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As filed with the Securities and Exchange Commission on May 2, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WIND RIVER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 94-287339
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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500 WIND RIVER WAY
ALAMEDA, CA 94501
(510) 748-4100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
RICHARD W. KRABER
CHIEF FINANCIAL OFFICER
WIND RIVER SYSTEMS, INC.
500 WIND RIVER WAY
ALAMEDA, CA 94501
(510) 748-4100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
Copies to:
ANDREA VACHSS, ESQ.
COOLEY GODWARD LLP
FIVE PALO ALTO SQUARE
3000 EL CAMINO REAL
PALO ALTO, CA 94306-2155
(650) 843-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
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If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1)
<S> <C> <C> <C>
Common Stock, $0.001 par value... 5,474,788 shares $39.8125 $217,964,997
<CAPTION>
AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Common Stock, $0.001 par value... $57,543
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act. The price per share and
aggregate offering price are based on the average of the high and low prices
of the Registrant's common stock on April 27, 2000 as reported on the Nasdaq
National Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON THE DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON A DATE THAT THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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SUBJECT TO COMPLETION, DATED MAY 2, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
5,474,788 SHARES
WIND RIVER SYSTEMS, INC.
COMMON STOCK
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The selling stockholders listed on pages 15 and 16 are offering up to
5,474,788 shares of Wind River Systems, Inc. common stock. The selling
stockholders acquired their shares of Wind River common stock on March 31, 2000
in connection with our acquisition of Embedded Support Tools Corporation.
Our common stock trades on the Nasdaq National Market under the symbol WIND.
On May 1, 2000, the last reported sale price of our common stock was $42.75 per
share.
We will not be paying any underwriting discounts or commissions in this
offering.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
May , 2000.
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TABLE OF CONTENTS
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PAGE
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WIND RIVER.................................................. 3
RISK FACTORS................................................ 4
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS........ 12
WHERE YOU CAN FIND MORE INFORMATION ABOUT WIND RIVER AND
THIS OFFERING............................................. 12
USE OF PROCEEDS............................................. 13
SELLING STOCKHOLDERS........................................ 14
PLAN OF DISTRIBUTION........................................ 15
LEGAL MATTERS............................................... 17
EXPERTS..................................................... 17
PRO FORMA COMBINED FINANCIAL INFORMATION.................... 17
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 24
REPORT OF INDEPENDENT ACCOUNTANTS........................... 39
CONSOLIDATED FINANCIAL STATEMENTS........................... 40
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS.............. 64
</TABLE>
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this prospectus. You should
not rely on any unauthorized information. This prospectus does not offer to sell
or buy any shares in any jurisdiction in which it is unlawful. The information
in this prospectus is current as of the date on the cover.
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WIND RIVER
Wind River Systems, Inc. develops, markets and supports advanced software
operating systems and development tools that allow customers to create complex,
robust, real-time software applications for embedded computers. An embedded
computer consists of a microprocessor, memory and software that are incorporated
into a larger device and dedicated to responding to external events by
performing specific tasks quickly, predictably and reliably. Some examples of
embedded computers are:
- telecommunications products such as PABX, routers, central office switches
and call processing systems;
- office products such as fax machines, laser printers and photocopiers;
- vehicle anti-lock brakes and navigation systems;
- consumer products such as camcorders, video games and set-top boxes;
- medical instrumentation and imaging systems;
- industrial automation equipment such as robots; and
- aerospace devices such as NASA's Mars probe, Pathfinder.
Our products enable customers to enhance the performance of their products,
standardize designs across projects, reduce research and development costs and
shorten product development cycles.
We are a Delaware corporation. Our principal offices are located at 500 Wind
River Way, Alameda, California 94501, and our telephone number is
(510) 748-4100. In this prospectus, "Wind River," "we" and "our" refer to Wind
River Systems, Inc. unless the context otherwise requires.
RECENT DEVELOPMENTS
On February 15, 2000, Wind River completed its acquisition of Integrated
Systems, Inc. in a stock-for-stock merger transaction. In connection with the
merger: (a) each outstanding share of Integrated Systems common stock was
exchanged for .92 of a share of Wind River common stock, resulting in the
issuance of an aggregate of 22,499,895 shares of Wind River common stock for all
outstanding shares of Integrated Systems common stock, and (b) all options to
purchase shares of Integrated Systems common stock outstanding immediately prior
to the consummation of the merger were converted into options to purchase
4,133,128 shares of Wind River common stock. The merger has been accounted for
as a pooling of interests.
On March 31, 2000, Wind River completed its acquisition of Embedded Support
Tools Corporation in a stock-for-stock merger transaction. In connection with
the merger: (a) each outstanding share of Embedded Support Tools common stock
was exchanged for .4246 of a share of Wind River common stock, resulting in the
issuance of an aggregate of 5,474,788 shares of Wind River common stock for all
outstanding shares of Embedded Support Tools common stock, and (b) all options
to purchase shares of Embedded Support Tools common stock outstanding
immediately prior to the consummation of the merger were converted into options
to purchase 1,122,855 shares of Wind River common stock. The merger has been
accounted for as a purchase.
Financial information relating to the pro forma combined results of Wind
River, Integrated Systems and Embedded Support Tools and the historical and
supplemental financial statements of Wind River begins on page 17.
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RISK FACTORS
OUR BUSINESS FACES SIGNIFICANT RISKS. THE RISKS DESCRIBED BELOW MAY NOT BE
THE ONLY RISKS WE FACE. ADDITIONAL RISKS THAT WE DO NOT YET KNOW OF OR THAT WE
CURRENTLY THINK ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY
OF THE EVENTS OR CIRCUMSTANCES DESCRIBED IN THE FOLLOWING RISKS ACTUALLY OCCURS,
OUR BUSINESS, FINANCIAL CONDITION, OR RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED AND THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.
OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM PERIOD TO
PERIOD AND CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
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 gross
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;
- 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.
IF WE DO NOT INTEGRATE OUR PRODUCTS WITH THOSE OF COMPANIES WE HAVE ACQUIRED, WE
MAY LOSE CUSTOMERS AND FAIL TO ACHIEVE OUR FINANCIAL OBJECTIVES.
We recently completed two significant business acquisitions. In February and
March 2000, we acquired Integrated Systems, Inc., and Embedded Support Tools
Corporation in merger transactions.
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Achieving the benefits of the mergers depends in part on the integration of Wind
River's, Integrated Systems' and Embedded Support Tools' products in a timely
and efficient manner. In order for us to provide enhanced and more valuable
products to our customers since the mergers, we will need to integrate our
product lines and development organizations. This will be difficult and
unpredictable because our products are highly complex, have been developed
independently and were designed without regard to such integration. If we cannot
successfully integrate our products and continue to provide customers with
products and new product features in the future on a timely basis, we may lose
customers and our business and results of operations may be seriously harmed.
IF WE ARE NOT SUCCESSFUL IN INTEGRATING OUR ORGANIZATIONS, WE WILL NOT BE ABLE
TO OPERATE EFFICIENTLY.
Achieving the benefits of the mergers also depends in part on the successful
integration of Wind River's, Integrated Systems' and Embedded Support Tools'
operations and personnel in a timely and efficient manner. Such integration
requires coordination of different development and engineering teams. This, too,
will be difficult and unpredictable because of possible cultural conflicts and
different opinions on technical decisions and product roadmaps. If we cannot
successfully integrate our operations and personnel, we will not realize the
expected benefits of the mergers.
INTEGRATING OUR COMPANIES MAY DIVERT MANAGEMENT'S ATTENTION AWAY FROM OUR
OPERATIONS.
Successful integration of Wind River's, Integrated Systems' and Embedded
Support Tools' operations, products and personnel may place a significant burden
on our management and our internal resources. The diversion of management
attention and any difficulties encountered in the transition and integration
process could have a material adverse effect on the combined company's business,
financial condition and operating results.
IF WE DO NOT SUCCESSFULLY INTEGRATE THE COMPANIES INTO A SINGLE BUSINESS AND
REALIZE THE EXPECTED BENEFITS OF THE MERGERS, WE WILL HAVE INCURRED SIGNIFICANT
COSTS, WHICH MAY HARM OUR BUSINESS.
Wind River expects to incur costs from integrating Integrated Systems' and
Embedded Support Tools' operations, products and personnel. These costs may be
substantial and may include costs for:
- employee redeployment, relocation or severance;
- conversion of information systems;
- combining research and development teams and processes;
- reorganization or closures of facilities; and
- relocation or disposition of excess equipment.
We do not know whether Wind River will be successful in these integration
efforts and cannot assure you that we will realize the expected benefits of the
mergers.
FAILURE TO RETAIN KEY EMPLOYEES COULD DIMINISH THE BENEFITS OF THE MERGERS.
The successful combination of Wind River, Integrated Systems and Embedded
Support Tools depends in part on the retention of key personnel. There can be no
assurance that Wind River will be able to retain Integrated Systems' and
Embedded Support Tools' key management, technical, sales and customer support
personnel, or that Wind River will realize the anticipated benefits of the
mergers.
