<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 October 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.
42,105,633 shares of Common Stock, $.001 par value, as of November 30, 1999
<PAGE>
WIND RIVER SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED OCTOBER 31, 1999
INDEX
<TABLE>
<S> <C>
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
for the three and nine month periods ended
October 31, 1999 and 1998
Condensed Consolidated Balance Sheets at October
31, 1999 and January 31, 1999
Condensed Consolidated Statements of Cash Flows
for the nine month periods ended October 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 6. Exhibits and Reports on Form 8-K
Signature
</TABLE>
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 Nine months ended
October 31, October 31,
1999 1998 1999 1998
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Products $32,403 $25,716 $ 84,644 $69,119
Services 12,198 8,483 33,037 23,606
-------- --------- --------- --------
Total revenues 44,601 34,199 117,681 92,725
-------- --------- --------- --------
Cost of revenues:
Products 3,133 2,118 7,702 6,491
Services 5,189 3,343 14,113 9,423
-------- --------- --------- --------
Total cost of revenues 8,322 5,461 21,815 15,914
-------- --------- --------- --------
Gross margin 36,279 28,738 95,866 76,811
-------- --------- --------- --------
Operating expenses:
Selling and marketing 15,931 11,596 42,486 32,812
Product development and engineering 7,580 4,765 21,369 13,629
General and administrative 4,849 1,935 11,961 5,484
-------- --------- --------- --------
Total operating expenses 28,360 18,296 75,816 51,925
-------- --------- --------- --------
Operating income 7,919 10,442 20,050 24,886
-------- --------- --------- --------
Other income (expense):
Interest income 3,743 3,393 11,202 10,027
Interest expense and other, net (2,233) (2,163) (7,636) (6,623)
-------- --------- --------- --------
Total other income 1,510 1,230 3,566 3,404
-------- --------- --------- --------
Income before provision for income taxes 9,429 11,672 23,616 28,290
Provision for income taxes 3,535 4,541 9,210 11,037
-------- --------- --------- --------
Net income $ 5,894 $ 7,131 $ 14,406 $17,253
-------- --------- --------- --------
-------- --------- --------- --------
Net income per share:
Basic $ 0.14 $ 0.18 $ 0.35 $ 0.43
Diluted $ 0.13 $ 0.16 $ 0.33 $ 0.40
Weighted average shares:
Basic 41,837 40,466 41,496 40,075
Diluted 43,989 43,841 43,881 43,661
</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>
October 31, January 31,
1999 1999
----------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 49,413 $ 42,837
Short-term investments 24,436 11,043
Accounts receivable, net 33,329 30,926
Prepaid and other current assets 12,081 10,598
----------- ----------
Total current assets 119,259 95,404
Investments 172,972 158,628
Land and equipment, net 35,505 31,513
Other assets 9,546 10,011
Restricted cash 35,544 34,157
----------- ----------
Total assets $372,826 $329,713
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,914 $ 3,472
Accrued liabilities 12,002 10,005
Accrued compensation 11,098 6,030
Income taxes payable 8,605 445
Deferred revenue 19,951 17,318
----------- ----------
Total current liabilities 56,570 37,270
Convertible subordinated notes 140,000 140,000
----------- ----------
Total liabilities 196,570 177,270
----------- ----------
Minority interest in consolidated subsidiary 820 551
----------- ----------
Stockholders' equity:
Common stock, par value $.001; 125,000 shares authorized;
43,219 and 42,449 shares issued; 41,942 and 41,337
shares outstanding 43 42
Additional paid in capital 130,949 126,855
Loan to stockholder (1,000) -
Treasury stock, 1,277 and 1,112 shares, at cost (29,488) (25,491)
Accumulated other comprehensive income (loss) 7,962 (2,155)
Retained earnings 66,970 52,641
----------- ----------
Total stockholders' equity 175,436 151,892
----------- ----------
Total liabilities and stockholders' equity $372,826 $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>
Nine months ended
October 31,
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,406 $ 17,253
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,856 4,980
Minority interest in consolidated subsidiary 269 92
Write-off of investment 500 -
Change in assets and liabilities:
Accounts receivable, net (2,403) (5,484)
Prepaid and other assets (3,813) (1,535)
Accounts payable 1,442 (895)
Accrued liabilities 1,997 1,222
Accrued compensation 5,068 741
Income taxes payable 8,160 7,828
Deferred revenue 2,633 854
----------- ----------
Net cash provided by operating activities 36,115 25,056
----------- ----------
Cash flows from investing activities:
Acquisition of equipment (9,553) (8,514)
Purchases of investments (109,519) (188,505)
Sales and maturities of investments 92,396 145,219
Restricted cash (1,387) (26,353)
----------- ----------
Net cash used in investing activities (28,063) (78,153)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 4,095 7,696
Purchase of treasury stock (3,997) (7,506)
Loan to stockholder (1,000) -
----------- ----------
Net cash provided by (used in) financing activities (902) 190
----------- ----------
Effect of exchange rate changes on cash and cash equivalents (497) 32
----------- ----------
Effect of changing fiscal year of acquired subsidiary (77) -
----------- ----------
Net increase (decrease) in cash and cash equivalents 6,576 (52,875)
Cash and cash equivalents at beginning of period 42,837 100,788
----------- ----------
Cash and cash equivalents at end of period $ 49,413 $ 47,913
----------- ----------
----------- ----------
</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) that 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 nine
months ended October 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the recorded amounts reported in the unaudited condensed
consolidated financial statements and accompanying notes. A change in the
facts and circumstance surrounding these estimates could result in a change
to the estimates and impact future operating results.
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 recognized a
charge totaling $500,000 for the difference between the carrying amount of
its investment and the net realizable value during the first quarter of
fiscal year 2000.
6
<PAGE>
3. Acquisitions
On June 30, 1999, Wind River completed the acquisition of RouterWare, Inc.,
("RouterWare") 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 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 for the three and nine months ended
October 31, 1998, are summarized as follows:
<TABLE>
<CAPTION>
Three months Ended Nine months Ended
October 31, October 31,
1998 1998
---------------------- ----------------------
<S> <C> <C>
(In thousands)
Revenues:
Wind River $ 33,600 $ 91,200
RouterWare 599 1,525
---------------------- ----------------------
Total revenues $ 34,199 $ 92,725
---------------------- ----------------------
---------------------- ----------------------
Net income (loss):
Wind River 7,165 17,531
RouterWare (34) (278)
---------------------- ----------------------
Total net income $ 7,131 $ 17,253
---------------------- ----------------------
---------------------- ----------------------
</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:
<TABLE>
<CAPTION>
Wind River RouterWare
<S> <C>
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
</TABLE>
RouterWare's net loss of $77,000 for the month of January 1999 has been
recorded as a decrease to stockholders' equity for the quarter ended April
30, 1999.
In connection with the acquisition of RouterWare, Wind River incurred
approximately $930,000 in merger related expenses consisting primarily of
transaction fees.
On October 21, 1999, Wind River entered into an agreement to merge with
Integrated Systems, Inc., an embedded operating systems and development tool
software developer, in a transaction to be accounted for as a pooling of
interests. Under the terms of the agreement, each issued and outstanding
common share of Integrated Systems will be exchanged for .92 shares of Wind
River common stock. Additionally, approximately 4,847,000 Integrated Systems
stock options will become options to purchase approximately 4,459,000 shares
of Wind River stock. Consummation of the transactions is subject to certain
conditions, including approval by the stockholders of each company.
7
<PAGE>
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.
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 investments 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 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.
8
<PAGE>
Comprehensive income for the three and nine months ended October 31, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
October 31, October 31,
----------------------------- ------------------------------
(In thousands) 1999 1998 1999 1998
------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 5,894 $ 7,131 $ 14,406 $ 17,253
------------- -------------- ------------- ---------------
Other comprehensive income
Foreign currency translation adjustments 84 (70) (497) 32
Unrealized gain (loss) on investments 6,796 (621) 10,614 (2,074)
------------- -------------- ------------- ---------------
Other comprehensive income (loss) 6,880 (691) 10,117 (2,042)
------------- -------------- ------------- ---------------
Total comprehensive income $ 12,774 $ 6,440 $ 24,523 $ 15,211
------------- -------------- ------------- ---------------
------------- -------------- ------------- ---------------
</TABLE>
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 Nine months Ended
October 31, October 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 41,837 40,466 41,496 40,075
Effect of dilutive potential common shares 2,152 3,375 2,385 3,586
------------- ------------ ----------- ------------
Shares used in diluted net income
per share computation 43,989 43,841 43,881 43,661
------------- ------------ ----------- ------------
------------- ------------ ----------- ------------
</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 4.9 million and 1.8 million common shares which
were outstanding at October 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 $17.44 to $31.92 and $26.46 to $31.92 at October 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 has not
repurchased any shares since March 17, 1999.
9
<PAGE>
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 October 31, 1999, Wind
River had outstanding forward contracts to hedge certain foreign currency
transaction exposures in certain European currencies. The difference between
cost and estimated fair value at October 31, 1999 was immaterial.
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 October 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
Wind River operates in one industry segment --technology for embedded
operating systems, and management used one measurement of profitability for
its business.
10
<PAGE>
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 Nine months ended
(In thousands) October 31, October 31, October 31, January 31,
------------------------ -------------------------- ----------------- ----------------
1999 1998 1999 1998 1999 1999
------------ ----------- ------------ ------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 28,683 $ 23,715 $ 75,277 $ 63,843 $ 343,762 $ 298,739
Japan 7,859 4,489 19,423 11,540 10,167 12,043
Other International 8,059 5,995 22,981 17,342 18,897 18,931
---------- --------- ---------- ----------- -------------- ------------
Consolidated $ 44,601 $ 34,199 $ 117,681 $ 92,725 $ 372,826 $ 329,713
------------ ----------- ------------ ------------- ------------------ ------------
------------ ----------- ------------ ------------- ------------------ ------------
</TABLE>
Other International consists of the revenues and assets of operations in Europe
and Asia Pacific excluding Japan.
12. Special Charges
During the fiscal year ended January 31, 1999, Wind River paid $500,000 for a
10% interest in the common stock of XACT, Inc, which 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 wtih 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 recognized a charge totaling $500,000 for
the difference between the carrying amount of its investment and the net
realizable value during the first quarter of fiscal year 2000. This charge is
included in interest expense and other for the nine months ended October 31,
1999. In addition, the Company wrote-off $302,000 in connection with the
costs associated with hiring the XACT employees, acquiring equipment and other
assets of XACT and revising a second distribution agreement for another
product wtih XACT. This charge is included in general and administrative
expenses for the nine months ended October 31, 1999.
During the second quarter of fiscal year 2000, Wind River incurred
approximately $1.2 million associated with the retirement package of its
former chief executive officer, who relinquished his responsibilities as
president and chief executive officer as of June 24, 1999. This charge, which
was incurred in the quarter ended July 31, 1999, is included in general and
administrative expenses for the nine months ended October 31, 1999.
Additionally, in connection with the acquisition of RouterWare, Wind River
incurred approximately $930,000 in merger related expenses consisting
primarily of transaction fees.
During the third quarter of fiscal year 2000, Wind River incurred
approximately $1.3 million in connection with hiring its new chief executive
officer, and approximately $975,000 related to non-capitalizable costs
associated with the implementation of an enterprise resource planning system.
These charges are included in general and administrative expenses for the
three months ended October 31, 1999.
11
<PAGE>
13. Secured Promissory Note with a Stockholder
On September 7, 1999, the Company's Chief Executive Officer, signed a secured
promissory note ("Note") to borrow up to $2.4 million from the Company to
purchase shares of Wind River's common stock. The note accrues interest at
the rate of 5.98% per year, and is due on September 7,2008. As of October 31,
1999, Mr. St. Dennis had borrowed $1.0 million against the Note. This loan is
full recourse and is secured by a pledge of shares of Wind River common stock
owned by Mr. St. Dennis. The loan amount is outstanding as of October 31,
1999 and is reflected as a reduction of equity in the accompanying
consolidated balance sheet.
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 are 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 products, Tornado II(TM) and VxWorks, enable customers to
enhance product performance, standardize designs across projects, reduce
research and development costs and shorten product development cycles.
On October 21, 1999, Wind River entered into an agreement to merge with
Integrated Systems, Inc., an embedded operating systems and development tool
software developer, in a transaction to be accounted for as a pooling of
interests. Under the terms of the agreement, each issued and outstanding
common share of Integrated Systems will be exchanged for .92 shares of Wind
River common stock. Additionally, shares of approximately 4,847,000
Integrated Systems stock options will become options to purchase
approximately 4,459,000 shares of Wind River stock. Consummation of the
transaction is subject to certain conditions, including approval by the
stockholders of each company.
