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ANNUAL REPORT AND FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21342
WIND RIVER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2873391
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
500 Wind River Way, Alameda, California 94501
(510) 748-4100
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of April 15, 1999 was $483,944,000. This calculation does not
reflect a determination that persons are affiliates for any other purposes.
Number of shares of Common Stock outstanding as of April 15, 1999: 41,756,000
DOCUMENTS INCORPORATED BY REFERENCE:
Part III - Portions of the registrant's definitive proxy statement to be
issued in conjunction with registrant's annual stockholders' meeting to be
held on June 24, 1999 are incorporated by reference into Part III of this
Form 10-K.
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TABLE OF CONTENTS
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Part I Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 4A. Executive Officers of the Registrant 18
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Part II Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 19
Item 6. Selected Consolidated Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 32
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 34
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Part III Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial Owners
and Management 53
Item 13. Certain Relationships and Related Transactions 53
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Part IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 54
Signatures 57
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PART I
This report contains forward-looking statements. In some cases, these
statements may be identified by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of such terms and other comparable
expressions. These statements involve known and unknown risks and
uncertainties that may cause the results, levels of activity, performance or
achievements of Wind River Systems, Inc. or its industry to be materially
different from those expressed or implied by the forward-looking statements.
Factors that may cause or contribute to such differences include, but are not
limited to, Wind River's ability to compete successfully in its industry, to
continue to develop products for new and rapidly changing markets, to
integrate acquired businesses and technologies and others discussed below and
under the captions "Additional Risk Factors" and "Management's Discussion and
Analysis of Financial Conditions and Results of Operations." Wind River
disclaims any obligation to update any of the forward-looking statements
contained in this report to reflect any future events or developments.
ITEM 1.
BUSINESS
Wind River Systems, Inc. ("Wind River") develops, markets, supports and
provides consulting services for advanced software operating systems and
development tools that allow customers to create complex, robust, real-time
software applications for embedded computers. An embedded computer is a
microprocessor that is incorporated into a larger device and is dedicated to
responding to external events by performing specific tasks quickly,
predictably, and reliably. Some examples of embedded computers are
telecommunications products such as PBXs, routers, central office switches,
and call processing systems; office products such as fax machines, laser
printers, and photocopiers; vehicle anti-lock brakes and navigation systems;
consumer products such as digital cameras, camcorders, video games, and
set-top boxes; medical instrumentation and imaging systems; industrial
automation equipment such as robots and process control equipment; and
aerospace products used for projects such as NASA's on-going missions to
Mars. Wind River's flagship product, TORNADO-TM-, enables customers to
enhance product performance, standardize designs across projects, reduce
research and development costs, and shorten product development cycles.
Wind River markets its products and services in North America and Europe
primarily through its own direct sales organization, which consists of
salespersons and field engineers. Wind River has eighteen licensed
international distributors principally to serve customers in regions not
serviced by its direct sales force or its Japanese master distributors. Wind
River's customers include Boeing Company, Cisco Systems, Inc., Ericsson Radio
Systems AB, General Motors Corporation, Hewlett-Packard Company, Hitachi,
Ltd., Hughes Aircraft Company, Lucent Technologies Inc., Intel Corporation,
Lockheed-Martin Corporation, McDonnell Douglas Corporation, Mitsubishi
Electric Corporation, Motorola, Inc., Network Computer, Inc., Nippon Electric
Corporation, Northern Telecom Ltd., Raytheon Company, Siemens AG, Sun
Microsystems, Inc., and TRW Inc.
Wind River is an ISO 9001 certified company. Wind River was incorporated in
California in February 1983 and reincorporated in Delaware in April 1993. Its
principal executive offices are located at 500 Wind River Way, Alameda,
California 94501, and its telephone number at that location is (510) 748-4100.
BACKGROUND
Embedded systems consist of a microprocessor and related software
incorporated into a larger device, dedicated to performing a specific set of
tasks. Embedded systems provide an immediate, predictable response to an
unpredictable sequence of external events. As more powerful microprocessors
have become available and have decreased in price, embedded systems are being
used in a wider range of applications and digital appliances and are
facilitating the development of entirely new products. In addition, emerging
Embedded Internet-Registered Trademark- applications for interactive
entertainment, network computers, remote maintenance, and other areas may
offer significant additional opportunities for embedded systems.
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To succeed in today's increasingly competitive markets, manufacturers using
embedded computers must bring complex applications for embedded systems to
market rapidly and economically. Developing real-time embedded software
applications has evolved from a relatively modest programming task to a
complex engineering effort. As more powerful and affordable 32-bit
microprocessors have become available, products based on them have become
richer in features and functions. In addition, the complexity of embedded
software is increasing dramatically, while the time available for product
development is decreasing. More sophisticated development tools are required
to develop these more complex applications, frequently including a real-time
operating system ("RTOS") that provides developers far more features, higher
performance and greater productivity than that necessary or feasible for
programming prior generations of microprocessors. Wind River's flexible
operating systems and powerful development tools allow customers to create
and standardize complex real-time embedded software applications quickly and
efficiently.
As real-time embedded applications increase in complexity, the costs
associated with providing software development, support and training of
engineers are rising rapidly. In addition, time-to-market, conformance to
standards, and product reliability have become critical issues for companies
developing real-time embedded applications.
PRODUCTS
Wind River's operating systems and development tools allow customers to
create complex real-time embedded software applications more quickly, more
economically and with less risk than creating such applications using
internally developed systems and tools. Wind River typically charges a
one-time fee for a development license and a run-time license fee for each
copy of its operating system embedded in the customer's product. A key
component of Wind River's strategy is to significantly increase revenue
through run-time license fees. Any increase in the percentage of revenues
attributable to run-time licenses will depend on Wind River's successful
negotiation of run-time license agreements and on the successful
commercialization by its customers of the underlying products.
TORNADO
TORNADO is a development environment for embedded applications and is
available for UNIX, Windows NT, Windows 95, and Windows 98 development
platforms. TORNADO was introduced in September 1995 and subsequently won the
Electronic Design News award for Innovation of the Year. In November 1998,
Wind River introduced TORNADO II. TORNADO II provides significant technical
advances for accelerated productivity, advanced networking connectivity, and
a platform for HTML, Java, and C++ graphics development.
TORNADO is a scalable cross-development environment that enables engineers to
develop embedded applications on a host workstation or PC and download the
code via a network or other communications channel to an RTOS that runs on
all significant 32- and 64- bit embedded target microprocessors.
TORNADO consists of three integrated components: the TORNADO toolset, a set
of cross-development tools and utilities; the VXWORKS-Registered
Trademark-run-time system, a high performance, scalable RTOS that executes on
the target processor; and a full range of communications options for the
target connection to the host.
The TORNADO development toolset consists of a launcher, a GNU compiler for C
and C++ programs, a remote source level debugger, a user-interface shell, a
browser, and a variety of other software tools that run on the development
host. TORNADO also offers a completely open and extensible environment that
facilitates the integration of a wide variety of third-party tools as well as
the customization of TORNADO tools by the developer.
A set of application program interfaces ("APIs") is available and published
on the Internet for reference, from the graphical user interface ("GUI") to
the connection implementation. Wind River believes that this open environment
may make TORNADO the development foundation of choice for embedded and
real-time applications.
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VXWORKS-Registered Trademark- is a high-performance, scalable RTOS based on
an object-oriented microkernel architecture that can form the foundation for
memory-constrained applications as small as 20 kilobytes or support large,
complex applications. The run-time system offers over 1,100 utility routines
such as buffer and list management for accelerating application development.
VXWORKS provides broad portability over a wide variety of commercial
processors and custom target hardware boards and adheres to a variety of
computing standards, including POSIX 1003.1/1b, ANSI C, and TCP/IP.
For communications between the development platform and the embedded target,
TORNADO provides a variety of options, including Ethernet, serial line,
in-circuit emulator, ROM emulator, or custom backend. TORNADO eliminates
many of the dependencies of a traditional cross-development environment. With
TORNADO, developers can use any host-target communications and the
capabilities of the toolset remain the same regardless of target processor
resources.
GRAPHICS PORTFOLIO
Wind River's comprehensive portfolio of graphics solutions makes it possible
to incorporate graphical user interfaces and to render, or display, rich
graphical content on traditional embedded devices and leading-edge
information appliances. Examples of products employing Wind River's graphics
solutions include process visualization terminals, front panels for digital
imaging devices, instrumentation and medical equipment, point-of-sale
terminals and information kiosks, as well as graphics and Internet-centric
devices such as screen phones, television set-top boxes, and car navigation
systems. The graphics portfolio addresses the diverse graphics requirements
of embedded computers with four core, standards-based solutions: PERSONAL
JWORKS-TM- (Wind River's port of Sun Microsystems' PersonalJava
specification), Wind River's version of NCI's eNavigator-TM- (ENAVIGATOR),
HTMLWORKS-TM-, and ZINC-Registered Trademark- FOR VXWORKS.
TORNADO FOR INTELLIGENT I/O
A consortium of leading enterprise computing vendors has proposed an
architecture, known as an I2O, to define and promote an open, standard set of
interface specifications for high-performance I/O subsystems. These
specifications will be used to simplify the task of building and maintaining
those subsystems for interface cards and PC server platforms. The I2O
specification makes it possible for systems to distribute I/O functions
across multiple processors, dramatically improving I/O and overall system
performance. Additionally, the specification allows vendors of network and
peripheral interface cards to write a single device driver that will be
compatible with a comprehensive range of operating systems, OS releases, and
vendor OS implementations. Wind River has entered into agreements with Intel
Corporation, certain division of Digital Equipment Corporation (now part of
Intel) and Symbios Logic, Inc. (now part of LSI Logic), under which such
companies will bundle Wind River's IXWORKS-Registered Trademark- operating
system into their respective input/output platforms ("IOPs"). IxWorks, Wind
River's I2O real-time operating system ("IRTOS") based on VXWORKS, is a
component of Wind River's TORNADO FOR INTELLIGENT I/O products and
facilitates the development of I2O-capable products by ensuring ongoing I2O
compliance. It also permits companies to get their products to market faster
by offering immediate availability of the IRTOS, the most significant
software building block of an I2O-ready system. A license for IXWORKS may be
included with IOPs shipped. This arrangement permits manufacturers to
develop their products quickly, since IXWORKS is available immediately. Wind
River believes that its relationships with Intel and LSI Logic for the
implementation of the I2O specification may open up a new market opportunity
for its products.
EMBEDDED INTERNET MARKET INITIATIVE
Wind River's TORNADO FOR EMBEDDED INTERNET-Registered Trademark- product
suite is a fully integrated package for bringing the advantages of the
Internet to embedded computers such as smart phones, TV set-top boxes,
network computers, networked printers, cable modems, and switches. With the
introduction of TORNADO FOR EMBEDDED INTERNET components, Wind River has
provided a common technology to build and deploy products throughout the
Internet, including its infrastructure, servers, and smart appliances. Wind
River believes there may be opportunities to increase the market size and
scope for its products, which incorporate, for example, server technology for
posting information to the Internet or corporate intranets, browsers for
viewing information on the World Wide Web, and "Java compliant" products for
developing "write once, run anywhere" applications. Wind River's EMBEDDED
INTERNET product suite includes PERSONAL JWORKS (based on Sun Microsystems'
PersonalJava specification), and WIND WEB SERVER.
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TORNADO FOR MANAGED SWITCHES SOLUTION
Wind River's TORNADO FOR MANAGED SWITCHES product provides a complete
software solution for data networking equipment, providing manufacturers all
the ingredients necessary to build management capabilities into layer 2 and
layer 3 Ethernet switches. Developed in cooperation with Xact, Inc., a Texas
corporation, TORNADO FOR MANAGED SWITCHES extends the TORNADO development
environment with three separate packages of software components, each
tailored for a different class of data networking equipment.
ADDITIONAL PRODUCTS
In addition to the preceding core products, Wind River offers the following:
VXWORKS OPTIONS. VXWORKS options include the VXVMI-TM- virtual memory
interface and the VXMP-TM- multiprocessing package. The VXVMI virtual memory
interface provides run-time memory management and debugging facilities and an
application program interface standardized across different microprocessing
architectures. The VXMP multiprocessing package allows applications to be
scaled beyond the performance of single microprocessors by allowing tasks on
different microprocessors to synchronize and communicate.
WINDNET. WINDNET-TM- is Wind River's networking environment, comprising both
core technology from Wind River such as TCP/IP and optional products such as
SNMP, STREAMS, and OSPF, and numerous integrated products from third-party
partners providing various communications protocols, as well as network
management, and distributed computing solutions.
CODETEST FOR TORNADO. CODETEST FOR TORNADO is a software-only version of
Applied Microsystems' CodeTEST family of embedded software verification
tools. CODETEST FOR TORNADO enables developers to identify software errors
easily, reliably, and cost effectively, and thus improve the quality of their
C/C++ code.
LOOK! FOR TORNADO. LOOK! FOR TORNADO is a C++ visualization and debugging
tool designed to graphically explore a C++ program as it executes.
STETHOSCOPE. STETHOSCOPE is a real-time data visualization, profiling and
debugging tool that lets the end user examine and analyze an embedded
application while it is running. STETHOSCOPE features a multi-window
environment that allows program variables to be plotted dynamically on a
workstation.
VXSIM EMBEDDED SYSTEM SIMULATOR. VXSIM-TM- is a comprehensive prototyping and
simulation tool that provides full VXWORKS simulation on a UNIX or Windows NT
workstation. VXSIM enables application development to begin before hardware
becomes available and allows software testing to occur early in the
development cycle, when errors are less costly to correct.
WINDVIEW. WINDVIEW-TM- is a diagnostic and analysis tool that provides
detailed visibility into the dynamic operation of an embedded system. With
WindView, the user can quickly and easily visualize the complicated
interaction among tasks and interrupt service routines and system objects in
an application. This information is presented through a GUI.
TORNADO FOR JAVA. Tornado for Java implements the full Java application
environment (JAE) on VxWorks. Tornado for Java enables Java applets and
applications to be executed as easily as C, C++, Ada, FORTRAN, or assembly
language applications. Any Java applet may be loaded from a network or from
local disk or ROM. Tornado for Java also provides the HotJava browser and
Applet Viewer.
PERSONAL JWORKS PERSONAL JWORKS represents the first RTOS port of
PersonalJava - a Java application environment targeted at personal consumer
devices -- to be certified for full compatibility. PERSONAL JWORKS brings all
the advantages of Java - cross-platform compatibility, Internet-readiness,
security - to the embedded world, specifically addressing the requirements of
consumer-oriented devices. With PERSONAL JWORKS , OEMs can readily define
unique, "designer brand" GUIs for memory-constrained network-connectable
consumer applications such as PDAs, Internet phones, and handheld devices,
set-top boxes, game consoles, car navigation systems, and smart phones.
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HTMLWORKS. HTMLWORKS -- part of Wind River's graphics portfolio -- comprises
a set of HTML and JavaScript components for VXWORKS, and a reference user
interface (UI) that enables developers to build and deploy more complex,
interactive UIs for embedded devices that are connected to a network but do
not perform general Web browsing. Together with TORNADO and VXWORKS,
HTMLWORKS provides an economical solution for building GUIs with highly
customized user interfaces on products such as process visualization
terminals, networked office equipment, and point-of-sale terminals.
eNAVIGATOR. Wind River's version of NCI's eNavigator (ENAVIGATOR ) is a World
Wide Web browser toolkit for information appliances, kiosks, and handheld
devices that require a state-of-the-art Web browser for retrieving and
displaying information.
ZINC FOR VXWORKS. ZINC FOR VXWORKS is a comprehensive tool suite for
developing small-footprint, natively compiled GUIs for performance-driven
embedded devices. ZINC FOR VXWORKS provides a complete, object-oriented C++
API for the creation of graphical user interfaces and event-driven
applications. ZINC FOR VXWORKS can easily be scaled and configured to meet
the exact GUI requirements of a given application.
WIND WEB SERVER. WIND WEB SERVER turns embedded devices into Web servers that
can provide a powerful interface to the Internet or to a corporate intranet.
It displays timely, dynamic information on an embedded device running VXWORKS
by means of a standard Web browser.
WIND FOUNDATION CLASSES. WIND FOUNDATION CLASSES-TM- enable embedded systems
developers to use and reuse highly optimized and extensively tested code to
create real-time embedded applications in less time, with fewer errors, and
at lower cost.
WINDNAVIGATOR. A multi-language browsing tool, WINDNAVIGATOR-TM- enables
developers to see the relationships between objects and functions, and easily
build programs using existing, proven modules.
TRUEFFS FOR TORNADO. TRUEFFS FOR TORNADO is an integrated flash file system
for embedded products built with TORNADO. TRUEFFS FOR TORNADO makes it
possible for embedded systems developers to implement rugged, reliable,
solid-state storage using a wide variety of embedded flash memory devices.
TRUEFFS FOR TORNADO is based on the data format of M-Systems Flash Disk
Pioneers' TrueFFS patented core technology, which implements the PCMCIA Flash
Translation Layer (FTL) standard.
BOARD SUPPORT PACKAGE DEVELOPER'S KIT. The VXWORKS operating system can be
used with a wide variety of processor types and target environments. They
isolate all hardware-specific features into a special section of code called
a board support package ("BSP"). The BSP DEVELOPER'S KIT provides assistance
to the developer porting TORNADO or VXWORKS to custom hardware or to a
commercial board not supported by Wind River. It includes comprehensive
documentation, a software validation suite, project management tools and a
template BSP to provide a convenient starting point. To assist third-party
developers, Wind River also offers a service in which it tests and validates
the resulting BSP.
SERVICES AND SUPPORT
Wind River provides comprehensive customer service and support to help
customers realize the most benefit from its products.
