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ANNUAL REPORT AND FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21342
WIND RIVER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2873391
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1010 Atlantic Avenue, Alameda, California 94501
(510) 748-4100
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
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 such 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 this
Form 10-K. [ ]
The aggregate market value of the voting stock by non-affiliates of the
registrant as of March 31, 1998 was $853,597,000. This calculation does not
reflect a determination that persons are affiliates for any other purposes.
Number of shares of Common Stock outstanding as of March 31, 1998: 26,005,000
DOCUMENTS INCORPORATED BY REFERENCE:
Part III - Portions of the registrant's definitive proxy statement to be issued
in conjunction with registrant's annual stockholders' meeting to be held on June
25, 1998 are incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
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Part I Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 4A. Executive Officers of the Registrant 15
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Part II Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 16
Item 6. Selected Consolidated Financial Data 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
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Part III Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management 44
Item 13. Certain Relationships and Related Transactions 44
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Part IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 45
Signatures 48
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PART I
Except for the historical information contained herein, the discussion in
this Form 10-K contains forward-looking statements that involve risks and
uncertainties. When used herein, the words "believe," "anticipate," "expect"
and "estimate" and similar expressions are intended to identify such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the ability of the Company to
compete successfully in its industry, to continue to develop products for new
and rapidly changing markets, to integrate acquired businesses and
technologies, and others discussed below and under the captions "Business --
Additional Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company disclaims any
obligation to update any of the forward-looking statements contained herein
to reflect any future events or developments.
ITEM 1.
BUSINESS
Wind River Systems, Inc. ("Wind River" or the "Company") develops, markets and
supports advanced software operating systems and development tools that allow
customers to create complex, robust, real-time software applications for
embedded computers. An embedded computer is a microprocessor that is
incorporated into a larger device and is dedicated to responding to external
events by performing specific tasks quickly, predictably and reliably. Some
examples of such devices are telecommunications products such as PBX, routers,
central office switches and call processing systems; office products such as fax
machines, laser printers and photocopiers; vehicle anti-lock brakes and
navigation systems; consumer products such as camcorders, video games and
set-top boxes; medical instrumentation and imaging systems; industrial
automation equipment such as robots; and NASA's Mars probe, Pathfinder. Wind
River's flagship product, Tornado-TM-, enables customers to enhance product
performance, standardize designs across projects, reduce research and
development costs and shorten product development cycles.
Wind River markets its products and services in North America and Europe
primarily through its own direct sales organization, which consists of
salespersons and field application engineers. Wind River has seventeen licensed
international distributors principally to serve customers in regions not
serviced by the Company's direct sales force or its Japanese master
distributors. Wind River's customers include Boeing Company, Cisco Systems,
Inc., Digital Equipment Corporation, Ericsson Radio Systems AB, General Motors
Corporation, Hewlett-Packard Company, Hitachi, Ltd., Hughes Aircraft Company,
Lucent Technologies Inc., Intel Corporation, Lockheed-Martin Corporation,
McDonnell Douglas Corporation, Mitsubishi Electric Corporation, Motorola, Inc.,
Nippon Electric Corporation, Northern Telecom Ltd., Raytheon Company, Siemens
AG, Sun Microsystems, Inc., and TRW Inc.
During fiscal year 1998, Wind River received ISO 9001 certification. The
Company was incorporated in California in 1983 and reincorporated in Delaware in
April 1993. The Company's principal executive offices are located at 1010
Atlantic Avenue, Alameda, California 94501, and its telephone number at that
location is (510) 748-4100.
BACKGROUND
Embedded systems consist of a microprocessor and related software incorporated
into a larger device, dedicated to performing a specific set of tasks. Embedded
systems provide an immediate, predictable response to an unpredictable sequence
of external events. As more powerful microprocessors have become available and
have decreased in price, embedded systems are being used in a wider range of
applications and are facilitating the development of entirely new products. In
addition to the applications discussed above, emerging embedded Internet
applications for interactive entertainment, network computers, remote
maintenance and other areas may offer significant additional opportunities for
embedded systems.
To succeed in today's increasingly competitive markets, manufacturers using
embedded computers must bring complex applications for embedded systems to
market rapidly and economically. Developing real-time embedded applications has
evolved from a relatively modest programming task to a complex engineering
effort. As more powerful and affordable 32-bit microprocessors have become
available, products based on them have become richer in features and functions.
In addition, the complexity of embedded software is increasing dramatically,
while the time available for product development is
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decreasing. More sophisticated development tools are required to develop
these more complex applications, frequently including a real-time operating
system ("RTOS") that provides developers far more features, higher
performance and greater productivity than that necessary or feasible for
programming prior generations of microprocessors. Wind River's flexible
operating systems and powerful development tools allow customers to create
and standardize complex real-time embedded software applications quickly and
efficiently.
As real-time embedded applications increase in complexity, the costs
associated with providing software development, support and training of
engineers are rising rapidly. In addition, time-to-market, conformance to
standards and product reliability have become critical issues for companies
developing real-time embedded applications.
PRODUCTS
Wind River's operating systems and development tools allow customers to create
complex real-time embedded software applications more quickly, more economically
and with less risk than creating such applications using internally developed
systems and tools. The Company typically charges a one-time fee for a
development license and a run-time license fee for each copy of the Company's
operating system embedded in the customer's product. A key component of the
Company's strategy is to significantly increase revenue through run-time license
fees. Any increase in the percentage of revenues attributable to run-time
licenses will depend on the Company's successful negotiation of run-time license
agreements and on the successful commercialization by the Company's customers of
the underlying products.
Tornado
Wind River's flagship product is Tornado, a development environment for embedded
applications, which is available for UNIX, Windows NT and Windows 95 development
platforms. Tornado was introduced in September 1995 and subsequently won the
Electronic Design News award for Innovation of the Year. Tornado is a scalable
cross-development environment that enables engineers to develop embedded
applications on a host workstation or PC and download the code via a network or
other communications channel to an RTOS that runs on all significant 32- and 64-
bit embedded target microprocessors.
Tornado consists of three integrated components: the Tornado toolset, a set
of cross-development tools and utilities; the VxWorks-Registered Trademark-
run-time system, a high performance, scalable RTOS that executes on the target
processor; and a full range of communications options for the target connection
to the host.
The Tornado development toolset consists of a launcher, a GNU compiler for
C and C++ programs, a remote source level debugger, a user-interface shell, a
browser, and a variety of other software tools that run on the development host.
Tornado also offers a completely open and extensible environment that
facilitates the integration of a wide variety of third-party tools as well as
the customization of Tornado tools by the developer.
A set of application program interfaces ("APIs") is available and published
on the Internet for reference, from the graphical user interface ("GUI") to the
connection implementation. The Company believes that this open environment may
make Tornado the development foundation of choice for embedded and real-time
applications.
VxWorks
VxWorks is a high-performance, scalable RTOS based on an object-oriented
microkernel architecture that requires only 8 kilobytes, and can form the
foundation for memory-constrained applications as small as 20 kilobytes or
support large, complex applications. The run-time system offers over 1,100
utility routines such as buffer and list management for accelerating application
development. VxWorks provides broad portability over a wide variety of
commercial processors and custom target hardware boards and adheres to a variety
of computing standards, including POSIX 1003.1/1b, ANSI C, and TCP/IP.
For communications between the development platform and the embedded
target, Tornado provides a variety of options, including Ethernet, serial line,
in-circuit emulator, ROM emulator, or custom backend. Tornado eliminates many of
the dependencies of a traditional cross-development environment. With Tornado,
developers can use any host-target communications strategy, and the capabilities
of the toolset remains the same regardless of the target processor resources.
Tornado for DSP
To address the need for more sophisticated approaches to developing digital
signal processing ("DSP") applications in the context of embedded real-time
computing, the Company has developed Tornado for DSP, which features DSP
development
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and run-time software integrated into a comprehensive embedded systems
applications design and deployment environment. It consists of the WiSP-TM-
RTOS, Tornado for DSP tools and Tornado tools-to-WiSP connectivity
strategies. It currently supports development of DSP applications based on
the Motorola 563xx DSP chip architecture, with Tornado development tools
running on Sun Solaris workstations and Windows NT and Windows 95 PCs.
I(2)O Product Initiative
Wind River has entered into agreements with Intel Corporation ("Intel"),
Digital Equipment Corporation ("Digital") and Symbios Logic, Inc.("Symbios")
in which such companies will bundle Wind River's IxWorks-Registered
Trademark- operating system into their respective input/output platforms
("IOPs"). IxWorks - the Company's I(2)O real-time operating system ("IRTOS")
based on VxWorks -facilitates the development of I(2)O -capable products by
ensuring ongoing I(2)O compliance. It also permits companies to get their
products to market faster by offering immediate availability of the IRTOS,
the most significant software building block of an I(2)O -ready system. I(2)O
has been proposed by a consortium of leading enterprise computing vendors
with the intent of defining and promoting an open, standard set of interface
specifications for high-performance I/O subsystems. These specifications will
be used to simplify the task of building and maintaining those subsystems for
interface cards and PC server platforms. The I(2)O specification makes it
possible for systems to distribute I/O functions across multiple processors,
dramatically improving I/O and overall system performance. Additionally, the
specification allows vendors of network and peripheral interface cards to
write a single device driver that will be compatible with a comprehensive
range of operating systems ("OS"), OS releases, and vendor OS
implementations. A license for IxWorks may be included with IOPs shipped.
This arrangement permits manufacturers to develop their products quickly,
since IxWorks is available immediately. The Company believes that its
relationships with Intel, Digital, and Symbios for the implementation of the
I(2)O specification may open up a new market opportunity for its products.
Embedded Internet Market Initiative
Wind River's Tornado for Embedded Internet-Registered Trademark- product suite
is a fully integrated package for bringing the advantages of the Internet to
embedded computers such as smart phones, TV set-top boxes, network computers,
networked printers, cable modems, and switches. With the introduction of Tornado
for Embedded Internet components, Wind River has provided a common technology to
build and deploy products throughout the Internet, including its infrastructure,
servers, and smart appliances. The Company believes there may be opportunities
to increase the market size and scope for its products, which incorporate, for
example, server technology for posting information to the Internet or corporate
intranets, browsers for viewing information on the World Wide Web, and "Java
compliant" products for developing "write once, run anywhere" applications. Wind
River's Embedded Internet product suite includes Tornado for Java, Tornado for
PersonalJava, Wind-Registered Trademark- Web Server and RtX-Windows.
UNIX, Windows NT and Windows 95 Support
The Company's Tornado environment supports Unix, Windows NT and Windows 95
development environments, and is the only RTOS to have earned the right to
use Microsoft's "Designed for Windows 95-Registered Trademark-" and "Designed
for Windows NT-Registered Trademark-" logos. The Company has maintained a
strong presence in providing development tools and the VxWorks RTOS for the
UNIX operating system.
Additional Products
In addition to the preceding core products, Wind River offers the following:
VXWORKS OPTIONS. VxWorks options include RtX-Windows, the VxVMI-TM- virtual
memory interface, and the VxMP-TM- multi-processing package. RtX-Windows, which
was specifically designed for VxWorks, is a scalable graphics package that
permits developers to build graphical VxWorks applications. VxVMI virtual memory
interface provides run-time memory management and debugging facilities and an
application program interface standardized across different microprocessing
architectures. The VxMP multiprocessing package allows applications to be scaled
beyond the performance of single microprocessors by allowing tasks on different
microprocessors to synchronize and communicate.
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WINDNET. WindNet-TM- is Wind River's networking environment, comprising
both core technology from Wind River such as TCP/IP, STREAMS, and the WindNet
SNMP network management product and numerous integrated products from third
party partners providing various communications protocols, as well as network
management, and distributed computing solutions.
LOOK! FOR TORNADO. Look! for Tornado is a C++ visualization and debugging
tool designed to graphically explore a C++ program as it executes.
VXSIM EMBEDDED SYSTEM SIMULATOR. VxSim-TM- is a comprehensive prototyping
and simulation tool that provides full VxWorks simulation on a UNIX workstation.
VxSim enables application development to begin before hardware becomes available
and allows software testing to occur early in the development cycle, when errors
are less costly to correct.
WINDVIEW. WindView-TM- is a diagnostic and analysis tool that provides
detailed visibility into the dynamic operation of an embedded system. With it,
the user can quickly and easily visualize the complicated interaction among
tasks and interrupt service routines and system objects in an application. This
information is presented through a GUI.
STETHOSCOPE. The Company is a reseller of StethoScope, a real-time data
visualization, profiling and debugging tool that lets the end user examine and
analyze an embedded application while it is running. StethoScope features a
multi-window environment that allows program variables to be plotted dynamically
on a workstation.
TORNADO FOR JAVA. Tornado for Java brings all of the advantages of Java --
cross-platform compatibility, Internet-readiness, security -- to the embedded
world. Tornado for Java enables Java applets and applications to be executed as
easily as C, C++, Ada, FORTRAN, or assembly language applications. Any Java
applet may be loaded from a network or from local disk or ROM. Tornado for Java
also provides the HotJava browser and Applet Viewer.
TORNADO FOR PERSONALJAVA. Tornado for PersonalJava is a subset of Tornado
for Java that makes PersonalJava -- a Java application environment targeted at
personal consumer devices -- available on a commercial real-time operating
system for the first time. Tornado for PersonalJava specifically addresses the
requirements of consumer-oriented devices such as PDAs, Internet phones or
hand-held terminals.
WIND WEB SERVER. Wind Web Server turns embedded devices into Web servers
that can provide a powerful interface to the Internet or to a corporate
intranet. It displays timely, dynamic information on an embedded device running
VxWorks by means of an standard Web browser.
WIND FOUNDATION CLASSES. Wind Foundation Classes-TM- enable embedded
systems developers to use and reuse highly optimized and extensively tested code
to create real-time embedded applications in less time, with fewer errors, and
at lower cost.
WINDNAVIGATOR. A multi-language browsing tool, WindNavigator-TM- enables
developers to see the relationships between objects and functions, and easily
build programs using existing, proven modules.
WILLOWS RT FOR TORNADO. Willows RT for Tornado enables developers to write
their applications to the standard Win32 application programming interface and
deploy them on top of VxWorks.
RTX-WINDOWS. RtX-Windows is a scalable, real-time graphics package that
gives developers maximum flexibility and a wide range of functions to choose
from when designing graphical application. RtX-Windows is specifically designed
for VxWorks and provides the graphics engine for the Java Virtual Machine
implemented in Tornado for Java.
BOARD SUPPORT PACKAGE DEVELOPER'S KIT. The VxWorks operating system can be
used with a wide variety of processor types and target environments. They
isolate all hardware-specific features into a special section of code called a
board support package ("BSP"). The BSP Developer's Kit provides assistance to
the developer porting Tornado or VxWorks to custom hardware or to a commercial
board not supported by Wind River. It includes comprehensive documentation, a
software validation suite, project management tools and a template BSP to
provide a convenient starting point. To assist third-party developers, Wind
River also offers a service in which it tests and validates the resulting BSP.
SERVICES AND SUPPORT
Wind River provides comprehensive customer service and support that help
customers realize the value and potential of the Company's products.
TRAINING CLASSES. Wind River offers several training courses and workshops
relating to the use of its products. The courses are provided several times each
month and are taught by Wind River trainers at the Company's training facilities
in Alameda, California. Outside North America, the courses are given under
license from the Company by distributors and training contractors. Training
courses can also be provided at a customer site.
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TECHNICAL SUPPORT. The Company's technical support staff assists customers
with problems and questions in the installation and use of the Company's
products. Technical support is provided by Wind River's staff of support
engineers in North America, by staff support engineers and /or local
distributors in Europe and by the Company's Japanese subsidiary. Technical
support is bundled with product updates and maintenance and is offered on an
annual fee basis. Wind River's Tornado includes a tool for submitting problem
reports via the Internet.
ENGINEERING SERVICES. A number of services are provided on a
fee-for-service basis, including BSP validation, application-level consulting,
customization, and porting to strategic semiconductor architectures. These are
coordinated and performed by the Engineering Services Group in North America and
Japan, though they may on occasion be supported by Engineering or outside
subcontractors in North America and Europe.
STRATEGIC ALLIANCES
The Company believes that strategic relationships with semiconductor
manufacturers and embedded device manufacturers are significant strengths of the
Company and key to future success in the embedded systems marketplace. Wind
River has strategic relationships with most of the major semiconductor companies
including ARM, Hewlett-Packard, Hitachi, Intel, Mitsubishi, Motorola, NEC,
Siemens, Silicon Graphics and Sun Microsystems. This strategy has allowed the
Company to leverage its partners' sales channels to give its products the widest
possible market exposure. The Company also enters into joint marketing and sales
agreements with certain developers of third-party applications as a means to
enhance its products with industry-specific features. In addition, Intel and
Wind River have a strategic relationship pursuant to which Intel supplies an
evaluation copy of Tornado for I(2)O to each customer purchasing an Intel i960Rx
I/O microprocessor and a copy of IxWorks on each such microprocessor sold. In
addition, Wind River has developed strategic relationships with Network
Computer, Inc. and Sun Microsystems for Embedded Internet applications ranging
from network computers to hand-held and intelligent phones.
CUSTOMERS
The Company's products have been deployed by a broad range of organizations,
including companies in the following industries: global communications, imaging,
consumer electronics, computers, medical and industrial, aerospace, research and
defense. No single customer accounted for more than 10% of the Company's total
revenues in fiscal 1998.
MARKETING, SALES AND DISTRIBUTION
In North America and Europe, Wind River markets its products and services
primarily through its own direct sales organization, which consists of
salespersons and field application engineers. As of January 31, 1998, Wind River
had 88 domestic direct salespersons and field application engineers located
throughout North America, 35 direct salespersons and field application engineers
throughout Europe and 10 sales and marketing employees in Japan.
The Company distributes its products in Japan through Wind River Systems,
K.K.("WRSKK"), a joint venture in which the Company owns a 70% equity interest.
Innotech Corporation ("Innotech"), Kobe Steel Ltd. and Nissin Electric Ltd., the
other partners in the joint venture, each owns a 10% equity interest. The
Company has licensed its products exclusively to WRSKK for distribution in
Japan. WRSKK has in turn entered into master distributor agreements with its
three joint venture partners that provide the right to appoint sub-distributors.
See Note 11 of Notes to Consolidated Financial Statements.
Wind River has licensed seventeen international distributors, principally
to serve customers in regions not serviced by the Company's direct sales force
or its Japanese master distributors. The Company also has established strategic
relationships with computer, semiconductor and software vendors and works
closely with a number of system integrators worldwide that enable Wind River to
further broaden the geographic and market scope for its products.
Revenues from international sales represented approximately 29%, 34% and
37% of the Company's total revenue in fiscal 1998, 1997 and 1996, respectively.
See Note 12 of Notes to Consolidated Financial Statements for a summary of
operations by geographic region, and "-- Additional Risk Factors -- Risks
Associated with International Operations."
The Company has experienced, and expects to continue to experience,
significant seasonality resulting primarily from customer buying patterns and
product development cycles. The Company has generally experienced the strongest
demand for its products in the fourth quarter of each fiscal year and the
weakest demand in the first quarter of each fiscal year. Quarterly revenue
levels have increased over the levels for like quarters in the prior fiscal
years but have typically decreased in the first quarter of each fiscal year from
the fourth quarter of the prior fiscal year.