During the fiscal year ended January 31, 1999, Wind River paid $500,000 for a
10% interest in the common stock of XACT, Inc. which 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
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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. In connection with the acquisition of RouterWare, Wind River
incurred approximately $930,000 in merger related expenses consisting
primarily of transaction fees.
Results of Operations
Operating results as a percentage of revenue for the three and nine month
periods ended October 31, 1999 and 1998 are summarized in the following table:
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
1999 1998 1999 1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Products 73% 75% 72% 75%
Services 27 25 28 25
-------------- -------------- -------------- -------------
Total revenues 100 100 100 100
-------------- -------------- -------------- -------------
Cost of revenues:
Products 7 6 7 7
Services 12 10 12 10
-------------- -------------- -------------- -------------
Total cost of revenues 19 16 19 17
-------------- -------------- -------------- -------------
Gross margin 81 84 81 83
-------------- -------------- -------------- -------------
Operating expenses:
Selling and marketing 36 34 36 35
Product development and engineering 17 14 18 15
General and administrative 11 6 10 6
-------------- -------------- -------------- -------------
Total operating expenses 64 54 64 56
-------------- -------------- -------------- -------------
Operating income 17 30 17 27
-------------- -------------- -------------- -------------
Other income (expense):
Interest income 8 10 10 11
Interest expense and other, net (5) (6) (6) (7)
-------------- -------------- -------------- -------------
Total other income 3 4 4 4
-------------- -------------- -------------- -------------
Income before provision for income taxes 20 34 21 31
Provision for income taxes 8 13 8 12
-------------- -------------- -------------- -------------
Net income 12% 21% 13% 19%
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
</TABLE>
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REVENUES
Total revenues for the three and nine months ended October 31, 1999 were
$44.6 million and $117.7 million, respectively, compared to $34.2 million and
$92.7 million for the same periods in fiscal 1999. The increase in total
revenues of 30% and 27% , for the three and nine months ended October 31,
1999, respectively, is due to increases in revenues from both products and
services.
Revenues from the sale of products increased 26% and 22%, to $32.4 million
and $84.6 million, for the three and nine months ended October 31, 1999,
respectively, compared to $25.7 million and $69.1 million for the same
periods in fiscal 1999. Product revenues primarily consist of development,
OEM and run-time license fees. Wind River typically charges a one-time fee
for development licenses, a separate OEM licenses fee for each customer
development project 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 run-time license revenues, as
customer developed products continue to be accepted by end-users, and to the
expansion of our product lines resulting from research and development and
the integration of products from acquired companies.
Services revenue increased 44% and 40%, to $12.2 million and $33.0 million,
for the three and nine months ended October 31, 1999, respectively, compared
to $8.5 million and $23.6 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) professional
services as the new business unit attracts additional customers; and (3)
training resulting from the increase in Wind River's installed base of
Tornado(TM) software development environment and software applications
provided to customers. These increases were partially offset by a decline in
revenues from engineering services.
Total revenues from international sales for the three and nine months ended
October 31, 1999 were $15.9 million and $42.4 million, respectively, compared
to $10.5 million and $28.9 million for the same periods in the prior fiscal
year. The increase of 52% and 47% for the three and nine months ended October
31, 1999 was primarily due to increased demand for our products and services
in Japan and Europe. International revenues accounted for 36% of total
revenues for both the three and nine months ended October 31, 1999, compared
to 31% for both 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 fluctuations of certain foreign currencies against the dollar have
occurred. These factors could adversely affect our future sales and operating
expenses, which could have a material adverse effect on our business, results
of operations and financial condition. Revenues from Asia Pacific sources
including Japan represented 56% and 54% of international revenues for the
three and nine months ended October 31, 1999, compared to 47% and 46% 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."
COSTS OF REVENUES
The overall cost of products and services as a percentage of total revenues
was 19% for both the three and nine month periods ended October 31, 1999,
compared to 16% and 17% for the same periods of fiscal 1999.
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Product-related cost of sales as a percentage of product revenues was 10% and
9% for the three and nine month periods ended October 31, 1999, compared to 8%
and 9% 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, and royalty payments to third
parties for the use of their software and documentation and packaging.
Amortization of technology purchased through acquisition of companies for the
three and nine month periods ended October 31, 1999, was $168,000 and
$504,000, respectively. We expect to expense approximately $168,000 on
technology acquired through acquisitions over each of the next five quarters.
Future acquisitions, including our contemplated acquisition of Integrated
Systems, would increase this amount. 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 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 nine month period ended October 31, 1999, compared
to 39% and 40% for the same periods in fiscal year 1999. Service related cost
of revenue 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 new
personnel and certified third party contractors to our professional services
organization. We expect that cost of service revenues 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 $15.9 million and $42.5 million for the
three and nine month periods ended October 31, 1999, compared to $11.6
million and $32.8 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 nine months ended October 31, 1999, compared to 34% and 35% for
the corresponding periods in the prior fiscal year. The increase 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 costs for new product
introductions, promotions and trade shows. 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 $7.6 million and $21.4
million for the three and nine month periods ended October 31, 1999, compared
to $4.8 million and $13.6 million for the same periods in the prior fiscal
year. As a percentage of total revenue, product development and engineering
expenses were 17% and 18% for the three and nine month periods ended October
31, 1999, compared to 14% and 15% for each of 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 as a result of the
acquisition of RouterWare in June 1999. In addition, Wind River had $148,000
and $223,000 of funded research and development for the second and third
quarters of fiscal year 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.
General and administrative expenses were $4.8 million and $12.0 million for
the three and nine months ended October 31, 1999, compared to $1.9 million
and $5.5 million, respectively, for the corresponding periods in
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the prior fiscal year. As a percentage of total revenue, general and
administrative expenses were 11% and 10% for the three and nine months ended
October 31, 1999, compared to 6% for each of the corresponding periods in the
prior fiscal year. The increase during the third quarter of fiscal year 2000
was due primarily to (1) a charge of $1.3 million incurred in connection with
hiring a chief executive officer; (2) the non-capitalizable costs associated
with the implementation of an enterprise resource planning system ("ERP") of
approximately $975,000; and (3) the growth in worldwide staff and
infrastructure investments in the areas of information systems, finance and
administration. We expect to continue to incur expenses related to our ERP
system in the fourth quarter as we complete data conversions and maintain
support during the start-up months of the system. The increase for the nine
month period was attributed, in addition to the above, to (1) a charge of
$1.2 million associated with the retirement package of the former chief
executive officer during the second quarter; (2) the costs incurred for the
acquisition of RouterWare of approximately $930,000; (3) the write-off of a
distribution agreement with XACT because XACT is unable to complete the
development of their product that is subject to the distribution agreement;
and (4) 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. Even excluding the charges related
to the retirement of the former chief executive officer and the search for
and hire of a new chief executive officer, RouterWare and XACT, we believe
that general and administrative expenses will continue to increase in
absolute dollars as we continue to invest in worldwide staff and
infrastructure in the areas of information systems, finance and
administration. Amortization of goodwill totaled $39,000 and $105,000 for the
three and nine month periods ended October 31, 1999 compared to $27,000 and
$80,000 for the same periods ended October 31, 1998.
OTHER INCOME AND EXPENSES
Interest income was $3.7 million and $11.2 million for the three and nine
months ended October 31, 1999, respectively, compared to $3.4 million and
$10.0 million for the same periods in the prior fiscal year. The increase in
interest income was primarily due to a larger investment portfolio and
restricted cash accounts as well as higher interest rates on invested
balances. Total cash and cash equivalents, investments and restricted cash at
October 31, 1999 and 1998 was approximately $282.4 million and $246.7
million, respectively.
Interest expense and other, net was $2.2 million and $7.6 million for the
three and nine months ended October 31, 1999, compared to $2.2 million and
$6.6 million for the same periods in the prior fiscal year. During the first
quarter of fiscal year 2000, Wind River recognized a charge totaling $500,000
relating to the difference between the carrying amount of our investment in
XACT and the net realizable value. 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.
PROVISION FOR INCOME TAXES
The effective tax rate for the three and nine months ended October 31, 1999
was 37.5% and 39.0%, compared to 38.9% and 39.0% 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 and varying levels of available research and
development credits.
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LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999, Wind River had working capital of approximately $62.7
million and cash and investments, excluding restricted cash of $35.5 million, of
approximately $246.8 million, which include investments with maturities greater
than one year of $173.0 million.
During the first nine months of fiscal 2000, Wind River's operating
activities provided net cash of $36.1 million due primarily to net income
adjusted for depreciation and amortization, and changes in accrued
compensation, income taxes payable and deferred revenue. These sources of
cash were partially offset by the changes in accounts receivable and prepaid
and other assets.
During the first nine months of fiscal 2000, investing activities used net
cash of $28.1 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.
During the nine months ended October 31, 1999, Wind River purchased fixed
assets of $9.6 million including $3.3 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.
Wind River's financing activities used net cash of $902,000 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 nine months ended October 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.
We have not made any repurchases since March 17, 1999. On September 7, 1999,
our chief executive officer signed a secured promissory note with the Company
to borrow up to $2.4 million. As of October 31, 1999, the CEO had borrowed
$1.0 million against this note. In fiscal 1998, Wind River entered into an
operating lease agreement for its headquarters facility in Alameda,
California. 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".)
In connection with the lease, Wind River was 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 October 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 effect on
Wind River's financial condition or results of operations.
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 October
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
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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.
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.
"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 two weeks, 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 has included 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.
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.
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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 has worked with critical suppliers to determine that such
suppliers' operations and the products and services they provide Wind River
are Year 2000 Compliant and has monitored their progress towards Year 2000
Compliance. Wind River has obtained from its critical suppliers completed
questionnaire that provides information regarding Year 2000 Compliance. The
suppliers have rated 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 reviewed information published by its
largest customers regarding Year 2000 Compliance. According to their
statements, the customers believe that they will not incur any business
interruptions related to Year 2000 Compliance issues. However, as is the case
with other software companies, if Wind River's 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 our financial reporting system,
we believe that we have completed approximately 95% of the work required to
obtain Year 2000 Compliance. As of October 31, 1999, we have incurred
approximately $240,000 on the Year 2000 Compliance project. We have incurred
approximately $4.4 million to implement our financial reporting system, which
was implemented on November 1, 1999. We believe the total cost incurred to
implement this system will be approximately $5.7 million. 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.
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Wind River has developed 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 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.
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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;
- the mix of our revenues from the sale of services (which have lower
margins than our revenue from the sale of products) as compared to
products;
- 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;
and
- 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.
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
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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; and
- adverse effects on relationships with customers, suppliers and
employees.
ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE OUR STOCKHOLDERS AND INCREASE
OUR INDEBTEDNESS.
On October 21, 1999, Wind River entered into an agreement to merge with
Integrated Systems, Inc., an embedded operating systems and development tool
software developer, in a transaction to be accounted for as a pooling of
interests. Under the terms of the agreement, each issued and outstanding
common share of Integrated Systems will be exchanged for .92 shares of Wind
River common stock. Additionally, approximately 4,847,000 Integrated Systems
stock options will become options to purchase approximately 4,459,000 Wind
River stock. Consummation of the transactions is subject to certain
conditions, including approval by the stockholders of each company. The
issuance of Wind River common stock in the merger could dilute our earnings
per share. We have incurred and will continue to incur significant costs in
connection with the proposed merger whether or not it actually occurs. The
merger may not be completed in a timely manner or at all. If the merger does
occur, we will face significant challenges integrating the two companies and
other risks, including:
- possible customer or supplier confusion;
- a decrease in our stock price if the combined company fails to meet
revenue and earnings expectations;
- loss of key Integrated Systems employees critical to the ongoing
success of Integrated Systems products and to the integration of the
two companies' product lines;
- the potential effect on the combined company of the lower rates of
Integrated Systems' revenue and earnings growth relative to Wind
River's over the last two years.
In any acquisition, 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.
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.
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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 these systems from
independent software vendors such as Wind River. We also compete with other
independent software vendors, including Accelerated Technology, Inc., Mentor
Graphics, Inc., Microsoft Corporation, Microware Systems Corporation, QNX
Software Systems, Ltd., Integrated Systems, Inc., Sun Microsystems, Inc. and
Symbian 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 than we do. 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, maintaining
these 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 were unable to compete successfully, our business,
financial condition and results of operations would be materially and
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. 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 recently introduced product
Tornado for Managed Switches. Such delays are commonplace in the software
industry. We must achieve design wins with key customers because once a
customer has designed a 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.
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 our 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.
IF OUR NEW PRODUCTS ARE NOT ACCEPTED, OUR BUSINESS WOULD BE MATERIALLY
ADVERSELY AFFECTED.
Our future success is substantially dependent upon whether our new
products gain wide market acceptance. We are continuously engaged in product
development for new or changing markets. It is difficult to predict whether
demand for any of these products will develop or increase in the future.
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
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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.
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.
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,
in turn, 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.
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.
