<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 July 31, 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.
26,335,155 shares of Common Stock; $.001 par value as of August 31, 1998
<PAGE>
WIND RIVER SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JULY 31, 1998
INDEX
<TABLE>
<S> <C> <C>
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements Condensed
Consolidated Income Statements for the
three and six month periods ended July 31,
1998 and 1997
Condensed Consolidated Balance Sheets at
July 31, 1998 and January 31, 1998
Condensed Consolidated Statements of Cash
Flows for the six month periods ended July
31, 1998 and 1997
Notes to the Condensed Consolidated
Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to the Vote of
Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signature
</TABLE>
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WIND RIVER SYSTEMS, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WIND RIVER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, July 31,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Products
$23,169 $15,926 $42,491 $29,183
Services 8,031 6,074 15,109 11,217
------- ------- ------- -------
Total revenues 31,200 22,000 57,600 40,400
------- ------- ------- -------
Cost of revenues:
Products 2,337 1,601 4,305 3,007
Services 3,231 2,362 6,052 4,300
------- ------- ------- -------
Total cost of revenues 5,568 3,963 10,357 7,307
------- ------- ------- -------
Gross margin 25,632 18,037 47,243 33,093
------- ------- ------- -------
Operating expenses:
Selling and marketing 11,035 8,346 20,911 15,601
Product development and engineering 4,287 3,005 8,061 5,439
General and administrative 1,904 1,565 3,608 3,102
------- ------- ------- -------
Total operating expenses 17,226 12,916 32,580 24,142
------- ------- ------- -------
Operating income 8,406 5,121 14,663 8,951
------- ------- ------- -------
Other income (expense):
Interest expense (2,223) 10 (4,357) 43
Interest income and other, net 3,447 916 6,529 1,663
------- ------- ------- -------
Total other income 1,224 926 2,172 1,706
------- ------- ------- -------
Income before income taxes 9,630 6,047 16,835 10,657
Provision for income taxes 3,699 2,177 6,469 3,837
------- ------- ------- -------
Net income $ 5,931 $ 3,870 $10,366 $ 6,820
------- ------- ------- -------
------- ------- ------- -------
Net income per share:
Basic $ 0.23 $ 0.15 $ 0.40 $ 0.27
Diluted $ 0.21 $ 0.14 $ 0.37 $ 0.24
Weighted average shares:
Basic 26,335 25,384 26,099 25,374
Diluted 28,330 28,196 28,155 28,127
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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WIND RIVER SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
<TABLE>
<CAPTION>
July 31, January 31,
1998 1998
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 39,805 $100,633
Short-term investments 14,366 61,107
Accounts receivable, net of allowances of $1,535 and $1,460 20,977 18,076
Other current assets 4,987 5,210
-------- --------
Total current assets 80,135 185,026
Investments 156,542 60,329
Property and equipment, net of accumulated
depreciation of $13,309 and $10,962 27,950 24,496
Other assets 31,529 17,957
-------- --------
Total assets $296,156 $287,808
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,220 $ 3,806
Accrued liabilities 5,936 9,733
Accrued compensation 4,681 5,441
Income taxes payable 4,769 1,415
Deferred revenue 15,559 15,027
-------- --------
Total current liabilities 35,165 35,422
Convertible subordinated notes 140,000 140,000
-------- --------
Total liabilities 175,165 175,422
-------- --------
Minority interest in consolidated subsidiary 558 400
-------- --------
Stockholders' equity:
Common stock, par value $.001, 125,000 authorized,
26,953 and 26,166 shares issued; 26,329 and 25,689
shares outstanding 27 26
Additional paid in capital 106,707 101,154
Treasury stock, 624 and 477 shares, at cost (20,482) (15,485)
Cumulative translation adjustments (1,598) (1,700)
Unrealized gain (loss) on investments (950) 503
Retained earnings 36,729 27,488
-------- --------
Total stockholders' equity 120,433 111,986
-------- --------
Total liabilities and stockholders' equity $296,156 $287,808
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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WIND RIVER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
July 31,
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,366 $ 6,820
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,485 1,896
Unrealized loss on investments (1,453) -
Minority interest in consolidated subsidiary 158 (8)
Change in assets and liabilities:
Accounts receivable (2,778) 752
Other assets (14,446) (1,720)
Accounts payable 261 864
Accrued liabilities (4,304) 729
Accrued compensation (860) 58
Income taxes payable 3,351 1,467
Deferred revenue 532 5,152
--------- --------
Net cash provided by (used in) operating activities (5,688) 16,010
--------- --------
Cash flows from investing activities:
Acquisition of property and equipment (5,745) (5,426)
Purchase of investments (150,664) (36,166)
Sales and maturities of investments 101,192 34,591
--------- --------
Net cash used in investing activities (55,217) (7,001)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 4,972 2,223
Purchase of treasury stock (4,997) (5,832)
Long-term debt issuance - 135,225
--------- --------
Net cash provided by (used in) financing activities (25) 131,616
--------- --------
Effect of exchange rate changes on cash and cash equivalents 102 (320)
--------- --------
Net increase (decrease) in cash and cash equivalents (60,828) 140,305
Cash and cash equivalents at beginning of period 100,633 9,848
--------- --------
Cash and cash equivalents at end of period $ 39,805 $150,153
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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WIND RIVER SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed 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 condensed
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 and six months ended July 31,
1998 are not necessarily indicative of results to be expected for the entire
fiscal year, which ends on January 31, 1999.
The condensed consolidated financial statements include the accounts of Wind
River Systems, Inc. ("Wind River" or "the Company") and its wholly-owned and
majority-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
In accordance with the rules and regulations of the Securities and Exchange
Commission, the unaudited condensed 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. However, the Company believes that the disclosures
are adequate to make the information presented not misleading.
Certain amounts in the fiscal 1998 condensed consolidated financial
statements have been reclassified to conform to the fiscal 1999 presentation.
2. ZINC SOFTWARE INCORPORATED ACQUISITION
In May 1998, the Company acquired Zinc Software, Inc. ("Zinc"), a privately
held company that develops, markets and supports graphical application
software. In connection therewith, the Company issued 226,611 shares of
common stock for all of the outstanding stock of Zinc. The acquisition was
accounted for as a pooling of interests, however, as the operations of Zinc
were not material to the Company's consolidated operations and financial
position, the financial statements of Zinc have been recorded in the
Company's consolidated financial statements as of May 1, 1998.
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3. REVENUE RECOGNITION
The Company has adopted the provisions of Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of
Position 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.
4. 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 as a component of stockholders' equity
until disposition. Fair value is determined based upon the quoted market
prices of the securities as of the balance sheet date.