TRAINING CLASSES. Wind River offers several training courses and workshops
relating to the use of its products. The courses are provided several times
each month at Wind River's training facilities in Alameda, California. In
February 1999, Wind River began offering training classes in the Washington,
D.C. area. Outside North America, the courses are given under license from
Wind River by distributors and training contractors. Training courses can
also be provided at a customer site.
TECHNICAL SUPPORT. Wind River's technical support staff assists customers
with problems and questions in the installation and use of Wind River's
products. Technical support is provided by Wind River's staff of support
engineers in North America, by staff support engineers and /or local
distributors in Europe and by Wind River's Japanese subsidiary. Technical
support is bundled with product updates and maintenance and is offered on an
annual fee basis. Wind River's TORNADO includes a tool for submitting problem
reports and receiving responses via the Internet.
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ENGINEERING SERVICES. A number of services are provided on a fee-for-service
basis, including BSP validation, application-level consulting, customization,
and porting to strategic semiconductor architectures. These are coordinated
and performed by the Engineering Services Group in North America and Japan,
though they may on occasion be supported by the Engineering Group or outside
subcontractors in North America and Europe.
CONSULTING SERVICES. Wind River offers consulting services to develop
applications for embedded devices. When developers of software content
require outside development expertise, Wind River's consulting professionals
help these developers by assisting or performing their software development.
Wind River offers consulting services in areas such as BSP and device driver
development, networking and graphics.
STRATEGIC ALLIANCES
Wind River believes that strategic relationships with semiconductor
manufacturers and embedded device manufacturers are significant strengths
that are key to its future success in the embedded systems marketplace. Wind
River has strategic relationships with most of the major semiconductor
companies including Advanced RISC Machines Limited, Fujitsu Limited, Hitachi,
Ltd, Intel Corporation, MIPS Technologies, Inc., Mitsubishi Electric
Corporation, Motorola, Inc., NEC Corporation, ST Microelectronics, Siemens AG
and Sun Microsystems, Inc. Wind River has ported its VxWorks technology to
their semiconductors, allowing Wind River to leverage its partners' sales
channels to give its products broad market exposure. Wind River also enters
into joint marketing and sales agreements with certain developers of
third-party applications as a means to enhance its products with
industry-specific features. In addition, Intel and Wind River have a
strategic relationship pursuant to which Intel supplies an evaluation copy of
TORNADO FOR INTELLIGENT I/O to each customer purchasing an Intel i960Rx I/O
microprocessor and a license for IXWORKS for each such microprocessor sold.
Wind River also has developed strategic relationships with Network Computer,
Inc. and Sun Microsystems for Embedded Internet applications ranging from
network computers to hand-held and intelligent phones.
CUSTOMERS
Wind River's products have been deployed by a broad range of organizations,
including companies in the following industries: global communications (both
data and voice), digital imaging, consumer electronics, computers and
peripherals, medical instrumentation, defense electronics and aerospace,
research, automotive control, and industrial measurement and control. No
single customer accounted for more than 10% of Wind River's total revenues in
fiscal 1999.
MARKETING, SALES AND DISTRIBUTION
In North America and Europe, Wind River markets its products and services
primarily through its own direct sales organization, which consists of
salespersons and field application engineers. Wind River's sales force
presents Wind River and its products for licensing to prospective customers,
while application engineers provide technical pre-sale and post-sales
support. As part of the sales cycle, Wind River's direct sales force
generally provides technical presentations, product demonstrations and, often
an on-site customer evaluation of Wind River software. As of January 31,
1999, Wind River had 111 domestic direct salespersons and field application
engineers located throughout North America, 40 direct salespersons and field
application engineers throughout Europe and 10 sales and marketing employees
in Japan.
Wind River distributes its products in Japan through Wind River Systems,
K.K.("WRSKK"), a subsidiary in which it owns a 70% equity interest. Innotech
Corporation, Kobe Steel Ltd. and Nissin Electric Ltd., each owns a 10% equity
interest. Wind River has licensed its products exclusively to WRSKK for
distribution in Japan. WRSKK has in turn entered into master distributor
agreements with its three joint venture partners that provide the right to
appoint sub-distributors. See Note 13 of Notes to Consolidated Financial
Statements.
Wind River has licensed eighteen international distributors, principally to
serve customers in regions not serviced by Wind River's direct sales force or
its Japanese master distributors. Wind River also has established strategic
relationships with computer, semiconductor and software vendors and works
closely with a number of system integrators worldwide that enable Wind River
to further broaden the geographic and market scope for its products.
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Revenues from international sales represented $41.6 million, $26.9 million,
and $22.1 million or approximately 32%, 29% and 34% of total revenue in
fiscal 1999, 1998 and 1997, respectively. See Note 14 of Notes to
Consolidated Financial Statements for a summary of operations by geographic
region, and "- Additional Risk Factors - Risks Associated with International
Operations." Prices for international customers are quoted from a local
currency international price list. The price list is prepared based on the
U.S. dollar price list but reflects the higher cost of doing business outside
the United States. International customers are invoiced in the local
currency or U.S. dollars using current exchange rates.
Wind River has experienced, and expects to continue to experience,
significant seasonality resulting primarily from customer buying patterns and
product development cycles. Wind River has generally experienced the
strongest demand for its products in the fourth quarter of each fiscal year
and the weakest demand in the first quarter of each fiscal year. Quarterly
revenue levels have increased over the levels for like quarters in the prior
fiscal years but have typically decreased in the first quarter of each fiscal
year from the fourth quarter of the prior fiscal year.
COMPETITION
The embedded real-time software industry is highly competitive and is
characterized by rapidly advancing technology. Therefore, Wind River's
ability to obtain such business is dependent upon its ability to offer better
strategic concepts and technical solutions, time-to-market for our customers,
competitive prices, integration into certain capabilities like graphic
interfaces, communication protocols and peripheral controllers, customer
support response time, or a combination of these factors. There can be no
assurance that Wind River 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 Wind River's business,
financial condition and results of operations. In order to maintain or
improve its position in the industry, Wind River must continue to enhance its
current products and rapidly develop new products and product extensions.
Wind River believes that its principal competition comes from companies that
develop real-time embedded software development systems in-house rather than
purchase such systems from independent software vendors such as Wind River,
and that it 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. Wind River also competes with other
independent software vendors, including Integrated Systems, Inc., Mentor
Graphics, Inc. (through its acquisition of Microtec/Ready Systems), Microware
Systems Corporation, QNX Software Systems, Ltd., Accelerated Technology, Inc.
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 Wind River's
products. Many of Wind River's existing and potential competitors have
substantially greater financial, technical, marketing and sales resources
than Wind River. 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. Furthermore, current and potential competitors have established or
may establish cooperative relationships among themselves or with third
parties. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In
addition, Wind River is aware of ongoing efforts by competitors to emulate
the performance and features of Wind River's products, and there can be no
assurance that competitors will not develop equivalent or superior technology
to that of Wind River. Because substantially all of Wind River's revenues
have been derived from sales of the Tornado, VxWorks and IxWorks family of
products and services, the effects of competition could be more adverse than
would be the case if Wind River had a broader product offering. In addition,
competitive pressures could cause Wind River to reduce the prices of its
products and services, which would result in reduced profit margins. There
can be no assurance that Wind River will be able to compete effectively
against its current and future competitors. If Wind River is unable to
compete successfully, its business, financial condition and results of
operations would be materially and adversely affected.
PRODUCT DEVELOPMENT AND ENGINEERING
Wind River believes that its success will depend primarily on its ability to
maintain and enhance its current product line, develop new products, maintain
technological competitiveness and meet an ever-expanding range of customer
and market requirements. Wind River's product development and engineering
group, at January 31, 1999, includes 181 full-time
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employees. During fiscal 1999, 1998 and 1997, product development and
engineering expenses were $17.6 million, $12.0 million and $7.7 million,
respectively, excluding capitalized software development costs. In fiscal
year 1999, Wind River did not capitalize costs for software development. In
fiscal years 1998 and 1997, costs capitalized for software development were
$803,000 and $707,000, respectively. See "Notes to Consolidated Financial
Statements" for a more complete description of Wind River's capitalization of
certain software development costs. Wind River anticipates that it will
continue to commit substantial resources to research and product development
in the future.
The embedded real-time software industry faces a fragmented market
characterized by ongoing technological developments, evolving industry
standards and rapid changes in customer requirements. The introduction of
products embodying new technologies and the emergence of new industry
standards could render Wind River's existing products obsolete and
unmarketable. Wind River'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 update its products in a
systematic manner such that they remain compatible with the microprocessor
families and to respond promptly to customers' requirements. The inability to
develop and introduce new products or product enhancements in a timely manner,
due to resource constraints or technological or other reasons, could have a
material adverse effect on Wind River's business, financial condition or
results of operations.
From time to time, Wind River or its competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten
the life cycles of Wind River's existing products. There can be no assurance
that announcements of currently planned or other new products by Wind River
or others will not cause customers to defer purchasing existing Wind River
products. Any failure by Wind River 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 Wind River's
business, financial condition and results of operations. See "Additional
Risk Factors - Product Development."
Wind River is continuously engaged in product development for new or changing
markets. In particular, Wind River 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. Wind River 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. Wind River 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 Wind River's products must be
ported. It is unclear which of these competing protocols ultimately will
achieve market acceptance. If the protocols upon which Wind River's Internet
products are based ultimately fail to be widely adopted, Wind River'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 Wind River in the future,
fail to develop, develop more slowly than anticipated or become saturated
with competitors, if Wind River's products are not developed in a timely
manner, or if Wind River's products and services do not achieve or sustain
market acceptance, Wind River's business, financial condition and results of
operations would be materially and adversely affected.
Like all software products, Wind River's products may contain undetected
errors that could cause loss or delay in market acceptance or cause failures
in the products containing the embedded systems. Damages and injury from
such failures could result in product liability claims against Wind River.
See "Additional Risk Factors - Risks of Product Defects; Product and Other
Liability."
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PROPRIETARY RIGHTS
Wind River's success is heavily dependent upon its proprietary technology. To
protect its proprietary rights, Wind River relies on a combination of
copyright, trade secret, patent and trademark laws, nondisclosure and other
contractual restrictions on copying, distribution and technical measures.
Wind River seeks to protect its software, documentation and other written
materials through trade secret and copyright laws, which provide only limited
protection. In addition, Wind River has one registered U.S. patent. There
can be no assurance that the claims allowed will be of sufficient scope or
strength (or be issued in all countries where Wind River's products can be
sold) to provide meaningful protection or any commercial advantage to Wind
River. As a part of its confidentiality procedures, Wind River 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 Wind River'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 Wind River's
efforts to protect its proprietary rights, it may be possible for
unauthorized third parties to copy Wind River's products or to reverse
engineer or obtain and use information that Wind River regards as
proprietary. There can be no assurance that Wind River's competitors will not
independently develop technologies that are substantially equivalent or
superior to Wind River's technologies. Policing unauthorized use of Wind
River's products is difficult, and while Wind River 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 Wind River's products.
As the number of patents, copyrights, trademarks, trade secrets and other
intellectual property rights in Wind River's industry increases, products
based on Wind River's technology may increasingly become the subject of
infringement claims. Wind River has received in the past and may receive in
the future letters from third parties asserting infringement claims against
Wind River. There can be no assurance that third parties will not assert
infringement claims against Wind River 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 Wind River to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to Wind River, or at all,
which could have a material adverse effect on Wind River's business,
financial condition and results of operations. In the event of an adverse
ruling in any such litigation, Wind River 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. In addition, Wind River may initiate
claims or litigation against third parties for infringement of Wind River's
proprietary rights or to establish the validity of Wind River's proprietary
rights. Litigation to determine the validity of any claims, whether or not
such litigation is determined in favor of Wind River, could result in
significant expense to Wind River and divert the efforts of Wind River's
technical and management personnel from productive tasks.
MANUFACTURING AND BACKLOG
Wind River's manufacturing operation consists of assembling, packaging and
shipping the software products and documentation needed to fulfill each
order. Limited manufacturing is currently performed in Wind River's Alameda,
California facility. Outside vendors provide tape and CD duplication,
printing of documentation and manufacturing of packaging materials.
Wind River does not believe that backlog is a meaningful indicator of sales
that can be expected in future periods, particularly in view of the fast pace
of technological change in the software industry. Wind River's order
fulfillment process is intended to efficiently manage the flow of products to
customers, often resulting in a number of weeks of backlog. At January 31,
1999, backlog was approximately 9 to 12 weeks of sales. Backlog includes
orders that may be filled at various times throughout the fiscal year.
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<PAGE>
EMPLOYEES
Wind River had, at January 31, 1999, 598 employees, including 324 in sales,
marketing and support activities, 181 in product development and engineering
and 93 in management, operations, finance and administration. Of these
employees, 441 were located in North America and 157 were located outside of
North America. None of Wind River's employees is represented by a labor union
or is subject to a collective bargaining agreement. Wind River has never
experienced a work stoppage. See "-Additional Risk Factors - Management of
Growth; Dependence on Key Personnel; Need for Additional Personnel."
ADDITIONAL RISK FACTORS
WIND RIVER'S BUSINESS FACES SIGNIFICANT RISKS. IF ANY OF THE EVENTS OR
CIRCUMSTANCES DESCRIBED IN THE FOLLOWING RISKS ACTUALLY OCCURS, WIND RIVER'S
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
AND ADVERSELY AFFECTED. THESE RISKS SHOULD BE READ IN CONJUNCTION WITH THE
OTHER INFORMATION SET FORTH IN THIS REPORT.
FLUCTUATIONS IN OPERATING RESULTS
Wind River 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 introduction, timing and acceptance of new products
and product enhancements by Wind River 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 Wind River's customers, competitive conditions in the
industry, business cycles affecting the markets in which Wind River'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 Wind River may fluctuate as a result
of these and other factors, including Wind River's ability to continue to
develop innovative and competitive products. In addition, Wind River
generally does not enter into long-term license agreements with its
customers, and the timing of license fees is difficult to predict. The
procurement process of Wind River's customers is often several months or
longer from initial inquiry to order and may involve competing
considerations. Further, as licensing of Wind River's products increasingly
becomes a more strategic decision made at higher management levels, there can
be no assurance that sales cycles for Wind River's product will not lengthen.
Product revenue in any quarter depends primarily on the volume and timing of
orders received in that quarter. Wind River 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 Wind River's
staffing and operating expenses are based on anticipated total revenue
levels, and a high percentage of Wind River'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
Wind River's operating results from quarter to quarter. Revenues also are
typically higher in the fourth quarter, which ends on January 31, than in
other quarters of the fiscal year 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 of their products. As is typical
in the software industry, Wind River's fixed costs as a percentage of
revenues are high, and significant price erosion could have a material
adverse effect on Wind River's revenues and operating results. A number of
additional factors may in the future cause Wind River's revenues and
operating results to vary significantly from period to period. These factors
include: software "bugs" or other product quality problems, including Year
2000 compliance issues; changes in operating expenses; changes in company
strategy; personnel changes; foreign currency exchange rates; and mix of
products sold. Although Wind River has been profitable for the last several
years on an annual basis, there can be no assurance that Wind River 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, Wind River
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, Wind
River's operating results will be below the expectations of stock market
analysts and investors. In such event, the market price of its common stock
could decrease significantly.
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RELIANCE ON CORE FAMILY OF PRODUCTS
Revenue from sales of the Tornado, VxWorks and IxWorks family of products and
services accounted for substantially all of Wind River's revenues in each of
the fiscal years ended January 31, 1999, 1998 and 1997. Wind River's future
results depend heavily on continued market acceptance of these products in
Wind River's current markets and successful application in new markets. Any
factor adversely affecting the market for the Tornado, VxWorks and IxWorks
family of products and services could have a material adverse affect on Wind
River's business, financial condition and results of operations. Wind River
typically charges a one-time fee for a development license and a run-time
license fee for each copy of Wind River's operating system embedded in the
customer's products. A key component of Wind River'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 Wind River's
successful negotiation of run-time license agreements and on the successful
commercialization by Wind River's customers of the underlying products. To
the extent that such customers are not successful, Wind River may not be able
to meet its objectives, and its business, financial condition and results of
operations could be materially and adversely affected.
PRODUCT DEVELOPMENT
The embedded real-time software industry faces a fragmented market
characterized by ongoing technological developments, evolving industry
standards and rapid changes in customer requirements. Wind River's success
depends and will continue to depend upon its ability to continue to develop
and introduce in a timely manner new products that take advantage of
technological advances, to identify and adhere to emerging standards, to
continue to improve the functionality of its Tornado development environment
and the scalability and functionality of the VxWorks product, to offer its
products across a spectrum of microprocessor families used in the embedded
systems market and to respond promptly to customers' requirements. Wind River
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 Wind River 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 Wind River's enhanced or new products will adequately
address the changing needs of the marketplace. Failure to develop and
introduce new products and product enhancements in a timely manner would
materially and adversely affect Wind River's business, financial condition
and results of operations.
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
Wind River 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 Wind River's products, which could have a material adverse
effect on Wind River's business, financial condition and results of
operations. Furthermore, although Wind River has not experienced material
adverse effects resulting from any such errors to date, there can be no
assurance that, despite testing by Wind River 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 Wind River's
business, operating results and financial condition. Although Wind River's
license and other agreements with its customers typically contain provisions
designed to limit Wind River's exposure to potential product liability and
other claims, these provisions may not be effective in all circumstances and
in all jurisdictions. 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 Wind
River has not experienced any product liability or economic loss claims to
date, the sale and support of Wind River's products entail the risk of such
claims. Wind River carries insurance against product liability risks and
errors or omissions coverage. However, there can be no assurance that such
insurance will continue to be available to Wind River on commercially
reasonable terms or at all. A product liability claim or claim for economic
loss brought against Wind River in excess of or outside the limits of
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its insurance coverage, or a product recall involving Wind River's software,
could materially and adversely affect Wind River's business, financial
condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, Wind River has completed the acquisitions
of Objective Software Technology, Ltd., Zinc Software Incorporated, and, in
April 1999, certain assets of Xact, Inc., and has acquired equity interests
in Emultek, Ltd., and 3Soft GmbH. Wind River has also licensed certain
technologies from Network Computer, Inc. Wind River 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 Wind River's ongoing business, the
inability to complete and integrate acquired technologies into new and
existing products, the inability of management to maximize the financial and
strategic position of Wind River, the potential for unidentified liabilities
to disrupt the ongoing operations of Wind River, 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 materially and adversely affect
Wind River'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.
