerstone of the business model is that the Viewpoint Media
Player, representing the required client-side playback engine, is free for users
to playback broadcasted content. After downloading the player, users can
receive all updates of the media player software for free, seamlessly and
without interruption of the playback.
The Company's professional services groups play an integral role in
its overall strategy. Professional services provide a significant revenue
opportunity, through the sale of complete solutions comprising technology and
content creation services to customers desiring a single vendor solution. At
the same time, the groups increase our ability to sell broadcast licenses, by
enabling us to offer Viewpoint content to clients who are impressed by the
advantages of Viewpoint Experience Technology but who do not wish to create
Viewpoint content themselves or trust that creation to others. Also, the
groups' work keeps us on the cutting-edge of the industry, giving us hands-on
experience with the design and development problems faced by our own clients,
and enabling us to provide thorough, up-to-date training for other industry
professionals. The Company is not reliant on its own content creation services,
however, as it has cultivated a network of thousands of independent content
developers trained to provide those services as well.
Recently, the Company's professional services have begun to include
specific engineering services to enhance existing or create new software
applications meant to perform a specific task or set of tasks or assist in
communicating through visualization. While content creation services focus on
creating interactive digital objects and enhancing Websites, engineering
services create or alter software to enable clients to design products, improve
process workflow or enhance customer service experiences. The Company's
engineering services leverage off of the existing engineering staff and the
Company's growing engineering application developers network.
COMPETITION
The Company's current competitors (and some of their products) include:
Kaon (Activate!3D); Cycore AB (Cult3D); IBM Corporation (Hotmedia); Macromedia,
Inc. (Shockwave and Flash); Shells Interactive Ltd. (3D Dreams); Pulse
Entertainment (Pulse3D); Shout Interactive (Shout 3D); Virtue 3D, Inc.
(Virtuoso); and Rich FX (Examine-FX). Some of the Company's competitors have
longer operating histories and significantly greater financial, management,
technology, development, sales, marketing and other resources than the Company.
As the Company competes with larger competitors across a broader range of
products and technologies, the Company may face increasing competition from such
companies. If these or other competitors develop products, technologies or
solutions that offer significant performance, price or other advantages over
those of the Company, the Company's business would be harmed.
A variety of other possible actions by the Company's competitors could
also have a material adverse effect on the Company's business, including
increased promotion or the introduction of new or enhanced products and
technologies. Moreover, new personal computer platforms and operating systems
may provide new entrants with opportunities to obtain a substantial market share
in the Company's markets.
The Company's competitors may be able to develop products or
technologies comparable or superior to those of the Company, or may be able to
develop new products or technologies more quickly. The Company also faces
competition from developers of personal computer operating systems such as
Microsoft and Apple Computer, Inc., as well as from open-source operating
systems such as Linux. These operating systems may incorporate functions that
could be superior to or incompatible with the Company's products and
technologies. Such competition would adversely affect the Company's business.
6
The Company believes that Viewpoint Experience Technology offers
significant advantages over many of our competitors' products:
- GREATER VISUAL REALISM -- We believe that 3D and other digital
rich media objects created in the Viewpoint format offer
higher quality and a more true-to-life online experience than
competitors' formats.
- INTERACTIVITY -- Viewpoint Experience Technology lets a
customer interact with our clients' brands and examine their
products in ways not possible with our competitors' formats.
Viewpoint lets consumers pick up/put down, zoom in/out, see
how parts move, add/remove components, turn products on/off,
change colors/fabrics/textures, instantly receive key data
(e.g. compare pricing).
- NARROWBAND FRIENDLY -- Viewpoint's proprietary compression
technology, TrixelsNT, greatly cuts download time of 3D
objects to almost what is expected from ordinary 2D images, so
that even consumers with slow connections to the Internet can
see Viewpoint content quickly and can interact with them in
real time. The client-side rendering makes this possible as
only a small file of instructions are communicated to the
client-side CPU, where the object is actually rendered. Many
of the Company's competitors render objects on the server-side
which is more taxing on servers and connections and leads to
poorer user interoperability.
- MANY MEDIA/ONE PLAYER -- Viewpoint includes and integrates
seamlessly with many rich media types like IPIX Panoramas,
high quality 3D, text annotations, Flash(TM) vector graphics,
audio and more, enabling clients to create more compelling Web
experiences in a concise and integrated fashion.
- NO POP-UP WINDOWS -- Viewpoint's transparent "windowless
rendering" allows 3D images to share space on the page with
text, graphics, and even buttons and hyperlinks. The new
"browserless rendering" now allows 3D objects and vector
graphics animation to play right over open windows. 2D images
can "hyper" zoom from traditional thumbnails into images that
utilize the entire screen's desktop area. The XML capabilities
of the technology allows a seamless and immediately updateable
data integration with back-end servers without generating
additional windows.
- AUTOMATIC UPDATES -- Once users download the Viewpoint Media
Player, they can automatically receive all releases and
upgrades. Because new releases and additional functionality
can be sent automatically, in the background, the user's
online experience is never interrupted.
- LACK OF DEPENDENCE ON JAVA -- The Company's technology is not
based upon the Java software language. It has been announced
publicly that Java is not supported in the current version of
Microsoft's browser, Internet Explorer 6.0, the latest version
of the world's most popular Internet browser. This lack of
support for Java requires users to download a plug-in in order
to view Java-based media. Many of Viewpoint's competitors base
their technology on the Java language and the Company feels
its lack of dependence on Java technology is an advantage.
- SEAMLESS INTEGRATION -- VET technology requires no special
server side software to deploy, and integrates easily with
existing HTML pages or back end database systems.
PRODUCT DEVELOPMENT
Continuous development of new products and enhancements of our existing
products is critical to our success. The Company's principal current product
development efforts are focused on the development of VET and other
complementary technologies. From time to time, the Company may also acquire
basic software technologies that it considers complementary to its Viewpoint
solution.
The Company's growth will, in part, be a function of the introduction
of new products, technologies and services and future enhancements to existing
products and technologies. Any such new products, technologies or enhancements
may not achieve market acceptance. In addition, the Company has historically
experienced delays in the development of new products, technologies and
enhancements, and such delays may occur in the future. If the Company were
unable, due to resource constraints or technological or other reasons, to
develop and introduce such products, technologies or enhancements in a timely
manner, this inability could have a material adverse effect on the Company's
business. In particular, the introductions of new products, technologies and
enhancements, are subject to the risk of development delays.
7
The Company's research and development expenses, exclusive of non-cash
stock compensation charges, were approximately $6,633,000, $6,241,000 and
$2,515,000, for 2001, 2000 and 1999, respectively. The Company may hire
additional engineers in connection with its continued product development
efforts, which would result in increased research and development expenses.
INTELLECTUAL PROPERTY
The Company regards its patents, copyrights, service marks, trademarks,
trade dress, trade secrets, propriety technology and similar intellectual
property as critical to its success, and relies on trademark, copyright and
patent law, trade secret protection and confidentiality and/or license
agreements with its employees, partners, customers and others to protect its
proprietary rights. The Company has applied for the registration of certain of
its trademarks and service marks in the United States and internationally. In
addition, the Company has filed U.S. and international patent applications
covering certain of its proprietary technology. Effective trademark, service
mark, copyright, patent and trade secret protection may not be available in
every country in which the Company's products and services are made available
online. The Company has licensed in the past, and expects that it may license in
the future, certain of its proprietary rights, such as patents, trademarks,
technology or copyrighted material, to third parties.
EMPLOYEES
As of March 22, 2002, Viewpoint had 172 full time employees, including
40 in sales and marketing; 66 in creative services; 46 in research, development
and quality assurance; and 20 in administration. The Company also employs
independent contractors. The employees and the Company are not parties to any
collective bargaining agreements, and the Company believes that its
relationships with its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
Company's executive officers as of March 22, 2002:
NAME AGE POSITION
---- ---- --------
Robert E. Rice 47 Chairman, President and Chief Executive Officer
David Feldman 35 Executive Vice President and Chief Strategist
Christopher Gentile 43 Executive Vice President, Creative Services
Paul Kadin 51 Executive Vice President, Business Development
Jeffrey J. Kaplan 54 Executive Vice President, Business Affairs
Anders Vinberg 52 Executive Vice President, Engineering and Enterprise Solutions
Anthony L. Pane 36 Senior Vice President and Chief Financial Officer
Mr. Rice has been President and Chief Executive Officer since March
2000 and Chairman of the Company's Board of Directors since July 2000. At the
Company, he served as Vice President of Strategic Affairs until September 1999.