IF CUSTOMER RELATIONSHIPS ARE DISRUPTED BY THE MERGERS, OUR SALES COULD DECLINE.
Customers may not continue their buying patterns in place prior to the
mergers. Any significant delay or reduction in orders for Wind River's,
Integrated Systems' or Embedded Support Tools'
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products could have a material adverse effect on the combined company's
business, financial condition and results of operations. Customers may defer
purchasing decisions as they evaluate the likelihood of successful integration
of Wind River's, Integrated Systems' and Embedded Support Tools' products and
the combined company's future product strategy. Customers may also consider
purchasing products of competitors. In addition, by increasing the breadth of
Wind River's, Integrated Systems' and Embedded Support Tools' business, the
mergers may make it more difficult for the combined company to enter into
relationships, including customer relationships, with strategic partners, some
of whom may view the combined company as a more direct competitor than Wind
River, Integrated Systems or Embedded Support Tools as an independent company.
WE FACE INTENSE COMPETITION, WHICH COULD DECREASE DEMAND FOR OUR PRODUCTS OR
CAUSE US TO REDUCE THEIR PRICES.
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
- Motorola, Inc.
- QNX Software Systems, Ltd.
- Sun Microsystems, Inc.; and
- Symbian Inc.
Recently, a number of companies, including RedHat, Inc. and Lynx Real-Time
Systems, Inc. have promoted Linux, an open source licensing model, as an
operating system for use in embedded applications. The open source licensing
model provides readily available source code and a royalty free operating
system. Because Linux is royalty free, Wind River may be forced to reduce the
prices of run time royalties, which could result in reduced profit margins.
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.
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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. Such delays are commonplace in the software industry. We plan
to introduce and market several new products in the next several months and 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 adapt or respond in a cost effective and timely
manner to new technologies and new customer requirements, the market for our
products would suffer.
BECAUSE OUR OPERATING RESULTS DEPEND UPON SALES OF A SMALL NUMBER OF PRODUCTS, A
REDUCTION IN DEMAND FOR A SINGLE PRODUCT MAY DISPROPORTIONATELY DECREASE OUR
OPERATING RESULTS.
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. Although we
have added new products to our offering as a result of the mergers, any decline
in price or 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 WE DO NOT CONTINUE TO SUCCESSFULLY ADDRESS NEW AND RAPIDLY CHANGING MARKETS,
OUR REVENUES WILL DECLINE.
We are continuously engaged in product development for new or rapidly
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 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, through two new business units, to develop software
solutions for Internet appliances and Internet infrastructure, including Tornado
for Managed Switches. These products must be ported to an increasing number of
Internet protocols and semiconductor architectures designed specifically for the
Internet. If the protocols and semiconductors upon which our Internet products
are based ultimately fail to be widely adopted, our products based on those
protocols and architectures will fail to achieve market acceptance. If our
products fail to achieve market acceptance or if their targeted markets fail to
develop, our revenues will decline.
A SIGNIFICANT PORTION OF OUR REVENUE IS DERIVED FROM ROYALTIES, WHICH ARE
DEPENDENT UPON THE EFFORTS OF THIRD PARTIES OUTSIDE OUR CONTROL.
Our operating systems are embedded in customers' end-user products, and we
receive royalty fees for each copy of our operating system embedded in those
products. Our royalty revenues depend upon our ability to successfully negotiate
royalty agreements with our customers and, in turn, their successful
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commercialization of the underlying products. We cannot control their product
development or predict its success. If our customers are not successful, our
royalty revenues will decline significantly.
WE HAVE RECENTLY BEGUN TO OFFER SOFTWARE CONSULTING SERVICES, WHICH HAVE LOWER
MARGINS THAN OUR CORE BUSINESS.
Our new professional services business is characterized by fixed-price
commitments and high costs for personnel and consultants. If this business is
not successful, or if it grows more slowly than anticipated, our gross margin
will suffer. In addition, we may enter into contracts with development schedules
in excess of a year. Failure to manage these contracts efficiently could put
additional pressure on our gross margin.
ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE OUR STOCKHOLDERS AND INCREASE OUR
INDEBTEDNESS.
As part of our business strategy, we anticipate that we will continue to
acquire or make investments in businesses, products and technologies that
complement ours. We have incurred significant costs in connection with completed
and pending transactions, and may incur significant costs in connection with
future transactions whether or not they actually occur. The transactions may not
be completed in a timely manner or at all. We may experience difficulties
integrating an acquired company's operations into ours. As a result, we may
divert management attention to the integration that would otherwise be available
for the ongoing development of our business. In particular, if we are unable to
combine our financial and customer databases, we will be unable to operate
efficiently. 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.
We may not be successful in integrating the businesses, products,
technologies or personnel we acquire. Similarly, we cannot guarantee that our
investments will yield a significant return if any. To finance acquisitions, we
may issue equity securities, which may dilute our earnings per share, or incur
significant indebtedness and related interest expense.
FAILURE OF OUR CURRENT AND PLANNED SYSTEMS, PROCEDURES AND CONTROLS TO
ADEQUATELY MANAGE AND SUPPORT OUR ANTICIPATED GROWTH AND FUTURE OPERATIONS,
COULD DISRUPT OUR BUSINESS.
We have experienced, and expect to continue to experience, both through
acquisitions and internal expansion, significant growth in our headcount and in
the scope, complexity and geographic reach of our operations. To support this
expansion, we must continue to improve our management controls, reporting
systems and procedures. To implement those improvements, we must purchase,
develop and maintain complex and expensive systems, such as our enterprise
resource planning system and our planned sales force automation system. Our
current and planned systems, procedures and controls may not be adequate to
support our future operations. Failure of these systems to meet our needs could
disrupt our operations.
IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES IN AN INCREASINGLY
COMPETITIVE ENVIRONMENT, OUR BUSINESS MAY SUFFER.
Our future success depends, and will continue to depend, on our ability to
hire, train, motivate 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 and principal engineering facilities. We cannot be
certain that we will be successful in
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recruiting and retaining such personnel. Our failure to do so could impair our
ability to compete successfully.
OUR SIGNIFICANT INTERNATIONAL BUSINESS ACTIVITIES SUBJECT US TO ECONOMIC RISKS.
During the fiscal years ended January 31, 2000 and 1999, we derived
approximately 37% of our total revenue from sales outside of North America. We
expect that international sales will continue to generate a significant
percentage of our total revenue in the foreseeable future, and we also expect to
continue to make investments to further expand our international operations and
to increase our direct sales force in Europe and Asia.
Risks inherent in international operations include:
- the imposition of governmental controls and regulatory requirements;
- the costs and risks of localizing products for foreign countries;
- unexpected changes in tariffs, import and export restrictions and other
barriers and restrictions;
- greater difficulty in accounts receivable collection;
- the restrictions of repatriation of earnings;
- the burdens of complying with a variety of foreign laws; and
- difficulties in staffing and managing foreign subsidiaries and branch
operations.
Any of these events could reduce our international sales and increase our
costs of doing business internationally.
GAINS AND LOSSES RESULTING FROM FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES
COULD HARM OUR INTERNATIONAL BUSINESS AND OUR OVERALL OPERATING RESULTS.
As a business with significant international operations, we face exposure to
adverse movements in foreign currency exchange rates. Sales by our 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.
OUR INTERNATIONAL BUSINESS DEPENDS ON THE EFFORTS OF THIRD PARTY DISTRIBUTORS
OUTSIDE OUR CONTROL.
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.
If our international distributors do not promote our products effectively, our
international revenues could decline.
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
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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 would reduce our revenues.
IF WE LOSE THIRD-PARTY LICENSE RIGHTS, WE MAY NOT BE ABLE TO SELL SOME OF OUR
PRODUCTS.
We license software products from other companies to distribute with some of
our products. These third parties may not be able to provide competitive
products with adequate features and high quality on a timely basis or to provide
sales and marketing cooperation. In addition, our products compete with products
produced by some of our licensors. When these licenses terminate or expire,
continued license rights might not be available to us on reasonable terms. In
addition, we might not be able to obtain similar products to substitute into our
tool suites.
THE RIGHTS WE RELY UPON TO PROTECT THE INTELLECTUAL PROPERTY UNDERLYING OUR
PRODUCTS MAY NOT BE ADEQUATE, WHICH COULD ENABLE THIRD PARTIES TO USE OUR
TECHNOLOGY AND REDUCE OUR ABILITY TO COMPETE IN THE MARKET.
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. For example, 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. In
addition, 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, particularly
in foreign countries, where the laws may not protect our intellectual property
as fully as in the United States. 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.
IF WE ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS THROUGH LITIGATION, THE COSTS
COULD BE SIGNIFICANT.
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.
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
10
<PAGE>
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 HURT 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 acceptance and sales, product returns,
diversion of development resources, injury to our reputation, and increased
service and warranty costs.
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.
THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Although we have not experienced any significant Year 2000 problems in our
own or third party software or with our suppliers, it is possible that such
problems still exist. If so, we could face unexpected expenses to fix such
problems or suffer unexpected outages, either of which would harm our business.