DEPENDENCE ON VME MARKET
A significant amount of Wind River'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 Wind River believes that revenues from sales of products designed
for embedded systems applications will account for an increasing percentage
of Wind River's revenues in the future, Wind River 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 Wind River's VME revenues, are dependent on government funding,
the continued availability of which is uncertain. Typically, Wind River's VME
customers have received government funding prior to placing its product
orders with Wind River. Any unanticipated future termination of government
funding of VME customers could have a material adverse effect on Wind River's
business, financial condition and results of operations.
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL
PERSONNEL
Wind River 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. Wind River's continued success will depend significantly on its
ability to integrate new operations and new personnel. Wind River's ability
to manage future expansion of its operations, if any, will require Wind River
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 Wind River
will be able to do so successfully. Wind River's failure to do so could have
a material adverse effect on Wind River's business, operating results and
financial condition. During fiscal 1998, Wind River purchased real property
in the City of Alameda, California for $11.4 million and entered into an
operating lease agreement for its new headquarters facility which was
constructed on such property. Wind River relocated its principal
administrative, sales, marketing, product development and engineering
facilities to the new headquarters facility during the fourth quarter in
fiscal 1999. As of January 31, 1999, the lessor has funded a total of $29.0
million of construction costs and has committed to fund up to a maximum of
$35 million. The operating lease payments will begin in May 1999. There can
be no assurance that any such relocation will be accomplished efficiently, or
that Wind River's operations will not be materially and adversely affected by
such relocation. Wind River'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 Wind River only recently. In addition, Wind River
believes its future success will depend in large part upon its ability to
attract and retain highly-skilled managerial, product development, marketing,
sales,
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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 Wind River is headquartered, and there can be no assurance
that Wind River will be successful in attracting and retaining such
personnel. The failure of Wind River to attract, integrate and retain the
necessary personnel could have a material adverse effect on Wind River's
business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
During the fiscal years ended January 31, 1999, 1998 and 1997, Wind River
derived approximately 32%, 29% and 34%, respectively, of its total revenue
from sales outside of North America. Wind River expects that international
sales will continue to generate a significant percentage of its total revenue
in the foreseeable future. Wind River also expects to continue to make
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 Wind River'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 Wind River. There can be no assurance that such factors will
not have a material adverse effect on Wind River's international sales and
consequently, Wind River's business, operating results and financial
condition. Sales by Wind River's foreign subsidiaries are denominated in the
local currency, and an increase in the relative value of the dollar against
such currencies would reduce Wind River's revenues in dollar terms or make
Wind River's products more expensive and, therefore, potentially less
competitive in foreign markets. Although Wind River attempts to reduce the
impact of foreign currency fluctuations, there can be no assurance that Wind
River's future results of operations will no be adversely affected by
currency fluctuations. Wind River enters into forward contracts to hedge
the short-term impact of foreign currency fluctuations. A portion of Wind
River's international revenues are derived from the Asia Pacific region
including Japan. During fiscal year 1999, economic uncertainty and related
weakening of foreign currencies, particularly the Japanese yen, against the
dollar, has occurred. As a result, Wind River's future sales in this region
may be adversely affected, which could have a material adverse effect on Wind
River's business, financial condition and results of operations. Wind River
relies on distributors for sales of its products in certain foreign countries
and, accordingly, is dependent on their ability to promote and support Wind
River's products and, in some cases, to translate them into foreign
languages. Wind River's international distributors generally offer products
of several different companies, including in some cases products that are
competitive with Wind River's products, and such distributors are not subject
to any minimum purchase or resale requirements. There can be no assurance
that Wind River's international distributors will continue to purchase Wind
River's products or provide them with adequate levels of support. Any changes
in the relationships Wind River has with its international distributors may
have a material adverse effect on Wind River's business, operating results
and financial condition.
IMPACT OF THE YEAR 2000
Many currently installed computer systems and software products include
coding to accept only two-digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish dates prior
to January 1, 2000, from dates on or after January 1, 2000. As a result, in
approximately eight months, computer systems and/or software used by many
companies will need to have been upgraded to comply with such "Year 2000"
requirements. Systems that do not properly recognize such information could
generate erroneous data or fail. Significant uncertainty exists in the
software industry concerning the potential effects associated with such
compliance. Although Wind River believes its most current releases of its
products, including third party software integrated into certain 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 performance as such products
on or before December 31, 1999 ("Year 2000 Compliance"), Wind River provides
no assurance that its software products contain all the necessary software
routines and programs for the accurate calculation, display, storage and
manipulation of data involving dates. Failure of Wind River's software
products to contain all the
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necessary software routines and programs for the accurate calculation,
display, storage and manipulation of data involving dates would have a
material adverse effect on its business, financial condition and results of
operations. The majority of Wind River's products are combined by its
customers with other software programs or hardware devices not provided by
Wind River. Such combination with other products that are not Year 2000
Compliant or modifications of Wind River's products by its customers may
introduce Year 2000 Compliance issues for its customers. Wind River's
customers' inability to remedy their own Year 2000 Compliance issues could
affect their demand for Wind River's products, which could materially and
adversely affect Wind River's business, financial condition and results of
operations. See -"Management's Discussion and Analysis of Financial
Condition and Results of Operations, 'Year 2000' Issues"
LEVERAGE
In connection with the sale of 5% Convertible Subordinated Notes in fiscal
1998, Wind River 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, Wind River's principal and interest obligations have
increased substantially. The degree to which Wind River will be leveraged
could materially and adversely affect Wind River's ability to obtain
financing for working capital, acquisitions or other purposes and could make
it more vulnerable to industry downturns and competitive pressures. Wind
River's ability to meet its debt service obligations will be dependent upon
Wind River's future performance, which will be subject to financial, business
and other factors affecting operations of Wind River, many of which are
beyond its control.
VOLATILITY OF STOCK PRICE
The market price of Wind River's common stock has fluctuated in the past, and
is likely to fluctuate in the future. Wind River believes that various
factors, including quarterly fluctuations in results of operations,
announcements of new products by Wind River or by its competitors, and
changes in the software industry in general may significantly affect the
market price of its 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 Wind River 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 or that it will not experience significant volatility.
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 Wind
River, could result in substantial costs and a diversion of management
attention and resources, which would have a material adverse effect on Wind
River's business, financial condition and results of operations, even if Wind
River is successful in such suits. Wind River's performance, market
fluctuations, and general economic, political and market conditions such as
recessions, may adversely affect the market price of Wind River's common
stock.
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ITEM 2.
PROPERTIES
During the fourth quarter in fiscal 1999, Wind River relocated its principal
administrative, sales, marketing, product development and engineering
facilities to a new headquarters facility in Alameda, California. The new
facility provides approximately 148,000 square feet of space. Rental
payments for the new facility will begin in May 1999 and will vary based on
the total construction costs of the property, including capitalized interest
and the LIBOR. In March 1998, Wind River entered into an accreting interest
rate swap 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 Wind River's interest rate exposure on its
operating lease to a fixed rate of 5.9%. Rental expenses incurred in fiscal
1999 amounted to approximately $1,126,000 for the previously leased
facilities. Wind River leases a customer training facility in Alameda,
California, which provides approximately 11,300 square feet of office space.
The lease expires in December 2001. Wind River also leases other domestic
sales offices in the United States and international sales and/or service
facilities in Canada, the United Kingdom, Scotland, France, Germany, Sweden,
Israel, Italy, Korea, Singapore and Japan. Wind River incurred approximately
$394,000 for the leased offices in Japan during fiscal year 1999. These
Japanese leases will expire in March and August 2000.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, Wind River is subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
patents and other intellectual property rights. Wind River is not currently
aware of any legal proceedings or claims that Wind River believes will have,
individually or in the aggregate, a material adverse effect on Wind River's
business, financial position or results of operations.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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ITEM 4A.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Wind River, and certain information about them as
of April 1, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH WIND RIVER
- --------------------------------------------------------------------------------
<S> <C> <C>
Jerry L. Fiddler 47 Chairman of the Board
Ronald A. Abelmann 61 President, Chief Executive
Officer and Director
David N. Wilner 45 Chief Technical Officer and Director
David G. Fraser 35 Vice President of Engineering
Richard W. Kraber 58 Vice President of Finance,
Chief Financial Officer and Secretary
Peter J. Richards 51 Vice President of Sales
Curtis B. Schacker 38 Vice President of Marketing
Graham D. Shenton 59 Managing Director of
European Operations
</TABLE>
Mr. Fiddler co-founded Wind River in February 1983, and currently serves as
Chairman of the Board. From February 1983 to March 1994 he served as Chief
Executive Officer of Wind River. Prior to founding Wind River, he was a
computer scientist in the Real-Time Systems Group at Lawrence Berkeley
Laboratory. Mr. Fiddler holds a B.A. in music and photography and an M.S. in
computer science from the University of Illinois.
Mr. Abelmann joined Wind River in March 1994 as President, Chief Executive
Officer and Director. From 1987 to 1993 he served as the founding Chief
Executive Officer of Vantage Analysis Systems, a developer of VHDL-based
simulation software for design automation. Prior to then, he served as Group
Vice President and General Manager for the Instrument Division of Varian
Associates. Mr. Abelmann holds B.S. and M.S. degrees in applied physics from
the University of California at Los Angeles, and an M.B.A. from Stanford
University.
Mr. Wilner co-founded Wind River in February 1983 and currently serves as
Chief Technical Officer and Director. Prior to founding Wind River, he was a
senior staff scientist in the Real-Time Systems Group at Lawrence Berkeley
Laboratory. Mr. Wilner holds a B.S. in computer science from the University
of California at Berkeley.
Mr. Fraser joined Wind River in September 1991 and currently serves as Vice
President of Engineering. From 1988 to 1991, he served as a product marketing
manager at Unisys/Convergent. From 1985 to 1988, he was a software engineer
at Hewlett-Packard in England. Mr. Fraser holds a B.S. in computing science
from Glasgow University, Scotland.
Mr. Kraber joined Wind River in August 1995 and currently serves as Vice
President of Finance and Chief Financial Officer and Secretary. From 1991 to
1995, he served as Chief Operating Officer and Chief Financial Officer of
Peerless Lighting, an industrial lighting products company. Prior to then, he
was Chief Financial Officer for GardenAmerica and a consultant and engagement
manager for McKinsey & Company. Mr. Kraber has a B.S. in mathematics from
Stanford University and an M.B.A. from Harvard University.
Mr. Richards joined Wind River in September 1998 as Vice President of Sales.
From March 1997 to August 1998, he served as President and Chief Executive
Officer for Toronto, Canada-based King Products Inc., which builds
Internet-enabled products. Prior to then, Mr. Richards held various positions
at Tandem Computers, a manufacturer of computer and related products, where
he last served as Vice President and General Manager. Mr. Richards studied
at Westminster College, United Kingdom and has an equivalent B.A. in
marketing management.
Mr. Schacker joined Wind River in 1990 and currently serves as Vice President
of Marketing. He joined Wind River as a Customer Engineering Manager. He
became a sales representative and then served as Sales Manager for the
Northwest
18
<PAGE>
Region of the United States until he assumed his current role in November of
1997. Prior to joining Wind River, he was an engineer for Ready Systems and
for Lockheed Missile and Space Company. Mr. Schacker has a B.S. in computer
science from Wright State University.
Mr. Shenton joined Wind River in July 1994 and currently serves as Managing
Director of European Operations. From 1990 to 1994, he was Managing Director
of Vantage Analysis Systems Europe, Ltd., a developer of VHDL-based
simulation software for design automation. From 1986 to 1989, he was Managing
Director of IMP Europe, Ltd., a semiconductor design and application firm.
Mr. Shenton holds a B.E. degree from Sydney University, Australia and an M.E.
degree from the University of New South Wales, Australia.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Wind River's Common Stock is traded on the Nasdaq National Market under the
symbol WIND. All share and per share amounts below have been adjusted to
give effect to three-for-two stock splits by means of stock dividends paid on
March 10, 1997 and February 4, 1999.
The closing price of Wind River's Common Stock as reported by the Nasdaq
National Market on April 15, 1999 was $13.94 per share. The prices per share
in the following table sets forth the low and high prices on the Nasdaq
National Market for the quarters indicated:
<TABLE>
<CAPTION>
LOW HIGH
- --------------------------------------------------------------------------------
<S> <C> <C>
Fiscal 1998
First quarter ended April 30,1997 $12.08 $23.00
Second quarter ended July 31,1997 15.50 28.67
Third quarter ended October 31,1997 20.50 31.83
Fourth quarter ended January 31,1998 21.17 30.92
<CAPTION>
LOW HIGH
- --------------------------------------------------------------------------------
<S> <C> <C>
Fiscal 1999
First quarter ended April 30,1998 $21.58 $28.08
Second quarter ended July 31,1998 19.00 25.92
Third quarter ended October 31,1998 18.67 34.42
Fourth quarter ended January 31,1999 20.17 33.42
</TABLE>
Wind River has not paid cash dividends and does not plan to pay dividends on
its Common Stock in the foreseeable future. Wind River presently intends to
retain all of its earning for use in its business.
At March 31, 1999, there were approximately 594 stockholders of record of
Wind River. Certain record holders are represented by brokers and other
institutions on behalf of stockholders. Wind River has estimated the total
number of such stockholders to be 14,700.
On May 18, 1998, Wind River issued 339,917 unregistered shares of its Common
Stock to the shareholders of Zinc Software, Incorporated in exchange for all
of the then outstanding shares of Zinc. As a result, Zinc is now a wholly
owned subsidiary of Wind River. The transaction was exempt from registration
under the Securities Act under Section 4(2) thereof, as a transaction not
involving any public offering.
19
<PAGE>
On January 26, 1999, Wind River issued 337,500 unregistered shares of its
Common Stock to Innotech Corporation upon Innotech's exercise of a warrant
issued in January 1995, for an aggregate exercise price of $1.1 million. The
transaction was exempt from registration under the Securities Act under
Section 4(2) thereof, as a transaction not involving any public offering.
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with the more detailed financial statements presented in Item 8
of this Form 10-K. The consolidated financial data for periods prior to the
financial statements presented in Item 8 of this Form 10-K are derived from
audited consolidated financial statements not included herein.
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(In thousands, except per share data) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $129,400 $ 92,400 $ 64,000 $ 44,000 $ 32,100
Operating income 37,089 10,066 (1) 15,817 8,130 3,452
Net income 26,051 4,870 (1) 11,280 5,383 2,460
Net income per share:
Basic .66 .13 (1) .32 .17 .08
Diluted .61 .12 (1) .29 .15 .07
Working capital 55,819 149,604 55,219 27,701 24,220
Total assets 326,776 287,808 128,661 45,480 39,183
Convertible subordinated notes
and long-term debt 140,000 140,000 -- -- 73
Stockholders' equity 149,414 111,986 108,749 32,813 28,345
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating income, net income and net income per share includes the effect
of the one-time write-offs of $15,159 ($13,353 after tax) which resulted from
the acquisition of in-process technologies from Network Computer, Inc. and
Objective Software Technology, Ltd. during the fiscal year ended January 31,
1998.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Wind River's actual results could differ materially
from those discussed in any forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to,
those discussed in this section, as well as under the caption "Business",
including "-Additional Risk Factors." All forward-looking statements included
in this document are based on information available to Wind River on the date
hereof, and Wind River assumes no obligation to update any such
forward-looking statements. The following discussion should be read in
conjunction with the consolidated financial statements and notes included
elsewhere herein.
Wind River was founded in 1983 to provide consulting and custom software
development services for a variety of business clients. From its inception,
Wind River directed its development efforts towards real-time and embedded
system applications and released its first commercial product,
VxWorks-Registered Trademark-, in 1987. Wind River subsequently broadened its
product offerings and has become a leading provider of operating systems and
development tools for the real-time embedded systems marketplace. Tornado,
Wind River's flagship product, consists of three integrated components: the
Tornado toolset, a set of cross-development tools and utilities; the VxWorks
run-time system, a high-performance, scalable RTOS that executes on the
target processor; and a full range of communications options. During the
past five years, Wind River has invested heavily in the development and
introduction of its products and in the establishment of worldwide sales,
distribution, customer support
20
<PAGE>
and consulting capabilities. Wind River markets its products on a worldwide
basis through its direct sales force, distributors and value-added resellers.
Wind River provides sales, marketing and product support for foreign
customers through wholly-owned subsidiary companies in the United States,
Europe and a majority-owned subsidiary in Japan. During fiscal year 1998,
Wind River received ISO 9001 certification.
Wind River typically charges a one-time fee for a development license and a
run-time license fee for each copy of Wind River's operating system embedded
in the customer's product. A key component of Wind River's strategy is to
significantly increase revenue through run-time license fees. Any increase in
the percentage of revenues attributable to run-time licenses will depend on
Wind River's successful negotiation of run-time license agreements and on the
successful commercialization by Wind River's customers of the underlying
products.