5. 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.
7
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Comprehensive income for the three and six month periods ended July 31, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
(In thousands) 1998 1997 1998 1997
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net income $5,931 $3,870 $10,366 $6,820
------ ------ ------- ------
------ ------ ------- ------
Other comprehensive income, net of tax
Foreign currency translation adjustments 381 (104) 66 (208)
Unrealized loss on investments (434) (27) (944) (91)
------ ------ ------- ------
Other comprehensive income (53) (131) (878) (299)
------ ------ ------- ------
Total comprehensive income $5,878 $3,739 $ 9,488 $6,521
------ ------ ------- ------
------ ------ ------- ------
</TABLE>
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 Six Months Ended
July 31, July 31,
(In thousands, except per share information) 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic computation:
Net income $ 5,931 $ 3,870 $10,366 $ 6,820
Weighted-average common shares 26,335 25,384 26,099 25,374
------- ------- ------- -------
Basic net income per share $ 0.23 $ 0.15 $ 0.40 $ 0.27
------- ------- ------- -------
------- ------- ------- -------
Diluted computation:
Net income $ 5,931 $ 3,870 $10,366 $ 6,820
Weighted-average common shares 26,335 25,384 26,099 25,374
Assumed incremental shares from:
Stock options and warrants 1,995 2,812 2,056 2,753
Convertible subordinated notes - - - -
------- ------- ------- -------
Dilutive potential common shares 1,995 2,812 2,056 2,753
------- ------- ------- -------
Total dilutive weighted-average
common shares 28,330 28,196 28,155 28,127
------- ------- ------- -------
------- ------- ------- -------
Diluted net income per share $ 0.21 $ 0.14 $ 0.37 $ 0.24
------- ------- ------- -------
------- ------- ------- -------
</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 1.8 million and 364,000 shares which were
outstanding at
8
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July 31, 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 $34.50 to $46.02 and $35.50 to $41.87 at July 31, 1998 and 1997,
respectively.
7. 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 Directors. The Company repurchased and holds as
treasury stock 68,500 shares and 79,300 shares of common stock in the first
and second quarters of fiscal year 1999, respectively, at a cost of $5.0
million.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"). 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 Company's consolidated
financial statements for the fiscal year ending January 31, 2000.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). FAS 133 requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting
from changes in the fair values of those derivatives would be accounted for
in current earnings unless specific
9
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hedge criteria are met. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting changes
in fair value or cash flows. The Company must formally document, designate,
and assess the effectiveness of transactions that receive hedge accounting.
The Company has not yet determined the impact, if any, of adopting this
statement. FAS 133 will be effective for the Company's consolidated
financial statements for the fiscal year ending January 31, 2001.
9. 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.
10
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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 other
of 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.
In May 1998, the Company acquired Zinc Software, Inc. ("Zinc"), a privately
held company that develops, markets and supports graphical application
software. In connection therewith, the Company issued 226,611 shares of
common stock for all of the outstanding stock of Zinc. The acquisition was
accounted for as a pooling of interests, however, as the operations of Zinc
were not material to the Company's consolidated operations and financial
position, the financial statements of Zinc have been recorded in the
Company's consolidated financial statements as of May 1, 1998.
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 and six months ended July 31, 1998 were $31.2
million and $57.6 million, respectively, compared to $22 million and $40.4
million for the same periods in fiscal 1998. The increase in revenues of 42%
and 43% for the three
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and six month periods ended July 31, 1998, respectively, is due to increases
in both the Company's product revenue and services revenues.
Revenue from the sale of products increased 45% and 46% to $23.2 million and
$42.5 million for the three and six months ended July 31, 1998, compared to
$15.9 million and $29.2 million for the same periods 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 increases were due primarily to the
continued acceptance of the Company's products and increased run-time license
revenues.
Service revenues increased 32% and 35% to $8.0 million and $15.1 million for
the three and six months ended July 31, 1998, compared to $6.1 million and
$11.2 million for the same periods in the prior fiscal year. The increases
were primarily due to an increase in maintenance support agreements resulting
from the increase in the Company's installed base of Tornado-TM- software
development environment and software applications provided to customers.
Total revenues from international sales for the three and six months ended
July 31, 1998 were $9.5 million and $18.4 million, compared to $6.3 million
and $12.6 million for the same periods in the prior fiscal year. The
increase of 50% and 46% for the three and six month periods ended July 31,
1998 were primarily due to increased sales in Japan and Europe.
International revenues accounted for 31% and 32% of total revenues for the
three and six month periods ended July 31, 1998, compared to 29% and 31% for
the same periods in the prior fiscal year. 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 including Japan
represented 40% and 46% of international revenues for the three and six
months ended July 31, 1998, compared to 31% and 38% for the same periods in
the prior fiscal year.
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COSTS OF REVENUES
The overall cost of products and services as a percentage of total revenues
was 18% for both the three and six month periods ended July 31, 1998, the
same as for the corresponding periods in fiscal 1998. Product-related cost
of sales as a percentage of product revenues was 10% for both the three and
six month periods ended July 31, 1998, respectively, the same as for the
corresponding periods of the prior fiscal year. Product-related costs consist
primarily of product media, documentation and packaging.
Service related cost of revenues as a percentage of service revenues was 40%
for both the three and six month periods of fiscal 1999, compared to 39% and
38% for the same periods in fiscal 1998. Service related costs consist
primarily of personnel related costs associated with providing services to
customers and the infrastructure to manage a services organization as well as
costs to research, develop, and retain services professionals. The increase
in costs of service revenues is due to investment in developing new services
offerings and the addition of service professionals. 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 $11.0 million and $20.9 million for the
three and six months ended July 31, 1998, compared to $8.3 million and $15.6
million for the same periods in the prior fiscal year. As a percentage of
total revenue, selling and marketing expenses decreased to 35% and 36% for
the three and six months ended July 31, 1998 from 38% and 39% for the
corresponding periods in the prior fiscal year. The increase in absolute
dollars resulted primarily from the growth of sales and marketing personnel
and field engineers and related costs 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 $4.3 million and $8.1
million for the three and six months ended July 31, 1998 or 14% of total
revenues for each period, compared to $3.0 million and $5.4 million or 14%
and 13% of total revenue, respectively for the same periods in the prior
fiscal year. The dollar 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.
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General and administrative expenses were $1.9 million and $3.6 million or 6%
of total revenues for the three and six month periods ended July 31, 1998,
compared to $1.6 million and $3.1 million or 7% and 8% of total revenues for
the corresponding periods in the prior fiscal year. The increase in absolute
dollars 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 in the areas of information systems, finance and
administration.