OUR INTERNATIONAL BUSINESS ACTIVITIES SUBJECT US TO RISKS THAT COULD
ADVERSELY AFFECT OUR BUSINESS.
During the three and nine month period ended October 31, 1999 and
the fiscal year ended January 31, 1999, we derived approximately 36%, 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;
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- greater difficulty in accounts receivable collection;
- the restrictions of repatriation of earnings;
- the burdens of complying with a variety of foreign laws; and
- 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.
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.
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; and
- 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.
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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.
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 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 COSTS.
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 US 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
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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.
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 software does not correctly 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; and
- 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.
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
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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.
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; and
- 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.
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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 10 percent point move in interest rates
affecting Wind River's floating and fixed rate financial instruments as of
October 31, 1999 would have an immaterial effect on Wind River's pretax
earnings. Wind River also believes the immediate 10 percent 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 October 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 October 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 October 31, 1999, the notional amount of
the accreting interest rate swap was $28.5 million. The estimated fair value
at October 31, 1999 was negligible.
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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. e-SIM went public in July 1998 at
$7.50 per share, and at October 31, 1999, the closing price of e-SIM's stock
was $6.13 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. Liberate went public in July 1999
at $16.00 per share, and at October 31, 1999, the closing price of Liberate's
stock was $68.13 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 October 31, 1999 at their
market value of approximately $18.1 million in aggregate, with the unrealized
gains and losses excluded from earnings and reported in accumulated other
comprehensive income component of stockholders' equity.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.25 Executive Employment Agreement between the Company
and Thomas St. Dennis, dated as of September 7,
1999.
10.26 Secured Promissory Note, dated as of
September 7, 1999 between the Company and
Thomas St. Dennis.
10.27 Investment Propriety Security Agreement by Thomas
St. Dennis in favor of the Company.
10.28 Non-Statutory Stock Option Agreement between the
Company and Marla A. Stark.
10.29(1) Agreement and Plan of Merger and Reorganization
dated as of October 21, 1999, among Wind River
Systems, Inc., University Acquisition Corp. and
Integrated Systems, Inc.
10.30(1) Stock Option Agreement dated as of October 21,
1999 between Wind River Systems, Inc. and Integrated
Systems, Inc.
10.31(1) Form of Voting Agreement between Wind River
Systems. Inc. and certain shareholders of Integrated
Systems, Inc.
10.32(1) Form of Voting Agreement betweeen Integrated
Systems, Inc. and certain stockholders of Wind River
Systems, Inc.
10.33(2) Stockholder Rights Plan.
27.1 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration
Statement on Form S-4 filed November 23, 1999 (No. 333-91545).
(2) Incorporated by reference to the Company's Form 8-K,
dated November 4, 1999.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K, dated September 13,
1999, reporting the appointment of Thomas St. Dennis as Chief
Executive Officer.
The Company filed a report on Form 8-K, dated October 21,
1999, reporting the execution of a definitive merger agreement
to acquire Integrated Systems, Inc.
The Company filed a report on Form 8-K, dated November 4,
1999, reporting the Stockholder Rights Plan adopted by the
Company on October 21, 1999
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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: December 14, 1999 \s\ RICHARD W. KRABER
----------------------------
Richard W. Kraber
Vice President and Chief Financial Officer
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WIND RIVER SYSTEMS, INC.
EXECUTIVE EMPLOYMENT AGREEMENT
FOR
THOMAS ST. DENNIS
THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is entered into as
of September 7, 1999 (the "Effective Date"), by and between THOMAS ST. DENNIS
("Executive") and WIND RIVER SYSTEMS, INC. (the "Company"), a Delaware
corporation.
WHEREAS, the Company desires to employ Executive to provide personal
services to the Company, and wishes to provide Executive with certain
compensation and benefits in return for his services; and
WHEREAS, Executive wishes to be employed by the Company and provide
personal services to the Company in return for certain compensation and
benefits, including the benefits provided in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, it is hereby agreed by and between the parties hereto as
follows:
1. EMPLOYMENT BY THE COMPANY.
1.1 TITLE AND RESPONSIBILITIES. Subject to terms set forth
herein, the Company agrees to employ Executive in the position of President
and Chief Executive Officer and Executive hereby accepts employment effective
as of September 7, 1999. During his employment with the Company, Executive
will devote his best efforts and substantially all of his business time and
attention (except for vacation periods as set forth herein and reasonable
periods of illness or other incapacity permitted by the Company's general
employment policies) to the business of the Company. Notwithstanding the
foregoing, the Company hereby agrees that Executive can devote a reasonable
amount of his time during September 1999 in order to complete an orderly
transition from his prior employer.
1.2 EXECUTIVE POSITION. Executive will serve in an
executive capacity and shall perform such duties as are reasonably assigned
from time to time by the Company's Board of Directors (the "Board"),
consistent with the Bylaws of the Company and as are consistent with
Executive's title and position. The Company shall use its best efforts to
elect Executive to the Board for as long as Executive holds the position of
President and Chief Executive Officer.
1.3 COMPANY EMPLOYMENT POLICIES. The employment
relationship between the parties shall also be governed by the general
employment policies and procedures of the Company, including those relating
to protection of confidential information and assignment of inventions,
except that when the terms of this Agreement differ from or are in conflict
with the Company's general employment policies or procedures, this Agreement
shall control.
1.
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2. COMPENSATION AND BENEFITS.
2.1 SALARY. For services rendered hereunder, Executive
shall receive an annualized base salary of four hundred thousand dollars
($400,000), less standard withholdings and deductions, payable in accordance
with the Company's standard payroll procedures. Executive will be considered
for annual changes in base salary in accordance with Company policy and
subject to review and approval by the Board.
2.2 ANNUAL PERFORMANCE BONUS. Executive shall be eligible
for an Annual Performance Bonus for each fiscal year Executive is employed by
the Company as President and Chief Executive Officer.
(a) DETERMINATION OF BONUS. The amount of
Executive's Annual Performance Bonus will be determined by the Board based on
certain measurable goals, including a target for on-plan performance and
performance in excess of plan, established by mutual agreement between the
Board and Executive within 90 days of the commencement of the Fiscal Year
beginning February 1, 2000 and prior to 30 days before the commencement of
each Fiscal Year thereafter (the "Performance Criteria"). If the Board and
Executive cannot reach agreement within 90 days, reasonable Performance
Criteria may be established in good faith by the Board. Executive's bonus
will be paid out in accordance with the Company's standard practice. To be
eligible to receive a bonus, Executive must remain in employment with the
Company as President and Chief Executive Officer throughout the entire fiscal
year, except as provided in Sections 2.2(b), and 6.6 below and except as
provided under the terms of the Executive Officers' Change of Control
Incentive and Severance Benefit Plan ("Change of Control Incentive Plan")
attached hereto as Exhibit A. This bonus will be paid at the same time as
other senior executive bonuses for the applicable fiscal year.
(b) TARGET BONUS FOR ON-PLAN PERFORMANCE. Executive
shall receive an annualized bonus of eight hundred thousand dollars
($800,000) for on-plan performance for the fiscal year ending January 31,
2000, prorated for the portion of the fiscal year during which the Executive
is an employee of the Company. For Fiscal Year 2001 and subsequent years,
Executive shall receive a bonus equal to two hundred percent (200%) of his
then current base salary for on-plan performance as determined by the Board
in accordance with the Performance Criteria. Bonuses paid for less than
on-plan performance will be determined based on the degree of satisfaction of
Performance Criteria on a pro-rated basis in the reasonable good faith
determination of the Board.
(c) BONUS FOR EXCEEDING PLAN. If Executive's
performance exceeds plan, Executive will receive an additional performance
bonus of up to fifty percent (50%) of the on-plan performance target bonus
for that fiscal year as determined by the Board in accordance with the
Performance Criteria.
(d) BONUS FOR FISCAL YEAR 2001 AND SUBSEQUENT YEARS.
For Fiscal Year 2001 and subsequent years, any bonus paid to Executive shall
be subject to the provisions of a CEO Bonus Plan which shall be submitted to
the Company's shareholders for approval in order to allow the Company to take
a federal income tax deduction for all cash payments under the CEO Bonus Plan
without being limited by Section 162(m) of the Internal Revenue Code.
Failure to obtain such approval will not reduce any bonus required to be paid
as set forth herein.
2.
<PAGE>
(e) GUARANTEED BONUS. With respect to the fiscal
year ending January 31, 2000, Executive's bonus is guaranteed to be not less
than three hundred twenty-two thousand two hundred dollars ($322,200). No
other minimum bonus is guaranteed to Executive.
2.3 STOCK OPTIONS. Upon commencement of employment,
Executive will be granted options to purchase an aggregate of 1,100,000
shares of common stock of the Company, subject to the terms of the Company's
1998 Equity Incentive Plan (the "Plan") and the Company's standard form of
stock option agreement. These options will be incentive stock options to the
maximum extent permissible under applicable law, with the remainder to be
granted as nonstatutory stock options. The exercise price of the options
shall be the closing price of the Company's common stock on September 3,
1999. The options shall vest over a four-year period, with one-fourth of the
shares vesting on the first anniversary of Executive's date of hire with the
Company and the remaining three-fourths of the shares vesting in equal shares
on a monthly basis during years two through four of the Executive's
employment with the Company. Vesting is subject to acceleration as provided
in Section 6.6(e)(ii) below and under the terms of the Change of Control
Incentive Plan.
2.4 LOAN AVAILABILITY FOR STOCK PURCHASE. The Company will
loan Executive an amount, not to exceed $2,397,802.40 in aggregate principal
amount, solely for the purpose of purchasing the Company's common stock in
the public market, subject to the Company's insider trading policies for
senior executives and directors of the Company. Executive may determine to
draw the loan and purchase the Company's common stock at any time during the
first six (6) months of his employment with the Company. The loan shall be
governed by a Secured Promissory Note and Investment Property Security
Agreement in the form of Exhibits B and C attached hereto. None of the
common stock purchased by Executive under this Section 2.4 shall be subject
to any purchase rights in favor of the Company; PROVIDED, HOWEVER, that the
common stock purchased by Executive under this Section is encumbered pursuant
to the terms of the Investment Property Security Agreement.
2.5 SIGN-ON BONUS. Within ten (10) days of the date that
Executive signs this Agreement, the Company will pay Executive a sign-on
bonus of nine hundred and fifty-nine thousand, one hundred and twenty dollars
and ninety-six cents ($959,120.96), less standard withholdings and
deductions. This amount represents forty percent (40%) of a stock purchase
made by Executive totaling $2,397,802.40.
2.6 STANDARD COMPANY BENEFITS. Executive shall be entitled
to all rights and benefits for which he is eligible under the terms and
conditions of the standard Company benefits and compensation plans which may
be in effect from time to time and provided by the Company to its executive
level employees generally.
2.7 LIFE INSURANCE POLICY. The Company will provide
Executive, at the Company's expense, with a five million dollar ($5,000,000)
split dollar life insurance policy with joint survivorship, with terms
substantially the same as those applied to the Company's prior Chief
Executive Officer.
3.
<PAGE>
2.8 BUSINESS EXPENSE REIMBURSEMENT. The Company shall
reimburse Executive for all reasonable travel, entertainment or other
expenses incurred by him in furtherance of or in connection with the
performance of his duties hereunder, in accordance with the Company's expense
reimbursement policy as in effect from time to time.
2.9 INDEMNIFICATION. The Company shall defend at its
expense and indemnify Executive for claims, causes of action, demands, or
suits relating to his employment or to any acts taken by him as an employee,
officer, director and agent of the Company, to the fullest extent permitted
by applicable law. In furtherance of this obligation, the Company and
Executive have entered into an indemnity agreement in the form attached
hereto as Exhibit D.
3. PROPRIETARY INFORMATION OBLIGATIONS.
3.1 PROPRIETARY INFORMATION AGREEMENT. Executive agrees to
execute and abide by the Proprietary Information and Inventions Agreement,
attached hereto as Exhibit E.
3.2 REMEDIES. Executive's duties under the Proprietary
Information and Inventions Agreement shall survive termination of Executive's
employment with the Company. Executive acknowledges that a remedy at law for
any breach or threatened breach by Executive of the provisions of the
Proprietary Information and Inventions Agreement would be inadequate and
Executive therefore agrees that the Company shall be entitled to seek
injunctive relief in case of any such breach or threatened breach.
4. OUTSIDE ACTIVITIES.
4.1 ACTIVITIES. Except with the prior written consent of
the Board, and except as set forth in Section 1.1, Executive will not during
his employment with the Company undertake or engage in any other employment,
occupation or business enterprise, other than ones in which Executive is a
passive investor or for which Executive serves as an outside member of the
board of directors. Executive may engage in civic and not-for-profit
activities so long as such activities do not materially interfere with the
performance of his duties hereunder.