He served as the President and a Director of Metastream since its formation in
June 1999. Mr. Rice co-founded Real Time Geometry Corporation and served as its
chairman until its sale to the Company in 1996. Before founding Real Time
Geometry, Mr. Rice was a partner at the law firm of Milbank, Tweed, Hadley and
McCloy LLP, where he advised on various corporate, tax, and intellectual
property issues. While at Milbank, Mr. Rice also co-founded the Professional
Chess Association with World Champion Garry Kasparov and served as its
commissioner for two years, organizing World Championships and major televised
events around the globe.
Mr. Feldman has been Executive Vice President and Chief Strategist of
the Company since February 2001. Mr. Feldman served as Vice President of
Business Development and Chief Strategist of Metastream from its formation in
June 1999 through its merger with the Company in November 2000 and served as
Vice President and Chief Strategist at the Company from November 2000 until
February 2001. Mr. Feldman served as Vice President, Business Development of the
Company in 1999 and had served as Director, Business Development, and Director,
Princeton Products Group of the Company from 1997 to 1999. Mr. Feldman served
both as Chief Strategist and a member of the board of directors of Specular
International from 1995 until its acquisition by the Company in 1997.
8
Mr. Gentile has been Executive Vice President, Creative Services of the
Company since November 2000. Before the merger of Metastream and Viewpoint, Mr.
Gentile served at Metastream as Vice-President of Production from July 1999
through February 2000, and as Managing Director of Professional Services from
February 2000 through November 2000. Before joining Metastream, Mr. Gentile
founded or co-founded several businesses, including MC Squared Incorporated, a
wholly owned consulting company that he founded in 1996 and where he has served
as President; Millennium RUSH, LLC, a software development company that he
founded in 1995 and where he served as President; and Abrams Gentile
Entertainment, Inc. a developer of consumer products and theme park designs that
he co-founded in 1986 and where he served as a partner.
Mr. Kadin has been with the Company since February 2000 and has served
as Executive Vice President, Business Development since February 2001. Following
an initial focus on Sales, Marketing, and Client Services globally, his current
focus is on development of the Company's digital advertising formats for the Web
and other media outlets. Prior to joining Viewpoint, Mr. Kadin was President -
North America for Customer Dialogue Systems, a Belgian based financial services
software provider. During 1996-98, he was Executive Vice President of Dreyfus
Corporation in charge of retail investment sales, product management and
internet activities. From 1988-1996, Mr. Kadin held senior positions in retail
banking at Chase Manhattan. A series of consumer brand management positions from
1975-1987 at Procter and Gamble, Warner Lambert and Sara Lee established Mr.
Kadin's marketing background.
Mr. Kaplan has been the Executive Vice President of Business Affairs of
the Company since November 2001 and was Executive Vice President and Chief
Financial Officer for the period from February 2001 to November 2001. Mr. Kaplan
served as Executive Vice President and Chief Financial Officer of Rare Medium
Group, Inc. from September 1999 until joining the Company and served as
Executive Vice President, Chief Financial Officer and Director of Safety
Components International, Inc., a leading manufacturer of airbag cushions and
fabric from February 1997 to August 1999. Safety Components filed for bankruptcy
on April 10, 2000 and emerged from bankruptcy on October 11, 2000. From October
1993 to February 1997, Mr. Kaplan served as Executive Vice President, Chief
Financial Officer and Director of International Post Limited, a leading provider
of post-production services for commercial and advertising markets.
Mr. Vinberg has been Executive Vice President, Engineering and
Information Systems at the Company since September 2000. Before this, Mr.
Vinberg was Divisional Senior Vice President at Computer Associates
International, Inc., ("Computer Associates") a software company, since 1986. In
this position, Mr. Vinberg acted as chief architect and was responsible for the
architecture of several of Computer Associates' strategic products. Mr. Vinberg
also represented Computer Associates on the board of directors of Metastream
from October 1999 until its merger with the Company in November 2000.
Mr. Pane joined the company in August of 2000 and has served as Senior
Vice President and Chief Financial Officer since November 2001. Previously Mr.
Pane was the Company's Vice President and Controller. From May 1999 to August
2000, Mr. Pane served as Controller of Computer Generated Solutions, Inc. From
July 1997 to March 1999, Mr. Pane was the Vice President and Controller of the
American Stock Exchange, Inc. From July 1994 to July 1997, Mr. Pane served in
various positions with Alliance Entertainment Corp., including as Chief
Financial Officer of its subsidiary, Abbey Road Distributors. Mr. Pane also
served in various positions, including Manager, for six years at
PricewaterhouseCoopers and Ernst & Young.
ITEM 2. PROPERTIES
The Company leases approximately 17,000 square feet of space on the
18th floor of a 24-story office building in New York City, New York. This space
houses approximately 100 personnel, including substantially all of the Company's
general and administrative and research and development personnel as well as a
significant portion of the sales and marketing and creative services personnel.
The primary lease agreement expires in March 2010, if not renewed. The Company
believes that this office space is adequate for its current needs and that
additional space is available in the building or in the New York City area to
provide for anticipated growth.
The Company also leases approximately 12,000 square feet of office
space in Draper, Utah, pursuant to a sublease agreement which expires in April
2010. This space houses approximately 40 personnel principally engaged in sales
and marketing, creative services, and management information systems services.
The Company also leases approximately 12,000 square feet of office
space in Los Angeles, California, pursuant to a lease which expires in December
2004. This space houses approximately 23 personnel principally engaged in sales
and marketing, creative services, and management information systems services.
The Company also leases a small office space in London under a
short-term lease.
9
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses in legal
actions in which it is the defendant and believes that the ultimate outcome of
such actions will not have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Viewpoint Corporation's ("Viewpoint" or the "Company") common stock,
$0.001 par value, began trading over the counter in December 1995. The common
stock is traded on The Nasdaq National Market under the symbol "VWPT." On March
22, 2002, there were 304 holders of record of our common stock. Because many of
such shares are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders
represented by these record holders. The following table sets forth, for the
periods indicated, the range of high and low closing sales prices per share of
our commons stock:
HIGH LOW
2001 $ 8.50 $ 2.75
4th Quarter 7.11 3.00
3rd Quarter 7.65 2.86
2nd Quarter 8.50 3.94
1st Quarter 7.69 2.75
2000 $ 30.88 $ 4.63
4th Quarter 11.00 4.63
3rd Quarter 14.06 8.00
2nd Quarter 18.50 6.00
1st Quarter 30.88 8.06
The Company has not paid any cash dividends on its common stock to
date. The Company currently anticipates that it will retain all future earnings,
if any, for use in its business and does not anticipate paying any cash
dividends on its common stock in the foreseeable future.
