<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____.
Commission file number 0-21342
WIND RIVER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2873391
(State of incorporation) (I.R.S. Employer Identification No.)
1010 ATLANTIC AVENUE, ALAMEDA, CALIFORNIA 94501
(Address of principal executive office)
(510) 748-4100
(Telephone number)
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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
26,337,000 shares of Common Stock; $.001 par value as of May 31, 1998
<PAGE>
WIND RIVER SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED APRIL 30, 1998
INDEX
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Income Statements for the three
month periods ended April 30, 1998 and 1997
Consolidated Balance Sheets at April 30,
1998 and January 31, 1998
Consolidated Statements of Cash Flows for the
three month periods ended April 30, 1998 and
1997
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits
Signature
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WIND RIVER SYSTEMS, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
April 30,
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Products $ 19,322 $ 13,257
Services 7,078 5,143
--------- ---------
Total revenues 26,400 18,400
--------- ---------
Cost of revenues:
Products 1,968 1,406
Services 2,821 1,938
--------- ---------
Total cost of revenues 4,789 3,344
--------- ---------
Gross margin 21,611 15,056
--------- ---------
Operating expenses:
Selling and marketing 9,876 7,255
Product development and engineering 3,774 2,434
General and administrative 1,704 1,537
--------- ---------
Total operating expenses 15,354 11,226
--------- ---------
Operating income 6,257 3,830
--------- ---------
Other income (expense):
Interest expense (2,134) --
Interest income and other, net 3,082 780
--------- ---------
Total other income 948 780
--------- ---------
Income before income taxes 7,205 4,610
Provision for income taxes 2,770 1,660
--------- ---------
Net income $ 4,435 $ 2,950
--------- ---------
--------- ---------
Net income per share:
Basic $ 0.17 $ 0.12
Diluted $ 0.16 $ 0.11
Weighted average shares:
Basic 25,864 25,364
Diluted 27,979 28,058
</TABLE>
See accompanying notes to the consolidated financial statements.
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WIND RIVER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
April 30, January 31,
1998 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52,273 $ 100,633
Short-term investments 9,921 61,107
Accounts receivable, net of allowances
of $1,308 and $1,460 15,543 18,076
Prepaid and other current assets 7,041 5,210
--------- ----------
Total current assets 84,778 185,026
Investments 153,041 60,329
Property and equipment, net of accumulated
depreciation of $12,091 and $10,962 26,415 24,496
Other assets 23,137 17,957
--------- ----------
Total assets $ 287,371 $ 287,808
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,810 $ 1,976
Accrued liabilities 9,111 11,563
Accrued compensation 4,308 5,441
Income taxes payable 1,995 1,415
Deferred revenue 13,759 15,027
--------- ----------
Total current liabilities 30,983 35,422
Convertible subordinated notes 140,000 140,000
--------- ----------
Total liabilities 170,983 175,422
--------- ----------
Minority interest in consolidated subsidiary 512 400
--------- ----------
Stockholders' equity:
Common stock, par value $.001, 75,000 authorized,
26,619 and 26,166 shares issued; 26,074 and
25,689 shares outstanding 27 26
Additional paid in capital 104,381 101,154
Treasury stock, 545 and 477 shares, at cost (17,988) (15,485)
Cumulative translation adjustments (2,185) (1,700)
Unrealized gain (loss) on investments (282) 503
Retained earnings 31,923 27,488
--------- ----------
Total stockholders' equity 115,876 111,986
--------- ----------
Total liabilities and stockholders'
equity $ 287,371 $ 287,808
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
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WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
April 30,
1998 1997
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,435 $ 2,950
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,802 813
Unrealized loss on investments (785) (99)
Minority interest in consolidated subsidiary 112 28
Change in assets and liabilities:
Accounts receivable 2,533 822
Prepaid and other assets (7,684) (765)
Accounts payable (166) 892
Accrued liabilities (2,452) (1,344)
Accrued compensation (1,133) (802)
Income taxes payable 580 1,682
Deferred revenue (1,268) 3,625
--------- --------
Net cash provided by (used in)
operating activities (4,026) 7,802
--------- --------
Cash flows from investing activities:
Acquisition of property and equipment (3,048) (2,568)
Purchase of investments (129,910) (49,078)
Sales and maturities of investments 88,384 49,537
--------- --------
Net cash used in investing activities (44,574) (2,109)
--------- --------
Cash flows from financing activities:
Issuance of Common Stock, net 3,228 450
Purchase of treasury stock (2,503) (2,250)
--------- --------
Net cash provided by (used in) financing
activities 725 (1,800)
--------- --------
Effect of exchange rate changes on cash and cash
equivalents (485) (160)
--------- --------
Net increase (decrease) in cash and
cash equivalents (48,360) 3,733
Cash and cash equivalents at beginning of period 100,633 9,848
--------- -------
Cash and cash equivalents at end of period $ 52,273 $ 13,581
--------- --------
--------- --------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,519 $ -
--------- --------
--------- --------
Cash paid for income taxes $ 1,504 $ 827
--------- --------
--------- --------
</TABLE>
See accompanying notes to the consolidated financial statements.