4.2 NON-COMPETITION. During his employment by the Company,
except on behalf of the Company, Executive 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 known by him to compete directly with the Company, anywhere in the
world, in any line of business engaged in (or planned to be engaged in) by
the Company; PROVIDED, HOWEVER, that anything above to the contrary
notwithstanding, Executive may own, as a passive investor, securities of any
entity, so long as Executive's direct holdings in any one such entity shall
not in the aggregate constitute more than one percent (1%) of the voting
securities of a public entity or more than five percent (5%) of the voting
securities of a private entity.
5. OTHER AGREEMENTS.
Executive represents and warrants that his employment by the
Company will not conflict with and will not be constrained by any prior
agreement or relationship with any third
4.
<PAGE>
party. Executive represents and warrants that he will not disclose to the
Company or use on behalf of the Company any confidential information governed
by any agreement with any third party except in accordance with an agreement
between the Company and any such third party. During Executive's employment
by the Company, Executive may use, in the performance of his duties, all
information generally known and used by persons with training and experience
comparable to his own and all information which is common knowledge in the
industry or otherwise legally in the public domain.
6. TERMINATION OF EMPLOYMENT.
6.1 AT-WILL EMPLOYMENT. Executive's relationship with the
Company is at-will. Both Executive and the Company shall have the right to
terminate Executive's employment with the Company at any time with or without
Cause and with or without notice, provided that Executive may be removed from
any position he holds as a member of the Company's Board only in the manner
provided by the Bylaws of the Company and applicable law.
6.2 TERMINATION BY COMPANY FOR CAUSE. If the Company
terminates Executive's employment at any time for Cause (as defined below),
Executive's salary shall cease on the date of termination and Executive shall
not be entitled to severance pay, pay in lieu of notice or any other such
compensation other than payment of accrued salary and vacation and such other
benefits as are expressly required in such event by applicable law or the
terms of applicable benefit plans. All stock options and any stock awards
held by Executive shall cease vesting as of the date of termination and shall
be exercisable thereafter only pursuant to the terms of the Company's
applicable compensatory stock plans and the corresponding stock award
agreements.
(a) DEFINITION. For purposes of this Agreement,
"Cause" shall mean the occurrence of one or more of the following: (i)
Executive's conviction of a felony or a crime involving moral turpitude or
dishonesty; (ii) Executive's participation in a fraud or act of dishonesty
against the Company; (iii) Executive's intentional and material damage to the
Company's property; (iv) material breach of this Agreement, the Company's
written policies, or the Proprietary Information and Inventions Agreement
that is not remedied by Executive within fourteen (14) days of written notice
of such breach from the Board; or (v) conduct by Executive which demonstrates
Executive's gross unfitness to serve the Company as President and Chief
Executive Officer that is not remedied by Executive within fourteen (14) days
of written notice of such unfitness from the Board. Executive's physical or
mental disability or death shall not constitute Cause hereunder.
6.3 EXECUTIVE'S VOLUNTARY RESIGNATION. Executive may
voluntarily terminate his employment with the Company at any time with or
without notice, and with or without Good Reason (as defined below). In the
event that Executive voluntarily terminates his employment other than for
Good Reason, he will not be entitled to severance pay, pay in lieu of notice
or any other such compensation other than payment of accrued salary and
vacation and such other benefits as expressly required in such event by
applicable law or the terms of applicable benefit plans. All stock options
and any other stock awards held by Executive shall cease vesting as of the
date of termination and shall be exercisable thereafter only pursuant to the
5.
<PAGE>
terms of the Company's applicable compensatory stock plans and the
corresponding stock award agreements.
6.4 TERMINATION FOR DEATH OR DISABILITY. Executive's
employment with the Company will be terminated in the event of Executive's
death, or any illness, disability or other incapacity that renders Executive
physically or mentally unable regularly to perform his duties hereunder for a
period in excess of one hundred twenty (120) consecutive days or more than
one hundred eighty (180) days in aggregate in any consecutive twelve (12)
month period. Executive's inability to be physically present on the
Company's premises shall not constitute a presumption that Executive is
unable to perform such duties. In the event that Executive's employment with
the Company is terminated for death or disability as described in this
Section 6.4, Executive or Executive's heirs, successors, and assigns shall
not receive any compensation or benefits other than payment of accrued salary
and vacation and such other benefits as expressly required in such event by
applicable law or the terms of applicable benefit plans. All stock options
and any other stock awards held by Executive shall cease vesting as of the
date of termination and shall be exercisable thereafter only pursuant to the
terms of the Company's applicable compensatory stock plans and the
corresponding stock award agreements. Notwithstanding the foregoing, the
Board may elect, in its discretion, to deem the termination of Executive's
employment under this Section 6.4 to be a termination by the Company without
Cause and subject to the severance benefits as set forth in Section 6.6 below.
6.5 EXECUTIVE'S RESIGNATION FOR GOOD REASON. Executive may
resign his employment for Good Reason so long as Executive tenders his
resignation to the Company within ninety (90) days after the occurrence of
the event which forms the basis for his termination for Good Reason. If
Executive terminates his employment for Good Reason, Executive shall be
eligible for severance benefits as set forth in Section 6.6 of this
Agreement.
(a) DEFINITION OF "GOOD REASON." For purposes of
this Agreement, "Good Reason" shall mean any one of the following events
which occurs on or after the commencement of Executive's employment without
Executive's consent: (i) any reduction of Executive's then existing annual
base salary or annual bonus target except such percentage reductions which
are applied equally to all senior executives of the Company which the Board
in good faith determines are necessary; (ii) any material reduction in the
package of benefits and incentives, taken as a whole, provided to the
Executive (except that employee contributions may be raised to the extent of
any cost increases imposed by third parties) or any action by the Company
which would materially and adversely affect the Executive's participation or
reduce the Executive's benefits under any such plans, except to the extent
that such benefits and incentives of all other senior executive officers of
the Company are similarly reduced; (iii) any material diminution of the
Executive's duties, responsibilities, authority, reporting structure, titles
or offices, which is not cured within fourteen (14) days after Executive has
provided written notice to the Board; (iv) any request that the Executive
relocate to a work site that would increase the Executive's one-way commute
distance by more than thirty-five (35) miles from his then principal
residence, unless the Executive accepts such relocation opportunity; (v)
any material breach by the Company of its obligations under this Agreement or
any other written agreement with Executive that is not remedied by Company
within thirty (30) days of written notice of such breach from Executive; or
(vi) the indviduals who, at the beginning of any period of two (2)
consecutive years, constitute the Board (the "Incumbent Directors") cease for
any reason during such period to constitute at least a majority of the Board,
unless the election or the nomination for election by the Company's
stockholders of a Director first elected during such period was approved by
the vote of at least two-thirds of the Incumbent Directors, whereupon such
Director shall also be classified as an Incumbent Director.
6.
<PAGE>
6.6 CONSULTING PERIOD, FEES, AND BENEFITS. In the event
that the Company terminates Executive's employment without Cause, or if
Executive terminates his employment with the Company for Good Reason,
Executive agrees to provide services as a consultant under the terms set
forth below, in exchange for the payment of certain consulting fees and
severance benefits as described below. This Section 6.6 shall not apply if
Executive's employment is terminated in a Change of Control Termination as
defined in the Change of Control Incentive Plan.
(a) CONSULTING PERIOD. As a condition to receiving
any severance benefits, Executive agrees to make himself available to perform
consulting services for a period of one (1) year following the termination of
Executive's employment (the "Consulting Period").
(b) CONSULTING DUTIES. For purposes of this
Agreement, "Consulting Services" refers to Executive's services to the
Company in any area of his expertise, but Consulting Services will not
include any services which are otherwise required in the discharge of
Executive's duties as a member of the Company's Board. During the first
three months of the Consulting Period, Executive agrees to provide Consulting
Services for up to twenty (20) hours per month as reasonably scheduled by
Executive and the Board. For the remainder of the Consulting Period,
Executive agrees to provide Consulting Services for up to five (5) hours per
month as reasonably scheduled by Executive and the Board. Executive further
agrees to exercise the highest degree of professionalism and utilize his
expertise and creative talents in performing Consulting Services. Executive
agrees 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 Executive fees equal to one (1) year of Executive's
annual salary as of the termination of Executive's employment with the
Company, in equal monthly installments during the Consulting Period
("Consulting Fees"). The Company will not deduct or withhold any amount from
the Consulting Fees for taxes, social security, or other payroll deductions,
but will instead issue Executive an IRS Form 1099 with respect to the
Consulting Fees. Executive acknowledges that in performing Consulting
Services, he will be serving as an independent contractor, not a Company
employee, and he will be entirely responsible for the payment of all
employment taxes and any other taxes due and owing as a result of the payment
of Consulting Fees. Executive hereby indemnifies the Company and holds 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 employment taxes subsequently
determined to be applicable, if any.
(d) NONCOMPETITION AND OTHER WORK ACTIVITIES. During
the Consulting Period, in order to protect the trade secrets and confidential
and proprietary information of the Company, except on behalf of the Company,
Executive agrees that he will not, 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 directly competes with the Company, anywhere in
the world, in the business of embedded software (including, but not limited to,
Microsoft
7.
<PAGE>
Corporation, Integrated Systems, Inc., Accelerated Technology, Inc., Lynx
Real Time Systems, Inc., Mentor Graphics, Inc., Microware Systems
Corporation, QNX Software Systems, Ltd., and Sun Microsystems, Inc.);
PROVIDED, HOWEVER, that Executive may own, as a passive investor, securities
of any entity, so long as Executive's direct holdings in any such entity
shall not in the aggregate constitute more than one percent (1%) of the
voting securities of a public entity, or more than five percent (5%) of the
voting securities of a private entity. Except as provided in the preceding
sentence, during the Consulting Period Executive may engage in employment,
consulting or other work relationships or professional or non-professional
activities in addition to providing Consulting Services to the Company. The
Company agrees to make reasonable arrangements to enable Executive to perform
Consulting Services at such times and in such manner so that it does not
unreasonably interfere with Executive's other such activities.
(e) CONSULTING BENEFITS. During the Consulting
Period, in addition to the Consulting Fees, Executive shall receive the
following benefits ("Consulting Benefits"):
(i) A bonus payment equal to a pro rata share
of the target on-plan bonus for the fiscal year in which the termination of
employment occurs, less standard or authorized withholdings and deductions,
payable according to the Company's standard practice at the end of the
Company's fiscal year; and
(ii) Continued vesting of all unvested stock
options held by Executive during the Consulting Period.
(f) CESSATION. If Executive materially violates any
provision of Sections 3, 6.6(b) or 6.6(d) of this Agreement or the
Proprietary Information and Inventions Agreement, any severance payments or
other benefits being provided to Executive will cease immediately and
Executive will not be entitled to any further compensation from the Company.
7. CHANGE OF CONTROL. In the event of a Change of Control or a
Change of Control Termination, as defined in the Change of Control Incentive
Plan, Executive will be entitled to all benefits as set forth in the Change
of Control Incentive Plan. The Company will not amend or discontinue the
Change of Control Incentive Plan to adversely effect Executive's rights
thereunder without Executive's express written consent.
8. RELEASE. Upon his termination of employment by the Company
without Cause or by Executive for Good Reason, Executive shall enter into and
execute a release substantially in the form attached hereto as Exhibit F (the
"Release"), as a condition of Executive's receipt of any severance or
consulting fees or benefits provided under this Agreement. Additionally,
unless the Release is executed by Executive and becomes fully effective under
the terms set forth in the Release, any acceleration of Executive's stock
awards as provided in this Agreement shall not apply and Executive's stock
awards in such event may be exercised following the date of Executive's
termination only to the extent provided under their original terms in
accordance with the applicable stock option plan, and the applicable option
agreements.
9. GENERAL PROVISIONS.
9.1 NOTICES. Any notices provided hereunder must be in writing
and shall be deemed effective upon the earlier of personal delivery (including,
personal delivery by facsimile transmission or the third day after mailing by
first class mail, to the Company at its primary
8.
<PAGE>
office location and to Executive at his address as listed on the Company
payroll (which address may be changed by written notice).
9.2 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability
will not affect any other provision or any other jurisdiction, but such
invalid, illegal or unenforceable provision will be reformed, construed and
enforced in such jurisdiction so as to render it valid, legal, and
enforceable consistent with the intent of the parties insofar as possible.
9.3 WAIVER. If either party should waive any breach of any
provisions of this Agreement, he or it shall not thereby be deemed to have
waived any preceding or succeeding breach of the same or any other provision
of this Agreement.