11
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
notes thereto appearing elsewhere in this Annual Report on Form 10-K.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Revenues:
Licenses ............................................... $ 9,681 $ 1,421 $ 2,818 $ 3,001 $ 1,262
Services ............................................... 4,327 2,159 275 -- --
-------- -------- -------- -------- --------
Total revenues ........................................... 14,008 3,580 3,093 3,001 1,262
-------- -------- -------- -------- --------
Cost of Revenues:
Licenses ............................................... 309 76 -- -- --
Services ............................................... 3,283 1,467 -- -- --
-------- -------- -------- -------- --------
Total cost of revenues ................................... 3,592 1,543 -- -- --
-------- -------- -------- -------- --------
Gross profit ............................................. 10,416 2,037 3,093 3,001 1,262
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing (including non-cash stock-based
compensation charges totaling $2,335 in 2001, $5,122
in 2000, and $675 in 1999)........................... 17,814 18,741 3,000 981 624
Research and development (including non-cash stock-based
compensation charges totaling $2,920 in 2001, $4,193
in 2000, and $2,540 in 1999)......................... 9,553 10,434 5,055 1,434 2,207
General and administrative (including non-cash
stock-based compensation charges totaling $1,918 in
2001, $3,026 in 2000, and $2,866 in 1999)............ 10,423 9,814 6,993 4,010 3,266
Compensation charge related to forgiveness of an officer
loan ................................................ -- 2,322 -- -- --
Amortization of goodwill and other intangibles (1)(2) .. 17,453 3,025 75 150 150
Goodwill impairment (3) ................................ 7,925 -- -- -- --
Depreciation ........................................... 1,804 801 406 399 205
Non-cash sales and marketing charges (4) ............... -- 19,998 -- -- --
Acquired in-process research and development costs (2) . -- 963 -- -- --
-------- -------- -------- -------- --------
Total operating expenses ................................. 64,972 66,098 15,529 6,974 6,452
-------- -------- -------- -------- --------
Loss from operations ..................................... (54,556) (64,061) (12,436) (3,973) (5,190)
Other income ............................................. 1,064 2,180 2,286 2,618 3,157
-------- -------- -------- -------- --------
Loss before provision for income taxes ................... (53,492) (61,881) (10,150) (1,355) (2,033)
Provision (benefit) for income taxes ..................... -- -- 5,481 (353) (210)
-------- -------- -------- -------- --------
Loss before minority interest in loss of subsidiary ...... (53,492) (61,881) (15,631) (1,002) (1,823)
Minority interest in loss of subsidiary .................. -- 4,429 1,048 -- --
-------- -------- -------- -------- --------
Net loss from continuing operations ...................... (53,492) (57,452) (14,583) (1,002) (1,823)
Discontinued operations:
Loss from discontinued operations (5) .................. -- -- (14,811) (18,829) (6,355)
Adjustment to net loss on disposal of discontinued
operations (5).......................................... 1,122 1,496 (21,260) -- --
-------- -------- -------- -------- --------
Net income (loss) from discontinued operations ........... 1,122 1,496 (36,071) (18,829) (6,355)
-------- -------- -------- -------- --------
Net loss ................................................. (52,370) (55,956) (50,654) (19,831) (8,178)
Accretion of mandatorily redeemable preferred stock of
subsidiary ............................................. -- (438) -- -- --
-------- -------- -------- -------- --------
Net loss applicable to common shareholders ............... $(52,370) $(56,394) $(50,654) $(19,831) $ (8,178)
======== ======== ======== ======== ========
Basic and diluted net loss per common share:
Net loss per common share from continuing operations ... $ (1.37) $ (2.01) $ (0.59) $ (0.04) $ (0.08)
Net income (loss) per common share from discontinued
operations .......................................... 0.03 0.05 (1.47) (0.79) (0.28)
-------- -------- -------- -------- --------
Net loss per common share ............................... $ (1.34) $ (1.96) $ (2.06) $ (0.83) $ (0.36)
======== ======== ======== ======== ========
Weighted average number of shares outstanding -- basic
and diluted ............................................ 39,077 28,718 24,581 23,779 22,965
======== ======== ======== ======== ========
12
DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Cash, cash equivalents and
marketable securities..... $ 15,413 $ 29,033 $ 37,247 $ 46,335 $ 50,002
Working capital (2) ...... 12,056 34,313 33,638 55,439 77,677
Total assets ............. 61,917 102,349 50,574 79,116 97,257
Stockholders' equity ..... 52,737 96,339 29,901 70,181 87,242
- ----------
(1) In November 2000, the Company consummated a share exchange with
Computer Associates International, Inc., ("Computer Associates") and
another shareholder of Metastream Corporation ("Metastream"), pursuant
to which the Company issued 1.15 shares of the Company's common stock
in exchange for each outstanding share of common stock of Metastream.
The share exchanges were accounted for as acquisitions of minority
interest under the purchase method of accounting, and goodwill of
$42,892,000 was recorded.
(2) In September 2000, the Company purchased all the outstanding capital
stock of Viewpoint Digital, Inc. ("Viewpoint Digital") from Computer
Associates. The purchase price of $19,169,000, excluding contingent
consideration of $30,000,000 in notes payable, consisted of 715,000
shares of common stock valued at $8,938,000, cash consideration of
$10,000,000 and $231,000 in direct acquisition costs. The contingent
consideration consisted of two promissory notes each in the amount of
$15,000,000. Both notes are contingent upon the achievement of certain
levels of future operating results and employee retention through March
8, 2002. During 2001, the Company entered into certain agreements with
Computer Associates whereby Computer Associates agreed to accept
newly-issued shares of Viewpoint common stock having a value of
$4,000,000, in partial repayment of the first contingent promissory
note due June 8, 2001. In addition Computer Associates agreed to
accept, at the Company's election, either cash or newly-issued shares
of Viewpoint common stock at an issue price of $4.00 per share in
repayment of any additional amounts due under the promissory note due
June 8, 2001, and the first $8,943,000 of the $15,000,000 contingent
promissory note due April 30, 2002, which amount will be determined by
the achievement of certain levels of future operating results and
employee retention. The amount due Computer Associates under the
promissory note due June 8, 2001 is approximately $4,657,000. In
connection with this promissory note, the Company recorded additional
goodwill and due to related parties in its consolidated balance sheet.
The acquisition of Viewpoint Digital was accounted for under the
purchase method of accounting, and goodwill and other intangibles of
$21,589,000 were recorded, inclusive of acquired in-process research
and development costs of $963,000.
(3) During 2001, the Company performed impairment assessments on the
goodwill and other intangibles recorded upon the acquisition of
Viewpoint Digital and the acquisition of Computer Associates' minority
interest in Metastream. As a result of continuing poor economic
conditions, which resulted in a decrease in estimated undiscounted
future cash flows, the Company recorded a $7,925,000 goodwill
impairment charge on the Viewpoint Digital goodwill during the fourth
quarter of 2001. The charge was determined based upon the estimated
discounted cash flows over the remaining useful life of the goodwill
using a discount rate of 15%. The assumptions supporting the cash flows
including the discount rate were determined using the Company's best
estimates as of the date the impairment was recorded.
(4) In connection with the issuance of mandatorily redeemable preferred
stock in Metastream to America Online, Inc. ("AOL") and Adobe Systems
Incorporated ("Adobe"), the Company recorded one-time non-cash sales
and marketing charges of approximately $19,998,000 during the year
ended December 31, 2000. These charges represented the difference
between the fair market value of the Company's common shares into which
AOL and Adobe could have converted the Metastream shares on the date of
issuance, and the $20,000,000 aggregate cash consideration received
from both AOL and Adobe. These charges were recorded as sales and
marketing, as the incremental value of the equity over the cash
consideration received was deemed to be the fair value of the license
and distribution agreements simultaneously entered into with AOL and
Adobe.
(5) In December 1999, the Board of Directors of the Company approved a plan
to focus exclusively on the Company's 3D and rich media visualization
and marketing technologies, and to correspondingly divest itself of all
its prepackaged graphics software business. Consequently, the results
of operations of the prepackaged graphics software business have been
classified as net income (loss) from discontinued operations for the
years ended December 31, 1997 through 2001.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in the section entitled " Factors That May Affect Future Results of Operations."
You should carefully review the risks described in other documents we file from
time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed in 2002. When used in this report,
the words "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"targets," "estimates," and similar expressions are generally intended to
identify forward-looking statements. You should not place undue reliance on the
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K. We undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this document.
OVERVIEW
Viewpoint Corporation is a leading provider of interactive media
technologies and services. Its graphics operating system platform, the Viewpoint
Media Player, has been licensed by Fortune 500 companies and others for use in
online, offline and embedded applications serving a wide variety of needs,
including: business process visualizations, marketing campaigns, rich media
advertising and product presentations. The Company also provides cross media
digital solutions for film, broadcast television and games.
Until December 1999, the Company was primarily engaged in the
development, marketing, and sales of prepackaged software graphics products. Its
principal products were computer graphics "painting" tools and photo imaging
software products. With its acquisition of Real Time Geometry Corporation in
December 1996, however, the Company became involved, on a limited basis, in the
development of technologies designed to make practical the efficient display and
deployment of rich media on the Internet.