OTHER INCOME AND EXPENSES
Interest expense was $2.2 million and $4.4 million for the three and six
month period ended July 31, 1998. No interest expense was incurred during
the same periods 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 $3.4 million and $6.5 million for the
three and six month periods ended July 31, 1998 compared to $0.9 million and
$1.7 million for the same periods in the prior fiscal year. The increase of
$2.5 million and $4.9 million for the three and six months, respectively, is
primarily due to higher average cash and cash equivalent and investment
balances and to the transition of the Company's investment portfolio from
tax-free investments to taxable investments.
PROVISION FOR INCOME TAXES
The effective tax rate for the three and six month periods ended July 31,
1998 was 38.4% compared to 36% for the same periods in the prior fiscal year.
The increase in the effective tax rate between the second 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.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, the Company had working capital of approximately $45
million and cash and investments of approximately $211 million, which include
investments with maturities of greater than one year of $157 million. The
increase in long term investments of $96 million from January 31, 1998 is
primarily due to the transfer of funds held as cash equivalents or short term
investments as of January 31, 1998 to longer term securities.
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Net cash used in operating activities was $5.7 million in the first six
months of fiscal 1999. In the first six months of fiscal 1999, the changes in
accounts receivable, other assets, accrued liabilities, and accrued
compensation were partially offset by net income, depreciation and
amortization, and changes in income taxes payable. 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 six months of fiscal 1999
totaled $55.2 million. In the first six 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. As the
Company transitioned its investment portfolio from short-term to long-term
investments, its long-term investments increased by $96 million.
Net cash used in financing activities in the first six months of fiscal year
1999 totaled $25,000. In the first six 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. During the six
months ended July 31, 1998, the Company repurchased and holds as treasury
stock 147,800 shares of common stock at a cost of approximately $5.0 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 July 31, 1998, the lessor has funded a total
of $17.5 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").
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 Poor's, or
Moody's equivalent, long-term senior debt rating.
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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 July 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 condition or results of operations.
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 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
adverse impact on the Company's ability to conduct its business.
The "Year 2000" issue also could affect the products that the Company sells.
The Company believes that its most current releases of its products will
neither cease to perform nor generate incorrect or ambiguous data or results
solely due to a change in date to or after January 1, 2000, and will
calculate any information dependent on such dates in the same manner, and
with the same functionality, data integrity and
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performance, as such products do on or before December 31, 1999
(collectively, "Year 2000 Compliance"). The Company will continue to analyze
and review its products for Year 2000 Compliance. The majority of the
Company's products are combined or used by its customers with other software
programs or hardware devices not provided by the Company. Such combination
with other products that are not Year 2000 compliant or modifications of the
Company's products by its customers may introduce Year 2000 Compliance issues
for its customers. The Company's customers' inability to remedy their Year
2000 issues could affect their demand for the Company's products, which may
have a material adverse effect on the Company's business, operating results,
and financial condition.
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 a material adverse effect on the Company's financial
position or results of operations.
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 will 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
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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 operating results. 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 will 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-TM- and VxWorks-Registered Trademark-
family of products and services accounted for a significant majority of the
Company's revenues in each of the fiscal
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years ended January 31, 1998, 1997 and 1996 and the six months ended July 31,
1998. 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.
COMPETITION
The embedded real-time software industry is highly competitive and is
characterized by rapidly advancing technology. Therefore, the Company's
ability to obtain such business is dependent upon its ability to offer better
strategic concepts and technical solutions, competitive prices, a quicker
response or a combination of these factors. There can be no assurance that
the Company will be able to effectively compete in each of these areas, and
any failure to compete in the embedded real-time software market would have a
material adverse effect on the Company's business, financial condition and
results of operations. 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 and the Company
is thus subject to the customers' "develop versus buy" decisions in addition
to the factors set forth above. 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
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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.
RISKS ASSOCIATED WITH NEW AND CHANGING MARKETS
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, a real-time operating system 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 has expended, and continues to expend,
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.
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RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS
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
operating system, 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 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.
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,
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are dependent on government funding, the continued availability of which is
uncertain. Although the Company's VME customers typically 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 operations 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 efficiently. 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, product development, marketing, sales,
customer support and operations functions to a new facility within the next
year. During fiscal 1998, the Company purchased real property in the City of
Alameda, California for $11.4 million. In fiscal 1998, the Company entered
into an operating lease agreement for its new headquarters facility being
constructed on such property. As of July 31, 1998, the lessor has funded a
total of $17.5 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. 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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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
During the six month period ended July 31, 1998 and the fiscal years ended
January 31, 1998, the Company derived approximately 32% 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. A portion of the
Company's international revenues are derived from the Asia Pacific region
including Japan. In recent months, economic uncertainty and related
weakening of foreign currencies, particularly the Japanese yen, against the
dollar, has occurred. As a result, the Company's future sales in this region
may be adversely affected which could have a material adverse effect on the
Company's business, results of operations and financial condition. 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, 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.
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RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company has recently completed the
acquisitions of Objective Software Technology, Ltd. and Zinc Software
Incorporated, has acquired equity interests in Emultek, Ltd. and 3Soft GmbH
and has also licensed certain technologies from Network Computer, Inc. The
Company expects to make additional 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
including, 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 material adverse effects resulting from any such errors to date,
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, 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's license and other agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential
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product liability and other claims, these provisions may not be effective in
all circumstances and in all jurisdictions. 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.
IMPACT OF THE YEAR 2000
Many older computer software programs use two digits in their date fields,
identifying years by the last two digits only. Such programs may interpret
the year 2000 as 1900 instead, causing such systems to fail after 1999.
Although the Company believes its products will not have such date-related
failures, it has not yet performed the testing and analysis necessary to
permit identification and correction of Year 2000 issues in its internal
computer and information systems and office equipment. There can be no
assurance that the Company will be able to identify and correct any such
problems successfully and in the requisite time frame. Year 2000 issues also
could affect the Company's suppliers and customers. Unresolved Year 2000
issues within the Company, its significant suppliers or customers could have
a material adverse effect on the Company's business, results of operations
and financial condition.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; 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
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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 products.
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. The Company has received in the past and may receive in
the future letters from third parties asserting infringement claims against
the Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future. Any such claims,
whether 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.
LEVERAGE
In connection with the sale of Convertible Subordinated Notes in fiscal 1998,
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
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financial, business and other factors affecting operations of the Company,
many of which are beyond its control.
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 would 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.