9.4 ENTIRE AGREEMENT. This Agreement, together with the
Secured Promissory Note, Investment Property Security Agreement, Indemnity
Agreement, Proprietary Information and Inventions Agreement, Executive
Officers' Change of Control Incentive and Severance Benefit Plan, the Release
Agreement and the stock option grants and agreements constitute the entire
agreement between Executive and the Company and supersede any prior
agreement, promise, representation, or statement written or otherwise between
Executive and the Company with regard to the subject matters thereof. It is
entered into without reliance on any promise, representation, statement or
agreement other than those expressly contained or incorporated herein, and it
cannot be modified or amended except in a writing signed by Executive and a
duly authorized officer of the Company.
9.5 COUNTERPARTS. This Agreement may be executed in
separate counterparts, any one of which need not contain signatures of more
than one party, but all of which taken together will constitute one and the
same Agreement.
9.6 HEADINGS. The headings of the sections hereof are
inserted for convenience only and shall not be deemed to constitute a part
hereof nor to affect the meaning thereof.
9.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to
bind and inure to the benefit of and be enforceable by Executive, the Company
and their respective successors, assigns, heirs, executors and
administrators, except that Executive may not assign any of his duties
hereunder and he may not assign any of his rights hereunder without the
written consent of the Company, which shall not be withheld unreasonably.
9.8 ARBITRATION. To provide a mechanism for rapid and
economical dispute resolution, Executive and the Company agree that any and
all disputes, claims, or causes of action, in law or equity, arising from or
relating to this Agreement (including the Release) or its enforcement,
performance, breach, or interpretation, will be resolved, to the fullest
extent permitted by law, by final, binding, and 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 Section 9.8 or in this Agreement is intended
9.
<PAGE>
to prevent either the Executive or the Company from obtaining injunctive
relief in court to prevent irreparable harm pending the conclusion of any
such arbitration. The prevailing party in any such arbitration shall be
entitled to recover his or its attorneys' fees and costs.
9.9 REMEDIES. Executive's duties under Sections 3, 6.6, and
the Proprietary Information and Inventions Agreement shall survive
termination of Executive's employment with the Company. Executive
acknowledges that a remedy at law for any breach or threatened breach by
Executive of the provisions of these sections and the Proprietary Information
and Inventions Agreement would be inadequate, and Executive therefore agrees
that the Company shall be entitled to seek injunctive relief in case of any
such breach or threatened breach.
9.10 GOVERNING LAW. All questions concerning the
construction, validity and interpretation of this Agreement will be governed
by the law of the State of California as applied to contracts made and to be
performed entirely within California.
10.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of
the Effective Date above written.
WIND RIVER SYSTEMS, INC.
By: /s/ Richard W. Kraber
------------------------------
[Name] Richard W. Kraber
[Title] Vice President and Chief Financial Officer
THOMAS ST. DENNIS
/s/ Thomas St. Dennis
- ---------------------------------
11.
<PAGE>
EXHIBIT A
EXECUTIVE OFFICERS' CHANGE OF CONTROL INCENTIVE AND SEVERANCE BENEFITS PLAN
(Previously filed as Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended January 31, 1998)
<PAGE>
EXHIBIT B
SECURED PROMISSORY NOTE
(Included herein as Exhibit 10.26)
<PAGE>
EXHIBIT C
INVESTMENT PROPERTY SECURITY AGREEMENT
(Included herein as Exhibit 10.27)
<PAGE>
EXHIBIT D
INDEMNITY AGREEMENT
(Previously filed as Exhibit 10.1 to the Company's
Form S-1 dated March 5, 1993, as amended)
<PAGE>
EXHIBIT E
INVENTION ASSIGNMENT AND
PROPRIETARY INFORMATION AGREEMENT
In consideration of my employment or continued employment by Wind River
Systems, Inc. (the "Company") and the compensation now and hereafter paid to
me, I hereby represent and agree as follows:
1. I understand that the Company is engaged in a continuous program of
research, development, production and marketing in connection with its
business and that, as an essential part of my employment with the Company,
I am expected to make new contributions to and create inventions of value
for the Company.
2. I will promptly disclose in confidence to the Company all inventions,
improvements, original works of authorship, formulas, processes, computer
programs, databases and trade secrets ("Inventions"), whether or not
patentable, copyrightable or protectable as trade secrets, that are made or
conceived or first reduced to practice or created by me, either alone or
jointly with others, during the period of my employment, whether or not in
the course of my employment, which are related in any way to the business
of the Company, similar to or competitive with the products or research and
development activities of the Company, or sold to the Company's customers
or potential customers.
3. I agree that all Inventions that (a) are developed using equipment,
supplies, facilities or trade secrets of the Company, (b) result from work
performed by me for the Company or (c) relate to the business or the actual
or anticipated research or development of the Company, will be the sole and
exclusive property of and are hereby assigned to the Company. I understand
that the provisions of this paragraph do not apply to any Invention that
qualifies fully under Section 2870 of the California Labor Code, which is
set forth in the Appendix to this Agreement.
4. I acknowledge that all original works of authorship which are made by me
(solely or jointly with others) within the scope of my employment and which
are protectable by copyright are "works made for hire," as that term is
defined in the United States Copyright Act (17 U.S.C. Section 101).
5. I agree to assist the Company in every proper way to obtain for the Company
and enforce patents, copyrights and other legal protections for the
Company's Inventions in any and all countries. I will execute any documents
that the Company may reasonably request for use in obtaining or enforcing
such patents, copyrights and other legal protections. My obligations under
this paragraph will continue beyond the termination of my employment with
the Company, provided that the Company will compensate me at a reasonable
rate after such termination for time actually spent by me at the Company's
request on such assistance. In the event the Company is unable for any
reason, after reasonable effort, to
E-1
<PAGE>
secure my signature on any document needed in connection with the actions
specified in this paragraph, I hereby irrevocably appoint the Company and
its duly authorized officers and agents as my agent and attorney in fact,
which appointment is coupled with an interest, to act for and in my behalf
to execute, verify and file any such documents and to do all other lawfully
permitted acts to further the purposes of the preceding paragraph with the
same legal force and effect as if executed by me. I hereby waive and
quitclaim to the Company any and all claims, of any nature whatsoever,
which I now or may hereafter have for infringement of any Proprietary
Rights assigned hereunder to the Company.
6. I understand that my employment by the Company creates a relationship of
confidence and trust with respect to any information of a confidential or
secret nature that may be disclosed to me by the Company that relates to
the business of the Company or to the business of any parent, subsidiary,
affiliate, customer or supplier of the Company or other third party
("Proprietary Information"). Such Proprietary Information includes but is
not limited to Inventions, ideas, data, know-how, developments, designs,
techniques, marketing plans, product plans, business strategies, financial
information, forecasts, personnel information and customer lists.
7. At all times, both during my employment and after its termination, I will
keep all such Proprietary Information in confidence and trust, and I will
not use or disclose any of such Proprietary Information without the written
consent of the Company, except as may be necessary to perform my duties as
an employee of the Company. Upon termination of my employment with the
Company, I will promptly deliver to the Company all documents and materials
of any nature pertaining to my work with the Company and I will not take
with me any documents or materials or copies thereof containing any
Proprietary Information.
8. I agree that during the period of my employment by the Company I will not,
without the Company's express written consent, engage in any employment or
business activity other than for the Company. I agree further that for the
period of my employment with the Company and for one (l) year after the
date of termination of my employment with the Company, I will not (i)
induce any employee of the Company to leave the employ of the Company or
(ii) solicit the business of any client or customer of the Company (other
than on behalf of the Company).
9. I represent that my performance of all terms of this Agreement and my
duties as an employee of the Company will not breach any invention
assignment or proprietary information agreement with any former employer or
other party. I represent that I will not bring with me to the Company or
use in the performance of my duties for the Company any documents or
materials of a former employer that are not generally available to the
public.
10. To preclude any possible uncertainty, I have set forth on Exhibit A
attached hereto a
E-2
<PAGE>
complete list of all Inventions that I have, alone or jointly with others,
conceived, developed or reduced to practice or caused to be conceived,
developed or reduced to practice prior to the commencement of my employment
with the Company, that I consider to be my property or the property of
third parties and that I wish to have excluded from the scope of this
Agreement. If disclosure of any such Invention on Exhibit A would cause
me to violate any prior confidentiality agreement, I understand that
I am not to list such Inventions in Exhibit A but am to inform the Company
that all such Inventions have not been listed for that reason.
11. This Agreement will be governed by and construed according to the laws of
the State of California. If any provision of this Agreement is deemed
unenforceable by law, then such provision will be deemed stricken from this
Agreement, unless it can be modified by a court so as to render it
enforceable consistent with the intent of the Agreement, and the remaining
provisions will continue in full force and effect. I understand that in the
event of a breach or threatened breach of this Agreement by me the Company
may suffer irreparable harm and will therefore be entitled to injunctive
relief to enforce this Agreement.
12. This Agreement is the final, complete and exclusive agreement of the
parties with respect to the subject matter hereof and supersedes all prior
representations. No modification of or amendment to this Agreement, nor any
waiver of any rights under this Agreement, will be effective unless in
writing and signed by the party to be charged.
13. The provisions of this Agreement shall survive the termination of my
employment and the assignment of this Agreement by the Company to any
successor in interest or other assignee.
14. I understand that this Agreement does not constitute a contract of
employment or obligate the Company to employ me for any stated period
of time. This Agreement shall be effected as of the first day of my
employment by the Company.
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY
FILLED OUT EXHIBIT A TO THIS AGREEMENT.
EMPLOYEE COMPANY
By: By:
---------------------------- ---------------------------
Title: Title:
------------------------- ------------------------
Date: Date:
-------------------------- -------------------------
E-3
<PAGE>
EXHIBIT A
PRIOR INVENTIONS
The following is a complete list of all inventions or improvements
relevant to the subject matter of my employment by Wind River Systems, Inc. (the
"Company") that have been made or conceived or first reduced to practice by me
alone or jointly with others prior to my engagement by the Company:
/ / No inventions or improvements.
/ / See below:
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
/ / Due to confidentiality agreements with prior employer, I
cannot disclose certain inventions that would otherwise be
included on the above-described list.
/ / Additional sheets attached.
-------------------------------
Employee Signature
-------------------------------
Employee -- Print Name
-------------------------------
Date
1.
<PAGE>
APPENDIX
CALIFORNIA LABOR CODE SECTION 2870
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in
an invention to his or her employer shall not apply to an invention
that the employee developed entirely on his or her own time without
using the employer's equipment, supplies, facilities, or trade secret
information except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from
being required to be assigned under subdivision (a), the provision is
against the public policy of this state and is unenforceable.
<PAGE>
EXHIBIT F
RELEASE AGREEMENT
I understand that my position with Wind River Systems, Inc. (the
"Company") terminated effective ___________, _____ (the "Separation Date").
The Company has agreed that if I choose to sign this Release, the Company
will pay me certain severance or consulting benefits pursuant to the terms of
the Executive Employment (the "Agreement") between myself and the Company,
and any agreements incorporated therein by reference. I understand that I am
not entitled to such benefits unless I sign this Release and it becomes fully
effective. I understand that, regardless of whether I sign this Release, the
Company will pay me all of my accrued salary and vacation through the
Separation Date, to which I am entitled by law.
In consideration for the severance benefits I am receiving under the
Agreement, I hereby release the Company and its officers, directors, agents,
attorneys, employees, shareholders, parents, subsidiaries, and affiliates
from any and all claims, liabilities, demands, causes of action, attorneys'
fees, damages, or obligations of every kind and nature, whether they are now
known or unknown, arising at any time prior to the date I sign this Release.
This general release includes, but is not limited to: all federal and state
statutory and common law claims related to my employment or the termination
of my employment or related to all claims for breach of contract, tort,
wrongful termination, discrimination, wages or benefits, or claims for any
form of equity or compensation. Notwithstanding the release in the preceding
sentence, I am not releasing any right of indemnification I may have in my
capacity as an employee, officer and/or director of the Company pursuant to
any express indemnification agreement, nor am I releasing any rights I may
have as an owner and/or holder of the Company's common stock and stock
options.
In releasing claims unknown to me at present, I am waiving all rights
and benefits under Section 1542 of the California Civil Code, and any law or
legal principle of similar effect in any jurisdiction: "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."
If I am forty (40) years of age or older as of the Separation Date, I
acknowledge that I am knowingly and voluntarily waiving and releasing any rights
I may have under the federal Age Discrimination in Employment Act of 1967, as
amended ("ADEA"). I also acknowledge that the consideration given for the
waiver in the above paragraph is in addition to anything of value to which I was
already entitled. I have been advised by this writing, as required by the ADEA
that: (a) my waiver and release do not apply to any claims that may arise after
my signing of this Release; (b) I should consult with an attorney prior to
executing this Release; (c) I have twenty-one (21) days within which to consider
this Release (although I may choose to voluntarily
<PAGE>
execute this Release earlier); (d) I have seven (7) days following the execution
of this release to revoke the Release; and (e) this Release will not be
effective until the eighth day after this Release has been signed both by me and
by the Company ("Effective Date").