In May 1998, Wind River acquired Zinc Software, Incorporated, a privately
held company that develops, markets and supports graphical application
software. In connection therewith, Wind River issued 339,917 shares of
common stock in exchange for all of the outstanding stock of Zinc. The
acquisition was accounted for as a pooling of interests. As the operations
of Zinc were not material to Wind River's consolidated operations and
financial position, the financial statements of Zinc have been recorded in
Wind River's consolidated financial statements as of May 1, 1998.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated income statement data and
its percentage of revenues for the periods indicated. These operating
results are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
Years ended January 31,
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Products $ 96,446 75 % $ 67,110 73 % $ 46,354 72 %
Services 32,954 25 25,290 27 17,646 28
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 129,400 100 92,400 100 64,000 100
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of revenues:
Products 8,760 7 6,245 7 4,580 7
Services 12,941 10 9,633 10 6,960 11
- -----------------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 21,701 17 15,878 17 11,540 18
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 107,699 83 76,522 83 52,460 82
- -----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling and marketing 45,308 35 33,066 36 23,900 37
Product development and engineering 17,638 14 11,970 13 7,722 12
General and administrative 7,664 6 6,261 7 5,021 8
Acquired in-process research and development -- -- 15,159 16 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 70,610 55 66,456 72 36,643 57
- -----------------------------------------------------------------------------------------------------------------------------------
Income from operations 37,089 28 10,066 11 15,817 25
Other income, net 4,709 4 3,298 4 2,140 3
- -----------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 41,798 32 13,364 15 17,957 28
Provision for income taxes 15,747 12 8,494 9 6,677 10
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 26,051 20 % $ 4,870 (1) 6 % $ 11,280 18 %
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income before the effect of the adjustment for acquired in-process
research and development of $15,159 ($13,353 after tax) was $18,223 million
or 20% of total revenue for the year ended January 31, 1998. The adjustment
resulted from the acquisition of in-process technologies from Network
Computer, Inc. and Objective Software Technology, Ltd.
21
<PAGE>
YEARS ENDED JANUARY 31, 1999 AND 1998
REVENUES
Revenues for fiscal 1999 were $129.4 million compared to $92.4 million for
fiscal 1998. Product revenues consist of licensing fees from operating
system and software development tool products and fees from embedded system
run-time licenses. Service revenues are derived from fees from software
porting and development contracts, software maintenance and support
contracts, customer training and consulting. Maintenance contracts are
generally sold separately from the products. The increase in revenues of 40%
is due to increases in both Wind River's product revenues and service
revenues. Product revenues accounted for approximately 75% and 73% of the
total revenues in fiscal 1999 and 1998, respectively, with service revenues
accounting for the balance of total revenue over this period.
Product revenues were $96.4 million for fiscal 1999 compared to $67.1 million
for fiscal 1998. The increase of 44% in product revenues was due primarily to
the continued acceptance of Wind River's products and increased run-time
license revenues. Tornado was first introduced in fiscal 1996, and its sales
have continued to grow as Tornado has become available for use with more host
platforms and microprocessor targets. In addition, demand grew for Tornado in
Windows-based customer development environments. Run-time license revenue has
increased each year in conjunction with growing shipments of customers'
products and systems that incorporate the VxWorks operating system.
Service revenues were $33.0 million for fiscal 1999 compared to $25.3 million
for fiscal 1998. The increase of 30% was primarily due to an increase in
maintenance support agreements and training resulting from the increase in
Wind River's installed base of Tornado software development environments and
software applications provided to customers. Maintenance contracts are
generally prepaid, with the revenue recognized ratably over the period of the
contract. The deferred revenue relates primarily to customer prepayments
under software maintenance and certain run-time agreements, which are
recognized ratably over the life of the agreements and engineering services
contracts and training arrangements, which are recognized as services are
performed.
Revenues from international sales were $41.6 million for fiscal 1999 compared
to $26.9 million for fiscal 1998. International revenues accounted for 32%
and 29% of total revenues for the fiscal years ended January 31, 1999 and
1998, respectively. Revenues from European sources increased 34% from fiscal
1998 to 1999 while revenues from Japan increased 100% over the same periods.
Wind River expects international sales to continue to represent a significant
portion of revenues, although the percentage may fluctuate from period to
period. Revenues derived from indirect sales channels worldwide represented
26% and 21% of total revenues in fiscal 1999 and 1998, respectively. A
significant portion of these indirect revenues are attributable to revenues
from WRSKK. Wind River sells products to WRSKK at discounts which
approximate those offered to other independent distributors of Wind River's
products. Wind River's international sales are denominated in the local
currencies, and an increase in the relative value of the dollar against such
currencies would reduce Wind River's revenues in dollar terms or make Wind
River's products more expensive and, therefore, potentially less competitive
in foreign markets. Wind River actively monitors its foreign currency
exchange exposure; and to date such exposures have not had a material impact
on Wind River's results of operations. Wind River enters into forward
contracts to hedge the short-term impact of foreign currency fluctuations.
During fiscal 1999, economic uncertainty and related weakening of foreign
currencies, particularly the Japanese yen, against the dollar, has occurred.
As a result, Wind River's future sales in this region may be adversely
affected which could have a material adverse effect on Wind River's business,
results of operations and financial condition. Revenues from Asia Pacific
sources including Japan represented 47% and 38% of international revenues for
the year ended January 31, 1999 and 1998, respectively. (See "Business -
Additional Risk Factors - Risks Associated with International Operations").
COST OF PRODUCTS
Cost of products was $8.8 million for fiscal 1999 compared to $6.2 million
for fiscal 1998. Product-related cost of revenues as a percentage of product
revenues remained at 9% for both fiscal 1999 and 1998. As a result, gross
profit margins for products remained constant at 91%. Product-related costs
include direct and indirect costs for the production and duplication of
manuals and media for software products, as well as those relating to the
packaging, shipping and delivery of the products
22
<PAGE>
to the customer. Product costs also include license and other direct purchase
costs of third-party software that is distributed by or integrated into Wind
River's products and the amortization of capitalized software development
costs. Amortization of capitalized software development costs included in
cost of products amounted to $530,000 and $654,000 in fiscal 1999 and 1998,
respectively. The unamortized portion of capitalized software development
costs was $446,000 at January 31, 1999.
COST OF SERVICES
Cost of services was $12.9 million for fiscal 1999 compared to $9.6 million
for fiscal 1998. Service related cost of revenues as a percentage of service
revenues was 39% and 38% for fiscal 1999 and 1998, respectively, resulting in
gross profit margin for services of 61% and 62%, respectively. 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 recruit, develop, and retain services
professionals. The increase in costs of service revenues is due to
investment in developing new services offerings, including consulting, and
the addition of services professionals. Wind River expects that customer
support costs will increase in absolute dollars as Wind River continues to
increase customer support staff and customer support capabilities.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $45.3 million for fiscal 1999 compared
to $33.1 million for fiscal 1998. The increase resulted primarily from
increases in sales and marketing personnel both domestically and
internationally and increased advertising. As a percentage of total
revenues, selling and marketing expenses were 35% and 36% for fiscal 1999 and
1998, respectively. This decrease was attributable to a growing revenue base
and more effective utilization of personnel. The increase of 37% from fiscal
1998 to 1999 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 and third-party
marketing costs for product introductions and promotions. During the fourth
quarter of fiscal year 1999, Wind River announced and launched the
introduction of Tornado II, an enhanced version of its integrated development
environment. Launch and introduction activities are expected to continue at
least until the third quarter of fiscal year 2000. Wind River expects that
sales and marketing expenses will increase in absolute dollars as Wind River
continues to expand its sales and marketing staff.
PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Product development and engineering expenses were $17.6 million for fiscal
1999 compared to $12.0 million for fiscal 1998, an increase of 47%. As a
percentage of revenues, product development and engineering expenses
increased from 13% to 14% from fiscal 1998 to 1999. The absolute 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 Wind River's product line, including the Tornado II integrated
development environment. Wind River believes that product development and
engineering expenses will increase in absolute dollars as it continues to
invest in developing new products, applications and product enhancements.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $7.7 million for fiscal 1999
compared to $6.3 million for fiscal 1998, an increase of 22%. As a
percentage of revenues, general and administrative expenses decreased to 6%
in fiscal 1999 from 7% in fiscal 1998. 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. In 1997,
Wind River commenced a worldwide financial business and production systems
replacement project that uses software primarily from Oracle. The new
systems are targeted at bringing Wind River's business and production
computer systems into compliance with Year 2000 requirements. Wind River
anticipates its financial and production systems will be operational in the
third quarter of fiscal year 2000. Wind River 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.
23
<PAGE>
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On December 31, 1997, Wind River entered into an OEM license agreement with
NCI to license the right to access and modify the source code version of
certain NCI technology and to duplicate, distribute and sublicense the object
code version of such modified source code included with certain of Wind
River's future products. Under this agreement, Wind River paid $9.8 million
for non-exclusive, restricted, perpetual rights to the technology and
$200,000 for NCI engineering services incurred prior to source code delivery.
In addition, selected elements of the NCI technology require Wind River to
pay additional per unit royalties in the event Wind River's future sales of
products that include the modified NCI technology exceed specified volume
levels. The licensed source code will be ported by Wind River to its
VxWorks, IxWorks, WiSP and other real time embedded operating systems and
will become a component of future products. At the date the source code was
acquired, there were no working models of such products incorporating the
licensed technology and because of the restrictive nature of the license
agreement, there were no alternative future uses for such technology in
research and development. Accordingly, the aggregate purchase price of $10
million was expensed immediately as in-process research and development.
On January 30, 1998, Wind River acquired Objective Software Technology, Ltd.
("OST"), a privately held Scotland-based company that designs and markets
visualization tools for development of embedded systems. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the
purchase price has been allocated to the assets purchased and the liabilities
assumed based upon the fair values at the date of acquisition. The excess
of the purchase price over the fair market value of the net tangible assets
acquired aggregated approximately $6.1 million, of which $4.1 million was
allocated to in-process research and development and expensed immediately.
Wind River used the discounted cash flow ("DCF") approach to determine the
fair value of OST and its identifiable assets, including the value of the
products in the development stage which were not considered to have reached
technological feasibility. The DCF approach includes an analysis of the
markets, completion costs, cash flows, other required assets, contributions
made by core technology, and risks associated with achieving such cash flows.
The balance of the excess acquisition cost was allocated to acquired
technology ($2.0 million) which is being amortized over three years.
Wind River incurred approximately $1.0 million of other non-merger
incremental costs associated with these acquisitions which were included in
the in-process research and development write-offs.
OTHER INCOME AND EXPENSE
Other income and expense includes interest income earned from the investment
of excess cash, interest expense incurred on the 5.0% Convertible
Subordinated Notes, due in 2002 (the "Notes") issued in July 1997, gains and
losses related to inter-company foreign currency transactions and income and
losses related to the 30% minority interest held by the Japanese participants
in WRSKK.
Interest income was $13.6 million for fiscal 1999 compared to $7.6 million
for fiscal 1998. The increase is primarily due to higher average cash and
cash equivalent and investment balances, primarily due to the cash received
from the issuance of the Notes, and to the transition of Wind River's
investment portfolio from tax-free investments to taxable investments.
Interest expense and other was $8.7 million for fiscal 1999 compared to $4.2
million for fiscal 1998. The increase in interest expense is primarily
related to the interest incurred for the entire year in fiscal year 1999 on
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.
PROVISION FOR TAXES
The effective tax rate was 37.7% for fiscal 1999 compared to 63.6% for fiscal
1998. The higher effective consolidated tax rate in fiscal 1998 resulted
from a portion of the write-off of certain acquired in-process research and
development being non-deductible. The overall changes in the effective tax
rates result primarily from the difference between foreign and domestic tax
rates and the ratio of foreign taxable income to domestic taxable income,
varying levels of available research and development credits, and varying
levels of tax-exempt interest income.
24
<PAGE>
YEARS ENDED JANUARY 31, 1998 AND 1997
REVENUES
Revenues for fiscal 1998 were $92.4 million compared to $64.0 million for
fiscal 1997. The increase in revenues of 44% is due to increases in both
Wind River's product revenue and services revenues. Product revenues
accounted for approximately 73% and 72% of the total revenues in fiscal 1998
and 1997, respectively, with service revenues accounting for the balance of
total revenue over this period.
Revenues from the sale of products was $67.1 million for fiscal 1998 compared
to $46.4 million for fiscal 1997. The increase of 45% in product revenues
was due primarily to the continued acceptance of Wind River's products and
increased run-time license revenues.
Wind River's service revenues were $25.3 million for fiscal 1998 compared to
$17.6 million for fiscal 1997. The increase of 43% was primarily due to an
increase in maintenance support agreements and training resulting from the
increase in Wind River's installed base of Tornado software development
environment and software applications provided to customers and engineering
services contracts primarily related to porting Wind River's VxWorks
operating system to microprocessor families.
Revenues from international sales were $26.9 million for fiscal 1998 compared
to $22.1 million for fiscal 1997. International revenues accounted for 29%
and 34% of total revenues for the fiscal years ended January 31, 1998 and
1997, respectively. Revenues from European sources increased 35% from fiscal
1997 to 1998 while revenues from Japan decreased 7% over the same periods.
Revenues derived from indirect sales channels worldwide represented 21% and
23% of total revenues in fiscal 1998 and 1997, respectively. A significant
portion of these indirect revenues are attributable to revenue from WRSKK.
Revenues from Asia Pacific sources including Japan represented 38% and 44% of
international revenues for the year ended January 31, 1998 and 1997,
respectively. (See "Business - Additional Risk Factors: Risks Associated
with International Operations").
COST OF PRODUCTS
Cost of products was $6.2 million for fiscal 1998 compared to $4.6 million
for fiscal 1997. Product-related cost of revenues as a percentage of product
revenues decreased from 10% to 9% from fiscal 1997 and 1998. The decrease is
due to the increase in fees generated from run-time licenses. The costs
associated with fees from run-time licenses are significantly less than the
costs required to generate fees for licenses for software products.
Amortization of capitalized software development costs included in cost of
products amounted to $654,000 and $600,000 in fiscal 1998 and 1997,
respectively.
COST OF SERVICES
Cost of services was $9.6 million for fiscal 1998 compared to $7.0 million
for fiscal 1997. Service related cost of revenues as a percentage of service
revenues was 38% and 39% for fiscal 1998 and 1997, respectively. The
increase in costs of service revenues is due to investment in developing new
services offerings and the addition of service professionals.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $33.1 million for fiscal 1998 compared
to $23.9 million for fiscal 1997 or 36% and 37% of total revenues,
respectively. This decrease was attributable to a growing revenue base and
more effective utilization of personnel. The increase of 38% from fiscal 1997
to 1998 resulted primarily from increases in sales and marketing personnel
both domestically and internationally and increased advertising and
third-party marketing costs for product introductions and promotions.
PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Product development and engineering expenses were $12.0 million for fiscal
1998 compared to $7.7 million for fiscal 1997, an increase of 55%. As a
percentage of revenues, product development and engineering expenses
increased from 12% to
25
<PAGE>
13% from fiscal 1997 to 1998. 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 Wind River's product line.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $6.3 million for fiscal 1998
compared to $5.0 million for fiscal 1997, an increase of 25%. As a
percentage of revenues, general and administrative expenses decreased to 7%
in fiscal 1998 from 8% in fiscal 1997. 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.
OTHER INCOME AND EXPENSE
Interest income was $7.6 million for fiscal 1998 compared to $2.5 million for
fiscal 1997. The increase is primarily due to higher average cash and cash
equivalent and investment balances which were obtained through the issuance
of the Notes in July 1997 and cash received in a secondary offering to the
public of common stock in July 1996.
Interest expense and other was $4.2 million for fiscal 1998 compared to $0
for fiscal 1997. The increase in interest expense is primarily related to
the interest paid on 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.
PROVISION FOR TAXES
The effective tax rate was 63.6% for fiscal 1998 compared to 37.2% for fiscal
1997. The higher effective consolidated tax rate in fiscal 1998 resulted
from a portion of the write-off of certain acquired in-process research and
development being non-deductible. The overall changes in the effective tax
rates result primarily from the difference between foreign and domestic tax
rates and the ratio of foreign taxable income to domestic taxable income,
varying levels of available research and development credits, and varying
levels of tax-exempt interest income.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly information for
Wind River's last eight fiscal quarters. Wind River believes that this
information has been prepared on the same basis as the audited consolidated
financial statements appearing in Item 8 of this Form 10-K and believes that
all necessary adjustments (consisting only of normal recurring adjustments)
have been included in the amounts stated below and present fairly the results
of such periods when read in conjunction with the audited consolidated
financial statements and notes thereto.
All share and per share amounts in this report have been adjusted to give
effect to three-for-two stock splits by means of stock dividends paid on
March 10, 1997 and February 4, 1999.
<TABLE>
<CAPTION>
Three Months Ended,
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, JAN. 31 OCT. 31 JUL. 31 APR. 30 JAN. 31 OCT. 31 JUL. 31 APR. 30
except per share amounts) 1999 1998 1998 1998 1998 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products $ 28,859 $ 25,096 $ 23,169 $ 19,322 $ 20,995 $ 16,932 $ 15,926 $ 13,257
Services 9,341 8,504 8,031 7,078 7,005 7,068 6,074 5,143
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 38,200 33,600 31,200 26,400 28,000 24,000 22,000 18,400
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of revenues:
Products 2,371 2,084 2,337 1,968 1,674 1,564 1,601 1,406
Services 3,561 3,328 3,231 2,821 2,669 2,664 2,362 1,938
- ------------------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 5,932 5,412 5,568 4,789 4,343 4,228 3,963 3,344
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 32,268 28,188 25,632 21,611 23,657 19,772 18,037 15,056
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling and marketing 12,912 11,485 11,035 9,876 9,312 8,153 8,346 7,255
Product development and
Engineering 5,128 4,449 4,287 3,774 3,654 2,877 3,005 2,434
General and administrative 2,225 1,831 1,904 1,704 1,628 1,531 1,565 1,537
Acquired in-process research
and development -- -- -- -- 15,159 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 20,265 17,765 17,226 15,354 29,753 12,561 12,916 11,226
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 12,003 10,423 8,406 6,257 (6,096) 7,211 5,121 3,830
Other income, net 1,309 1,228 1,224 948 662 930 926 780
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 13,312 11,651 9,630 7,205 (5,434) 8,141 6,047 4,610
Provision for income taxes 4,792 4,486 3,699 2,770 1,726 2,931 2,177 1,660
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8,520 $ 7,165 $ 5,931 $ 4,435 $ (7,160) $ 5,210 $ 3,870 $ 2,950
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ 0.21 $ 0.18 $ 0.15 $ 0.11 $ (0.19) $ 0.14 $ 0.10 $ 0.08
Diluted $ 0.20 $ 0.17 $ 0.14 $ 0.11 $ (0.19) $ 0.12 $ 0.09 $ 0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common and
common equivalent shares:
Basic 40,109 40,265 39,502 38,796 38,396 38,220 38,076 38,046
Diluted 43,047 43,029 42,495 41,968 38,396 42,414 42,294 42,087
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, Wind River had working capital of approximately $56
million and cash and investments of approximately $207 million, which include
investments with maturities of greater than one year of $156 million. Wind
River invests primarily in instruments that are highly liquid and of
investment grade.
