<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 31, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____.
Commission file number 0-21342
WIND RIVER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2873391
(State of incorporation) (I.R.S. Employer Identification No.)
500 WIND RIVER WAY, ALAMEDA, CALIFORNIA 94501
(Address of principal executive office)
(510) 748-4100
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
41,791,022 shares of Common Stock, $.001 par value, as of August 31, 1999
<PAGE>
WIND RIVER SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JULY 31, 1999
INDEX
<TABLE>
<S><C>
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for
the three and six month periods ended July 31,
1999 and 1998
Condensed Consolidated Balance Sheets at July
31, 1999 and January 31, 1999
Condensed Consolidated Statements of Cash Flows
for the six month periods ended July 31, 1999
and 1998
Notes to the Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
Part II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security
Holders
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
Signature
2
<PAGE>
WIND RIVER SYSTEMS, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WIND RIVER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, July 31,
1999 1998 1999 1998
-------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Products $ 28,702 $ 23,737 $ 52,241 $ 43,403
Services 10,902 8,065 20,839 15,123
-------------- ---------------- -------------- ---------------
Total revenues 39,604 31,802 73,080 58,526
-------------- ---------------- -------------- ---------------
Cost of revenues:
Products 2,822 2,371 4,569 4,373
Services 4,708 3,245 8,924 6,080
-------------- ---------------- -------------- ---------------
Total cost of revenues 7,530 5,616 13,493 10,453
-------------- ---------------- -------------- ---------------
Gross margin 32,074 26,186 59,587 48,073
-------------- ---------------- -------------- ---------------
Operating expenses:
Selling and marketing 14,269 11,229 26,555 21,216
Product development and engineering 7,306 4,707 13,789 8,864
General and administrative 4,574 1,923 7,112 3,549
-------------- ---------------- -------------- ---------------
Total operating expenses 26,149 17,859 47,456 33,629
-------------- ---------------- -------------- ---------------
Operating income 5,925 8,327 12,131 14,444
-------------- ---------------- -------------- ---------------
Other income (expense):
Interest income 3,775 3,547 7,459 6,634
Interest expense and other, net (2,278) (2,322) (5,403) (4,460)
-------------------------------- -------------- ---------------
Total other income 1,497 1,225 2,056 2,174
-------------- ---------------- -------------- ---------------
Income before provision for income taxes 7,422 9,552 14,187 16,618
Provision for income taxes 3,180 3,698 5,675 6,496
-------------- ---------------- -------------- ---------------
Net income $ 4,242 $ 5,854 $ 8,512 $ 10,122
============== ================ ============== ===============
Net income per share:
Basic $ 0.10 $ 0.15 $ 0.21 $ 0.25
Diluted $ 0.10 $ 0.13 $ 0.19 $ 0.23
Weighted average shares:
Basic 41,385 40,233 41,325 39,880
Diluted 43,735 43,833 43,827 43,571
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
WIND RIVER SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
July 31, January 31,
1999 1999
------------------- -----------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,201 $ 42,837
Short-term investments 24,262 11,043
Accounts receivable, net 27,399 30,926
Prepaid and other current assets 10,250 10,598
------------------ ------------------
Total current assets 121,112 95,404
Investments 148,177 158,628
Land and equipment, net 34,005 31,513
Other assets 8,855 10,011
Restricted cash 35,879 34,157
--------------------------------------
Total assets $ 348,028 $ 329,713
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,319 $ 3,472
Accrued liabilities 10,153 10,005
Accrued compensation 8,093 6,030
Income taxes payable 5,230 445
Deferred revenue 16,412 17,318
------------------ ------------------
Total current liabilities 44,207 37,270
Convertible subordinated notes 140,000 140,000
------------------ ------------------
Total liabilities 184,207 177,270
------------------ ------------------
Minority interest in consolidated subsidiary 653 551
------------------ ------------------
Stockholders' equity:
Common stock, par value $.001; 125,000 shares authorized;
43,020 and 41,718 shares issued; 41,743 and 40,606
shares outstanding 42 41
Additional paid in capital 130,456 126,856
Treasury stock, 1,277 and 1,112 shares, at cost (29,488) (25,491)
Accumulated other comprehensive income (loss) 1,082 (2,155)
Retained earnings 61,076 52,641
------------------ ------------------
Total stockholders' equity 163,168 151,892
------------------ ------------------
Total liabilities and stockholders' equity $ 348,028 $ 329,713
================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
WIND RIVER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
July 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,512 $ 10,122
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,573 3,790
Minority interest in consolidated subsidiary 102 158
Write-off of investment 500 -
Change in assets and liabilities:
Accounts receivable, net 3,527 (3,117)
Prepaid and other assets (460) 1,241
Accounts payable 847 303
Accrued liabilities 148 (4,304)
Accrued compensation 2,063 (820)
Income taxes payable 4,785 3,371
Deferred revenue (906) 581
---------------- ----------------
Net cash provided by operating activities 23,691 11,325
---------------- ----------------
Cash flows from investing activities:
Acquisition of equipment (5,601) (5,746)
Cash received in acquisitions - 25
Purchases of investments (73,094) (150,664)
Sales and maturities of investments 74,144 100,712
Restricted cash (1,722) (16,515)
---------------- ----------------
Net cash used in investing activities (6,273) (72,188)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 3,601 4,972
Purchase of treasury stock (3,997) (4,997)
---------------- ----------------
Net cash used in financing activities (396) (25)
------------- --------------
Effect of exchange rate changes on cash and cash equivalents (581) 102
---------------- ----------------
Effect of changing fiscal year end of acquired subsidiary (77) -
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 16,364 (60,786)
Cash and cash equivalents at beginning of period 42,837 100,788
---------------- ----------------
Cash and cash equivalents at end of period $ 59,201 $ 40,002
================ ================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated financial statements and related notes
of Wind River Systems, Inc. ("Wind River"or the "Company") are unaudited.
However, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim period
have been included. These condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the fiscal year ended January 31, 1999 included in Wind River's
Annual Report on Form 10-K. The results of operations for the three and six
months ended July 31, 1999 are not necessarily indicative of results to be
expected for the entire fiscal year, which ends on January 31, 2000 or for any
future period.
In accordance with the rules and regulations of the Securities and Exchange
Commission, unaudited condensed consolidated financial statements may omit or
condense certain information and disclosures normally required for a complete
set of financial statements prepared in accordance with generally accepted
accounting principles. However, Wind River believes that the notes to the
condensed consolidated financial statements contain disclosures adequate to make
the information presented not misleading.
The condensed consolidated financial statements include the accounts of Wind
River and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts in the fiscal 1999 condensed consolidated financial statements
have been reclassified to conform to the fiscal 2000 presentation.
2. Write-Off of Investment
During the fiscal year ended January 31, 1999, Wind River paid $500,000 for a
10% interest in the common stock of XACT, Inc. ("XACT") that was accounted for
under the cost method. During April 1999, Wind River entered into an asset
purchase agreement with XACT pursuant to which Wind River acquired certain
office and other equipment from XACT and revised the terms of an existing
distribution agreement with XACT. Subsequently but not pursuant to the asset
purchase agreement, Wind River hired a significant number of XACT employees. As
a result of these events, Wind River believes the future operations and cash
flows of XACT have become uncertain and that Wind River's original investment is
not recoverable. Accordingly, Wind River has recognized a charge totaling
$500,000 for the difference between the carrying amount of its investment and
the net realizable value.
3. RouterWare Acquisition
On June 30, 1999, Wind River completed the acquisition of RouterWare, Inc., a
California corporation. RouterWare develops and markets a suite of software
modules used in data communications products such as bridges, routers, gateways,
and remote access servers. Pursuant to the merger agreement, Wind River issued
730,923 shares of its common stock and reserved an additional 634,065 shares for
issuance upon exercise of outstanding employee stock options in exchange for all
of the outstanding shares of
6
<PAGE>
RouterWare common stock and shares issuable upon exercise of employee stock
options assumed in the merger. Wind River recorded this transaction using the
pooling-of-interests accounting method, and all financial data of Wind River
has been restated to include the historical financial information of
RouterWare.The results of operations previously reported by RouterWare and
the combined amounts for the fiscal years ended January 31, 1999 and 1998,
and for the quarters ended April 30, 1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
Year ended Three months ended
January 31, April 30,
(In thousands) 1999 1998 1999 1998
-------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Wind River $ 129,400 $ 92,400 $ 32,600 $ 26,400
RouterWare 2,503 1,370 876 324
============== ================ ============== ===============
Total revenues $ 131,903 $ 93,770 $ 33,476 $ 26,724
============== ================ ============== ===============
Net income (loss):
Wind River $ 26,051 $ 4,870 $ 4,154 $ 4,435
RouterWare (428) (544) 116 (167)
============== ================ ============== ===============
Total net income $ 25,623 $ 4,326 $ 4,270 $ 4,268
============== ================ ============== ===============
</TABLE>
Because the fiscal year ends of Wind River and RouterWare differ, the
statements of operations date for RouterWare have been recast as shown below:
Wind River RouterWare
Fiscal year ended January 31, 1999 Fiscal year ended December 31, 1998
Fiscal year ended January 31, 1998 Fiscal year ended December 31, 1997
Fiscal year ended January 31, 1997 Fiscal year ended December 31, 1996
RouterWare's net loss of $77,000 for the period January 1, 1999 through
January 31, 1999 has been recorded as a decrease to stockholders' equity for
the quarter ended April 30, 1999.
4. 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.
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 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 became effective
for transactions entered into in fiscal years beginning after March 15, 1999.
Retroactive application is prohibited. We have evaluated the requirements of SOP
98-9 and the effects, if any, on our current revenue recognition policies and
believe the effects of adopting SOP 98-9 will be immaterial to our financial
statements.
7
<PAGE>
5. Cash and Cash Equivalents, Investments and Restricted Cash
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. Fair value is determined based upon the quoted market prices of the
securities as of the balance sheet date.
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 equity securities, 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 accumulated other
comprehensive income component of stockholders' equity until disposition. Fair
value is determined based upon the quoted market prices of the securities as of
the balance sheet date. 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.
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.
6. 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.
Comprehensive income for the three and six months ended July 31, 1999 and 1998
is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
----------------------------- ------------------------------
(In thousands) 1999 1998 1999 1998
------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 4,242 $ 5,854 $ 8,512 $ 10,122
------------- -------------- ------------- ---------------
Other comprehensive income
Foreign currency translation adjustments (185) 381 (581) 66
Unrealized gain (loss) on investments 4,455 (434) 3,818 (944)
------------- -------------- ------------- ---------------
Other comprehensive income (loss) 4,270 (53) 3,237 (878)
============= ============== ============= ===============
Total comprehensive income $ 8,512 $ 5,801 $ 11,749 $ 9,244
============= ============== ============= ===============
</TABLE>
8
<PAGE>
7. Net Income Per Share
Wind River reports both basic net income per share, which is based on the
weighted-average number of common shares outstanding and diluted net income per
share, which is based on the weighted-average number of common shares
outstanding and all dilutive potential common shares outstanding. Potential
dilutive common shares consist of stock options and warrants (using the treasury
stock method) and convertible subordinated notes (using the if converted
method).
The following is a reconciliation of the number of shares used in the basic and
diluted earnings per share computations for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
--------------------------- -------------------------
(In thousands, except per share information) 1999 1998 1999 1998
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares used in basic net income
per share computation 41,385 40,233 41,325 39,880
Effect of dilutive potential common shares 2,350 3,600 2,502 3,691
============= ============ =========== ============
Shares used in diluted net income
per share computation 43,735 43,833 43,827 43,571
============= ============ =========== ============
</TABLE>
The effect of assumed conversion of the convertible subordinated notes is
anti-dilutive and is therefore excluded from the above computations. Options to
purchase approximately 4.5 million and 2.7 million common shares which were
outstanding at July 31, 1999 and 1998, respectively, were not included in the
calculation because the exercise prices were greater than the average market
price of common shares in each respective quarter and the effect would be
anti-dilutive. The exercise prices of these options ranged from $16.75 to $31.92
and $23.00 to $30.68 at July 31, 1999 and 1998, respectively.
8. Treasury Stock
In June 1999, Board of Directors rescinded the $25.0 million increase in stock
repurchases authorized in April 1999 and Wind River's ongoing stock repurchase
program of $4.0 million per quarter. Wind River did not repurchase any shares
under either authorization during the second quarter ended July 31, 1999.
9. Derivative Financial Instruments
Wind River enters into foreign currency forward exchange 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 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. 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 July 31, 1999, Wind River had outstanding forward
contracts to hedge certain foreign currency transaction exposures primarily in
Japanese yen and certain European currencies. The difference between cost and
estimated fair value at July 31, 1999, was immaterial.
9
<PAGE>
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.
The Swap Agreement effectively changes Wind River's interest rate exposure on
its operating lease, which is at one month London interbank offering rate
("LIBOR"), to a fixed rate of 5.9%. At July 31, 1999, the notional amount of the
accreting interest rate swap was $28.5 million. 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 counterparties to meet the term
of their contracts) are generally limited to the amounts, if any, by which the
counterparties' obligations exceed the obligations of Wind River.
10. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("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. In July 1999, the FASB issued SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
SFAS No. 133." SFAS 137 deferred the effective date of SFAS 133 until the first
fiscal quarter beginning after June 15, 2000. Wind River has not yet determined
the impact, if any, of adopting this statement.
11. Segment and Geographic Information
Through the first six months of fiscal 2000, Wind River operated in one industry
segment --technology for embedded operating systems, and management used one
measurement of profitability for its business.
Wind River markets its products and related services to customers in the United
States, Canada, Europe and the Asia Pacific region. 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>
Revenue Assets
--------------------------------------------------- ---------------------------------
Three months ended Six months ended
(In thousands) July 31, July 31, July 31, January 31,
------------------------ -------------------------- ---------------- ---------------
1999 1998 1999 1998 1999 1999
------------ ----------- ------------ ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 26,389 $ 22,282 $ 46,594 $ 40,126 $ 321,035 $ 298,739
Japan 5,792 2,944 11,564 7,052 9,789 12,043
Other International 7,423 6,576 14,922 11,348 17,204 18,931
============ ========= =========== ============ ============= =============
Consolidated $ 39,604 $ 31,802 $ 73,080 $ 58,526 $ 348,028 $ 329,713
============ ========= =========== ============ ============= =============
</TABLE>
Other International consists of the revenues and assets of operations in Europe
and Asia Pacific excluding Japan.
10
<PAGE>
12. Chief Executive Officer Retirement Package
During the second quarter, Wind River incurred approximately $1.2 million
associated with the retirement package of the chief executive officer who
relinquished his responsibilities as president and chief executive officer as
of June 24, 1999. This non-recurring charge is included in general and
administrative expenses for the three months ended July 31, 1999.
11
<PAGE>
WIND RIVER SYSTEMS, INC.
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 business and technologies and
others discussed in Wind River's Annual Report on Form 10-K for the fiscal year
ended January 31, 1999. Wind River disclaims any obligation to update any of the
forward-looking statements contained in this report to reflect any future events
or developments. The following discussions should be read in conjunction with
the unaudited condensed consolidated financial statements and notes included
elsewhere herein.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
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. Wind River's flagship product,
Tornado II -TM-, enables customers to enhance product performance, standardize
designs across projects, reduce research and development costs and shorten
product development cycles.
During the fiscal year ended January 31, 1999, Wind River paid $500,000 for a
10% interest in the common stock of XACT, Inc. ("XACT") that was accounted for
under the cost method. During April 1999, Wind River entered into an asset
purchase agreement with XACT pursuant to which Wind River acquired certain
office and other equipment from XACT and revised the terms of an existing
distribution agreement with XACT. Subsequently but not pursuant to the asset
purchase agreement, Wind River hired a significant number of XACT employees. As
a result of these events, Wind River believes the future operations and cash
flows of XACT have become uncertain and that its original investment is not
recoverable. Accordingly, Wind River has recognized a charge totaling $500,000
for the difference between the carrying amount of its investment and the net
realizable value.
On June 30, 1999, Wind River completed the acquisition of RouterWare, Inc., a
California corporation. RouterWare develops and markets a suite of software
modules used in data communications products such as bridges, routers, gateways,
and remote access servers. Pursuant to the merger agreement, Wind River issued
730,923 shares of its common stock and reserved an additional 634,065 shares for
issuance upon exercise of outstanding employee stock options in exchange for all
of the outstanding shares of RouterWare common stock including shares issuable
upon exercise of employee stock options. Wind River recorded this transaction
using the pooling-of-interests accounting method and all financial data of Wind
River has been restated to include the historical financial information of
RouterWare.
12
<PAGE>
Results of Operations
REVENUES
Total revenues for the three and six months ended July 31, 1999 were $39.6
million and $73.1 million, respectively, compared to $31.8 million and $58.5
million for the same periods in fiscal 1999. The increase in revenues for
both periods is due to increases in revenues of our products and services.
Revenue from the sale of products increased 21% and 20%, to $28.7 million and
$52.2 million, for the three and six months ended July 31, 1999, respectively,
compared to $23.7 million and $43.4 million for the same periods in fiscal 1999.
Product revenues primarily consist of development license fees and run-time
license fees. Wind River typically charges a one-time fee for development
licenses and OEM licenses and a run-time license fee for each copy of Wind
River's operating system embedded in the customer's product. The increase in
product revenues was due primarily to an increase in development license and OEM
licenses revenues, an increase in run-time license revenues, and revenues
related to the sale of RouterWare products. In addition, during the second
quarter, we began shipping Tornado for Managed Switches.
Services revenue increased 35% and 38%, to $10.9 million and $20.8 million, for
the three and six months ended July 31, 1999, respectively, compared to $8.1
million and $15.1 million for the same periods in the prior fiscal year. The
increase was primarily due to increases in revenue from (1) maintenance support
agreements, both new and recurring, (2) training resulting from the increase in
Wind River's installed base of Tornado -TM- software development environment and
software applications provided to customers; and (3) professional services.
These increases were partially offset by a decline in revenues from engineering
services.
Total revenues from international sales for the three and six months ended
July 31, 1999 were $13.2 million and $26.5 million, respectively, compared to
$9.5 million and $18.4 million for the same periods in the prior fiscal year.
The increase of 39% and 44% for the three and six months ended July 31, 1999
was primarily due to increased demand for our products and services in Japan
and Europe. International revenues accounted for 33% and 36% of total
revenues for the three and six months ended July 31, 1999, compared to 30%
and 31% for the same periods in the prior fiscal year. We expect
international sales to continue to represent a significant portion of
revenues, although the actual percentage may fluctuate from period to period.
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 our revenues and backlog in dollar terms or make our 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 our results of
operations. We enter into forward contracts to hedge the short-term impact of
foreign currency fluctuations. In recent years, economic uncertainty and
related weakening of certain foreign currencies against the dollar has
occurred. These factors could adversely affect our future sales, which could
have a material adverse effect on our business, results of operations and
financial condition. Revenues from Asia Pacific sources including Japan
represented 17% and 19% of international revenues for the three and six
months ended July 31, 1999, compared to 12% and 14% for the same periods in
the prior fiscal year. See "Additional Risk Factors that may affect Future
Results of Operations-Our International Business Activities Subject Us to
Risks That Could Adversely Affect Our Business."
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COSTS OF REVENUES
The overall cost of products and services as a percentage of total revenues
was 19% and 18% for the three and six month periods ended July 31, 1999,
compared to 18% for the same periods of fiscal 1999. Product-related cost of
sales as a percentage of product revenues was 10% and 9% for the three and
six month period ended July 31, 1999, compared to 10% for each of the
corresponding periods of the prior fiscal year. Product-related costs consist
primarily of salaries and benefits for production employees, product media,
royalty payments to third parties for the use of their software and
documentation and packaging. Wind River's cost of revenue as a percentage of
product revenues may be affected in the future by the amortization of
purchased technology and distribution rights related to the introduction of
new products, including Tornado II, Tornado for Embedded Internet products
and Tornado for Managed Switches and by the royalty payments to other third
parties for sales related to their products.
Service related cost of revenue as a percentage of service revenue was 43%
for each of the three and six month period ended July 31, 1999, compared to
40% for the same periods in fiscal 1999. 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 our investment in developing new services
offerings and the addition of our new professional services organization. We
expect that customer services costs will increase in absolute dollars as we
continue to increase our customer support staff, customer support
capabilities and professional services organization.
OPERATING EXPENSES
Selling and marketing expenses were $14.3 million and $26.6 million for the
three and six months ended July 31, 1999, compared to $11.2 million and $21.2
million for the same periods in the prior fiscal year. As a percentage of
total revenue, selling and marketing expenses were 36% for both the three and
six months ended July 31, 1999, compared to 35% and 36% for the corresponding
periods in the prior fiscal year. The increase in absolute dollars resulted
primarily from the growth in the number of sales and marketing personnel and
field engineers and related costs and increases in expenses related to
marketing and advertising programs including third party marketing costs for
product introductions and promotions. During the six months ended July 31,
1999, Wind River continued its introduction of Tornado II to the marketplace,
and first customer shipment took place in the second quarter of fiscal 2000.
We expect that sales and marketing expenses will continue to increase in
absolute dollars as we continue to expand our sales and marketing staff.
Product development and engineering expenses were $7.3 million and $13.8
million for the three and six months ended July 31, 1999, compared to $4.7
million and $8.9 million for the same periods in the prior fiscal year. As a
percentage of total revenue, product development and engineering expenses
were 18% and 19% for the three and six months ended July 31, 1999, compared
to 15% for both the corresponding periods in the prior fiscal year. The
increase in product development and engineering expenses is primarily due to
the increase in staff and associated support for engineers to expand and
enhance Wind River's product line, including the costs associated with
integrating the XACT engineering team Wind River hired in April 1999 and with
the additional engineering staff through the acquisition of RouterWare in
June 1999. In addition, Wind River had $148,000 of funded research and
development for the second quarter of fiscal 2000. We believe that product
development and engineering expenses will continue to increase in absolute
dollars as we continue to invest in the development of new products,
technologies, applications and product enhancements.
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General and administrative expenses were $4.6 million and $7.1 million for
the three and six months ended July 31, 1999, compared to $1.9 million and
$3.5 million, respectively, for the corresponding periods in the prior fiscal
year. As a percentage of total revenue, general and administrative expenses
were 12% and 10% for the three and six months ended July 31, 1999, compared
to 6% for each of the corresponding periods in the prior fiscal year. The
increase during the second quarter was due primarily to (1) a non-recurring
charge of $1.2 million incurred for the retirement package for our former
chief executive officer, (2) the costs incurred for the acquisition of
RouterWare of approximately $930,000 and (3) the growth in worldwide
staff and infrastructure investments in the areas of information systems,
finance and administration. The increase for the first six months was
attributed, in addition to the above, to (1) the write-off of a distribution
agreement with XACT in which XACT is unable to complete the development of
their product that is subject to the distribution agreement; and (2) the
costs associated with hiring the XACT employees, acquiring equipment and
other assets of XACT and revising a second distribution agreement for another
product with XACT. We believe that general and administrative expenses will
continue to increase in absolute dollars excluding the non-recurring charges
related to the chief executive officer retirement package, RouterWare and
XACT as it continues to invest in worldwide staff and infrastructure in the
areas of information systems, finance and administration.
OTHER INCOME AND EXPENSES
Interest income was $3.8 million and $7.5 million for the three and six
months ended July 31, 1999, respectively, compared to $3.5 million and $6.6
million for the same periods in the prior fiscal year. The increase in
interest income was primarily due to larger cash and cash equivalent,
investment portfolio and restricted cash accounts compounded with higher
interest rates. Total cash and cash equivalent, investment and restricted
cash at July 31, 1999 and 1998 was approximately $268 million and $232
million, respectively.
Interest expense and other, net was $2.3 million and $5.4 million for the three
and six months ended July 31, 1999, compared to $2.3 million and $4.5 million
for the same periods in the prior fiscal year. Wind River pays interest on the
5.0% Convertible Subordinated Notes, due in 2002 and maturities of certain
issuance costs associated with these 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.
During the fiscal year ended January 31, 1999, Wind River paid $500,000 for a
10% interest in the common stock of XACT that was accounted for under the cost
method. During April 1999, Wind River entered into an asset purchase agreement
with XACT pursuant to which Wind River acquired certain office and other
equipment from XACT and revised the terms of an existing distribution agreement
with XACT. Subsequently but not pursuant to the asset purchase agreement, Wind
River hired a significant number of XACT employees. As a result of these events,
Wind River believes the future operations and cash flows of XACT have become
uncertain and that its original investment is not recoverable. Accordingly, Wind
River has recognized a charge totaling $500,000 for the difference between the
carrying amount of its investment and the net realizable value.
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PROVISION FOR INCOME TAXES
The effective tax rate for the three and six months ended July 31, 1999 was
42.8% and 40.0%, compared to 38.7% and 39.1% for the same periods in the
prior fiscal year. The overall changes in the effective tax rates result
primarily from certain non-deductible acquisition costs related to
RouterWare. In addition, the changes are attributed to the difference between
foreign and domestic tax rates, 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.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, Wind River had working capital of approximately $76.9
million and cash and investments, excluding restricted cash, of approximately
$231.6 million, which include investments with maturities greater than one
year of $148.2 million. The decrease in long-term investments of $10.5
million from January 31, 1999 was primarily due to transfer of funds held
from long-term securities to short-term investments and cash equivalents. The
decrease in long-term investment was partially offset by an approximately
$8.0 million increase in the market value of our equity securities.
During the first six months of fiscal 2000, Wind River's operating activities
provided net cash of $23.7 million due primarily to net income adjusted for
depreciation and amortization, and changes in accounts receivable, accrued
compensation and income taxes payable. These sources of cash were partially
offset by the changes in prepaid and other assets and deferred revenue.