5
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WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes are
unaudited. However, in the opinion of management, all adjustments (consisting
only of normal recurring adjustments) which are necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim period have been included. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the fiscal year ended January 31, 1998 included in the
Company's Annual Report on Form 10-K. The results of operations for the three
months ended April 30, 1998 are not necessarily indicative of results to be
expected for the entire fiscal year, which ends on January 31, 1999.
The consolidated financial statements include the accounts of Wind River
Systems, Inc. ("Wind River" or "the Company") and its wholly owned subsidiaries
and its majority-owned subsidiary. All significant inter-company accounts and
transactions have been eliminated.
In accordance with the rules and regulations of the Securities and Exchange
Commission, the unaudited consolidated financial statements omit or condense
certain information and footnote disclosures normally required for complete
financial statements prepared in accordance with generally accepted accounting
principles.
Certain amounts in the fiscal 1998 consolidated financial statements have been
reclassified to conform to the fiscal 1999 presentation.
2. REVENUE RECOGNITION
The Company has adopted the provisions of Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended by SOP 98-4,
"Deferral of the Effective Date of Certain Provisions of SOP 97-2" ("SOP
98-4"), effective February 1, 1998. SOP 97-2 and SOP 98-4 provide guidance
on recognizing revenue on software transactions and supersede SOP 91-1. The
adoption of SOP 97-2 and SOP 98-4 did not have a material impact on the
Company's current licensing or revenue recognition practices. However,
should Wind River 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.
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3. CASH AND CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents consist of highly liquid investments with an original maturity
of three months or less. These investments consist of fixed income securities,
which are readily convertible to cash and are stated at cost, which
approximates fair value. 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 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.
4. COMPREHENSIVE INCOME
In February 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). Comprehensive
income is defined as the change in equity of a company during a period from
transactions and other events and circumstances excluding transactions resulting
from investments by owners and distributions to owners. The primary difference
between net income and comprehensive income, for the Company, results from
foreign currency translation adjustments and unrealized gains and losses on
available-for-sale securities.
Comprehensive income for the three months ended April 30, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
April 30,
(In thousands) 1998 1997
-------- --------
<S> <C> <C>
Net income $ 4,435 $ 2,950
-------- --------
Other comprehensive income, net of tax
Foreign currency translation adjustments (315) (104)
Unrealized loss on investments (510) (64)
-------- --------
Other comprehensive income (825) (168)
-------- --------
Total comprehensive income $ 3,610 $ 2,782
-------- --------
-------- --------
</TABLE>
5. COMMON STOCK TRANSACTIONS
The Company currently repurchases approximately $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
through the quarter ending October 31, 1998 unless extended or shortened by the
Board of
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Directors. The Company repurchased and held as treasury stock 68,500
shares of common stock in the first quarter of fiscal year 1999, at a cost of
$2.5 million.
6. 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"). 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 potential common shares consist of stock options and warrants (using
the treasury stock method) and convertible subordinated notes (using the if
converted method).
In accordance with FAS 128, the calculation of basic and diluted net income per
share is presented below:
<TABLE>
<CAPTION>
Three Months Ended
April 30,
(In thousands, except per share information) 1998 1997
-------- --------
<S> <C> <C>
Basic computation:
Net income $ 4,435 $ 2,950
Weighted average common shares 25,864 25,364
-------- --------
Basic net income per share $ 0.17 $ 0.12
-------- --------
-------- --------
Diluted computation:
Net income $ 4,435 $ 2,950
Weighted average common shares 25,864 25,364
Assumed incremental shares from:
Stock options 2,115 2,694
Convertible subordinated notes - -
-------- --------
Dilutive potential common shares 2,115 2,694
-------- --------
Total dilutive weighted average common shares 27,979 28,058
-------- --------
Diluted net income per share $ 0.16 $ 0.11
-------- --------
-------- --------
</TABLE>
The effect of assumed conversion of the convertible subordinated notes is
anti-dilutive and is therefore excluded from the above computations. Options
to purchase approximately 1.6 million and 8,000 shares which were
outstanding at April 30, 1998 and 1997, respectively, were not included in the
calculation because the exercise prices were greater than the average market
price of common shares in each respective quarter. The exercise price ranges
of these options were $37.44 to $46.02 and $26.17 to $31.75 at April 30, 1998
and 1997, respectively.