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COMPETITION
The embedded real-time software industry is highly competitive and is
characterized by rapidly advancing technology. The Company believes that it
competes favorably in its markets on the basis of product capabilities,
price/performance characteristics, product portability, ease of use, sales and
marketing strength, financial stability, support services and corporate
reputation. In order to maintain or improve its position in the industry, the
Company must continue to enhance its current products and rapidly develop new
products and product extensions. The Company believes that its principal
competition comes from companies that develop real-time embedded software
development systems in-house rather than purchasing such systems from
independent software vendors such as the Company. Many of these organizations
have substantial internal programming resources with the capability to develop
specific products for their needs. The Company also competes with other
independent software vendors, including Integrated Systems, Inc., Mentor
Graphics, Inc. (through its acquisition of Microtec/Ready Systems), Microware
Systems Corporation, and Microsoft Corporation. In addition, hardware or other
software vendors could seek to expand their product offerings by designing and
selling products that directly compete with or adversely affect sales of the
Company's products. Many of the Company's existing and potential competitors
have substantially greater financial, technical, marketing and sales resources
than the Company. In addition, the Company is aware of ongoing efforts by
competitors to emulate the performance and features of the Company's products
and there can be no assurance that competitors will not develop equivalent or
superior technology to that of the Company. Because a substantial percentage of
the Company's revenues has been derived from sales of the Tornado and VxWorks
family of products and services, the effects of competition could be more
adverse than would be the case if the Company had a broader product offering. In
addition, competitive pressures could cause the Company to reduce the prices of
its products, which would result in reduced profit margins. There can be no
assurance that the Company will be able to compete effectively against its
current and future competitors. If the Company is unable to compete
successfully, its business, financial condition and results of operations would
be materially and adversely affected.
PRODUCT DEVELOPMENT AND ENGINEERING
Wind River believes that its success will depend in large part on its ability
to maintain and enhance its current product line, develop new products,
maintain technological competitiveness and meet an ever-expanding range of
customer requirements. The Company's product development and engineering
group includes 132 full-time employees. During fiscal 1998, 1997 and 1996,
product development and engineering expenses were $12.0 million, $7.7 million
and $5.5 million, respectively, excluding capitalized software development
costs. Costs capitalized for software development for these periods were
$803,000, $707,000 and $490,000, respectively. During fiscal 1998, the
Company acquired certain technology from Network Computer, Inc. and all of
the outstanding stock of Objective Software Technology Ltd. In each of these
transactions, a portion of the purchase price was allocated to in-process
research and development and expensed at the time of the acquisition. The
amount of each write-off totaled $10 million and $4.1 million, respectively.
The Company incurred approximately $1.0 million of other non-merger
incremental costs associated with these acquisitions which were included in
the in-process research and development write-off. The Company anticipates
that it will continue to commit substantial resources to research and product
development in the future.
The embedded real-time software industry faces a fragmented market
characterized by ongoing technological developments, evolving industry standards
and rapid changes in customer requirements. The Company's success depends and
will continue to depend upon its ability to continue to develop and introduce in
a timely manner new products that take advantage of technological advances, to
identify and adhere to emerging standards, to continue to improve the
capabilities of its Tornado development environment and the scalability and
features of the VxWorks product, to offer its products across a spectrum of
microprocessor families used in the embedded systems market and to respond
promptly to customers' requirements. The Company has from time to time
experienced delays in the development of new products and the enhancement of
existing products. Such delays are commonplace in the software industry. There
can be no assurance that the Company will be successful in developing and
marketing, on a timely basis or at all, competitive products, product
enhancements and new products that respond to technological change, changes in
customer requirements and emerging industry standards, or that the Company's
enhanced or new products will adequately address the changing needs of the
marketplace. The inability of the Company, due to resource constraints or
technological or other reasons, to develop and introduce new products or product
enhancements in a timely manner could have a material adverse effect on the
Company's business, financial condition or results of operations. From time to
time, the Company or its competitors may announce new
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products, capabilities or technologies that have the potential to replace or
shorten the life cycles of the Company's existing products. There can be no
assurance that announcements of currently planned or other new products by
the Company or others will not cause customers to defer purchasing existing
Company products. Any failure by the Company to anticipate or respond
adequately to changing market conditions, or any significant delays in
product development or introduction, would have a material adverse effect on
the Company's business, financial condition and results of operations.
As a result of their complexity, software products may contain undetected
errors or compatibility issues, particularly when first introduced or as new
versions are released. There can be no assurance that, despite testing by the
Company and testing and use by current and potential customers, errors will not
be found in new products after commencement of commercial shipments. The
occurrence of such errors could result in loss of or delay in market acceptance
of the Company's products, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The
increasing use of the Company's products for applications in systems that
interact directly with the general public, particularly applications in
transportation, medical systems and other markets where the failure of the
embedded system could cause substantial property damage or personal injury,
exposing the Company to significant product liability claims. In addition, the
Company's products may be used for applications in mission-critical business
systems where the failure of the embedded system could be linked to substantial
economic loss. Although the Company has not experienced any product liability or
economic loss claims to date, the sale and support of the Company's products
entails the risk of such claims.
The Company is continuously engaged in product development for new or
changing markets. In particular, the Company has invested significant time and
effort, together with a consortium of industry participants, in the development
of I(2)O, a new specification that is intended to create an open standard set of
interface specifications for high performance I/O systems. The specification is
intended to be used by system, network and peripheral interface card and
operating systems vendors to simplify the task of building and maintaining
high-performance I/O subsystems. The Company also has developed IxWorks, an RTOS
for use in conjunction with the I(2)O specification. The success of the I(2)O
specification and the IxWorks product line depends heavily on its adoption by a
broad segment of the industry. The Company also is expending substantial time
and financial resources to develop embedded operating software and development
tools for Internet applications. The commercial Internet market has only
recently begun to develop, is rapidly changing and is characterized by an
increasing number of new entrants with competitive products. Moreover, there is
an increasing number of new Internet protocols to which the Company's products
must be ported. It is unclear which of these competing protocols ultimately will
achieve market acceptance. If the protocols upon which the Company's Internet
products are based ultimately fail to be widely adopted, the Company's business,
financial condition and results of operations may be materially and adversely
affected. It is difficult to predict with any assurance whether demand for any
of these products will develop or increase in the future. If these markets, or
any other new market targeted by the Company in the future, fail to develop,
develop more slowly than anticipated or become saturated with competitors, if
the Company's products are not developed in a timely manner, or if the Company's
products and services do not achieve or sustain market acceptance, the Company's
business, financial condition and results of operations would be materially and
adversely affected.
PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary technology. To
protect its proprietary rights, the Company relies on a combination of
copyright, trade secret, patent and trademark laws, nondisclosure and other
contractual restrictions on copying, distribution and technical measures. The
Company seeks to protect its software, documentation and other written materials
through trade secret and copyright laws, which provide only limited protection.
In addition, the Company has two United States patent applications pending.
There can be no assurance that patents will issue from the Company's pending
applications or that any claims allowed will be of sufficient scope or strength
(or be issued in all countries where the Company's products can be sold) to
provide meaningful protection or any commercial advantage to the Company. As a
part of its confidentiality procedures, the Company generally enters into
nondisclosure agreements with its employees, consultants, distributors and
corporate partners and limits access to and distribution of its software,
documentation and other proprietary information. End user licenses of the
Company's software are frequently in the form of shrink wrap license agreements,
which are not signed by licensees, and therefore may be unenforceable under the
laws of many jurisdictions. Despite the Company's efforts to protect its
proprietary rights, it may be possible for unauthorized third parties to copy
the Company's products or to reverse engineer or obtain and use information that
the Company regards as proprietary. There can
9
<PAGE>
be no assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
software piracy of its products exists, software piracy can be expected to be
a persistent problem. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain countries. The status
of U.S. patent protection in the software industry is not well defined and
is likely to evolve as the U.S. Patent and Trademark Office grants additional
patents. Patents have been granted on fundamental technologies in software,
and patents may issue in the future that relate to fundamental technologies
incorporated into the Company's products. Wind River believes that, due to the
rapid pace of innovation within its industry, factors such as the technological
and creative skills of its personnel are more important to establishing and
maintaining a technology leadership position within the industry than are the
various legal protections of its technology.
As the number of patents, copyrights, trademarks, trade secrets and
other intellectual property rights in the Company's industry increases,
products based on the Company's technology may increasingly become the
subject of infringement claims. There can be no assurance that third parties
will not assert infringement claims against the Company in the future. Any
such claims with or without merit could be time consuming, result in costly
litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements,
if required, may not be available on terms acceptable to the Company, or at
all, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Litigation to determine the validity of any claims,
whether or not such litigation is determined in favor of the Company, could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks. In the
event of an adverse ruling in any such litigation, the Company might be
required to pay substantial damages, discontinue the use and sale of
infringing products, expend significant resources to develop non-infringing
technology or obtain license to infringing technology.
MANUFACTURING AND BACKLOG
The Company's manufacturing operation consists of assembling, packaging and
shipping the software products and documentation needed to fulfill each order.
All manufacturing is currently performed in the Company's Alameda, California,
facility. Outside vendors provide tape and CD duplication, printing of
documentation and manufacturing of packaging materials.
The Company does not believe that backlog is a meaningful indicator of
sales that can be expected in future periods, particularly in view of the fast
pace of technological change in the software industry. The Company's order
fulfillment process is intended to efficiently manage the flow of products to
customers, often resulting in a number of weeks of backlog. Backlog at January
31, 1998 was approximately 11 to 16 weeks of sales. Backlog includes orders that
may be filled at various times throughout the fiscal year.
EMPLOYEES
The Company has 438 employees, including 241 in sales, marketing and support
activities, 132 in product development and engineering and 65 in management,
operations, finance and administration. Of these employees, 330 were located in
North America and 108 were located outside of North America. None of the
Company's employees is represented by a labor union or is subject to a
collective bargaining agreement. Wind River has never experienced a work
stoppage. See "-- Additional Risk Factors -- Management of Growth; Dependence on
Key Personnel; Need for Additional Personnel."
ADDITIONAL RISK FACTORS
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced from time to time significant period-to-period
fluctuations in revenues and operating results and anticipates that such
fluctuations could occur in the future. These fluctuations may be attributable
to a number of factors, including the volume and timing of orders received
during the quarter, the timing and acceptance of new products and product
enhancements by the Company or its competitors, unanticipated sales and buyouts
of run-time licenses, stages of product life cycles, purchasing patterns of
customers and distributors, market acceptance of products sold by the Company's
customers, competitive conditions in the industry, business cycles affecting the
markets in which the Company's products are
10
<PAGE>
sold, extraordinary events, such as acquisitions, including related charges,
and economic conditions generally or in specific geographic areas. The future
operating results of the Company may fluctuate as a result of these and other
factors, including the Company's ability to continue to develop innovative
and competitive products. In addition, the Company generally does not enter
into long-term agreements with its customers, and the timing of license fees
is difficult to predict. The procurement process of the Company's customers
is often several months or longer from initial inquiry to order and may
involve competing considerations. Further, as licensing of the Company's
products increasingly becomes a more strategic decision made at higher
management levels, there can be no assurance that sales cycles for the
Company's product will not lengthen. Product revenue in any quarter depends
primarily on the volume and timing of orders received in that quarter. The
Company has at times recognized a substantial portion of its total revenue
from sales booked and shipped in the latter part of the quarter; thus, the
magnitude of quarterly fluctuations may not become evident until late in a
particular quarter. Because the Company's staffing and operating expenses are
based on anticipated total revenue levels and a high percentage of the
Company's costs are fixed in the short term, small variations between
anticipated orders and actual orders, as well as non-recurring or large
orders, could cause disproportionate variations in the Company's operating
results from quarter to quarter. Revenues also are typically higher in the
fourth quarter than in other quarters of the fiscal year, which ends on
January 31, primarily as a result of purchases by customers prior to the
calendar year end, as well as by customers who purchase at the commencement
of a new calendar year. These trends are expected to continue.
Because the software industry is intensely competitive, software vendors
have from time to time experienced price erosion on their products. As is
typical in the software industry, the Company's fixed costs as a percentage of
revenues are high, and significant price erosion could have a material adverse
effect on the Company's revenues and operations. A number of additional factors
may in the future cause the Company's revenues and operating results to vary
significantly from period to period. These factors include: software "bugs" or
other product quality problems; changes in operating expenses; changes in
Company strategy; personnel changes; foreign currency exchange rates; and mix of
products sold. Although the Company has been profitable for the last several
years on an annual basis, there can be no assurance that the Company will be
able to continue its growth in revenue or sustain its profitability on a
quarterly or annual basis. Due to all of the foregoing factors, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance. It is possible that, in some future quarters, the Company's
operating results could be below the expectations of stock market analysts and
investors. In such event, the price of the Common Stock could be materially and
adversely affected.
RELIANCE ON CORE FAMILY OF PRODUCTS
Revenue from sales of the Tornado and VxWorks family of products and services
accounted for a significant majority of the Company's revenues in each of the
fiscal years ended January 31, 1998, 1997 and 1996. The Company's future results
depend heavily on continued market acceptance of these products in the Company's
current markets and successful application in new markets. Any factor adversely
affecting the market for the Tornado and VxWorks family of products and services
could have a material adverse affect on the Company's business, financial
condition and results of operations. The Company typically charges a one-time
fee for a development license and a run-time license fee for each copy of the
Company's operating system embedded in the customer's products. A key component
of the Company's strategy is to increase revenue through run-time license fees.
Any increase in the percentage of revenues attributable to run-time licenses
will depend on the Company's successful negotiation of run-time license
agreements and on the successful commercialization by the Company's customers of
the underlying products. To the extent that such customers are not successful,
the Company may not be able to meet its objectives, and its business, financial
condition and results of operations could be materially and adversely affected.
PRODUCT DEVELOPMENT
The embedded real-time software industry faces a fragmented market characterized
by ongoing technological developments, evolving industry standards and rapid
changes in customer requirements. The Company's success depends and will
continue to depend upon its ability to continue to develop and introduce in a
timely manner new products that take advantage of technological advances, to
identify and adhere to emerging standards, to continue to improve the
functionality of its Tornado development environment and the scalability and
functionality of the VxWorks product, to offer its products across a spectrum of
microprocessor families used in the embedded systems market and to respond
promptly to customers'
11
<PAGE>
requirements. The Company has from time to time experienced delays in the
development of new products and the enhancement of existing products. Such
delays are commonplace in the software industry. There can be no assurance
that the Company will be successful in developing and marketing, on a timely
basis or at all, competitive products, product enhancements and new products
that respond to technological change, changes in customer requirements and
emerging industry standards, or that the Company's enhanced or new products
will adequately address the changing needs of the marketplace.
As a result of their complexity, software products may contain undetected
errors or compatibility issues, particularly when first introduced or as new
versions are released. There can be no assurance that, despite testing by the
Company and testing and use by current and potential customers, errors will not
be found in new products after commencement of commercial shipments. The
occurrence of such errors could result in loss of or delay in market acceptance
of the Company's products, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The
increasing use of the Company's products for applications in systems that
interact directly with the general public, particularly applications in
transportation, medical systems and other markets where the failure of the
embedded system could cause substantial property damage or personal injury,
could expose the Company to significant product liability claims. In addition,
the Company's products may be used for applications in mission-critical business
systems where the failure of the embedded system could be linked to substantial
economic loss. Although the Company has not experienced any product liability or
economic loss claims to date, the sale and support of the Company's products
entails the risk of such claims, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON VME MARKET
A significant amount of the Company's revenues historically has been derived
from sales of systems built to the VME (versabus module eurocard) standard.
These systems typically are used in high cost, low volume applications,
including military, telecommunications, space and research applications.
Although the Company believes that revenues from sales of products designed for
embedded systems applications will account for an increasing percentage of the
Company's revenues in the future, the Company expects revenues from the VME
market to continue to be significant for the foreseeable future. Academic
institutions and defense industry participants, which generate a significant
portion of the Company's VME revenues, are dependent on government funding, the
continued availability of which is uncertain. Typically, the Company's VME
customers have received government funding prior to placing its product orders
with Wind River. Any unanticipated future termination of government funding of
VME customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company has experienced, and expects to continue to experience, significant
growth in the number of employees, the scope and complexity of its operating and
financial systems and the geographic area of its operations. The Company's
continued success will depend significantly on its ability to integrate new
operations and new personnel. There can be no assurance that the Company will be
successful in achieving such integration efficiently. In addition, the Company
anticipates the need to relocate its management, engineering, marketing, sales
and customer support operation to a new facility within the next few years. On
October 24, 1997, the Company purchased real property in the City of Alameda,
California for $11.4 million. The property is being developed to construct the
Company's new headquarters facility. There can be no assurance that any such
relocation will be accomplished efficiently, or that the Company's operations
will not be materially and adversely affected by such relocation. The Company's
future performance depends to a significant degree upon the continued
contributions of its key management, product development, marketing, sales,
customer support and operations personnel, several of whom have joined the
Company only recently. In addition, the Company believes its future success will
depend in large part upon its ability to attract and retain highly-skilled
managerial, product development, marketing, sales, customer support and
operations personnel, many of whom are in great demand. Competition for such
personnel is particularly intense in the San Francisco Bay Area, where the
Company is headquartered, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The failure of the
Company to attract, integrate and retain the necessary personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations.
12
<PAGE>
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company has recently completed the
acquisition of Objective Software Technology, Ltd., has acquired an equity
interest in Emultek, Ltd. and has also acquired certain technologies from
Network Computer, Inc. The Company expects to make acquisitions of, or
significant investments in, businesses that offer complementary products,
services and technologies. Any acquisitions or investments will be accompanied
by the risks commonly encountered in acquisitions of businesses and
technologies. Such risks include, among other things, the difficulty of
assimilating the operations and personnel of the acquired businesses, the
potential disruption of the Company's ongoing business, the inability to
integrate acquired technologies into new and existing products, the inability of
management to maximize the financial and strategic position of the Company, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and customers as a result of any
integration of new management personnel. These factors could have a material
adverse effect on the Company's business, results of operations or financial
condition. Consideration paid for future acquisitions, if any, could be in the
form of cash, stock, debt, rights to purchase stock or a combination thereof.
Dilution to existing stockholders and to earnings per share may result to the
extent that shares of stock or other rights to purchase stock are issued in
connection with any such future acquisitions.
RISKS OF PRODUCT DEFECTS; PRODUCT AND OTHER LIABILITY
As a result of their complexity, software products may contain undetected errors
or compatibility issues, particularly when first introduced or as new versions
are released. There can be no assurance that, despite testing by the Company and
testing and use by current and potential customers, errors will not be found in
new products after commencement of commercial shipments. The occurrence of such
errors could result in loss of or delay in market acceptance of the Company's
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations. The increasing use of the
Company's products for applications in systems that interact directly with the
general public, particularly applications in transportation, medical systems and
other markets where the failure of the embedded system could cause substantial
property damage or personal injury, could expose the Company to significant
product liability claims. In addition, the Company's products may be used for
applications in mission-critical business systems where the failure of the
embedded system could be linked to substantial economic loss. Although the
Company has not experienced any product liability or economic loss claims to
date, the sale and support of the Company's products entails the risk of such
claims. The Company carries insurance against product liability risks and errors
or omissions coverage, although there can be no assurance that such insurance
will continue to be available to the Company on commercially reasonable terms or
at all. A product liability claim or claim for economic loss brought against the
Company in excess of or outside the limits of its insurance coverage, or a
product recall involving the Company's software, could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
In the fiscal years ended January 31, 1998, 1997 and 1996, the Company derived
approximately 29%, 34% and 37%, respectively, of its total revenue from sales
outside of North America. The Company expects that international sales will
continue to generate a significant percentage of its total revenue in the
foreseeable future. The Company also expects to make substantial investments to
expand further its international operations and to increase its direct sales
force in Europe and Asia. There can be no assurance that these investments will
result in commensurate increases in the Company's international sales.