During the first six months of fiscal 2000, investing activities used net
cash of $6.3 million due primarily to purchases of investments, the
acquisition of equipment, and changes in restricted cash. These uses of cash
were partially offset by cash provided relating to the sales of investments.
As Wind River transitioned its investment portfolio from long-term to
short-term investments and cash equivalents, our long-term investments
decreased by $10.5 million. During the six months ended July 31, 1999, Wind
River purchased fixed assets of $5.6 million including $1.8 million for its
new financial databases, applications, and reporting systems. Restricted cash
increased primarily due to the increased collateral funding required for the
operating lease of Wind River's headquarters. The collateral consists of
direct obligations of the United States government, with the majority being
long-term securities.
Wind River's financing activities used net cash of $396,000 due primarily for
stock repurchases of approximately $4.0 million in the first quarter
substantially offset by cash provided by the issuance of common stock from
employee stock option exercises and a purchase of stock by a member of the
Board of Directors. During the six months ended July 31, 1999, Wind River
repurchased as part of its systematic stock repurchase program, 165,000
shares of its common stock at a cost of approximately $4.0 million. In June
1999, the Board of Directors rescinded all stock repurchase authorizations
and we have not made any repurchases since March 17, 1999.
In fiscal 1998, Wind River entered into an operating lease agreement for a new
headquarters facility to be constructed on land owned by Wind River in Alameda,
California. The lessor of the building funded the costs of the building
construction directed by the Company. The building construction was completed in
August 1999 and the final balance on the commitment amounted to $32.4 million.
Operating lease payments commenced upon completion of construction and will vary
based on the London interbank offering rate ("LIBOR".)
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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%. At July 31, 1999, the notional
amount of the accreting interest rate swap was $28.5 million. 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 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 counterparties to meet the
term of their contracts) are generally limited to the amounts, if any, by which
the counterparties' 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.
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 funding
obligation. Wind River is also required to maintain 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 July 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 Wind River's working capital and the cash flow from
operations will be sufficient to meet its working capital requirements for
planned expansion, product development and capital expenditures for the next
twelve months.
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"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
four 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 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 an ongoing program designed to
address the most critical Year 2000 items that would affect its products, its
worldwide business systems, and the operations of 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
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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 fourth quarter of fiscal 2000. 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,
we believe that we have completed approximately 90% of the work required to
obtain Year 2000 Compliance. We expect to incur costs of approximately $4.0
million to implement its financial reporting system. As of July 31, 1999,
Wind River has incurred $2.9 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 fourth
quarter of fiscal 2000. 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
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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
and 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 our current assessment, we do not expect that the
Euro conversion will have a material adverse effect on our business,
financial condition or results of operations.
ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
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.
NUMEROUS FACTORS MAY CAUSE OUR REVENUES AND OPERATING RESULTS TO FLUCTUATE
SIGNIFICANTLY FROM PERIOD TO PERIOD
Our revenues and operating results have fluctuated significantly in the past and
may continue to do so in the future. If our quarterly or annual operating
results do not meet the expectations of securities analysts and investors, the
market price of our common stock could decline significantly. A number of
factors, many of which are outside our control, may cause or contribute to these
fluctuations, including:
- - the amount and timing of orders we receive
- - changes in the length of our products' sales cycles, which increase as our
customers' purchase decisions become more strategic and are made at higher
management levels
- - the success of our customers' products from which we derive our royalty
revenues
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- - the mix of our revenues from the sale of services as compared to
products, which have higher margins
- - our ability to control our operating expenses, which we anticipate will
continue to increase during the current fiscal year
- - our ability to continue to develop, introduce and ship competitive new
products and product enhancements quickly
- - announcements, new product introductions and price reductions by our
competitors
- - our ability to manage costs for fixed-price consulting engagements
- - changes in business cycles that affect the markets in which we sell our
products;
- - economic conditions generally and in international markets, which
historically have provided a significant portion of our revenues
- - foreign currency exchange rates
In addition, we often recognize a significant portion of our quarterly
revenues from orders we receive and ship in the last month of the quarter
and, as a result, we may not be able to forecast our revenues until late in
the period. Further, our customers historically have purchased more of our
products in our fourth fiscal quarter than in other quarters. A decrease in
orders is likely to adversely and disproportionately affect our operating
results, because a significant portion of our expenses are fixed and are
based, in part, on our expectations of future revenues. Therefore, we have a
limited ability to reduce expenses in response to a shortfall in anticipated
revenues. We believe that period-to-period comparisons of our operating
results may not be meaningful, and should not be relied on as an indication
of our future performance.
WE ONLY RECENTLY BEGAN TO FOCUS ON OFFERING SOFTWARE CONSULTING SERVICES AND
THEREFORE, MAY NOT BE AS EXPERIENCED IN THIS BUSINESS AS OTHERS. TO BE
SUCCESSFUL WITH OUR PROFESSIONAL SERVICES BUSINESS, WE MUST OVERCOME SEVERAL
FACTORS INCLUDING:
- - Services contracts can be fixed-price commitments and if our cost of
performing the services consistently and significantly exceeds the amount
the customer has agreed to pay, it could materially adversely affect our
business, financial condition and results of operations.
- - Our cost of services personnel and certified consultants is high which
results in lower gross margins than our software business.
If we cannot accurately estimate our costs and achieve milestones during
consulting engagements and retain competent services personnel, our business,
financial condition and results of operations could be materially adversely
affected.
OUR OPERATING RESULTS ARE DEPENDENT UPON SALES OF A SMALL NUMBER OF PRODUCTS
Revenue from sales of our Tornado and VxWorks family of products and services
has historically accounted for substantially all of our revenue, and we expect
this concentration will continue in the foreseeable future. Any reduction in the
demand for Tornado or VxWorks family of products and services could materially
adversely affect our operating results and cause the price of our common stock
to decline.
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A SIGNIFICANT PORTION OF OUR REVENUE IS DEPENDENT UPON THE MARKET ACCEPTANCE OF
OUR CUSTOMERS' PRODUCTS
One of the key components of our business strategy is to increase revenue
through royalty fees for each copy of our operating system embedded in the
products our customers sell. Success of this strategy depends upon our ability
to successfully negotiate royalty agreements with our customers and their
successful commercialization of the underlying products. To the extent that our
customers are not successful, for whatever reason, our revenues may be reduced
significantly and our business, financial condition and results of operations
could be materially adversely affected.
OUR FAILURE TO RESPOND QUICKLY TO RAPID TECHNOLOGICAL CHANGE WITH PRODUCT
OFFERINGS WILL ADVERSELY AFFECT OUR ABILITY TO COMPETE
The market for embedded real-time software is characterized by ongoing
technological developments, evolving industry standards, and rapid changes in
customer requirements. Our success depends upon our ability to adapt and respond
to these changes. We must continuously update our existing products to keep them
current with customer needs, and must develop new products to take advantage of
new technologies, emerging standards, and expanding customer requirements that
could render our existing products obsolete. Additionally, we have from time to
time experienced delays in the development of new products and the enhancement
of existing products, including, most recently, a delay in the development of
our new product "Tornado for Managed Switches." Such delays are commonplace in
the software industry. Furthermore, if we cannot achieve design wins with key
customers, our business will be significantly affected. Once a customer has
designed the product with a particular operating system, that customer typically
is reluctant to change its supplier, due to the significant costs associated
with selecting a new supplier. If we cannot, for technical, legal, financial or
other reasons, adapt or respond in a cost effective and timely manner to
changing market conditions or customer requirements, our business and operating
results would suffer.
IF OUR NEW PRODUCT LINES ARE NOT ACCEPTED, OUR BUSINESS WOULD BE MATERIALLY
ADVERSELY AFFECTED
Our future success is substantially dependent upon whether our new product lines
gain wide market acceptance. We are continuously engaged in product development
for new or changing markets. In particular, we have invested significant time
and effort, together with a consortium of industry participants, in the
development of I2O, a new specification that is intended to create an open
standard set of interface specifications for high performance Input Output (I/O)
systems. In parallel with this effort, we have developed IxWorks, a real-time
operating system for use in conjunction with the I2O specification. The success
of the I2O specification and the IxWorks product line depends heavily on its
adoption by a broad segment of the industry.
We have also spent, and continue to spend, substantial time and financial
resources to develop software for Internet appliances and Internet
infrastructure, including "Tornado for Managed Switches." 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 are an increasing number of new Internet protocols
to which our products must be ported. It is unclear which of these competing
protocols ultimately will achieve market acceptance. If the protocols upon
which our Internet products are based ultimately fail to be widely adopted,
our business, financial condition and results of operations may be materially
and adversely affected.
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It is difficult to predict whether demand for any of these products will develop
or increase in the future. If these markets, or any other new market we target
in the future, fail to develop, develop more slowly than anticipated or become
saturated with competitors, if our products are not developed in a timely
manner, or if our products and services do not achieve or sustain market
acceptance, our business, financial condition and results of operations would
suffer.
WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
MAINTAIN OR INCREASE SALES OF OUR PRODUCTS
The embedded real-time software industry is highly competitive. We believe that
our principal competition comes from companies that develop real-time operating
systems in-house rather than purchase such systems from independent software
vendors such as Wind River. We also compete with other independent software
vendors, including Accelerated Technology, Inc., Integrated Systems, Inc.,
Mentor Graphics, Inc., Microsoft Corporation, Microware Systems Corporation, QNX
Software Systems, Ltd., and Sun Microsystems, Inc. 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 our
products. Many of our existing and potential competitors have substantially
greater financial, technical, marketing and sales resources. 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. Moreover, our competitors may
foresee the course of market developments more accurately than we do and could
in the future develop new technologies that compete with our products or even
render our products obsolete. Although we believe we presently have certain
technological and other advantages over our competitors, realizing and
maintaining such advantages will require a continued high level of investment in
research and development, marketing and customer service and support. In
addition, competitive pressures could cause us to reduce the prices of our
products, run-time royalties and services, which would result in reduced profit
margins. If we are unable to compete successfully, our business, financial
condition and results of operations would be materially and adversely affected.
ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE OUR STOCKHOLDERS AND INCREASE OUR
INDEBTEDNESS
As part of our business strategy, we have acquired or made investments in
several businesses, products and technologies that complement ours, and we
anticipate that we will continue to do so in the future. We may experience
difficulties integrating an acquired company's operations into ours. As a
result, we may divert management attention to the integration that would
otherwise be available for the ongoing development of our business. Acquisitions
have additional inherent risks, including:
- - difficulties assimilating acquired operations, technologies or products
- - unanticipated costs
- - adverse effects on relationships with customers, suppliers and employees
We may not be successful in integrating the businesses, products, technologies
or personnel we acquire, and our failure to do so could materially adversely
affect our business, financial condition and results of operations. Similarly,
we cannot guarantee that our investments will yield a significant return if any.
In addition, to finance acquisitions, we may issue equity securities, which may
dilute our earnings per share, or incur significant indebtedness, which could
materially adversely affect our results of operations.
23
<PAGE>
Certain of our acquisitions have been accounted for under the
pooling-of-interests accounting method and financial reporting rules. To qualify
these acquisitions as pooling-of-interests for accounting purposes, certain
criteria established in opinions by the Accounting Principles Board and
interpreted by the Financial Accounting Standards Board and the Securities and
Exchange Commission must be met. These opinions are complex and the
interpretation of them is subject to change. In addition, the availability of
pooling-of-interests accounting treatment depends in part upon circumstances and
events occurring after the acquisition. The failure of an acquisition to qualify
for pooling-of-interests accounting treatment for financial reporting purposes
for any reason would materially adversely affect our reported earnings and
likely, the price of our common stock.
WE SELL A SIGNIFICANT PORTION OF OUR PRODUCTS TO CUSTOMERS DEPENDENT UPON
GOVERNMENT FUNDING, WHICH MAY NOT CONTINUE TO BE AVAILABLE
We have derived a portion of our revenues historically 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 we believe that
revenues from sales of products designed for embedded systems applications
(non-VME customers) will account for an increasing percentage of our revenues in
the future, we do expect revenues from the VME market to continue to be
significant for the foreseeable future. Academic institutions and defense
industry participants, which generate most of our VME revenues, are dependent on
government funding. Any unanticipated future termination of government funding
of VME customers could have a material adverse effect on our business, financial
condition and results of operations.
FAILURE TO MANAGE OUR GROWTH COULD SIGNIFICANTLY STRAIN OUR PERSONNEL AND OTHER
RESOURCES
We have experienced, and expect to continue to experience, significant growth in
our headcount and in the scope, complexity and geographic reach of our
operations. Our future success will depend, in part, on our ability to continue
to integrate new operations and personnel. To support this expansion, we must
continue to hire, train, motivate and manage our workforce and improve our
management controls, reporting systems and procedures. Our current and planned
personnel, systems, procedures and controls may not be adequate to support our
future operations. Failure to forecast our needs accurately or to manage our
growth appropriately could materially adversely affect our business, financial
condition and results of operations.