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7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board 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 method companies use to 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 disclosures prescribed by FAS 131 will be
effective for the Company's consolidated financial statements for the fiscal
year ending January 31, 1999. FAS 131's interim reporting disclosures are not
required until the Company's fiscal quarter ending April 30, 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 consolidated financial statements for the fiscal
year ending January 31, 2000.
8. 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.
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WIND RIVER SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below, in the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1998, as well as in the Company's Securities and Exchange
Commission filings. The following discussions should be read in conjunction
with the unaudited consolidated financial statements and notes included
elsewhere herein.
Wind River Systems, Inc. ("Wind River" or "the Company") develops, markets and
supports advanced software operating systems and software 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. The
Company'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.
RESULTS OF OPERATIONS
REVENUES
Total revenues for the three months ended April 30, 1998 were $26.4 million,
compared to $18.4 million for the same period in fiscal 1998. The increase in
revenues of 43% is due to increases in both the Company's product revenue and
services revenues.
Revenue from the sale of products was $19.3 million for the three month
period ended April 30, 1998, compared to $13.3 million for the same period in
fiscal 1998. Product revenues primarily consist of development license fees
and run-time license fees. 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. The increase
of 46% was due primarily to the continued
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acceptance of the Company's products and increased run-time license revenues.
Service revenues for the three months ended April 30, 1998 were $7.1 million
compared to $5.1 million for the same period in the prior fiscal year. The
increase of 38% is primarily due to an increase in maintenance support
agreements resulting from the increased sale of the Tornado-TM- software
development environment and software applications provided to customers.
Total revenues from international sales for the three months ended April 30,
1998 were $8.9 million, compared to $6.3 million for the same period in the
prior fiscal year. The increase of 41% is primarily due to the increased sales
in Japan from $2.4 million to $4.1 million during the first three months of
fiscal 1998 and 1999, respectively. International revenues accounted for 34%
of total revenues for each of the three month periods ended April 30, 1998 and
April 30, 1997. The Company expects international sales to continue to represent
a significant portion of net product revenues although the percentage may
fluctuate from period to period. 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. Revenues from Asia
Pacific sources represented 52% of international revenues for the three months
ended April 30, 1998, compared to 45% for the same period in the prior fiscal
year.
COSTS OF REVENUES
The overall cost of products and services as a percentage of total revenues
remained at 18% in the three months ended April 30, 1998, as compared to the
same period in fiscal 1998. Product-related cost of sales as a percentage of
product revenues was 10% and 11% in the three month period ended April 30, 1998
and 1997, respectively. Product-related costs consist primarily of product
media, documentation and packaging. The decrease in costs of product revenues
was due to increases in run-time sales of products which carries lower cost of
sales. Service related cost of revenues as a percentage of service revenues
increased to 40% for the three month period of fiscal 1999, from 38% for the
same period in fiscal 1998. The increase in costs of service revenues is due
to the addition of customer support and training staff. The Company expects
that customer support costs will increase in absolute dollars as the Company
continues to increase customer support staff and customer support capabilities.
OPERATING EXPENSES
Selling and marketing expenses were $9.9 million or 37% of total revenues for
the three month period ended April 30, 1998, compared to $7.3 million or 39% of
total
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revenues for the same period in the prior fiscal year. The increase in
absolute dollars resulted primarily from the growth of sales and marketing
personnel and field engineers and increases in expenses related to marketing and
advertising programs. The Company expects that sales and marketing expenses
will increase in absolute dollars as the Company continues to expand its sales
and marketing staff.
Product development and engineering expenses were $3.8 million or 20% of total
product revenues for the three month period ended April 30, 1998, compared to
$2.4 million or 18% of total product revenues for the same period in the prior
fiscal year. The increase in product development and engineering expense is
primarily due to the increase in staff and associated support for engineers to
expand and enhance the Company's product line. The Company believes that
product development and engineering expenses will increase in absolute dollars
as it continues to invest in developing new products, applications and product
enhancements.
General and administrative expenses were $1.7 million or 6% of total revenues
for the three month period ended April 30, 1998, compared to $1.5 million or 8%
of total revenues for the same period in the prior fiscal year. The increase
was primarily due to the growth in worldwide staff and infrastructure
investments in the areas of information systems, finance and administration.
The Company believes that general and administrative expenses will increase in
absolute dollars as it continues to invest in worldwide staff and infrastructure
investments in the areas of information systems, finance and administration.