In June 1999, the Company increased its commitment to the development
of rich media Internet technologies and formed Metastream to operate a business
exploiting these technologies. The Company originally held an 80% equity
interest in Metastream with Computer Associates holding the remaining 20% equity
interest.
In December 1999, the Board of Directors of the Company approved a plan
to focus exclusively on the Internet technologies of Metastream and to
correspondingly divest the Company of all its prepackaged software business. By
April 2000, the Company had sold substantially all of its prepackaged software
product lines.
In September 2000, the Company acquired Viewpoint Digital, a
wholly-owned subsidiary of Computer Associates. Viewpoint Digital publishes the
world's largest library of 3D digital content and provides creative 3D services
to thousands of customers in entertainment, advertising, visual simulation,
computer-based training and corporate communications.
The Company's primary initiatives include:
- Licensing technology for specific marketing and e-commerce
visualization solutions;
- Providing a full range of fee-based digital asset content
creation and engineering professional services for
implementing visualization solutions for marketing and
creating new and enhancing existing enterprise software
applications;
- Proliferating the Viewpoint format into digital advertisements
on various digital media, primarily the Web and digital
set-top cable boxes;
- Forging technological alliances with leading interactive
agencies and Web content providers; and
- Maximizing market penetration and name recognition, including
distribution of the Company's client-side software graphics
operating system, the Viewpoint Media Player
Viewpoint believes that its success will depend largely on its ability
to proliferate its digital technologies into various media, including broadcast
television, games, movies, print, closed intranets, new and existing enterprise
applications and television set-top
14
boxes. Accordingly, Viewpoint has and intends to continue to invest in research
and development and sales and marketing. Revenues from continuing operations
primarily have been from the sale of technology licenses and fee based
professional services, including digital content creation services and
engineering services to enhance and create new enterprise software applications.
In light of its relatively recent change in strategic focus from
selling prepackaged software, Viewpoint has a limited operating history upon
which an evaluation of the Company and its prospects can be based. Viewpoint's
prospects must be considered in light of the risks and difficulties frequently
encountered by early stage technology companies. There can be no assurance that
Viewpoint will achieve or sustain profitability. Viewpoint has had significant
quarterly and annual operating losses since its inception, and as of December
31, 2001, had an accumulated deficit of $198,184,000.
The Company may, from time to time, provide guidance of certain
financial and non-financial expectations and has done so within this Form 10-K.
We use these expectations to assist us in making decisions about our allocations
of resources, not as predictions of future results. The expectations are subject
to risks of our business as well as those contained in "Factors That May Affect
Future Results of Operations."
RESULTS OF OPERATIONS
The following table sets forth certain selected financial information
expressed as a percentage of net revenues for the periods indicated:
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
------- ------- -------
STATEMENT OF OPERATIONS DATA
Revenues:
Licenses ........................................... 69.1% 39.7% 91.1%
Services ........................................... 30.9 60.3 8.9
------- ------- -------
Total revenues: ...................................... 100.0 100.0 100.0
------- ------- -------
Cost of revenues:
Licenses ........................................... 2.2 2.1 --
Services ........................................... 23.4 41.0 --
------- ------- -------
Total cost of revenues ............................... 25.6 43.1 --
------- ------- -------
Gross profit ......................................... 74.4 56.9 100.0
------- ------- -------
Operating expenses:
Sales and marketing (including non-cash stock-based
compensation charges) ........................... 127.2 523.4 97.1
Research and development (including non-cash
stock-based compensation charges)................ 68.2 291.5 163.4
General and administrative (including non-cash
stock-based compensation charges)................ 74.4 274.1 226.1
Compensation charge related to forgiveness of an
officer loan..................................... -- 64.9 --
Amortization of goodwill and other intangibles ..... 124.6 84.5 2.4
Goodwill impairment ................................ 56.6 -- --
Depreciation ....................................... 12.9 22.4 13.1
Non-cash sales and marketing charges ............... -- 558.6 --
Acquired in-process research and development costs . -- 26.9 --
------- ------- -------
Total operating expenses ............................. 463.9 1,846.3 502.1
------- ------- -------
Loss from operations ................................. (389.5) (1,789.4) (402.1)
Other income ......................................... 7.6 60.9 73.9
------- ------- -------
Loss before provision for income taxes ............... (381.9) (1,728.5) (328.2)
Provision for income taxes ........................... -- -- 177.2
------- ------- -------
Loss before minority interest in loss of subsidiary .. (381.9) (1,728.5) (505.4)
Minority interest in loss of subsidiary .............. -- 123.7 33.9
------- ------- -------
Net loss from continuing operations .................. (381.9) (1,604.8) (471.5)
Discontinued operations:
Loss from discontinued operations .................. -- -- (478.9)
Adjustment to net loss on disposal of discontinued
operations.......................................... 8.0 41.8 (687.3)
------- ------- -------
Net income (loss) from discontinued operations ..... 8.0 41.8 (1,166.2)
------- ------- -------
Net loss ............................................. (373.9) (1,563.0) (1,637.7)
Accretion of mandatorily redeemable preferred stock of
subsidiary ......................................... -- (12.2) --
------- ------- -------
Net loss applicable to common shareholders ........... (373.9)% (1,575.2)% (1,637.7)%
======= ======= =======
15
REVENUES
2001 % CHANGE 2000 % CHANGE 1999
------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Total revenues $14,008 291% $ 3,580 16% $ 3,093
The Company recognizes revenue in accordance with Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended, and Staff Accounting
Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements."
Viewpoint generates revenues through two sources: (a) software license
revenues and (b) service revenues. License revenues are generated from licensing
the rights to use our products directly to end-users and indirectly through
value added resellers ("VARs"). Service revenues are generated from fee based
professional services, sales of customer support services (maintenance
contracts), and training services performed for customers that license our
products.
License revenue includes sales of perpetual and term based licenses for
broadcasting viewpoint 3D content, and limited licenses for its digital content
library. License revenue is recognized over the term of the license in a
term-based broadcast license model and up-front in a perpetual broadcast license
model, providing that no significant vendor obligations remain and the resulting
receivable is deemed collectible by management.
Fee-based professional services are performed on a time-and-material
basis or on a fixed-fee basis, under separate service arrangements. Revenues
related to these services are recognized on a percentage-of-completion basis in
accordance with the provisions of SOP 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts."
Percentage-of-completion for service contracts is measured principally by the
percentage of costs incurred and accrued to date for each contract to the
estimated total cost for each contract at completion. Revenues from customer
support services are recognized ratably over the term of the contract. Revenues
from training services are recognized as services are performed.
License revenue increased approximately $8,260,000 or 581% and service
revenue increased approximately $2,168,000 or 100% for the year ended December
31, 2001, compared to the year ended December 31, 2000. The increase in revenues
is primarily attributable to an increase in sales of licenses and fee-based
professional services resulting from increases to our direct sales force,
expansion of our indirect channel partnerships, and incremental sales from the
acquisition of Viewpoint Digital. The weakening of the U.S. economy, however,
continues to negatively impact our revenue growth. The Company's revenues can
also be negatively impacted by increased competition in the market, the lack of
acceptance of the Company's existing products or the Company's failure to
develop new products.
During the year ended December 31, 2001, the Company recorded revenues
totaling $2,385,000 related to agreements, including reseller arrangements, with
two stockholders who have representatives on the Company's Board of Directors.
One of the agreements is a multi-year agreement that may significantly impact
revenues in the future.
In furtherance of the Company's indirect sales strategy, the Company
entered into a license agreement under which the Company licensed certain of its
products to a long-time, leading distributor of 3D animation software. During
the year ended December 31, 2001 the Company recorded revenue of $750,000 for
this transaction and, after certain minimum revenue targets are met, the Company
will share in future revenues derived from sublicenses of the products. The
distributor will bear all marketing and sales costs. The Company expects this
type of transaction to lead to higher margins over time.
