| VIEWPOINT CORP Item 1A Risk Factors FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS An investment in Viewpoint involves a high degree of risk |
| You should consider carefully the following information about these risks, before you decide to invest in Viewpoint |
| If any of the following risks actually occur, our business, financial condition or results of operations would likely 9 _________________________________________________________________ suffer |
| In this case, the market price of our common stock could decline, and you could lose all or part of your investment |
| WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE, WHICH MAY CAUSE OUR SHARE PRICE TO DECLINE We have had significant quarterly and annual operating losses since our inception, and as of December 31, 2005, we had an accumulated deficit of approximately dlra265dtta9 million |
| We may continue to incur operating losses in the future, which may cause our share price to decline |
| In the event that the Company is unable to reach profitable operations or raise additional capital in the future, operations will need to be scaled back or discontinued |
| If the Companyapstas expected revenue targets are not achieved management would consider implementing cost reduction measures including workforce reductions as well as reductions in overhead and capital expenditures |
| The Company may seek additional funds when necessary through public or private equity financing or from other sources to fund operations and pursue growth, although there are no assurances that the Company can obtain such financing with reasonable terms |
| The Company currently has no commitment for additional financing and may experience difficulty in obtaining additional financing on favorable terms, if at all |
| Any financing the Company obtains may contain covenants that restrict the Companyapstas freedom to operate the business or may have rights, preferences or privileges senior to the Companyapstas common stock and may dilute the Companyapstas current shareholders &apos ownership interest in Viewpoint |
| OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING HISTORY AND HAVE ONLY RELATIVELY RECENTLY LAUNCHED OUR SEARCH TOOLBAR AND UAP PRODUCTS We began offering our Graphically Enhanced Search toolbar services and our ad systems product, now called UAP, in 2004 |
| Accordingly, we have limited relevant operating history upon which an investor can make an evaluation of the likelihood of our success with these products |
| An investor in our securities must consider the uncertainties, expenses, and difficulties frequently encountered by companies such as ours that are in the early stages of development |
| An investor should consider the likelihood of our future success to be speculative in light of our limited operating history, as well as the problems, limited resources, expenses, risks, and complications frequently encountered by similarly situated companies in the early stages of development, particularly companies in new and rapidly evolving markets, such as Internet advertising, Internet search, and e-commerce |
| AND OTHERS THAT HAVE SIGNIFICANTLY GREATER RESOURCES THAN WE DO TO BUILD A BUSINESS Developing a new business like our Search or Advertising delivery products require significant resources to continue to develop product innovations and attract customers |
| These businesses generated minimal revenues for us prior to June 2004 |
| Our competitors in these new businesses are much larger with more extensive resources which may enable them to develop product enhancements that attract new customers more successfully than we can |
| Our inability to keep pace with these developments may cause our revenue growth to be reduced or even eliminated |
| OUR EFFORTS TO DISTRIBUTE OUR GRAPHICALLY ENHANCED SEARCH TOOLBAR MAY EXPERIENCE SETBACKS LIMITING OR REDUCING OUR SEARCH REVENUE We distribute our Graphically Enhanced Search toolbar through a complicated process that relies on internet users visiting websites or seeing advertising for a sufficient period of time to receive the software that eventually offers them our search toolbar |
| We need to continue to expand our reach of internet users who visit affiliated websites or view our advertising in order to receive the software |
| We have had some success at reaching and offering our Viewpoint Toolbar to approximately 4dtta0 million internet users per month during the third and fourth quarters of 2004 |
| During 2005, however, our rate of installation slowed to approximately 1dtta0 million per month |
| There can be no assurance that this rate of 10 _________________________________________________________________ installation, which is dependent on our ability to extend our internet reach, will continue |
| Additionally our reach is impacted by the rate of uninstallation of our Viewpoint Toolbars |
| We believe 3dtta3 million and 6dtta6 million Viewpoint Toolbars were uninstalled during 2004 and 2005, respectively, after being accepted by a consumer |
| The Viewpoint Toolbars could have been uninstalled for a variety of reasons including lack of use, concern over performance, acceptance of a competitorapstas product or user error |
| If we are not able to continue to offer the Viewpoint Toolbar at the current rate, the pace of uninstallations could lead to a decrease in our total net installed universe, and a decline in revenues |
| THE SUCCESS OF OUR GRAPHICALLY ENHANCED SEARCH OPERATIONS DEPENDS ON USERS &apos SATISFACTION WITH SEARCH RESULTS SUPPLIED BY YAHOO! |
| We entered into an agreement with Yahoo! |
| which establishes Yahoo! |
| as our exclusive supplier of search results for the Viewpoint Toolbar, which was recently extended to March 2008 |
| The market for products that enable and supply search results is relatively new, intensely competitive, and rapidly changing |