OTHER INCOME AND EXPENSES
Interest expense was $2.1 million for the three month period ended April 30,
1998. No interest expense was incurred during the same period in the prior
fiscal year. The increase in interest expense is primarily related to the
interest paid on the 5.0% Convertible Subordinated Notes, due in 2002 (the
"Notes") and amortization of certain issuance costs associated with the
Notes. The interest on the Notes is payable on February 1 and August 1 of
each year commencing February 1, 1998. The Notes mature on August 1, 2002.
Interest income and other, net was $3.1 million for the three month period
ended April 30, 1998 compared to $0.8 million for the same period in the
prior fiscal year. The increase of $2.3 million is primarily due to higher
average cash and cash equivalent and long-term investment balances during the
quarter.
PROVISION FOR INCOME TAXES
The effective tax rate in the first quarter of fiscal 1999 was 38.4% compared
to 36% for the same period in fiscal 1998. The increase in the effective tax
rate between the first quarters of fiscal 1999 and 1998 was due to the
transition of the Company's investment portfolio from tax-free investments to
taxable investments. The provision for income taxes is an estimate based on
the Company's anticipated effective tax rate for the full fiscal year.
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LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company had working capital of approximately $54 million
and cash and investments of approximately $215 million, which include
investments with maturities of greater than one year of $153 million. The
increase in long term investments of $93 million from January 31, 1998 is
primarily because the funds held as cash equivalents or short term investments
as of January 31, 1998 have been invested in longer term securities.
Net cash used in operating activities was $4.0 million in the first three
months of fiscal 1999. In the first three months of fiscal 1999, the changes
in prepaid and other assets, accrued liabilities, accrued compensation, and
deferred revenue were partially offset by net income, depreciation and
amortization, and changes in accounts receivable. Prepaid and other assets
increased primarily due to the increased collateral funding for the operating
lease of the Company's future headquarters. The collateral consists of direct
obligations of the United States government, with the majority being
long-term securities. Accrued liabilities decreased as the Company made a
final payment for certain technologies purchased from Network Computer, Inc. in
the quarter ended January 31, 1998.
Net cash used in investing activities in the first three months of fiscal 1999
totaled $44.6 million. In the first three months of fiscal 1999, uses of cash
relating to the acquisition of equipment and purchases of investments were
partially offset by cash provided from the sales of investments. The Company
increased its long-term investments by $93 million to increase the interest
earned on its investments.
Net cash provided by financing activities in the first three months of fiscal
year 1999 totaled $700,000. In the first three months of fiscal 1999, cash
provided by the issuance of common stock from employee stock option exercises
was offset by cash used in the repurchase of treasury stock. The Company
repurchased and held as treasury stock 68,500 shares of common stock at a cost
of approximately $2.5 million.
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 April 30, 1998, the lessor has funded a total of
$10 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
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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 April 30, 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 condition or results of operations.
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.
This Agreement effectively changes the Company's interest rate exposure on
its operating lease which is based on one month LIBOR to a fixed rate of
5.9%. The notional amount of the swap 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. The Company manages
potential counterparty credit risk prior to entering into transactions by
requiring that all counterparties have at least a AA Standard and Poors', or
Moody's equivalent, long-term senior debt rating.
The Company has an investment portfolio of fixed income securities that are
classified as available-for-sale securities. These securities, like all fixed
income instruments, are subject to interest rate risk and will decline in value
if market interest rates increase. The Company attempts to limit this exposure
by investing primarily in high grade securities.
Management believes that the Company's working capital and the cash flow
generated from operations are sufficient to meet its working capital
requirements for planned expansion, product development and capital
expenditures for 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
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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 2000. 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 correct 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.
ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
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 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.
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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.
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
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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. As
a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion, sale and support of their products
than the Company. Furthermore, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. 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.
RELIANCE ON CORE FAMILY OF PRODUCTS
Revenue from sales of the Tornado and VxWorks family of products and services
account for a significant majority of the Company's revenues. 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
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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 introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products obsolete and unmarketable. 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 including new releases, applications
and enhancements 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' requirements. 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 products,
capabilities or technologies that have the potential to replace or shorten
the life cycles of the Company's existing products. In the past, the Company
has 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 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.
The Company is continuously engaged in product development for new or
changing
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markets. In particular, the Company has invested significant time
and effort, together with a consortium of industry participants, in the
development of I2O, 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, a real-time operating system for use in conjunction with the I2O
specification. The success of the I2O 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.
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 material adverse effects resulting from any such
errors to date, there can be no assurance that, despite testing
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by the Company and by current and potential customers, errors will not be found
in new products after commencement of commercial shipments, resulting in loss
of or delay in market acceptance, which could have a material adverse effect
upon the Company's business, operating results and financial condition.
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.
PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT
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 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
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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 licenses
to infringing technology.
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.
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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.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
During the three month period ended April 30, 1998 and the fiscal year ended
January 31, 1998, the Company derived approximately 34% and 29%, 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 including restrictions on repatriation of earnings;
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.