WE DEPEND ON OUR KEY PERSONNEL AND ON ATTRACTING QUALIFIED EMPLOYEES FOR OUR
FUTURE SUCCESS
Our success depends to a significant degree upon the continued contributions of
our senior management and key technical personnel, any of whom would be
difficult to replace. The loss of these individuals could materially adversely
affect our operations. We believe our future success will also depend on our
ability to attract and retain additional highly skilled managerial, product
development, marketing, sales, customer support and operations personnel to
support our growing business. Competition for these personnel is intense,
especially for engineers and especially in the San Francisco Bay Area where we
maintain our headquarters. We cannot be certain that we will be successful in
recruiting and retaining such personnel. Our failure to do so could materially
adversely affect our business, financial condition and results of operations.
24
<PAGE>
OUR INTERNATIONAL BUSINESS ACTIVITIES SUBJECT US TO RISKS THAT COULD ADVERSELY
AFFECT OUR BUSINESS
During the three and six month period ended July 31, 1999 and the fiscal year
ended January 31, 1999, we derived approximately 33%, 36% and 32%, respectively,
of our total revenue from sales outside of North America. We expect that
international sales will continue to generate a significant percentage of our
total revenue in the foreseeable future and we also expect to continue to make
investments to further expand our international operations and to increase our
direct sales force in Europe and Asia.
Risks inherent in international operations include:
- - The imposition of governmental controls and regulatory requirements
- - The costs and risks of localizing products for foreign countries
- - Unexpected changes in tariffs, import and export restrictions and other
barriers and restrictions
- - Greater difficulty in accounts receivable collection
- - The restrictions of repatriation of earnings
- - The burdens of complying with a variety of foreign laws
- - Difficulties in staffing and managing foreign subsidiaries and branch
operations
In addition, 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 our revenues in dollar terms or make our products more
expensive and, therefore, potentially less competitive in foreign markets. Gains
and losses on the conversion to dollars of accounts receivable, accounts payable
and other monetary assets and liabilities arising from international operations
may contribute to fluctuations in our results of operations. Although we enter
into forward contracts to hedge the short-term impact of foreign currency
fluctuations, foreign currency fluctuations could materially adversely affect
Wind River's business, financial condition and results of operations.
We rely on distributors for sales of our products in certain foreign countries.
Accordingly, we are dependent on their ability to promote and support our
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. We cannot predict that our international distributors will
continue to market our products or provide them with adequate levels of support.
Any changes in the relationships we have with our international distributors may
have a material adverse effect on our business, financial condition and results
of operations.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY WOULD IMPAIR OUR COMPETITIVE
POSITION
We believe that our continued success depends primarily upon continuing
innovation, marketing, and technical expertise, as well as the quality of
product support and customer relations. At the same time, our success is
partially dependent upon the proprietary technology contained in our products.
We currently rely on a combination of patents, copyrights, trademarks, trade
secret laws, and contractual provisions to establish and protect our
intellectual property rights in our products. We cannot be certain that the
steps we take to protect our intellectual property will adequately protect our
rights, that others will not independently develop or otherwise acquire
equivalent or superior technology, or that we can maintain such technology as
trade secrets. End user licenses of our software are frequently in the form of
shrink wrap or click wrap license agreements, which are not signed by licensees,
and these may be
25
<PAGE>
unenforceable in some cases. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which software
piracy of our products exists, software piracy can be expected to be a
persistent problem. In addition, employees, consultants, and others who
participate in the development of our products may breach their agreements
with us regarding our intellectual property, and we may not have adequate
remedies for any such breach. Finally, the laws of some of the countries in
which our products are or may be developed, manufactured or sold may not
protect our products and intellectual property rights to the same extent as
the laws of the United States or at all. We may initiate claims or litigation
against third parties for infringement of our proprietary rights or to
establish the validity of our proprietary rights. Litigation to determine the
validity of any claims, whether or not such litigation is determined in our
favor, could result in significant expense to us and divert the efforts of
our technical and management personnel from productive tasks. Our failure to
protect our intellectual property rights could have a material adverse effect
on our business, and financial condition and results of operations.
THIRD PARTY CLAIMS OF PATENT INFRINGEMENT COULD RESULT IN SUBSTANTIAL COST
We occasionally receive communications from third parties alleging patent
infringement, and there is always the chance that third parties may assert
infringement claims against us. Any such claims, with or without merit, could
result in costly litigation, expense of significant resources to develop
non-infringing technology, cause product shipment delays or require us to enter
into royalty or licensing agreements. We cannot be certain that the necessary
licenses will be available or that they can be obtained on commercially
reasonable terms. If we were to fail to obtain such royalty or licensing
agreements in a timely manner and on reasonable terms, our business, financial
condition and results of operations would be materially adversely affected. We
believe that our products and technology do not infringe on the intellectual
property rights of others or upon intellectual property rights that may be
granted in the future pursuant to pending applications. We also believe that we
will not be required to obtain licenses of technology owned by other parties.
DEFECTS IN OUR PRODUCTS COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND EXPOSE
WIND RIVER TO SIGNIFICANT PRODUCT LIABILITY CLAIMS
Because of their complexity, software products, including Wind River's, have in
the past and may in the future contain undetected or unresolved errors,
particularly when first introduced or as new versions are released. Despite
extensive testing, errors may be found in our current or future products or
enhancements after commencement of commercial shipments. If this occurs, we may
experience delay in or loss of market acceptance and sales, product returns,
diversion of development resources, injury to our reputation, and increased
service and warranty costs, any of which could materially adversely affect our
business, financial condition and results of operations.
Our products are increasingly used in applications, such as network
infrastructure, transportation, medical and mission-critical business systems,
in which the failure of the embedded system could cause property damage,
personal injury or economic loss resulting in product liability claims against
us. Although our agreements with our customers typically contain provisions
intended to limit our exposure to liability claims, these provisions may not be
effective in doing so in all circumstances or in all jurisdictions. We maintain
product liability insurance covering certain damages arising from use of our
products, however such insurance may not adequately cover claims brought against
us. Liability claims against us could require us to spend significant time and
money in litigation and, if successful, to pay significant damages. As a result,
such claims could damage our reputation and materially adversely affect our
business, financial condition and results of operations.
26
<PAGE>
WE HAVE SUBSTANTIAL DEBT SERVICE AND PRINCIPAL REPAYMENT OBLIGATIONS, WHICH
COULD MAKE IT DIFFICULT FOR US TO OBTAIN FINANCING
We sold $140 million of 5% convertible subordinated notes in 1997, which mature
in 2002. This debt financing increased significantly both the ratio of our
long-term debt to our total capitalization and our interest expenses. The degree
to which we are leveraged could materially adversely affect our ability to
obtain financing for working capital or acquisitions, should we need to do so.
The notes are convertible into our common stock at a price of $32.33 per share,
and no notes have been converted to date. On August 1, 2002, we will be required
either to pay off or refinance any unconverted notes. We do not know if we will
be able to refinance the notes on favorable terms or at all. If a significant
amount of the notes remains unconverted at maturity and we are unable to
refinance the notes, the repayment would deplete our cash reserves
significantly.
THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The "year 2000 problem" is typically the result of limitations of certain
software written using two digits rather than four digits to define the
applicable year resulting in certain programs recognizing "00" as the year 1900
rather than the year 2000. If systems do not currently recognize date
information when the year changes to 2000, there could be an adverse impact on
our operations. The risk exists primarily in four areas:
- - Potential warranty or other claims from our customers, which may result in
significant expense to Wind River
- - Failure of systems we use to run our business, which could disrupt our
business operations
- - Failure of systems used by our suppliers, which could delay or affect the
quality of our manufacturing or products
- - The potential failure of our products due to Year 2000 problems, which may
require that we replace any such products and potentially incur significant
unexpected expenses
Although we believe our most current releases of our products, including third
party software integrated into certain products are year 2000 compliant, because
all customer situations cannot be anticipated, we may see an increase in
warranty and other claims as a result of the year 2000 transition. In addition,
litigation regarding year 2000 compliance issues may increase. Significant
customer claims or litigation, even if decided in our favor, could have a
material adverse impact on our business, financial condition, or results of
operations.
The majority of our products are combined by our customers with other software
programs or hardware devices not provided by us. These combinations with other
products that are not year 2000 compliant or modifications of our products by
our customers may introduce year 2000 issues for our customers. Our customers'
inability to remedy their own year 2000 problems could affect their demand for
our products which could materially and adversely affect our business, financial
condition and results of operations.
27
<PAGE>
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
The trading price of our common stock has been and is likely to be volatile. It
could fluctuate widely in response to a variety of factors, including:
- - actual or anticipated variations in our operating results
- - announcements of new products or significant events or transactions by us
or our competitors
- - changes in our industry
- - changes in financial estimates by securities analysts
- - pricing pressures
- - general market conditions
- - events affecting other companies that investors believe to be comparable to
us
- - other events or factors that may be beyond our control
In recent years, the stock markets in general and the shares of technology
companies in particular have experienced extreme price fluctuations. These
fluctuations often have been unrelated or disproportionate to the operating
performance of the companies affected. Any change in investors' perception of
our prospects could depress our stock price regardless of our results. Other
broad market and industry factors may decrease our stock price, as may general
political or economic conditions such as recessions or interest rate or currency
fluctuations. In the past, following declines in the market price of a company's
securities, securities class action litigation often has been instituted against
the company. Litigation of this type, even if ultimately unsuccessful, could
result in substantial costs and a diversion of management's time and focus,
which could materially affect our business, financial condition and results of
operations.
28
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
INTEREST RATE SENSITIVITY
Wind River's exposure to market risk for changes in interest rates relate
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 an immediate 100 basis point move in interest rates
affecting Wind River's floating and fixed rate financial instruments as of July
31, 1999 would have an immaterial effect on Wind River's pretax earnings. Wind
River also believes 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. The unrealized gains and losses on the
outstanding forward contracts at July 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 July 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.
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 July 31, 1999, the notional amount of the accreting
interest rate swap was $28.5 million. The estimated fair value at July 31, 1999
was negligible.
29
<PAGE>
EQUITY PRICE RISK
Wind River owns 633,752 shares of common stock of e-SIM Ltd., formerly known
as Emultek, Inc., an Israeli corporation. Wind River purchased the common
stock prior to e-SIM's public offering price of $7.50 per share. e-SIM went
public in July 1998, and at July 31, 1999, the closing price of e-SIM's stock
was $11.13 per share. Wind River also owns 208,333 shares of common stock of
Liberate Technologies, Inc, a Delaware corporation. Wind River purchased the
stock prior to Liberate's public offering price of $16.00 per share. Liberate
went public in July 1999, and at July 31, 1999, the closing price of
Liberate's stock was $19.13 per share. Wind River values these investments
using the closing price of the stock at the end of each month. As a result,
Wind River reflects these investment on its balance sheet at July 31, 1999 at
their market value of approximately $11.0 million in aggregate, with the
unrealized gains and losses excluded from earnings and reported in
accumulated other comprehensive income or loss component of stockholders'
equity.
30
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 1999, Wind River sold 100,000 shares of
unregistered common stock to William B. Elmore, a director of
the Company, for a purchase price of $16.50 per share, the
fair market value of the common stock on such date. The
transaction was exempt from registration under the Securities
Act of 1933, as amended, under Section 4(2) thereof, as a
transaction not involving a public offering.
On June 30, 1999, Wind River issued an aggregate of 720,923
shares of unregistered common stock to the shareholders of
RouterWare, Inc. in exchange for all the outstanding common
stock of RouterWare. As a result, RouterWare is now a wholly
owned subsidiary of Wind River. The transaction was exempt
from registration under the Securities Act of 1933, as
amended, under Section 4(2) thereof, as a transaction not
involving a public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June
24, 1999 in Alameda, California. Of the 40,492,666 shares
outstanding as of the record date, 33,614,716 were present or
represented by proxy at the meeting. The results of the voting
on the matters submitted to the stockholders are as follows:
<TABLE>
<CAPTION>
(1) To elect the following to serve as directors of the
Company for the ensuing year:
Name For Withheld
---- --- --------
<S> <C> <C>
Jerry L. Fiddler 33,544,599 70,117
Ronald A. Abelmann 33,544,418 70,298
William B. Elmore 33,544,599 70,117
David B. Pratt 33,544,599 70,117
Grant Inman 33,544,455 70,261
</TABLE>
<TABLE>
<CAPTION>
(2) To approve Wind River's 1993 Employee Stock Purchase
Plan, as amended, to increase the number of shares of
common stock authorized for issuance under such plan by
150,000 shares:
<S> <C>
Votes for: 32,610,493
Votes against: 933,171
Votes abstaining: 71,052
<CAPTION>
(3) To ratify the selection of PricewaterhouseCoopers LLP as
independent accountants of Wind River for its fiscal
year ending January 31, 2000:
<S> <C>
Votes for: 33,536,526
Votes against: 45,175
Votes abstaining: 33,015
</TABLE>
31
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.24 Retirement and Consulting Agreement between the
Registrant and Ronald A. Abelmann, dated as of
July 29, 1999
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On July 16, 1999, Wind River filed a Current Report on Form
8-K reporting under Item 5 thereof that (i) on June 30, 1999,
the Board of Directors of Wind River Systems, Inc. rescinded
the Company's stock repurchase programs and (ii) on June 30,
1999, the Company acquired RouterWare, Inc., a leading
supplier of networking protocol source code, in a
stock-for-stock acquisition.