International operations are subject to certain risks, including foreign
government regulation; more prevalent software piracy; longer payment cycles;
unexpected changes in, or imposition of, regulatory requirements, tariffs,
import and export restrictions and other barriers and restrictions; greater
difficulty in accounts receivable collection; potentially adverse tax
consequences; the burdens of complying with a variety of foreign laws; staffing
and managing foreign operations; political and economic instability; changes in
diplomatic and trade relationships; possible recessionary environments in
economies outside the United States; and other factors beyond the control of the
Company. Sales by the Company's foreign subsidiaries are denominated in the
local currency, and an increase in the relative value of the dollar against such
currencies would reduce the Company's revenues in dollar terms or make the
Company's products more expensive and, therefore, potentially less competitive
in foreign markets. There can be no assurance that the Company's future results
of operations will not be adversely affected by currency fluctuations. The
Company relies on distributors for sales of its products in certain foreign
countries and, accordingly, is dependent on their ability to promote and support
the Company's products and, in some cases,
13
<PAGE>
to translate them into foreign languages. The Company's international
distributors generally offer products of several different companies,
including in some cases products that are competitive with the Company's
products, and such distributors are not subject to any minimum purchase or
resale requirements. There can be no assurance that the Company's
international distributors will continue to purchase the Company's products
or provide them with adequate levels of support.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has fluctuated in the past, and
is likely to fluctuate in the future. The Company believes that various factors,
including quarterly fluctuations in results of operations, announcements of new
products by the Company or by its competitors, and changes in the software
industry in general may significantly affect the market price of the Common
Stock. In addition, in recent years the stock market in general, and the shares
of technology companies in particular, have experienced extreme price
fluctuations. This volatility has had a substantial effect on the market prices
of securities issued by the Company and other high technology companies, often
for reasons unrelated to the operating performance of the specific companies.
The market prices of many high technology companies stocks, including the stock
of the Company, are at or near their historical highs and reflect price/earning
ratios substantially above historical norms. There can be no assurance that the
market price of the Common Stock will remain at or near its current level. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
that company. Such litigation, if instituted against the Company, could result
in substantial costs and a diversion of management attention and resources,
which could have a material adverse effect on the Company's business, financial
condition and results of operation, even if the Company is successful in such
suits. These market fluctuations, as well as general economic, political and
market conditions such as recessions, may adversely affect the market price of
the Common Stock.
ITEM 2.
PROPERTIES
The Company's principal administrative, sales, marketing, product development
and engineering facilities are located in leased buildings providing
approximately 74,000 square feet of office space in Alameda, California. Rental
expenses in fiscal 1998 amounted to approximately $1,123,000 for these
facilities. The leases expire on various dates from August 1998 through December
1999. The Company leases eighteen other domestic sales offices in the United
States. The Company leases international sales and/or service facilities in
Canada, the United Kingdom, France, Germany, Sweden, Israel, Italy, Korea and
Japan. The Company anticipates the need to relocate its management, engineering,
marketing, sales and customer support operation to a new facility within the
next few years. On October 24, 1997, the Company purchased real property in the
City of Alameda, California, for $11.4 million. The property is being developed
to construct the Company's new headquarters facility. There can be no assurance
that any such relocation will be accomplished efficiently, or that the Company's
operations will not be materially and adversely affected by such relocation.
ITEM 3.
LEGAL PROCEEDINGS
The Company is a party to litigation arising in the normal course of its
business. The Company believes that such litigation, even if resolved adversely
to the Company, would not have a material effect on its business, financial
condition or results of operations.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
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ITEM 4A.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and certain information about them as of
April 1, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- -------------------------------------------------------------------------------
<S> <C> <C>
Jerry L. Fiddler 46 Chairman of the Board and Director
Ronald A. Abelmann 60 President, Chief Executive
Officer and Director
David N. Wilner 44 Chief Technical Officer and Director
Robert L. Wheaton 51 Senior Vice President of Sales
David G. Fraser 34 Vice President of Engineering
Richard W. Kraber 57 Vice President of Finance,
Chief Financial Officer and
Secretary
Curtis B. Schacker 37 Vice President of Marketing
Graham D. Shenton 58 Managing Director of
European Operations
</TABLE>
Mr. Fiddler co-founded the Company in February 1983, and currently
serves as Chairman of the Board. From February 1983 to March 1994 he served
as Chief Executive Officer of the Company. Prior to founding the Company, he
was a computer scientist in the Real-Time Systems Group at Lawrence Berkeley
Laboratory. Mr. Fiddler holds a B.A. in music and photography and an M.S. in
computer science from the University of Illinois.
Mr. Abelmann joined the Company in March 1994 as President and Chief
Executive Officer and Director. From 1987 to 1993 he served as the founding
Chief Executive Officer of Vantage Analysis Systems, a developer of
VHDL-based simulation software for design automation. Prior to then, he
served as Group Vice President and General Manager for the Instrument
Division of Varian Associates. Mr. Abelmann holds B.S. and M.S. degrees in
applied physics from the University of California at Los Angeles, and an
M.B.A. from Stanford University.
Mr. Wilner co-founded the Company in February 1983 and currently serves
as Chief Technical Officer and Director. Prior to founding the Company, he
was a senior staff scientist in the Real-Time Systems Group at Lawrence
Berkeley Laboratory. Mr. Wilner holds a B.S. in computer science from the
University of California at Berkeley.
Mr. Wheaton joined the Company in March 1992 and currently serves as
Senior Vice President of Sales. From 1989 to 1991, he served as the Vice
President of Marketing for ShareBase Corporation, a relational database
hardware and software company. From 1988 to 1989, he served as the Western
Regional Manager of Powersoft Corporation, a computer software company.
Mr. Wheaton holds a B.S. in automotive engineering from Western Michigan
University.
Mr. Fraser joined the Company in September 1991 and currently serves as
Vice President of Engineering. From 1988 to 1991, he served as a product
marketing manager at Unisys/Convergent. From 1985 to 1988, he was a software
engineer at Hewlett-Packard in England. Mr. Fraser holds a B.S. in computing
science from Glasgow University, Scotland.
Mr. Kraber joined the Company in August 1995 and currently serves as
Vice President of Finance and Chief Financial Officer. From 1991 to 1995, he
served as Chief Operating Officer and Chief Financial Officer of Peerless
Lighting, an industrial lighting products company. Prior to then, he was
Chief Financial Officer for GardenAmerica and a consultant and engagement
manager for McKinsey & Company. Mr. Kraber has a B.S. in mathematics from
Stanford University and an M.B.A. from Harvard University.
Mr. Schacker joined the Company in 1990 and currently serves as Vice
President of Marketing. He joined the Company as a Customer Engineering
Manager. He became a sales representative and then served as Sales Manager
for the Northwest Region of the United States until he assumed his current
role in November of 1997. Prior to joining Wind River, he was an engineer for
Ready Systems and for Lockheed Missile and Space Company. Mr. Schacker has a
B.S. in computer science from Wright State University.
15
<PAGE>
Mr. Shenton joined the Company in July 1994 and currently serves as
Managing Director of European Operations. From 1990 to 1994, he was Managing
Director of Vantage Analysis Systems Europe, Ltd., a developer of VHDL-based
simulation software for design automation. From 1986 to 1989, he was Managing
Director of IMP Europe, Ltd., a semiconductor design and application firm.
Mr. Shenton holds a B.E. degree from Sydney University, Australia and an M.E.
degree from the University of New South Wales, Australia.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Wind River's Common Stock is traded on the Nasdaq National Market under the
symbol WIND. On April 25, 1996, the Board of Directors declared a three-for-two
Common Stock split in the form of a stock dividend, payable May 24, 1996, to
stockholders of record on May 10, 1996. In addition, on February 13, 1997, the
Board of Directors declared a three-for-two stock split in the form of a stock
dividend, payable March 10, 1997, to stockholders of record on February 24,
1997. All share and per share amounts have been adjusted to give effect to these
stock splits.
The closing price of the Company's Common Stock as reported by the Nasdaq
National Market as of March 31, 1998 was $39.75 per share. The price per share
in the following table sets forth the low and high closing prices in the Nasdaq
National Market for the quarter indicated:
<TABLE>
<CAPTION>
LOW HIGH
- --------------------------------------------------------------------------------
<S> <C> <C>
Fiscal 1997
First quarter ended April 30,1996 $12.56 $18.00
Second quarter ended July 31,1996 16.89 25.67
Third quarter ended October 31,1996 21.83 31.00
Fourth quarter ended January 31,1997 26.33 35.83
</TABLE>
<TABLE>
<CAPTION>
LOW HIGH
- --------------------------------------------------------------------------------
<S> <C> <C>
Fiscal 1998
First quarter ended April 30,1997 $19.63 $33.17
Second quarter ended July 31,1997 25.75 41.75
Third quarter ended October 31,1997 35.75 47.00
Fourth quarter ended January 31,1998 32.00 45.75
</TABLE>
The Company has not paid dividends and does not plan to pay dividends on
its Common Stock in the foreseeable future. The Company presently intends to
reinvest earnings to fund future growth.
At March 31, 1998, there were approximately 463 stockholders of record of
the Company. Certain record holders are represented by brokers and other
institutions on behalf of stockholders. The Company has estimated the total
number of such stockholders to be 9,300.
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<PAGE>
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with the more detailed financial statements presented in Item 8 of
this Form 10-K. The consolidated financial data for periods prior to the
financial statements presented in Item 8 of this Form 10-K are derived from
audited consolidated financial statements not included herein.
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
In thousands, except per share data 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 92,400 $ 64,000 $44,000 $32,100 $27,341
Net income 4,870 (1) 11,280 5,383 2,460 332
Net income per share
Basic .19 (1) .49 .26 .12 .02
Diluted .17 (1) .43 .23 .11 .02
Working capital 149,604 55,219 27,701 24,220 21,486
Total assets 287,808 128,661 45,480 39,183 33,880
Long-term debt 140,000 -- -- 73 583
Stockholders' equity $111,986 $108,749 $32,813 $28,345 $24,612
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income and net income per share includes the effect of the one-time
write-offs of $15,159 ($13,353 after tax) which resulted from the acquisition of
in-process technologies from Network Computer, Inc. and Objective Software
Technology, Ltd. during the fiscal year ended January 31, 1998.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section, as well as under the caption
"Business", including "- Additional Risk Factors." The following discussions
should be read in conjunction with the consolidated financial statements and
notes included elsewhere herein.
Wind River was founded in 1983 to provide consulting and custom software
development services for a variety of business clients. From its inception, the
Company directed its development efforts towards real-time and embedded system
applications and released its first commercial product, VxWorks, in 1987. Wind
River has subsequently broadened its product offerings and has become a leading
provider of operating systems and development tools for the real-time embedded
systems marketplace. In 1995, Tornado was introduced and became the Company's
flagship product. It consists of three integrated components: the Tornado
toolset, a set of cross-development tools and utilities; the VxWorks run-time
system, a high-performance, scalable RTOS that executes on the target processor;
and a full range of communications options. During the past five years, the
Company has invested heavily in the development and introduction of its products
and in the establishment of worldwide sales, distribution and customer support
capabilities. The Company markets its products on a worldwide basis through its
direct sales force, distributors and value-added resellers. The Company provides
sales, marketing and product support for foreign customers through wholly-owned
subsidiary companies in Europe and a majority-owned joint-venture company in
Japan. During fiscal year 1998, Wind River received ISO 9001 certification.
The Company typically charges a one-time fee for a development license and
a run-time license fee for each copy of the Company's operating system embedded
in the customer's product. A key component of the Company's strategy is to
significantly increase revenue through run-time license fees. Any increase in
the percentage of revenues attributable to run-
17
<PAGE>
time licenses will depend on the Company's successful negotiation of run-time
license agreements and on the successful commercialization by the Company's
customers of the underlying products.
On December 31, 1997, the Company entered into an OEM License Agreement
(the "Agreement") with Network Computer, Inc. ("NCI") to license the right to
access and modify the source code version of certain NCI technology and to
duplicate, distribute and sublicense the object code version of such modified
source code included with certain of the Company's future products. At the date
the source code was acquired, there were no working models of such products
incorporating the licensed technology and because of the restrictive nature of
the license Agreement, there were no alternative future uses for such technology
in research and development. Accordingly, the aggregate purchase price of $10
million was expensed immediately as in-process research and development.
On January 30, 1998, the Company acquired Objective Software Technology
Ltd. ("OST"), a privately-held Scotland-based company that designs and markets
visualization tools for development of embedded systems. The acquisition was
accounted for using the purchase method of accounting. The excess of the
purchase price over the fair market value of the net tangible assets acquired
aggregated approximately $6.1 million, of which $4.1 million was allocated to
in-process research and development and expensed immediately. The balance of the
excess acquisition cost was allocated to acquired technology ($2 million) which
is being amortized over three years. In addition, the Company incurred
approximately $1.0 million of other non-merger incremental costs associated
with these acquisitions which were included in the in-process research and
development write-off.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated income statement data and
its percentage of revenues for the periods indicated. These operating results
are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product $67,110 73% $46,354 72% $31,200 71%
Services 25,290 27 17,646 28 12,800 29
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue 92,400 100 64,000 100 44,000 100
- ---------------------------------------------------------------------------------------------------------------------------
Costs of revenues:
Products 6,245 7 4,580 7 3,746 9
Services 9,633 10 6,960 11 5,530 12
- ---------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 15,878 17 11,540 18 9,276 21
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 76,522 83 52,460 82 34,724 79
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling and marketing 33,066 36 23,900 37 17,905 41
Product development and engineering 11,970 13 7,722 12 5,531 13
General and administrative 6,261 7 5,021 8 3,158 7
Acquired in-process research and development 15,159 16 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 66,456 72 36,643 57 26,594 61
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 10,066 11 15,817 25 8,130 18
- ---------------------------------------------------------------------------------------------------------------------------
Other income (expense), net 3,298 4 2,140 3 661 2
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,364 15 17,957 28 8,791 20
Provision for income taxes 8,494 9 6,677 10 3,408 8
- ---------------------------------------------------------------------------------------------------------------------------
Net income $4,870 (1) 6% $11,280 18% $ 5,383 12%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income before the effect of the adjustment for acquired in-process
research and development of $15,159 ($13,353 after tax) was $18,223 million or
20% of total revenue for the year ended January 31, 1998. The adjustment
resulted from the acquisition of in-process technologies from Network Computer,
Inc. and Objective Software Technology, Ltd.
18
<PAGE>
REVENUES
The Company's overall revenue growth rate was 44% from fiscal 1997 to 1998 and
45% from fiscal 1996 to 1997. The Company's revenue results primarily from fees
for licenses of its software products, fees from run-time licenses for each copy
of the Company's operating system embedded in the customer's products and fees
for customer support, training, maintenance and engineering services. Product
revenues accounted for approximately 73%, 72% and 71% of the total revenues in
fiscal 1998, 1997 and 1996, respectively, with service revenues accounting for
the balance of total revenue over this period.
Product revenues increased 45% from fiscal 1997 to 1998 and 49% from fiscal
1996 to 1997. The Company derives product revenue primarily from one-time
development license fees and run-time license fees for each copy of the
Company's operating system embedded in the customer's products. The increases in
product revenues for both fiscal 1998 and fiscal 1997 were attributable
primarily to increased market acceptance of the Company's products, expansion of
the Company's sales and marketing efforts, and introductions of new products.
Tornado, the Company's flagship product, was first introduced in fiscal 1996 and
its sales have continued to grow as Tornado became available for use with more
host platforms and microprocessor targets. In addition, demand grew for Tornado
in Windows-based customer development environments. Run-time license revenue has
increased each year in conjunction with growing shipments of customers' products
and systems that incorporate the VxWorks operating system.
International revenues represented 29%, 34% and 37% of total revenues in
fiscal 1998, 1997 and 1996, respectively. Revenues from European sources
increased 35% from fiscal 1997 to 1998 and 41% from fiscal 1996 to 1997 while
revenues from Asia Pacific sources increased 6% and 32% over the same
periods, respectively. The Company expects international sales to continue to
represent the significant portion of net product revenues although the
percentage may fluctuate from period to period. Revenues derived from
indirect sales channels worldwide represented 21%, 23% and 27% of total
revenues in fiscal 1998, 1997 and 1996, respectively. A significant portion
of these indirect revenues are attributable to the contribution of the
Company's majority-owned joint-venture company in Japan, Wind River Systems
K.K. ("WRSKK"). The Company sells products to WRSKK at discounts which
approximate those offered to other independent distributors of the Company's
products. The Company's international sales are denominated in the local
currencies and an increase in the relative value of the dollar against such
currencies would reduce the Company's revenues in dollar terms or make the
Company's products more expensive and, therefore, potentially less
competitive in foreign markets. The Company actively monitors its foreign
currency exchange exposure and to date such exposures have not had a material
impact on the Company's results of operations. To date, the Company has not
utilized derivative instruments to manage such exposure.
Service revenues increased 43% from fiscal 1997 to 1998 and 38% from fiscal
1996 to 1997. The increases were due primarily to increases in maintenance and
training resulting from increases in the installed customer base, as well as a
significant increase in the engineering services consulting business.
Maintenance contracts are generally prepaid, with the revenue recognized ratably
over the period of the contract. The deferred software support and development
revenue balance relates primarily to customer prepayments under software
maintenance and run-time agreements. Deferred revenue will be recognized as
revenue ratably over the life of the agreements..
COST OF PRODUCTS
Cost of products includes direct and indirect costs for the production and
duplication of manuals and media for software products, as well as those
relating to the packaging, shipping and delivery of the products to the
customer. Product costs also include license and other direct purchase costs
of third-party software that is distributed by or integrated into the
Company's products and the amortization of capitalized software development
costs. During the past three years, the cost of products has remained
relatively constant. As a result, gross profit margins for products have also
remained constant between 88% to 91%. Amortization of capitalized software
development costs included in cost of products amounted to $654,000, $600,000
and $360,000 in fiscal 1998, 1997 and 1996, respectively. The unamortized
portion of capitalized software development costs was $977,000 at January 31,
1998.
19
<PAGE>
COST OF SERVICES
Cost of services includes customer technical support, engineering services
consulting, maintenance and training. The gross margin was at 62% in fiscal
1998 as compared to 61% and 57% in fiscal 1997 and 1996, respectively. The
improvement during this period is due primarily to the more efficient
utilization of resources as the Company's maintenance base grew, as well as
to improved margins in the Company's engineering services contracts.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased 38% from fiscal 1997 to 1998 and 33% from
fiscal 1996 to 1997. The increase in costs in fiscal 1998 and 1997 resulted
primarily from increases in sales and marketing personnel both domestically and
internationally and increased advertising and third-party marketing costs for
product introductions and promotions. Sales and marketing costs as a percentage
of revenues continued to decrease to 36% in fiscal 1998 from the 37% and 41%
experienced in fiscal 1997 and 1996, respectively. This decrease was
attributable to a growing revenue base and more effective utilization of
personnel.
PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Product development and engineering expenses have grown by 55% from fiscal
1997 to 1998 and 40% from fiscal 1996 to 1997. Product development and
engineering expense, as a percentage of revenues, increased from 12% to 13%
from fiscal 1997 to 1998 and decreased from 13% to 12% from fiscal 1996 to
1997. Over this period of time, the Company has made a concerted effort to
migrate its products across a wide range of system architectures including
Internet-related architectures and to improve its technological capabilities
and systems. While the Company has taken measures to improve the efficiency
of its product development and engineering efforts and to reduce its reliance
on third-party providers for key components of new products, the Company
expects that it will be necessary to continue to make significant investments
in engineering and product development for the foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 25% from fiscal 1997 to 1998 and
59% from fiscal 1996 to 1997. The increase in general and administrative expense
is attributable to worldwide investment in information systems and finance
staffing and infrastructure. General and administrative costs have decreased as
a percentage of revenues to 7% in fiscal 1998 from 8% in fiscal 1997. The
general and administrative expense increased as a percentage of revenue from 7%
in fiscal 1996 to 8% in fiscal 1997.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On December 31, 1997, the Company entered into an OEM License Agreement (the
"Agreement") with NCI to license the right to access and modify the source code
version of certain NCI technology and to duplicate, distribute and sublicense
the object code version of such modified source code included with certain of
the Company's future products. Under the Agreement, the Company paid or is
obligated to pay $9.8 million for non-exclusive, restricted, perpetual rights to
the technology and $200,000 for NCI engineering services to be incurred prior to
source code delivery. In addition, selected elements of the NCI technology
require the Company to pay additional per unit royalties in the event the
Company's future sales of products that include the modified NCI technology
exceed specified volume levels. The licensed source code will be ported by the
Company to its VxWorks, IxWorks, WiSP and other real time embedded operating
systems and will become a component of future products. At the date the source
code was acquired, there were no working models of such products incorporating
the licensed technology and because of the restrictive nature of the license
Agreement, there were no alternative future uses for such technology in research
and development. Accordingly, the aggregate purchase price of $10 million was
expensed immediately as in-process research and development.