Agreed:
WIND RIVER SYSTEMS, INC. THOMAS ST. DENNIS
By:
--------------------------- ----------------------------------
[Name]
[Title]
Date: Date:
----------------- ---------------------
<PAGE>
SECURED PROMISSORY NOTE
$2,397,802 September 7, 1999
Alameda, California
FOR VALUE RECEIVED, THOMAS ST. DENNIS ("BORROWER"), an employee of
WIND RIVER SYSTEMS, INC. (the "COMPANY"), hereby unconditionally promises to
pay to the order of the Company, in lawful money of the United States of
America and in immediately available funds, the principal sum of Two Million
Three Hundred Ninety Seven Thousand Eight Hundred Two and No/100 Dollars
($2,397,802) (the "LOAN"), or such lesser amount as shall have been advanced
by the Company to the Borrower hereunder, together with accrued and unpaid
interest thereon, each due and payable on the dates and in the manner set
forth below.
This Secured Promissory Note is the Note referred to in and is
executed and delivered in connection that certain Executive Employment
Agreement (the "EMPLOYMENT AGREEMENT") dated as of September 7, 1999, between
Borrower and the Company, and is secured by the collateral identified and
described as security therefor in that certain Investment Property Security
Agreement dated as of even date herewith, and executed and delivered by
Borrower in favor of the Company (as the same may from time to time be
amended, modified or supplemented or restated, the "SECURITY AGREEMENT").
Additional rights of the Company are set forth in the Security Agreement.
All capitalized terms used herein and not otherwise defined herein shall have
the respective meanings given to them in the Security Agreement. It is the
intent of Borrower and the Company that the purpose of this Note is not for
consumer, family or household purposes.
1. PRINCIPAL REPAYMENT. The outstanding principal amount of the
Loan shall be due and payable on September 7, 2008; PROVIDED, HOWEVER, that
(a) Borrower may prepay the outstanding principal amount of the Loan at any
time without premium, and (b) in the event Borrower sells or otherwise
disposes of any of the shares of common stock constituting Collateral, as
permitted under the Security Agreement, Borrower shall prepay that portion of
the principal amount of the Loan, together with accrued interest thereon,
equal to $19.03 multiplied by the number of shares of common stock
constituting Collateral sold or otherwise disposed of.
2. INTEREST RATE. Borrower further promises to pay interest on
the outstanding principal amount hereof from the date hereof until payment in
full, which interest shall be payable at the rate of five and ninety-eight
hundredths percent (5.98%) PER ANNUM or the maximum rate permissible by law
(which under the laws of the State of California shall be deemed to be the
laws relating to permissible rates of interest on commercial loans),
whichever is less. Interest shall be due and payable annually in arrears on
each anniversary date hereof, and shall be calculated on the basis of a 365
day year for the actual number of days elapsed.
3. PLACE/MANNER OF PAYMENT. All amounts payable hereunder shall
be payable at the office of the Company unless another place of payment shall
be specified in writing by the Company.
<PAGE>
4. APPLICATION OF PAYMENTS. Payment on this Note shall be applied
first to accrued interest, if any, and thereafter to the outstanding
principal balance hereof.
5. DEFAULT. Each of the following events shall be an "EVENT OF
DEFAULT" hereunder:
(a) Borrower fails to pay timely any of the principal amount
due under this Note or any accrued interest or other amounts due under this
Note within fourteen (14) days after receipt of written notice of such
failure;
(b) Borrower files a petition or action for relief under any
bankruptcy, insolvency or moratorium law or any other law for the relief of,
or relating to, debtors, now or hereafter in effect, or makes any assignment
for the benefit of creditors or takes any action in furtherance of any of the
foregoing;
(c) An involuntary petition is filed against Borrower
(unless such petition is dismissed or discharged within sixty (60) days)
under any bankruptcy statute now or hereafter in effect, or a custodian,
receiver, trustee, assignee for the benefit of creditors (or other similar
official) is appointed to take possession, custody or control of any property
of Borrower;
(d) Borrower defaults on any material obligation contained
in the Security Agreement and fails to cure such default within fourteen (14)
days after receipt of written notice of such default; or
(e) Borrower's employment by or association with the Company
is terminated for any reason or no reason, including, without limitation,
death of Borrower.
Upon the occurrence of an Event of Default hereunder, all unpaid principal,
accrued interest and other amounts owing hereunder shall, at the option of
the Company, and, in the case of an Event of Default pursuant to (b) or (c)
above, automatically, be immediately due, payable and collectible by the
Company pursuant to applicable law. Notwithstanding the foregoing, if an
Event of Default has occurred under (e) above, this Note shall be accelerated
only after six (6) months after such termination; PROVIDED, HOWEVER, that if
an Event of Default has occurred under (e) above by reason of death or
disability, this Note shall be accelerated only after twelve (12) months
after such termination. The Company shall have all rights and may exercise
any remedies available to it under law, successively or concurrently. Upon
the occurrence of an Event of Default hereunder, Borrower expressly
acknowledges and agrees that the Company shall have the right to offset any
obligations of Borrower hereunder against salaries, bonuses or other amounts
that may be payable to Borrower by the Company.
6. WAIVER. Borrower waives presentment and demand for payment, notice
of dishonor, protest and notice of protest of this Note, and shall pay all
costs of collection when incurred, including, without limitation, reasonable
attorneys' fees, costs and other expenses. The right to plead any and all
statutes of limitations as a defense to any demands hereunder is hereby
waived to the full extent permitted by law.
7. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of California, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
2.
<PAGE>
8. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to
the benefit of and be binding on any successor to Borrower and shall extend
to any holder hereof. Borrower shall not, without the prior written consent
of holder, assign any of its rights or obligations hereunder.
BORROWER: /s/ Thomas St. Dennis
----------------------------
THOMAS ST. DENNIS
3.
<PAGE>
INVESTMENT PROPERTY SECURITY AGREEMENT
THIS INVESTMENT PROPERTY SECURITY AGREEMENT ("SECURITY AGREEMENT") is made by
THOMAS ST. DENNIS, an individual with a residence at
_________________________________ ("PLEDGOR"), in favor of WIND RIVER
SYSTEMS, INC., with its principal place of business at 1010 Atlantic Avenue,
Alameda, California 94501 ("PLEDGEE").
WHEREAS, Pledgor has concurrently herewith executed that certain
Secured Promissory Note (the "NOTE") in favor of Pledgee in the stated
principal amount of Two Million Three Hundred Ninety-Seven Thousand Eight
Hundred Two and No/100 Dollars ($2,397,802) to evidence the loan made to
Pledgor for the purpose of purchasing one hundred twenty-six thousand
(126,000) shares of Common Stock of Pledgee; and
WHEREAS, Pledgee is willing to accept the Note from Pledgor, but only
upon the condition, among others, that Pledgor shall have executed and
delivered to Pledgee this Security Agreement;
NOW, THEREFORE, in consideration of the foregoing recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, and intending to be legally bound, Pledgor hereby agrees
as follows:
ARTICLE 1
DEFINITIONS
As used herein, the following terms shall have the following meanings:
SECTION 1.1 "ACCOUNT" means the securities account No. _________, in
the name of Thomas St. Dennis, held by Broker, as such securities account
exists on the date hereof and as it may be constituted in the future.
SECTION 1.2 "BROKER" means SG Cowen Securities, with an address at
________________________.
SECTION 1.3 "COLLATERAL" means the Account, together with (a) any
free credit balance or other money, now or hereafter credited to, or owing
from Broker to Pledgor in respect of, the Account; (b) any money, securities
(certificated or uncertificated), commodity contracts, instruments,
documents, general intangibles, financial assets or other investment property
distributed from the Account, now or in the future; (c) all books and records
relating thereto; (d) all the proceeds of the sale, exchange, redemption or
exercise of any of the foregoing thereof, including, without limitation, any
dividend, interest payment or other distribution of cash or property in
respect thereof; and (e) any rights incidental to the ownership of any of the
foregoing, such as voting, conversion and registration rights and rights of
recovery for violations of applicable securities laws.
1.
<PAGE>
ARTICLE 2
SECURITY INTEREST
SECTION 2.1 GRANT OF SECURITY INTEREST. Pledgor hereby grants a
security interest in all of Pledgor's right, title and interest in and to the
foregoing Collateral, whether now or hereafter acquired or existing and
wheresoever located.
SECTION 2.2 SECURED OBLIGATIONS. The security interest granted by
Pledgor to Pledgee herein secures all of Pledgor's obligations arising out of
the Note and this Agreement (the "SECURED OBLIGATIONS"), and extends to any
renewal, refinancing, refunding, extension or modification of any Secured
Obligations on one or more and to any interest that accrues on any Secured
Obligations before or after the bankruptcy of Pledgor.
SECTION 2.3 CONTROL AGREEMENT. Simultaneously with the execution
and delivery of this Agreement, Pledgor, Pledgee and Broker are parties to
that certain Account Control Agreement of even date herewith (the "CONTROL
AGREEMENT") for the purpose of perfecting the security interest granted by
Pledgor to Pledgee herein.
SECTION 2.4 VOTING AND TRADING RIGHTS. If no event of default as
described in Section 5.1 below (an "EVENT OF DEFAULT") has occurred or is
continuing, Pledgor may (a) exercise any voting or consensual rights that he
may have as to any of the Collateral for any purpose which is not
inconsistent with this Agreement; and (b) so long as Pledgor complies with
Section 1 of the Note and uses proceeds of such sale or other disposition to
prepay all or a portion of the Note, as the case may be, Pledgor may sell or
otherwise dispose of any of the Collateral. If an Event of Default has
occurred and is continuing, Pledgor shall cease making trades in the Account,
Pledgee may exercise all voting or consensual rights as to any of the
Collateral and Pledgor shall deliver to Pledgee all notices, proxy
statements, proxies and other information and instruments relating to the
exercise of such rights received by Pledgor from the issuers of any of the
Collateral promptly upon receipt thereof and shall at the request of Pledgee
execute and deliver to Pledgee any proxies or other instruments which are, in
the reasonable judgment of Pledgee, necessary for Pledgee to validly exercise
such voting and consensual rights.
SECTION 2.5 SUBSEQUENT CHANGES AFFECTING COLLATERAL. Pledgor
acknowledges that he has made his own arrangements for keeping informed of
changes or potential changes affecting the Collateral (including, but not
limited to, conversions, subscriptions, exchanges, reorganizations,
dividends, offers, mergers, consolidations and shareholder meetings) and
Pledgor agrees that Pledgee has no responsibility to inform Pledgor of such
matters or to take any action with respect thereto even if any of the
Collateral has been registered in the name of Pledgee or its agent or nominee.
SECTION 2.6 RETURN OF COLLATERAL. The security interest panted to
Pledgee hereunder shall not terminate and Pledgee shall not be required to
return the Collateral to Pledgor or to terminate its security interest therein
unless and until (a) the Secured Obligations have been fully paid or performed,
(b) all of Pledgor's obligations hereunder have been fully paid or performed,
and (c) Pledgor has reimbursed Pledgee for any expenses of returning the
Collateral and filing
2.
<PAGE>
any termination statements and other instruments as are required to be filed
in public offices under applicable laws.
SECTION 2.7 TAX REPORTING. All items of income, gain, expense and
loss recognized in the Account shall be reported to the Internal Revenue
Service and all state and local taxing authorities under the name and
taxpayer identification number of Pledgor.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES.
Pledgor hereby represents and warrants to Pledgee as follows:
SECTION 3.1 ENFORCEABILITY. This Agreement and the Control
Agreement have been duly executed and delivered by Pledgor, constitute his
valid and legally binding obligations and are enforceable in accordance with
their respective terms against Pledgor.
SECTION 3.2 NO CONFLICT. The execution, delivery and performance of
this Agreement and the Control Agreement, the grant of the security interest
in the Collateral hereunder and the consummation of the transactions
contemplated hereby and thereby will not, with or without the giving of
notice or the lapse of time, (a) violate any material law applicable to
Pledgor, (b) violate any judgment, writ, injunction or order of any court or
governmental body or officer applicable to Pledgor, (c) violate or result in
the breach of any material agreement to which Pledgor is a party or by which
any of his properties, including the Collateral, is bound, nor (d) violate
any restriction on the transfer of any of the Collateral.
SECTION 3.3 NO CONSENTS. No consent, approval, license, permit or
other authorization of any third party (other than Broker) or any
governmental body or officer is required for the valid and lawful execution
and delivery of this Agreement and the Control Agreement, the creation and
perfection of Pledgee's security interest in the Collateral or the valid and
lawful exercise by Pledgee of remedies available to it under this Agreement,
the Control Agreement or applicable law or of the voting and other rights
granted to it in this Agreement or the Control Agreement except as may be
required for the offer or sale of those items of Collateral which are
securities under applicable securities laws.