32
<PAGE>
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto authorized.
WIND RIVER SYSTEMS, INC.
Date: September 13, 1999 \s\ RICHARD W. KRABER
-----------------------------
Richard W. Kraber
Vice President and Chief Financial Officer
33
<PAGE>
July 28, 1999
Ronald A. Abelmann
Wind River Systems, Inc.
500 Wind River Way
Alameda, California 94501
RE: RETIREMENT AND CONSULTING AGREEMENT
Dear Ron:
This letter sets forth the substance of the retirement and consulting agreement
(the "Agreement") that WIND RIVER SYSTEMS, INC. (the "Company") is offering to
you to aid in your employment transition.
1. RESIGNATION. As of July 29, 1999 (the "Resignation Date"), you are
resigning as an employee and officer of the Company, and from all positions
you may hold with the Company and any affiliated entities, except as a
director of the Company.
2. BOARD OF DIRECTORS. At your discretion and subject to applicable
law, you may remain as a director on the Company's Board of Directors (the
"Board") through the Company's Annual Meeting in 2000. After the Company's
Annual Meeting in 2000, your nomination for membership on the Board and your
service as a director on the Board will be subject to the Board's discretion.
You agree that you will receive no compensation, bonus, benefits, stock
options, accelerated vesting, stock, or other equity rights in exchange for
service on the Board after the Resignation Date; and you further agree that
you will not be considered a non-employee director for purposes of any stock
option grants or other compensation which may be provided to directors of the
Company.
3. ACCRUED SALARY AND PAID TIME OFF.
A. ACCRUED SALARY. On the Resignation Date, the Company will pay
you all accrued salary, subject to standard payroll deductions and
withholdings. You are entitled to this payment regardless of whether or not
you sign this Agreement.
B. BONUS, VACATION AND SABBATICALS. You agree to waive and
relinquish any right you otherwise would have had to payments to you on the
Resignation Date for accrued bonus, vacation and sabbaticals earned through
the Resignation Date.
4. CONSULTING. The Company agrees to retain you, and you agree to make
yourself available and perform, as a consultant, under the terms specified
below.
A. CONSULTING PERIOD. The consulting relationship commences as of
August 1, 1999 and continues through March 31, 2002 (the "Consulting Period").
B. CONSULTING DUTIES. For purposes of this Agreement,
"Consulting" refers to providing services to the Company in any area of your
expertise, but Consulting will not
<PAGE>
include any services which are otherwise required in the discharge of your
duties as a member of the Board. During the first three months of the
Consulting Period, you agree to provide Consulting for up to ten (10) hours
per month. For the remainder of the Consulting Period, you agree to provide
Consulting for up to five (5) hours per month. You further agree to exercise
the highest degree of professionalism and utilize your expertise and creative
talents in performing Consulting. You agree not to represent or purport to
represent the Company in any manner whatsoever to any third party during the
Consulting Period unless authorized by the Company in writing to do so.
C. CONSULTING FEES. During the Consulting Period, the Company
will pay you fees totaling nine hundred sixty-eight thousand seven hundred
fifty dollars ($968,750.00), on a monthly basis in the amount twenty-nine
thousand three hundred fifty-six dollars and six cents ($29,356.06) per month
("Consulting Fees"), commencing on August 1, 1999. The Company will not
deduct or withhold any amount from your Consulting Fees for taxes, social
security, or other payroll deductions, but will instead issue you an IRS Form
1099 with respect to your Consulting Fees. You acknowledge that in performing
Consulting services, you will be serving as an independent contractor, not a
Company employee, and you will be entirely responsible for the payment of all
employment taxes and any other taxes due and owing as a result of your
Consulting Fees. You hereby indemnify the Company and hold it harmless from
any liability for any taxes, penalties, and interest that may be assessed by
any taxing authority with respect to the Consulting Fees, with the exception
of the employer's share of social security, if any.
D. NONCOMPETITION AND OTHER WORK ACTIVITIES. During the
Consulting Period and for three (3) months thereafter, in order to protect
the trade secrets and confidential and proprietary information of the
Company, except on behalf of the Company, you will not directly or
indirectly, whether as an officer, director, stockholder, partner,
proprietor, associate, representative, consultant, or in any capacity
whatsoever engage in, become financially interested in, be employed by or
have any business connection with any other person, corporation, firm,
partnership or other entity whatsoever which competes with the Company,
anywhere in the world, in the business of embedded software (including, but
not limited to, Microsoft Corporation and ISS); provided, however, that you
may own, as a passive investor, securities of any competitor corporation, so
long as your direct holdings in any one such corporation shall not in the
aggregate constitute more than 1% of the voting stock of such corporation.
Except as provided in the preceding sentence, during the Consulting Period
you may engage in employment, consulting or other work relationships or
professional or non-professional activities in addition to providing
Consulting to the Company. The Company agrees to make reasonable arrangements
to enable you to perform Consulting at such times and in such manner so that
it does not unreasonably interfere with other such activities in which you
may engage.
5. STOCK OPTIONS.
A. ACCELERATED VESTING. Subject to the approval of the Board, the
vesting of all of your outstanding unvested stock options shall be
accelerated such that they will be fully vested as of July 29, 1999, except
for the unvested stock options under your September 8, 1997 Option Grant and
your April 13, 1999 Option Grant.
<PAGE>
B. SEPTEMBER 8, 1997 OPTION GRANT. Subject to the approval of the
Board, the vesting of your option under the September 8, 1997 Option Grant
shall be accelerated such that ninety-seven thousand (97,000) shares shall be
fully vested as of July 29, 1999, and the remainder of the September 8, 1997
Option Grant will be terminated.
C. APRIL 13, 1999 OPTION GRANT. Subject to the approval of the
Board, the vesting of your option under the April 13, 1999 Option Grant shall
be accelerated such that seventy thousand (70,000) shares shall be fully vested
as of July 29, 1999, and the remainder of the April 13, 1999 Option Grant
will be terminated.
D. EXERCISE DATE. You will have the right to exercise all vested
options through the end of the three month period following the earlier of
the termination of the Consulting Period or your material breach of this
Agreement. All unexercised options will terminate after such three month
period.
E. TAX TREATMENT. You acknowledge that the Company is not making
any representation regarding the tax treatment of any of your stock options
and that you have been advised by the Company to seek independent tax advice
on that matter.
6. HEALTH INSURANCE. To the extent provided by the federal COBRA law
or, if applicable, state insurance laws, and by the Company's current group
health insurance policies, you will be eligible to continue your group health
insurance benefits at your own expense. Later, you may be able to convert to
an individual policy through the provider of the Company's health insurance,
if you wish. If you elect continued coverage under COBRA, the Company, as
part of this Agreement, will pay your COBRA premiums for seventeen (17)
months following the Resignation Date. The Company's obligation to make these
payments will cease immediately if you become eligible for any other health
insurance benefits at the expense of a new employer. You agree to immediately
provide the Company written notice of the availability of health insurance if
you accept new employment prior to December 31, 2000.
7. LIFE INSURANCE POLICY. The Company will continue to make the
remaining three (3) years of payments under your split dollar life insurance
arrangement (the "Arrangement") (attached hereto as Exhibit A) until the five
million dollar ($5,000,000) life insurance policy subject to such Arrangement
(the "Policy") (attached hereto as Exhibit B) is fully paid. You agree that
the Company will receive reimbursement of the aggregate of the premiums paid
by the Company under the Policy pursuant to the Arrangement in the form of
all dividends thereon or, to the extent necessary, proceeds of the Policy.
8. OTHER COMPENSATION OR BENEFITS. You acknowledge that, except as
expressly provided in this Agreement, you will not receive any additional
compensation, bonuses, stock, stock options, accelerated vesting, other
equity rights, severance or benefits after the Resignation Date, except
insofar as you have vested rights in the Company's 401(k) retirement plan as
of the Resignation Date.
9. EXPENSE REIMBURSEMENTS. You agree that, within thirty (30) days of
the Resignation Date, you will submit your final documented expense
reimbursement statement
<PAGE>
reflecting all business expenses incurred through the Resignation Date, if
any, for which you seek reimbursement. The Company will reimburse you for
these expenses pursuant to its regular business practice. The Company will
reimburse you for any documented expenses incurred with the Company's prior
written authorization in performing Consulting.
10. RETURN OF COMPANY PROPERTY. By the Resignation Date, you agree to
return to the Company all Company documents (and all copies thereof) and
other Company property that you have had in your possession at any time,
including, but not limited to, Company files, notes, notebooks, memoranda,
correspondence drawings, books and records, plans and forecasts, financial
information, personnel information, sales and marketing information, research
and development information, specifications, computer-recorded information,
tangible property (including, but not limited to, computers, credit cards,
entry cards, identification badges and keys); and any materials of any kind
that contain or embody any proprietary or confidential information of the
Company (and all reproductions thereof). It is notwithstanding the foregoing,
we have agreed that you will keep your notebooks and copies of the WRS Annual
Operating Plans for your own historical purposes and which will be kept as
strictly confidential to you.
11. PROPRIETARY INFORMATION OBLIGATIONS. Agree to maintain in
confidence and not to use or disclose any confidential or proprietary
information of the Company which you may obtain or develop during the
Consulting Period, except as expressly authorized by the Company.
12. NONSOLICITATION. You agree that for three (3) years following the
Resignation Date, you will not directly or indirectly solicit, entice,
induce, or encourage any employee, consultant or independent contractor of
the Company to terminate his or her relationship with the Company in order to
become an employee, consultant or independent contractor to or for any other
person or entity.
13. CONFIDENTIALITY. The provisions of this Agreement will be held in
strictest confidence by you and the Company and will not be publicized or
disclosed in any manner whatsoever; PROVIDED, HOWEVER, that: (a) you may
disclose this Agreement to your immediate family; (b) the parties may
disclose this Agreement in confidence to their respective attorneys,
accountants, auditors, tax preparers, and financial advisors; (c) the Company
may disclose this Agreement as necessary to fulfill standard or legally
required corporate reporting or disclosure requirements; and (d) the parties
may disclose this Agreement insofar as such disclosure may be necessary to
enforce its terms or as otherwise required by law. In particular, and without
limitation, you agree not to disclose the terms of this Agreement to any
current or former Company employee.
14. NONDISPARAGEMENT. Both you and the Company agree not to disparage
the other party, and the other party's officers, directors, employees,
shareholders and agents, in any manner likely to be harmful to them or their
business, business reputation or personal reputation; provided that both you
and the Company will respond accurately and fully to any question, inquiry or
request for information when required by legal process.
<PAGE>
15. RELEASE. In exchange for the payments and other consideration
under this Agreement to which you would not otherwise be entitled and except
as otherwise set forth in this Agreement, you hereby release, acquit and
forever discharge the Company, its parents and subsidiaries, and their
officers, directors, agents, servants, employees, attorneys, shareholders,
successors, assigns and affiliates, of and from any and all claims,
liabilities, demands, causes of action, costs, expenses, attorneys fees,
damages, indemnities and obligations of every kind and nature, in law,
equity, or otherwise, known and unknown, suspected and unsuspected, disclosed
and undisclosed, arising out of or in any way related to agreements, events,
acts or conduct at any time prior to and including the execution date of this
Agreement, including but not limited to: all such claims and demands directly
or indirectly arising out of or in any way connected with your employment
with the Company or the termination of that employment; claims or demands
related to salary, bonuses, commissions, stock, stock options, or any other
ownership interests in the Company, vacation pay, fringe benefits, expense
reimbursements, severance pay, or any other form of compensation; claims
pursuant to any federal, state or local law, statute, or cause of action
including, but not limited to, the federal Civil Rights Act of 1964, as
amended; the federal Americans with Disabilities Act of 1990; the federal Age
Discrimination in Employment Act of 1967, as amended ("ADEA"); the California
Fair Employment and Housing Act, as amended; tort law; contract law; wrongful
discharge; discrimination; harassment; fraud; defamation; emotional distress;
and breach of the implied covenant of good faith and fair dealing.
Notwithstanding the release in this Section 15, you are not hereby releasing
the Company from any obligation it may have to defend and indemnify you for
any claims or liabilities arising from activities within the course and scope
of your service as an officer or director of the Company.
16. ADEA WAIVER. You acknowledge that you are knowingly and
voluntarily waiving and releasing any rights you may have under the ADEA. You
also acknowledge that the consideration given for the waiver and release in
the preceding paragraph hereof is in addition to anything of value to which
you were already entitled. You further acknowledge that you have been advised
by this writing, as required by the ADEA, that: (a) your waiver and release
do not apply to any rights or claims that may arise after the execution date
of this Agreement; (b) you should consult with an attorney prior to executing
this Agreement; (c) you have twenty-one (21) days to consider this Agreement
(although you may choose to voluntarily execute this Agreement earlier); (d)
you have seven (7) days following the execution of this Agreement by the
parties to revoke the Agreement; and (e) this Agreement will not be effective
until the date upon which the revocation period has expired, which will be
the eighth day after this Agreement is executed by you, provided that the
Company has also executed this Agreement by that date ("Effective Date").