On January 30, 1998, the Company acquired OST, a privately-held
Scotland-based company that designs and markets visualization tools for
development of embedded systems. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the purchase price has been
allocated to the assets purchased and the liabilities assumed based upon the
fair values at the date of acquisition. The excess of the purchase price over
the fair market value of the net tangible assets acquired aggregated
approximately $6.1 million, of which $4.1 million was allocated to in-process
research and development and expensed immediately. The Company used the
discounted cash flow ("DCF") approach to determine the
20
<PAGE>
fair value of OST and its identifiable assets, including the value of the
products in the development stage which were not considered to have reached
technological feasibility. The DCF approach includes an analysis of the
markets, completion costs, cash flows, other required assets, contributions
made by core technology, and risks associated with achieving such cash flows.
The balance of the excess acquisition cost was allocated to acquired
technology ($2 million) which is being amortized over three years.
The Company incurred approximately $1.0 million of other non-merger
incremental costs associated with these acquisitions which were included in
the in-process research and development write-off.
OTHER INCOME AND EXPENSE
Other income and expense includes interest income derived from the investment
of excess cash, interest expense incurred on the convertible subordinated
notes issued in July 1997, and income or loss related to the 30% minority
interest held by the Japanese participants in WRSKK. The increase in other
income in fiscal 1998 and fiscal 1997 was due to the increase in interest
income earned on the investment of excess cash received from the issuance of
the convertible subordinated notes and the investment of excess cash received
in a public offering of Common Stock in July 1996, respectively.
PROVISION FOR TAXES
The Company's effective consolidated tax rates amounted to 64%, 37% and 39%
in fiscal 1998, 1997 and 1996, respectively. The effective consolidated tax
rate increased in fiscal 1998 due to a portion of the write-off of certain
acquired in-process research and development being non-deductible. The
overall changes in the effective tax rates result primarily from the
difference between foreign and domestic tax rates and the ratio of foreign
taxable income to domestic taxable income, varying levels of available
research and development credits, and varying levels of tax-exempt interest
income.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly information for the
Company's last eight fiscal quarters. The Company believes that this information
has been prepared on the same basis as the audited consolidated financial
statements appearing in Item 8 of this Form 10-K and believes that all necessary
adjustments (consisting only of normal recurring adjustments) have been included
in the amounts stated below and present fairly the results of such periods when
read in conjunction with the audited consolidated financial statements and notes
thereto.
On May 24, 1996, a three-for-two stock split was effected by means of a
stock dividend with respect to all holders of the Company's Common Stock
outstanding on May 10, 1996. On March 10, 1997, a three-for-two stock split was
effected by a stock dividend with respect to all holders of the Company's Common
Stock outstanding on February 24, 1997. All share numbers and prices in this
Annual Report and Form 10-K have been adjusted to give effect to these stock
splits.
<TABLE>
<CAPTION>
QUARTERS ENDED
JAN. 31 OCT. 31 JUL. 31 APR. 30 JAN. 31 OCT. 31 JUL. 31 APR. 30
In thousands, except per share amounts 1998 1997 1997 1997 1997 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products $20,995 $16,932 $15,926 $13,257 $14,826 $12,297 $10,700 $8,531
Services 7,005 7,068 6,074 5,143 4,974 4,303 4,300 4,069
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 28,000 24,000 22,000 18,400 19,800 16,600 15,000 12,600
- ---------------------------------------------------------------------------------------------------------------------------------
Cost of revenues:
Products 1,674 1,564 1,601 1,406 1,119 1,126 1,246 1,089
Services 2,669 2,664 2,362 1,938 1,979 1,676 1,744 1,561
- ---------------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 4,343 4,228 3,963 3,344 3,098 2,802 2,990 2,650
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 23,657 19,772 18,037 15,056 16,702 13,798 12,010 9,950
- ---------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling and marketing 9,312 8,153 8,346 7,255 6,861 6,133 5,767 5,139
Product development and
engineering 3,654 2,877 3,005 2,434 2,331 1,883 1,913 1,595
General and administrative 1,628 1,531 1,565 1,537 1,646 1,224 1,133 1,018
Acquired in-process research
and development 15,159 -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 29,753 12,561 12,916 11,226 10,838 9,240 8,813 7,752
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (6,096) 7,211 5,121 3,830 5,864 4,558 3,197 2,198
Other income, net 662 930 926 780 920 835 193 192
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (5,434) 8,141 6,047 4,610 6,784 5,393 3,390 2,390
Provision for income taxes 1,726 2,931 2,177 1,660 2,524 1,933 1,300 920
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (7,160) $ 5,210 $ 3,870 $ 2,950 $ 4,260 $ 3,460 $ 2,090 $ 1,470
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share
Basic $ (0.28) $ 0.20 $ 0.15 $ 0.12 $ 0.17 $ 0.14 $ 0.10 $ 0.07
Diluted $ (0.28) $ 0.18 $ 0.14 $ 0.11 $ 0.15 $ 0.12 $ 0.08 $ 0.06
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average common and
common equivalent shares
Basic 25,597 25,480 25,384 25,364 25,184 24,959 21,607 20,816
Diluted 25,597 28,276 28,196 28,058 28,176 27,914 24,633 23,793
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, the Company had working capital of approximately $150
million and cash and investments of approximately $222 million, which include
investments with maturities of greater than one year of $60 million. Wind
River invests primarily in instruments that are highly liquid and of
investment grade, which generally have maturities of less than one year with
the intent to make such funds readily available for operating purposes.
The Company's operating activities provided net cash of $37.9 million due
primarily to net income, a one-time write-off of acquired in-process research
and development and increases in deferred revenue and accounts payable and
accrued liabilities. These sources of cash were partially offset by increases in
accounts receivable and prepaids and other assets. Increased sales activities in
response to higher customer demand contributed to increases in accounts
receivable, accounts payable and deferred revenue.
The Company's investing activities used net cash of $72.6 million. During
fiscal year 1998, the Company acquired certain technologies and companies for
$20.6 million. Other investing activities included capital expenditures,
capitalization of software development costs and purchases of investments. These
were partially offset by sales of investments.
The Company's financing activities provided net cash of $126.8 million
primarily as a result of the issuance of convertible subordinated notes and the
issuance of Common Stock for stock option exercises. The increase in financing
activities was partially offset by treasury stock repurchases pursuant to the
Company's ongoing repurchase program. Under the current program, the Company
repurchases $2.5 million of its Common Stock per quarter on the open market at
prevailing market prices or in negotiated transactions off the market. The
current program is expected to continue for one year from the quarter ended
January 31, 1998. During fiscal 1998, the Company repurchased 364,000 shares of
Common Stock at a cost of $12.4 million.
In July 1997, the Company issued $140 million of 5.0% Convertible
Subordinated Notes (the "Notes"), due 2002. The Notes are subordinated to all
existing and future senior debt and are convertible into shares of the Company's
Common Stock at a conversion price of $48.50 per share. The Notes are redeemable
at the option of the Company, in whole or in part, at any time on or after
August 2, 2000 at 102% of the principal amount initially, and thereafter at
prices declining to 100% at maturity, in each case plus accrued interest. Each
holder of these Notes has the right, subject to certain conditions and
restrictions, to require the Company to offer to repurchase all outstanding
Notes, in whole or in part, owned by such holder, at specified repurchase prices
plus accrued interest upon the occurrence of certain events. The $5.1 million of
costs incurred in connection with the offering are included in prepaid and other
assets. These unamortized costs are being amortized to interest expense over the
5-year term of the Notes using the straight-line method, which approximates the
effective interest method. Interest on the Notes began accruing July 31, 1997
and is payable semi-annually on February 1 and August 1, commencing February 1,
1998.
In fiscal 1998, the Company purchased real property in the City of Alameda,
California for $11.4 million cash. The property is being developed to construct
the Company's new headquarters facility.
In fiscal 1998, the Company entered into an operating lease agreement
for its new headquarters facility being constructed on the land the Company
purchased in Alameda, California. As of January 31, 1998, the lessor has
funded a total of $2.5 million of construction costs and has committed to
fund up to a maximum of $35 million. The operating lease payments will begin
upon completion of construction and will vary based on the total construction
costs of the property, including capitalized interest and the London
interbank offering rate ("LIBOR"). Construction of the building is currently
expected to be completed in December 1998. In connection with the lease, the
Company is obligated to enter into a lease of its land in Alameda, California
to the lessor of the building at a nominal rate and for a term of 55 years.
If the Company terminates or does not negotiate an extension of the building
lease, the ground lease converts to a market rental rate. The lease provides
the Company with the option at the end of the lease of either acquiring the
building at the lessor's original cost or arranging for the building to be
acquired. The Company has guaranteed the residual value associated with the
building to the lessor of approximately 82% of the lessor's $35 million
funding obligation. The Company is also required, periodically during the
construction period, to deposit fixed income securities with a custodian as a
deposit to secure the performance of its obligations under the lease. In
addition, under the terms of the lease, the Company must maintain compliance
with certain financial covenants. As of January 31, 1998, the Company was in
compliance with these covenants. Management believes that the contingent
liability relating to the residual value guarantees will not have a material
adverse effect on the Company's financial position or results of operations.
23
<PAGE>
On March 18, 1998, the Company entered into an accreting interest rate
swap agreement (the "Agreement") to reduce the impact of changes in interest
rates on its floating rate operating lease for its new corporate headquarters
(See Note 10 to the consolidated financial statements). This agreement
effectively changes the Company's interest rate exposure on its operating
lease which is at one month LIBOR to a fixed rate of 5.9%. The notional
amount under the Agreement is scheduled to increase in relation to the funds
used to construct the Company's new headquarters. The differential to be paid
or received under this Agreement will be recognized as an adjustment to rent
expense related to the operating lease. The Agreement matures at the same
time as the operating lease expires. The amounts potentially subject to
credit risk (arising from the possible inability of counterparty to meet the
term of their contracts) are generally limited to the amounts, if any, by
which the counterparty's obligations exceed the obligations of the Company.
Management believes that the Company's working capital and cash flow
generated from operations are sufficient to meet its working capital
requirements for planned expansion, product development and capital
expenditures for at least the next twelve months.
"YEAR 2000" ISSUES
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as many computer systems will be affected in some way
by the rollover of the two-digit year value to 00. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The "Year 2000" issue creates risk for the Company from unforeseen
problems in its own computer systems and from third parties with whom the
Company deals on transactions worldwide. Failures of the Company's and/or third
parties' computer systems could have a material impact on the Company's ability
to conduct its business.
The Company is currently upgrading its financial information systems. The
Company believes it will complete the upgrade during fiscal 1999. These upgraded
financial information systems are believed to be "Year 2000" compliant. The
Company is analyzing its remaining computer systems to identify any potential
"Year 2000" issues and will take appropriate corrective action based on the
results of such analysis. Management does not believe the costs related to
achieving "Year 2000" compliance will be material.
The Company has initiated communications with its significant suppliers to
determine the extent to which the Company's operations are vulnerable to those
third parties' failure to solve their own "Year 2000" issues. Specific factors
that might cause suppliers to be vulnerable to "Year 2000" issues include, but
are not limited to, the availability and cost of personnel trained in this area,
the ability to locate and corrupt all relevant computer codes, and similar
uncertainties. There can be no assurance that the systems of other companies on
which the Company relies will be converted on a timely basis and will not have
an adverse effect on the Company's financial position or results of operations.
The "Year 2000" issue also could affect the products that the Company
sells. The Company believes that the current versions of its products are "Year
2000" compliant. The Company's products are subject to ongoing analysis and
review.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 ("FAS 130"). FAS 130 establishes
standards for reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in equity (net
assets) during a period from non-owner sources. Examples of items to be included
in comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains/losses on
available-for-sale securities. The disclosure prescribed by FAS 130 must be made
beginning with the first quarter of fiscal 1999.
Additionally in June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
Company has not yet determined the impact, if any, of adopting this new
standard. The disclosures prescribed by FAS 131 will be effective for the
year ending January 31, 1999 consolidated financial statements.
24
<PAGE>
In October 1997 and March 1998, the American Institute of Certified
Public Accountants issued Statements of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2") and 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"), which the
Company currently is required to adopt for transactions entered into in the
fiscal year beginning February 1, 1998. SOP 97-2 and SOP 98-4 provides
guidance on recognizing revenue on software transactions and supersedes SOP
91-1. The Company believes that the adoption of SOP 97-2 and SOP 98-4 will
not have a significant impact on its current licensing or revenue recognition
practices. However, should the Company adopt new or change its existing
licensing practices, the Company's revenue recognition practices may be
subject to change to comply with the accounting guidance provided in SOP 97-2
and SOP 98-4.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred for
computer software developed or obtained for internal use. The Company has not
yet determined the impact, if any, of adopting this statement. The
disclosures prescribed by SOP 98-1 will be effective for the year ending
January 31, 2000 consolidated financial statements.
25
<PAGE>
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
- ------------------------------------------------------------------------------
<S> <C>
Financial Statements:
Report of Independent Accountants 27
Consolidated Statements of Income
for the years ended January 31, 1998, 1997 and 1996 28
Consolidated Balance Sheets
at January 31, 1998 and 1997 29
Consolidated Statements of Cash Flows
for the years ended January 31, 1998, 1997, and 1996 30
Consolidated Statements of Changes
in Stockholders' Equity for the years
ended January 31, 1998, 1997 and 1996. 31
Notes to Consolidated Financial Statements 32
Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts 47
</TABLE>
All other schedules have been omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF WIND RIVER SYSTEMS, INC.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Wind
River Systems, Inc. and its subsidiaries at January 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
February 23, 1998, except for Note 13 which is as of March 18, 1998
27
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
In thousands, except per share amounts 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Products $67,110 $46,354 $31,200
Services 25,290 17,646 12,800
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 92,400 64,000 44,000
- ---------------------------------------------------------------------------------------------------------------------------
Cost of revenues:
Products 6,245 4,580 3,746
Services 9,633 6,960 5,530
- ---------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 15,878 11,540 9,276
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 76,522 52,460 34,724
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling and marketing 33,066 23,900 17,905
Product development and engineering 11,970 7,722 5,531
General and administrative 6,261 5,021 3,158
Acquired in-process research and development 15,159 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 66,456 36,643 26,594
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 10,066 15,817 8,130
- ---------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 7,599 2,465 847
Interest expense and other (4,213) - (199)
Minority interest in consolidated subsidiary (88) (325) 13
- ---------------------------------------------------------------------------------------------------------------------------
Total other income 3,298 2,140 661
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,364 17,957 8,791
Provision for income taxes 8,494 6,677 3,408
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 4,870 $11,280 $ 5,383
- ---------------------------------------------------------------------------------------------------------------------------
Net income per share:
Basic $ .19 $ .49 $ .26
Diluted $ .17 $ .43 $ .23
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares:
Basic 25,456 23,142 20,980
Diluted 28,153 26,129 23,435
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
In thousands, except par value 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $100,633 $ 9,848
Short-term investments 61,107 46,895
Accounts receivable, net of allowances of $1,460 and $1,204 18,076 13,296
Prepaid and other current assets 5,210 4,780
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 185,026 74,819
Investments 60,329 43,004
Land and equipment, net 24,496 8,426
Other assets 17,957 2,412
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $287,808 $128,661
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,976 $ 1,340
Accrued liabilities 11,563 5,657
Accrued compensation 5,441 4,391
Income taxes payable 1,415 1,941
Deferred revenue 15,027 6,271
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 35,422 19,600
Convertible subordinated notes 140,000 -
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 175,422 19,600
- ---------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiary 400 312
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, par value $.001, 75,000 authorized, 26,166
and 25,382 shares issued; 25,689 and 25,269 shares outstanding 26 25
Additional paid in capital 101,154 89,890
Cumulative translation adjustments (1,700) (310)
Unrealized gain (loss) on investments 503 (353)
Retained earnings 27,488 22,618
Less treasury stock, 477 and 113 shares at cost (15,485) (3,121)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 111,986 108,749
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $287,808 $128,661
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,870 $ 11,280 $ 5,383
Adjustments to reconcile net income to net cash
provided by operations:
Provision for doubtful accounts 256 826 132
Depreciation and amortization 4,288 2,880 1,809
Amortization of debt issuance costs 510 - -
Unrealized gain (loss) on investments 856 (353) -
Deferred income taxes (2,894) (780) (652)
Minority interest in consolidated subsidiary 88 105 (13)
Acquired in-process research and development 15,159 - -
Change in assets and liabilities:
Accounts receivable (5,036) (4,906) 2,889
Prepaid and other assets (5,727) (4,435) 529
Accounts payable and accrued liabilities 6,402 3,162 834
Accrued compensation 1,050 1,749 770
Income taxes payable 9,368 6,410 1,746
Deferred revenue 8,756 2,057 392
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 37,946 17,995 13,819
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of land and equipment (19,704) (6,647) (2,180)
Capitalized software development costs (803) (707) (490)
Acquisitions, net of cash acquired (20,553) - -
Purchases of investments (266,558) (79,031) (68,437)
Sales and maturities of investments 235,021 9,764 65,796
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (72,597) (76,621) (5,311)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of Common Stock, net 4,265 59,361 1,491
Purchase of treasury stock (12,364) (7,050) (3,265)
Sales of treasury stock - 7,194 -
Issuance of convertible subordinated notes, net 134,925 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 126,826 59,505 (1,774)
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (1,390) (236) (389)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 90,785 643 6,345
Cash and cash equivalents at beginning of year 9,848 9,205 2,860
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 100,633 $ 9,848 $ 9,205
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ - $ - $ 19
Cash paid for income taxes $ 3,037 $ 2,285 $ 1,682
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
30
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAINS TOTAL
ADDITIONAL CUMULATIVE (LOSSES) ON STOCK-
COMMON STOCK PAID IN TRANSLATION INVEST- RETAINED TREASURY STOCK HOLDERS
In thousands SHARES AMOUNT CAPITAL ADJUSTMENTS MENTS EARNINGS SHARES AMOUNT EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1995 20,488 $20 $ 22,128 $ 242 $ - $ 5,955 - $ - $ 28,345
Common Stock issued 488 1 611 612
upon exercise of stock options
Common Stock issued under 199 - 779 779
stock purchase plan
Tax benefit from stock plans 1,175 1,175
Sale of warrants 100 100
Purchase of treasury stock (338) (3,265) (3,265)
Currency translation adjustments (316) (316)
Net income 5,383 5,383
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1996 21,175 21 24,793 (74) - 11,338 (338) (3,265) 32,813
Common Stock issued 3,142 3 55,586 563 7,194 62,783
in public offering, net
Common Stock issued 980 1 2,593 2,594
upon exercise of stock options
Common Stock issued under 85 - 1,178 1,178
stock purchase plan
Tax benefit from stock plans 5,740 5,740
Purchase of treasury stock (338) (7,050) (7,050)
Unrealized loss on investments (353) (353)
Currency translation adjustments (236) (236)
Net income 11,280 11,280
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1997 25,382 25 89,890 (310) (353) 22,618 (113) (3,121) 108,749
Common Stock issued 720 1 2,403 2,404
upon exercise of stock options
Common Stock issued under 64 - 1,861 1,861
stock purchase plan
Tax benefit from stock plans 7,000 7,000
Purchase of treasury stock (364) (12,364) (12,364)
Unrealized gain on investments 856 856
Currency translation adjustments (1,390) (1,390)
Net income 4,870 4,870
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 26,166 $26 $101,154 $(1,700) $503 $27,488 (477) $(15,485) $111,986
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wind River Systems, Inc. (the "Company") is engaged in developing and marketing
operating systems and software development tools for creating real-time and
embedded applications. The Company's flagship product, Tornado, is a scalable,
cross-development environment that enables engineers to develop embedded
applications on a host workstation or PC and download the code via a network or
other communication channel to a real-time operating system ("RTOS") that runs
on all significant 32- and 64- bit embedded target microprocessors. Tornado
consists of the Tornado toolset, the VxWorks, an RTOS, and a full range of
communications options.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries: Wind River Systems International, Inc., a
United States corporation; Wind River Systems, E.C., S.A.R.L., a French
corporation; Wind River Systems GmbH, a German corporation; Wind River
Systems Italia, S.r.l, an Italian corporation; Wind River Systems UK, Ltd., a
United Kingdom corporation; Objective Software Technology Ltd., a Scotland
corporation; and its majority-owned subsidiary Wind River Systems K.K.