SECTION 3.4 ACCOUNT. The Account is a valid and legally binding
obligation of Broker, the securities entitlements credited thereto are valid
and genuine and Pledgor has provided Pledgee with a complete and accurate
statement of the financial assets and the money credited to the account as of
the date hereof
SECTION 3.5 SECURITY INTEREST. Pledgor is the sole owner of the
Collateral free and clear of all liens, encumbrances and adverse claims
(other than those created by this Agreement) has the unrestricted right to
grant the security interest provided for herein to Pledgee and has granted to
Pledgee a valid and perfected first priority security interest in the
Collateral free of all liens, encumbrances, transfer restrictions and adverse
claims.
3.
<PAGE>
ARTICLE 4
COVENANTS.
Pledgor hereby covenants and agrees with Pledgee that Pledgor shall:
SECTION 4.1 DEFEND TITLE. Defend his title to the Collateral and
the security interest of Pledgee therein against the claims of any person
claiming rights in the Collateral against or through Pledgor and maintain and
preserve such security interest so long as this Agreement shall remain in
effect.
SECTION 4.2 NO TRANSFER. Except as permitted under Section 2.4,
neither withdraw any money or property from the Account; nor sell nor offer
to sell nor otherwise transfer nor encumber any portion of the Collateral.
SECTION 4.3 CONTROL AND CUSTOMER AGREEMENTS. Neither attempt to
modify nor attempt to terminate the Control Agreement or the customer
agreement with Broker under which the Account was established.
SECTION 4.4 FURTHER ASSURANCES.
(a) At Pledgor's expense, do such further acts and execute
and deliver such additional conveyances, certificates, instruments, and other
assurances as Pledgee may at any time request or require to protect, assure
or enforce its interest, rights and remedies under this Agreement.
(b) Promptly deliver any certificate or instrument
constituting or representing any of the Collateral he may obtain possession
of from time to time, to Broker for credit to the Account, forthwith duly
endorsed in blank without restriction.
(c) Promptly deliver to Broker any endorsements or
instruments which may be necessary or convenient to transfer any financial
assets held by Broker, which are registered in the name of, payable to the
order of, or specially endorsed to Pledgor, to Broker or its securities
intermediary or to one of their respective nominees.
SECTION 4.5 NAME AND ADDRESS. Notify Pledgee at least thirty (30)
days before he changes the address of his principal residence.
SECTION 4.6 STATEMENTS. Cause Broker to send to Pledgee a complete
and accurate copy of every statement, confirmation, notice or other
communication concerning the Account that Broker sends to Pledgor. All
information furnished by Pledgor concerning the Collateral or otherwise in
connection with this Agreement, is or shall be at the time the same is
furnished, accurate, correct and complete in all material respects, to
Pledgor's knowledge.
4.
<PAGE>
ARTICLE 5
DEFAULT.
SECTION 5.1 EVENTS OF DEFAULT.
(a) If an Event of Default under and as defined in the Note
occurs; or
(b) If Pledgor fails to perform any obligation or violates
any covenant contained in this Agreement or the Control Agreement, and such
failure or violation continues for a period of fourteen (14) days after
Pledgee requests Pledgor to remedy such failure or violation; or
(c) If any representation or warranty made by Pledgor in
this Agreement or the Control Agreement or any other document delivered to
Pledgee by contains any untrue statement of a material fact or omits to state
a material fact necessary to make the statements therein not misleading in
light of the circumstances in which they were made;
Pledgor shall be in default and Pledgee shall have, in addition to any
other remedies available to it under Section 5.2 below and under the law or
any agreement, the rights and remedies of a secured party under Article 9 of
the Uniform Commercial Code of California (the "UNIFORM COMMERCIAL CODE").
SECTION 5.2 REMEDIES.
(a) If an Event of Default has occurred and is continuing,
Pledgee may, in its discretion: (i) deliver a notice of exclusive control
under the Control Agreement to Broker; (ii) cause the Account to be
reregistered in its sole name or transfer the Account to another
broker/dealer in its sole name; (iii) remove any Collateral from the Account
and register such Collateral in its name or in the name of its broker/dealer,
agent or nominee or any of the nominees; (iv) exchange certificates
representing any of the Collateral for certificates of larger or smaller
denominations; (v) exercise any voting, conversion, registration, purchase or
other rights of a holder of any of the Collateral and any reasonable expense
of such exercise shall be deemed to be an expense of preserving the value of
such Collateral; and (vi) collect, including by legal action, any notes,
checks or other instruments for the payment of money included in the
Collateral and compromise or settle with any obligor of such instruments.
(b) If notice of time and place of any public sale of the
Collateral or the time after which any private sale or other intended
disposition is required by the Uniform Commercial Code, Pledgor acknowledges
that five (5) days' advance notice thereof will be a reasonable notice.
Pledgee shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. Pledgee may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor,
and such sale may, without further notice, be made at the time and place to
which it was so adjourned.
(c) If, under the Uniform Commercial Code, Pledgee may
purchase any part of the Collateral, it may in payment of any part of the
purchase price thereof, cancel any part of the Secured Obligations.
5.
<PAGE>
(d) If any of the Collateral is sold on credit or for future
delivery, it need not be retained by Pledgee until the purchase price is paid
and Pledgee shall incur no liability if the purchaser fails to take up or pay
for such Collateral. In case of any such failure, such Collateral may be
sold again.
(e) Pledgor shall execute and deliver to the purchasers of
the Collateral all instruments and other documents necessary or proper to
sell, convey and transfer title to such Collateral and, if approval of any
sale of Collateral by any governmental body or officer is required, Pledgor
shall prepare or cooperate fully in the preparation of and cause to be filed
with such governmental body or officer all necessary or proper applications,
reports and forms and do all other things necessary or proper to
expeditiously obtain such approval.
(f) Any cash held by Pledgee as Collateral and all cash
proceeds of any sale of, collection from, or other realization upon all or
any part of the Collateral may, in the discretion of Pledgee, be held by
Pledgee as collateral for, or then or at any time thereafter be applied
(after payment of any amounts payable to Pledgee pursuant to Article 4 above)
in whole or in part against, all or any part of the Secured Obligations in
such order as Pledgee may elect. Any surplus of such cash or cash proceeds
held by Pledgee and remaining after payment in full of all of Pledgee's
expenses hereunder and the Secured Obligations shall be paid over to Pledgor
or to whomever may be lawfully entitled to receive such surplus.
SECTION 5.3 APPOINTMENT OF PLEDGEE AS AGENT. Pledgor hereby
appoints and constitutes Pledgee, its successors and assigns, as his agent
and attorney-in-fact with the power, after and during the continuance of an
Event of Default, to carry out the provisions of this Agreement and take any
action or execute any instrument that Pledgee considers necessary or
convenient for such purpose, including the power to endorse and deliver
checks, notes and other instruments for the payment of money in the name of
and on behalf of Pledgor, to endorse and deliver in the name of and on behalf
of Pledgor securities certificates and execute and deliver in the name of and
on behalf of Pledgor instructions to the issuers of uncertificated
securities, and to execute and deliver in the name of and on behalf of
Pledgor financing statements (which may be photocopies of this Agreement) and
continuations and amendments to financing statements in the State of
California or elsewhere and Forms 4, 5, 144 and Schedules 13D and 13G with
the United States Securities and Exchange Commission. This appointment is
coupled with an interest and is irrevocable and will not be affected by the
death or bankruptcy of Pledgor nor by the lapse of time. If Pledgor fails to
perform any act required by this Agreement, Pledgee may perform such act in
the name of and on behalf of Pledgor and at his expense. Pledgor hereby
consents and agrees that the issuers of or obligors of the Collateral or any
registrar or transfer agent or trustee for any of the Collateral shall be
entitled to accept the provisions hereof as conclusive evidence of the rights
of Pledgee to effect any transfer pursuant to this Agreement and the
authority granted to Pledgee herein, notwithstanding any other notice or
direction to the contrary heretofore or hereafter given by Pledgor, or any
other person, to any of such issuers, obligors, registrars, transfer agents,
or trustees.
SECTION 5.4 IMPACT OF REGULATIONS. Pledgor acknowledges that
compliance with the Securities Act of 1933 and the rules and regulations
thereunder and any relevant state securities laws and other applicable laws may
impose limitations on the right of Pledgee to sell or otherwise dispose of
securities included in the Collateral. For this reason, Pledgor hereby
6.
<PAGE>
authorizes Pledgee to sell any securities included in the Collateral in such
manner and to such persons as would, in the judgment of Pledgee, help to
ensure that the transfer of such securities will be given prompt and
effective approval by any relevant regulatory authorities and will not
require any of the securities to be registered or qualified under any
applicable securities laws. Pledgor understands that a sale under the
foregoing circumstances may yield a substantially lower price for such
Collateral than would otherwise be obtainable if the same were registered and
sold in the open market, and Pledgor shall not attempt to hold Pledgee
responsible for selling any of the Collateral at an inadequate price even if
Pledgee accepts the first offer received or if only one possible purchaser
appears or bids at any such sale. If Pledgee shall sell any securities
included in the Collateral at such sale, Pledgee shall have the right to rely
upon the advice and opinion of any qualified appraiser or investment banker
as to the commercially reasonable price obtainable on the sale thereof but
shall not be obligated to obtain such advice or opinion. Pledgor hereby
assigns to Pledgee any registration rights or similar rights Pledgor may have
from time to time with respect to any of the Collateral.
ARTICLE 6
MISCELLANEOUS.
SECTION 6.1 ENTIRE AGREEMENT. This Agreement, the schedules and
exhibits hereto and the agreements and instruments required to be executed
and delivered hereunder set forth the entire agreement of the parties with
respect to the subject matter hereof and supersede and discharge all prior
agreements (written or oral) and negotiations and all contemporaneous oral
agreements concerning such subject matter and negotiations. There are no
oral conditions precedent to the effectiveness of this Agreement.
SECTION 6.2 NON-WAIVER. Neither the failure of nor any delay by any
party to this Agreement to enforce any right hereunder or to demand
compliance with its terms is a waiver of any right hereunder. No action
taken pursuant to this Agreement on one or more occasions is a waiver of any
right hereunder or constitutes a course of dealing that modifies this
Agreement.
SECTION 6.3 WAIVERS. No waiver of any right or remedy under this
Agreement shall be binding on any party unless it is in writing and is signed
by the party to be charged. No such waiver of any right or remedy under any
term of this Agreement shall in any event be deemed to apply to any
subsequent default under the same or any other term contained herein.
SECTION 6.4 AMENDMENTS. No amendment, modification or termination
of this Agreement shall be binding on any party hereto unless it is in
writing and is signed by the party to be charged.
SECTION 6.5 SEVERABILITY. If any term or provision set forth in
this Agreement shall be invalid or unenforceable, the remainder of this
Agreement, or the application of such terms or provisions to persons or
circumstances, other than those held invalid or unenforceable, shall be
construed in all respects as if such invalid or unenforceable term or
provision were omitted.
SECTION 6.6 SUCCESSORS. The terms of this Agreement shall be binding
upon Pledgor, his heirs and personal representatives, and shall inure to the
benefit of Pledgee, its corporate
7.
<PAGE>
successors and any holder, owner or assignee of any rights in the Note and
will be enforceable by them as their interest may appear.
SECTION 6.7 NOTICES. Any notice, request or other communication
required or permitted to be given under this Agreement shall be in writing
and deemed to have been properly given when delivered in person, or when sent
by telecopy or other electronic means and electronic confirmation of error
free receipt is received or two days after being sent by certified or
registered United States mail, return receipt requested, postage prepaid,
addressed to the party at the address set forth next to such parties'
signature hereto and with such copies delivered, transmitted or mailed to
such persons as are specified therein. Any party may change his address for
notices in the manner set forth above.
SECTION 6.8 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, all of which shall constitute one and the same
instrument, and any party hereto may execute this Agreement by signing and
delivering one or more counterparts.
SECTION 6.9 GOVERNING LAW, ETC.This Agreement shall be governed by
and construed in accordance with the law of the State of California.
[Remainder of page intentionally left blank
8.
<PAGE>
IN WITNESS WHEREOF, the Pledgor has signed this Investment Property
Security Agreement as of the date first written above.
THOMAS ST. DENNIS
/s/ Thomas St. Dennis
---------------------------
Residence:
---------------------------
---------------------------
---------------------------
Accepted as of this 7th day of September 1999
WIND RIVER SYSTEMS, INC.
By: /s/ Richard W. Kraber
--------------------------------------------
Name: Richard W. Kraber
--------------------------------------------
Title: Vice President and Chief Financial Officer
--------------------------------------------
9.
<PAGE>
WIND RIVER SYSTEMS, INC.