17. RELEASE BY THE COMPANY. Except as otherwise set forth in this
Agreement, the Company hereby releases, acquits and forever discharges you
and your agents, attorneys, successors, assigns and affiliates from any and
all claims, liabilities, demands, causes of actions, costs, expenses,
attorneys fees, damages, indemnities, and obligations of every kind and
nature, in law, equity, or otherwise, known and unknown, suspected and
unsuspected, disclosed and undisclosed arising out of or in any way related
to agreements, events, acts or conduct at any time prior to and including the
date the Company executes this Agreement, relating to any act or omission by
you within the course and scope of your employment with the Company.
<PAGE>
18. SECTION 1542 WAIVER. In granting the releases herein, you and the
Company acknowledge that each has read and understands California Civil Code
section 1542: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT
WITH THE DEBTOR." You and the Company expressly waive and relinquish all
rights and benefits under that section and any law of any jurisdiction of
similar effect with respect to the release of any unknown or unsuspected
claims contained in this Agreement.
19. ARBITRATION. To ensure rapid and economical resolution of any and
all disputes that may arise in connection with this Agreement, you and the
Company agree that any and all disputes, claims, causes of action, in law or
equity, arising from or relating to this Agreement or its enforcement,
performance, breach, or interpretation, with the sole exception of those
disputes that may arise from your Proprietary Information and Inventions
Agreement, will be resolved by final and binding confidential arbitration
held in San Francisco, California and conducted by Judicial Arbitration &
Mediation Services/Endispute ("JAMS"), under its then-existing Rules and
Procedures. Nothing in this paragraph is intended to prevent either you or
the Company from obtaining injunctive relief in court to prevent irreparable
harm pending the conclusion of any such arbitration.
20. MISCELLANEOUS. This Agreement, including all exhibits, constitutes
the complete, final and exclusive embodiment of the entire agreement between
you and the Company with regard to this subject matter. It is entered into
without reliance on any promise or representation, written or oral, other
than those expressly contained herein, and it supersedes any other such
promises, warranties or representations. This Agreement may not be modified
or amended except in a written agreement signed by both you and a duly
authorized officer of the Company. This Agreement will bind the heirs,
personal representatives, successors and assigns of both you and the Company,
and inure to the benefit of both you and the Company, their heirs, successors
and assigns. If any provision of this Agreement is determined to be invalid
or unenforceable, in whole or in part, this determination will not affect any
other provision of this Agreement and the provision in question will be
modified by the court so as to be rendered enforceable in a manner consistent
with the intent of the parties insofar as possible. This Agreement will be
deemed to have been entered into and will be construed and enforced in
accordance with the laws of the State of California as applied to contracts
made and to be performed entirely within California.
If this Agreement is acceptable to you, please sign below and return the
original to me.
I wish you the best in your future endeavors.
Sincerely,
WIND RIVER SYSTEMS, INC.
By: \s\ Richard W. Kraber
-----------------------------------------------------
Richard W. Kraber
Vice President of Finance and Chief Financial Officer
AGREED:
\s\ Ronald A. Abelmann
- -----------------------------------------------------
Ronald A. Abelmann
<PAGE>
Exhibit A - Split Dollar Life Insurance Arrangement
Exhibit B - Life Insurance Policy
<PAGE>
EXHIBIT A
SPLIT DOLLAR LIFE INSURANCE ARRANGEMENT
<PAGE>
EXECUTIVE LIFE INSURANCE PLAN FOR RON ABELMANN - JOINT LIFE EQUIVALENT
JOHN HANCOCK LIFE
ROLLOUT FROM POLICY VALUES AT YEAR 16
INSURANCE VALUES BASED ON A GROSS EARNINGS RATE OF 10 %
<TABLE>
<CAPTION>
WINDRIVER SYSTEMS
--------------- ------------------------------------------------------------------------------------------------
-1- -2- -3- -4- -5- -6- -7-
After-tax
Policy Total Net Cumulative Cost of Corporate Corporate Corporate
Year Age Annual Corporate Corporate US38 Net Cash Net Death Charge to
Premium Premium Premium Bonus Value Benefit Earnings
--------------- -----------------------------------------------------------------------------------------------
Col. 1 - US38 Cumulative Col. 8 *40% Lesser of Col. 3 Col. 5[t] - Col. 5
less rollouts of Col. 2 Col. 3 or Col. 12 [t-1] - Col. 2
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 60 $187,553 $185,687 $185,687 $1,119 $150,081 $185,688 (35,606)
1999 61 187,553 185,350 371,037 1,322 338,878 371,038 3,446
2000 62 187,553 184,950 555,987 1,562 526,168 555,988 2,340
2001 63 187,553 184,478 740,466 1,845 737,814 740,466 27,168
2002 64 187,553 183,914 924,380 2,183 924,380 924,380 2,652
2003 65 0 (4,300) 920,079 2,580 920,079 920,080 0
2004 66 0 (5,091) 914,988 3,055 914,988 914,988 0
2005 67 0 (6,025) 908,963 3,615 908,963 908,963 0
2006 68 0 (7,131) 901,832 4,279 901,832 901,832 0
2007 69 0 (8,446) 893,386 5,068 893,386 893,386 0
Subtotals $937,765 $893,386 $893,386 $26,627 $893,386 $893,386 $0
2008 70 $0 ($9,998) $883,388 $5,999 $883,388 $883,388 $0
2009 71 0 (11,837) 871,551 7,102 871,551 871,551 0
2010 72 0 (14,012) 857,539 8,407 857,539 857,539 0
2011 73 0 (16,586) 840,953 9,951 840,953 840,953 0
2012 74 0 (19,631) 821,322 11,778 821,322 821,323 0
2013 75 0 (821,322) 0 0 0 0 0
2014 76 0 0 0 0 0 0 0
2015 77 0 0 0 0 0 0 0
2016 78 0 0 0 0 0 0 0
2017 79 0 0 0 0 0 0 0
Subtotals $937,765 $0 $0 $69,866 $0 $0 $0
2018 80 $0 $0 $0 $0 $0 $0 $0
2019 81 0 0 0 0 0 0 0
2020 82 0 0 0 0 0 0 0
2021 83 0 0 0 0 0 0 0
2022 84 0 0 0 0 0 0 0
2023 85 0 0 0 0 0 0 0
2024 86 0 0 0 0 0 0 0
2025 87 0 0 0 0 0 0 0
2026 88 0 0 0 0 0 0 0
2027 89 0 0 0 0 0 0 0
Totals $937,765 $0 $0 $69,866 $0 $0 $0
------------- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TOTAL INSURANCE
EXECUTIVE BENEFIT
------------------------------------------------------------------------------------- --------------------------
-8- -9- -10- -11- -12- -13- -14-
Bonus from IRR on Exec.
Year Age Company Tax on Contribution Total Total
US38 "US 38" Net Cash Net Death to Trust's Cash Death
Cost Bonus Value Benefit Death Benefit Value Benefit
------------------------------------------------------------------------------------- ---------------------------
based on a 40 % Col. 12- Col. 5 Col. 13 - Col.5 IRR Col. 7 to Col. 5 + Col.10 Col. 6 + Col. 11
tax bracket Col. 9
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 60 $1,866 $746 $0 $5,000,000 669927.97% $150,081 $5,185,688
1999 61 2,203 881 0 5,000,000 8026.69% 338,878 5,371,038
2000 62 2,603 1,041 0 5,000,000 1744.26% 526,168 5,555,988
2001 63 3,075 1,230 0 5,000,000 772.51% 737,814 5,740,466
2002 64 3,639 1,456 41,283 5,000,000 455.24% 965,663 5,924,380
2003 65 4,300 1,720 119,079 5,000,000 310.35% 1,039,158 5,920,080
2004 66 5,091 2,037 201,061 5,000,000 230.52% 1,116,049 5,914,988
2005 67 6,025 2,410 291,827 5,000,000 181.00% 1,200,790 5,908,963
2006 68 7,131 2,852 392,141 5,000,000 147.69% 1,293,972 5,901,832
2007 69 8,446 3,378 502,829 5,000,000 123.93% 1,396,215 5,893,386
Subtotals $44,379 $17,752 $502,829 $5,000,000 123.93% $1,396,215 $5,893,386
2008 70 $9,998 $3,999 $624,999 $5,000,000 106.22% $1,508,387 $5,883,388
2009 71 11,837 4,735 758,728 5,000,000 92.54% 1,630,279 5,871,551
2010 72 14,012 5,605 905,023 5,000,000 81.69% 1,762,562 5,857,539
2011 73 16,586 6,634 1,064,855 5,000,000 72.88% 1,905,808 5,840,953
2012 74 19,631 7,852 1,239,339 5,000,000 65.59% 2,060,661 5,821,323
2013 75 0 0 1,335,187 5,000,000 59.50% 1,335,187 5,000,000
2014 76 0 0 1,437,369 5,000,000 54.33% 1,437,369 5,000,000
2015 77 0 0 1,545,686 5,000,000 49.88% 1,545,686 5,000,000
2016 78 0 0 1,659,765 5,000,000 46.03% 1,659,765 5,000,000
2017 79 0 0 1,778,993 5,000,000 42.67% 1,778,993 5,000,000
Subtotals $116,443 $46,577 $1,778,993 $5,000,000 42.67% $1,778,993 $5,000,000
2018 80 $0 $0 $1,903,394 $5,000,000 39.71% 1,903,394 $5,000,000
2019 81 0 0 2,032,508 5,000,000 37.10% 2,032,508 5,000,000
2020 82 0 0 2,165,668 5,000,000 34.77% 2,165,668 5,000,000
2021 83 0 0 2,302,127 5,000,000 32.69% 2,302,127 5,000,000
2022 84 0 0 2,439,946 5,000,000 30.82% 2,439,946 5,000,000
2023 85 0 0 2,578,379 5,000,000 29.13% 2,578,379 5,000,000
2024 86 0 0 2,716,716 5,000,000 27.60% 2,716,716 5,000,000
2025 87 0 0 2,854,633 5,000,000 26.22% 2,854,633 5,000,000
2026 88 0 0 2,989,322 5,000,000 24.95% 2,989,322 5,000,000
2027 89 0 0 3,119,372 5,000,000 23.79% 3,119,372 5,000,000
Totals $116,443 $46,577 $3,119,372 $5,000,000 23.79% $3,119,372 $5,000,000
------------------------------------------------------------------------------------- ---------------------------
Insurance values are not valid without complete ledger illustration and prospectuses.
Insurance values are based on an annual average gross earnings rate of 10 %. This is a
hypothetical projection, not a guarantee of future performance.
Insurance values are based on current insurance company mortality charges, expenses, and taxes. ---------------------------------
Investment returns and insurance values are based on projections and are not guaranteed. Registered Representatives
Insurance values are based on a male age 60, and a female Mutual Service Corporation
age 57; both non-smokers in good health. Member NASD & SIPC
The annual economic benefit is calculated using the lesser of the insurance company's ----------------------------------
published one-year term rates or the IRS' US 38 rates. 08-Apr-98
Sitzmann, Morris and Lavis does not provide legal or accounting advice. Please consult your legal
and accounting advisors in these areas.
</TABLE>
SITZMANN, MORRIS, & LAVIS
<PAGE>
EXHIBIT B
LIFE INSURANCE POLICY
<PAGE>
JOHN HANCOCK Variable Life Insurance Company John Hancock Place
Boston, Massachusetts 02117
INSUREDS RONALD A ABELMANN SUM INSURED $5,185,688
JERYL C ABELMANN AT ISSUE
POLICY NUMBER 20 023 859 DATE OF ISSUE MARCH 3, 1998
DEATH BENEFIT OPTION A (see Section 4)
PLAN FLEXIBLE PREMIUM VARIABLE SURVIVORSHIP LIFE INSURANCE
JOINT VARIABLE LIFE INSURANCE
The John Hancock Variable Life Insurance Company agrees, subject to the
conditions and provisions of this policy, to pay the Death Benefit to the
Beneficiary upon the death of the Surviving Insured if such death occurs
while the policy is in full force, and to provide the other benefits, rights,
and privileges of the policy. The Death Benefit (see Section 4) will be
payable, subject to the 'Deferral of Determinations and Payments' provision,
on receipt at the Home Office of the Company of due proof of the Surviving
Insured's death. Also, due proof of the death of the first Insured to die
must be given to us when such death occurs.
The Death Benefit of this policy will increase or decrease based on the
experience of the Separate Accounts. The Death Benefit may be guaranteed, if
the Guaranteed Minimum Death Benefit feature is elected and if premiums are
paid as described in Section 6.
The policy, which includes any Riders which are a part of the policy on
delivery, is issued in consideration of the application and the payment of
the Minimum Initial Premium shown on Page 4.