("WRSKK"), a Japanese corporation, (the "Subsidiaries"). All significant
inter-company accounts and transactions have been eliminated.
The Company has a fiscal year end of January 31. The Subsidiaries have
fiscal year-ends of December 31. The consolidated financial statements include
the Subsidiaries' accounts as of December 31.
Certain amounts in the fiscal 1996 and fiscal 1997 financial statements
have been reclassified to conform to the fiscal 1998 presentation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with an original maturity
of three months or less. These investments consist of income-producing
securities, which are readily convertible to cash and are stated at cost, which
approximates fair value.
INVESTMENTS
Investments with maturities greater than three months and less than one year are
classified as short-term investments. Investments with maturities greater than
one year are classified as long-term investments. The Company accounts for its
investments in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities". The
Company determines the appropriate classification of its marketable securities
at the time of purchase and re-evaluates such classification as of each balance
sheet date. The Company has classified all of its investments as
available-for-sale and carries such investments at fair value, with unrealized
gains and losses reported in stockholders' equity until disposition. Fair value
is determined based upon the quoted market prices of the securities as of the
balance sheet date. The cost of securities sold is based on the specific
identification method. Realized gains or losses and declines in value, if any,
judged to be other than temporary on available-for-sale securities are reported
in other income or expense.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash, cash equivalents, short-term and long-term
investments, and accounts receivable. The Company's investments consist of
investment grade securities managed by qualified professional investment
managers. The investment policy limits the Company's exposure to concentration
of credit risk. The Company's accounts receivable result primarily from software
sales to a broad customer base both domestically and internationally and are
typically unsecured. The Company performs on-going credit evaluations of its
customers' financial condition, limits the amount of credit when deemed
necessary and
32
<PAGE>
maintains allowances for potential credit losses; historically, such losses
have been immaterial. As a consequence, concentrations of credit risk are
limited.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable and accounts payable,
the carrying amounts approximate fair value due to their short maturities. The
estimated fair value for the convertible subordinated notes (with a carrying
amount of $140 million at January 31, 1998) is approximately $144 million at
January 31, 1998. The fair value for the convertible subordinated notes is based
on quoted market prices.
LAND AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on equipment is computed
using the straight-line method over the estimated useful lives of the assets,
which range from one to ten years. Leasehold improvements are amortized over the
term of the related lease. Repairs and maintenance are charged to expense.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed." Costs incurred to establish
the technological feasibility of a computer software product are considered
research and development costs and are expensed as incurred. When the
technological feasibility of a software product has been established using the
working model approach, development costs are capitalized. Capitalization of
these costs ceases when the product is considered available for general release
to customers. Amortization of capitalized software development costs is provided
on a product-by-product basis at the greater of the amount computed using
(a) the ratio of current gross revenues for a product to the total of current
and anticipated future gross revenues or (b) the straight-line method over
the remaining estimated economic life of the product. Generally, an original
estimated economic life of eighteen months is assigned to capitalized
software development costs. Amortization of capitalized software costs is
charged to cost of product revenues. Research and development expenditures
are charged to research and development in the period incurred. The
amortization of capitalized software costs which were charged to cost of
product revenues during fiscal 1998, 1997 and 1996 were $654,000, $600,000
and $360,000, respectively. At January 31, 1998 and 1997, the Company had
capitalized software costs of $977,000 and $828,000, respectively.
OTHER ASSETS
Other assets include bond issuance costs, purchased technology, capitalized
software development costs, equity investment in a foreign company, restricted
cash in the collateral account for the operating lease and deposits. Bond
issuance costs are amortized over five years and purchased technology is
amortized over three years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its land and equipment and
intangible assets in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("FAS 121"). FAS 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets.
REVENUE RECOGNITION
The Company's revenue recognition policy is in compliance with the provisions of
the American Institute of Certified Public Accountants' Statement of Position
91-1, "Software Revenue Recognition." Product revenues consist of licensing fees
from operating system and software development tool products and fees from
embedded system run-time licenses. Service revenues are derived from fees from
software porting and development contracts, customer maintenance, support and
training. Maintenance contracts are generally sold separately from the products.
The Company's customers consist of end users, distributors, original equipment
manufacturers, system integrators and value-added resellers.
33
<PAGE>
Product revenues are recognized at the time of shipment or upon the
delivery of a product master in satisfaction of noncancellable contractual
obligations under agreements where the customer has software reproduction and
distribution rights provided that no significant vendor obligations remain and
collection of the resulting receivable is deemed probable by management. Service
revenue from software maintenance, support and update fees (post-contract
support) is charged separately and recognized ratably over the contract period.
Revenues from training and consulting are recognized when services are provided.
Revenue from engineering services contracts is recognized on the
percentage-of-completion basis.
In October 1997 and March 1998, the American Institute of Certified
Public Accountants issued Statements of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2") and 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"), which the
Company is required to adopt for transactions entered into in the fiscal year
beginning February 1, 1998. SOP 97-2 and SOP 98-4 provides guidance on
recognizing revenue on software transactions and supersedes SOP 91-1. The
Company believes that the adoption of SOP 97-2 and SOP 98-4 will not have a
significant impact on its current licensing or revenue recognition practices.
However, should the Company adopt new or change its existing licensing
practices, the Company's revenue recognition practices may be subject to
change to comply with the accounting guidance provided in SOP 97-2 and SOP
98-4.
FOREIGN CURRENCY TRANSLATION
The functional currency of foreign subsidiaries is the local currency.
Accordingly, assets and liabilities of the subsidiaries are translated using the
exchange rates in effect at the end of the period, while income and expense
items are translated at average rates of exchange during the period. Gains or
losses from translation of foreign operations where the local currency is the
functional currency are included as a separate component of stockholders'
equity. The net gains and losses resulting from foreign currency transactions
are recorded in net income in the period incurred and were not significant for
any of the periods presented.
STOCK-BASED COMPENSATION PLANS
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("FAS 123"). Under APB 25,
compensation cost is recognized over the vesting period based on the difference,
if any, on the date of grant between the fair market value of the Company's
stock and the amount an employee must pay to acquire the stock. The Company's
policy is to grant options with an exercise price equal to the quoted market
price of the Company's stock on the grant date. Accordingly, no compensation has
been recognized for its stock option plans.
NET INCOME PER SHARE
Net income per share is calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS 128") which was required to be adopted in the quarter ended January 31,
1998. FAS 128 requires the Company to report both basic net income per share,
which is based on the weighted-average number of common shares outstanding,
and diluted net income per share, which is based on the weighted-average
number of common shares outstanding and all dilutive potential common shares
outstanding. Dilutive common equivalent shares consist of stock options and
warrants (using the treasury stock method) and convertible subordinated notes
(using the if converted method). Common equivalent shares are excluded from
the computation if their effect is anti-dilutive. Net income per share data
has been restated for all prior periods to reflect basic and diluted net
income per share in accordance with FAS 128.
STOCK SPLITS
On April 25, 1996, the Board of Directors declared a three-for-two split of its
Common Stock effected in the form of a stock dividend, payable May 24, 1996, to
stockholders of record on May 10, 1996. In addition, on February 13, 1997, the
Board of Directors declared a three-for-two split of Common Stock effected in
the form of a stock dividend, payable March 10, 1997, to stockholders of record
on February 24, 1997. All share and per share amounts have been adjusted to give
retroactive effect to these stock splits.
34
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 ("FAS 130"). FAS 130 establishes
standards for reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in equity (net
assets) during a period from non-owner sources. Examples of items to be included
in comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains/losses on
available-for-sale securities. The disclosure prescribed by FAS 130 must be made
beginning with the first quarter of fiscal 1999.
Additionally in June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
Company has not yet determined the impact, if any, of adopting this new
standard. The disclosures prescribed by FAS 131 will be effective for the
Company's consolidated financial statements for the year ending January 31,
1999.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred for
computer software developed or obtained for internal use. The Company has not
yet determined the impact, if any, of adopting this statement. The
disclosures prescribed by SOP 98-1 will be effective for the year ending
January 31, 2000 consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2: ACQUISITIONS
On December 31, 1997, the Company entered into an OEM License Agreement (the
"Agreement") with Network Computer, Inc. ("NCI") to license the right to access
and modify the source code version of certain NCI technology and to duplicate,
distribute and sublicense the object code version of such modified source code
included with certain of the Company's future products. Under the Agreement, the
Company paid or is obligated to pay $9.8 million for non-exclusive, restricted,
perpetual rights to the technology and $200,000 for NCI engineering services to
be incurred prior to source code delivery. In addition, selected elements of the
NCI technology require the Company to pay additional per unit royalties in the
event the Company's future sales of products that include the modified NCI
technology exceed specified volume levels. The licensed source code will be
ported by the Company to its VxWorks, IxWorks, WiSP and other real time embedded
operating systems and will become a component of future products. At the date
the source code was acquired, there were no working models of such products
incorporating the licensed technology and because of the restrictive nature of
the license Agreement, there were no alternative future uses for such technology
in research and development. Accordingly, the aggregate purchase price of $10
million was expensed immediately as in-process research and development.
On January 30, 1998, the Company acquired Objective Software Technology
Ltd. ("OST"), a privately-held Scotland-based company that designs and markets
visualization tools for development of embedded systems. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price has been allocated to the assets purchased and the liabilities assumed
based upon the fair values at the date of acquisition. The excess of the
purchase price over the fair market value of the net tangible assets acquired
aggregated approximately $6,100,000, of which $4,100,000 was allocated to
in-process research and development and expensed immediately. The Company used
the discounted cash flow ("DCF") approach to determine the fair value of OST and
its identifiable assets, including the value of the products in the development
stage which were not considered to have reached technological feasibility. The
DCF approach includes an
35
<PAGE>
analysis of the markets, completion costs, cash flows, other required assets,
contributions made by core technology, and risks associated with achieving
such cash flows. The balance of the excess acquisition cost was allocated to
acquired technology ($2 million) which is being amortized over three years.
The Company incurred approximately $1.0 million of other non-merger
incremental costs associated with these acquisitions which were included in
the in-process research and development write-off.
NOTE 3: BALANCE SHEET COMPONENTS
Land and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 11,445 $ -
Computer equipment 18,989 12,430
Furniture and equipment 3,005 2,176
Leasehold improvements 2,019 1,148
- ------------------------------------------------------------------------------
35,458 15,754
Less accumulated depreciation (10,962) (7,328)
- ------------------------------------------------------------------------------
$ 24,496 $ 8,426
- ------------------------------------------------------------------------------
</TABLE>
In fiscal 1998, the Company purchased real property in the City of Alameda,
California for $11.4 million cash.
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Purchased technology and equity investment $ 6,024 $ -
Bond issuance costs 4,565 -
Restricted funds 2,760 -
Capitalized research and development costs 977 828
Prepaid expenses and other 3,631 1,584
- ------------------------------------------------------------------------------
$ 17,957 $ 2,412
- ------------------------------------------------------------------------------
</TABLE>
NOTE 4: INVESTMENTS
The carrying value of the Company's investment portfolio approximated fair value
at January 31, 1998. Cash equivalents and investments consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Money market fund $ 15,039 $ 6,190
Municipal bonds 55,445 79,095
U.S. government and agency obligations 71,588 2,551
Corporate bonds 44,587 1,000
Other debt securities 23,640 7,201
- ------------------------------------------------------------------------------
Total available-for-sale securities 210,299 96,037
Less amounts classified as cash equivalents (88,863) (6,138)
- ------------------------------------------------------------------------------
Total Investments $ 121,436 $ 89,899
- ------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
The contractual maturities of marketable securities at January 31, 1998,
regardless of their balance sheet classification, was as follows:
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------
<S> <C>
Due in 1 year or less $ 61,107
Due in 1-2 years 34,274
Due in 2-5 years 26,055
- ------------------------------------------------------------------------------
Total investments $ 121,436
- ------------------------------------------------------------------------------
</TABLE>
Gross realized gains and losses from the sale of securities classified as
available-for-sale were not material for the years ended January 31, 1998, 1997
and 1996. For the purpose of determining gross realized gains and losses, the
cost of securities is based upon specific identification.
NOTE 5: PROVISION FOR INCOME TAXES
Income before income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 11,085 $ 16,761 $ 6,780
Non-U.S. 2,279 1,196 2,011
- -----------------------------------------------------------------------------------------------
Total $ 13,364 $ 17,957 $ 8,791
- -----------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes was composed as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 7,092 $5,139 $3,040
State 1,588 1,151 733
Foreign 2,708 1,167 287
- -----------------------------------------------------------------------------------------------
11,388 7,457 4,060
- -----------------------------------------------------------------------------------------------
Deferred:
Federal (1,901) (736) (574)
State (207) 14 (59)
Foreign (786) (58) (19)
- -----------------------------------------------------------------------------------------------
(2,894) (780) (652)
- -----------------------------------------------------------------------------------------------
$8,494 $6,677 $3,408
- -----------------------------------------------------------------------------------------------
</TABLE>
Deferred tax assets (liabilities) which result from temporary differences in the
recognition of certain revenues and expenses for financial and income tax
reporting purposes consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
(In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Amortization $2,065 $ -
Employee benefit accruals 595 329
Accounts receivable reserves 472 357
Accrued expenses and other 978 929
- -----------------------------------------------------------------------------------------------
Gross deferred tax assets 4,110 1,615
- -----------------------------------------------------------------------------------------------
Foreign deferred revenues - (786)
Depreciation (364) (224)
Other (568) (323)
- -----------------------------------------------------------------------------------------------
Gross deferred tax liabilities (932) (1,333)
- -----------------------------------------------------------------------------------------------
Net deferred tax assets $3,178 $ 282
- -----------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
In fiscal 1998, 1997 and 1996, respectively, tax benefits resulting from
the exercise of employee stock options amounting to $7.0 million, $5.7 million
and $1.2 million, respectively, were credited to stockholders' equity and
reduced income taxes payable. The provision for income taxes differs from the
amount computed using the statutory federal income tax rate of 35% and 34% as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected rate 35.0% 34.0% 34.0%
State taxes, net of federal benefit 6.7 4.1 5.4
Foreign taxes 8.8 5.0 3.0
In-process technology write-off 26.2 - -
Research and development, net (1.7) (1.0) -
Tax exempt interest (8.9) (4.5) (2.7)
Foreign sales corporation benefit (1.4) (0.7) -
Other (1.1) 0.3 (0.9)
- -----------------------------------------------------------------------------------------------
63.6% 37.2% 38.8%
- -----------------------------------------------------------------------------------------------
</TABLE>
The effective consolidated tax rate in fiscal 1998 was higher due to the
permanent difference resulting from the write-off of in-process research and
development during the fourth quarter of fiscal 1998.
NOTE 6: CONVERTIBLE SUBORDINATED NOTES
In July 1997, the Company issued $140 million of 5.0% Convertible Subordinated
Notes (the "Notes"), due 2002. The Notes are subordinated to all existing and
future senior debt and are convertible into shares of the Company's Common Stock
at a conversion price of $48.50 per share. The Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after August 2,
2000 at 102% of the principal amount initially, and thereafter at prices
declining to 100% at maturity, in each case plus accrued interest. Each holder
of these Notes has the right, subject to certain conditions and restrictions, to
require the Company to offer to repurchase all outstanding Notes, in whole or in
part, owned by such holder, at specified repurchase prices plus accrued interest
upon the occurrence of certain events. The $5.1 million of costs incurred in
connection with the offering are included in prepaid and other assets. These
unamortized costs are being amortized to interest expense over the 5-year term
of the Notes using the straight-line method, which approximates the effective
interest method. Interest on the Notes began accruing July 31, 1997 and is
payable semi-annually on February 1 and August 1, commencing February 1, 1998.
NOTE 7: NET INCOME PER SHARE
In accordance with FAS 128, the calculation of basic and diluted net income
per share is presented below:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(In thousands, except per share information) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic computation
Net income $ 4,870 $ 11,280 $ 5,383
Weighted average common shares outstanding 25,456 23,142 20,980
- -----------------------------------------------------------------------------------------------
Basic net income per share $ 0.19 $ 0.49 $ 0.26
- -----------------------------------------------------------------------------------------------
Diluted computation
Net income $ 4,870 $ 11,280 $ 5,383
Weighted average common shares outstanding 25,456 23,142 20,980
Incremental shares from assumed conversions:
Stock options 2,697 2,987 2,455
Convertible subordinated notes - - -
Dilutive potential common shares 2,697 2,987 2,455
Total dilutive average common shares outstanding 28,153 26,129 23,435
- -----------------------------------------------------------------------------------------------
Diluted net income per share $ 0.17 $ 0.43 $ 0.23
- -----------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
Effect of assumed conversion of the convertible subordinated notes is deemed
anti-dilutive and therefore excluded from the above computations.
NOTE 8: COMMON STOCK
In July 1996, the Company completed a public offering of 3,705,000 shares of
Common Stock at a price of $18.00 per share. The proceeds of the Common Stock
offering, after deducting all associated costs, were $62.8 million.
The Company currently repurchases $2.5 million of its Common Stock per
quarter on the open market at prevailing market prices or in negotiated
transactions off the market. The current program is expected to continue for
one year from the quarter ended January 31, 1998. During fiscal 1998, the
Company repurchased 364,000 shares of Common Stock at a cost of $12.4 million.
NOTE 9: STOCK BASED COMPENSATION PLANS
As of January 31, 1998, the Company had three stock-based compensation plans.
The Company accounts for its stock-based compensation plans in conformity with
APB 25 and related Interpretations and has adopted the additional pro forma
disclosure provisions of FAS 123. Accordingly, no compensation expense has been
recognized for its two fixed stock option plans and its stock purchase plan.
The Amended and Restated 1987 Equity Incentive Plan allows for the issuance
of options and other stock awards to Company employees and consultants to
purchase a maximum of 9,450,000 shares of Common Stock. Stock options granted
under the Plan may be incentive stock options or nonstatutory stock options,
although the Company's practice is to grant nonstatutory stock options.
Individuals owning more than 10% of the Company's stock are not eligible to
receive incentive stock options under the Plan unless the option's price is at
least 110% of the fair market value of the Common Stock at the date of grant and
the term of the option does not exceed five years from the date of grant.
Nonstatutory stock options issued to holders of less than 10% of the Company's
stock may be granted at prices of at least 85% of the fair market value of the
stock at the grant date and with expirations not to exceed ten years from the
grant date, although the Company's current practice is to grant options with
exercise prices at least 100% of the fair market value. Under the terms of the
Plan, option vesting provisions are established by the Board of Directors when
options are granted (options generally vest over four years), and unexercised
options are automatically canceled three months after termination of the
optionee's employment or other service with the Company.