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 impair our ability to obtain financing
for working capital or acquisitions, should we need to do so. The notes are
convertible into our common stock at a price of $32.33 per share, and no notes
have been converted to date. On August 1, 2002, we will be required either to
pay off or refinance any unconverted notes. We do not know if we will be able to
refinance the notes on favorable terms or at all. If a significant amount of the
notes remains unconverted at maturity and we are unable to refinance the notes,
the repayment would deplete our cash reserves significantly.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE; A SIGNIFICANT DECREASE
IN OUR STOCK PRICE MAY INCREASE OUR EXPOSURE TO SECURITIES LITIGATION.
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;
11
<PAGE>
- 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus and the documents incorporated by
reference are forward-looking statements. These statements are based on our
current expectations, assumptions, estimates and projections about our business
and our industry, and involve known and unknown risks, uncertainties and other
factors that may cause our or our industry's results, levels of activity,
performance or achievement to be materially different from any future results,
levels of activity, performance or achievements expressed or implied in or
contemplated by the forward-looking statements. Words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may," "should," "estimate,"
"predict," "potential," "continue," or the negative of such terms or other
similar expressions, identify forward-looking statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. Our actual
results could differ materially from those anticipated in such forward-looking
statements as a result of several factors more fully described under the caption
"Risk Factors" and in the documents incorporated by reference. The
forward-looking statements made in this prospectus relate only to events as of
the date on which the statements are made. We do not intend to update publicly
any forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
WHERE YOU CAN FIND MORE INFORMATION ABOUT WIND RIVER AND THIS OFFERING
You should rely only on the information provided or incorporated by
reference in this prospectus. We have authorized no one to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the date on the front of the document.
We have filed with the SEC a registration statement on Form S-3 to register
the common stock offered by this prospectus. However, this prospectus does not
contain all of the information contained in the registration statement and the
exhibits and schedules to the registration statement. We strongly encourage you
to carefully read the registration statement and the exhibits and schedules to
the registration statement.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, DC, New York, New York and Chicago,
Illinois. You can request copies of these documents by contacting the SEC and
paying a fee for the copying cost. Please call the SEC at
12
<PAGE>
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from the SEC's website at www.sec.gov.
The SEC allows us to "incorporate by reference" the information contained in
documents that we file with them, which means that we can disclose important
information to you by referring to those documents. The information incorporated
by reference is considered to be part of this prospectus. Information in this
prospectus supersedes information incorporated by reference which we filed with
the SEC prior to the date of this prospectus, while information that we file
later with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934.
The following documents filed with the SEC are incorporated by reference in
this prospectus:
1. Our Annual Report on Form 10-K for the fiscal year ended January 31,
2000; and
2. The description of our common stock set forth in our Registration
Statement on Form 8-A, filed with the SEC on March 12, 1993.
We will furnish without charge to you, on written or oral request, a copy of
any or all of the documents incorporated by reference, including exhibits to
these documents. You should direct any requests for documents to Wind River
Systems, Inc., 500 Wind River Way, Alameda, California 94501, telephone:
(510) 748-4100.
USE OF PROCEEDS
The proceeds from the sale of the common stock offered pursuant to this
prospectus are solely for the account of the selling stockholders. We will not
receive any proceeds from the sale of these shares of common stock.
13
<PAGE>
SELLING STOCKHOLDERS
We are registering the shares covered by this prospectus on behalf of the
selling stockholders named in the table below. We issued all of the shares to
the selling stockholders in a private placement transaction in connection with
our acquisition of Embedded Support Tools on March 31, 2000. We have registered
the shares to permit the selling stockholders and their pledgees, donees,
transferees or other successors-in-interest that receive their shares from a
selling stockholder as a gift, partnership distribution or other non-sale
related transfer after the date of this prospectus to resell the shares.
The following table sets forth the name of each selling stockholder, the
number of shares of our common stock owned by each selling stockholder as of
April 1, 2000, the number of shares that may be offered under this prospectus
and the number of shares of our common stock owned by each selling stockholder
after this offering is completed. Except as set forth in the table below, none
of the selling stockholders has had a material relationship with us within the
past three years. The number of shares in the column "Number of Shares Being
Offered" represent all of the shares that each selling stockholder may offer
under this prospectus. The selling stockholders may sell some, all or none of
their shares. We do not know how long the selling stockholders will hold the
shares before selling them. The shares offered by this prospectus may be offered
from time to time by the selling stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF SHARES SHARES BENEFICIALLY
NAME OFFERING BEING OFFERED OWNED AFTER OFFERING
- ---- ------------------- ---------------- --------------------
<S> <C> <C> <C>
Peter Dawson(1)............................. 2,193,908 2,193,908 0
James Watkins(2)............................ 943,461 943,461 0
John T. W. Baggott(3)....................... 943,461 943,461 0
Richard Cote(2)............................. 83,646 83,646 0
Allan George(2)............................. 92,138 92,138 0
Nicholas Lossky(2).......................... 255,184 255,184 0
Daniel J. McGillivray(2).................... 332,037 332,037 0
Randall N. Rohrbach(2)...................... 70,059 70,059 0
Stuart Schlitt(2)........................... 185,125 185,125 0
John P. Shaughnessy(2)...................... 93,412 93,412 0
Dawson Family Irrevocable Trust of 1999..... 42,460 42,460 0
Katherine Emily Dawson Gift Trust........... 84,920 84,920 0
Sarah Elizabeth Dawson Gift Trust........... 84,920 84,920 0
Nicholas McGillivray Gift Trust............. 12,313 12,313 0
Hannah McGillivray Gift Trust............... 12,313 12,313 0
Erin McGillivray Gift Trust................. 12,313 12,313 0
Juliette A. Lossky Gift Trust............... 12,313 12,313 0
Victor A. Lossky Gift Trust................. 12,313 12,313 0
James Richard Cote Gift Trust............... 4,246 4,246 0
Kristen Lee Cote Gift Trust................. 4,246 4,246 0
</TABLE>
- ------------------------
(1) Peter Dawson is Vice President, Wind River Hardware Software Integration.
(2) Current employee of Embedded Support Tools, a wholly owned subsidiary of
Wind River.
(3) Mr. Baggott is a former employee of Embedded Support Tools; includes 110,396
shares held in the Jonathan A. Baggott Trust.
14
<PAGE>
PLAN OF DISTRIBUTION
The selling stockholders may sell the shares from time to time. The selling
stockholders will act independently of us in making decisions regarding the
timing, manner and size of each sale. The sales may be made on one or more
exchanges or in the over-the-counter market or otherwise, at prices and at terms
then prevailing or at prices related to the then current market price, or in
privately negotiated transactions. The selling stockholders may effect these
transactions by selling the shares to or through broker-dealers. The selling
stockholders may sell their shares in one or more of, or a combination of:
- a block trade in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal
to facilitate the transaction,
- purchases by a broker-dealer as principal and resale by a broker-dealer
for its account under this prospectus,
- an exchange distribution in accordance with the rules of an exchange,
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers, and
- privately negotiated transactions.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. If the plan of
distribution involves an arrangement with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, the amendment or supplement
will disclose:
- the name of each selling stockholder and of the participating
broker-dealer(s),
- the number of shares involved,
- the price at which the shares were sold,
- the commissions paid or discounts or concessions allowed to the
broker-dealer(s), where applicable,
- that a broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus, and
- other facts material to the transaction.
From time to time, a selling stockholder may transfer, pledge, donate or
assign its shares of common stock to lenders or others and each of such persons
will be deemed to be a "selling stockholder" for purposes of this prospectus.
The number of shares of common stock beneficially owned by the selling
stockholder will decrease as and when it takes such actions. The plan of
distribution for the selling stockholders' shares of common stock sold under
this prospectus will otherwise remain unchanged, except that the transferees,
pledgees, donees or other successors will be selling stockholders hereunder.
Upon being notified by a selling stockholder that a donee or pledgee intends to
sell more than 500 shares, we will file a supplement to this prospectus.
The selling stockholders may enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the shares.
The broker-dealer may then resell or otherwise transfer the shares under this
prospectus. The selling stockholders also may loan or pledge the shares to a
broker-dealer. The broker-dealer may sell the loaned shares, or upon a default
the broker-dealer may sell the pledged shares under this prospectus.
In effecting sales, broker-dealers engaged by the selling stockholders may
arrange for other broker-dealers to participate in the resales. Broker-dealers
or agents may receive compensation in the form of commissions, discounts or
concessions from selling stockholders. Broker-dealers or agents may also receive
compensation from the purchasers of the shares for whom they act as agents or to
whom they
15
<PAGE>
sell as principals, or both. Compensation as to a particular broker-dealer might
be in excess of customary commissions and will be in amounts to be negotiated in
connection with the sale. Broker-dealers or agents and any other participating
broker-dealers or the selling stockholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act of 1933, as amended,
in connection with sales of the shares. Accordingly, any commission, discount or
concession received by them and any profit on the resale of the shares purchased
by them may be deemed to be underwriting discounts or commissions under the
Securities Act. Because selling stockholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the selling
stockholders will be subject to the prospectus delivery requirements of the
Securities Act. In addition, any securities covered by this prospectus that
qualify for sale under Rule 144 promulgated under the Securities Act may be sold
under Rule 144 rather than under this prospectus. The selling stockholders have
advised that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
securities. There is no underwriter or coordinating broker acting in connection
with the proposed sale of shares by the selling stockholders.
The shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in some
states the shares may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Under applicable rules and regulations under the Securities Exchange Act of
1934, as amended, any person engaged in the distribution of the shares may not
simultaneously engage in market making activities with respect to our common
stock for a period of two business days prior to the commencement of the
distribution. In addition, each selling stockholder will be subject to
applicable provisions of the Exchange Act and the associated rules and
regulations under the Exchange Act, including Regulation M, which provisions may
limit the timing of purchases and sales of shares of our common stock by the
selling stockholders. We will make copies of this prospectus available to the
selling stockholders and have informed them of the need to deliver copies of
this prospectus to purchasers at or prior to the time of any sale of the shares.
We will bear all printing, registration and filing fees and our own legal
and accounting fees and in connection with the registration of the shares. The
selling stockholders will bear their own legal fees and costs and all
commissions, discounts and expenses of underwriters or brokers, if any,
attributable to the sales of the shares. We and the selling stockholders have
agreed to indemnify each other against certain liabilities that could arise from
the registration and sale of the shares.
We currently have Lock-Up Agreements with each of the selling stockholders
except John T. Baggott. These agreements restrict the number of shares that each
selling stockholder may sell prior to certain dates. These restrictions lapse as
to approximately 25% of the shares upon the effectiveness of this Registration
Statement. The remaining restrictions lapse as to approximately 25% of the
shares on each of the one-year, 18-month and two-year anniversaries of the
closing of our acquisition of Embedded Support Tools.
We have agreed to use commercially reasonable efforts to keep the
registration statement effective until the earlier of (i) the date on which all
Registrable Shares covered by the Registration Statement have been sold to the
public pursuant to the Registration Statement, (ii) the later to occur of
(x) 30 days after the expiration of the "Lock-Up Agreement" between Wind River
and each of the selling shareholders except John T.W. Baggott covering any of
the Registrable Shares and (y) two years after the date the Registration
Statement is declared effective, or (iii) the date on which each of the selling
stockholders can sell pursuant to Rule 144 all of his Registrable Shares covered
by the Registration Statement within three months. The selling stockholders may
sell all, some or none of the shares offered by this prospectus.
16
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon by Cooley Godward LLP.
EXPERTS
The consolidated financial statements and the supplemental pooled
consolidated financial statements of Wind River Systems, Inc. as of January 31,
2000 and 1999 and for each of the three years in the period ended January 31,
2000 included in this prospectus have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
PRO FORMA COMBINED FINANCIAL INFORMATION
The accompanying pro forma condensed combined financial statements contain
certain restated financial information which has not yet been otherwise filed
under the Securities Exchange Act of 1934 and has been retroactively restated to
reflect the combined pro forma financial position and combined pro forma results
of operations of Wind River Systems, Inc. ("Wind River"), Integrated
Systems, Inc. ("ISI" or "Integrated Systems") and Embedded Support Tools
Corporation ("EST" or "Embedded Support Tools") for all periods presented,
giving effect to Wind River's acquisitions of Integrated Systems and Embedded
Support Tools as if they had occurred at the beginning of the earliest period.
The pro forma combined statement of operations for the year ended January 31,
2000 reflect the results of operations of Wind River for the year ended
January 31, 2000, combined with the results of operations of Integrated Systems
for the year ended January 31, 2000 and the results of operations of Embedded
Support Tools for the year ended December 31, 1999.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have occurred if the mergers had been consummated at the
beginning of the periods presented, nor is it necessarily indicative of future
operating results or financial position.
17
<PAGE>
WIND RIVER SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, 2000 EST
--------------------- PRO FORMA PRO FORMA DECEMBER 31, PRO FORMA PRO FORMA
WIND RIVER ISI ADJUSTMENTS COMBINED 1999 ADJUSTMENTS COMBINED
---------- -------- ----------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents......... $ 58,621 $ 19,906 (598)(c) $ 77,929 $ 1,552 $ 79,481
Short-Term Investments............ 25,383 328 25,711 -- 25,711
Accounts Receivable, net of
allowances...................... 48,621 31,111 (146)(c) 79,586 5,915 $ (517)(f) 84,984
Prepaid and Other Current
Assets.......................... 21,893 13,482 35,375 3,857 39,232
-------- -------- ------- -------- ------- -------- --------
Total Current Assets............ 154,518 64,827 (744) 218,601 11,324 (517) 229,408
Investments......................... 184,572 24,345 208,917 -- 208,917
Land and Equipment, net............. 35,755 20,576 56,331 1,240 57,571
Intangible Assets, net.............. 1,248 34,480 35,728 -- 331,521 (g) 367,249
Other Assets........................ 7,373 3,230 (834)(d) 9,769 697 10,466
Restricted Cash..................... 39,744 39,744 -- 39,744
-------- -------- ------- -------- ------- -------- --------
Total Assets........................ $423,210 $147,458 $(1,578) $569,090 $13,261 $331,004 $913,355
======== ======== ======= ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable.................. $ 6,393 $ 4,158 $ 10,551 $ 1,766 $ (517)(f) $ 11,800
Line of Credit.................... 5,094 5,094 -- 5,094
Accrued Liabilities............... 11,059 11,228 22,287 432 2,000 (h) 24,719
Accrued Compensation.............. 10,335 7,575 17,910 2,098 20,008
Income Taxes Payable.............. 9,862 (281)(c) 9,581 9,581
Deferred Revenue.................. 24,476 24,925 49,401 1,227 50,628
Note Payable...................... -- 2,400 2,400
-------- -------- ------- -------- ------- -------- --------
Total Current Liabilities....... 67,219 47,886 (281) 114,824 7,923 1,483 124,230
-------- -------- ------- -------- ------- -------- --------
Deferred Taxes Payable.............. 12,408 (834)(d) 11,574 -- 9,325 (i) 20,899
Long-Term Debt...................... -- 598 598 -- 598
Convertible Subordinated Notes...... 140,000 140,000 -- 140,000
-------- -------- ------- -------- ------- -------- --------
Total Liabilities............... 219,627 48,484 (1,115) 266,996 7,923 10,808 285,727
-------- -------- ------- -------- ------- -------- --------
Redeemable Common Stock............. -- -- -- 1,893 (1,893)(j) --
Note Receivable from Stockholder.... -- -- -- (550) 550 --
-------- -------- ------- -------- ------- -------- --------
Total Redeemable Common Stock... -- -- -- -- 1,343 (1,343) --
-------- -------- ------- -------- ------- -------- --------
Minority Interest in Consolidated
Subsidiary........................ 878 -- 878 -- -- 878
Stockholders' Equity:
Common Stock...................... 43 -- 23 (e) 66 278 (273)(j)(k) 71
Additional Paid in Capital........ 140,715 75,457 (23)(e) 216,149 7,264 322,987 (k) 546,400
Loans to Stockholders............. (1,900) -- (1,900) (472) (550) (2,922)
Treasury Stock at Cost............ (29,488) -- (29,488) -- (29,488)
Accumulated Other Comprehensive
Income (Loss)................... 18,300 (1,801) 16,499 (89) 89 (j) 16,499
Retained Earnings................. 75,035 25,318 (463)(c) 99,890 (2,986) (714)(k)(j) 96,190
-------- -------- ------- -------- ------- -------- --------
Total Stockholders' Equity...... 202,705 98,974 (463) 301,216 3,995 321,539 626,750
-------- -------- ------- -------- ------- -------- --------
Total Liabilities and
Stockholders' Equity........ $423,210 $147,458 $(1,578) $569,090 $13,261 $331,004 $913,355
======== ======== ======= ======== ======= ======== ========
</TABLE>
See the accompanying notes to unaudited pro forma combined financial statements.