The Policy Specifications on pages 3 and 4 and the conditions and provisions
on this and the following pages are part of the policy.
Signed for the Company at Boston, Massachusetts.
\s\ Henry D. Shaw \s\ Jason Morgan
President Secretary
Variable Survivorship Policy
Flexible Premiums
Death Benefit payable at death of Surviving Insured
Not eligible for dividends
Schedule of benefits and premiums and the premium class are shown on page 3
To the extent any benefit, payment, or value under this policy (including the
Account Value) is based on the investment experience of a Separate Account,
such benefit, payment, or value may increase or decrease in accordance with
the investment experience of the Separate Account and is not guaranteed as to
fixed dollar amount. However, this policy may provide a Guaranteed Minimum
Death Benefit, if such option is elected at issue and if premiums are paid as
described in Section 6.
Right to Cancel - The Owner may surrender this policy by delivering or
mailing it to the Company at Boston, Massachusetts (or to the agent or agency
office through which it was delivered) within 45 days after the date of Part
A of the application, or within 10 days after receipt by the Owner of the
policy, or within 10 days after mailing by the Company of the Notice of
Withdrawal Right, whichever is latest. Immediately on such delivery or
mailing, the policy shall be deemed void from the beginning. Any premium paid
on it will be refunded.
<PAGE>
1. POLICY SPECIFICATIONS
Names of Insureds RONALD A ABELMANN JERYL C ABELMANN
Age at Issue 60 58
Sex M F
Premium Class Standard Nonsmoker Standard Nonsmoker
Owner, Beneficiary As designated in the application subject to Section 18 of
the policy.
Policy Number 20 023 859 Plan Flexible Premium
Variable Survivorship
Life
Date of Issue March 3, 1998 Total Sum Insured $5,000,000 Basic Sum
at Issue Insured plus
$185,688 Additional
Sum Insured
Death Benefit Option A State of Issue CA
Option (See Section 4)
Other Benefits and None Selected
Riders
Special Services
----------------
Policy Loan Minimum Loan Amount: $1,000; (See Section 10)
Partial Withdrawals Minimum Withdrawal Amount: $1,000
of Account Value Withdrawal charge: $20. (See Section 11)
Subaccount Allocation Until changed in accordance with Section 14. Net
Premiums and all other credits will be allocated
among the Variable Account and the Fixed Account
as shown in the application for this policy.
<PAGE>
2. TABLE OF RATES
A. Table of Guaranteed Maximum Policy Charges
<TABLE>
<CAPTION>
Deductions from Premium Payments
--------------------------------
<S> <C>
Sales Charge
Policy Year 1 30% of Target Premium, 3.5% of Excess Premium
Policy Years 2-5 15% of Target Premium, 3.5% of Excess Premium
Policy Years 6-10 10% of Target Premium, 3.5% of Excess Premium
Policy Year 11-20 4% of Target Premium, 3% of Excess Premium
Policy Years 21 and 3% of Target and Excess Premium
thereafter
Federal DAC Tax Charge 1.25% of Target and Excess Premium
Rate Premium Tax Charge 2.35% of Target and Excess Premium
Premium Processing 1.2441973% of Target and Excess Premium
Charge
</TABLE>
<TABLE>
<CAPTION>
Deductions from Account Value
-----------------------------
<S> <C>
Administrative Charge $10.00 per month for all Policy Years plus
$.03 per $1,000 of Total Sum Insured at Issue per
month for all Policy Years.
Guaranteed Minimum $.03 per $1,000 of Basic Sum Insured at Issue per
Death Benefit Charge month, beginning in the 11th Policy Year.
Policy Split Option Charge $.03 per $1,000 of Total Sum Insured at Issue per
month until the policy anniversary nearest the
older insured's 80th birthday.
Issue Charge $55.55 per month for first 5 Policy Years plus
$.02 per month per $1,000 of Total Sum Insured
at Issue for first 3 Policy Years.
</TABLE>
<TABLE>
<CAPTION>
Deductions from Separate Account
--------------------------------
<S> <C>
Mortality and Expense Risk .60% of Account Value, deducted daily for all
Charge Policy Years
</TABLE>
<PAGE>
2. Table of Rates, continued
B. Table of Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Guaranteed Rates Current Rates Guaranteed Rates Current Rates
Year per $1,000 per $1,000 Year per $1,000 per $1,000
- ---- ---------- ---------- ---- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 0.008 $ 0.008 22 $ 4.152 $ 0.938
2 0.026 0.026 23 4.818 1.176
3 0.048 0.048 24 5.580 1.471
4 0.075 0.075 25 6.447 1.864
5 0.110 0.110 26 7.424 2.330
6 0.153 0.153 27 8.492 2.876
7 0.206 0.204 28 9.645 3.501
8 0.271 0.188 29 10.862 4.311
9 0.349 0.173 30 12.146 5.270
10 0.441 0.159 31 13.486 6.348
11 0.548 0.156 32 14.897 7.583
12 0.679 0.160 33 16.383 8.853
13 0.824 0:169 34 17.975 10.072
14 1.006 0.185 35 19.756 11.288
15 1.227 0.209 36 21.856 12.539
16 1.492 0.245 37 24.543 13.753
17 1.806 0.295 38 28.327 14.983
18 2.170 0.366 39 34.031 16.226
19 2.584 0.463 40 42.583 17.481
20 3.048 0.594 41 54.565 33.425
21 3.567 0.747 42 83.197 18.857
</TABLE>
<PAGE>
3. DEFINITIONS
The term "age" means age on the nearest birthday.
The term "Annual Processing Date" means every 12th Processing Date starting
with the Processing Date next after the Date of Issue.
The term "Excess Premium" means that portion of the total Premiums received
during any Policy Year that exceeds the Target Premium.
The term "Fixed Account" means an account established by us which accumulates
at rates which we will determine and declare from time to time, but which
will not be less than 4%. The assets of a Fixed Account are invested in a
segment of our General Account.
The term "Fund" means a series type mutual fund registered under the
Investment Company Act of 1940 as an open-end diversified management
investment company.
The term "in full force" means that the policy has not lapsed in accordance
with Section 7.
The term "indebtedness" means the unpaid balance of a policy loan. As
provided in Section 10, the policy loan amount includes accrued interest.
The term "Minimum Initial Premium" means the amount shown on Page 4.
The term "Net Premium" is defined in Section 5.
The term "payment" means, unless otherwise stated, payment at our Home Office
in Boston, Massachusetts.
The term "Planned Premium" means the amount that the Owner intends to pay, as
indicated on the application.
The term "Policy Year" means (a) or (b) below whichever is applicable:
(a) The first Policy Year is the period beginning on the Date of Issue and
ending on the Valuation Date immediately preceding the first Annual
Processing Date;
(b) Each subsequent Policy Year is the period beginning on an Annual
Processing Date and ending on the Valuation Date immediately preceding the
next Annual Processing Date.
The term "Portfolio" means each division of a Fund which has a specific
investment objective.
The term "Premium", unmodified, is defined in Section 5.
The term "Processing Date" means the first day of a policy month which
immediately follows a Valuation Date. The Date of Issue is not a Processing
Date.
The term "Separate Account", unmodified, means a separate investment account,
established by us pursuant to applicable law, in which you are eligible to
invest under this policy.
The term "Subaccount" means a Variable Account or a Fixed Account.
The term "Surviving Insured" means the Insured who is living upon the death
of the other Insured. If both Insureds die simultaneously, then the term
"Surviving Insured" shall mean the younger of the two Insureds.
The term "Target Premium" means the amount shown on Page 4.
The term "Valuation Date" means any date on which we are open for business,
the New York Stock Exchange is open for trading, and on which the Fund values
its shares.
The term "Valuation Period" means the period of time from the beginning of
the day following a Valuation Date to the end of the next following Valuation
Date.
The term "Variable Account" means each division of a Separate Account which
has a specific investment objective. The assets of each Variable Account are
invested solely in shares of the corresponding Portfolio of a Fund.
The terms "we", "us" and "our" refer only to the John Hancock Variable Life
Insurance Company.
The term "written notice" means, unless otherwise stated, a written notice
filed at our Home Office in Boston, Massachusetts.
The terms "you" and "your" refer only to the Owner(s) of this policy.
4. DEATH BENEFIT
The Death Benefit is payable when the Surviving Insured dies while the policy
is in full force. This Death Benefit will equal the death benefit of the
policy minus any indebtedness on the date of death. If the Surviving Insured
dies during a grace period we will also deduct any unpaid monthly charges
under Section 9.
<PAGE>
6. GUARANTEED MINIMUM DEATH BENEFIT PREMIUM TARGET
If the Guaranteed Minimum Death Benefit feature has been elected, it will so
indicate on the Policy Specification Page. The Guaranteed Minimum Death
Benefit Premium Target equals the sum of all Guaranteed Minimum Death Benefit
Premiums shown on page 4 from the Date of Issue up to the date the Guaranteed
Minimum Death Benefit Premium Target is being measured, with each such
premium accumulated from its due date at an annual effective interest rate of
4%. In order to maintain the Guaranteed Minimum Death Benefit, the Cumulative
Premium Balance defined below must exceed the Guaranteed Minimum Death
Premium Target on each Annual Processing Date.
The Cumulative Premium Balance is the amount equal to the sum of all Premiums
paid less the sum of all withdrawals as described in Section 11, each
accumulated at an annual effective interest rate of 4%. Such interest will be
calculated from the date the Premium was credited or the date the withdrawal
was made up to the date the Cumulative Premium Balance is being measured.
7. GRACE PERIOD
A. If the Guaranteed Minimum Death Benefit feature has been elected:
On each Processing Date, we will compare the Cumulative Premium Balance at
the end of the immediately preceding Valuation Date to the Guaranteed Minimum
Death Benefit Premium Target on that Valuation Date. If, on any such
Processing Date, the Cumulative Premium Balance is less than the Guaranteed
Minimum Death Benefit Premium Target, the Guaranteed Minimum Death Benefit
will be deemed to be in default as of such Processing Date.
The amount by which the Guaranteed Minimum Death Benefit Premium Target
exceeds the Cumulative Premium Balance is the "GMDB shortfall." Any GMDB
shortfall may be paid within a grace period of 61 days after the date of
default. We will send notice to your last known address at least 31 days
before the end of the grace period specifying the minimum payment that you
must make to continue the Guaranteed Minimum Death Benefit in force beyond
the end of the grace period.
If a payment at least equal to the GMDB shortfall is received before the end
of the grace period, the Guaranteed Minimum Death Benefit will remain in the
policy. Any payment will be processed as of the date of receipt.
If a payment at least equal to the GMDB shortfall is not received by the end
of the grace period, the Guaranteed Minimum Death Benefit feature will be
removed from the policy. On the next Processing Date following the removal of
the Guaranteed Minimum Death Benefit, and on each Processing Date thereafter,
the policy will be tested as described in Subsection B.
If the policy contains Additional Sum Insured, in addition to the test
described in Subsection A it will be tested under Subsection B, to ensure
that the policy is funded at a sufficient level to support the Additional Sum
Insured.
If the Surviving Insured dies during the grace period, we will deduct from
the proceeds the GMDB shortfall.
B. If the Guaranteed Minimum Death Benefit feature has not been elected or
has been removed or if the policy contains Additional Sum Insured:
If, on any Processing Date, the Account Value at the end of the immediately
preceding Valuation Date is less than the total of all Section 9 charges for
that Processing Date the policy will be deemed to be in default as of the
Processing Date on which such determination is made. We will send a notice to
your last known address specifying the minimum amount you must pay to cure
the default (the "Default Payment"). The Default Payment will be equal to a
payment which, after deduction of all Section 5 charges, yields a Net Premium
equal to the total of all Section 9 charges for the date of default and the
next two Processing Dates.
If a payment at least equal to the Default Payment is received before the end
of a grace period of 61 days after the date the notice is mailed, the policy
will then no longer be in default. Any payment received will be processed as
a premium payment as of the date of receipt. When payment is received, any
Section 9 charges which are past due and unpaid will be deducted from the
Account Value.
If a payment at least equal to the Default Payment is not received by the end
of the grace period, then either (a) if the Guaranteed Minimum Death Benefit
is in effect, any Additional Sum Insured will be removed from the policy, or
(b) if there is no Guaranteed Minimum Death Benefit in effect, the policy
will lapse without value and will not be in full force.
No Rider provisions will be in effect after the policy ceases to be in full
force.
<PAGE>
10. LOANS
You may borrow money from us on receipt at our Home Office of a completed
form satisfactory to us assigning the policy as the only security for the
loan.
Loans may be made if a Loan Value is available. Each loan must be for at
least $1000. We may defer loans as provided by the law or as provided in
Section 21. Loans may not be made if the policy is in a grace period.
The Loan Value while the policy is in full force will be 90% of the Account
Value. The amount of loan available will be the Loan Value less any existing
indebtedness.
Loan interest at a rate described in 'Variable Loan Interest Rate' provision
below will accrue daily and will be payable on each Annual Processing Date
and on the date the loan is settled. Accrued interest will be added to the
loan daily and will bear interest from that date at the same rate.