| apstas principal competitors for supplying search results include Google Inc |
| If these or other competitors develop more popular search results, end users may choose to use search toolbars or other search methods through which results from these competitors are supplied |
| EXPIRES IN MARCH 2008 |
| is successful at attracting advertisers who seek to purchase internet search advertisements, and our agreement with Yahoo! |
| provides us a satisfactory percentage of those revenues |
| Our contract with Yahoo! |
| There can be no assurance that our agreement with Yahoo! |
| will be renewed on the same or more favorable terms, if at all |
| Furthermore, there can be no assurance that we would be able to successfully replace Yahoo! |
| with another provider of search results on similar financial terms if necessary |
| OUR SOFTWARE PRODUCTS MAY BE WRONGLY LABELED AS SPYWARE OR ADWARE WHICH MIGHT LEAD TO ITS UNINSTALLATION CAUSING A DECREASE IN OUR REVENUES Our software products do not collect personally-identifiable information about users or track their activity on the internet |
| Nonetheless, our software products, including the Viewpoint Toolbar and the Viewpoint Media Player, have been wrongly characterized as spyware or adware by certain security software vendors |
| We monitor activity in this area and undertake efforts to educate vendors about the characteristics of our software, and thus far have been successful at getting these vendors to change their characterization of our Viewpoint Toolbar |
| Should we fail to persuade such vendors about the functionality of our Viewpoint Toolbar, or not learn about a false characterization on a timely basis, a substantial number of our Viewpoint Toolbars could be uninstalled leading to a decrease in our revenues and our business will be materially and adversely affected |
| OUR BUSINESS MAY NOT GROW IF THE INTERNET ADVERTISING MARKET DOES NOT CONTINUE TO DEVELOP OR IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS MODEL A significant part of our business model is to generate revenue by providing interactive marketing solutions to advertisers, ad agencies and web publishers |
| The profit potential for this business model is unproven |
| For our business to be successful, internet advertising will need to achieve increasing market acceptance by advertisers, ad agencies and web publishers |
| The intense competition among Internet advertising sellers has led to the creation of a number of pricing alternatives for Internet advertising |
| These alternatives make it difficult for us to project future levels of advertising revenue and applicable gross margin that can be sustained by us or the Internet advertising industry in general |
| Intensive marketing and sales efforts may be necessary to educate prospective advertisers regarding the uses and benefits of, and to generate demand for, our products and services |
| Advertisers may be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing 11 _________________________________________________________________ systems |
| Acceptance of our new solutions will depend on the continued emergence of Internet commerce, communication, and advertising, and demand for its solutions |
| We cannot assure you that use of the Internet will continue to grow or that current uses of the Internet are sustainable |
| OUR FAILURE TO SUCCESSFULLY COMPETE MAY HINDER OUR GROWTH The markets for Internet advertising and related products and services are intensely competitive and such competition is expected to increase |
| Our failure to successfully compete may hinder our growth |
| Many of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than ours |
| In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products or services to address the needs of our prospective clients |
| We cannot be certain that we will be able to successfully compete against current or future competitors |
| In addition, the Internet must compete for a share of advertisers &apos total budgets with traditional advertising media, such as television, radio, cable and print, as well as content aggregation companies and other companies that facilitate Internet advertising |
| To the extent that the Internet is perceived to be a limited or ineffective advertising or direct marketing medium, advertisers and direct marketers may be reluctant to devote a significant portion of their advertising budgets to Internet marketing |
| OUR REVENUES WILL BE SUBJECT TO SEASONAL FLUCTUATIONS We believe that our revenues will be subject to seasonal fluctuations because advertisers generally place fewer advertisements during the first and third calendar quarters of each year and direct marketers mail substantially more marketing materials in the third quarter of each year |
| Furthermore, Internet user traffic typically drops during the summer months, which reduces the number of advertisements to sell and deliver and searches performed |
| Expenditures by advertisers and direct marketers tend to vary in cycles that reflect overall economic conditions as well as budgeting and buying patterns |
| Our revenue could be materially reduced by a decline in the economic prospects of advertisers, direct marketers or the economy in general, which could alter current or prospective advertisers &apos spending priorities or budget cycles or extend our sales cycle |
| Due to such risks, you should not rely on quarter-to-quarter comparisons of our results of operations as an indicator of our future results |
| It may be difficult for us to adjust our spending to compensate for any unexpected shortfall |
| If we are unable to reduce our spending following any such shortfall, our results of operations would be adversely affected |