In fiscal 1999, Wind River's operating activities provided net cash of $31.0
million due primarily to net income, the tax benefit related to employee
stock option exercises, and the non-cash impact of depreciation and
amortization. These sources of cash were partially offset by increases in
accounts receivable and prepaid and other assets. The increase in accounts
receivable is due to the increased sales activities in response to higher
customer demand for Wind River's products and services. The increase in
prepaid and other current assets is primarily due to interest receivable on
investments and prepaid foreign and state taxes.
In fiscal 1999, Wind River's investing activities used net cash of $88.8
million. Uses of cash relating to the acquisition of equipment, purchases of
investments and purchases of investments held as collateral for the operating
lease and the accreting interest rate swap were partially offset by cash
provided from the sale of investments. As Wind River transitioned its
investment portfolio from short-term to long-term investments, its long-term
investments increased by $95 million. Restricted cash increased primarily
due to the increased collateral funding for the operating lease of Wind
River's new headquarters. The collateral consists of direct obligations of
the United States government, with the majority being long-term investments.
Wind River's financing activities used net cash of $522,000. Cash provided
by the issuance of Common Stock for stock option exercises was offset by
treasury stock repurchases pursuant to Wind River's ongoing Common Stock
repurchase program. During fiscal 1999, Wind River repurchased approximately
397,000 shares of Common Stock at an aggregate cost of approximately $10
million. In January 1999, the Board of Directors increased the amount of the
Common Stock to be repurchased each quarter to $4.0 million per quarter.
In July 1997, Wind River issued $140 million of 5% Convertible Subordinated
Notes (the "Notes"), which mature on August 1, 2002. The Notes are
subordinated to all existing and future senior debt and are convertible into
shares of Wind River's Common Stock at a conversion price of $32.33 per
share. The Notes are redeemable at the option of Wind River, in whole or in
part, at any time on and after August 2, 2000 at 102% of the principal amount
initially, and thereafter at prices declining to 100% at maturity, in each
case plus accrued interest. Each holder of these Notes has the right,
subject to certain conditions and restrictions, to require Wind River to
offer to repurchase all outstanding Notes, in whole or in part, owned by such
holder, at specified repurchase prices plus accrued interest upon the
occurrence of certain events. The $5.1 million of costs incurred in
connection with the offering are included in prepaid and other assets. These
unamortized costs are being amortized to interest expense over the 5-year
term of the Notes using the straight-line method, which approximates the
effective interest method. Interest on the Notes began accruing July 31, 1997
and is payable semi-annually on February 1 and August 1, commencing on
February 1, 1998.
In fiscal 1998, Wind River purchased real property in the City of Alameda,
California for $11.4 million. The property has been developed for Wind
River's new headquarters facility. Wind River has incurred an additional
$2.2 million for related land improvements.
In fiscal 1998, Wind River entered into an operating lease agreement for its
new headquarters facility being constructed on the land Wind River purchased
in Alameda, California. As of January 31, 1999, the lessor has funded a
total of $29.0 million of construction costs and has committed to fund up to
a maximum of $35 million. The operating lease payments will begin in May
1999 and will vary based on the total construction costs of the property,
including capitalized interest, and the LIBOR.
On March 18, 1998, Wind River entered into an accreting interest rate swap
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 Wind River'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 Wind
28
<PAGE>
River'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 the contract) are
generally limited to the amounts, if any, by which the counterparty's
obligations exceed the obligations of Wind River. Wind River 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.
Construction of the new headquarters building was completed in the first
quarter of fiscal year 2000. In connection with the lease, Wind River is
obligated to enter into a lease of its land in Alameda, California with the
lessor of the building at a nominal rate and for a term of 55 years. If Wind
River terminates or does not negotiate an extension of the building lease,
the ground lease converts to a market rental rate. The lease provides Wind
River with the option at the end of the lease term to either acquire the
building at the lessor's original cost or arrange for the building to be
acquired. Wind River has guaranteed the residual value associated with the
building to the lessor of approximately 82% of the lessor's $35 million
funding obligation. Wind River is also required 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, Wind
River must maintain compliance with certain financial covenants. As of
January 31, 1999, Wind River 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 Wind River's
financial condition or results of operations.
Wind River 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. Wind River attempts to limit
this exposure by investing primarily in high grade securities.
Management believes that Wind River's working capital and cash flow generated
from operations are sufficient to meet its working capital requirements for
planned expansion, product development and capital expenditures for at least
the next twelve months.
"YEAR 2000" ISSUES
Many currently installed computer systems and software products include
coding to accept only two digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish dates prior
to January 1, 2000, from dates on and after January 1, 2000. As a result, in
approximately eight months, computer systems and/or software used by many
companies will need to be upgraded to comply with such "Year 2000"
requirements. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. Significant uncertainty
exists in the software industry concerning the potential effects associated
with such compliance.
Wind River has conducted Year 2000 compliance reviews for current versions of
its products. The review includes assessment, implementation, validation
testing and contingency planning. Although Wind River believes the 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 on 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
performance as such products on or before December 31, 1999 (collectively
"Year 2000 Compliance"), Wind River provides no assurance that its software
products contain all the necessary software routines and programs for the
accurate calculation, display, storage and manipulation of data involving
dates. Failure of Wind River's software products to contain all the
necessary software routines and programs for the accurate calculation,
display, storage and manipulation of data involving dates would have a
material adverse effect on Wind River's business, financial condition and
results of operation. The majority of Wind River's products are combined by
its customers with other software programs or hardware devices not provided
by Wind River. Such combination with other products that are not Year 2000
Compliant or modifications of Wind River's products by its customers may
introduce Year 2000 Compliance issues for its customers. Wind River's
customers' inability to remedy their own Year 2000 Compliance issues could
affect their demand for Wind River's products, which may materially and
adversely affect Wind River's business, financial condition and results of
operations. Wind River continues to respond to customer concerns about prior
versions of Wind River's products on a case-by-case basis. For certain
older versions of Wind River's products which may not be Year
29
<PAGE>
2000 compliant, Wind River is providing a patch to bring the product into
compliance. With respect to certain third party products included in Wind
River's product offerings that may not be Year 2000 compliant, Wind River is
working with software vendors to bring the products into compliance.
To address Year 2000 issues, Wind River has initiated a program designed to
address the most critical Year 2000 items that would affect its products, its
worldwide business systems, and the operations of the following functions:
research and development, finance, sales and marketing, manufacturing, and
human resources. Assessment and remediation efforts regarding these critical
items are proceeding in parallel.
Wind River has tested software obtained from third parties that is integrated
into or with Wind River's products, and seeks assurances from vendors that
licensed software is Year 2000 Compliant. Despite testing by Wind River,
current customers and potential customers, and assurances from developers of
products incorporated into Wind River's products, such products may contain
undetected errors or defects associated with Year 2000 date functions. Known
or unknown errors or defects in Wind River's products or third party products
may result in delay or loss of revenue, diversion of development resources,
damage to Wind River's reputation, or increased service and warranty costs.
The occurrence of any of the foregoing could materially adversely affect Wind
River's business, financial condition and results of operations.
Wind River is working with critical suppliers to determine that such
suppliers' operations and the products and services they provide Wind River
are Year 2000 Compliant or to monitor their progress towards Year 2000
Compliance. Wind River has requested its critical suppliers to complete a
questionnaire that provides information regarding Year 2000 Compliance. The
suppliers rate themselves as currently Year 2000 Compliant or are engaged in
programs to become Year 2000 Compliant. Wind River will continue to monitor
the status of suppliers who have not completed their Year 2000 Compliance
programs. Wind River has received information from its largest customers
regarding Year 2000 Compliance. The customers state that they will not incur
any business interruptions related to Year 2000 Compliance issues. As is the
case with other software companies, if its current or future outside
customers or suppliers fail to achieve Year 2000 Compliance or if they divert
technology expenditures to address their own Year 2000 Compliance problems,
Wind River's business, financial condition or results of operations could be
materially adversely affected.
In 1997, Wind River commenced a worldwide financial business and production
systems replacement project that uses software primarily from Oracle. The
new systems are targeted at bringing Wind River's business and production
computer systems into Year 2000 Compliance. Wind River anticipates its
financial and production systems will be operational in the third quarter of
1999. In January 1998, Wind River initiated an analysis of the condition of
Year 2000 readiness for the programs it uses for internal development. Wind
River will modify or replace programs that were determined not to be Year
2000 Compliant. Wind River believes the software and hardware it uses
internally or will have installed for internal use will comply with Year 2000
requirements and is not aware of any material operational issues or costs
associated with preparing its internally used software and hardware for the
Year 2000. However, Wind River provides no assurances that it will not
experience serious, unanticipated negative consequences, including material
costs caused by undetected errors or defects in the technology used in its
internal systems. The occurrence of any of the foregoing could have a
material adverse effect on Wind River's business, operating results or
financial condition.
Wind River has funded its Year 2000 Compliance review from operating cash
flows and, except for its new financial reporting system, has not separately
accounted for these costs. Wind River will incur additional amounts related
to the Year 2000 Compliance review including administrative personnel to
manage the review, outside contractors to provide technical advice and
technical support for its products, product engineering and customer
satisfaction. Excluding the implementation of its financial reporting
system, Wind River believes it has completed approximately 85% of the work
required to obtain Year 2000 Compliance. Wind River expects to incur costs of
approximately $3.5 million to implement its financial reporting system. As
of January 31, 1999, Wind River has incurred $1.1 million for the
implementation. Wind River's Year 2000 budget will be modified as necessary
to address correction of any additional systems identified to be
non-compliant. However, management does not anticipate that Wind River will
incur other significant operating expenses or be required to invest heavily
in computer systems improvements to be Year 2000 Compliant.
Wind River is currently developing contingency plans to be implemented as
part of its efforts to identify and correct Year 2000 problems affecting its
internal systems. Wind River expects to complete its contingency plans by
the first quarter of
30
<PAGE>
1999. Depending on the systems affected, these plans could include
accelerated replacement of affected equipment or software, short to
medium-term use of backup equipment and software, increased work hours for
Company personnel or use of contract personnel to correct (on an accelerated
schedule) any Year 2000 problems that arise or to provide manual workarounds
for information systems, and similar approaches. If Wind River is required
to implement any of these contingency plans, it could have a material adverse
effect on Wind River's financial condition and results of operations.
Wind River's ability to achieve Year 2000 Compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify propriety software, and unanticipated problems
identified in the ongoing compliance review. Such failures could have a
material adverse affect on Wind River's business, financial condition and
results of operations.
EURO CURRENCY
On January 1, 1999, several member countries of the European Union
established fixed conversion rates between their sovereign currencies and
adopted the Euro as their new common legal currency. Since that date, the
Euro has traded on currency exchanges. The legacy currencies will remain
legal tender in the participating countries for a transition period between
January 1999 and January 1, 2002. During the transition period, non-cash
payments can be made in the Euro, and parties can elect to pay for goods and
services and transact business using either the Euro or a legacy currency.
Between January 1, 2002 and July 1, 2002, the participating countries will
introduce Euro notes and coins and withdraw all legacy currencies from
circulation. The Euro conversion may affect cross-border competition by
creating cross-border price transparency. Wind River is assessing its
pricing/marketing strategy in order to insure that it remains competitive in
a broader European market and is reviewing whether certain existing contracts
will need to be modified. Wind River has assessed the ability of information
technology systems to allow for transactions to take place in both the legacy
currencies and the Euro and the eventual elimination of the legacy currencies
and believes that its information technology systems will not be affected by
the transition to the Euro. Wind River does not presently expect that
introduction and use of the Euro will materially affect Wind River's foreign
exchange exposures and hedging activities or will result in any material
increase in costs to Wind River. Wind River's currency risk and risk
management for operations in participating countries may be reduced as the
legacy currencies are converted to the Euro. Final accounting, tax and
governmental, legal and regulatory guidance is not available. Wind River
will continue to evaluate issues involving introduction of the Euro. Based
on current information and Wind River's current assessment, it does not
expect that the Euro conversion will have a material adverse effect on its
business, financial condition or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 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. Wind River believes that the adoption of SOP 98-1 will not
have a material impact on its consolidated financial statements. SOP 98-1
will be effective for Wind River's consolidated financial statements for the
fiscal year ending January 31, 2000.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 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 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. Wind River must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS 133 will
be effective for Wind River's consolidated financial statements for the
fiscal year ending January 31, 2001. Wind River has not yet determined the
impact, if any, of adopting this statement.
31
<PAGE>
In December 1998, the AICPA released SOP 98-9, "Modification of SOP 97-2,
'Software Revenue Recognition' with Respect to Certain Transactions" ("SOP
98-9"). SOP 98-9 amends SOP 97-2 to require that an entity recognize revenue
for multiple element arrangements by means of the "residual method" when (1)
there is vendor-specific objective evidence ("VSOE") of the fair values of
all the undelivered elements that are not accounted for by means of long-term
contract accounting, (2) VSOE of fair value does not exist for one or more of
the delivered elements, and (3) all revenue recognition criteria of SOP 97-2
(other than the requirement for VSOE of the fair value of each delivered
element) are satisfied. The provisions of SOP 98-9 that extend the deferral
of certain paragraphs of SOP 97-2 became effective December 15, 1998. These
paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions that
are entered into in fiscal years beginning after March 15, 1999. Retroactive
application is prohibited. We are evaluating the requirements of SOP 98-9 and
the effects, if any, on our current revenue recognition policies.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
Wind River's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio and long-term debt obligations.
Wind River places its investments with high quality credit issuers and, by
policy, limits the amount of credit exposure to any one issuer. As stated in
its policy, Wind River's first priority is to reduce the risk of principal
loss. Consequently, Wind River seeks to preserve its invested funds by
limiting default risk, market risk and reinvestment risk. Wind River
mitigates default risk by investing in only high quality credit securities
that it believes to be low risk and by positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity.
Wind River believes that an immediate 100 basis point move in interest rates
affecting Wind River's floating and fixed rate financial instruments as of
January 31, 1999 would have an immaterial effect on Wind River's pretax
earnings. Wind River also believes that the immediate 100 basis point move
in interest rates would have an immaterial effect on the fair value of Wind
River's financial instruments.
FOREIGN CURRENCY RISK
Wind River transacts business in various foreign currencies, primarily in
Japanese yen and certain European currencies. Wind River has established a
foreign currency hedging program, utilizing foreign currency exchange
contracts for its foreign currency transaction exposures in Japan and certain
European countries. Under this program, increases or decreases in Wind
River's foreign currency transactions are partially offset by gains and loses
on the forward contracts, so as to mitigate the possibility of foreign
currency transaction gains and losses. Wind River does not use forward
contracts for trading purposes. All outstanding forward contracts at the end
of a period are marked-to-market with unrealized gains and losses included in
other income, net, and thus are recognized in income in advance of the actual
foreign currency cash flows. As these forward contracts mature, the realized
gains and losses are recorded and are included in net income as a component
of other income, net. Wind River's ultimate realized gain or loss with
respect to currency fluctuations will depend on the currency exchange rates
and other factors in effect as the contracts mature. At January 31, 1999,
Wind River had outstanding forward contracts to hedge Japanese Yen with
notional amounts totaling approximately $3.7 million.
The unrealized gains and losses on the outstanding forward contracts at
January 31, 1999 were immaterial to Wind River's consolidated financial
statements. Due to the short-term nature of the forward contracts, the fair
value at January 31, 1999 was negligible. The realized gains and losses on
these contracts as they matured were not material to the consolidated
operations of Wind River.
32
<PAGE>
INTEREST RATE SWAP RISK
Wind River entered into a 5.9% accreting interest rate swap to reduce the
impact of changes in interest rates on its floating interest rate operating
lease for its new headquarters. At January 31, 1999, the notional amount of
the accreting interest rate swap was $24.5 million. The estimated fair value
at January 31, 1999 was negligible.
EQUITY PRICE RISK
Wind River owns 633,752 shares of common stock of Emultek, Inc., an Israeli
corporation. Wind River purchased the common stock prior to Emultek's public
offering at a price of $7.50 per share. Emultek went public in July 1998,
and at January 31, 1999, the closing price of Emultek's stock was $4.75 per
share. Wind River values this investment using the closing price of the
stock at the end of each month. As a result, Wind River reflects this
investment on our balance sheet at January 31, 1999 at its market value of
approximately $3.0 million, with the unrealized gains and losses excluded
from earnings and reported in the accumulated other comprehensive income
component of stockholders' equity. At March 31, 1999, the closing price of
Emultek's stock was $7.69.