27
<PAGE>
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 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on June 25,
1998 in Alameda, California. Of the 26,074,460 shares outstanding as
of the record date, 23,663,963 were present or represented by proxy
at the meeting. The following matters were submitted to a vote of
the security holders:
(1) To elect the following to serve as Directors of the Company:
<TABLE>
<CAPTION>
Name For Withheld
---- --- --------
<S> <C> <C>
Jerry L. Fiddler 23,518,248 145,715
Ronald A. Abelmann 23,518,398 145,565
David Wilner 23,518,398 145,565
William B. Elmore 23,518,398 145,565
David B. Pratt 23,518,398 145,565
</TABLE>
(2) To approve an amendment to the Company's Certificate of Incorporation
to increase the number of shares of Common Stock that the Company is
authorized to issue from 75,000,000 to 125,000,000:
<TABLE>
<S> <C>
Votes for: 22,550,483
Votes against: 1,085,558
Votes abstaining: 27,922
</TABLE>
(3) To approve an amendment to the Company's 1998 Equity Incentive Plan
and the issuance of 1,000,000 shares of Common Stock:
<TABLE>
<S> <C>
Votes for: 18,246,218
Votes against: 5,372,623
Votes abstaining: 45,122
</TABLE>
28
<PAGE>
(4) To ratify the Company's appointment of PricewaterhouseCoopers LLP as
the Company's independent accountants for the fiscal year ending
January 31, 1999:
<TABLE>
<S> <C>
Votes for: 23,631,838
Votes against: 10,076
Votes abstaining: 22,049
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<S> <C>
10.22 1998 Equity Incentive Plan
10.23 Form of Option Agreement
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
None.
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: September 14, 1998 \s\ RICHARD W. KRABER
----------------------------
Richard W. Kraber
Chief Financial Officer
29
<PAGE>
EXHIBIT 10.22
WIND RIVER SYSTEMS, INC.
1998 EQUITY INCENTIVE PLAN
ADOPTED APRIL 23, 1998
APPROVED BY STOCKHOLDERS JUNE 25, 1998
TERMINATION DATE: APRIL 22, 2008
1. PURPOSES.
(a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive
Stock Awards are the Employees, Directors and Consultants of the Company and
its Affiliates.
(b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a
means by which eligible recipients of Stock Awards may be given an
opportunity to benefit from increases in value of the Common Stock through
the granting of the following Stock Awards: (i) Incentive Stock Options,
(ii) Nonstatutory Stock Options, (iii) stock appreciation rights, (iv) stock
bonuses and (v) rights to acquire restricted stock.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to
retain the services of the group of persons eligible to receive Stock Awards,
to secure and retain the services of new members of this group and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined
in Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c).
(e) "COMMON STOCK" means the common stock of the Company.
(f) "COMPANY" means Wind River Systems, Inc., a Delaware corporation.
(g) "CONSULTANT" means any person, including an advisor, (1) engaged
by the Company or an Affiliate to render consulting or advisory services and
who is compensated for such services or (2) who is a member of the Board of
Directors of an Affiliate. However, the term "Consultant" shall not include
either Directors of the Company who are not compensated by the Company for
their services as Directors or Directors of the Company who are merely paid
a director's fee by the Company for their services as Directors.
<PAGE>
(h) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is
not interrupted or terminated. The Participant's Continuous Service shall
not be deemed to have terminated merely because of a change in the capacity
in which the Participant renders service to the Company or an Affiliate as an
Employee, Consultant or Director or a change in the entity for which the
Participant renders such service, provided that there is no interruption or
termination of the Participant's Continuous Service. For example, a change
in status from an Employee of the Company to a Consultant of an Affiliate or
a Director of the Company will not constitute an interruption of Continuous
Service. The Board or the chief executive officer of the Company, in that
party's sole discretion, may determine whether Continuous Service shall be
considered interrupted in the case of any leave of absence approved by that
party, including sick leave, military leave or any other personal leave.
(i) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange
Act, as determined for purposes of Section 162(m) of the Code.
(j) "DIRECTOR" means a member of the Board of Directors of the Company.
(k) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person employed by the Company or an
Affiliate. Mere service as a Director or payment of a director's fee by the
Company or an Affiliate shall not be sufficient to constitute "employment" by
the Company or an Affiliate.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock 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 the Common Stock) on the last market 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.
(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
<PAGE>
(p) "NON-EMPLOYEE DIRECTOR" means a Director of the Company who either
(i) is not a current Employee or Officer of the Company or its parent or a
subsidiary, does not receive compensation (directly or indirectly) from the
Company or its parent or a subsidiary for services rendered as a consultant
or in any capacity other than as a Director (except for an amount as to which
disclosure would not be required under Item 404(a) of Regulation S-K of the
Securities and Exchange Commission ("Regulation S-K")), does not possess an
interest in any other transaction as to which disclosure would be required
under Item 404(a) of Regulation S-K and is not engaged in a business
relationship as to which disclosure would be required under Item 404(b) of
Regulation S-K; or (ii) is otherwise considered a "non-employee director" for
purposes of Rule 16b-3.
(q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(r) "OFFICER" means 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.
(s) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option granted pursuant to the Plan.
(t) "OPTION AGREEMENT" means 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.
(u) "OPTIONEE" means a person to whom an Option is granted pursuant to
the Plan or, if applicable, such other person who holds an outstanding Option.
(v) "OUTSIDE DIRECTOR" means a Director of the Company who either (i)
is not a current employee of the Company or an "affiliated corporation"
(within the meaning of Treasury Regulations promulgated under Section 162(m)
of the Code), is not a former employee of the Company or an "affiliated
corporation" receiving compensation for prior services (other than benefits
under a tax qualified pension plan), was not an officer of the Company or an
"affiliated corporation" at any time and is not currently receiving direct or
indirect remuneration from the Company or an "affiliated corporation" for
services in any capacity other than as a Director or (ii) is otherwise
considered an "outside director" for purposes of Section 162(m) of the Code.
(w) "PARTICIPANT" means a person to whom a Stock Award is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Stock Award.
(x) "PLAN" means this Wind River Systems, Inc. 1998 Equity Incentive
Plan.
(y) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.
(z) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(aa) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock appreciation right, a stock bonus and a right to acquire
restricted stock.
<PAGE>
(bb) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of
an individual Stock Award grant. Each Stock Award Agreement shall be subject
to the terms and conditions of the Plan.
(cc) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to
own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of
the Company or of any of its Affiliates.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board will administer the Plan unless
and until the Board delegates administration to a Committee, as provided in
subsection 3(c).