In April 1995, the Company adopted the 1995 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides for automatic
grants of nonstatutory stock options to purchase Common Stock of the Company to
directors of the Company who are not employees of, or consultants to, the
Company or any affiliate of the Company (Non-Employee Directors). The Directors'
Plan allows for the issuance of options to purchase a maximum of 225,000 shares
of Common Stock. Options issued are granted at prices of 100% of the fair market
value of the Common Stock at the date of grant and with expirations of ten years
from the grant date. Initial options granted to each Non-Employee Director vest
in annual increments over a period of four years from the date of grant,
commencing on the date one year after the date of grant of the initial options.
Subsequent options shall become 100% vested at the end of the one-year period
following the date of grant as long as the optionee has attended 75% of the
meetings of the board and committees on which he serves. Unexercised options
will terminate six months after such optionee's termination of all service with
the Company and its affiliates.
39
<PAGE>
The number of shares for which options under these two plans were
exercisable was approximately 1,735,000, 1,369,000, and 1,282,500 at January 31,
1998, 1997 and 1996, respectively. Activity under the Equity Incentive Plan and
the Directors' Plan is summarized as follows:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
(In thousands, WEIGHTED WEIGHTED WEIGHTED
except per NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER AVERAGE
share amounts) SHARES PRICE PER SHARES PRICE PER OF SHARES PRICE PER
SHARE SHARE SHARE
- ----------------- ----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Beginning
balance 3,549 6.87 3,911 3.77 3,265 1.95
Granted 1,991 33.54 741 17.12 1,412 6.88
Exercised (720) 3.36 (980) 2.47 (488) 1.24
Canceled (392) 17.17 (123) 5.72 (278) 2.62
- ----------------- ----------- ------------- ----------- ------------- ---------- ------------
Ending
balance 4,428 18.45 3,549 6.87 3,911 3.77
- ----------------- ----------- ------------- ----------- ------------- ---------- ------------
</TABLE>
The following table summarizes information about fixed stock options
outstanding at January 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED- AVERAGE WEIGHTED- WEIGHTED-
RANGE OF EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
(IN THOUSANDS) (IN YEARS) (IN THOUSANDS)
- ------------------- -------------- -------------------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
$.01 - $4.75 1,361 6.2 $ 2.65 1,128 $ 2.47
$4.76 - $7.13 392 7.4 $ 6.00 186 $ 5.97
$7.14 - $10.69 70 7.8 $ 9.41 36 $ 9.40
$10.70 - $16.03 535 8.1 $11.56 251 $11.58
$16.04 - $24.05 556 8.8 $18.43 122 $17.15
$24.06 - $36.07 194 9.4 $31.92 5 $30.47
$36.08 - $46.02 1,320 9.6 $39.74 7 $38.37
- ------------------- ------------ ---------------------- ------------------- ------------- -------------------
$.01 - $46.02 4,428 8.0 $18.45 1,735 $ 5.56
- ------------------- ------------ ---------------------- ------------------- ------------- -------------------
</TABLE>
In March 1993, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 450,000 shares of Common Stock. The
Purchase Plan was amended in April 1995 to increase the number of shares
authorized for issuance by 450,000 to a total of 900,000 shares. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the commencement
of the Purchase Plan. Employees who participate in an offering can have up to
15% of their earnings withheld pursuant to the Purchase Plan. The amount
withheld is used to purchase shares of Common Stock on specified dates
determined by the Board. The price of Common Stock purchased under the Purchase
Plan is equal to 85% of the lower of the fair market value of the Common Stock,
determined by the closing price on the Nasdaq National Market, at the
commencement date or the ending date of each six month offering period.
Sales under the Purchase Plan in fiscal 1998, 1997 and 1996 were 64,000,
85,000 and 199,000 shares of Common Stock, respectively, at an average price of
$29.15 , $14.67 and $3.92, respectively. At January 31, 1998, 316,661 shares of
Common Stock were available for future purchase.
40
<PAGE>
PRO FORMA DISCLOSURES
The pro forma disclosure requirements of FAS 123 are presented below.
Under FAS 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes model with the following assumptions used for
grants during fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rates 6.04% 6.33% 5.36%
Expected volatility 54% 66% 68%
Expected option life 6.3 years 6.4 years 5.9 years
Expected dividends - - -
- ------------------------------------------------------------------------------------------------
</TABLE>
The Company applies the provisions of APB 25 and related Interpretations in
accounting for compensation expense under the Equity Incentive Plan, the
Directors' Plan and the Purchase Plan. Had compensation expense under these
plans been determined pursuant to FAS 123, the Company's net income and net
income per share for the years ended January 31, 1998, 1997 and 1996 would have
been as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 4,870 $ 11,280 $ 5,383
Pro Forma (5,782) 7,296 4,248
Net income per share:
As reported
Basic $ 0.19 $ 0.49 $ 0.26
Diluted 0.17 0.43 0.23
Pro Forma
Basic (0.23) 0.32 0.20
Diluted (0.23) 0.28 0.18
- ----------------------------------------------------------------------------------
</TABLE>
The Pro Forma amounts include compensation expense related to fiscal 1998,
1997 and 1996 stock option grants and sales of Common Stock under the Purchase
Plan only. In future years, the annual compensation expense factor is expected
to increase relative to the fair value of stock options granted in those future
years.
NOTE 10: COMMITMENTS AND CONTINGENCIES
The Company leases certain property consisting of corporate and subsidiary
headquarters, sales facilities, equipment and furniture. The Company occupies
its principal facilities under non-cancelable operating leases which expire from
1998 through 2002. The facility lease agreements provide for rental abatement
periods varying from five to six months and one contains a three year renewal
option.
Future minimum rental payments under non-cancelable operating leases
subsequent to fiscal 1998 are as follows:
<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------
<S> <C>
1999 $ 1,824
2000 1,169
2001 270
2002 150
Thereafter -
- ------------------------------------------
$ 3,413
- ------------------------------------------
</TABLE>
Rental expense for fiscal 1998, 1997 and 1996 was $2.5 million, $2.0
million and $1.7 million, respectively.
41
<PAGE>
In fiscal 1998, the Company entered into an operating lease agreement
for its new headquarters facility being constructed on the land the Company
purchased in Alameda, California. As of January 31, 1998, the lessor has
funded a total of $2.5 million of construction costs and has committed to
fund up to a maximum of $35 million. The operating lease payments will begin
upon completion of construction and will vary based on the total construction
costs of the property, including capitalized interest and the London
interbank offering rate ("LIBOR"). Construction of the building is currently
expected to be completed in December 1998. The amount of this rent obligation
is contingent upon future events and is not included in the above future
minimum lease commitment under non-cancelable operating leases. In connection
with the lease, the Company is obligated to enter into a lease of its land in
Alameda, California to the lessor of the building at a nominal rate and for a
term of 55 years. If the Company terminates or does not negotiate an
extension of the building lease, the ground lease converts to a market rental
rate. The lease provides the Company with the option at the end of the lease
of either acquiring the building at the lessor's original cost or arranging
for the building to be acquired. The Company has guaranteed the residual
value associated with the building to the lessor of approximately 82% of the
lessor's $35 million funding obligation. The Company is also required,
periodically during the construction period, to deposit fixed income
securities with a custodian as a deposit to secure the performance of its
obligations under the lease. In addition, under the terms of the lease, the
Company must maintain compliance with certain financial covenants. As of
January 31, 1998, the Company was in compliance with these covenants.
Management believes that the contingent liability relating to the residual
value guarantee will not have a material adverse effect on the Company's
financial position or results of operations.
From time to time the Company is subject to legal proceedings and claims
in the ordinary course of business, including claims of alleged infringement
of patents and other intellectual property rights. The Company is not
currently aware of any legal proceedings or claims that the Company believes
will have, individually or in the aggregate, a material adverse effect on the
Company's financial position or results of operations.
NOTE 11: RELATED PARTY TRANSACTIONS
The Company distributes its products in Japan through Wind River Systems,
K.K.("WRSKK"), a joint venture in which the Company owns a 70% equity interest.
Innotech Corporation ("Innotech"), Kobe Steel Ltd. and Nissin Electric Ltd., the
other partners in the joint venture, each owns a 10% equity interest. The
Company entered into distributor agreements with three of the minority interest
owners of WRSKK, Innotech, Kobe Steel, Ltd., and Nissin Electric
Ltd., in March 1993, October 1991, and October 1991, respectively. The Innotech
agreement was amended in December 1995 to provide for an extended contract term
and to issue to Innotech a warrant to purchase 225,000 shares of the Company's
Common Stock for $4.93 per share. The warrant was valued at $100,000 and charged
to cost of sales in fiscal 1996. The warrant is exercisable from January 25,
1999 to July 25, 1999.
All product in Japan is sold through WRSKK's three master distributors.
Revenues derived from master distributor transactions in Japan amounted to $8.5
million, $9.1 million, and $6.7 million in fiscal 1998, 1997 and 1996,
respectively. The percentage of Japan revenues from Innotech in fiscal year
1998, 1997 and 1996 was 32%, 58% and 26%, respectively. The percentage of Japan
revenues from Kobe Steel Ltd. in fiscal year 1998, 1997 and 1996 was 52%, 24%
and 56%, respectively. The percentage of Japan revenues from Nissin Electric
Ltd. in fiscal year 1998, 1997 and 1996 was 16%, 18% and 18%, respectively.
Advances from the joint venture partners were approximately $1.9 million and
$2.4 million at January 31, 1998 and 1997, respectively.
42
<PAGE>
NOTE 12: SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment. The distribution of revenues,
operating income (loss) and assets by geographic location is as follows:
<TABLE>
<CAPTION>
NORTH WESTERN
(In thousands) AMERICA EUROPE JAPAN CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year ended January 31, 1998
Total revenues $ 67,312 $ 16,584 $ 8,504 $ 92,400
- ---------------------------------------------------------------------------------------------------------------------------
Operating income $ 8,214 $ 1,240 $ 612 $ 10,066
- ---------------------------------------------------------------------------------------------------------------------------
Identifiable assets $266,970 $ 13,642 $ 7,196 $287,808
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal year ended January 31, 1997
Total revenues $ 42,590 $ 12,306 $ 9,104 $ 64,000
- ---------------------------------------------------------------------------------------------------------------------------
Operating income $ 14,626 $ 551 $ 640 $ 15,817
- ---------------------------------------------------------------------------------------------------------------------------
Identifiable assets $109,359 $ 9,562 $ 9,740 $128,661
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal year ended January 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues $ 28,542 $ 8,709 $ 6,749 $ 44,000
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 8,332 $ (198) $ (4) $ 8,130
- ---------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 38,763 $ 3,746 $ 2,971 $ 45,480
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in revenues from North America are direct export sales to the Asia
Pacific area excluding Japan amounting to $1.8 million, $0.7 million and $0.7
million in fiscal 1998, 1997 and 1996.
NOTE 13 : SUBSEQUENT EVENT
On March 18, 1998, the Company entered into an accreting interest rate swap
agreement (the "Agreement") to reduce the impact of changes in interest rates
on its floating rate operating lease for its new corporate headquarters (see
Note 10). The Agreement effectively changes the Company's interest rate
exposure on its operating lease which is at one month LIBOR to a fixed rate
of 5.9%. The notional amount under the Agreement is scheduled to increase in
relation to the funds used to construct the Company's new headquarters. The
differential to be paid or received under the Agreement will be recognized as
an adjustment to rent expense related to the operating lease. The Agreement
matures at the same time as the operating lease expires. The amounts
potentially subject to credit risk (arising from the possible inability of
the counterparty to meet the term of their contracts) are generally limited
to the amounts, if any, by which the counterparty's obligations exceed the
obligations of the Company.
43
<PAGE>
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to the registrant's executive
officers is included in Item 4A of this 10-K. The information required by the
item relating to the registrant's directors is incorporated by reference from
the Company's proxy statement related to the annual stockholders' meeting to be
held on June 25, 1998, to be filed by the Company with the Securities and
Exchange Commission ("Proxy Statement").
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Proxy Statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Proxy Statement.
44
<PAGE>
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements and Financial Statement
Schedules - See Index to Consolidated Financial Statements at Item 8 on
page 26 of this report. All other schedules are omitted because they
were not required or the required information is included in the
Consolidated Financial Statements or Notes thereto.
2. Exhibits
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1 (i) Certificate of Incorporation of Wind River.
3.2 (i) By-laws of Wind River.
10.1 * (i) Form of Indemnity Agreement entered into between the Registrant and its officers and directors.
10.2 *(iv) 1987 Equity Incentive Plan, as Amended to date.
10.3 * (i) Form of Incentive Stock Option Grant under the Equity Incentive Plan.
10.4 * (i) Form of Non-qualified Stock Option Grant under the Equity Incentive Plan.
10.5 *(iv) 1993 Employee Stock Purchase Plan, as Amended to date.
10.6 (i) Master Technology License Agreement between the Registrant and Wind River Systems, K.K., dated as of
September 11, 1990.
10.7 (i) Amended Joint Venture Agreement for Wind River Systems, K.K. between the Registrant and the parties named
herein, dated as of October 1, 1991.
10.9 (i) Marina Village Industrial Gross Lease between the Registrant and Alameda Real Estate Investments, dated as
of March 15, 1990, as amended.
10.10 *(ii) Employment Agreement between the Registrant and Ronald A. Abelmann, dated as of March 4, 1994.
10.12 *(iii) Amended and restated Deferred Compensation Agreement between the Registrant and Ronald A. Abelmann.
10.14 *(iv) 1995 Non-Employee Directors' Stock Option Plan.
10.15 * (v) Form of Non-Qualified Stock Option Grant under the Non-Employee Director's Stock Option Plan.
10.16 (vi) Indenture between the Company and Deutschebank AG as Trustee, dated as of July 31, 1997.
10.17 (vi) Convertible Subordinated Notes Purchase Agreement between the Registrant and Deutsche Morgan Grenfell Inc.,
Hambrecht & Quist LLC, and Wessels, Arnold & Henderson, L.L.C., dated as of July 31, 1997.
10.18 (vi) Registration Rights Agreement between the Registrant and Deutsche Morgan Grenfell Inc., Hambrecht & Quist LLC
and Wessels, Arnold & Henderson, L.L.C., dated as of July 31, 1997.
10.19 (vii) Lease Agreement between Deutsche Bank AG, New York Branch, and Wind River Systems, Inc., dated as of
September 12, 1997.
10.13 * Executive Officers' Change of Control Incentive and Severance Benefit Plan dated as of November 16, 1995.
10.20 * Form of Performance Option under the Amended and Restated Wind River Systems, Inc. 1987 Equity Incentive Plan.
21 Subsidiaries of Registrant.
23 Consent of Independent Accountants.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
27.3 Restated Financial Data Schedule.
27.4 Restated Financial Data Schedule.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(i) Incorporated by reference from the Company's Registration
Statement on Form S-1 (No. 33-59146), filed with the Commission
on March 5, 1993, as amended through the date hereof.
45
<PAGE>
(ii) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended January 31, 1994 and incorporated herein by reference.
(iii) Filed as an exhibit to Form 10-Q/A, Amendment No. 2, for the
quarterly period ended April 30, 1996 and incorporated herein by
reference.
(iv) Incorporated by reference from the Company's Registration
Statement on Form S-8 (No. 333-06921) filed with the Commission on
June 18, 1996.
(v) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended January 31, 1997 and incorporated herein by reference.
(vi) Filed as an exhibit to Form 10-Q for the quarter ended July 31,
1997 and incorporated herein by reference.
(vii) Filed as an exhibit to Form 10-Q for the quarter ended October 31,
1997 and incorporated herein by reference.
* Indicates management contracts or compensatory arrangements filed
pursuant to Item 601(b)(10) of Regulations S-K.
(b) Reports on Form 8-K
On January 13, 1998, the Company filed a report on Form 8-K reporting that the
Company had announced the signing of a technology partnership with Network
Computer, Inc. to advance embedded technology.
46
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO END OF
(In thousands) THE YEAR EXPENSES WRITE-OFFS THE YEAR
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Allowance for doubtful accounts $ 589 $223 $ (12) $ 800
Allowance for sales returns 615 114 (69) 660
- ---------------------------------------------------------------------------------------------------------------------------
$1,204 $337 $ (81) $1,460
- ---------------------------------------------------------------------------------------------------------------------------
1997:
Allowance for doubtful accounts $ 378 $300 $ (89) $ 589
Allowance for sales returns -- 615 -- 615
- ---------------------------------------------------------------------------------------------------------------------------
$ 378 $915 $ (89) $1,204
- ---------------------------------------------------------------------------------------------------------------------------
1996:
Allowance for doubtful accounts $ 246 $196 $ (64) $ 378
Allowance for sales returns -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
$ 246 $196 $ (64) $ 378
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Wind River Systems, Inc.
Dated: April 20, 1998 \s\ RICHARD W. KRABER
---------------------
Richard W. Kraber
Vice President of Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities indicated, on April 20, 1998.
NAME TITLE
\s\ JERRY L. FIDDLER Chairman of the Board
- ---------------------------
Jerry L. Fiddler
\s\ RONALD A. ABELMANN President, Chief Executive Officer and
- --------------------------- Director (principal executive officer)
Ronald A. Abelmann
\s\ DAVID N. WILNER Chief Technical Officer and Director
- ---------------------------
David N. Wilner
\s\ RICHARD W. KRABER Vice President of Finance, Chief Financial
- --------------------------- Officer and Secretary (principal financial
Richard W. Kraber and accounting officer)
\s\ WILLIAM B. ELMORE Director
- ---------------------------
William B. Elmore
\s\ DAVID PRATT Director
- ---------------------------
David Pratt
48
<PAGE>
WIND RIVER SYSTEMS, INC.
EXECUTIVE OFFICERS' CHANGE OF CONTROL
INCENTIVE AND SEVERANCE BENEFIT PLAN
SECTION 1. INTRODUCTION.
This Wind River Systems, Inc. Executive Officers' Change of Control
Incentive and Severance Benefit Plan (the "Plan") was approved by the
Compensation Committee of the Board of Directors of Wind River Systems, Inc.
(the "Company") on November 16, 1995 (the "Effective Date"). The purpose of
the Plan is to encourage valued senior employees to work in the Company's
best interests during and following a Change of Control (defined below) by
providing for the payment of incentive and severance benefits as set forth
herein. This Plan shall supersede any group severance benefit plan, policy
or practice previously maintained by the Company for the employees described
herein. This Plan document also is the Summary Plan Description for the Plan.
SECTION 2. ELIGIBILITY FOR BENEFITS.
(a) GENERAL RULES. Subject to the requirements set forth in this
Section 2, and subject to further limitations set forth subsequently in this
Plan, the Company will award incentive benefits to Eligible Employees and
will grant severance benefits during the Benefit Period to Eligible
Employees. As a condition of receiving severance benefits under the Plan,
each Eligible Employee must execute a general waiver and release, on the form
provided by the Company, which releases the Company from any and all claims
the Eligible Employee may have against the Company.
(i) "ELIGIBLE EMPLOYEES" are, for purposes of the Plan's
incentive benefits, all employees employed at the level of Vice President or
above at the time of the occurrence of a Change of Control. This term, for
purposes of the Plan's severance benefits, shall mean all employees employed
at the level of Vice President or above whose employment with the Company is
involuntarily terminated other than for Cause or who voluntarily terminate
employment for Good Reason, at any time within twelve (12) months following a
Change of Control.