33
<PAGE>
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
- --------------------------------------------------------------------------------
<S> <C>
Financial Statements:
Report of Independent Accountants 35
Consolidated Statements of Income
for the years ended January 31, 1999, 1998 and 1997 36
Consolidated Balance Sheets
at January 31, 1999 and 1998 37
Consolidated Statements of Cash Flows
for the years ended January 31, 1999, 1998, and 1997 38
Consolidated Statements of Stockholders' Equity
for the years ended January 31, 1999, 1998 and 1997. 39
Notes to Consolidated Financial Statements 40
Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts 58
</TABLE>
All other schedules have been omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF WIND RIVER SYSTEMS, INC.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Wind River Systems, Inc. and its subsidiaries at January 31, 1999
and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended January 31, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 24, 1999
35
<PAGE>
WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(In thousands, except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Products $ 96,446 $ 67,110 $ 46,354
Services 32,954 25,290 17,646
- ------------------------------------------------------------------------------------------
Total revenues 129,400 92,400 64,000
- ------------------------------------------------------------------------------------------
Cost of revenues:
Products 8,760 6,245 4,580
Services 12,941 9,633 6,960
- ------------------------------------------------------------------------------------------
Total cost of revenues 21,701 15,878 11,540
- ------------------------------------------------------------------------------------------
Gross profit 107,699 76,522 52,460
- ------------------------------------------------------------------------------------------
Operating expenses:
Selling and marketing 45,308 33,066 23,900
Product development and engineering 17,638 11,970 7,722
General and administrative 7,664 6,261 5,021
Acquired in-process research and development - 15,159 -
- ------------------------------------------------------------------------------------------
Total operating expenses 70,610 66,456 36,643
- ------------------------------------------------------------------------------------------
Income from operations 37,089 10,066 15,817
- ------------------------------------------------------------------------------------------
Other income (expense):
Interest income 13,589 7,599 2,465
Interest expense and other (8,729) (4,213) -
Minority interest in consolidated subsidiary (151) (88) (325)
- ------------------------------------------------------------------------------------------
Total other income 4,709 3,298 2,140
- ------------------------------------------------------------------------------------------
Income before provision for income taxes 41,798 13,364 17,957
Provision for income taxes 15,747 8,494 6,677
- ------------------------------------------------------------------------------------------
Net income $ 26,051 $ 4,870 $ 11,280
- ------------------------------------------------------------------------------------------
Net income per share:
Basic $ .66 $ .13 $ .32
Diluted $ .61 $ .12 $ .29
- ------------------------------------------------------------------------------------------
Weighted average common and common equivalent
shares:
Basic 39,536 38,184 34,713
Diluted 42,502 42,230 39,194
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
WIND RIVER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
(In thousands, except par value) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,514 $ 100,633
Short-term investments 9,143 61,107
Accounts receivable, net of
allowances of $1,550 and $1,460 30,375 18,076
Prepaid and other current assets 10,598 5,210
- --------------------------------------------------------------------------------
Total current assets 92,630 185,026
Investments 155,618 60,329
Land and equipment, net 31,350 24,496
Other assets 13,021 15,447
Restricted cash 34,157 2,510
- --------------------------------------------------------------------------------
Total assets $ 326,776 $ 287,808
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,389 $ 3,806
Accrued liabilities 10,005 9,733
Accrued compensation 5,950 5,441
Income taxes payable 405 1,415
Deferred revenue 17,062 15,027
- --------------------------------------------------------------------------------
Total current liabilities 36,811 35,422
Convertible subordinated notes 140,000 140,000
- --------------------------------------------------------------------------------
Total liabilities 176,811 175,422
- --------------------------------------------------------------------------------
Minority interest in consolidated subsidiary 551 400
- --------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
Stockholders' equity:
Common Stock, par value $.001; 125,000
authorized; 41,718 and 39,250 shares issued;
40,606 and 38,535 shares outstanding 41 39
Additional paid in capital 124,605 101,141
Treasury stock, 1,112 and 715 shares at cost (25,491) (15,485)
Accumulated other comprehensive loss (2,155) (1,197)
Retained earnings 52,414 27,488
- --------------------------------------------------------------------------------
Total stockholders' equity 149,414 111,986
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 326,776 $ 287,808
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 26,051 $ 4,870 $ 11,280
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 8,339 4,798 2,880
Deferred income taxes (244) (2,894) (780)
Minority interest in consolidated subsidiary 151 88 105
Acquired in-process research and development - 15,159 -
Change in assets and liabilities:
Accounts receivable (12,176) (4,780) (4,080)
Prepaid and other assets (5,388) (5,727) (4,435)
Accounts payable (570) 2,015 446
Accrued liabilities (235) 4,387 2,716
Accrued compensation 409 1,050 1,749
Income taxes payable 12,631 9,368 6,410
Deferred revenue 2,035 8,756 2,057
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 31,003 37,090 18,348
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of land and equipment (12,670) (19,704) (6,647)
Capitalized software development costs - (803) (707)
Acquisitions, net of cash acquired - (20,553) -
Purchases of investments (232,193) (264,048) (79,031)
Sales and maturities of investments 187,753 235,877 9,411
Restricted cash (31,647) (2,510) -
- -----------------------------------------------------------------------------------------
Net cash used in investing activities (88,757) (71,741) (76,974)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of Common Stock, net 9,484 4,265 59,361
Purchase of treasury stock (10,006) (12,364) (7,050)
Sales of treasury stock - - 7,194
Issuance of convertible subordinated notes, net - 134,925 -
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (522) 126,826 59,505
- -----------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents 157 (1,390) (236)
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (58,119) 90,785 643
Cash and cash equivalents at beginning of year 100,633 9,848 9,205
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 42,514 $ 100,633 $ 9,848
- -----------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 7,000 $ -- $ --
Cash paid for income taxes $ 1,896 $ 3,037 $ 2,285
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
38
<PAGE>
WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID IN TREASURY STOCK
(In thousands) SHARES AMOUNT CAPITAL SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1996 31,763 $ 32 $ 24,782 (507) $ (3,265)
Net income - - - - -
Unrealized loss on investments - - - - -
Currency translation adjustments - - - - -
Comprehensive income - - - - -
Common Stock issued
in public offering, net 4,713 5 55,584 845 7,194
Common Stock issued
upon exercise of stock options 1,470 1 2,593 - -
Common Stock issued under
stock purchase plan 128 - 1,178 - -
Tax benefit from stock plans - - 5,740 - -
Purchase of treasury stock - - - (507) (7,050)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1997 38,074 38 89,877 (169) (3,121)
Net income - - - - -
Unrealized gain on investments - - - - -
Currency translation adjustments - - - - -
Comprehensive income - - - - -
Common Stock issued
upon exercise of stock options 1,080 1 2,403 - -
Common Stock issued under
stock purchase plan 96 - 1,861 - -
Tax benefit from stock plans - - 7,000 - -
Purchase of treasury stock - - - (546) (12,364)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 39,250 39 101,141 (715) (15,485)
Net income - - - - -
Unrealized loss on investments - - - - -
Currency translation adjustments - - - - -
Comprehensive income - - - - -
Common Stock issued upon
acquisition of Zinc Software, Inc. 339 - 582 - -
Common Stock issued
upon exercise of a warrant 337 - 1,109 - -
Common Stock issued
upon exercise of stock options 1,671 2 5,926 - -
Common Stock issued under
stock purchase plan 121 - 2,447 - -
Tax benefit from stock plans - - 13,400 - -
Purchase of treasury stock - - - (397) (10,006)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1999 41,718 $ 41 $ 124,605 (1,112) $ (25,491)
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ACCUMULATED TOTAL STOCK-
OTHER COMPREHENSIVE RETAINED HOLDERS'
(In thousands) INCOME (LOSS) EARNINGS EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 31, 1996 $ (74) $ 11,338 $ 32,813
----------------- -----------------
Net income - 11,280 11,280
Unrealized loss on investments (353) - (353)
Currency translation adjustments (236) - (236)
----------------- -----------------
Comprehensive income (589) - 10,691
----------------- -----------------
Common Stock issued
in public offering, net - - 62,783
Common Stock issued
upon exercise of stock options - - 2,594
Common Stock issued under
stock purchase plan - - 1,178
Tax benefit from stock plans - - 5,740
Purchase of treasury stock - - (7,050)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1997 (663) 22,618 108,749
----------------- -----------------
Net income - 4,870 4,870
Unrealized gain on investments 856 - 856
Currency translation adjustments (1,390) - (1,390)
----------------- -----------------
Comprehensive income (534) - 4,336
----------------- -----------------
Common Stock issued
upon exercise of stock options - - 2,404
Common Stock issued under
stock purchase plan - - 1,861
Tax benefit from stock plans - - 7,000
Purchase of treasury stock - - (12,364)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 (1,197) 27,488 111,986
----------------- -----------------
Net income - 26,051 26,051
Unrealized loss on investments (1,115) - (1,115)
Currency translation adjustments 157 - 157
----------------- -----------------
Comprehensive income (958) - 25,093
----------------- -----------------
Common Stock issued upon
acquisition of Zinc Software, Inc. - (1,125) (543)
Common Stock issued
upon exercise of a warrant - - 1,109
Common Stock issued
upon exercise of stock options - - 5,928
Common Stock issued under
stock purchase plan - - 2,447
Tax benefit from stock plans - - 13,400
Purchase of treasury stock - - (10,006)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1999 $ (2,155) $ 52,414 $ 149,414
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wind River Systems, Inc. and its subsidiaries are engaged in developing and
marketing operating systems and software development tools for creating
real-time and embedded applications. Wind River's flagship product, TORNADO,
is a scalable, cross-development environment that enables engineers to
develop embedded applications on a host workstation or PC and download the
code via a network or other communication channel to a real-time operating
system ("RTOS") that runs on all significant 32- and 64- bit embedded target
microprocessors. TORNADO consists of the Tornado toolset, VxWorks, an RTOS,
and a full range of communications options.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Wind River and
its wholly owned subsidiaries: Wind River Systems International, Inc., a
United States corporation; Wind River Systems, E.C., S.A.R.L., a French
corporation; Wind River Systems GmbH, a German corporation; Wind River
Systems Italia, S.r.l, an Italian corporation; Wind River Systems UK, Ltd., a
United Kingdom corporation; Wind River Systems Scotland Ltd., a Scottish
corporation; Zinc Software, Incorporated, a United States Corporation; and
its majority-owned subsidiary Wind River Systems K.K. ("WRSKK"), a Japanese
corporation. All significant inter-company accounts and transactions have
been eliminated.
Wind River has a fiscal year end of January 31. The international
subsidiaries have fiscal year-ends of December 31. The consolidated financial
statements include the subsidiaries' accounts as of December 31.
Certain amounts in the fiscal 1998 financial statements have been
reclassified to conform to the fiscal 1999 presentation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with an original
maturity of three months or less. These investments consist of fixed income
securities, which are readily convertible to cash and are stated at cost,
which approximates fair value. Restricted cash consists of the investments
held as collateral under the operating lease of Wind River's headquarters and
an accreting interest rate swap agreement. Fair value is determined based
upon the quoted market prices of the securities as of the balance sheet date.
INVESTMENTS
Investments with maturities greater than three months and less than one year
are classified as short-term investments. Investments with maturities
greater than one year are classified as long-term investments. Wind River
accounts for its investments, including money market funds, municipal bonds,
U.S. government and agency obligations, corporate bonds and other debt
securities, in accordance with Statement of Financial Accounting Standards
No. ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities." Wind River determines the appropriate classification of its
marketable securities at the time of purchase and re-evaluates such
classification as of each balance sheet date. Wind River has classified all
of its investments as available-for-sale and carries such investments at fair
value, with unrealized gains and losses reported in stockholders' equity
until disposition. Fair value is determined based upon the quoted market
prices of the securities as of the balance sheet date. The cost of
securities sold is based on the specific identification method. Realized
gains or losses and declines in value, if any, judged to be other than
temporary on available-for-sale securities are reported in other income or
expense.
40
<PAGE>
CONCENTRATION OF CREDIT RISK
Wind River's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash, cash equivalents, investments, and
accounts receivable. Wind River's investments consist of investment grade
securities managed by qualified professional investment managers. The
investment policy limits Wind River's exposure to concentration of credit
risk. Wind River's accounts receivable result primarily from software sales
to a broad customer base both domestically and internationally and are
typically unsecured. Wind River performs on-going credit evaluations of its
customers' financial condition, limits the amount of credit when deemed
necessary and maintains allowances for potential credit losses; historically,
such losses have been immaterial. As a consequence, concentrations of credit
risk are limited.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of Wind River's financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable and accounts
payable, the carrying amounts approximate fair value due to their short
maturities. The estimated fair value for the convertible subordinated notes
(with a carrying amount of $140 million at January 31, 1999) is approximately
$135.8 million at January 31, 1999. The fair value for the convertible
subordinated notes is based on quoted market prices.
LAND AND EQUIPMENT
Land and equipment are stated at cost. Depreciation on equipment is computed
using the straight-line method over the estimated useful lives of the assets,
which is generally two to four years for computer equipment and four to ten
years for furniture and equipment. Leasehold improvements are amortized over
the term of the related lease or useful economic life, if shorter.
SOFTWARE DEVELOPMENT COSTS
Wind River accounts for software development costs in accordance with SFAS
86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed." Costs incurred to establish the technological
feasibility of a computer software product are considered research and
development costs and are expensed as incurred. When the technological
feasibility of a software product has been established using the working
model approach, development costs are capitalized. Capitalization of these
costs ceases when the product is considered available for general release to
customers. Amortization of capitalized software development costs is provided
on a product-by-product basis at the greater of the amount computed using (a)
the ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
remaining estimated economic life of the product. Generally, an original
estimated economic life of eighteen months is assigned to capitalized
software development costs. Amortization of capitalized software costs is
charged to cost of product revenues. Research and development expenditures
are charged to research and development in the period incurred. The
amortization of capitalized software costs which were charged to cost of
product revenues during fiscal 1999, 1998 and 1997 were $530,000, $654,000
and $600,000, respectively. At January 31, 1999 and 1998, Wind River had
capitalized software costs of $446,000 and $977,000, respectively.
OTHER ASSETS
Other assets include bond issuance costs, purchased technology, capitalized
software development costs, equity investments, and deposits. Bond issuance
costs are amortized over five years and purchased technology is amortized
over three years.
Wind River evaluates the recoverability of its property and equipment and
intangible assets in accordance with SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. Accordingly, Wind River evaluates asset
recoverability at each balance sheet date or when an event occurs that may
impair recoverability of the asset. Wind River determines the recoverability
of the carrying amount of each intangible asset by reviewing the following
factors: the undiscounted value of expected operating cash flows in relation
to its net capital investments, the estimated useful or contractual life of
the intangible asset, the contract or product
41
<PAGE>
supporting the intangible asset, and in the case of purchased technology and
capitalized software development costs, Wind River periodically reviews the
recoverability of the assets value by evaluating its products with respect to
technological advances, competitive products and the needs of its customers.
REVENUE RECOGNITION
Wind River adopted the provisions of Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended by SOP 98-4, "Deferral of the
Effective Date of Certain Provisions of SOP 97-2," 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 Wind River's current licensing or
revenue recognition practices.
Product revenues consist of licensing fees from operating system and software
development tool products and fees from embedded system run-time licenses.
Service revenues are derived from fees from software porting and development
contracts, software maintenance and support contracts, customer training and
consulting. Maintenance contracts are generally sold separately from the
products. Wind River's customers consist of end users, distributors, original
equipment manufacturers, system integrators and value-added resellers.
Product revenues are generally recognized at the time of shipment or upon the
delivery of a product master in satisfaction of non-cancelable contractual
agreements provided that collection of the resulting receivable is probable,
the fee is fixed or determinable and vendor-specific objective evidence
("VSOE") exists to allocate the total fee to all delivered and undelivered
elements of the arrangement. Any maintenance included in these arrangements
is deferred based on VSOE and recognized ratably over the term of the
arrangement. Service revenues from engineering services contracts are
generally recognized on the percentage-of-completion basis. Service revenues
from software maintenance, support and update fees (post-contract support)
are recognized ratably over the contract period. Services revenue from
training and consulting are recognized when the services are provided.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") released SOP 98-9, "Modification of SOP 97-2, 'Software Revenue
Recognition' with Respect to Certain Transactions." SOP 98-9 amends SOP 97-2
to require that an entity recognize revenue for multiple element arrangements
by means of the "residual method" when (1) there is VSOE of the fair values
of all the undelivered elements that are not accounted for by means of
long-term contract accounting, (2) VSOE of fair value does not exist for one
or more of the delivered elements, and (3) all revenue recognition criteria
of SOP 97-2 (other than the requirement for VSOE of the fair value of each
delivered element) are satisfied. The provisions of SOP 98-9 that extend the
deferral of certain paragraphs of SOP 97-2 became effective December 15,
1998. These paragraphs of SOP 97-2 and SOP 98-9 will be effective for
transactions that are entered into in fiscal years beginning after March 15,
1999. Retroactive application is prohibited. We are evaluating the
requirements of SOP 98-9 and the effects, if any, on our current revenue
recognition policies.
FOREIGN CURRENCY TRANSLATION
The functional currency of foreign subsidiaries is the local currency.
Accordingly, assets and liabilities of the subsidiaries are translated using
the exchange rates in effect at the end of the period, while income and
expense items are translated at average rates of exchange during the period.
Gains or losses from translation of foreign operations where the local
currency is the functional currency are included as other comprehensive
income or loss. The net gains and losses resulting from foreign currency
transactions are recorded in net income in the period incurred and were not
significant for any of the periods presented.
STOCK-BASED COMPENSATION PLANS
Wind River accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and complies with the
disclosure provisions of SFAS 123, "Accounting for Stock Based Compensation."
Under APB 25, compensation cost is recognized over the vesting period based
on the difference, if any, on the date of grant between the fair market value
of Wind River's stock and the amount an employee must pay to acquire the
stock. Wind River's policy is to grant options with an
42
<PAGE>
exercise price equal to the quoted market price of Wind River's stock on the
grant date. Accordingly, no compensation expense has been recognized for its
stock option plans.