During the year ended December 31, 2001, the Company established a
strategic relationship with one of its customers whereby the customer purchased
licenses from the Company and the Company agreed to purchase publicly traded
equities of the customer's parent. The Company also entered into a license
agreement with another customer in exchange for the customer's mass distribution
of the Viewpoint Media Player to an important target audience. These
transactions effectively include nonmonetary sales of our software for equity
securities and services of our customers, and accordingly the Company used the
fair value of the equities and services received in determining the amount of
revenues and expenses to record. Total revenues and expenses were $429,000 and
$264,000, respectively, related to these transactions.
Revenues in 2000 were related to sales of licenses, fee-based
professional services and 3D digital content with two customers accounting for
40% of total revenues. Fee based professional services and 3D digital content
sales of $2,459,000 were the result of the acquisition of Viewpoint Digital.
Revenues in 1999 primarily consisted of one-time licenses for Viewpoint and
related technologies from a limited number of strategic partners. Specifically,
revenues from two customers accounted for 88% of total
16
revenues in 1999.
The Company expects its revenue to continue to increase in 2002 based
upon the visible increase in the market acceptance of our technology. It is
anticipated that the increase in revenues will be derived from both license and
service revenues.
COST OF REVENUES
2001 % CHANGE 2000 % CHANGE 1999
------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Total cost of revenues ...... $3,592 133% $1,543 N/A $--
Percentage of total revenues 26% 43% -- %
Cost of revenues consist primarily of salaries and consulting fees for
those who provide fee-based professional services. The increase in cost of
revenues is directly related to an increase in fee-based professional services.
As the amount of services revenue is expected to increase in 2002, the
Company expects cost of revenues to increase in absolute dollars, while
decreasing slightly as a percentage of total revenues, due to improved
efficiencies and the mix of license and services revenues.
SALES AND MARKETING (INCLUDING NON-CASH STOCK-BASED COMPENSATION CHARGES
TOTALING $2,335 IN 2001, $5,122 IN 2000 AND $675 IN 1999)
2001 % CHANGE 2000 % CHANGE 1999
------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Sales and marketing ......... $17,814 (5)% $18,741 525% $ 3,000
Percentage of total revenues 127% 523% 97%
Sales and marketing expenses include salaries and benefits, sales
commissions, non-cash stock-based compensation charges, consulting fees and
travel expenses for our sales and marketing personnel. Sales and marketing
expenses also include the cost of programs aimed at increasing revenue, such as
advertising, trade shows and public relations.
Sales and marketing expenses decreased $927,000, or 5% in 2001 compared
to 2000 primarily due to a decrease in advertising costs, Web development costs
and non-cash stock-based compensation charges, which was partially offset by an
increase in salaries, benefits, sales commissions, and travel expenses related
to an increase in personnel due to internal growth and the acquisition of
Viewpoint Digital. Non-cash stock-based compensation charges decreased because
the Company generally no longer grants stock options to employees at below fair
market value at the date of grant and certain employees who were granted stock
options below fair market value have left the Company.
Sales and marketing expenses increased $15,741,000, or 525%, in 2000
compared to 1999, primarily due to an increase in salaries and benefits,
non-cash stock based compensation charges, recruiting fees, travel expenses, and
an increase in advertising and public relation agency fees related to the launch
of Viewpoint Experience Technology.
The Company does not expect a material increase in sales and marketing
expenses in 2002 over that of 2001 as a result of the company's indirect
marketing strategy and the increased utilization of creative services personnel,
which will increase cost of revenues, rather than sales and marketing expenses.
It is expected that these decreases in costs will be partially offset by
increases in selling expenses to support the projected higher revenues. As a
percentage of total revenues, sales and marketing expenses are expected to
decrease.
RESEARCH AND DEVELOPMENT (INCLUDING NON-CASH STOCK-BASED COMPENSATION CHARGES
TOTALING $2,920 IN 2001, $4,193 IN 2000 AND $2,540 IN 1999)
2001 % CHANGE 2000 % CHANGE 1999
------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Research and development .... $ 9,553 (8)% $10,434 106% $ 5,055
Percentage of total revenues 68% 292% 163%
17
Research and development expenses consist primarily of salaries and
benefits for software developers, contracted development efforts, non-cash
stock-based compensation charges, and required equipment costs related to the
Company's product development efforts. The Company expenses as incurred research
and development costs necessary to establish the technological feasibility of
its internally-developed software products and technologies. To date, the
establishment of technological feasibility of the Company's products and general
release have substantially coincided. As a result, the Company has not
capitalized any internal software development costs since costs qualifying for
such capitalization have not been significant. Additionally, the Company
capitalizes costs of software, consulting services, hardware and payroll-related
costs incurred to purchase or develop internal-use software, when technological
feasibility has been established, it is probable that the project will be
completed and the software will be used as intended. The Company expenses costs
incurred during preliminary project assessment, research and development,
re-engineering, training and application maintenance.
Research and development expenses decreased $881,000, or 8% in 2001
compared to 2000 primarily due to a decrease in non-cash stock-based
compensation charges and a decrease in bad debt expense partially offset by an
increase in salaries and benefits and an increase in contracted development
efforts. Approximately $2,106,000 of the decrease is attributable to a decrease
in bad debt expense resulting from a $1,441,000 reserve against a loan from an
executive whose chief responsibilities were research and development in 2000 of
which approximately $665,000 was recovered during 2001. Non-cash stock-based
compensation charges decreased because the Company generally no longer grants
stock options to employees at below fair market value at the date of grant and
certain employees who were granted stock options below fair market value have
left the Company.
Research and development expenses increased $5,379,000, or 106% in 2000
compared to 1999 due to an increase in salaries and benefits, non-cash
stock-based compensation charges, and travel related to increased internal
development personnel, and contracted development efforts in connection with the
further development of Viewpoint Experience Technology. In addition,
approximately $1,441,000 of the increase is due to a reserve against a loan from
an executive whose chief responsibilities were research and development.
The Company expects research and development expenses to remain
relatively flat in 2002, as compared to 2001. Anticipated increases in research
and development expenditures are expected to be offset by customer-specific
engineering efforts in the enterprise applications group, which will be
classified as cost of revenues. As a percentage of total revenues, research and
development expenses are expected to decrease.
GENERAL AND ADMINISTRATIVE (INCLUDING NON-CASH STOCK-BASED COMPENSATION CHARGES
TOTALING $1,918 IN 2001, $3,026 IN 2000 AND $2,866 IN 1999)
2001 % CHANGE 2000 % CHANGE 1999
------- -------- ------ -------- -------
(DOLLARS IN THOUSANDS)
General and administrative... $10,423 6% $9,814 40% $6,993
Percentage of total revenues. 74% 274% 226%
General and administrative expenses primarily consist of corporate
overhead of the Company, which includes salaries and benefits related to finance
and administration personnel along with other administrative costs such as
legal, accounting and investor relation fees, and insurance expense.
General and administrative expenses increased $609,000 or 6% in 2001
compared to 2000 due to an increase in salaries and benefits, rent expense,
insurance and legal costs offset by a decrease in bad debt expense and non-cash
stock-based compensation charges. Non-cash stock-based compensation charges
decreased because the Company generally no longer grants stock options to
employees at below fair market value at the date of grant and certain employees
who were granted stock options below fair market value have left the Company.
General and administrative expenses increased $2,821,000 or 40% in 2000
compared to 1999 due to a reserve against an officer's loan and an increase in
corporate expenses resulting from a full year of operations for Metastream.
General and administrative expenses are expected to decrease in
absolute dollars and as a percentage of total revenues in 2002 compared to 2001,
due to the closing of the Company's Tokyo and San Francisco offices.
18
COMPENSATION CHARGE RELATED TO FORGIVENESS OF AN OFFICER LOAN
2001 % CHANGE 2000 % CHANGE 1999
---- -------- ------ -------- ----
(DOLLARS IN THOUSANDS)
Compensation charge related to
forgiveness of an officer loan ......... $ -- (100)% $2,322 N/A $--
Percentage of total revenues.......... -- % 65% -- %
A loan to an officer which accrued interest semi-annually at 5.67%, was
forgiven in 2000 in accordance with the contractual terms of the officer's
employment agreement, upon the merger of the Company and Metastream.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
2001 % CHANGE 2000 % CHANGE 1999
------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Amortization of goodwill and
other intangibles .......... $17,453 477% $ 3,025 3,933% $ 75
Percentage of total revenues 125% 85% 2%
Amortization of goodwill and other intangibles increased $14,428,000 or
477% in 2001 compared to 2000 due to a full year of amortization of intangibles
recorded as part of the acquisition of Viewpoint Digital and the acquisition of
Computer Associates' minority interest in Metastream.