(ii) "CHANGE OF CONTROL" shall mean (i) a merger or consolidation
in which the Company is not the surviving corporation; (ii) a reverse merger
in which the Company is the surviving corporation but the shares of the
Company's common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise; (iii) any other capital reorganization in
which the beneficial ownership of more than fifty percent (50%) of the shares
of the Company entitled to vote changes; (iv) a transaction or group of
related transactions involving the sale of all or substantially all of the
Company's assets; or (v) the acquisition by any person, entity or group
(excluding any employee benefit plan, or related trust, sponsored or
maintained by the Company
<PAGE>
or any subsidiary of the Company) of the beneficial ownership, directly or
indirectly, of securities of the Company representing more than fifty percent
(50%) of the combined voting power in the election of directors.
(iii) "CAUSE" shall mean misconduct, including: (i) conviction of
any felony or any crime involving moral turpitude or dishonesty; (ii)
participation in a fraud or act of dishonesty against the Company; (iii)
conduct by Executive which based upon a good faith and reasonable factual
investigation and determination by the Company demonstrates gross unfitness
to serve; or (iv) intentional, material violation by Executive of any
contract between Executive and the Company or any statutory duty of Executive
to the Company that is not corrected within thirty (30) days after written
notice to Executive thereof. Physical or mental disability shall not
constitute "Cause".
(iv) "GOOD REASON" shall mean any one of the following events
which occurs on or after the date of the Change of Control: (i) reduction of
the Eligible Employee's rate of compensation; (ii) reduction in the package
of welfare benefit plans, taken as a whole, provided to the Eligible Employee
(except that employee contributions may be raised to the extent of any cost
increases imposed by third parties) or any action by the Company which would
adversely affect the Eligible Employee's participation or reduce the Eligible
Employee's benefits under any of such plans; (iii) change in the Eligible
Employee's responsibilities, authority, title, reporting relationship or
offices resulting in diminution of position, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith which
is remedied by the Company promptly after notice thereof is given by the
Eligible Employee; (iv) request that the Eligible Employee relocate to a
worksite that is more than 35 miles from his prior worksite, unless the
Eligible Employee accepts such relocation opportunity; (v) material reduction
in Eligible Employee's duties; (vi) failure or refusal of a successor to the
Company to assume the Company's obligations under the Plan; or (vii) material
breach by the Company or any successor to the Company of any of the material
provisions of the Plan.
(v) "BENEFIT PERIOD" shall mean the period commencing on the date
an employee of the Company becomes an Eligible Employee as defined in
paragraph (i) of this Subsection (a) (the "Termination Date") and continuing
for twelve (12) months (eighteen (18) months if the Eligible Employee is the
Company's Chief Executive Officer) following the Termination Date, if the
Termination Date occurs at any time within twelve (12) months after the
Change of Control.
(b) EXCEPTIONS. An employee who otherwise is an Eligible Employee will
not receive severance benefits under the Plan in any of the following
circumstances:
(i) The employee voluntarily terminates employment with the
Company other than for Good Reason.
(ii) The employee voluntarily terminates employment with the
Company in order to accept employment with another entity that is wholly or
partly owned (directly or
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indirectly) by the Company or a successor to the Company, or is wholly or
partly owned (directly or indirectly) by the parent or other affiliate of the
Company or its successor.
SECTION 3. AMOUNT OF INCENTIVE AND SEVERANCE BENEFITS.
(a) INCENTIVE BENEFITS. Individuals who are Eligible Employees at the
time of a Change of Control shall receive the following incentive benefits:
(i) If, on the date of the Change of Control, the Eligible
Employee has outstanding stock options to purchase shares in the stock of the
Company, the vesting schedule for such outstanding stock options, to the
extent not already vested, shall be accelerated by a period of one year.
(ii) If on the date of the Change of Control, the Eligible
Employee is the Chief Executive Officer of the Company, and the Chief
Executive Officer has outstanding stock options to purchase shares in the
stock of the Company, the vesting schedule for such outstanding stock
options, to the extent not already vested, shall be accelerated by a period
of two years.
(iii) Notwithstanding the provisions of the preceding paragraph
3(a)(ii), in the event that the Company shall determine that the acceleration
of the vesting schedule for the Chief Executive Officer's outstanding options
shall cause the Chief Executive Officer to become subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code (the "Code") because
some of the value of the option acceleration would constitute an excess
parachute payment within the meaning of Section 280G of the Code (the "Excise
Tax"), then the Company shall make a determination of the maximum number of
shares subject to such options which may receive accelerated vesting without
triggering the Excise Tax and the vesting schedule only with respect to those
shares shall be accelerated. In making this determination, the Company shall
first include those shares subject to options which would otherwise vest
immediately upon the occurrence of the date of the Change of Control, and if
all of those shares subject to option may vest without triggering the Excise
Tax, then the Company shall then include the maximum number of remaining
shares subject to options which may receive accelerated vesting without
triggering the Excise Tax in the order of the length of time which the Chief
Executive Officer must provide continued service in order to vest in those
shares, with the shares subject to the shortest remaining vesting period
being counted first. If all of the shares subject to options which would
otherwise vest immediately upon the occurrence of the date of the Change of
Control may not receive accelerated vesting without triggering the Excise
Tax, then the Company shall accelerate the vesting on the maximum number of
shares subject to options which is possible without triggering the Excise Tax
in the order of the exercise price which the Chief Executive Officer must pay
to purchase the shares, with the shares subject to the lowest exercise price
being counted first. The Company's determination shall be final and binding
upon all parties with an interest in these calculations, including the Chief
Executive Officer.
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(b) SEVERANCE BENEFITS. Eligible Employees whose employment is
terminated as described in Subsection 2(a) of this Plan will receive, subject
to Section 4 hereof, the following severance benefits:
(i) The Eligible Employee shall receive Compensation during the
Benefit Period. "Compensation" shall be the Eligible Employee's total base
pay and bonus (excluding draws, commissions, and other forms of additional
compensation). For purposes of this paragraph 3(b)(i), the amount of the
Eligible Employee's base pay shall be equal to the amount of base pay
actually paid to the Eligible Employee during the twelve (12) month period
(eighteen (18) months if the Eligible Employee is the Company's Chief
Executive Officer) immediately preceding the Termination Date. For purposes
of this paragraph 3(b)(i), the amount of the bonus shall be determined based
upon the bonus which the Eligible Employee would have been entitled to
receive under the terms of the Company's annual incentive bonus plan for the
Company's fiscal year in which the Termination Date occurs, assuming on-plan
performance by the Eligible Employee and the Company. If the Eligible
Employee is the Company's Chief Executive Officer, this bonus amount shall be
multiplied by a factor of 1.5.
(ii) The Eligible Employee shall receive a bonus payment for the
year in which the Termination Date occurs if the Eligible Employee received a
bonus payment for the year immediately preceding the year in which the
Termination Date occurs. The amount of the bonus payment payable for the
year in which the Termination Date occurs shall be equal to the amount of the
bonus payment, if any, paid to the Eligible Employee for the year immediately
preceding the year in which the Termination Date occurs, multiplied by a
fraction, the numerator of which shall be the number of months the Eligible
Employee works for the Company during the year in which the Termination Date
occurs, including the month in which the Termination Date occurs, and the
denominator of which shall be twelve.
(iii) If, on the Termination Date, the Eligible Employee has
outstanding stock options to purchase shares in the stock of the Company,
such outstanding stock options, to the extent they would otherwise vest if
the Eligible Employee completed twelve months of employment with the Company
following the Termination Date, shall become vested and exercisable on the
Termination Date. In addition, to the extent that any portion of the
outstanding stock options of the Company's Chief Executive Officer did not
become fully vested under paragraph 3(a)(ii) of the Plan because of the
limitation of paragraph 3(a)(iii) of the Plan, such options shall become
vested and exercisable on the Termination Date.
(iv) If the Eligible Employee elects continuation coverage, the
Company shall pay the Eligible Employee's health or dental plan premiums for
coverage required under the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA") as set forth in further detail under Subsection 9(a) below.
SECTION 4. LIMITATION ON AMOUNT OF BENEFIT; GOLDEN PARACHUTE TAXES.
(a) Notwithstanding any other provision of the Plan to the contrary,
any benefits payable to an Eligible Employee under this Plan shall be offset,
to the maximum extent permitted
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<PAGE>
by law, by any severance benefits payable by the Company to such individual
under any other arrangement covering the individual.
(b) Notwithstanding any other provision of the Plan to the contrary,
(i) the severance benefits under this Plan are in lieu of any other benefit
provided under any other group severance plan of the Company and (ii)
severance benefits under this Plan shall be reduced by the amount of any
payment to which the Eligible Employee is entitled under any individual
severance agreement then in effect between the Eligible Employee and the
Company. In addition, the Company shall withhold appropriate federal, state,
local and foreign income and employment taxes from any payments hereunder.
(c) Notwithstanding any other provision of the Plan to the contrary, in
the event it shall be determined, either by the Company or by a final
determination of the Internal Revenue Service, that any payment or
distribution by the Company to or for the benefit of an Eligible Employee,
whether paid or payable or distributed or distributable pursuant to the terms
of the Plan or otherwise (the "Payments"), with the exception of incentive
benefits described under Subsection 3(a) of the Plan, would cause the
Eligible Employee to become subject to the excise tax imposed by Section 4999
of the Code (the "Excise Tax"), then the Company shall pay to the Eligible
Employee, within the later of ninety (90) days of the Termination Date or
ninety (90) days of the date of determination referred to above, an
additional amount (the "Gross-Up Payment") such that the net amount retained
by the Eligible Employee, after deduction of any Excise Tax and any federal
(and state and local) income and employment taxes on the Gross-Up Payment,
shall be equal to the Payments. For purposes of determining the amount of
the Gross-Up Payment, the Eligible Employee shall be deemed to pay federal,
state and local income taxes at the highest nominal marginal rate of such
federal, state and local income taxation in the calendar year in which the
Gross-Up Payment is made, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and local taxes.
In the event that the Excise Tax is subsequently determined to be less than
the amount taken into account to determine the amount of the Gross-Up
Payment, then the Eligible Employee shall repay to the Company at that time
the portion of the Gross-Up Payment attributable to such reduction (plus an
amount equal to any tax reduction, whether of the Excise Tax, any applicable
income tax, or any applicable employment tax, which the Eligible Employee may
enjoy as a result of such initial repayment). In the event that the Excise
Tax is subsequently determined, whether by the Company or by a final
determination of the Internal Revenue Service, to be more than the amount
taken into account to determine the amount of the Gross-Up Payment, then the
Company shall pay to the Eligible Employee an additional amount, which shall
be determined using the same methods as were used for calculating the
Gross-Up Payment, with respect to such excess. For purposes of this
Subsection 4(c), a determination of the Internal Revenue Service as to the
amount of Excise Tax for which an Eligible Employee is liable shall not be
treated as final until the time that either (i) the Company agrees to
acquiesce to the determination of the Internal Revenue Service or (ii) the
determination of the Internal Revenue Service has been upheld in a court of
competent jurisdiction and the Company decides not to appeal such judicial
decision or such decision is not appealable. If the Company chooses to
contest the determination of the
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Internal Revenue Service, then all costs, attorneys fees, and other expenses
shall be borne by the Company.
SECTION 5. NOTICE OF TERMINATION.
Any termination by the Company, whether or not for Cause, or by the
Eligible Employee for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given by hand delivery or by registered
or certified mail, return receipt requested, postage prepaid, if to the
Eligible Employee, then to the Eligible Employee at the Eligible Employee's
address as set forth in the Company's records, and, if to the Company, to
Wind River Systems, Inc., 1010 Atlantic Avenue, Alameda, CA 94501 Attention:
Chief Financial Officer. For purposes of the Plan, a Notice of Termination
means a written notice which (i) indicates the specific termination provision
in the Plan relied upon and (ii) if the Termination Date is other than the
date of receipt of such notice, specifies the Termination Date (which date
shall be not more than fifteen (15) days after the giving of such notice).
The failure by the Company or the Eligible Employee to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing
of Cause or of Good Reason shall not waive any right of the Company or of the
Eligible Employee, respectively, or preclude the Company or the Eligible
Employee, respectively, from asserting such fact or circumstance in enforcing
its, his or her rights hereunder.
SECTION 6. TIME OF PAYMENT AND FORM OF BENEFIT.
The Company reserves the right to pay the salary continuation severance
payments described in paragraph 3(b)(i) of the Plan in accordance with its
regular payroll cycle or to choose an alternative accelerated timing for such
payments. Bonus payments described in paragraph 3(b)(ii), if any, may be
paid by the Company in the normal course of business, or at such other time
as may be determined by the Company, but in no event later than the time on
which bonuses for the fiscal year of the Company in which the Termination
Date occurs would regularly be paid to those individuals remaining employed
by the Company. Notwithstanding the foregoing, all payments under this Plan
will be completed within twelve (12) months of an Eligible Employee's
Termination Date (eighteen (18) months if the Eligible Employee is the
Company's Chief Executive Officer). If an Eligible Employee is indebted to
the Company at his or her Termination Date, the Company reserves the right to
offset any severance benefits under the Plan by the amount of such
indebtedness. In no event shall payment of any Plan benefit payable in cash
be made prior to the Eligible Employee's Termination Date.
SECTION 7. MITIGATION.
The Eligible Employee shall not be required to mitigate the amount of
the severance benefits payable under this Plan by seeking other employment or
otherwise, and any amount earned by the Eligible Employee after the
Termination Date shall not reduce or otherwise affect the amount of such
severance benefits, including salary continuance, during the Benefit Period.
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<PAGE>
SECTION 8. RIGHT TO INTERPRET PLAN; AMEND AND TERMINATE; OTHER
ARRANGEMENTS.
(a) EXCLUSIVE DISCRETION. The Plan Administrator (as defined in
Subsection 13(a) below) shall have the exclusive discretion and authority to
establish rules, forms, and procedures for the administration of the Plan,
and to construe and interpret the Plan and to decide any and all questions of
fact, interpretation, definition, computation or administration arising in
connection with the operation of the Plan, including, but not limited to, the
eligibility to participate in the Plan and amount of benefits paid under the
Plan. The rules, interpretations, computations and other actions of the Plan
Administrator shall be binding and conclusive on all persons.
(b) AMENDMENT OR TERMINATION. The Compensation Committee of the Board
of Directors of the Company reserves the right to amend or discontinue this
Plan or the benefits provided hereunder at any time; provided, however, that
no such amendment or termination shall affect the right to any unpaid benefit
of any Eligible Employee whose Termination Date has occurred prior to
amendment or termination of the Plan. Any action amending or terminating the
Plan shall be in writing and executed by the Chief Executive Officer or Chief
Financial Officer of the Company.
SECTION 9. CONTINUATION OF EMPLOYMENT BENEFITS.
(a) COBRA CONTINUATION. Each Eligible Employee who is enrolled in a
health or dental plan sponsored by the Company may be eligible to continue
coverage under such health or dental plan (or to convert to an individual
policy), at the time of the Eligible Employee's termination of employment.
The Company agrees to pay the premiums for COBRA continuation coverage for
the Eligible Employee and his or her qualified beneficiaries for the period
ending on the earlier of (i) the end of the Benefit Period or (ii) the date
on which the Eligible Employee is no longer entitled to COBRA continuation
coverage as provided by law. The Company will notify the individual of any
such right to continue health coverage at the time of termination. No
provision of this Plan will affect the continuation coverage rules under
COBRA, except that the Company's payment of any applicable insurance premiums
will be credited as payment by the Eligible Employee for purposes of the
Eligible Employee's payment required under COBRA. Therefore, the period
during which an Eligible Employee must elect to continue the Company's group
medical or dental coverage under COBRA, the length of time during which COBRA
coverage will be made available to the Eligible Employee, and all other
rights and obligations of the Eligible Employee under COBRA (except the
obligation to pay insurance premiums that the Company pays) will be applied
in the same manner that such rules would apply in the absence of this Plan.
At the conclusion of the period, described above, during which the Company
will pay the Eligible Employee's COBRA premiums, the Eligible Employee will
be responsible for the entire payment of premiums required under COBRA, if
any, for the duration of the COBRA period.
(b) OTHER EMPLOYEE BENEFITS. All non-health benefits (such as life
insurance and disability coverage) terminate as of the employee's Termination
Date as provided under the
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<PAGE>
terms of those benefit plans in effect at such time (except to the extent
that any conversion privilege is available thereunder).
SECTION 10. INDEMNIFICATION.
The Company shall continue to indemnify the Eligible Employee against
potential civil liability claims arising during the period during which such
Eligible Employee was an employee of the Company in accordance with the
indemnification policies and agreements applicable to such Eligible Employee
on the date of termination to the extent permitted by applicable law. Such
indemnification shall continue from the date of termination until the statute
of limitations period expires on such potential civil liability claims.
SECTION 11. NO IMPLIED EMPLOYMENT CONTRACT.
The Plan shall not be deemed (i) to give any employee or other person
any right to be retained in the employ of the Company and shall not be deemed
(ii) to interfere with the right of the Company to discharge any employee or
other person at any time and for any reason, which right is hereby reserved.
SECTION 12. LEGAL CONSTRUCTION.
This Plan is intended to be governed by and shall be construed in
accordance with the Employee Retirement Income Security Act of 1974 ("ERISA")
as a "welfare benefit plan" as defined in Section 3(1) of ERISA, and, to the
extent not preempted by ERISA, the laws of the State of California. If any
term, provision, covenant or restriction of the Plan is held by a court of
competent jurisdiction or other authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of the Plan shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
SECTION 13. CLAIMS, INQUIRIES AND APPEALS.
(a) APPLICATIONS FOR BENEFITS AND INQUIRIES. Any application for
benefits, inquiries about the Plan or inquiries about present or future
rights under the Plan must be submitted to the Plan Administrator in writing.
The Plan Administrator is:
Wind River Systems, Inc.
1010 Atlantic Avenue
Alameda, CA 94501
(b) DENIAL OF CLAIMS. In the event that any application for benefits
is denied in whole or in part, the Plan Administrator must notify the
applicant, in writing, of the denial of the application, and of the
applicant's right to review the denial. The written notice of denial will be
set forth in a manner designed to be understood by the employee, and will
include specific reasons for the denial, specific references to the Plan
provision upon which the denial is based, a description of any information or
material that the Plan Administrator needs to complete the review and an
explanation of the Plan's review procedure.
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This written notice will be given to the employee within 90 days after
the Plan Administrator receives the application, unless special circumstances
require an extension of time, in which case, the Plan Administrator has up to
an additional 90 days for processing the application. If an extension of
time for processing is required, written notice of the extension will be
furnished to the applicant before the end of the initial 90-day period.
This notice of extension will describe the special circumstances
necessitating the additional time and the date by which the Plan
Administrator is to render its decision on the application. If written
notice of denial of the application for benefits is not furnished within the
specified time, the application shall be deemed to be denied. The applicant
will then be permitted to appeal the denial in accordance with the review
procedure described below.
(c) REQUEST FOR A REVIEW. Any person (or that person's authorized
representative) for whom an application for benefits is denied (or deemed
denied), in whole or in part, may appeal the denial by submitting a request
for a review to the Plan Administrator within 60 days after the application
is denied (or deemed denied). The Plan Administrator will give the applicant
(or his or her representative) an opportunity to review pertinent documents
in preparing a request for a review. A request for a review shall be in
writing and shall be addressed to:
Wind River Systems, Inc.
1010 Atlantic Avenue
Alameda, CA 94501
A request for review must set forth all of the grounds on which it is based,
all facts in support of the request and any other matters that the applicant
feels are pertinent. The Plan Administrator may require the applicant to
submit additional facts, documents or other material as it may find necessary
or appropriate in making its review.