STOCK OPTION GRANT NOTICE
(OUTSIDE OF THE 1998 EQUITY INCENTIVE PLAN)
WIND RIVER SYSTEMS, INC. (the "Company") hereby grants to Optionee a
nonstatutory stock option to purchase the number of shares of the Company's
common stock (the "Shares") set forth below. This option is not intended to
qualify as an "incentive stock option" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). This option is not
subject to, and is granted outside of the Company's 1998 Equity Incentive Plan.
This option is subject to all of the terms and conditions as set forth herein
and in Attachments I and II, which are incorporated herein in their entirety.
OPTIONEE: Marla Ann Stark
DATE OF GRANT: October 8, 1999
SHARES SUBJECT TO OPTION: 400,000
EXERCISE PRICE PER SHARE: $18.375
EXPIRATION DATE: October 7, 2009
- -------------------------------------------------------------------------------
VESTING SCHEDULE
25% of the shares subject to this option shall vest on October 8, 2000. 1/48th
of the shares shall vest monthly thereafter.
- -------------------------------------------------------------------------------
PAYMENT: Payment of the option exercise price may be made in cash, check or any
other method provided in the Stock Option Agreement.
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionee acknowledges
receipt of, and understands and agrees to, this Grant Notice and the Stock
Option Agreement. Optionee further acknowledges that as of the Date of Grant,
this Grant Notice and the Stock Option Agreement set forth the entire
understanding between Optionee and the Company regarding the acquisition of
Shares pursuant to the option and supersedes all prior oral and written
agreements on that subject with the exception of the following agreements only:
OTHER AGREEMENTS: _______________________________________________
_______________________________________________
_______________________________________________
WIND RIVER SYSTEMS, INC. OPTIONEE
By:/S/ Richard W. Kraber /S/Marla Ann Stark
- ---------------------------------- -----------------------------------
Signature
Title: CFO
----------------------------
Date: 12-3-99
-----------------------------
Attachment I: Stock Option Agreement
Attachment II: Notice of Exercise
<PAGE>
WIND RIVER SYSTEMS, INC.
STOCK OPTION AGREEMENT
Pursuant to the Grant Notice and this Stock Option Agreement, Wind River
Systems, Inc. (the "Company") has granted you an option to purchase the number
of shares of the Company's common stock ("Shares") indicated in the Grant Notice
at the exercise price indicated in the Grant Notice.
This option is granted in connection with and in furtherance of the
Company's compensatory benefit plan for the Company's employees (including
officers), directors or consultants.
The details of this option are as follows:
1. VESTING. Subject to the limitations contained herein, this option
will vest as provided in the Grant Notice, provided that vesting will cease
upon the termination of your Continuous Service. For purposes of this Option
Agreement, Continuous Service shall mean that your service with the Company
or an affiliate of the Company, whether as an employee, director or
consultant, is not interrupted or terminated. Furthermore, your Continuous
Service shall not be deemed to have terminated merely because of a change in
the capacity in which you render service to the Company or an affiliate as an
employee, director or consultant or a change in the entity for which you
render such service, provided that there is no interruption or termination of
your Continuous Service. For example, a change in status from an employee to
a consultant will not constitute an interruption of Continuous Service. The
Board of Directors or the Chief Executive Officer of the Company, in that
party's sole discretion, may determine whether Continuous Service shall be
considered interrupted in the case of any leave of absence approved by that
party, including sick leave, military leave or any other personal leave.
2. METHOD OF PAYMENT. Payment of the exercise price by cash or check
is due in full upon exercise of all or any part of this option, provided that
you may elect, to the extent permitted by applicable law and the Grant
Notice, to make payment of the exercise price under the following
alternatives, (i) provided that at the time of exercise the Company's stock
is publicly traded and quoted regularly in the Wall Street Journal: payment
by delivery of already-owned Shares, held for the period required to avoid a
charge to the Company's reported earnings, and owned free and clear of any
liens, claims, encumbrances or security interests, which Shares shall be
valued at their fair market value on the date of exercise, or (ii) payment
pursuant to a program developed under Regulation T as promulgated by the
Federal Reserve Board which, prior to the issuance of Shares, results in
either the receipt of cash (or check) by the Company or the receipt of
irrevocable instructions to pay the aggregate exercise price to the Company
from the sales proceeds.
3. WHOLE SHARES. This option may be exercised only for whole Shares.
4. TERM. The term of this option commences on the Date of Grant and
expires upon the earliest of:
1.
<PAGE>
(a) the tenth (10th) anniversary of the Date of Grant;
(b) eighteen (18) months after your death, if you die while an
employee, director or consultant of the Company or within three (3) months
after termination of your Continuous Service;
(c) twelve (12) months after the termination of your Continuous
Service due to your permanent and total disability (within the meaning of
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended); or
(d) three (3) months after the termination of your Continuous
Service for any reason other than death or disability.
5. EXERCISE.
(a) You may exercise the vested portion of this option during its
term by delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.
(b) By exercising this option you agree that:
(i) As a condition to any exercise of this option, the Company
may require you to enter into an arrangement providing for the payment by you to
the Company of any tax withholding obligation of the Company arising by reason
of (1) the exercise of this option; (2) the lapse of any substantial risk of
forfeiture to which the Shares are subject at the time of exercise; or (3) the
disposition of Shares acquired upon such exercise.
(ii) Regardless of whether the offer and sale of Shares subject
to this option have been registered under the Securities Act of 1933, as amended
(the "1933 Act") or have been registered or qualified under the securities laws
of any state, the Company may impose restrictions upon the sale, pledge or other
transfer of such Shares (including the placement of appropriate legends on stock
certificates) if in the judgment of the Company and its counsel such
restrictions are necessary or desirable in order to achieve compliance with the
provisions of the 1933 Act, the securities laws of any state or any other law.
6. TRANSFERABILITY. This option is not transferable, except by will or
by the laws of descent and distribution, and is exercisable during your lifetime
only by you.
7. CAPITALIZATION ADJUSTMENTS. If any change is made in the Shares
subject to this option without the receipt of consideration by the Company
(through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the option will be appropriately adjusted in the
class(es) and number of shares and price per share of stock subject to such
option. Such adjustments shall be made by the Board of Directors of the
Company, determination of which shall be final, binding and conclusive. (The
2.
<PAGE>
conversion of any convertible securities of the Company shall not be treated
as a transaction "without receipt of consideration" by the Company.)
8. CHANGE OF CONTROL. Your option is subject to accelerated vesting
in accordance with the provision of the Wind River Systems, Inc. Executive
Officers' Change of Control Incentive and Severance Benefit Plan, as such
Plan may apply to you.
9. PURCHASE FOR INVESTMENT; RIGHTS OF HOLDER ON SUBSEQUENT
REGISTRATION. Unless the Shares to be issued upon exercise of your option
have been effectively registered under the 1933 Act, the Company shall be
under no obligation to issue any Shares covered by the option unless the
person who exercises such option, whether such exercise is in whole or in
part, shall give a written representation and undertaking to the Company
which is satisfactory in form and scope to counsel for the Company and upon
which, in the opinion of such counsel, the Company may reasonably rely, that
he or she is acquiring the Shares issued to him or her pursuant to such
exercise of the option for his or her own account as an investment and not
with a view to, or for sale in connection with, the distribution of any such
Shares, and that he or she will make no transfer of the same except in
compliance with any rules and regulations in force at the time of such
transfer under the 1933 Act, or any other applicable law, and that if Shares
are issued without such registration a legend to this effect may be endorsed
on the securities so issued. In the event that the Company shall,
nevertheless, deem it necessary or desirable to register under the 1933 Act
or other applicable statutes any Shares with respect to which an option shall
have been exercised, or to qualify any such Shares for exemption from the
1933 Act or other applicable statutes, then the Company shall take such
action at its own expense and may require from each participant such
information in writing for use in any registration statement, prospectus,
preliminary prospectus or offering circular as is reasonably necessary for
such purpose and may require reasonable indemnity to the Company and its
officers and directors from such holder against all losses, claims, damages
and liabilities arising from such use of the information so furnished and
caused by any untrue statement of any material fact required to be stated
therein or necessary to make the statement therein not misleading in light of
the circumstances under which they were made.
10. OPTION NOT AN EMPLOYMENT CONTRACT. This option is not an
employment contract, and nothing in this option shall be deemed to create in
any way whatsoever any obligation on your part to continue in the employ of
the Company, or of the Company to continue your employment with the Company.
The Company may terminate your employment at any time, for any reason or no
reason, with or without cause.
11. NOTICES. Any notices provided for in this option shall be given in
writing and shall be deemed effectively given upon receipt or, in the case of
notices delivered by the Company to you, five (5) days after deposit in the
United States mail, postage prepaid, addressed to you at the last address you
provided to the Company.
12. CHOICE OF LAW. This option shall be governed by, and construed in
accordance with the laws of the State of California, as such laws are applied
to contracts entered into and performed in such State.
3.
<PAGE>
13. GOVERNING AUTHORITY. This option is subject to all
interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted by the Company. This authority shall be
exercised by the Board, or by a committee of one or more members of the Board
in the event that the Board delegates its authority to a committee. The
Board, in the exercise of this authority, may correct any defect, omission or
inconsistency in this option in a manner and to the extent the Board shall
deem necessary or desirable to make this option fully effective. References
to the Board also include any committee appointed by the Board to administer
and interpret this option. Any interpretations, amendments, rules and
regulations promulgated by the Board shall be final and binding upon the
Company and its successors in interest as well as you and your heirs,
assigns, and other successors in interest.
Dated the 4th day of December, 1999.
Very truly yours,
WIND RIVER SYSTEMS , INC.
By: /S/Richard W. Kraber
-------------------------------
Duly authorized on behalf
of the Board of Directors
4.
<PAGE>
NOTICE OF EXERCISE
Wind River Systems, Inc.
1010 Atlantic Avenue
Alameda, CA 94501 Date of Exercise: _________________
Ladies and Gentlemen:
This constitutes notice under my nonstatutory stock option that I elect to
purchase the number of shares for the price set forth below.
Stock option dated: October 8, 1999
--------------------
Number of shares as
to which option is
exercised:
--------------------
Certificate to be
issued in name of:
--------------------
Total exercise price: $
--------------------
Cash payment (or check) delivered herewith: $
--------------------
Value of ______ shares of
Wind River Systems, Inc.
common stock delivered herewith(1): $
--------------------
By this exercise, I agree to provide such additional documents as you may
reasonably require. I understand that my right to receive the shares otherwise
issuable to me upon the exercise of the option is contingent upon my
satisfaction of these requirements.
I hereby make the following statements with respect to the shares of common
stock (the "Shares"), which are being acquired by me for my own account upon
this exercise of the option as set forth above:
- ------------------------
(1) Shares must meet the public trading requirements set forth in the
option. Shares must be valued in accordance with the terms of the option
being exercised, must have been owned for the minimum period required in the
option, and must be owned free and clear of any liens, claims, encumbrances
or security interests. Certificates must be endorsed or accompanied by an
executed assignment separate from certificate.
1.
<PAGE>
I acknowledge and agree that as a condition to this exercise of the option,
the Company may require me to enter an arrangement providing for the payment by
me to the Company of any tax withholding obligation of the Company arising by
reason of (1) the exercise of the option; (2) the lapse of any substantial risk
of forfeiture to which the Shares are subject at the time of exercise; or
(3) the disposition of Shares acquired upon such exercise.
I further acknowledge and agree that regardless of whether the offer and
sale of Shares subject to the option have been registered under the Securities
Act of 1933, as amended (the "1933 Act") or have been registered or qualified
under the securities laws of any state, the Company may impose restrictions upon
the sale, pledge or other transfer of the Shares (including the placement of
appropriate legends on stock certificates) if in the judgment of the Company and
its counsel such restrictions are necessary or desirable in order to achieve
compliance with the provisions of the 1933 Act, the securities laws of any state
or any other law.
Very truly yours,
___________________________________
2.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AS OF OCTOBER 31, 1999, AND THE CONSOLIDATED STATEMENTS IF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED OCTOBER 31, 19991 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> OCT-31-1999
<CASH> 49,413
<SECURITIES> 24,436
<RECEIVABLES> 35,481
<ALLOWANCES> 2,152
<INVENTORY> 0
<CURRENT-ASSETS> 119,259
<PP&E> 53,819
<DEPRECIATION> 18,314
<TOTAL-ASSETS> 372,826
<CURRENT-LIABILITIES> 56,570
<BONDS> 140,000
0
0
<COMMON> 43
<OTHER-SE> 175,436
<TOTAL-LIABILITY-AND-EQUITY> 372,826
<SALES> 32,403
<TOTAL-REVENUES> 44,601
<CGS> 3,133
<TOTAL-COSTS> 8,322
<OTHER-EXPENSES> 28,360
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,130
<INCOME-PRETAX> 9,429
<INCOME-TAX> 3,535
<INCOME-CONTINUING> 5,894
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,894
<EPS-BASIC> .14
<EPS-DILUTED> .13
</TABLE>