There can be no assurance that such factors will not have a material adverse
effect on the Company's international sales and consequently, the Company's
business, operating results and financial condition. 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
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foreign countries and, accordingly, is dependent on their ability to promote
and support the Company's products and, in some cases, 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. Any changes in the relationships the Company has with its
international distributors may have a material adverse effect on the
Company's business, operating results and financial condition.
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. The Company's ability to manage future expansion
of its operations, if any, will require the Company to continue to improve its
financial and management controls, reporting systems and procedures on a timely
basis and expand, train and manage its employee work force. There can be no
assurance that the Company will be able to do so successfully. The Company's
failure to do so could have a material adverse effect on the Company's business,
operating results and financial condition. 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.
During fiscal 1998, 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.
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RISK ASSOCIATED WITH ISSUANCE OF CONVERTIBLE SUBORDINATED NOTES
In connection with the sale of Convertible Subordinated Notes, the Company
incurred $140 million in debt which resulted in an increase in its ratio of
long-term debt to total capitalization. As a result of this additional
indebtedness, the Company's principal and interest obligations have increased
substantially. The degree to which the Company will be leveraged could
materially and adversely affect the Company's ability to obtain financing for
working capital, acquisitions or other purposes and could make it more
vulnerable to industry downturns and competitive pressures. The Company's
ability to meet its debt service obligations will be dependent upon the
Company's future performance, which will be subject to financial, business and
other factors affecting operations of the Company, many of which are beyond its
control.
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 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.
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PART II - OTHER INFORMATION
ITEM 1. 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS
10.21 1998 Non-Officer Stock Option Plan
27.1 Financial Data Schedule
(b)REPORTS ON FORM 8-K
On February 6, 1998, the Company filed a report on Form 8-K reporting
that the Company had announced the acquisition of Objective Software
Technology Limited, based in Livingston, Scotland.
No other items.
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto authorized.
WIND RIVER SYSTEMS, INC.
Date: June 15, 1998 \s\ RICHARD W. KRABER
-------------------------------
Richard W. Kraber
Chief Financial Officer
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WIND RIVER SYSTEMS, INC.
1998 NON-OFFICER STOCK OPTION PLAN
AS ADOPTED EFFECTIVE ON APRIL 23, 1998
STOCKHOLDER APPROVAL NOT REQUIRED
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Consultants who are not Officers or members of the Board of
Directors may be given an opportunity to benefit from increases in value of
the common stock of the Company through the granting of Nonstatutory Stock
Options. Only Nonstatutory Stock Options may be granted hereunder.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Consultants who are not Officers or members
of the Board of Directors, to secure and retain the services of such new
Employees and Consultants and to provide incentives for such persons to exert
maximum efforts for the success of the Company and its Affiliates.
2. DEFINITIONS. AS USED HEREIN, THE FOLLOWING DEFINITIONS SHALL APPLY:
(a) "AFFILIATE" shall mean any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f) respectively, of the Code, or such other parent
corporation or subsidiary corporation designated by the Board.
(b) "BOARD" shall mean the Committee, if one has been appointed, or the
Board of Directors, if no Committee is appointed.
(c) "BOARD OF DIRECTORS" shall mean the Board of Directors of the
Company.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" shall mean the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan, if one
is appointed.
(f) "COMMON STOCK" shall mean the Common Stock of the Company.
(g) "COMPANY" shall mean Wind River Systems, Inc., a Delaware
corporation.
(h) "CONSULTANT" shall mean any consultants, independent contractors or
advisers to the Company or an Affiliate (provided that such persons render
bona fide services not in connection with the offering and sale of securities
in capital raising transactions) excluding officers and directors of the
Company and stockholders beneficially owning 10% or more of the Company's
Common Stock.
(i) "CONTINUOUS SERVICE" shall mean the absence of any interruption or
termination of service to the Company, an Affiliate, or any successors thereto,
whether as an Employee or
<PAGE>
Consultant. The Board or the Chief Executive Officer of the Company may
determine, in that party's sole discretion, whether Continuous Service as an
Employee or Consultant shall be considered interrupted in the case of: (i)
any leave of absence approved by the Board or the Chief Executive Officer of
the Company, including sick leave, military leave, or any other personal
leave; or (ii) transfers between the Company, Affiliates or their successors.
(j) "EMPLOYEE" shall mean any person employed by the Company or by any
Affiliate, excluding officers and directors of the Company and stockholders
beneficially owning 10% or more of the Company's Common Stock.