(d) DECISION ON REVIEW. The Plan Administrator will act on each
request for review within 60 days after receipt of the request, unless
special circumstances require an extension of time (not to exceed an
additional 60 days), for processing the request for a review. If an
extension for review is required, written notice of the extension will be
furnished to the applicant within the initial 60-day period. The Plan
Administrator will give prompt, written notice of its decision to the
applicant. In the event that the Plan Administrator confirms the denial of
the application for benefits in whole or in part, the notice will outline, in
a manner calculated to be understood by the applicant, the specific Plan
provisions upon which the decision is based. If written notice of the Plan
Administrator's decision is not given to the applicant within the time
prescribed in this Subsection (d), the application will be deemed denied on
review.
(e) RULES AND PROCEDURES. The Plan Administrator will establish rules
and procedures, consistent with the Plan and with ERISA, as necessary and
appropriate in carrying out its responsibilities in reviewing benefit claims.
The Plan Administrator may require an applicant who wishes to submit
additional information in connection with an appeal from the denial (or
deemed denial) of benefits to do so at the applicant's own expense.
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<PAGE>
(f) EXHAUSTION OF REMEDIES. No legal action for benefits under the
Plan may be brought until the claimant (i) has submitted a written
application for benefits in accordance with the procedures described by
Subsection 13(a) above, (ii) has been notified by the Plan Administrator that
the application is denied (or the application is deemed denied due to the
Plan Administrator's failure to act on it within the established time
period), (iii) has filed a written request for a review of the application in
accordance with the appeal procedure described in Subsection 13(c) above and
(iv) has been notified in writing that the Plan Administrator has denied the
appeal (or the appeal is deemed to be denied due to the Plan Administrator's
failure to take any action on the claim within the time prescribed by
Subsection 13(d) above).
SECTION 14. BASIS OF PAYMENTS TO AND FROM PLAN.
All benefits under the Plan shall be paid by the Company. The Plan
shall be unfunded, and benefits hereunder shall be paid only from the general
assets of the Company.
SECTION 15. OTHER PLAN INFORMATION.
(a) EMPLOYER AND PLAN IDENTIFICATION NUMBERS. The Employer
Identification Number assigned to the Company (which is the "Plan Sponsor" as
that term is used in ERISA) by the Internal Revenue Service is 94-2873391.
The Plan Number assigned to the Plan by the Plan Sponsor pursuant to the
instructions of the Internal Revenue Service is 503.
(b) ENDING DATE FOR PLAN'S FISCAL YEAR. The date of the end of the
fiscal year for the purpose of maintaining the Plan's records is December 31.
(c) AGENT FOR THE SERVICE OF LEGAL PROCESS. The agent for the service
of legal process with respect to the Plan is: Wind River Systems, Inc., 1010
Atlantic Avenue, Alameda, CA 94501, Attn: Chief Financial Officer. Service
of legal process also may be made upon the Plan Administrator.
(d) PLAN SPONSOR AND ADMINISTRATOR. The "Plan Sponsor" and the "Plan
Administrator" of the Plan is Wind River Systems, Inc. 1010 Atlantic Avenue,
Alameda, CA 94501. The Plan Sponsor's and Plan Administrator's telephone
number is (510) 748-4100. The Plan Administrator is the named fiduciary
charged with the responsibility for administering the Plan.
SECTION 16. STATEMENT OF ERISA RIGHTS.
Participants in this Plan (which is intended to be an ERISA welfare
benefit plan sponsored by Wind River Systems, Inc.) are entitled to certain
rights and protections under ERISA. If you are an Eligible Employee, you are
considered a participant in the Plan and, under ERISA, you are entitled to:
(a) Examine, without charge, at the Plan Administrator's office and at
other specified locations, such as work sites, all Plan documents and copies
of all documents filed by the Plan with the U.S. Department of Labor, such as
detailed annual reports;
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<PAGE>
(b) Obtain copies of all Plan documents and Plan information upon
written request to the Plan Administrator. The Administrator may make a
reasonable charge for the copies;
(c) Receive a summary of the Plan's annual financial report, in the
case of a plan which is required to file an annual financial report with the
Department of Labor. (Generally, all pension plans and welfare plans with
100 or more participants must file these annual reports.)
In addition to creating rights for Plan participants, ERISA imposes
duties upon the people responsible for the operation of the employee benefit
plan. The people who operate the Plan, called "fiduciaries" of the Plan,
have a duty to do so prudently and in the interest of you and other Plan
participants and beneficiaries.
No one, including your employer or any other person, may fire you or
otherwise discriminate against you in any way to prevent you from obtaining a
Plan benefit or exercising your rights under ERISA. If your claim for a Plan
benefit is denied in whole or in part, you must receive a written explanation
of the reason for the denial. You have the right to have the Plan review and
reconsider your claim.
Under ERISA, there are steps you can take to enforce the above rights.
For instance, if you request materials from the Plan and do not receive them
within 30 days, you may file suit in a federal court. In such a case, the
court may require the Plan Administrator to provide the materials and pay you
up to $100 a day until you receive the materials, unless the materials were
not sent because of reasons beyond the control of the Plan Administrator. If
you have a claim for benefits that is denied or ignored, in whole or in part,
you may file suit in a state or federal court. If it should happen that the
Plan fiduciaries misuse the Plan's money, or if you are discriminated against
for asserting your rights, you may seek assistance from the U.S. Department
of Labor, or you may file suit in a federal court. The court will decide who
should pay court costs and legal fees. If you are successful, the court may
order the person you have sued to pay these costs and fees. If you lose, the
court may order you to pay these costs and fees, for example, if it finds
your claim is frivolous.
If you have any questions about the Plan, you should contact the Plan
Administrator. If you have any questions about your rights under ERISA, you
should contact the nearest area office of the U.S. Labor - Management
Services Administration, Department of Labor.
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SECTION 17. EXECUTION.
To record the adoption of the Plan as set forth herein, effective as of
November 16, 1995, Wind River Systems, Inc. has caused its duly authorized
officer to execute the same this ____ day of __________, 1995.
WIND RIVER SYSTEMS, INC.
By:
--------------------------------
Title:
-----------------------------
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FORM OF PERFORMANCE OPTION UNDER THE
AMENDED AND RESTATED WIND RIVER SYSTEMS, INC.
1987 EQUITY INCENTIVE PLAN
WIND RIVER SYSTEMS, INC. (the "Company"), pursuant to the Company's
Amended and Restated 1987 Equity Incentive Plan (the "Plan") grants to
_________________ ("Optionee") a nonstatutory stock option to purchase
__________ shares of the Company's common stock ("Option Shares") at the
exercise price of $__________ per share.
This option is not intended to qualify as an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended from time to time (the "Code").
The details of your option are as follows:
1. Unless sooner terminated in accordance with the terms of this
option, this option shall vest and become exercisable in its entirety on
September 8, 2004; provided, however, that the option shall accelerate and
become vested and exercisable as set forth on Schedule A, attached hereto.
On the date of grant, it is anticipated that Optionee will be employed by the
Company through September 8, 2004. Notwithstanding the foregoing, nothing in
this option should be viewed as an employment or consultancy contract; and
nothing in this option shall abridge the right of Optionee to terminate
employment or consultancy with the Company, or the right of the Company to
terminate the Optionee's employment or consultancy with the Company. In
addition, nothing in this option shall obligate the Company or any Affiliate
of the Company (as defined in the Plan), or their respective stockholders,
Board of Directors, officers or employees to continue any relationship which
Optionee might have as a Director for the Company or Affiliate of the Company.
2. Payment of the exercise price per share is due in full in cash upon
exercise of all or any part of each installment which has become exercisable
by you; PROVIDED, HOWEVER, that if at the time of exercise, the Company's
Common Stock is publicly traded and quoted regularly in the WALL STREET
JOURNAL, payment of the exercise price, to the extent permitted by applicable
statutes and regulations, may be made by delivery of already-owned shares of
Common Stock owned by you for at least six (6) months and owned free and
clear of any liens, claims, encumbrances or security interests or a
combination of cash and already-owned Common Stock. Such Common Stock shall
be valued (i) if listed on a national securities exchange or quoted on the
Nasdaq National Market, at the closing price on the trading day immediately
preceding the date of exercise or (ii) otherwise at the average closing bid
and ask quotations published in the Wall Street Journal for the trading day
immediately preceding the date of exercise.
3. The minimum number of shares with respect to which this option may
be exercised at any one time is ten percent (10%) of the total Option Shares,
except that
<PAGE>
immediately prior to expiration of this option any remaining vested Option
Shares may be exercised in full.
4. Notwithstanding anything to the contrary contained herein, this
option may not be exercised unless the shares issuable upon exercise of this
option are then registered under the Securities Act of 1933, as amended (the
"Act") or, if such shares are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the
registration requirements of the Act.
5. The term of this option commences on September 8, 1997 the date of
grant and expires on September 7, 2007 (the "Expiration Date"), unless this
option expires sooner as set forth below or in the Plan. This option shall
terminate prior to the Expiration Date as follows: three (3) months after the
termination of your continuous status in your current position (or equivalent
or superior position) with the Company or an Affiliate of the Company for any
reason or for no reason unless:
(a) such termination is due to your permanent and total disability
(within the meaning of Section 422(e)(6) of the Code), in which event
the option shall expire on the earlier of the Expiration Date set forth
above or one (1) year following such termination; or
(b) such termination is due to your death, in which event the
option shall expire on the earlier of the Expiration Date set forth
above or eighteen (18) months after your death; or
(c) during any part of such three (3) month period the option is
not exercisable solely because of the condition set forth in paragraph 4
above, in which event the option shall not expire until the earlier of
the Expiration Date set forth above or until it shall have been
exercisable for an aggregate period of three (3) months after such
termination.
However this option may be exercised following such termination only as
to that number of shares as to which it was exercisable on the date of such
termination under provisions of paragraph 1 of this option.
6. This option may be exercised, to the extent specified above, by
delivering a notice of exercise together with the exercise price to the
Secretary of the Company, or to such other person as the Company may
designate, during regular business hours, together with such additional
documents as the Company may then require pursuant to subparagraph 6(f) of
the Plan. If the Company is required to withhold on account of any present or
future tax imposed as a result of such exercise, the notice of exercise shall
be accompanied by a check to the order of the Company in payment of the
amount of such withholding.
7. This option is not transferable, except by will or by the laws of
descent and distribution, and is exercisable during your life only by you.
2
<PAGE>
8. Any notices provided for in this option or the Plan shall be given
in writing and shall be deemed effectively given upon receipt or, in the case
of notices delivered by the Company to you, five (5) days after deposit in
the United States mail, postage prepaid, addressed to you at the address
specified below or at such other address as you hereafter designate by
written notice to the Company.
9. In the event of: (i) a dissolution or liquidation of the Company;
(ii) a merger or consolidation in which the Company is not the surviving
corporation; or (iii) a reverse merger in which the Company is the surviving
corporation but the shares of the Company's common stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise, then,
at the sole discretion of the Board and to the extent permitted by applicable
law: (a) any surviving corporation shall assume any options outstanding
under the Plan or shall substitute similar options for those outstanding
under the Plan, (b) such options shall continue in full force and effect, or
(c) the time during which such options become vested or may be exercised
shall be accelerated and any outstanding unexercised rights under any options
terminated if not exercised prior to such event.
10. In the event of either (1) the acquisition by any person, entity or
group within the meaning of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") or any comparable successor
provisions (excluding any employee benefit plan, or related trust, sponsored
or maintained by the Company or an Affiliate of the Company) of the
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power
entitled to vote in the election of directors, which acquisition has not been
approved by resolution of the Company's Board of Directors, or (2) a change
in a majority of the membership of the Company's Board of Directors within a
twenty-four (24) month period where the selection of such majority either (A)
was not approved by a majority of the members of the Board of Directors at
the beginning of such twenty-four (24) month period or (B) occurred as the
result of an actual or threatened "Election Contest" (as described in Rule
14a-11 promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of any person other than
the Board (a "Proxy Contest"), including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest, then to the extent
not prohibited by applicable law, the time during which options outstanding
under the Plan may be exercised shall be accelerated prior to such event, but
only to the extent that such options would have become exercisable within
thirty (30) months of the date of such event, and the options terminated if
not exercised after such acceleration and at or prior to such event.
3
<PAGE>
11. This option is subject to all provisions of the Plan, a copy of
which is attached hereto and its provisions are hereby made a part of this
option, including without limitation the provisions of paragraph 6 of the
Plan relating to option provisions, and paragraph 13 relating to adjustments
upon changes in stock and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated
and adopted pursuant to the Plan. In the event of any conflict between the
provisions of this option and those of the Plan, the provisions of the Plan
shall control.
Dated:_________________, 19__
Very truly yours,
______________________________________
4
<PAGE>
THE UNDERSIGNED:
(a) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with
respect to this option are set forth in the option and the Plan.
(b) Acknowledges that Optionee has not been given by the Company, or
any representative of or counsel to the Company, advice or representations as
to the tax consequences of the grant or exercise of the option hereby granted
or the sale or other disposition of shares of stock acquired by exercise of
the option; Optionee has consulted or will consult at appropriate times,
Optionee's own tax adviser regarding such tax consequences; and Optionee
assumes full responsibility for all such consequences and for the preparation
and filing of all tax returns and elections which may or must be filed in
connection with the Option Shares.
(c) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned Optionee and the
Company and its affiliates regarding the acquisition of stock in the Company
relating to this option and supersedes all prior oral and written agreements
on that subject relating to this option with the exception of the following
agreements only: ______________________ (if none, so state).
__________________________________
_______________________ (Optionee)
________, 19__ (Date of Grant)
Date: ______________________________
Address: __________________________
__________________________
Attachments:
AMENDED AND RESTATED WIND RIVER SYSTEMS, INC. 1987 EQUITY INCENTIVE PLAN
5
<PAGE>
SCHEDULE A
6
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Wind River Systems, E.C., S.A.R.L, a French corporation.
Wind River Systems GmbH, a German corporation.
Wind River Systems UK, Ltd., a United Kingdom corporation.
Wind River Systems Italia, S.r.l., an Italian corporation.
Wind River Systems K.K., a Japanese corporation, a majority
(70%)-owned subsidiary.
Wind River Systems International, Inc., a U.S. corporation.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-63796, 33-59146 and 333-06921) of Wind River
Systems, Inc. of our report dated February 23, 1998, except for Note 13 which
is as of March 18, 1998, appearing page 27 of this Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
April 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1998 AND THE CONSOLIDATED STATEMENT
OF INCOME DATED AS OF THE FISCAL YEAR ENDED JANUARY 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 100,633
<SECURITIES> 61,107
<RECEIVABLES> 19,536
<ALLOWANCES> 1,460
<INVENTORY> 0
<CURRENT-ASSETS> 185,026
<PP&E> 35,458
<DEPRECIATION> 10,962
<TOTAL-ASSETS> 287,808
<CURRENT-LIABILITIES> 35,422
<BONDS> 140,000
0
0
<COMMON> 26
<OTHER-SE> 111,960
<TOTAL-LIABILITY-AND-EQUITY> 287,808
<SALES> 67,110
<TOTAL-REVENUES> 92,400
<CGS> 6,245
<TOTAL-COSTS> 15,878
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 223
<INTEREST-EXPENSE> 4,126
<INCOME-PRETAX> 13,364
<INCOME-TAX> 8,494
<INCOME-CONTINUING> 4,870
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,870
<EPS-PRIMARY> 0.19<F1>
<EPS-DILUTED> 0.17
<FN>
<F1>ITEM CONSISTS OF BASIC EARNINGS PER SHARE
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1996
<PERIOD-END> JAN-31-1997 JAN-31-1996
<CASH> 9,848 9,205
<SECURITIES> 46,895 20,632
<RECEIVABLES> 14,500 9,594
<ALLOWANCES> 1,204 378
<INVENTORY> 0 0
<CURRENT-ASSETS> 74,819 40,161
<PP&E> 15,754 9,107
<DEPRECIATION> 7,328 5,048
<TOTAL-ASSETS> 128,661 45,480
<CURRENT-LIABILITIES> 19,600 12,460
<BONDS> 0 0
0 0
0 0
<COMMON> 25 21
<OTHER-SE> 108,724 32,792
<TOTAL-LIABILITY-AND-EQUITY> 128,661 45,480
<SALES> 46,354 31,200
<TOTAL-REVENUES> 64,000 44,000
<CGS> 4,580 3,746
<TOTAL-COSTS> 11,540 9,276
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 300 196
<INTEREST-EXPENSE> 0 199
<INCOME-PRETAX> 17,957 8,791
<INCOME-TAX> 6,677 3,408
<INCOME-CONTINUING> 11,280 5,383
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 11,280 5,383
<EPS-PRIMARY> 0.49<F1> 0.26<F1>
<EPS-DILUTED> 0.43 0.23
<FN>
<F1>ITEM CONSISTS OF BASIC EARNINGS PER SHARE
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998 JAN-31-1998
<PERIOD-START> FEB-01-1997 FEB-01-1997 FEB-01-1997
<PERIOD-END> OCT-31-1997 JUL-31-1997 APR-30-1997
<CASH> 16,218 150,153 13,581
<SECURITIES> 154,566 20,641 26,511
<RECEIVABLES> 14,810 13,708 13,538
<ALLOWANCES> 1,241 1,164 1,064
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 190,442 188,969 57,595
<PP&E> 33,716 20,445 18,143
<DEPRECIATION> 9,897 8,924 7,991
<TOTAL-ASSETS> 288,935 279,673 133,633
<CURRENT-LIABILITIES> 35,463 27,870 23,653
<BONDS> 140,000 140,000 0
0 0 0
0 0 0
<COMMON> 26 26 26
<OTHER-SE> 113,162 111,473 109,614
<TOTAL-LIABILITY-AND-EQUITY> 288,935 279,673 133,633
<SALES> 46,115 29,183 13,257
<TOTAL-REVENUES> 64,400 40,400 18,400
<CGS> 4,571 3,007 1,406
<TOTAL-COSTS> 11,535 7,307 3,344
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 60 60 0
<INTEREST-EXPENSE> 1,750 0 0
<INCOME-PRETAX> 18,798 10,657 4,610
<INCOME-TAX> 6,768 3,837 1,660
<INCOME-CONTINUING> 12,030 6,820 2,950
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 12,030 6,820 2,950
<EPS-PRIMARY> 0.48<F1> 0.27<F1> 0.12<F1>
<EPS-DILUTED> 0.43 0.24 0.11
<FN>
<F1>ITEM CONSISTS OF BASIC EARNINGS PER SHARE
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1997 JAN-31-1997
<PERIOD-START> FEB-01-1996 FEB-01-1996 FEB-01-1996
<PERIOD-END> OCT-31-1996 JUL-31-1996 APR-30-1996
<CASH> 6,042 7,484 9,143
<SECURITIES> 57,809 57,240 18,766
<RECEIVABLES> 12,221 10,999 11,742
<ALLOWANCES> 487 473 435
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 78,473 76,548 40,529
<PP&E> 13,884 12,084 8,644
<DEPRECIATION> 6,604 5,977 4,014
<TOTAL-ASSETS> 114,734 111,817 46,464
<CURRENT-LIABILITIES> 16,736 14,925 13,423
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 17 17 9
<OTHER-SE> 97,677 96,602 32,821
<TOTAL-LIABILITY-AND-EQUITY> 114,734 111,817 46,464
<SALES> 31,527 19,231 8,531
<TOTAL-REVENUES> 44,200 27,600 12,600
<CGS> 3,461 2,335 1,089
<TOTAL-COSTS> 8,442 5,640 2,650
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 109 95 57
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 11,173 5,780 2,390
<INCOME-TAX> 4,153 2,220 920
<INCOME-CONTINUING> 7,020 3,560 1,470
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 7,020 3,560 1,470
<EPS-PRIMARY> 0.31<F1> 0.17<F1> 0.07<F1>
<EPS-DILUTED> 0.27 0.15 0.06
<FN>
<F1>ITEM CONSISTS OF BASIC EARNINGS PER SHARE
</FN>
</TABLE>