(b) POWERS OF BOARD. The board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible under
the Plan shall be granted Stock Awards; when and how each Stock Award shall
be granted; what type or combination of types of Stock Award shall be
granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive stock pursuant to a Stock Award; and the number of shares with
respect to which a Stock Award shall be granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award
Agreement, in a manner and to the extent it shall deem necessary or expedient
to make the Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section 12.
(iv) Generally, to exercise such powers and to perform such acts as the
Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) DELEGATION TO COMMITTEE.
<PAGE>
(i) GENERAL. The Board may delegate administration of the Plan to a
Committee or Committees of one or more members of the Board, and the term
"Committee" shall apply to any person or persons to whom such authority has
been delegated. If administration is delegated to a Committee, the
Committee shall have, in connection with the administration of the Plan, the
powers theretofore possessed by the Board, including the power to delegate to
a subcommittee any of the administrative powers the Committee is authorized
to exercise (and references in this Plan to the Board shall thereafter be to
the Committee or subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and
revest in the Board the administration of the Plan.
(ii) COMMITTEE COMPOSITION. As long as the Common Stock is publicly
traded, in the discretion of the Board, a Committee may consist solely of two
or more Outside Directors, in accordance with Section 162(m) of the Code,
and/or solely of two or more Non-Employee Directors, in accordance with Rule
16b-3. Within the scope of such authority, the Board or the Committee may
(i) delegate to a committee of one or more members of the Board who are not
Outside Directors, the authority to grant Stock Awards to eligible persons
who are either (a) not then Covered Employees and are not expected to be
Covered Employees at the time of recognition of income resulting from such
Stock Award or (b) not persons with respect to whom the Company wishes to
comply with Section 162(m) of the Code and/or (ii) delegate to a committee of
one or more members of the Board who are not Non-Employee Directors the
authority to grant Stock Awards to eligible persons who are not then subject
to Section 16 of the Exchange Act.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in stock, the stock that may be issued pursuant to
Stock Awards shall not exceed in the aggregate one million (1,000,000) shares
of Common Stock.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall
for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full (or vested in the case of Restricted Stock),
the stock not acquired under such Stock Award shall revert to and again
become available for issuance under the Plan. Shares subject to stock
appreciation rights exercised in accordance with the Plan shall not be
available for subsequent issuance under the Plan. If any Common Stock
acquired pursuant to the exercise of an Option shall for any reason be
repurchased by the Company under an unvested share repurchase option provided
under the Plan, the stock repurchased by the Company under such repurchase
option shall not revert to and again become available for issuance under the
Plan.
(c) SOURCE OF SHARES. The stock subject to the Plan may be unissued
shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may
be granted only to Employees. Stock Awards other than Incentive Stock
Options may be granted to Employees, Directors and Consultants.
<PAGE>
(b) TEN PERCENT STOCKHOLDERS. No Ten Percent Stockholder shall be
eligible for the grant of an Incentive Stock Option unless the exercise price
of such Option is at least one hundred ten percent (110%) of the Fair Market
Value of the Common Stock at the date of grant and the Option is not
exercisable after the expiration of five (5) years from the date of grant.
(c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11
relating to adjustments upon changes in stock, no employee shall be eligible
to be granted Options covering more than seven hundred fifty thousand
(750,000) shares of the Common Stock during any calendar year.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be
separately designated Incentive Stock Options or Nonstatutory Stock Options
at the time of grant, and a separate certificate or certificates will be
issued for shares purchased on exercise of each type of Option. The
provisions of separate Options need not be identical, but each Option shall
include (through incorporation of provisions hereof by reference in the
Option or otherwise) the substance of each of the following provisions:
(a) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Incentive Stock Option shall be exercisable after
the expiration of ten (10) years from the date it was granted.
(b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the
exercise price of each Incentive Stock Option shall be not less than one
hundred percent (100%) of the Fair Market Value of the stock subject to the
Option on the date the Option is granted. Notwithstanding the foregoing, an
Incentive Stock 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.
(c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. The exercise price
of each Nonstatutory Stock Option shall be not less than eighty-five percent
(85%) of the Fair Market Value of the stock subject to the Option on the date
the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock
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.
<PAGE>
(d) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii)
at the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Nonstatutory Stock Option) by delivery to the
Company of other Common Stock, according to a deferred payment or other
arrangement (which may include, without limiting the generality of the
foregoing, the use of other Common Stock) with the Participant or in any
other form of legal consideration that may be acceptable to the Board;
provided, however, that at any time that the Company is incorporated in
Delaware, payment of the Common Stock's "par value," as defined in the
Delaware General Corporation Law, shall not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be
interest under the deferred payment arrangement.
(e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionee
only by the Optionee. Notwithstanding the foregoing provisions of this
subsection 6(e), 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.
(f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory
Stock Option shall be transferable to the extent provided in the Option
Agreement. If the Nonstatutory Stock Option does not provide for
transferability, then the Nonstatutory Stock Option shall not be transferable
except by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the Optionee only by the Optionee.
Notwithstanding the foregoing provisions of this subsection 6(f), 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.
(g) VESTING GENERALLY. The total number of shares of Common Stock
subject to an Option may, but need not, vest and therefore become exercisable
in periodic installments which may, but need not, be equal. 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 vesting provisions of individual Options may
vary. The provisions of this subsection 6(g) are subject to any Option
provisions governing the minimum number of shares as to which an Option may
be exercised.
(h) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionee's
Continuous Service terminates (other than upon the Optionee's death or
Disability), the Optionee may exercise his or her Option (to the extent that
the Optionee was entitled to exercise it as of the date of termination) but
only within such period of time ending on the earlier of (i) the date three
(3) months following the termination of the Optionee's Continuous Service (or
such longer or shorter period specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement.
If, after termination, the Optionee does not exercise his or her Option
within the time specified in the Option Agreement, the Option shall terminate.
<PAGE>
(i) EXTENSION OF TERMINATION DATE. An Optionee's Option Agreement may
also provide that if the exercise of the Option following the termination of
the Optionee's Continuous Service (other than upon the Optionee's death or
Disability) would be prohibited at any time solely because the issuance of
shares would violate the registration requirements under the Securities Act,
then the Option shall terminate on the earlier of (i) the expiration of the
term of the Option set forth in subsection 6(a) or (ii) the expiration of a
period of three (3) months after the termination of the Optionee's Continuous
Service during which the exercise of the Option would not be in violation of
such registration requirements.