Amortization of goodwill and other intangibles increased $2,950,000 or
3,933% in 2000 compared to 1999 due to amortization of intangibles recorded as
part of the acquisition of Viewpoint Digital in September 2000 and the
acquisition of Computer Associates' minority interest in Metastream in November
2000.
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," will be adopted by the Company on January 1, 2002,
and as a result, the Company will cease to amortize approximately $33,042,000 of
goodwill. The Company recorded approximately $13,068,000 and $1,414,000 of
goodwill amortization during 2001 and 2000, respectively. In lieu of
amortization, the Company will be required to test goodwill for impairment using
the two-step approach prescribed in SFAS No. 142.
GOODWILL IMPAIRMENT
2001 % CHANGE 2000 % CHANGE 1999
------- -------- ------- -------- ------
(DOLLARS IN THOUSANDS)
Goodwill impairment.............. $ 7,925 N/A $ -- N/A $ --
Percentage of total revenues..... 57% -- % -- %
The Company assesses the impairment of long-lived assets periodically
in accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
During 2001, the Company performed impairment assessments on the goodwill and
other intangibles recorded upon the acquisition of Viewpoint Digital and the
acquisition of Computer Associates' minority interest in Metastream. As a result
of continuing poor economic conditions, which resulted in a decrease in
estimated undiscounted future cash flows, the Company recorded a $7,925,000
goodwill impairment charge on the Viewpoint Digital goodwill during the fourth
quarter of 2001. The charge was determined based upon the estimated discounted
cash flows over the remaining useful life of the goodwill using a discount rate
of 15%. The assumptions supporting the cash flows including the discount rate
were determined using the Company's best estimates as of the date the impairment
was recorded.
The Company has not completed its impairment analysis of goodwill under
SFAS No. 142, but it may need to take additional goodwill impairment charges in
2002.
DEPRECIATION
2001 % CHANGE 2000 % CHANGE 1999
------- -------- ------- -------- ------
(DOLLARS IN THOUSANDS)
Depreciation..................... $ 1,804 125% $ 801 97% $ 406
Percentage of total revenues..... 13% 22% 13%
Depreciation expense increased $1,003,000, or 125% in 2001 compared to
2000, and $395,000, or 97% in 2000 compared to 1999
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due to increases in property and equipment additions.
The Company expects that depreciation expense will increase in absolute
dollars in 2002 compared to 2001, in conjunction with the anticipated purchasing
of depreciable equipment during the year. As a percentage of total revenues,
depreciation expense is expected to decrease.
NON-CASH SALES AND MARKETING CHARGES
2001 % CHANGE 2000 % CHANGE 1999
------- --------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Non-cash sales and marketing
charges.......................... $ -- (100)% $19,998 N/A $ --
Percentage of total revenues..... -- % 559% -- %
In connection with the issuance of mandatorily redeemable preferred
stock in Metastream to AOL and Adobe, the Company recorded one-time non-cash
sales and marketing charges of $19,998,000 during the year ended December 31,
2000. These charges represented the difference between the fair market value of
the Company's common shares into which AOL and Adobe could have converted the
Metastream shares on the date of issuance, and the $20,000,000 aggregate cash
consideration received from both AOL and Adobe. These charges were recorded as
sales and marketing, as the incremental value of the equity over the cash
consideration received was deemed to be the fair value of the license and
distribution agreements simultaneously entered into with AOL and Adobe.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS
2001 % CHANGE 2000 % CHANGE 1999
------- -------- ------ -------- -----
(DOLLARS IN THOUSANDS)
Acquired in-process research
and development costs........ $ -- (100)% $ 963 N/A $ --
Percentage of total revenues. -- % 27% -- %
Acquired in-process research and development costs represent the
write-off of research and development costs recorded as part of the Viewpoint
Digital acquisition in September 2000.
OTHER INCOME
2001 % CHANGE 2000 % CHANGE 1999
------- -------- -------- -------- ------
(DOLLARS IN THOUSANDS)
Other income................. $ 1,064 (51)% $ 2,180 (5)% $2,286
Percentage of total revenues. 8% 61% 74%
Other income primarily consists of interest and investment income on
cash, cash equivalents and marketable securities. As a result, other income
fluctuates with changes in the Company's cash, cash equivalents and marketable
securities balances and market interest rates.
Other income decreased $1,116,000 or 51% in 2001 compared to 2000, and
$106,000 or 5% in 2000 compared to 1999 due to a decrease in average cash, cash
equivalents and marketable securities balances as well as a decline in interest
rates.
Other income is expected to decrease in absolute dollars and as a
percentage of total revenues in 2002 compared to 2001 due to a decline in
interest rates and an expected decrease in average cash, cash equivalents and
marketable security balances.
PROVISION FOR INCOME TAXES
2001 % CHANGE 2000 % CHANGE 1999
------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Provision for income taxes... $ -- N/A $ -- (100)% $5,481
Percentage of total revenues. -- % -- % 177%
In the fourth quarter of 1999, the Company recorded a provision for
income taxes in the amount of $5,481,000, which provided a full valuation
allowance against its net deferred tax assets. The Company's net deferred tax
assets include substantial amounts of net operating loss carryforwards.
Inability to generate taxable income within the carryforward period would affect
the ultimate realizability of such assets. Consequently, management determined
that sufficient uncertainty exists regarding the realizability of these
20
assets to warrant the establishment of the full valuation allowance. Utilization
of the Company's net operating loss carryforwards, which begin to expire in 2011
for federal and state purposes, may be subject to certain limitations under
Section 382 of the Internal Revenues Code of 1986, as amended.
MINORITY INTEREST IN LOSS OF SUBSIDIARY
2001 % CHANGE 2000 % CHANGE 1999
------- --------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Minority interest in loss of
subsidiary................... $ -- (100)% $ 4,429 323% $1,048
Percentage of total revenues. -- % 124% 34%
Metastream, originally a joint initiative between the Company and
Computer Associates, was formed in June 1999. For financial reporting purposes,
the assets, liabilities and operations of Metastream were included in the
Company's consolidated financial statements. Computer Associates and another
minority shareholder's combined 20% interest in Metastream was recorded as
minority interest in the Company's consolidated balance sheets, and the losses
attributed to their combined 20% interest were reported as the minority interest
in the Company's consolidated statements of operations. In November 2000, the
Company acquired the minority interest by issuing approximately 5,578,000 shares
of Company common stock in exchange for 4,850,000 shares of Metastream common
stock.
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS
2001 % CHANGE 2000 % CHANGE 1999
------- -------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
Net income (loss) from
discontinued operations...... $ 1,122 (25)% $ 1,496 (104)% $ (36,071)
Percentage of total revenues. 8% 42% (1,166)%
In December 1999, the Board of Directors of the Company approved a plan
to focus exclusively on its digital marketing technologies and services and to
correspondingly divest itself of its prepackaged graphics software business.
Accordingly, these operations are reflected as discontinued operations for all
periods presented in the accompanying consolidated statements of operations.
The loss on disposal of discontinued operations, which totaled
approximately $21,260,000 for the year ended December 31, 1999, consisted of the
estimated future results of operations of the discontinued business through the
estimated date of divestiture, the amounts expected to be realized upon the sale
of the discontinued business, severance and related benefits, and asset
write-downs. The Company recorded an adjustment to net loss on disposal of
discontinued operations of $1,496,000 during the year ended December 31, 2000,
primarily as a result of better than expected net revenues during the year from
the discontinued business. The Company also recorded an adjustment to net loss
on disposal of discontinued operations of $1,122,000 during the year ended
December 31, 2001, as a result of changes in estimates related to assets and
liabilities of the discontinued business. Changes in estimates will be accounted
for prospectively and included in net income (loss) from discontinued
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT
We have been developing e-commerce visualization solutions for the Web
since our acquisition of Real Time Geometry Corp. in December 1996.