| WE MAY ENTER INTO BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES WHICH COULD BE DIFFICULT TO INTEGRATE AND MAY DISRUPT OUR BUSINESS We acquired Unicast Communications Corp |
| on January 3, 2005 and may continue to pursue expansion of our operations or market presence by entering into additional 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; • responsibility for liabilities of acquired businesses; and • impairment of relationships with existing employees, customers and business partners |
| 12 _________________________________________________________________ WE MAY NEED TO DEVELOP NEW PRODUCTS OR OTHER UNTESTED METHODS OF INCREASING SALES WITH OUR EXISTING PRODUCTS OR DISTRIBUTION NETWORK TO GENERATE SALES AND IF WE ARE UNSUCCESSFUL THE GROWTH OF OUR BUSINESS MAY CEASE OR DECLINE Our license and services revenues have declined over recent quarters |
| If this decrease in sales of our products continues or our new products are unsuccessful, we will be unable to generate sufficient revenues to offset current costs |
| Accordingly, we may be required to develop new products or other untested methods decline or cease to increase sales |
| If these new products or untested methods fail to increase sales, our business may cease or decline |
| WE WILL NEED TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE IN THE INTERNET SEARCH AND ADVERTISING INDUSTRIES In order to remain competitive, we will be continually required to enhance and to improve the functionality and features of our Search and Advertising systems products, which could require us to invest significant capital |
| If our competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, our existing services, technology, and systems may become obsolete and we may not have the funds or technical know-how to upgrade our services, technology, and systems |
| We may face material delays in introducing new services, products, and enhancements |
| If such delays occur, our users may forego use of our services and select those of our competitors, in which event, our business, prospects, financial condition and results of operations could be materially adversely affected |
| OUR AD CAMPAIGN MANAGEMENT AND DEPLOYMENT SOLUTION MAY NOT BE SUCCESSFUL AND MAY CAUSE BUSINESS DISRUPTION UAP is our proprietary ad deployment technology |
| We must, among other things, ensure that this technology will function efficiently at high volumes, interact properly with our database, offer the functionality demanded by our customers and assimilate our sales and reporting functions |
| Customers may become dissatisfied by any system failure that interrupts our ability to provide our services to them, including failures affecting our ability to deploy advertisements without significant delay to the viewer |
| Sustained or repeated system failures would reduce the attractiveness of our solutions to advertisers, ad agencies, and web publishers and could result in contract terminations, fee rebates and make-goods, thereby reducing revenue |
| Slower response time or system failures may also result from straining the capacity of our deployed software or hardware due to an increase in the volume of advertising deployed through our servers |
| To the extent that we do not effectively address any capacity constraints or system failures, our business, results of operations and financial condition could be materially and adversely affected |
| WE MIGHT EXPERIENCE SIGNIFICANT DEFECTS IN OUR PRODUCTS Software products frequently contain errors or failures, especially when first introduced or when new versions are released |
| We might experience significant errors or failures in our products, or they might not work with other hardware or software as expected, which could delay the growth of our Viewpoint Toolbar or UAP products, or which could adversely affect market acceptance of our products |
| Any significant product errors or design flaws would slow the adoption of our products and cause damage to our reputation, which would seriously harm our business |
| If customers were dissatisfied with product functionality or performance, we could lose revenue or be subject to liability for service or warranty costs and claims, and our business, operating results and financial condition could be adversely affected |
| OUR TECHNICAL SYSTEMS ARE VULNERABLE TO INTERRUPTION AND DAMAGE A disaster could interrupt our services for an indeterminate length of time and severely damage our business, prospects, financial condition and results of operations |
| Our systems and operations are vulnerable to damage or interruption from fire, floods, power loss, telecommunications failures, break- 13 _________________________________________________________________ ins, sabotage, computer viruses, penetration of our network by unauthorized computer users and “hackers,” and similar events |
| The occurrence of a natural disaster or unanticipated problems at our technical operations facilities could cause material interruptions or delays in our business, loss of data, or render us unable to provide services to customers |
| Failure to provide the data communications capacity we require, as a result of human error, natural disaster, or other operational disruptions could cause interruptions in our services and web sites |
| The occurrence of any or all of these events could adversely affect our business, prospects, financial condition and results of operations |
| In addition, interruptions in our services could result from the failure of our telecommunications providers to provide the necessary data communications capacity in the time frame we require |
| Our UAP technology resides on computer systems located in our data centers hosted by IBM and Savvis and uses the networking capabilities of these companies, Akamai and other providers |
| These systems &apos continuing and uninterrupted performance is critical to our success |