(j) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Service terminates as a result of the Optionee's Disability, the Optionee may
exercise his or her Option (to the extent that the Optionee was entitled to
exercise it as of the date of termination), but only within such period of
time ending on the earlier of (i) the date twelve (12) months following such
termination (or such longer or shorter period specified in the Option
Agreement) or (ii) the expiration of the term of the Option as set forth in
the Option Agreement. If, after termination, the Optionee does not exercise
his or her Option within the time specified herein, the Option shall
terminate.
(k) DEATH OF OPTIONEE. In the event (i) an Optionee's Continuous
Service terminates as a result of the Optionee's death or (ii) the Optionee
dies within the period (if any) specified in the Option Agreement after the
termination of the Optionee's Continuous Service for a reason other than
death, then the Option may be exercised (to the extent the Optionee was
entitled to exercise the Option as of the date of death) by the Optionee's
estate, by a person who acquired the right to exercise the Option by bequest
or inheritance or by a person designated to exercise the option upon the
Optionee's death pursuant to subsection 6(e) or 6(f), but only within the
period ending on the earlier of (1) the date eighteen (18) months following
the date of death (or such longer or shorter period specified in the Option
Agreement) or (2) the expiration of the term of such Option as set forth in
the Option Agreement. If, after death, the Option is not exercised within
the time specified herein, the Option shall terminate.
(l) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time before the Optionee's Continuous
Service terminates to exercise the Option as to any part or all of the shares
subject to the Option prior to the full vesting of the Option. Any unvested
shares so purchased may be subject to an unvested share repurchase option in
favor of the Company or to any other restriction the Board determines to be
appropriate.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such
form and shall contain such terms and conditions as the Board shall deem
appropriate. The terms and conditions of stock bonus agreements may change
from time to time, and the terms and conditions of separate stock bonus
agreements need not be identical, but each stock bonus agreement shall
include (through incorporation of provisions hereof by reference in the
agreement or otherwise) the substance of each of the following provisions:
(i) CONSIDERATION. A stock bonus shall be awarded in consideration for
past services actually rendered to the Company or for its benefit.
<PAGE>
(ii) VESTING. Shares of Common Stock awarded under the stock bonus
agreement may, but need not, be subject to a share repurchase option in favor
of the Company in accordance with a vesting schedule to be determined by the
Board.
(iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event a
Participant's Continuous Service terminates, the Company may reacquire any or
all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the stock bonus
agreement.
(iv) TRANSFERABILITY. Rights to acquire shares under the stock bonus
agreement shall be transferable by the Participant only upon such terms and
conditions as are set forth in the stock bonus agreement, as the Board shall
determine in its discretion, so long as stock awarded under the stock bonus
agreement remains subject to the terms of the stock bonus agreement.
(b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement
shall be in such form and shall contain such terms and conditions as the
Board shall deem appropriate. The terms and conditions of the restricted
stock purchase agreements may change from time to time, and the terms and
conditions of separate restricted stock purchase agreements need not be
identical, but each restricted stock purchase agreement shall include
(through incorporation of provisions hereof by reference in the agreement or
otherwise) the substance of each of the following provisions:
(i) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. The purchase price
shall not be less than eighty-five percent (85%) of the stock's Fair Market
Value on the date such award is made or at the time the purchase is
consummated.
(ii) CONSIDERATION. The purchase price of stock acquired pursuant to
the restricted stock purchase agreement shall be paid either: (i) in cash at
the time of purchase; (ii) at the discretion of the Board, according to a
deferred payment or other arrangement with the Participant; or (iii) in any
other form of legal consideration that may be acceptable to the Board in its
discretion; provided, however, that at any time that the Company is
incorporated in Delaware, payment of the Common Stock's "par value," as
defined in the Delaware General Corporation Law, shall not be made by
deferred payment.
(iii) VESTING. Shares of Common Stock acquired under the restricted
stock purchase agreement may, but need not, be subject to a share repurchase
option in favor of the Company in accordance with a vesting schedule to be
determined by the Board.
(iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event a
Participant's Continuous Service terminates, the Company may repurchase or
otherwise reacquire any or all of the shares of Common Stock held by the
Participant which have not vested as of the date of termination under the
terms of the restricted stock purchase agreement.
<PAGE>
(v) TRANSFERABILITY. Rights to acquire shares under the restricted
stock purchase agreement shall be transferable by the Participant only upon
such terms and conditions as are set forth in the restricted stock purchase
agreement, as the Board shall determine in its discretion, so long as stock
awarded under the restricted stock purchase agreement remains subject to the
terms of the restricted stock purchase agreement.
(c) STOCK APPRECIATION RIGHTS.
(i) AUTHORIZED RIGHTS. The following three types of stock appreciation
rights shall be authorized for issuance under the Plan:
(1) TANDEM RIGHTS. A "Tandem Right" means a stock appreciation right
granted appurtenant to an Option which is subject to the same terms and
conditions applicable to the particular Option grant to which it pertains
with the following exceptions: The Tandem Right shall require the holder to
elect between the exercise of the underlying Option for shares of Common
Stock and the surrender, in whole or in part, of such Option for an
appreciation distribution. The appreciation distribution payable on the
exercised the Tandem Right shall be in cash (or, if so provided, in an
equivalent number of shares of Common Stock based on Fair Market Value on the
date of the Option surrender) in an amount up to the excess of (A) the Fair
Market Value (on the date of the Option surrender) of the number of shares of
Common Stock covered by that portion of the surrendered Option in which the
Optionee is vested over (B) the aggregate exercise price payable for such
vested shares.
(2) CONCURRENT RIGHTS. A "Concurrent Right" means a stock appreciation
right granted appurtenant to an Option which applies to all or a portion of
the shares of Common Stock subject to the underlying Option and which is
subject to the same terms and conditions applicable to the particular Option
grant to which it pertains with the following exceptions: A Concurrent Right
shall be exercised automatically at the same time the underlying Option is
exercised with respect to the particular shares of Common Stock to which the
Concurrent Right pertains. The appreciation distribution payable on an
exercised Concurrent Right shall be in cash (or, if so provided, in an
equivalent number of shares of Common Stock based on Fair Market Value on the
date of the exercise of the Concurrent Right) in an amount equal to such
portion as determined by the Board at the time of the grant of the excess of
(A) the aggregate Fair Market Value (on the date of the exercise of the
Concurrent Right) of the vested shares of Common Stock purchased -under the
underlying Option which have Concurrent Rights appurtenant to them over (B)
the aggregate exercise price paid for such shares. <PAGE>
<PAGE>
(3) INDEPENDENT RIGHTS. An "Independent Right" means a stock
appreciation right granted independently of any Option but which is subject
to the same terms and conditions applicable to a Nonstatutory Stock Option
with the following exceptions: An Independent Right shall be denominated in
share equivalents. The appreciation distribution payable on the exercised
Independent Right shall be not greater than an amount equal to the excess of
(a) the aggregate Fair Market Value (on the date of the exercise of the
Independent Right) of a number of shares of Company stock equal to the number
of share equivalents in which the holder is vested under such Independent
Right, and with respect to which the holder is exercising the Independent
Right on such date, over (b) the aggregate Fair Market Value (on the date of
the grant of the Independent Right) of such number of shares of Company
stock. The appreciation distribution payable on the exercised Independent
Right shall be in cash or, if so provided, in an equivalent number of shares
of Common Stock based on Fair Market Value on the date of the exercise of the
Independent Right.