NET INCOME PER SHARE
Net income per share includes basic net income per share, which is based on
the weighted-average number of common shares outstanding, and diluted net
income per share, which is based on the weighted-average number of common
shares outstanding and all dilutive potential common shares outstanding.
Dilutive common equivalent shares consist of stock options and warrants
(using the treasury stock method) and convertible subordinated notes (using
the if converted method). Common equivalent shares are excluded from the
computation if their effect is anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." 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. Wind River believes that
the adoption of SOP 98-1 will not have a material impact on its consolidated
financial statements. SOP 98-1 will be effective for Wind River's
consolidated financial statements for the fiscal year ending January 31, 2000.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 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 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. Wind River must formally document, designate, and assess
the effectiveness of transactions that receive hedge accounting. SFAS 133
will be effective for Wind River's consolidated financial statements for the
fiscal year ending January 31, 2001. Wind River has not yet determined the
impact, if any, of adopting this statement.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2: ACQUISITIONS
In May 1998, Wind River acquired Zinc Software, Incorporated, a privately
held company that develops, markets and supports graphical application
software. In connection therewith, Wind River issued 339,917 shares of
common stock in exchange for all of the outstanding stock of Zinc. The
acquisition was accounted for as a pooling of interests. As the operations
of Zinc were not material to Wind River's consolidated operations and
financial position, the financial statements of Zinc have been recorded in
the consolidated financial statements as of May 1, 1998.
On December 31, 1997, Wind River entered into an OEM license agreement with
NCI to license the right to access and modify the source code version of
certain NCI technology and to duplicate, distribute and sublicense the object
code version of such modified source code included with certain of Wind
River's future products. Under the agreement, Wind River paid $9.8 million
for non-exclusive, restricted, perpetual rights to the technology and
$200,000 for NCI engineering services incurred prior to source code delivery.
In addition, selected elements of the NCI technology require Wind River to
pay additional per unit royalties in the event Wind River's future sales of
products that include the modified NCI technology exceed specified volume
levels. The licensed source code will be ported by Wind River to its
VxWorks, IxWorks, WiSP and
43
<PAGE>
other real time embedded operating systems and will become a component of
future products. At the date the source code was acquired, there were no
working models of such products incorporating the licensed technology and
because of the restrictive nature of the license agreement, there were no
alternative future uses for such technology in research and development.
Accordingly, the aggregate purchase price of $10 million was expensed
immediately as in-process research and development.
On January 30, 1998, Wind River acquired Objective Software Technology, Ltd.
("OST"), a privately held Scotland-based company that designs and markets
visualization tools for development of embedded systems. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the
purchase price has been allocated to the assets purchased and the liabilities
assumed based upon the fair values at the date of acquisition. The excess
of the purchase price over the fair market value of the net tangible assets
acquired aggregated approximately $6.1 million, of which $4.1 million was
allocated to in-process research and development and expensed immediately.
Wind River used the discounted cash flow ("DCF") approach to determine the
fair value of OST and its identifiable assets, including the value of the
products in the development stage which were not considered to have reached
technological feasibility. The DCF approach includes an analysis of the
markets, completion costs, cash flows, other required assets, contributions
made by core technology, and risks associated with achieving such cash flows.
The balance of the excess acquisition cost was allocated to acquired
technology ($2.0 million) which is being amortized over three years.
Wind River incurred approximately $1.0 million of other non-merger
incremental costs associated with these acquisitions which were included in
the in-process research and development write-offs.
NOTE 3: LAND AND EQUIPMENT
Land and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 13,640 $ 11,445
Computer equipment 27,625 18,989
Furniture and equipment 4,552 3,005
Leasehold improvements 1,127 2,019
- --------------------------------------------------------------------------------
46,944 35,458
Less accumulated depreciation (15,594) (10,962)
- --------------------------------------------------------------------------------
$ 31,350 $ 24,496
- --------------------------------------------------------------------------------
</TABLE>
In fiscal 1998, Wind River purchased real property for its headquarters in
the City of Alameda, California for $11.4 million. In fiscal 1999, Wind
River made $2.2 million of related land improvements.
44
<PAGE>
NOTE 4: INVESTMENTS
Cash equivalents and investments consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Money market fund $ 7,003 $ 15,039
Municipal bonds 4,935 55,445
U.S. government and agency obligations 43,267 71,588
Corporate bonds 85,326 44,587
Other debt securities 61,423 23,640
- --------------------------------------------------------------------------------
Total available-for-sale securities 201,954 210,299
Less amounts classified as cash equivalents (37,193) (88,863)
- --------------------------------------------------------------------------------
Total investments $ 164,761 $ 121,436
- --------------------------------------------------------------------------------
</TABLE>
The contractual maturities of marketable securities, regardless of their
balance sheet classification, were as follows:
<TABLE>
<CAPTION>
JANUARY 31,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in 1 year or less $ 9,143 $ 61,107
Due in 1-2 years 30,385 34,274
Due in 2-5 years 78,523 26,055
Due in 5 years or more 46,710 -
- --------------------------------------------------------------------------------
Total investments $ 164,761 $ 121,436
- --------------------------------------------------------------------------------
</TABLE>
Gross realized gains and losses from the sale of securities classified as
available-for-sale were not material for the years ended January 31, 1999,
1998 and 1997. For the purpose of determining gross realized gains and
losses, the cost of securities is based upon specific identification.
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
Wind River enters into foreign currency forward exchange contracts ("forward
contracts") to manage exposure related to certain foreign currency
transactions. Wind River does not enter into derivative financial instruments
for trading purposes. All outstanding forward contracts at the end of a
reporting period are marked-to-market, with unrealized gains and losses
included in net income as a component of other income (expense). Wind River
may, from time to time, adjust its foreign currency hedging position by
taking out additional contracts or by terminating or offsetting existing
forward contracts. These adjustments may result from changes in the
underlying foreign currency exposures or from fundamental shifts in the
economics of particular exchange rates. Gains and losses on terminated
forward contracts, or on contracts that are offset, are recognized in income
in the period of contract termination or offset. At January 31, 1999, Wind
River had outstanding forward contracts with notional amounts totaling
approximately $3.7 million. These contracts, which mature in less than
ninety days, are hedges of certain foreign currency transaction exposures in
the Japanese yen. The difference between cost and estimated fair value at
January 31, 1999 was negligible.
On March 18, 1998, Wind River entered into an accreting interest rate swap
agreement (the "Swap Agreement") to reduce the impact of changes in interest
rates on its floating rate operating lease for its new corporate headquarters
(see Note 12). The Swap Agreement effectively changes Wind River's interest
rate exposure on its operating lease which is at one month LIBOR to a fixed
rate of 5.9%. The notional amount under the Swap Agreement is scheduled to
increase in relation to the funds used to construct Wind River's new
headquarters. The differential to be paid or received under the Swap
Agreement will be recognized as an adjustment to rent expense related to the
operating lease. The Swap Agreement matures at the same time as the
operating lease expires. The amounts potentially subject to credit risk
(arising from the possible inability of the counterparty to meet the term of
their contracts) are generally limited to the amounts, if any, by which the
counterparty's obligations exceed the obligations of Wind River.
45
<PAGE>
NOTE 6: PROVISION FOR INCOME TAXES
The provision for income taxes was composed as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $11,716 $7,092 $5,139
State 1,836 1,588 1,151
Foreign 2,439 2,708 1,167
- --------------------------------------------------------------------------------
15,991 11,388 7,457
- --------------------------------------------------------------------------------
Deferred:
Federal (245) (1,901) (736)
State 1 (207) 14
Foreign 0 (786) (58)
- --------------------------------------------------------------------------------
(244) (2,894) (780)
- --------------------------------------------------------------------------------
$ 15,747 $8,494 $6,677
- --------------------------------------------------------------------------------
</TABLE>
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected rate 35.0% 35.0% 34.0%
State taxes, net of federal benefit 3.8 6.7 4.1
Foreign taxes 1.3 8.8 5.0
In-process technology write-off - 26.2 -
Research and development, net (1.4) (1.7) (1.0)
Tax exempt interest (0.3) (8.9) (4.5)
Foreign sales corporation benefit (0.5) (1.4) (0.7)
Other (0.2) (1.1) 0.3
- --------------------------------------------------------------------------------
37.7% 63.6% 37.2%
- --------------------------------------------------------------------------------
</TABLE>
The effective consolidated tax rate in fiscal 1998 was higher due to the
permanent difference resulting from the write-off of in-process research and
development during the fourth quarter of fiscal 1998. In fiscal 1999, 1998
and 1997, tax benefits resulting from the exercise of employee stock options
amounting to $13.4 million, $7.0 million and $5.7 million, respectively, were
credited to stockholders' equity and reduced income taxes payable.
Deferred tax assets (liabilities) which result from temporary differences in
the recognition of certain revenues and expenses for financial and income tax
reporting purposes consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Amortization $1,898 $2,065
Employee benefit accruals 737 595
Accounts receivable reserves 524 472
Accrued expenses and other 1,253 978
- --------------------------------------------------------------------------------
Gross deferred tax assets 4,412 4,110
- --------------------------------------------------------------------------------
Depreciation (589) (364)
Other (401) (568)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (990) (932)
- --------------------------------------------------------------------------------
Net deferred tax assets $3,422 $3,178
- --------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
NOTE 7: CONVERTIBLE SUBORDINATED NOTES
In July 1997, Wind River issued $140 million of 5% Convertible Subordinated
Notes (the "Notes"), which mature on August 1, 2002. The Notes are
subordinated to all existing and future senior debt and are convertible into
shares of Wind River's Common Stock at a conversion price of $32.33 per
share. The Notes are redeemable at the option of Wind River, in whole or in
part, at any time on or after August 2, 2000 at 102% of the principal amount
initially, and thereafter at prices declining to 100% at maturity, in each
case plus accrued interest. Each holder of these Notes has the right,
subject to certain conditions and restrictions, to require Wind River to
offer to repurchase all outstanding Notes, in whole or in part, owned by such
holder, at specified repurchase prices plus accrued interest upon the
occurrence of certain events. The $5.1 million of costs incurred in
connection with the offering are included in prepaid and other assets. These
unamortized costs are being amortized to interest expense over the 5-year
term of the Notes using the straight-line method, which approximates the
effective interest method. Interest on the Notes began accruing July 31, 1997
and is payable semi-annually on February 1 and August 1, commencing on
February 1, 1998.
NOTE 8: COMPREHENSIVE INCOME
In February 1998, Wind River adopted SFAS 130, "Reporting Comprehensive
Income." 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 Wind River, results from foreign currency translation adjustments
and unrealized gains and losses on available-for-sale securities. The
adoption of SFAS 130 had no impact on Wind River's results of operations.
Wind River's comprehensive income has been presented in the Consolidated
Statements of Stockholders' Equity. As of January 31, 1999, accumulated other
comprehensive loss consisted of foreign currency translation adjustments of
$1,543,000 and unrealized loss on investments of $612,000.
NOTE 9: NET INCOME PER SHARE
In accordance with SFAS 128, the calculation of basic and diluted net income
per share is presented below:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
(In thousands, except per share
information) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic computation:
Net income $ 26,051 $ 4,870 $ 11,280
Weighted average common shares
outstanding 39,536 38,184 34,713
- --------------------------------------------------------------------------------
Basic net income per share $ 0.66 $ 0.13 $ 0.32
- --------------------------------------------------------------------------------
Diluted computation:
Net income $ 26,051 $ 4,870 $ 11,280
- --------------------------------------------------------------------------------
Weighted average common shares
outstanding 39,536 38,184 34,713
Incremental shares from assumed
conversions:
Stock options 2,966 4,046 4,481
Convertible subordinated notes -
Dilutive potential common shares 2,966 4,046 4,481
- --------------------------------------------------------------------------------
Total dilutive average common shares
outstanding 42,502 42,230 39,194
- --------------------------------------------------------------------------------
Diluted net income per share $ 0.61 $ 0.12 $ 0.29
- --------------------------------------------------------------------------------
</TABLE>
Effect of assumed conversion of the convertible subordinated notes is
anti-dilutive and therefore excluded from the above computations.
47
<PAGE>
NOTE 10: COMMON STOCK
On May 24, 1996, March 10, 1997 and February 4, 1999, Wind River effected
three-for-two splits of its Common Stock in the form of stock dividends. Par
value remained at $0.001 per share. Accordingly, all share and per share
amounts have been adjusted to give retroactive effect to these stock splits.
During fiscal year 1999, Wind River repurchased approximately 397,000 shares
of Common Stock at an aggregate cost of approximately $10.0 million. In
January 1999, the Board of Directors increased the amount of the Common Stock
to be repurchased per quarter at prevailing market prices or in negotiated
transactions off the market to $4.0 million per quarter.
In May 1998, Wind River issued 339,917 unregistered shares of its Common
Stock to the shareholders of Zinc Software, Incorporated in exchange for all
of the then outstanding shares of Zinc. In January 1999 Wind River issued
337,500 of unregistered shares of its Common Stock to Innotech Corporation
upon Innotech's exercise of a warrant issued in January 1995, for an
aggregate exercise price of approximately $1.1 million.
NOTE 11: STOCK BASED COMPENSATION PLANS
As of January 31, 1999, Wind River had five stock-based compensation plans.
Wind River accounts for its stock-based compensation plans in conformity with
APB 25 and related Interpretations and has adopted the additional pro forma
disclosure provisions of SFAS 123. Accordingly, no compensation expense has
been recognized for its four fixed stock option plans and its stock purchase
plan.
The Amended and Restated 1987 Equity Incentive Plan (the "1987 Plan") allows
for the issuance of options and other stock awards to Company employees and
consultants to purchase a maximum of 14,175,000 shares of Common Stock. Stock
options granted under the 1987 Plan may be incentive stock options or
nonstatutory stock options. Individuals owning more than 10% of Wind River's
stock are not eligible to receive incentive stock options under the 1987 Plan
unless the option's price is at least 110% of the fair market value of the
Common Stock at the date of grant and the term of the option does not exceed
five years from the date of grant. Nonstatutory stock options issued to
holders of less than 10% of Wind River's stock may be granted at prices of at
least 85% of the fair market value of the stock at the grant date and with
expirations not to exceed ten years from the grant date, although Wind
River's current practice is to grant options with exercise prices at least
100% of the fair market value. Under the terms of the 1987 Plan, option
vesting provisions are established by the Board of Directors when options are
granted. Options generally will vest over four years, although options may be
granted that vest upon achievement of performance criteria. Unexercised
options are automatically canceled three months after termination of the
optionee's employment or other service with Wind River.
In April 1995, Wind River adopted the 1995 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides for
automatic grants of nonstatutory stock options to purchase Common Stock of
Wind River to directors of Wind River who are not employees of, or
consultants to, Wind River or any affiliate of Wind River (Non-Employee
Directors). The Directors' Plan allows for the issuance of options to
purchase a maximum of 337,500 shares of Common Stock. Options issued are
granted at prices of 100% of the fair market value of the Common Stock at the
date of grant and with expirations of ten years from the grant date. Initial
options granted to each Non-Employee Director vest in annual increments over
a period of four years from the date of grant, commencing on the date one
year after the date of grant of the initial options. Subsequent options shall
become 100% vested at the end of the one-year period following the date of
grant as long as the optionee has attended 75% of the meetings of the board
and committees on which he serves. Unexercised options will terminate six
months after such optionee's termination of all service with Wind River and
its affiliates.
In April 1998, Wind River adopted the 1998 Non-Officer Stock Option Plan (the
"Non-Officer Plan"). The Non-Officer Plan provides for grants of
nonstatutory stock options to employees and consultants who are not officers
or directors of Wind River. An aggregate of 1,950,000 shares of Common Stock
have been reserved for issuance under the Non-Officer Plan. The exercise
price of nonstatutory stock option granted under the Non-Officer Plan may not
be less than 85 percent of the fair market value of the Common Stock on the
date of grant. All nonstatutory stock options may be granted under the
Non-Officer Plan have a maximum term of 10 years. Options generally will
vest over four years, although options may be
48
<PAGE>
granted that vest upon achievement of performance criteria. The Non-Officer
Plan and options thereunder may be amended by the Board from time to time.
The Non-Officer Plan will terminate on April 22, 2008.
In June 1998, Wind River adopted the 1998 Equity Incentive Plan (the "1998
Plan"). The 1998 Plan provides for grants of options and other stock awards
to Company employees, directors and consultants to purchase a maximum of
1,500,000 shares of Common Stock. Stock options granted under the 1998 Plan
may be incentive stock options or nonstatutory stock options. Individuals
owning more than 10% of Wind River's stock are not eligible to receive
incentive stock options under the 1998 Plan unless the option's price is at
least 110% of the fair market value of the Common Stock at the date of grant
and the term of the option does not exceed five years from the date of grant.
Nonstatutory stock options issued to holders of less than 10% of Wind River's
stock may be granted at prices of at least 85% of the fair market value of
the stock at the grant date and with expirations not to exceed ten years from
the grant date, although Wind River's current practice is to grant options
with exercise prices at least 100% of the fair market value. Under the terms
of the 1998 Plan, option vesting provisions are established by the Board of
Directors when options are granted. Options generally will vest over four
years, although options may be granted that vest upon achievement of
performance criteria. Unexercised options are automatically canceled three
months after termination of the optionee's employment or other service with
Wind River.