(k) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock of the Company determined as follows:
(i) If the Common Stock is listed on any established stock
exchange, or traded on the Nasdaq National Market or the Nasdaq SmallCap
Market, the Fair Market Value of a share of Common Stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the
greatest volume of trading in Common Stock) on the trading day prior to the
day of determination, as reported in the Wall Street Journal or such other
source as the Board deems reliable;
(ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
(m) "NONSTATUTORY STOCK OPTION" shall mean an Option not intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code and the regulations promulgated thereunder.
(n) "OFFICER" shall mean a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder and any other Employees of the Company
whom the Board or the Committee classifies as "Officer" in its sole
discretion.
(o) "OPTION" shall mean a Nonstatutory Stock Option granted pursuant to
the Plan.
(p) "OPTION AGREEMENT" shall mean a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual
Option grant. Each Option Agreement shall be subject to the terms and
conditions of the Plan.
(q) "OPTIONED STOCK" shall mean the Common Stock subject to an Option.
(r) "OPTIONEE" shall mean an Employee or Consultant who receives an
Option.
(s) "PLAN" shall mean this 1998 Non-Officer Stock Option Plan.
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(t) "SHARE" shall mean a share of Common Stock, as adjusted in
accordance with Section 11 of the Plan.
3. STOCK SUBJECT TO THE PLAN.
Subject to the provisions of Section 11 of the Plan, the maximum
aggregate number of Shares which may be optioned and sold under the Plan is
three hundred thousand (300,000) shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should
expire or become unexercisable for any reason without having been exercised
in full, the unpurchased Shares which were subject thereto shall, unless the
Plan shall have been terminated, become available for future grant under the
Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE. The Plan shall be administered by the Board of
Directors. The Board of Directors may appoint a Committee consisting of not
less than two members of the Board of Directors to administer the Plan on
behalf of the Board of Directors, subject to such terms and conditions as the
Board of Directors may prescribe. Once appointed, the Committee shall
continue to serve until otherwise directed by the Board of Directors. From
time to time the Board of Directors may increase the size of the Committee
and appoint additional members thereof, remove members (with or without
cause), and appoint new members in substitution therefor, fill vacancies
however caused and remove all members of the Committee, and thereafter
directly administer the Plan. Notwithstanding anything in this Section 4 to
the contrary, at any time the Board of Directors or the Committee may
delegate to a committee of one or more members of the Board of Directors the
authority to grant Options to all Employees and Consultants or any portion or
class thereof.
(b) POWERS OF THE BOARD. Subject to the provisions of the Plan, the
Board shall have such authority with regard to the Plan and the options as
determined by the Board of Directors, including the authority, in its
discretion: (i) to grant options under the Plan, provided, however, that only
nonstatutory options may be granted under the Plan; (ii) to determine, upon
review of relevant information and in accordance with Section 8(c) of the
Plan, the Fair Market Value of the Common Stock; (iii) to determine the
exercise price per share of Options to be granted, which exercise price shall
be determined in accordance with Section 8(a) of the Plan; (iv) to determine
the Employees or Consultants to whom, and the time or times at which, Options
shall be granted and the number of Shares to be represented by each Option,
provided that no Options may be granted to persons who are neither Employees
nor Consultants; (v) to interpret the Plan; (vi) to prescribe, amend and
rescind rules and regulations relating to the Plan; (vii) to determine the
terms and provisions of each Option granted (which need not be identical) in
accordance with the Plan, and, with the consent of the holder thereof with
respect to any adverse change, modify or amend each Option; (viii) to
accelerate or defer (the latter with the consent of the Optionee) the
exercise date and vesting of any Option; (ix) to authorize any person to
execute on behalf of the Company any instrument required to effectuate the
grant of an Option previously granted by the Board; and (x) to make all other
determinations deemed necessary or advisable for the administration of the
Plan.
3
<PAGE>
(c) EFFECT OF BOARD'S DECISION. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and
any other holders of any Options granted under the Plan.
5. ELIGIBILITY.
Options may be granted only to Employees or Consultants as defined in
Section 2 hereof. An Employee or Consultant who has been granted an Option
may, if he or she is otherwise eligible, be granted an additional Option or
Options. Notwithstanding the foregoing, no Employee who is an Officer of the
Company or who is a member of the Board of Directors shall be entitled to
receive the grant of an Option under the Plan.
The Plan shall not confer upon any Optionee any right with respect to
continuation of employment or consulting with the Company, nor shall it
interfere in any way with the Optionee's right or the Company's right to
terminate the Optionee's employment at any time or the Optionee's consulting
for the Company pursuant to the terms of the Consultant's agreement with the
Company.
6. TERM OF THE PLAN.
The Plan shall become effective upon its adoption by the Board of
Directors. It shall continue in effect until terminated under Section 13 of
the Plan.