Additionally, the e-commerce market is relatively new and evolving rapidly.
Accordingly, we have a relatively short operating history in this market upon
which you can evaluate our business and prospects. You should consider our
prospects in light of the risks and difficulties frequently encountered by early
stage online companies, including, but not limited to:
- We have an evolving and unpredictable business model;
- We face intense competition;
- We must establish and develop broad market acceptance of our
products, technologies and services;
- We must continue to develop new products, technologies and
enhancements;
21
- We must respond quickly to rapidly changing market
developments, customer demands and industry standards;
- We must attract, train and retain qualified employees; and
- We must effectively manage our growth.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE
We have had significant quarterly and annual operating losses since our
inception, and as of December 31, 2001, we had an accumulated deficit of
approximately $198,184,000. We have recently changed the focus of our business
from prepackaged graphics software products to e-commerce visualization
solutions. We believe that, despite this change in our strategic focus, we will
continue to incur operating losses for the foreseeable future.
OUR FUTURE REVENUES MAY BE UNPREDICTABLE AND MAY CAUSE OUR QUARTERLY RESULTS TO
FLUCTUATE
As a result of our limited operating history and the rapidly changing
nature of the markets in which we compete, we may be unable to forecast our
quarterly and annual revenues accurately. If our future quarterly operating
results fall below the expectations of securities analysts or investors, the
trading price of our common stock will likely drop. Our quarterly operating
results have fluctuated significantly in the past and may continue to fluctuate
in the future as a result of many factors, including:
- Ability to retain existing customers, attract new customers,
and satisfy our customers' demands;
- Market acceptance of our products, technologies and services;
- Introduction or enhancement of new products, technologies or
services by us or our competitors;
- Changes in prices for our products, technologies and services
or our competitors' products, technologies and services;
- Changes in usage of the Internet and online services and
consumer acceptance of the Internet and e-commerce;
- Acceptance of our technology in other digital medium, such as:
enterprise applications, digital cable set-top boxes, print,
motion pictures and broadcast television;
- Costs of litigation and intellectual property protection;
- Industry transitions to new business and information delivery
models;
- Growth in Internet use;
- Emergence of new competition;
- Varying operating costs and capital expenditures related to
the expansion of our business operations and infrastructure;
and
- Technical difficulties with our technologies.
Based on these and other factors, we believe our revenues, expenses and
operating results could vary significantly in the future and period-to-period
comparisons should not be relied upon as indications of future results.
Our staffing and other operating expenses are based in large part on
anticipated revenues. It would be difficult for us to adjust our spending to
compensate for any unexpected shortfall. If we are unable to reduce our spending
following any such shortfall, our results of operations would be adversely
affected.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS
22
We expect that our cash on hand, cash equivalents, and marketable
securities will meet our operating expense, working capital and capital
expenditure needs for at least the next 12 months. After that time, we may need
to raise additional funds and we cannot be certain that we would be able to
obtain additional financing on favorable terms, if at all. If we cannot raise
funds, if needed, on acceptable terms, we may not be able to develop or enhance
our products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could have a material adverse
effect on our business, operating results and financial condition.
OUR STOCK PRICE IS VOLATILE AND MAY CONTINUE TO FLUCTUATE IN THE FUTURE
The market price of our common stock has fluctuated significantly in
the past. The price at which our common stock will trade in the future will
depend on a number of factors including:
- Our historical and anticipated operating results;
- General market and economic conditions;
- Our announcement of new products, technologies or services;
- Actual or anticipated fluctuations in our operating results;
and
- Developments regarding our products, technologies or services,
or those of our competitors.
In addition, the stock market has experienced extreme price and volume
fluctuations recently. This volatility has had a substantial effect on our stock
price, as well as the stock prices of other software companies, particularly
Internet companies. These broad market and industry fluctuations may adversely
affect the market price of our common stock. As a result, the market price of
our common stock may continue to fluctuate.
Also, securities class action litigation has often been brought against
companies following periods of volatility in the market price of its securities.
We may in the future be the target of similar litigation. Securities litigation
could result in substantial costs and divert management's attention and
resources, which could have a material adverse effect on our business, operating
results and financial condition.
IF THE INTERNET DOES NOT CONTINUE TO EXPAND AS A WIDESPREAD COMMERCE MEDIUM,
DEMAND FOR OUR PRODUCTS AND TECHNOLOGIES MAY DECLINE SIGNIFICANTLY
The market for our products, technologies and services is new and
evolving rapidly. Growth in this market depends, in large part, on increased use
of the Internet for e-commerce. If the rate of adoption of the Internet as a
method for e-commerce slows, the market for our products, technologies and
services may not grow, or may develop more slowly than expected.
It may be reasonable to believe that increased Internet use may depend
on the availability of greater bandwidth or data transmission speeds or on other
technological improvements, and we are largely dependent on third party
companies to provide or facilitate these improvements. Changes in content
delivery methods and emergence of new Internet access devices such as TV set-top
boxes could dramatically change the market for streaming media products and
services if new delivery methods or devices do not use streaming media or if
they provide an alternative method for transferring data than streaming media.
The e-commerce market is relatively new and evolving. Licensing of our
products and technologies depends in part on the development of the Internet as
a viable commercial marketplace. There are now substantially more users and much
more "traffic" over the Internet than ever before, use of the Internet is
growing faster than anticipated, and the technological infrastructure of the
Internet may be unable to support the demands placed on it by continued growth.
Delays in development or adoption of new technological standards and protocols,
or increased government regulation, could also affect Internet use. In addition,
issues related to use of the Internet, such as security, reliability, cost, ease
of use and quality of service, remain unresolved and may affect the amount of
business that is conducted over the Internet and in other digital media.
23
OUR MARKET IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGY, AND IF WE DO NOT
RESPOND IN A TIMELY MANNER, OUR PRODUCTS AND TECHNOLOGIES MAY NOT SUCCEED IN THE
MARKETPLACE
The market for e-commerce visualization is characterized by rapidly
changing technology. As a result, our success depends substantially upon our
ability to continue to enhance our products and technologies and to develop new
products and technologies that meet customers' increasing expectations.
Additionally, we may not be successful in developing and marketing enhancements
to our existing products and technologies or introducing new products and
technologies on a timely basis. Our new or enhanced products and technologies
may not succeed in the marketplace.
In addition, the industry is subject to rapidly changing methods and
models of information delivery. If a general market migration to a method of
information delivery that is not conforming with the Company's technologies were
to occur, the Company's business and financial results would be adversely
impacted.
We expect our research and development expenditures will increase in
the future. If our increased research and development spending is not
accompanied by increased revenues, our business would be harmed.
POTENTIAL DELAYS IN PRODUCT RELEASES COULD HARM OUR BUSINESS
We also depend on internal efforts for the development of new products,
technologies and enhancements. In the past, we have had delays in the
development of new products, technologies and enhancements. We may experience
similar delays in the future, which would harm our business.
UNDETECTED ERRORS IN OUR PRODUCTS AND TECHNOLOGIES COULD RESULT IN ADVERSE
PUBLICITY, REDUCED MARKET ACCEPTANCE OR LAWSUITS BY CUSTOMERS
We offer complex software products and technologies, which may contain
undetected errors. If errors are found in our products or technologies after we
have commercially released them, we could likely experience adverse publicity,
reduced market acceptance or lawsuits by customers. This would adversely affect
our business.