18
<PAGE>
WIND RIVER SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED EST
JANUARY 31, 2000 YEAR
------------------- ENDED
WIND PRO FORMA PRO FORMA DEC. 31, PRO FORMA PRO FORMA
RIVER ISI ADJUSTMENTS COMBINED 1999 ADJUSTMENTS COMBINED
-------- -------- ----------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products......................... $125,529 $ 86,042 $ (893)(a)(c) $210,678 $28,451 (715)(f) $238,414
Services......................... 45,581 59,803 (8)(c) 105,376 -- 105,376
-------- -------- ------- -------- ------- -------- --------
Total Revenues................. 171,110 145,845 (901) 316,054 28,451 (715) 343,790
Cost of Revenues:
Products......................... 11,124 16,782 (180)(a) 27,726 5,349 (715)(f) 32,360
Services......................... 20,508 22,854 43,362 -- 43,362
-------- -------- ------- -------- ------- -------- --------
Total Cost of Revenues......... 31,632 39,636 (180) 71,088 5,349 (715) 76,394
-------- -------- ------- -------- ------- -------- --------
Gross Profit................... 139,478 106,209 (721) 244,966 23,102 -- 268,068
Operating Expenses:
Selling and Marketing............ 60,962 62,280 23 (b) 123,265 10,595 133,860
Product Development and
Engineering.................... 29,659 25,642 55,301 4,838 60,139
General and Administrative....... 15,924 17,982 (1,580)(b) 32,326 1,815 34,141
Acquisition--Related and Other... 1,436 8,462 1,436 (b) 11,334 -- 11,334
Amortization of Goodwill and
Purchased Intangible Assets.... 816 5,528 144 (b) 6,488 -- 82,566 (g) 89,272
Stock Related Compensation
Expense........................ -- -- -- 9,437 9,437
-------- -------- ------- -------- ------- -------- --------
Total Operating Expenses....... 108,837 119,894 23 228,844 26,685 82,566 338,313
Income (Loss) from Operations...... 30,641 (13,685) (744) 16,212 (3,583) (82,566) (82,566)
Other Income (Expense):
Interest Income.................. 15,378 3,557 18,935 238 19,173
Interest Expense and Other....... (9,112) -- (9,112) -- (9,112)
Minority Interest in Consolidated
Subsidiary..................... (327) -- (327) -- (327)
-------- -------- ------- -------- ------- -------- --------
Total Other Income............. 5,939 3,557 -- 9,496 238 -- 9,734
-------- -------- ------- -------- ------- -------- --------
Income (Loss) before Provision
(Benefit) for Income Taxes....... 36,580 (10,128) (744) 25,708 (3,345) (82,566) (60,421)
Provision (Benefit) for Income
Taxes............................ 14,109 1,517 (281)(c) 15,345 402 (1,242)(i)(l) 14,505
-------- -------- ------- -------- ------- -------- --------
Net Income (Loss).............. $ 22,471 $(11,645) $ (463) $ 10,363 $(3,747) $(81,324) $(77,410)
Accretion of Redeemable Common
Stock to Redemption Value........ -- -- (1,893) 1,893 (j)
-------- -------- ------- -------- ------- -------- --------
Net Income (Loss) to
Stockholders................. $ 22,471 $(11,645) $ (463) $ 10,363 $(5,640) $(83,217) $(77,410)
======== ======== ======= ======== ======= ======== ========
Net Income (Loss) per Share:
Basic............................ $ 0.54 $ (0.50) $ 0.16 $ (0.49) $ (1.13)
Diluted.......................... $ 0.50 $ (0.50) $ 0.15 $ (0.49) $ (1.13)
Weighted average common and common
equivalent shares:
Basic............................ 41,674 23,285 63,096 11,621 68,571
Diluted.......................... 44,778 23,285 67,029 11,621 68,571
</TABLE>
See the accompanying notes to unaudited pro forma combined financial statements.
19
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying combined financial statements and related notes of Wind
River 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 and results of operations for the periods
presented have been included. These combined financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto for the fiscal year ended January 31, 2000 included in Wind River's
Annual Report on Form 10-K for that period.
In accordance with the rules and regulations of the Securities and Exchange
Commission, unaudited combined 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 combined financial statements
contain disclosures adequate to make the information presented not misleading.
The combined 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 on 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 combined
financial statements and accompanying notes. A change in the facts and
circumstances surrounding these estimates could result in a change to the
estimates and impact future operating results.
2. PERIODS PRESENTED
Wind River's fiscal year ends on January 31. Prior to the merger, Integrated
Systems' fiscal year ended on the last day of February. Integrated Systems
changed its year-end to January 31 to conform to Wind River's year-end. Prior to
the acquisition, Embedded Support Tools Corporation's fiscal year ended on the
last day of December. The accompanying unaudited pro forma statements of
operations information gives effect to the merger of Wind River, Integrated
Systems and Embedded Support Tools as if such merger occurred as of the
beginning of the earliest period presented. The pro forma combined statement of
operations for the year ended January 31, 2000 reflect the results of operations
of Wind River for the year ended January 31, 2000, which includes the results of
operations for the year ended December 31, 1999 of Wind River's international
subsidiaries, combined with the results of operations of Integrated Systems for
the year ended January 31, 2000, which includes the results of operations for
the year ended December 31, 1999 of Integrated Systems' international
subsidiaries and the results of the year ended December 31, 1999 of Embedded
Support Tools. An adjustment has been made to stockholders' equity as of
January 31, 2000, to eliminate the effect of including Integrated Systems'
unaudited results of operations for the month ended February 28, 1999 in both
the year ended January 31, 2000 and the year ended January 31, 1999.
The pro forma combined balance sheets as of January 31, 2000, combine the
assets, liabilities and stockholders' equity of Wind River at January 31, 2000
with the assets, liabilities and stockholders' equity of Integrated Systems as
of January 31, 2000 and the assets, liabilities and stockholder's equity of
Embedded Support Tools as of December 31, 1999.
20
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. PURCHASE PRICE ALLOCATION
Effective March 31, 2000, Wind River acquired all the outstanding stock and
stock rights of Embedded Support Tools, which designs, manufactures, sells and
supports hardware and software tools used for development and debugging embedded
systems. The total purchase price of approximately $329.1 million consisted of
5,474,788 shares of stock and 1,122,855 options assumed and $2.0 million of
merger costs. The value of the assumed options was based on the Black-Scholes
model. The acquisition has been accounted for using the purchase method of
accounting and accordingly the purchase price has been allocated to the tangible
and intangible assets acquired and the liabilities assumed on the basis of their
respective fair values on the acquisition date. This is an initial estimate of
the purchase price and is subject to change.
The allocation of the purchase price is summarized below (in thousands):
<TABLE>
<S> <C>
Completed technology........................................ $ 15,150
In-process research and development......................... 3,700
Trademark................................................... 650
Workforce................................................... 5,650
Assumed net assets/liabilities.............................. 3,206
Deferred tax liability...................................... (9,325)
Goodwill.................................................... 310,071
--------
Total purchase price........................................ $329,102
========
</TABLE>
The amount allocated to the in-process research and development represents
the purchased in-process technology for projects that, as of the date of the
acquisition, had not yet reached technological feasibility and had no
alternative future use. Based on preliminary assessments, the value of these
projects was determined by estimating the resulting net cash flows from the sale
of the products resulting from the completion of the projects, reduced by the
portion of the revenue attributable to core technology and the percentage
completion of the project. The resulting cash flows were then discounted back to
their present value at appropriate discount rates.
The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specification including function, features and technical performance
requirements. The resulting net cash flows from such products are based on
estimates of revenue, cost of revenue, research and development costs, sales and
marketing costs, and income taxes from such projects.
4. MERGER COSTS
Wind River and Integrated Systems incurred approximately $4.0 million of
costs associated with the merger, including $3.0 million for legal, accounting
and other professional consulting fees and $1.0 million for investment banking
fees, which have been recorded in Prepaid and Other Current assets as of
January 31, 2000. An additional $15.0 million of transaction costs have been
incurred in the first quarter of fiscal year 2001, of which $9.4 million was
associated with investment banking fees. It is estimated that a further
$6.0 million of merger costs will be incurred in the first quarter of fiscal
year 2001, primarily relating to severance payments.
21
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. MERGER COSTS (CONTINUED)
The foregoing estimate is a forward looking statement that involves risks
and uncertainties. Actual results could differ materially due to factors such as
timing and number of employee terminations, consolidation and relocation of
operations and associated costs.
5. PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the historical
financial statements of Wind River, Integrated Systems and Embedded Support
Tools based upon assumptions made by management for the purpose of preparing the
unaudited pro forma combined condensed financial statements.
(a) To eliminate intercompany royalties and costs associated with product
sold to Wind River by Integrated Systems.
(b) To reclass acquisition-related and other charges and amortization of
goodwill and purchased intangible assets for the year ended January 31,
2000.
(c) To align the international entity year ends.
(d) To reclass tax asset for appropriate GAAP presentation.
(e) To reclass the par value of Wind River shares issued for Integrated
Systems outstanding shares.
(f) To eliminate intercompany sales and costs associated with product sold
to Wind River by Embedded Support Tools, and the related receivable and
payable balances.
(g) To reflect cost and/or amortization of goodwill and purchased intangible
assets associated with the acquisition of Embedded Support Tools as
follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZATION
AMORTIZATION EXPENSE FOR 12
AMOUNT PERIOD MONTH PERIOD
-------- ------------ --------------
<S> <C> <C> <C>
Goodwill.................................. $310,071 4 years $77,518
Trademark................................. 650 5 years 130
Workforce................................. 5,650 5 years 1,130
Completed technology...................... 15,150 4 years 3,788
-------- -------
$331,521 $82,566
======== =======
</TABLE>
(h) To record the Embedded Support Tools merger costs incurred.