7. TERM OF OPTION.
The term of each Option shall be ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
8. EXERCISE PRICE, CONSIDERATION AND VESTING.
(a) EXERCISE PRICE. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be no less than 85% of the
Fair Market Value per Share on the date of grant. Notwithstanding the
foregoing, an Option may be granted with an exercise price lower than that
set forth in the preceding sentence if such Option is granted pursuant to an
assumption or substitution for another option in a manner satisfying the
provisions of Section 424(a) of the Code.
(b) CONSIDERATION. The consideration to be paid for the Shares to be
issued upon exercise of an Option, including the method of payment, shall be
determined by the Board and may consist entirely of (i) cash or check; (ii)
other shares of the Common Stock of the Company having a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as
to which the Option shall be exercised, including by delivering to the
Company an attestation of ownership of owned and unencumbered shares of the
Common Stock of the Company in a form approved by the Company; (iii) payment
pursuant to a program developed under Regulation T as promulgated by the
Federal Reserve Board which, prior to the issuance of Common Stock, results
in either the receipt of cash (or check) by the Company or the receipt of
4
<PAGE>
irrevocable instructions to pay the aggregate exercise price to the Company
from the sales proceeds; (iv) any combination of such methods of payment; or
(v) such other consideration and method of payment for the issuance of Shares
to the extent permitted under applicable law. In making its determination as
to the type of consideration to accept, the Board shall consider if
acceptance of such consideration may be reasonably expected to benefit the
Company.
(c) VESTING. The total number of Shares subject to an Option may, but
need not, be allotted in periodic installments (which may, but need not, be
equal). The Option Agreement may provide that, from time to time during each
of such installment periods, the Option may become exercisable ("vest") with
respect to some or all of the Shares allotted to that period, and may be
exercised with respect to some or all of the Shares allotted to such period
and/or any prior period as to which the Option became vested but was not
fully exercised. The Option may be subject to such other terms and
conditions on the time or times when it may be exercised (which may be based
on performance or other criteria) as the Board may deem appropriate. The
provisions of this Section 8(c) are subject to any Option provisions
governing the minimum number of Shares as to which an Option may be
exercised.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Board, including performance criteria with
respect to the Company and/or the Optionee, and as shall be permissible under
the terms of the Plan.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(c) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 11 of the
Plan. An Option may not be exercised for a fraction of a Share.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
The Option may, but need not, include a provision whereby the
Optionee may elect at any time while an Employee or Consultant (or while an
officer or director of the Company) to exercise the Option as to any part or
all of the shares subject to the Option, subject to a repurchase right in
favor of the Company on such terms as the Board shall establish.
5
<PAGE>
(b) TERMINATION OF SERVICE AS AN EMPLOYEE OR CONSULTANT. If an
Optionee's Continuous Service as an Employee or Consultant ceases for any
reason other than death or disability, the Optionee may, but only within
three (3) months (or such other period of time as is determined by the Board)
after the date the Optionee's Continuous Service as an Employee or Consultant
ceases, exercise the Option to the extent that the Optionee was entitled to
exercise it at the date of such termination. To the extent that the Optionee
was not entitled to exercise the Option at the date of such termination, or
if the Optionee does not exercise such Option (which the Optionee was
entitled to exercise) within the time specified herein, the Option shall
terminate.
(c) DEATH OF OPTIONEE. In the event of the death during the term of
the Option of an Optionee who is at the time of his or her death an Employee
or Consultant and who shall have been in Continuous Service as an Employee or
Consultant since the date of grant of the Option, or in the event of the
death of an Optionee within three (3) months following the termination of the
Optionee's Continuous Service as an Employee or Consultant for any other
reason, the Option may be exercised at any time within eighteen (18) months
(or such other period of time as is determined by the Board) following the
date of death by the Optionee's estate or by a person who acquired the right
to exercise the Option by bequest or inheritance, to the extent that the
Optionee was entitled to exercise it at the date of such termination. To the
extent that the Optionee was not entitled to exercise the Option at the date
of such termination, or if the Option is not exercised (to the extent the
Optionee was entitled to exercise) within the time specified herein, the
Option shall terminate.
(d) DISABILITY OF OPTIONEE. In the event of the disability during the
term of the Option of an Optionee who is at the time of his or her disability
an Employee or Consultant and who shall have been in Continuous Service as an
Employee or Consultant since the date of grant of the Option, the Optionee
may, but only within twelve (12) months (or such other period of time as is
determined by the Board) after the date the Optionee ceases to be an Employee
or Consultant on account of such disability, exercise the Option to the
extent that the Optionee was entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise
the Option at the date of such termination, or if the Optionee does not
exercise such Option (which the Optionee was entitled to exercise) within the
time specified herein, the Option shall terminate.