IN ORDER TO INCREASE MARKET AWARENESS OF OUR PRODUCTS AND GENERATE INCREASED
REVENUE WE MAY NEED TO EXPAND OUR SALES AND MARKETING CAPABILITIES
We expanded our sales force in 2001 and may be required to continue to
expand our sales and marketing operations to increase market awareness of our
products and generate increased revenue. We cannot be certain that we would be
successful in these efforts. In addition, market acceptance of these and future
products will depend on continued market development for Internet products and
services and the commercial adoption of standards on which our Viewpoint
technology products are based. Our products and services require a sophisticated
sales effort targeted at the senior management of our prospective clients. New
hires require training and take time to achieve full productivity. We cannot be
certain that our recent hires will become as productive as necessary or that we
will be able to hire enough qualified individuals or retain existing employees
in the future.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Our success and ability to compete partly depend on the uniqueness or
value of our products and technologies. We rely on a combination of copyright,
trademark, patent, trade secret laws, employee and third-party nondisclosure
agreements and exclusive contracts to protect our intellectual and proprietary
rights, products, and technologies. Policing unauthorized use of our products
and technologies is difficult and the steps we take may not prevent the
misappropriation or infringement of technology or proprietary rights. In
addition, litigation may be necessary to enforce our intellectual property
rights. Such misappropriation or litigation could result in substantial costs
and diversion of resources and the potential loss of intellectual property
rights, any of which would adversely impair our business.
Our products and technologies may be the subject of infringement claims
in the future. This could result in costly litigation and could require us to
obtain a license to the intellectual property of third parties. We may be unable
to obtain licenses from these third parties on favorable terms, if at all. Even
if a license is available, we may have to pay substantial royalties to obtain
it. If we cannot obtain necessary licenses on reasonable terms, our business
would be adversely affected.
24
SECURITY RISKS COULD LIMIT THE GROWTH OF E-COMMERCE AND EXPOSE US TO LITIGATION
OR LIABILITY
E-commerce depends on the ability to transmit confidential information
securely over public networks. Any compromise of our customers' ability to
transmit confidential information securely could harm our business. Online
transmissions are subject to the following risks, among others:
- Encryption and authentication technology may be subject to
events or developments that could compromise or breach the
security of customer information;
- A third party could circumvent security measures and
misappropriate proprietary information or interrupt
operations;
- Credit card companies could restrict online credit card
transactions; or
- Security breaches could damage our or our customers'
reputation and expose us to litigation or liability.
INCREASING GOVERNMENT REGULATION COULD INCREASE OUR COST OF DOING BUSINESS OR
INCREASE OUR LEGAL EXPOSURE
In 1999 Congress passed legislation that regulates certain aspects of
the Internet, including on-line content, copyright infringement, user privacy,
taxation, access charges, liability for third-party activities and jurisdiction.
In addition, federal, state, local and foreign governmental organizations have
and may continue to enact legislation applicable to the Internet in areas such
as content distribution, performance and copying, other copyright issues,
network security, encryption, the use of key escrow data, privacy protection,
caching of content by server products, electronic authentication or "digital"
signatures, illegal or obscene content, access charges and retransmission
activities. The applicability to the Internet of existing laws governing issues
such as property ownership, content, taxation, defamation and personal privacy
is also uncertain. Export or import restrictions, new legislation or regulation
or governmental enforcement of existing regulations may limit the growth of the
Internet, increase our cost of doing business or increase our legal exposure.
In addition, our business may be indirectly affected by our clients who
may be subject to such legislation. Increased regulation of the Internet may
decrease the growth in the use of the Internet, which could decrease the demand
for our services, increase our cost of doing business or otherwise have a
material adverse effect on our business, results of operations and financial
condition.
WE MAY NEED TO ENTER INTO BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES WHICH
COULD BE DIFFICULT TO INTEGRATE AND MAY DISRUPT OUR BUSINESS
We may continue to expand our operations or market presence by entering
into business combinations, investments, joint ventures or other strategic
alliances with other companies. These transactions create risks such as:
- Difficulty assimilating the operations, technology and
personnel of the combined companies;
- Disruption of our ongoing business;
- Problems retaining key technical and managerial personnel;
- Expenses associated with amortization of purchased intangible
assets;
- Additional operating losses and expenses of acquired
businesses;
- Impairment of relationships with existing employees, customers
and business partners; and
- If such other business combinations and strategic alliances
are not successful in addressing these risks, our business
would be adversely affected.
THE LOSS OF ANY OF OUR KEY PERSONNEL WOULD HARM OUR BUSINESS
We depend on the continued employment of our senior executive officers
and other key management personnel. Other than a very few instances, we do not
have long-term employment agreements with our key personnel, and we do not have
"key person" life
25
insurance policies. If any of our senior officers or other key employees leave
our company and are not adequately replaced, our business would be adversely
affected.
OUR REVENUES COULD BE NEGATIVELY AFFECTED BY THE LOSS OF RESELLERS AND STRATEGIC
PARTNERS AND IF WE FAIL TO ESTABLISH, MAINTAIN OR EXPAND OUR STRATEGIC
RELATIONSHIPS FOR THE INTEGRATION OF OUR TECHNOLOGY WITH THE SERVICES OF THIRD
PARTIES, THE GROWTH OF OUR BUSINESS MAY CEASE OR DECLINE
For the year ended December 31, 2001, the Company recorded revenues
totaling 17% of total 2001 revenues related to certain agreements, including
reseller arrangements, with two stockholders who have representatives on the
Company's Board of Directors. The loss of any reseller or strategic partner
could significantly reduce our revenues, which could have a material adverse
effect on our financial condition, operating results and business.
In order to expand our business, we must generate, maintain and
strengthen strategic relationships with third parties. Currently, we have
relationships with AOL and Adobe, through which they integrate our technology
into their services. We may need to establish additional strategic relationships
in the future. If these parties do not provide sufficient, high-quality service
or integrate and support our technology correctly, or if we are unable to enter
into successful new strategic relationships, our revenues and growth may suffer.
We cannot be assured that the time and effort spent on developing or maintaining
strategic relationships will produce significant benefits to us.
OUR LENGTHY SALES CYCLE AND PRODUCT IMPLEMENTATION MAKES IT DIFFICULT TO PREDICT
OUR QUARTERLY RESULTS
We have a long sales cycle because we generally need to educate
potential customers regarding the use and benefits of e-business applications.
Our long sales cycle makes it difficult to predict the quarter in which revenues
may fall. In addition, since we recognize a portion of our revenue throughout
completion of our services, the timing of product implementation could cause
significant variability in our license and service revenues and operating
results for any particular period. The implementation of our product requires a
significant commitment of resources by our customers which makes it difficult to
predict the quarter when implementation will be completed.
OUR PROJECTS VARY IN SIZE AND SCOPE; THEREFORE, A CLIENT THAT ACCOUNTS FOR A
LARGE PORTION OF OUR REVENUES IN ONE PERIOD MAY NOT GENERATE A SIMILAR AMOUNT OF
REVENUE IN SUBSEQUENT PERIODS
We face a risk because a large amount of our revenues are generated
from a small number of clients, and there are no assurances that these clients
will retain our services for the same level of work in the future. Any
cancellation, deferral or significant reduction in work performed for these
principal clients or a significant number of smaller clients could have a
material adverse effect on our business, financial condition and results of
operations.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO IDENTIFY, HIRE, TRAIN AND RETAIN
HIGHLY QUALIFIED EMPLOYEES
Our future success depends on our continuing ability to identify, hire,
train and retain other highly qualified technical and managerial employees. The
competition for such employees is intense, and we have experienced difficulty in
identifying and hiring qualified engineering and creative services personnel. If
we do not succeed in attracting and retaining necessary technical and managerial
employees in the future, our business would be adversely affected.
Additionally, in order to attract and retain employees in the past, we
have granted options to purchase shares of common stock to employees at an
exercise price below the fair market value of the common stock on the date of
grant. As a result, we have had to record deferred compensation related to the
intrinsic value of the option. This deferred compensation is amortized over the
vesting period of applicable options, which is generally four years, resulting
in a non-cash charge to earnings over the related vesting period. We generally
no longer issue options at an exercise price below the fair market value of the
common stock on the date of grant, however, if we do so in the future, our
business would be adversely affected.
OUR CHARTER DOCUMENTS COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE
US
Our Certificate of Incorporation and By-laws are designed to make it
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to stockholders. For example, our Certificate or
Incorporation authorizes our Board of Directors to issue up to 5,000,000 shares
of "blank check" preferred stock. Without stockholder approval, the Board of
Directors has the
26
authority to attach special rights, incl