(i) To reflect the effect of the above adjustments on provision for income
taxes and deferred tax liabilities.
(j) To eliminate Embedded Support Tools' equity and redeemable common stock.
(k) To issue 5,474,788 shares of common stock.
(l) To record income tax benefit assuming C corporation tax.
22
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. PRO FORMA NET INCOME PER SHARE
The pro forma combined basic net income per share is based on the combined
weighted average number of common shares of Wind River's common stock and
Integrated Systems' common stock outstanding for each period, calculated using
the exchange ratios that resulted in the issuance of 22,499,895 shares of Wind
River common stock for all of the outstanding shares of Integrated Systems as of
February 15, 2000, and the issuance of 5,474,788 shares of Wind River common
stock for all of the outstanding shares of Embedded Support Tools as of
March 31, 2000. All employee stock options have been included in the computation
of pro forma combined diluted net income per share using the treasury stock
method to the extent such instruments were dilutive for the periods presented.
7. SEGMENT AND GEOGRAPHIC INFORMATION
Wind River operates in one industry segment--technology for embedded
operating systems. Wind River markets its products and related services to
customers in the United States, Canada, Europe and Asia Pacific.
Internationally, Wind River markets its products and services primarily through
its subsidiaries and various distributors. Revenues are attributed to geographic
areas based on the country in which the customer is domiciled. The distribution
of revenues and assets by geographic location is as follows:
REVENUES
<TABLE>
<CAPTION>
FISCAL
FISCAL YEAR ENDED YEAR
JANUARY 31, 2000 ENDED
--------------------- PRO FORMA PRO FORMA 12/31/99 PRO FORMA PRO FORMA
WIND RIVER ISI ADJUSTMENTS COMBINED EST ADJUSTMENTS COMBINED
---------- -------- ----------- --------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
North America.............. $113,799 $ 85,117 $ (180) $198,736 $19,262 $(578) $217,420
Japan...................... 26,411 16,469 42,880 2,480 45,360
Other International........ 30,900 44,259 (721) 74,438 6,709 (137) 81,010
-------- -------- ------ -------- ------- ----- --------
Total........................ $171,110 $145,845 $ (901) $316,054 $28,451 $(715) $343,790
======== ======== ====== ======== ======= ===== ========
</TABLE>
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, 2000
--------------------- PRO FORMA PRO FORMA 12/31/99 PRO FORMA PRO FORMA
WIND RIVER ISI ADJUSTMENTS COMBINED EST ADJUSTMENTS COMBINED
---------- -------- ----------- --------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
North America.............. $355,751 $116,282 (834) $471,199 $ 8,573 $331,004 $810,776
Japan...................... 25,596 6,121 31,717 1,250 32,967
Other International........ 41,863 25,055 (744) 66,174 3,438 69,612
-------- -------- ------ -------- ------- -------- --------
Total........................ $423,210 $147,458 (1,578) $569,090 $13,261 $331,004 $913,355
======== ======== ====== ======== ======= ======== ========
</TABLE>
Other International consists of the revenues and assets of operations in
Europe and Asia Pacific, excluding Japan.
23
<PAGE>
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates solely to the supplemental consolidated
financial statements appearing on pages 64 through 87 of this prospectus, and
should be read in conjunction with such financial statements and with Wind
River's "Management's Discussion of Financial Condition and Results of
Operations" covering its audited consolidated financial statements as of and for
the three years ended January 31, 2000 included in Wind River's 2000 Annual
Report on Form 10-K, which is incorporated by reference into this prospectus.
The following discussion contains forward-looking statements that involve
risks and uncertainties. Wind River's actual results could differ materially
from those discussed in any forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in this section. All forward-looking statements included in this
document are based on information available to Wind River on the date hereof,
and Wind River assumes no obligation to update any such forward-looking
statements. The following discussion should be read in conjunction with the
supplemental consolidated financial statements and notes included elsewhere in
this report.
Wind River was founded in 1983 to provide consulting and custom software
development services for a variety of business clients. From its inception, Wind
River directed its development efforts towards real-time and embedded system
applications and released its first commercial product,
VxWorks-Registered Trademark-, in 1987. Wind River subsequently broadened its
product offerings both internally and through technology and business
acquisitions and has become a leading provider of operating systems and
development tools for the real-time embedded systems marketplace. During the
past six years, Wind River has invested heavily in the development and
introduction of its products and in the establishment of worldwide sales,
distribution, customer support and consulting capabilities. Wind River markets
its products on a worldwide basis through its direct sales force, distributors
and value-added resellers. Wind River provides sales, marketing and product
support for foreign customers through wholly-owned subsidiary companies in the
United States, Europe and a majority-owned subsidiary in Japan.
Wind River typically charges a one-time fee for a development license and a
run-time license fee for each copy of Wind River's operating system embedded in
the customer's product. A key component of Wind River's strategy is to
significantly increase revenue through run-time license fees. Any increase in
the percentage of revenues attributable to run-time licenses will depend on Wind
River's successful negotiation of run-time license agreements and on the
successful commercialization by Wind River's customers of the underlying
products.
In May 1998, Wind River acquired Zinc Software, Incorporated, a privately
held company that develops, markets and supports graphical application software.
In connection therewith, Wind River issued 339,917 shares of common stock in
exchange for all of the outstanding stock of Zinc. The acquisition was accounted
for as a pooling of interests. As the operations of Zinc were not material to
Wind River's consolidated operations and financial position, the financial
statements of Zinc have been recorded in Wind River's consolidated financial
statements as of May 1, 1998.
During the fiscal year ended January 31, 1999, Wind River paid $500,000 for
a 10% interest in the common stock of XACT, Inc. 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
24
<PAGE>
difference between the carrying amount of its investment and the net realizable
value during the first quarter of fiscal year 2000.
In June 1999, Wind River acquired RouterWare, Incorporated, a corporation
that 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 in exchange for all of the outstanding shares of RouterWare
common stock and reserved an additional 634,065 shares for issuance upon
exercise of outstanding 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. In connection with the acquisition of
RouterWare, Wind River incurred approximately $930,000 in merger related
expenses consisting primarily of transaction fees.
On February 15 2000, Wind River acquired Integrated Systems, Inc., an
embedded operating systems and development tool software developer, in a
transaction to be accounted for as a pooling of interests. In the acquisition,
each outstanding share of Integrated Systems common stock was exchanged for .92
shares of Wind River, resulting in the issuance of an aggregate of 22,499,895
shares of Wind River common stock for all outstanding shares of Integrated
Systems common stock. Additionally, approximately 4,493,000 Integrated Systems
stock options became options to purchase approximately 4,133,000 shares of Wind
River common stock. In connection with the merger of Integrated Systems, Wind
River had incurred approximately $4.0 million in deferred merger related costs
as of January 31, 2000. These costs are to be charged in the period the
acquisition was completed.
On March 13, 2000, Wind River announced a definitive agreement to acquire
AudeSi, a privately held company that supplies innovative embedded Java based
tools and other components for building flexible, multi-application consumer
devices. Wind River will acquire AudeSi in exchange for an aggregate of
1,075,000 shares of Wind River common stock. Consummation of the acquisition is
subject to Canadian regulatory approvals. Upon completion of the acquisition,
certain AudeSi staff members will become part of Wind River's Consumer business
unit and remain located in Calgary, Alberta, Canada.
On March 15, 2000, Wind River announced its strategic equity investment in
Highlander Engineering, Inc. ("Highlander"), a privately held company. A member
of Wind River management will join the Highlander board of directors. During
fiscal year 2000, Wind River also made equity investments in Liberate
Technologies, Inc. and privately held FlashPoint Technology, Inc.
On March 31, 2000, Wind River completed its acquisition of Embedded Support
Tools Corporation, a worldwide provider of integrated hardware and software
tools for programming, testing and debugging embedded systems. Wind River issued
an aggregate of 5,474,788 shares of common stock in exchange for all outstanding
shares of Embedded Support Tools Corporation and reserved an additional
1,122,855 shares for issuance upon exercise of employee stock options. The
acquisition is being accounted for as a purchase.