(e) WITHHOLDING. To the extent provided by the terms of the Option
Agreement, the Optionee may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such Option by any of the
following means ( in addition to the Company's right to withhold from any
compensation paid to Optionee by the Company)or by a combination of such
means: (i) tendering a cash payment; (ii) authorizing the Company to
withhold Shares from the Shares otherwise issuable to the Optionee as a
result of the exercise of the Option; or (iii) delivering to the Company
owned and unencumbered shares of the Common Stock of the Company.
10. TRANSFERABILITY OF OPTIONS.
6
<PAGE>
Except as otherwise expressly provided in the terms of the Option
Agreement, the Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws
of descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. Notwithstanding the foregoing, the Optionee
may, by delivering written notice to the Company, in a form satisfactory to
the Company, designate a third party who, in the event of the death of the
Optionee, shall thereafter be entitled to exercise the Option.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any Option, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation,
stock dividend, dividend in property other than cash, stock split,
liquidating dividend, combination of shares, exchange of shares, change in
corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan and the outstanding Options will be
appropriately adjusted in the class(es) and number of securities and price
per share of stock subject to such outstanding Options. Such adjustments
shall be made by the Board, the determination of which shall be final,
binding and conclusive. (The conversion of convertible securities, cashless
exercise of options and net exercise of warrants shall not be treated as
transactions "without receipt of consideration" by the Company.)
(b) In the event of: (1) a dissolution or liquidation of the Company;
(2) a merger or consolidation in which the Company is not the surviving
corporation; or (3) 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,
subject to paragraph (c) of this Section 11, at the sole discretion of the
Board and to the extent permitted by applicable law: (i) any surviving
corporation shall assume any Options outstanding under the Plan or shall
substitute similar Options for those outstanding under the Plan, (ii) such
Stock Awards shall continue in full force and effect, or (iii) the time
during which such Stock Awards become vested or may be exercised shall be
accelerated and any outstanding unexercised rights under any Stock Awards
terminated if not exercised prior to such event. In the event any surviving
corporation or acquiring corporation refuses to assume such Options or to
substitute similar Options for those outstanding under the Plan, then with
respect to Options held by Optionees whose Continuous Service has not
terminated, the vesting shall be accelerated in full, and the Options shall
terminate if not exercised at or prior to such event. With respect to any
other Options outstanding under the Plan, such Options shall terminate if not
exercised prior to such event.
(c) In the event of either (i) the acquisition by any person, entity or
group within the meaning of Section 13(d) or 14(d) of 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
7
<PAGE>
in the election of directors, which acquisition has not been approved by
resolution of the Company's Board of Directors, or (ii) 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.
12. TIME OF GRANTING OPTIONS.
The date of grant of an Option shall, for all purposes, be the date on
which the Board makes the determination granting such Option. Notice of the
determination shall be given to each Employee or Consultant to whom an Option
is so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable.
(b) EFFECT OF AMENDMENT OR TERMINATION. Options granted before
amendment of the Plan shall not be impaired any amendment unless mutually
agreed otherwise between the Optionee and the Company, which agreement must
be in writing and signed by the Optionee and the Company.
14. SECURITIES LAW COMPLIANCE.
Notwithstanding any provisions relating to vesting contained herein or
in an Option, no Option granted hereunder may be exercised unless the shares
issuable upon exercise of such option are then registered under the
Securities Act of 1933, as amended.
15. RESERVATION OF SHARES.
The Company, during the term of this Plan, will at all times reserve
and keep available such number of Shares as shall be sufficient to satisfy
the requirements of the Plan.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect
8
<PAGE>
of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. OPTION AGREEMENT.
Options shall be evidenced by written Option Agreements in such form
or forms as the Board or the Committee shall approve.
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERECE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 52,273
<SECURITIES> 9,921
<RECEIVABLES> 16,851
<ALLOWANCES> 1,308
<INVENTORY> 0
<CURRENT-ASSETS> 84,778
<PP&E> 38,506
<DEPRECIATION> 12,091
<TOTAL-ASSETS> 287,371
<CURRENT-LIABILITIES> 30,983
<BONDS> 140,000
0
0
<COMMON> 27
<OTHER-SE> 115,849
<TOTAL-LIABILITY-AND-EQUITY> 287,371
<SALES> 19,322
<TOTAL-REVENUES> 26,400
<CGS> 1,968
<TOTAL-COSTS> 4,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,134
<INCOME-PRETAX> 7,205
<INCOME-TAX> 2,770
<INCOME-CONTINUING> 4,435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,435
<EPS-PRIMARY> 0.17<F1>
<EPS-DILUTED> 0.16
<FN>
<F1>Item consists of basic earnings per share
</FN>
</TABLE>