(ii) RELATIONSHIP TO OPTIONS. Stock appreciation rights appurtenant to
Incentive Stock Options may be granted only to Employees. The "Section
162(m) Limitation" provided in subsection 5(c) and any authority to reprice
Options shall apply as well to the grant of stock appreciation rights.
(iii) EXERCISE. To exercise any outstanding stock appreciation right,
the holder shall provide written notice of exercise to the Company in
compliance with the provisions of the Stock Award Agreement evidencing such
right. Except as provided in subsection 5(c) regarding the "Section 162(m)
Limitation," no limitation shall exist on the aggregate amount of cash
payments that the Company may make under the Plan in connection with the
exercise of a stock appreciation right.
8. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common
Stock required to satisfy such Stock Awards.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to issue and sell
shares of Common Stock upon exercise of the Stock Awards; provided, however,
that this undertaking shall not require the Company to register under the
Securities Act the Plan, any Stock Award or any stock issued or issuable
pursuant to any such Stock Award. If, after reasonable efforts, the Company
is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful
issuance and sale of stock under the Plan, the Company shall be relieved from
any liability for failure to issue and sell stock upon exercise of such Stock
Awards unless and until such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have
the power to accelerate the time at which a Stock Award may first be
exercised or the time during which a Stock Award or any part thereof will
vest in accordance with the Plan, notwithstanding the provisions in the Stock
Award stating the time at which it may first be exercised or the time during
which it will vest.
<PAGE>
(b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any
shares subject to such Stock Award unless and until such Participant has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant or other holder of Stock Awards any right to continue to
serve the Company or an Affiliate in the capacity in effect at the time the
Stock Award was granted or shall affect the right of the Company or an
Affiliate to terminate (i) the employment of an Employee with or without
notice and with or without cause, (ii) the service of a Consultant pursuant
to the terms of such Consultant's agreement with the Company or an Affiliate
or (iii) the service of a Director pursuant to the Bylaws of the Company or
an Affiliate, and any applicable provisions of the corporate law of the state
in which the Company or the Affiliate is incorporated, as the case may be.
(d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of stock with
respect to which Incentive Stock Options are exercisable for the first time
by any Optionee during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options
or portions thereof which exceed such limit (according to the order in which
they were granted) shall be treated as Nonstatutory Stock Options.
(e) INVESTMENT ASSURANCES. The Company may require a Participant, as a
condition of exercising or acquiring stock under any Stock Award, (i) to give
written assurances satisfactory to the Company as to the Participant's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he
or she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (ii)
to give written assurances satisfactory to the Company stating that the
Participant is acquiring the stock subject to the Stock Award for the
Participant's own account and not with any present intention of selling or
otherwise distributing the stock. The foregoing requirements, and any
assurances given pursuant to such requirements, shall be inoperative if (iii)
the issuance of the shares upon the exercise or acquisition of stock under
the Stock Award has been registered under a then currently effective
registration statement under the Securities Act or (iv) as to any particular
requirement, a determination is made by counsel for the Company that such
requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company,
place legends on stock certificates issued under the Plan as such counsel
deems necessary or appropriate in order to comply with applicable securities
laws, including, but not limited to, legends restricting the transfer of the
stock.
<PAGE>
(f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or
local tax withholding obligation relating to the exercise or acquisition of
stock under a Stock Award by any of the following means (in addition to the
Company's right to withhold from any compensation paid to the Participant 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 of the Common
Stock otherwise issuable to the participant as a result of the exercise or
acquisition of stock under the Stock Award; or (iii) delivering to the
Company owned and unencumbered shares of the Common Stock.
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 in the election of directors, which
acquisition has not been approved by resolution of the
<PAGE>
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 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.
17. AMENDMENT OF THE PLAN AND STOCK AWARDS.
<PAGE>
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time,
may amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder
approval is necessary to satisfy the requirements of Section 422 of the Code,
Rule 16b-3 or any Nasdaq or securities exchange listing requirements.
(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion,
submit any other amendment to the Plan for stockholder approval, including,
but not limited to, amendments to the Plan intended to satisfy the
requirements of Section 162(m) of the Code and the regulations thereunder
regarding the exclusion of performance-based compensation from the limit on
corporate deductibility of compensation paid to certain executive officers.
(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the
Board may amend the Plan in any respect the Board deems necessary or
advisable to provide eligible Employees with the maximum benefits provided or
to be provided under the provisions of the Code and the regulations
promulgated thereunder relating to Incentive Stock Options and/or to bring
the Plan and/or Incentive Stock Options granted under it into compliance
therewith.
(d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted
before amendment of the Plan shall not be impaired by any amendment of the
Plan unless (i) the Company requests the consent of the Participant and (ii)
the Participant consents in writing.
(e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
18. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate on the day before
the tenth (10th) anniversary of the date the Plan is adopted by the Board or
approved by the stockholders of the Company, whichever is earlier. No Stock
Awards may be granted under the Plan while the Plan is suspended or after it
is terminated.
(b) NO IMPAIRMENT OF RIGHTS. Rights and obligations under any Stock
Award granted while the Plan is in effect shall not be impaired by suspension
or termination of the Plan, except with the written consent of the
Participant.
19. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Award shall be exercised (or, in the case of a stock bonus, shall be granted)
unless and until the Plan has been approved by the stockholders of the
Company, which approval shall be within twelve (12) months before or after
the date the Plan is adopted by the Board.
<PAGE>
EXHIBIT 10.23
WIND RIVER SYSTEMS, INC.
NONSTATUTORY STOCK OPTION
(1998 EQUITY PLAN)
_________________________, Optionee:
WIND RIVER SYSTEMS, INC. (the "Company"), pursuant to its 1998 EQUITY
INCENTIVE PLAN (the "Plan"), has granted to you, the optionee named above, an
option to purchase shares of the common stock of the Company ("Common
Stock"). This option is not intended to qualify as and will not be treated as
an "incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
The details of your option are as follows:
1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of
shares of Common Stock subject to this option is ____________________
(______).