| Despite precautions that we have taken, unanticipated problems affecting our systems in the future could cause interruptions in the delivery of our solutions |
| Our business, results of operations and financial condition could be materially and adversely affected by any damage or failure that interrupts or delays our operations |
| To improve the performance and to prevent disruption of our services, we may have to make substantial investments to deploy additional servers or one or more copies of our web sites to mirror our online resources |
| Although we believe we carry property insurance with adequate coverage limits, our coverage may not be adequate to compensate us for all losses, particularly with respect to loss of business and reputation, that may occur |
| OUR MANAGEMENT TEAM HAS ONLY RECENTLY STARTED WORKING TOGETHER During 2005 the Company hired a new Chief Executive Officer and General Counsel |
| The Company also hired several new sales and marketing managers in 2005 |
| While all these individuals were familiar with the Internet business and Viewpoint in particular, and several had worked together before, there can be no assurance that these employees will successfully be able to transfer their experience to Viewpoint |
| Furthermore, there can be no assurance that these new employees or existing Viewpoint employees will successfully support one another to execute the required strategy and tactics to be a successful and profitable company |
| WE MAY HAVE TO OBTAIN FINANCING ON LESS FAVORABLE TERMS, WHICH COULD DILUTE CURRENT STOCKHOLDERS &apos OWNERSHIP INTERESTS IN THE COMPANY In order to fund our operations and pursue our growth strategy we may seek additional financing through public or private equity funding or from other sources |
| We have no commitment for additional financing and we may experience difficulty in obtaining additional financing on favorable terms, if at all |
| Any financing we obtain may contain covenants that restrict our freedom to operate our business or may have rights, preferences, or privileges senior to our common stock and may dilute our current stockholders &apos ownership interest in Viewpoint |
| OUR STOCK PRICE IS VOLATILE, WHICH COULD SUBJECT US TO CLASS ACTION LITIGATION The market price of our common stock has fluctuated significantly in the past |
| The price at which our common stock will trade in the future will depend on a number of factors including: • actual or anticipated fluctuations in our operating results; • general market and economic conditions affecting Internet companies; • our announcement of new products, technologies or services; • developments regarding our products, technologies or services, or those of our competitors; and • sales of large blocks of common stock by individual or institutional shareholders |
| 14 _________________________________________________________________ In addition, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities |
| We may in the future be the target of similar litigation |
| Securities litigation could result in substantial costs and divert managementapstas attention and resources, which could have a material adverse effect on our business, financial condition, operating results and cash flows |
| OUR CHARTER DOCUMENTS COULD MAKE IT MORE DIFFICULT FOR AN UNSOLICITED THIRD PARTY TO ACQUIRE US Our certificate of incorporation and by-laws contain provisions that could make it difficult for an unsolicited third party to acquire control of us, even if a change in control would be beneficial to stockholders |
| For example, our certificate of incorporation authorizes our board of directors to issue up to 5cmam000cmam000 shares of “blank check” preferred stock |
| Without stockholder approval, the board of directors has the authority to attach special rights, including voting and dividend rights, to this preferred stock |
| With these rights, preferred stockholders could make it more difficult for an unsolicited third party to acquire our company |
| In addition, we must receive a stockholders &apos proposal for an annual meeting within a specified period for that proposal to be included on the agenda |
| Because stockholders do not have the power to call meetings and stockholder proposals for consideration at an annual or special meeting are subject to timing requirements, any third-party takeover not supported by the board of directors would be subject to significant delays and difficulties |
| THE MARKET FOR DIGITAL VISUALIZATION SOLUTIONS 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 solutions 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 &apos increasing expectations |
| Additionally, we may not be successful in developing and marketing enhancements to our existing products and technologies or introducing new products and technologies on a timely basis |
| Our new or enhanced products and technologies may not succeed in the marketplace |
| In addition, the computer graphics industry is subject to rapidly changing methods and models of information delivery |
| If a general market migration to a method of information delivery that is not conforming with our technologies were to occur, our business and financial results would be adversely impacted |
| WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS Our success and ability to compete substantially depend on the uniqueness or value of our products and technologies |
| We rely on a combination of copyright, trademark, patent, trade secret laws, and employee and third-party nondisclosure agreements to protect our intellectual and proprietary rights, products, and technologies |
| Policing unauthorized use of our products and technologies is difficult and the steps we take may not prevent the misappropriation or infringement of technology or proprietary rights |