RESULTS OF OPERATIONS
The results of operations presented below are for Wind River and have been
restated to include the historical financial information of RouterWare and
Integrated Systems. Wind River believes that these operating results are not
necessarily indicative of results for any future periods. The following
25
<PAGE>
table sets forth certain consolidated income statement data and percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
---------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- -------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Products.................................... $210,678 67% $171,792 65% $131,551 61%
Services.................................... 105,376 33 93,364 35 82,468 39
-------- --- -------- --- -------- ---
Total revenues............................ 316,054 100 265,156 100 214,019 100
-------- --- -------- --- -------- ---
Cost of revenues:
Products.................................... 27,726 9 23,526 9 20,502 10
Services.................................... 43,362 14 35,938 14 37,063 17
-------- -------- --------
Total cost of revenues.................... 71,088 23 59,464 23 57,565 27
-------- --- -------- --- -------- ---
Gross profit............................ 244,966 77 205,693 77 156,454 73
-------- --- -------- --- -------- ---
Operating Expenses:
Selling and marketing....................... 123,265 39 93,686 35 73,950 35
Product development and engineering......... 55,301 17 37,772 14 31,721 15
General and administrative.................. 33,946 11 23,339 8 19,930 9
Acquisition related and other............... 9,898 3 7,307 3 15,159 7
Amortization of goodwill & purchased
intangibles............................... 6,344 2 1,303 1 688 0
-------- --- -------- --- -------- ---
Total operating expenses.................. 228,754 72 163,409 61 141,448 66
-------- --- -------- --- -------- ---
Income from operations........................ 16,212 5 42,284 16 15,006 7
Other income, net............................. 9,496 3 9,763 4 7,350 3
-------- --- -------- --- -------- ---
Income before provision for income taxes...... 25,708 8 52,047 20 22,356 10
Provision for income taxes.................... 15,345 5 16,791 7 11,957 9
-------- --- -------- --- -------- ---
Net income.................................. $ 10,363(3) 3% $ 35,256(2) 13% $ 10,399(1) 5%
======== === ======== === ======== ===
</TABLE>
- ------------------------
(1) Net income before the effect of the adjustment for acquisition related and
other charges of $15,159 was $17,679 or 8% of total revenue for the year
ended January 31, 1998. The adjustment resulted from the acquisition of
in-process technologies from Liberate Technologies, Inc. and Objective
Software Technology, Ltd.
(2) Net income before the effect of the adjustment for acquisition related and
other of $7,307 was $40,361 or 15% of total revenue for the year ended
January 31, 1999. The adjustment resulted from arbitration related expenses
in a legal settlement.
(3) Net income before the effect of the adjustment for acquisition related and
other of $9,898 and for amortization of goodwill and purchased intangibles
of $6,344, was $26,345 or 8% of total revenue for the year ended
January 31, 2000. These adjustments resulted from the acquisition of
in-process technologies from Software Development Systems, Inc ("SDS") and
other acquisition related expenses, executive transition costs, and the
amortization of goodwill and purchased intangibles, primarily from the
acquisition of SDS.
26
<PAGE>
YEARS ENDED JANUARY 31, 2000 AND 1999
REVENUES
Revenues for fiscal year 2000 were $316.1 million compared to
$265.2 million for fiscal year 1999. Product revenues consist of licensing fees
from operating system and software development tool products and fees from
embedded system run-time licenses. Service revenues are derived from software
development and porting contracts, software maintenance and support contracts,
customer training and consulting. Software maintenance and support contracts are
generally sold separately from the software licenses and tools. The increase in
revenues of 19% is due to increases in both product revenues and service
revenues. Product revenues accounted for approximately 67% and 65% of the total
revenues in fiscal years 2000 and 1999, respectively, with service revenues
accounting for the balance of total revenue over this period.
Product revenues were $210.7 million for fiscal year 2000 compared to
$171.8 million for fiscal year 1999. The increase of 23% in product revenues was
due primarily to the continued acceptance of Wind River's products, 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, including the Tornado II integrated development
environment, the integration of products from acquired companies, including
Tornado for Managed Switches from XACT and Network Protocols from RouterWare and
to the acquisition in July 1999 of Software Development Systems, Inc. Product
revenues are generally recognized at the time of shipment or upon the delivery
of a product master in satisfaction of non-cancelable contractual agreements
provided that collection of the resulting receivable is probable, the fee is
fixed or determinable and vendor-specific objective evidence ("VSOE") exists to
allocate the total fee to all delivered and undelivered elements of the
arrangement.
Service revenues were $105.4 million for fiscal year 2000 compared to
$93.4 million for fiscal year 1999. The increase of 13% was primarily due to
increases in revenue from maintenance support agreements, both new and recurring
and training resulting from the increase in Wind River's installed base of
Tornado and pRISM+ software development environments and software applications
provided to customers. In addition, revenue from professional services increased
as Wind River place additional strategic emphasis in this area. Maintenance
contracts are generally prepaid, with the revenue recognized ratably over the
period of the contract. Deferred revenue results primarily from customer
prepayments under software maintenance, which are recognized ratably over the
life of the agreements, certain run-time agreements, which are recognized as
target licenses are delivered, and professional services and engineering
services contracts or training arrangements, which are recognized as services
are performed.
Revenues from international sales were $117.3 million for fiscal year 2000
compared to $98.1 million for fiscal year 1999. International revenues accounted
for 37% of total revenues for each of the fiscal years ended January 31, 2000
and 1999. Revenues from European sources increased 16% from fiscal year 1999 to
2000 while revenues from Japan increased 26% over the same period. Wind River
expects international sales to continue to represent a significant portion of
revenues, although the percentage may fluctuate from period to period. Wind
River's international sales are primarily denominated in the local currencies,
and an increase in the relative value of the dollar against such currencies
would reduce Wind River's revenues in dollar terms or make Wind River's products
more expensive and, therefore, potentially less competitive in foreign markets.
Wind River actively monitors its foreign currency exchange exposure; and to date
such exposures have not had a material impact on Wind River's results of
operations. Wind River enters into forward contracts to hedge the short-term
impact of foreign currency fluctuations. Revenues from Asia Pacific sources
including Japan represented 15% of international revenues for both fiscal years
2000 and 1999.
27
<PAGE>
COST OF PRODUCTS
Cost of products was $27.7 million for fiscal year 2000 compared to
$23.5 million for fiscal year 1999. Product-related cost of revenues as a
percentage of product revenues was 13% and 14% for fiscal years 2000 and 1999,
respectively. Product-related costs consist primarily of royalty payments to
third parties for the use of their software, amortization of capitalized
software development costs, salaries and benefits for production employees,
product media, and documentation and packaging. Wind River's cost of revenue as
a percentage of product revenues will be affected in the future by the
distribution rights related to the introduction of new products, including
Tornado II and a next generation Tornado product, Tornado for Embedded Internet
products and Tornado for Managed Switches and by royalty payments to third
parties for sales related to their products which are integrated into our
technology and are sold as support tools. During fiscal year 2000, Wind River
introduced a new pricing model in which it created product bundles that include
third party tools that were previously sold separately. As a result, Wind River
has experienced an increase in absolute dollars paid to third party vendors for
their software tools. We expect the amount paid to third party vendors in the
future to increase in absolute dollars. Amortization of capitalized software
development costs included in cost of products amounted to $2.4 million and
$1.9 million in fiscal years 2000 and 1999, respectively. Wind River will
amortize approximately $600,000 of capitalized software development costs in
each of the next 5 quarters.
COST OF SERVICES
Cost of services was $43.4 million for fiscal year 2000 compared to
$35.9 million for fiscal year 1999. Service related cost of revenues as a
percentage of service revenues was 41% and 38% for fiscal years 2000 and 1999,
respectively. Service related cost of revenues consists 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 cost 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 the 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. In
addition, we expect our cost of services as a percentage of total revenues to
increase as we invest more resources in professional services through Integrated
Systems' Doctor Design unit.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $123.3 million for fiscal year 2000
compared to $93.7 million for fiscal year 1999. The increase resulted primarily
from increases in sales and marketing personnel both domestically and
internationally and increased advertising. As a percentage of total revenues,
selling and marketing expenses were 39% and 35% for fiscal years 2000 and 1999,
respectively. The increase in absolute dollars and as a percentage of total
revenues from fiscal year 1999 to 2000 resulted primarily from the growth of
sales and marketing personnel, field engineers, expenses related to marketing
and advertising programs and third-party marketing costs for product
introductions, including Tornado II, and promotions. We expect our selling and
marketing expenses to increase in absolute dollars as we continue to increase
our sales and marketing personnel and marketing and advertising programs.
PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Product development and engineering expenses were $55.3 million for fiscal
year 2000 compared to $37.8 million for fiscal year 1999, an increase of 46%. As
a percentage of total revenues, product development and engineering expenses
increased from 14% to 17% from fiscal year 1999 to 2000. The increase in product
development and engineering expenses is primarily due to the increase in staff
and
28
<PAGE>
associated support for engineers to expand and enhance the Wind River's product
lines, including the costs associated with integrating engineering teams from
XACT, Routerware and SDS. We believe that product development and engineering
expenses will continue to increase in absolute dollars as a result of the
investment in the internal development of new products, technologies, and
through acquisitions of companies and technologies.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $33.9 million for fiscal year 2000
compared to $23.3 million for fiscal year 1999, an increase of 45%. As a
percentage of revenues, general and administrative expenses increased to 11% in
fiscal year 2000 from 8% in fiscal year 1999. The increase was primarily due to
the growth in infrastructure investments in the areas of information systems,
finance and administration and worldwide staff. In 1997, Wind River commenced a
worldwide financial business and production systems replacement project that
uses software primarily from Oracle. The new systems brought Wind River's
business and production computer systems into compliance with Year 2000
requirements and will create the financial system infrastructure to support
integration of acquired companies' financial systems. The financial and
production systems became operational during the fourth quarter of fiscal year
2000. In fiscal years 2000 and 1999, Wind River incurred $4.9 and $1.1 million,
respectively, to implement the Oracle software. Wind River believes that general
and administrative expenses will increase as it continues to invest in worldwide
staff and infrastructure in the areas of information systems, finance and
administration and integrating the financial and administrative operations of
Integrated Systems.