2. VESTING. Subject to the limitations contained herein, 1/4th of the
shares covered by this option will vest (become exercisable) on ____________,
19__ (12 months after the date of grant) and 1/48th of the shares will then
vest each month thereafter until either (i) you cease to provide services to
the Company for any reason, or (ii) this option becomes fully vested.
3. EXERCISE PRICE AND METHOD OF PAYMENT.
(a) EXERCISE PRICE. The exercise price of this option is
_______________________ ($____) per share, being not less than 85% of the
fair market value of the Common Stock on the date of grant of this option.
(b) METHOD OF PAYMENT. Payment of the exercise price per share is
due in full upon exercise of all or any part of each installment that has
accrued to you. You may elect, to the extent permitted by applicable
statutes and regulations, to make payment of the exercise price under one of
the following alternatives:
(i) Payment of the exercise price per share in cash
(including check) at the time of exercise;
(ii) 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 irrevocable instructions to pay the aggregate exercise
price to the Company from the sales proceeds;
(iii) Provided that at the time of exercise the Company's
Common Stock is publicly traded and quoted regularly in the Wall Street
Journal, payment by delivery of already-owned shares of Common Stock, held
for the period required to avoid a charge to the Company's reported earnings,
and owned free and clear of any liens, claims, encumbrances or
- 1 -
<PAGE>
security interests, which Common Stock shall be valued at its fair market
value on the date of exercise; or
(iv) Payment by a combination of the methods of payment
permitted by subsection 3(b)(i) through 3(b)(ii) above.
4. WHOLE SHARES. This option may not be exercised for any number of
shares that would require the issuance of anything other than whole shares.
5. SECURITIES LAW COMPLIANCE. 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 "Securities 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 Securities
Act.
6. TERM. The term of this option commences on __________, 19__, the
date of grant, and expires at midnight on ______________________ (the
"Expiration Date," which is the day before the tenth anniversary from the
date of grant), unless this option expires sooner as set forth below or in
the Plan. In no event may this option be exercised on or after the
Expiration Date. This option shall terminate prior to the Expiration Date of
its term as follows: three (3) months after the termination of your
Continuous Status as an Employee, Director or Consultant (as defined in the
Plan) with the Company or an Affiliate of the Company unless one of the
following circumstances exists:
(a) If your termination of Continuous Status as an Employee,
Director or Consultant is due to your permanent and total disability (within
the meaning of Section 422(c)(6) of the Code), then this option will then
expire on the earlier of the Expiration Date set forth above or twelve (12)
months following such termination.
(b) If your termination of Continuous Status as an Employee,
Director or Consultant is due to your death or your death occurs within three
(3) months following such termination, then this option will then expire on
the earlier of the Expiration Date set forth above or eighteen (18) months
after your death.
(c) If during any part of such three (3) month period you may not
exercise your option solely because of the condition set forth in Section 5
above, then your option will not expire until the earlier of the Expiration
Date set forth above or until this option shall have been exercisable for an
aggregate period of three (3) months after your termination of Continuous
Status as an Employee, Director or Consultant.
However, this option may be exercised following termination of
Continuous Status as an Employee, Director or Consultant only as to that number
of shares as to which it was exercisable on the date of such termination under
the schedule set forth in Section 2 of this option.
- 2 -
<PAGE>
7. EXERCISE.
(a) This option may be exercised, to the extent specified above,
by delivering a notice of exercise (in a form designated by the Company)
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 subsection 10(e) of the Plan.
(b) By exercising this option you agree that, as a precondition to
the completion of any exercise of this option, the Company may require you to
enter an arrangement providing for the payment by you to the Company of any
tax withholding obligation of the Company arising by reason of (1) the
exercise of this option; (2) the lapse of any substantial risk of forfeiture
to which the shares are subject at the time of exercise; or (3) the
disposition of shares acquired upon such exercise.
8. TRANSFERABILITY. 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. Notwithstanding the foregoing, by delivering written
notice to the Company, in a form satisfactory to the Company, you may
designate a third party who, in the event of your death, shall thereafter be
entitled to exercise this option.
9. OPTION NOT A SERVICE CONTRACT. This option is not an employment
contract and nothing in this option shall be deemed to create in any way
whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in this option shall obligate the Company or
any Affiliate of the Company, or their respective stockholders, Board of
Directors, officers or employees to continue any relationship that you might
have as a Director or Consultant for the Company or Affiliate.
10. NOTICES. 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.
11. CHANGE OF CONTROL.
(a) 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
- 3 -
<PAGE>
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.
(b) 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 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. GOVERNING PLAN DOCUMENT. This option is subject to all the
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 Section 6 of the Plan relating to option provisions and Section
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.
- 4 -
<PAGE>
Dated the ____ day of __________________, 19__.
Very truly yours,
WIND RIVER SYSTEMS, INC.
By: ___________________________________
Duly authorized on behalf
of the Board of Directors
ATTACHMENTS:
Wind River Systems, Inc. 1998 Equity Incentive Plan
Notice of Exercise
- 5 -
<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; and
(b) 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
under this option and supersedes all prior oral and written agreements on
that subject with the exception of (i) the options previously granted and
delivered to the undersigned under stock option plans of the Company, and
(ii) the following agreements only:
NONE __________________
(Initial)
OTHER __________________________________
__________________________________
__________________________________
_____________________________________________
OPTIONEE
Address: ____________________________________
_____________________________________________
- 6 -
<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 REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 39,805
<SECURITIES> 14,366
<RECEIVABLES> 22,512
<ALLOWANCES> 1,535
<INVENTORY> 0
<CURRENT-ASSETS> 80,135
<PP&E> 41,259
<DEPRECIATION> 13,309
<TOTAL-ASSETS> 296,156
<CURRENT-LIABILITIES> 35,165
<BONDS> 140,000
0
0
<COMMON> 27
<OTHER-SE> 120,406
<TOTAL-LIABILITY-AND-EQUITY> 296,156
<SALES> 23,169
<TOTAL-REVENUES> 31,200
<CGS> 2,337
<TOTAL-COSTS> 5,568
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,223
<INCOME-PRETAX> 9,630
<INCOME-TAX> 3,699
<INCOME-CONTINUING> 5,931
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,931
<EPS-PRIMARY> 0.23<F1>
<EPS-DILUTED> 0.21
<FN>
<F1>Item consists of basic earnings per share.
</FN>
</TABLE>