| In addition, litigation may be necessary to enforce our intellectual property rights |
| Such misappropriation or litigation could result in substantial costs and diversion of resources and the potential loss of intellectual property rights, any of which would adversely impair our business |
| WE MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS Our products and technologies may be the subject of infringement claims in the future |
| This could result in costly litigation and could require us to obtain a license to the intellectual property of third parties |
| We may be unable to obtain licenses from these third parties on favorable terms, if at all |
| If we cannot obtain necessary licenses on reasonable terms, our business would be adversely affected |
| 15 _________________________________________________________________ REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS We are not currently subject to direct regulation by any government agency other than laws or regulations applicable generally to e-commerce |
| Due to the increasing popularity and use of the Internet and other online services, federal, state, and local governments may adopt laws and regulations, or amend existing laws and regulations, with respect to the Internet or other online services covering issues such as user privacy, pricing, content, copyrights, distribution, and characteristics and quality of products and services |
| In 1998, the United States Congress established the Advisory Committee on Electronic Commerce which is charged with investigating, and making recommendations to Congress regarding, the taxation of sales by means of the Internet |
| Furthermore, the growth and development of the market for e-commerce may prompt calls for more stringent consumer protection laws and impose additional burdens on companies conducting business online |
| The adoption of any additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for our services and increase our cost of doing business, or otherwise have a material adverse effect on our business, prospects, financial condition and results of operations |
| Moreover, the relevant governmental authorities have not resolved the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership and personal privacy and it may take time to resolve these issues definitively |
| Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could have a material adverse effect on our business, prospects, financial condition and results of operations |
| CHANGES IN REGULATIONS OR USER CONCERNS REGARDING PRIVACY AND PROTECTION OF USER DATA COULD ADVERSELY AFFECT OUR BUSINESS Federal, state and international laws and regulations may govern the collection, use, sharing and security of data that we receive from our users and partners |
| In addition, we have and post on our website our own privacy policies and practices concerning the collection, use and disclosure of user data |
| Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, Federal Trade Commission requirements or other federal, state or international privacy-related laws and regulations could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business |
| Further, failure or perceived failure to comply with our policies or applicable requirements related to the collection, use, sharing or security of personal information or other privacy-related matters could result in a loss of user confidence in us and ultimately in a loss of users, partners or advertisers, which could adversely affect our business |
| There are a large number of legislative proposals pending before the United States Congress, various state legislative bodies and foreign governments concerning privacy issues related to our business |
| It is not possible to predict whether or when such legislation may be adopted |
| Certain proposals, if adopted, could impose requirements that may result in a decrease in our revenues |
| In addition, the interpretation and application of user data protection laws are in a state of flux |
| These laws may be interpreted and applied inconsistently from country to country and inconsistently with our current data protection policies and practices |
| Complying with these varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business |
| INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS The process of e-commerce aggregation by means of our hardware and software infrastructure involves the transmission and analysis of confidential and proprietary information of the advertiser, as well as our own confidential and proprietary information |
| The compromise of our security or misappropriation of proprietary information could have a material adverse effect on our business, prospects, financial condition and results of operations |
| We rely on encryption and authentication technology licensed from other companies to provide the security and authentication necessary to effect 16 _________________________________________________________________ secure Internet transmission of confidential information, such as credit and other proprietary information |
| Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the technology used by us to protect client transaction data |
| Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause material interruptions in our operations |
| We may be required to expend significant capital and other resources to protect against security breaches or to minimize problems caused by security breaches |
| To the extent that our activities or the activities of others involve the storage and transmission of proprietary information, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability |
| Our security measures may not prevent security breaches |
| Our failure to prevent these security breaches may have a material adverse effect on our business, prospects, financial condition and results of operations |