The number of shares for which options under these four plans were
exercisable was approximately 2,338,000, 2,603,000, and 2,054,000 at January
31, 1999, 1998 and 1997, respectively. Activity under the 1987 Plan, the
Directors' Plan, the 1998 Plan and the Non-Officer Plan is summarized as
follows:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 FISCAL 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
per share amounts) SHARES PRICE PER SHARE SHARES PRICE PER SHARE SHARES PRICE PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 6,642 12.30 5,324 4.58 5,867 2.51
Granted 2,471 24.52 2,986 22.36 1,112 11.41
Exercised (1,671) 3.92 (1,080) 2.24 (1,470) 1.65
Canceled (479) 17.41 (588) 11.45 (185) 3.81
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 6,963 18.27 6,642 12.30 5,324 4.58
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about fixed stock options
outstanding at January 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- --------------------------------------
WEIGHTED-AVERAGE
RANGE OF EXERCISE NUMBER REMAINING CONTRACTUAL WEIGHTED-AVERAGE WEIGHTED- AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE NUMBER EXERCISABLE EXERCISE PRICE
(In thousands) (In years) (In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.01 - $2.00 602 4.8 $ 1.31 598 $ 1.31
$2.01 - $5.00 661 6.3 $ 3.48 551 $ 3.37
$5.01 - $10.00 643 7.0 $ 7.61 445 $ 7.60
$10.01 - $15.00 606 7.8 $12.25 306 $12.05
$15.01 - $22.00 847 9.1 $21.27 102 $20.42
$22.01 - $25.00 735 9.2 $23.34 42 $23.96
$25.01 - $27.00 1,757 9.1 $26.11 241 $25.64
$27.01 - $31.92 1,112 8.7 $27.63 53 $27.85
- -----------------------------------------------------------------------------------------------------------------------------------
$.01 - $31.92 6,963 8.1 $18.27 2,338 $ 8.75
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In March 1993, Wind River adopted the Employee Stock Purchase Plan (the
"Purchase Plan"). An aggregate of 1,350,000 shares of Common Stock are
authorized for issuance under the Purchase Plan. Under the Purchase Plan, the
Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings following the commencement of the
Purchase Plan. Employees who participate in an offering can have up to 15% of
their earnings withheld pursuant to the Purchase Plan. The amount withheld is
used to purchase shares of Common Stock on specified dates determined by the
Board. The price of Common Stock purchased under the Purchase Plan is equal
to 85% of the lower of the
49
<PAGE>
fair market value of the Common Stock, determined by the closing price on the
Nasdaq National Market, at the commencement date or the ending date of each
six month offering period.
Sales under the Purchase Plan in fiscal 1999, 1998 and 1997 were 121,000,
96,000 and 127,500 shares of Common Stock, respectively, at an average price
of $20.28, $19.43 and $9.78, respectively. At January 31, 1999, 354,473
shares of Common Stock were available for future purchase.
PRO FORMA DISCLOSURES
Under SFAS 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes model with the following assumptions used
for grants during fiscal 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Years Ended January 31,
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rates 5.30% 6.04% 6.33%
Expected volatility 48% 54% 66%
Expected option life 6.5 years 6.3 years 6.4 years
Expected dividends - - -
- --------------------------------------------------------------------------------
</TABLE>
Wind River applies the provisions of APB 25 and related Interpretations in
accounting for stock based compensation arrangements. Had compensation
expense under these arrangements been determined pursuant to SFAS 123, Wind
River's net income and net income per share would have been as follows:
<TABLE>
<CAPTION>
(In thousands except YEARS ENDED JANUARY 31,
per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 26,051 $ 4,870 $ 11,280
Pro Forma $ 4,279 $ (5,782) $ 7,296
Net income per share:
Basic:
As reported $ 0.66 $ 0.13 $ 0.32
Pro Forma $ 0.11 $ (0.15) $ 0.21
Diluted:
As reported $ 0.61 $ 0.12 $ 0.29
Pro Forma $ 0.10 $ (0.15) $ 0.19
- --------------------------------------------------------------------------------
</TABLE>
The pro forma amounts include compensation expense related to fiscal 1999,
1998 and 1997 stock option grants and sales of Common Stock under the
Purchase Plan only. The effects of applying SFAS 123 on pro forma disclosures
of net income or loss and net income or loss per share for fiscal 1999, 1998
and 1997 are not likely to be representative of the pro forma effects on net
income and net income per share in future years.
50
<PAGE>
NOTE 12: COMMITMENTS AND CONTINGENCIES
Wind River leases certain property consisting of subsidiary headquarters,
customer training facilities, sales facilities and equipment under
non-cancelable operating leases that expire at various dates through March
2007. Future minimum rental payments under non-cancelable operating leases
subsequent to fiscal 1999 are as follows:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
<S> <C>
Year ending January 31,
2000 $ 2,845
2001 1,311
2002 327
2003 150
2004 135
Thereafter 238
- --------------------------------------------------------------------------------
$ 5,006
- --------------------------------------------------------------------------------
</TABLE>
Rental expense for fiscal 1999, 1998 and 1997 was $3.1 million, $2.5 million
and $2.0 million, respectively.
In fiscal 1998, Wind River entered into an operating lease agreement for its
new headquarters facility being constructed on the land Wind River purchased
in Alameda, California. As of January 31, 1999, the lessor has funded a
total of $29.0 million of construction costs and has committed to fund up to
a maximum of $35 million. The operating lease payments will begin in May
1999 and will vary based on the total construction costs of the property,
including capitalized interest, and the London interbank offering rate
("LIBOR").
Construction of the new headquarters building was completed in the first
quarter of fiscal year 2000. In connection with the lease, Wind River is
obligated to enter into a lease of its land in Alameda, California with the
lessor of the building at a nominal rate and for a term of 55 years. If Wind
River terminates or does not negotiate an extension of the building lease,
the ground lease converts to a market rental rate. The lease provides Wind
River with the option at the end of the lease term to either acquire the
building at the lessor's original cost or arrange for the building to be
acquired. Wind River has guaranteed the residual value associated with the
building to the lessor of approximately 82% of the lessor's $35 million
funding obligation. Wind River 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, Wind River must maintain compliance
with certain financial covenants. As of January 31, 1999, Wind River 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 Wind River's financial condition or results of operations.
From time to time, Wind River is subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
patents and other intellectual property rights. Wind River is not currently
aware of any legal proceedings or claims that Wind River believes will have,
individually or in the aggregate, a material adverse effect on Wind River's
financial position or results of operations.
NOTE 13: RELATED PARTY TRANSACTIONS
Wind River distributes its products in Japan through WRSKK, a joint venture
in which Wind River owns a 70% equity interest. Innotech Corporation
("Innotech"), Kobe Steel Ltd. and Nissin Electric Ltd., the other partners in
the joint venture, each owns a 10% equity interest. Wind River entered into
distributor agreements with the three minority interest owners of WRSKK,
Innotech, Kobe Steel, Ltd., and Nissin Electric Ltd., in March 1993, October
1991, and October 1991, respectively. The Innotech agreement was amended in
December 1995 to provide for an extended contract term and to issue to
Innotech a warrant to purchase 337,500 shares of Wind River's Common Stock
for $3.29 per share. The warrant was valued at $100,000 and charged to cost
of sales in fiscal 1996. The warrant was exercised on January 26, 1999.
51
<PAGE>
All products in Japan are sold through WRSKK's three master distributors.
Revenues derived from master distributor transactions in Japan amounted to
$17.0 million, $8.5 million, and $9.1 million in fiscal 1999, 1998 and 1997,
respectively. The percentage of Japan revenues from Innotech in fiscal year
1999, 1998 and 1997 was 53%, 32% and 58%, respectively. The percentage of
Japan revenues from Kobe Steel Ltd. in fiscal year 1999, 1998 and 1997 was
34%, 52% and 24%, respectively. The percentage of Japan revenues from Nissin
Electric Ltd. in fiscal year 1999, 1998 and 1997 was 13%, 16% and 18%,
respectively. Advances from the joint venture partners were approximately
$310,000 and $1.9 million at January 31, 1999 and 1998, respectively.
NOTE 14: SEGMENT AND GEOGRAPHIC INFORMATION
Wind River has adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information," effective for fiscal year 1999. SFAS 131
supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 changes current practice under SFAS 14 by establishing
a new framework on which to base segment reporting and also requires interim
reporting of segment information.
Wind River operates in one industry segment - technology for embedded
operating systems. Management uses one measurement of profitability for its
business. Wind River markets its products and related services to customers
in the United States, Canada, Europe and Asia Pacific. Internationally, Wind
River markets its products and services primarily through its subsidiaries
and various distributors. Revenues are attributed to geographic areas based
on the country in which the customer is domiciled. The distribution of
revenues and assets by geographic location is as follows:
<TABLE>
<CAPTION>
(In thousands) REVENUES ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C>
Fiscal year ended January 31, 1999
Unites States $ 87,787 $ 295,802
Japan 17,018 12,043
Other International 24,595 18,931
- --------------------------------------------------------------------------------
Consolidated $ 129,400 $ 326,776
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 1998
Unites States $ 65,475 $ 266,970
Japan 8,504 7,196
Other International 18,421 13,642
- --------------------------------------------------------------------------------
Consolidated $ 92,400 $ 287,808
- --------------------------------------------------------------------------------
Fiscal year ended January 31, 1997
Unites States $ 41,928 $ 109,359
Japan 9,104 9,740
Other International 12,968 9,562
- --------------------------------------------------------------------------------
Consolidated $ 64,000 $ 128,661
- --------------------------------------------------------------------------------
</TABLE>
Other International consists of the revenues and assets of operations in
Europe and Asia Pacific excluding Japan.
52
<PAGE>
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to the registrant's executive
officers is included in Item 4A of this 10-K. The information required by
the item relating to the registrant's directors is incorporated by reference
from Wind River's proxy statement related to the annual stockholders' meeting
to be held on June 24, 1999, to be filed by Wind River with the Securities
and Exchange Commission ("Proxy Statement").
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Proxy Statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Proxy Statement.
53
<PAGE>
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements and Financial Statement
Schedules - See Index to Consolidated Financial Statements at Item 8 on
page 34 of this report.
All other schedules are omitted because they were not required or the
required information is included in the Consolidated Financial
Statements or Notes thereto.
2. Exhibits
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 (xi) Certificate of Incorporation of Wind River, as amended to date.
3.2 (i) By-laws of Wind River.
10.1* (i) Form of Indemnity Agreement entered into between the Registrant and its officers and directors.
10.2* (iv) 1987 Equity Incentive Plan, as amended to date.
10.3* (i) Form of Incentive Stock Option Grant under the 1987 Equity Incentive Plan.
10.4* (i) Form of Nonstatutory Stock Option Grant under the 1987 Equity Incentive Plan.
10.5* (iv) 1993 Employee Stock Purchase Plan, as amended to date.
10.6 (i) Master Technology License Agreement between the Registrant and Wind River Systems, K.K., dated as of
September 11, 1990.
10.7 (i) Amended Joint Venture Agreement for Wind River Systems, K.K. between the Registrant and the parties named
herein, dated as of October 1, 1991.
10.9 (i) Marina Village Industrial Gross Lease between the Registrant and Alameda Real Estate Investments, dated as of
March 15, 1990, as amended.
10.10* (ii) Employment Agreement between the Registrant and Ronald A. Abelmann, dated as of March 4, 1994.
10.12* (iii) Amended and restated Deferred Compensation Agreement between the Registrant and Ronald A. Abelmann.
10.14* (iv) 1995 Non-Employee Directors' Stock Option Plan.
10.15* (v) Form of Nonstatutory Stock Option Grant under the Non-Employee Director's Stock Option Plan.
10.16 (vi) Indenture between Wind River and Deutschebank AG as Trustee, dated as of July 31, 1997.
10.17 (vi) Convertible Subordinated Notes Purchase Agreement between the Registrant and Deutsche Morgan Grenfell Inc.,
Hambrecht & Quist L.L.C., and Wessels, Arnold & Henderson, L.L.C., dated as of July 31, 1997.
10.18 (vi) Registration Rights Agreement between the Registrant and Deutsche Morgan Grenfell Inc., Hambrecht & Quist
L.L.C., and Wessels, Arnold & Henderson, L.L.C., dated as of July 31, 1997.
10.19 (vii) Lease Agreement between Deutsche Bank AG, New York Branch, and Wind River Systems, Inc., dated as of
September 12 1997.
10.13* (viii) Executive Officers' Change of Control Incentive and Severance Benefit Plan dated as of November 16, 1995.
10.20* (viii) Form of Performance Option under the Amended and Restated Wind River Systems, Inc. 1987 Equity Incentive Plan.
10.21 (ix) 1998 Non-Officer Stock Option Plan.
10.22* (x) 1998 Equity Incentive Plan.
10.23* (x) Form of Stock Option Agreement under the 1998 Equity Incentive Plan.
21 Subsidiaries of Registrant.
23 Consent of Independent Accountants.
54
<PAGE>
27.1 Financial Data Schedule.
- ----------------------------------------------------------------------------------------------------------------------------------
(i) Incorporated by reference from Wind River's Registration Statement on Form S-1 (No. 33-59146), filed with the
Commission on March 5, 1993, as amended through the date hereof.
(ii) Filed as an exhibit to the Annual Report on Form 10-K for the year ended January 31, 1994 and incorporated
herein by reference.
(iii) Filed as an exhibit to Form 10-Q/A, Amendment No. 2, for the quarter ended April 30, 1996 and incorporated
herein by reference.
(iv) Incorporated by reference from Wind River's Registration Statement on Form S-8 (No. 333-06921) filed with the
Commission on June 18, 1996.
(v) Filed as an exhibit to the Annual Report on Form 10-K for the year ended January 31, 1997 and incorporated
herein by reference.
(vi) Filed as an exhibit to Form 10-Q for the quarter ended July 31, 1997 and incorporated herein by reference.
(vii) Filed as an exhibit to Form 10-Q for the quarter ended October 31, 1997 and incorporated herein by reference.
(viii) Filed as an exhibit to the Annual Report on Form 10-K for the year ended January 31, 1998 and incorporated
herein by reference.
(ix) Filed as an exhibit to Form 10-Q for the quarter ended April 30, 1998 and incorporated herein by reference.
(x) Filed as an exhibit to Form 10-Q for the quarter ended July 31, 1998 and incorporated herein by reference.
(xi) Filed as an exhibit to Form 10-Q for the quarter ended October 31, 1998 and incorporated herein by reference.
* Indicates management contracts or compensatory arrangements filed pursuant to Item 601(b) (10) of Regulation S-K.
</TABLE>
(b) Reports on Form 8-K
None.
55
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Wind River Systems, E.C., S.A.R.L, a French corporation.
Wind River Systems GmbH, a German corporation.
Wind River Systems UK, Ltd., a United Kingdom corporation.
Wind River Systems Scotland Ltd., a Scottish corporation
Wind River Systems Italia, S.r.l., an Italian corporation.
Wind River Systems K.K., a Japanese corporation, a majority (70%)-owned
subsidiary.
Wind River Systems International, Inc., a U.S. corporation.
Zinc Software, Incorporated, a U.S. corporation.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-63796, 33-59146, 333-06921, 333-66245 and
333-61053) and the Prospectuses constituting part of Form S-3 (Nos. 333-59311
and 333-38987) of Wind River Systems, Inc. of our report dated February 24,
1999, appearing on page 35 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 23, 1999
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Wind River Systems, Inc.
Dated: April 23, 1999 \s\ RICHARD W. KRABER
-------------------------------
Richard W. Kraber
Vice President of Finance and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities indicated, on April 23, 1999.
<TABLE>
<CAPTION>
NAME TITLE
<S> <C>
\s\ JERRY L. FIDDLER Chairman of the Board
- ----------------------------------
Jerry L. Fiddler
\s\ RONALD A. ABELMANN President, Chief Executive Officer and
- ---------------------------------- Director (principal executive officer)
Ronald A. Abelmann
\s\ DAVID N. WILNER Chief Technical Officer and Director
- ----------------------------------
David N. Wilner
\s\ RICHARD W. KRABER Vice President of Finance, Chief
- ---------------------------------- Financial Officer and Secretary
Richard W. Kraber (principal financial and accounting
officer)
\s\ WILLIAM B. ELMORE Director
- ----------------------------------
William B. Elmore
\s\ DAVID B. PRATT Director
- ----------------------------------
David B. Pratt
</TABLE>
57
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO END OF
(In thousands) THE YEAR EXPENSES (1) WRITE-OFFS THE YEAR
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended January 31, 1999:
Allowance for doubtful accounts $800 $ -- $ (48) $ 752
Allowance for sales returns 660 288 (150) 798
- ------------------------------------------------------------------------------------------
$1,460 $288 $(198) $ 1,550
- ------------------------------------------------------------------------------------------
Year ended January 31, 1998:
Allowance for doubtful accounts $589 $223 $ (12) $ 800
Allowance for sales returns 615 114 (69) 660
- ------------------------------------------------------------------------------------------
$1,204 $337 $ (81) $1,460
- ------------------------------------------------------------------------------------------
Year ended January 31, 1997:
Allowance for doubtful accounts $378 $300 $ (89) $ 589
Allowance for sales returns -- 615 -- 615
- ------------------------------------------------------------------------------------------
$378 $915 $ (89) $1,204
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Additions resulting from increase in allowance for sales returns were offset
against revenue.
58
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1999 AND THE CONSOLIDATED STATEMENT
OF INCOME DATED AS OF THE FISCAL YEAR ENDED JANUARY 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 42,514
<SECURITIES> 9,143
<RECEIVABLES> 31,925
<ALLOWANCES> 1,550
<INVENTORY> 0
<CURRENT-ASSETS> 92,630
<PP&E> 46,944
<DEPRECIATION> 15,594
<TOTAL-ASSETS> 326,776
<CURRENT-LIABILITIES> 36,811
<BONDS> 140,000
0
0
<COMMON> 41
<OTHER-SE> 149,373
<TOTAL-LIABILITY-AND-EQUITY> 149,414
<SALES> 96,446
<TOTAL-REVENUES> 129,400
<CGS> 8,760
<TOTAL-COSTS> 21,701
<OTHER-EXPENSES> 70,610
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,873
<INCOME-PRETAX> 41,798
<INCOME-TAX> 15,747
<INCOME-CONTINUING> 26,051
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,051
<EPS-PRIMARY> .66
<EPS-DILUTED> .61
</TABLE>