A loan may be repaid in full or in part at any time before the Surviving
Insured's death, and while the policy is in full force.
When excess indebtedness occurs, the policy will terminate at the end of the
Valuation Period in which the 31st day after the Notice Date occurs if such
excess has not been repaid by that date. "Excess indebtedness" is the amount,
if any, by which indebtedness exceeds an amount equal to the Loan Value.
"Notice Date" is the date on which notice of excess indebtedness is mailed to
you and any assignee of record with us at the address last known to us.
When a loan is made, the amount of the loan will be added to Loan Assets. The
amount of the loan will be removed from the Subaccounts in proportion to your
policy investment in each Subaccount on the date such loan is made. Upon any
loan repayment, the amount of the repayment will be allocated among the
Subaccounts in accordance with the Subaccount Investment Rule in effect on
the date of repayment.
VARIABLE LOAN INTEREST RATE
We will annually determine the Loan Interest Rate for this policy.
Determination will be made in the calendar month immediately preceding the
calendar month in which the policy anniversary occurs. This Rate will apply
to all indebtedness outstanding during the policy year next following the
date of determination. The rate will not exceed the higher of (a) the
"Published Monthly Average" for the calendar month which is two months before
the month in which the date of determination occurs; and (b) 5%.
The "Published Monthly Average" means Moody's Corporate Bond Yield Average -
Monthly Average Corporates as published by Moody's Investors Service, Inc. or
any successor thereto. If the "Published Monthly Average" is no longer
published, we reserve the right to select a substitute that we deem
appropriate, subject to applicable law, regulation, or other state
requirement.
When a new rate is determined: (a) we may increase the previous rate if the
increase would be at least 1/2%; and (b) we must reduce the previous rate if
the decrease would be at least 1/2%. We will: (a) notify you of the initial
Loan Interest Rate at the time a loan is made; and (b) notify you in advance
of any increase in the Loan Interest Rate if there is outstanding
indebtedness on the policy.
11. SURRENDERS AND WITHDRAWALS
We will determine and pay the Surrender Value of the policy if the Surviving
Insured is then alive, subject to Section 21, and the policy will terminate,
as of the end of the Valuation Period in which we receive at our Home Office
(i) written notice requesting surrender of the policy, and (ii) the
surrendered policy.
While the policy is in full force, the Surrender Value will be an amount
equal to the Account Value less any indebtedness. If the policy is
surrendered before the end of the second Policy Year, then any excess Sales
Load as defined in Rule 6e-3(t) of the Investment Company Act of 1940 will be
returned to the Owner.
You may request a withdrawal of part or all of the Surrender Value in
accordance with our rules then in effect. The amount of the withdrawal will
be removed from the Subaccounts in proportion to your policy investment in
each Subaccount on the date such loan is made. For each withdrawal we will
make a charge to the Account Value of $20. Each withdrawal must be at least
$1000. All amounts withdrawn will be subtracted from the Cumulative Premium
Balance as described in Section 6, and will be reflected in Option A death
benefit as described in Section 4.
<PAGE>
14. ALLOCATION TO SUBACCOUNTS
On the Date of Issue and during the first 19 days after the Date of Issue,
Net Premiums will be invested in the Money Market Subaccount. On the 20th day
after the Date of Issue, we will reallocate the amount in the Money Market
Subaccount in accordance with the Subaccount Investment Rule, as chosen by
you and shown in the application for this policy. We will then allocate
future Net Premiums and other credits among the Subaccounts in accordance
with this Subaccount Investment Rule. You may elect to change the Subaccount
Investment Rule at any time. A change will be effective at the end of the
Valuation Period in which we receive notice satisfactory to us, however, fund
transfers will not be made if the policy is in a grace period. We reserve the
right to impose limits on the number and frequency of such changes. The
minimum percentage that may be allocated to any Subaccount and the maximum
number of Subaccounts in which assets may be held will be subject to our
administrative rules in effect at the time of election. We will allocate any
charges under Section 9 among the applicable Subaccounts in proportion to the
value of your policy investment in each Subaccount on the date of the charge.
Variable Account Transfer Provision
You may elect to transfer assets held in the Variable Accounts without charge.
We reserve the right to impose limits on the number and frequency of such
transfers. A transfer will be effective at the end of the Valuation Period in
which we receive notice satisfactory to us.
Fixed Account Transfer Provision
You may elect by notice satisfactory to us to transfer without charge part or
all of the assets in a Fixed Account, in the manner described below. Except
as provided in Section 15, such a transfer will be permitted only once during
the period beginning 60 days before each policy anniversary and ending 30
days after such anniversary. If notice is served on or before the
anniversary, the transfer will be effective at the end of the Valuation
Period during which the anniversary falls. If notice is received after the
anniversary, the transfer will be effective at the end of the Valuation
Period in which we receive the notice. The maximum transfer amount is 20% of
the Fixed Account Assets, or $500, if greater. We may defer the transfer for
up to 6 months after your election would be effective.
15. INVESTMENT POLICY CHANGE
The investment policy of the Portfolios shall not be materially changed
unless a statement of the change is filed with, and not disapproved by the
Insurance Commissioner of Massachusetts. In the event of such a change in
investment policy, and while this policy is in full force, you may elect a
transfer in accordance with Section 14 within 60 days after (i) the effective
date of the material change or (ii) the receipt of a notice of the available
options, whichever is later. No charge will be made for any such transfer
(regardless of the number of transfers previously made), which will be
effective as of the end of the Valuation Period in which we receive the
notice. If required, any statement of material change filed with the
Insurance Commissioner of Massachusetts will be filed with the insurance
supervisory officials of the jurisdiction in which this policy is delivered
or issued for delivery.
16. ANNUAL REPORT TO OWNER
While the policy is in full force, we will furnish annually to the Owner a
statement which shows:
(a) The Death Benefit, Guaranteed Minimum Death Benefit if elected, and
Account Value as of the date of the report;
(b) Payments received and charges made since the last report;
(c) Withdrawals since the last report; and
(d) Loan information.
We will furnish other reports if required by law or regulation.
<PAGE>
When at least one Insured is alive, you may change the Owner and Beneficiary
by written notice. You may also revoke any change of Owner prior to its
effective date by written notice. No change or revocation will take effect
unless we acknowledge receipt of the notice. If such acknowledgment occurs,
then (i) a change of Beneficiary will take effect on the date the notice is
signed, and (ii) a change or a revocation of Owner will take effect as of the
date specified in the notice, or if no such date is specified, on the date
the notice is signed. A change or revocation will take effect whether or not
you or either Insured is alive on the date we acknowledge receipt. A change
or revocation will be subject to the rights of any assignee of record with us
and subject to any payment made or other action taken by us before we
acknowledge receipt.
19. INTEREST ON PROCEEDS
We will pay interest on proceeds paid in one sum in the event of the
Surviving Insured's death from the date of death to the date of payment. The
rate will be the same as declared for Option 1, Settlement Provisions.
20. TRANSFER OF ASSETS DURING FIRST 24 MONTHS
At any time during the first 24 months from the Date of Issue of this policy
while this policy is in full force, you may elect to transfer all assets held
in the Variable Account to the Fixed Account. No charge will be made for such
transfer. Such transfer will be allowed regardless of any limits we have
imposed on the number and/or frequency of fund transfers.
21. DEFERRAL OF DETERMINATIONS AND PAYMENTS
During any period when the New York Stock Exchange is closed for trading
(except for normal holiday closings) or when the Securities and Exchange
Commission has determined that a state of emergency exists which may make
payment impractical, or the Commission by order permits postponement for the
protection of our policyholders, we reserve the right to do the following:
(1) To defer determination of the Account Value, and if such
determination has been deferred, to defer:
(a) determination of the values for a loan as of the end of the
Valuation Period in which we receive the loan application
at our Home Office, and payment of the loan; and
(b) payment or application of any Death Benefit in excess of the
Guaranteed Minimum Death Benefit, if elected.
(2) To defer determination, application, processing, or payment of a
Surrender Value or any other policy transaction dependent upon
Account Value.
A deferral, as described above, will be applicable only if any portion of the
Account Value is invested in a Variable Account.
Except as provided in this provision we will make payment of the Death
Benefit, any Surrender Value, any withdrawal, or any loan amount within 7
days of the date it becomes payable.
22. CLAIMS OF CREDITORS
The proceeds and any income payments under the policy will be exempt from the
claims of creditors to the extent permitted by law. These proceeds and
payments may not be assigned or withdrawn before becoming payable without our
agreement.
23. ASSIGNMENT
Your interest in this policy may be assigned without the consent of any
revocable Beneficiary. Your interest, any interest of the Insureds and of any
revocable Beneficiary shall be subject to the terms of the assignment.
We will not be on notice of any assignment unless it is in writing, nor will
we be on notice until a duplicate of the original assignment has been
received at our Home Office. We assume no responsibility for the validity or
sufficiency of any assignment.
28. SETTLEMENT PROVISIONS
OPTIONAL METHODS OF SETTLEMENT
In place of a single payment, an amount of $1,000 or more payable under the
policy as a benefit or as the Surrender Value, if any, may be left with us,
under the terms of a supplementary agreement. The agreement will be issued
when the proceeds are applied through the choice of any one of the options
<PAGE>
below. We shall at least annually declare the rate of interest or amount of
payment for each option. Such declaration shall be effective until the date
specified in the next declaration.
Option 1 - Interest Income at the declared rate but not less than 3.5% a year
on proceeds held on deposit. The proceeds may be paid or withdrawn in whole
or in part at any time as elected.
Option 2A - Income of a Specified Amount, with payments each year of at least
1/12th of the proceeds, until they are paid in full. We will credit interest on
unpaid balances at the declared rate but not less than 3.5% a year.
Option 2B - Income for a Fixed Period with each payment as declared but not
less than that shown in the Table for Option 2B.
Option 3 - Life Income with Payments for a Guaranteed Period, with each
payment as declared but not less than that shown in the Table for Option 3.
If the Payee dies within that period, we will pay the present value of those
remaining payments. In determining present value, we will use the same
interest rate used to determine the payments for this option.
Option 4 - Life Income without Refund at the death of the Payee of any part
of the proceeds applied. The amount of each payment shall be as declared but
not less than that shown in the Table for Option 4.
Option 5- Life Income with Cash Refund at the death of the Payee of the
amount, if any, equal to the proceeds applied less the sum of all income
payments made. The amount of each payment shall be as declared but not less
than that shown in the Table for Option 5.
You may choose an option by sending written notice to us: (a) while either
Insured is alive; and (b) before the proceeds become payable. If you have
made no effective choice, the Payee may make one by written notice within:
(a) 6 months after the date of death of the Surviving Insured; or (b) 2
months after the date on which the proceeds, if any, are payable in any case
except death.
No choice of an option may provide for income payments of less than $50.00.
The first payment will be payable as of the date the proceeds are applied,
except that under Option 1 it will be payable at the end of the first payment
interval.
The Payee under an option shall be the Beneficiary or either of the Insureds.
No option may be chosen without our consent if the proceeds are payable: (1)
in any case, except death, before the policy has been in force on the same
plan for at least 5 years; or (2) in any case to an executor, administrator,
trustee, corporation, partnership, association or assignee.
A Payee may, by written notice, name and change a Contingent Payee to receive
any final amount that would otherwise be payable to the Payee's estate.
Options 3,4 and 5 are available only if the Payee's age is 40 or older.
<PAGE>
JOHN HANCOCK
Financial Services
To cancel or surrender your life insurance policy you must provide written
notice to us. The notice must contain at least all of the following:
1) An unequivocal request to cancel or surrender.
2) The policy number to be canceled or surrendered.
3) The insured's name on the policy to be canceled or surrendered.
4) The policyowner's signature and, if required by the policy or by a
legally binding document of which we have actual notice, the signature
of a collateral assignee, irrevocable beneficiary, or other person
having an interest in the policy through the legally binding document.
5) Either the policy itself, or, in lieu of the policy, a statement that
the policy itself has been lost or destroyed.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AS OF JULY 31, 1999, AND THE CONSOLIDATED STATEMENTS OF INCOME FOR
THE THREE AND SIX MONTH PERIODS ENDED JULY 31, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 59,201
<SECURITIES> 24,262
<RECEIVABLES> 29,199
<ALLOWANCES> 1,800
<INVENTORY> 0
<CURRENT-ASSETS> 121,112
<PP&E> 49,867
<DEPRECIATION> 15,862
<TOTAL-ASSETS> 348,028
<CURRENT-LIABILITIES> 44,207
<BONDS> 140,000
0
0
<COMMON> 42
<OTHER-SE> 163,126
<TOTAL-LIABILITY-AND-EQUITY> 348,028
<SALES> 28,702
<TOTAL-REVENUES> 39,604
<CGS> 2,822
<TOTAL-COSTS> 7,530
<OTHER-EXPENSES> 26,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,432
<INCOME-PRETAX> 7,422
<INCOME-TAX> 3,180
<INCOME-CONTINUING> 4,242
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,242
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