We allocate the total costs for information technology and facilities to
each of the functional areas that uses the information technology and facilities
services based on their headcount. Information technology allocated costs
include salaries, information technology, project costs, communication costs and
depreciation expense for shared infrastructure costs. Facilities allocated costs
include facility rent for the corporate offices as well as shared function
offices, property taxes, depreciation expenses for office furniture and other
department operating costs.
ACQUISITION RELATED AND OTHER COSTS
Acquisition related and other costs were $9.9 million for fiscal year 2000.
These costs relate primarily to Integrated Systems' acquisition in July 1999 of
Software Development Systems, Inc. ("SDS"), including a $6.3 million charge
relating to the write-off of in-process research and development costs, and to
the acquisition of RouterWare and 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. Other costs in fiscal year
1999 of $7.3 million consisted of arbitration-related expenses from a legal
settlement at Integrated Systems.
In connection with the acquisition of Integrated Systems, we expect to incur
integration costs in fiscal year 2001. The cost estimated to be incurred in
fiscal year 2001 is approximately $25.0 million, of which the majority is
expected to be incurred during the first quarter.
AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLES
Amortization of goodwill and purchased intangibles was $6.3 million in
fiscal year 2000 compared to $1.3 million in fiscal year 1999. This increase was
primarily due to Integrated Systems' acquisition of SDS in the second quarter of
fiscal year 2000. In the first quarter of fiscal year 2001, we expect to expense
approximately $6.8 million of goodwill and purchased intangibles and write off
approximately $3.7 million of in-process research and development as a result of
recent acquisitions. We expect to expense approximately $19.5 million of
goodwill and purchased intangibles acquired through acquisitions over each of
the following 16 quarters. The increase is primarily due to our recent
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<PAGE>
acquisition of EST. Wind River's results from operations will also be affected
in the future by the amortization of goodwill and purchased intangibles related
to the acquisition of AudeSi.
OTHER INCOME AND EXPENSE
Other income and expense includes interest income earned from the investment
of excess cash, interest expense incurred on the 5.0% Convertible Subordinated
Notes, due in 2002 (the "Notes") issued in July 1997, gains and losses related
to inter-company foreign currency transactions and income and losses related to
the 30% minority interest held by the Japanese participants in Wind River's
subsidiary in Japan, WRSKK.
Interest income was $18.9 million for fiscal year 2000 compared to
$18.6 million for fiscal year 1999. The increase is primarily due to a larger
investment portfolio and restricted cash accounts as well as higher interest
rates on invested balances. Total cash, investments and restricted cash at
January 31, 2000 and 1999 was approximately $352.9 million and $325.0 million,
respectively.
Net interest expense and other was $9.1 million for fiscal year 2000
compared to $8.7 million for fiscal year 1999. The increase in net interest
expense and other is related to a charge during the first quarter of $500,000
relating to the difference between the carrying amount of our investment in XACT
and the net realizable value and a distribution agreement with XACT because XACT
was unable to complete the development of their product that is subject to the
distribution agreement. Wind River also incurred interest on the Notes and
amortization of certain issuance costs associated with the Notes. The interest
on the Notes is payable on February 1 and August 1 of each year commencing
February 1, 1998. The Notes mature on August 1, 2002.
PROVISION FOR TAXES
The effective tax rate was 59.7% for fiscal year 2000 compared to 32.3% for
fiscal year 1999. The increase is primarily due to non-deductible acquisition
costs related to SDS. Excluding the impact of these costs, the effective tax
rate for fiscal year 2000 was 37.2%. The 32.3% effective tax rate for fiscal
year 1999 includes a $2.4 million federal tax benefit related to a tax election
at Integrated Systems. Excluding this tax benefit, the effective tax rate for
fiscal year 1999 was 36.9%. Variations in the effective tax rate result
primarily from differences between foreign and domestic tax rates and the ratio
of foreign taxable income to domestic taxable income and varying levels of
research and development credits.
YEARS ENDED JANUARY 31, 1999 AND 1998
REVENUES
Revenues for fiscal year 1999 were $265.1 million compared to
$214.0 million for fiscal year 1998. The increase in revenues of 24% is due to
increases in both Wind River's product revenue and services revenues. Product
revenues accounted for approximately 65% and 61% of the total revenues in fiscal
years 1999 and 1998, respectively, with service revenues accounting for the
balance of total revenue over this period.
Revenues from the sale of products were $171.8 million for fiscal year 1999
compared to $131.6 million for fiscal year 1998. The increase of 31% in product
revenues was due primarily to the continued acceptance of Wind River's products
and increased run-time license revenues. Tornado was first introduced in fiscal
year 1996, and its sales have continued to grow, as Tornado has become available
for use with more host platforms and microprocessor targets. In addition, demand
grew for Tornado in Windows-based customer development environments. Run-time
license revenue has increased each year in conjunction with growing shipments of
customers' products and systems that
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incorporate the VxWorks operating system. Additionally, revenue from the
licensing of the pRISM+, SNiFF+ and Diab Data products increased between fiscal
years 1998 and 1999.
Wind River's service revenues were $93.3 million for fiscal year 1999
compared to $82.4 million for fiscal year 1998. The increase of 13% was
primarily due to an increase in maintenance support agreements and training
resulting from the increase in Wind River's installed base of Tornado software
development environment and software applications provided to customers and
engineering services contracts primarily related to porting Wind River's VxWorks
operating system to microprocessor families.
Revenues from international sales were approximately $98.1 million for
fiscal year 1999 compared to $76.8 million for fiscal 1998. International
revenues accounted for 37% and 36% of total revenues for the fiscal years ended
January 31, 1999 and 1998, respectively. Revenues from Japan increased over 25%
from fiscal year 1998 to 1999. Revenues from other international sources
represented 24% and 23% of international revenues for the year ended
January 31, 1999 and 1998, respectively.
COST OF PRODUCTS
Cost of products was $23.5 million for fiscal year 1999 compared to
$20.5 million for fiscal year 1998. Product-related cost of revenues as a
percentage of product revenues was 14% and 16% in fiscal years 1999 and 1998,
respectively. 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. Product costs
also include license and other direct purchase costs of third-party software
that is distributed by or integrated into Wind River's products and the
amortization of capitalized software development costs. Amortization of
capitalized software development costs included in cost of products amounted to
$1.9 million and $1.6 million in fiscal years 1999 and 1998, respectively.
COST OF SERVICES
Cost of services was $35.9 million for fiscal year 1999 compared to
$37.1 million for fiscal year 1998. Service related cost of revenues as a
percentage of service revenues was 38% and 45% for fiscal years 1999 and 1998,
respectively. The increase in costs of service revenues is due to investment in
developing new services offerings, including consulting, and the addition of
service professionals.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $93.6 million for fiscal year 1999
compared to $74.0 million for fiscal year 1998 or 35% of total revenues for both
fiscal years. The increase of 27% from fiscal year 1998 to 1999 in absolute
dollars resulted primarily from the growth of sales and marketing personnel and
field engineers and related costs and increases in expenses related to marketing
and advertising programs and third-party marketing costs for product
introductions and promotions. During the fourth quarter of fiscal year 1999,
Wind River announced and launched the introduction of Tornado II, an enhanced
version of its integrated development environment.
PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Product development and engineering expenses were $37.8 million for fiscal
year 1999 compared to $31.7 million for fiscal year 1998, an increase of 20%. As
a percentage of revenues, product development and engineering expenses decreased
from 15% to 14% from fiscal year 1998 to 1999. The dollar increase in product
development and engineering expense is primarily due to the increase in staff
and associated support for engineers to expand and enhance the Wind River and
Integrated Systems product lines, including the Tornado II integrated
development environment.
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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $23.3 million for fiscal year 1999
compared to $19.9 million for fiscal year 1998, an increase of 17%. As a
percentage of revenues, general and administrative expenses decreased slightly
from 9% in fiscal year 1998 to 8% in fiscal year 1999. The increase in absolute
dollars was primarily due to the growth in worldwide staff and infrastructure
investments in the areas of information systems, finance and administration. In
addition, general and administrative expenses increased in fiscal year 1998 due
to the acquisition of Epilogue and the consolidation of Diab Data. In 1997, Wind
River commenced a worldwide financial business and production systems
replacement project that uses software primarily from Oracle. The new systems
were implemented, in part, to bring Wind River's business and production
computer systems into compliance with Year 2000 requirements.
ACQUISITION RELATED COSTS
On December 31, 1997, Wind River entered into an OEM license agreement with
Liberate Technologies, Inc. to license the right to access and modify the source
code version of certain Liberate Technologies, Inc. technology and to duplicate,
distribute and sublicense the object code version of such modified source code
included with certain of Wind River's future products. Under this agreement,
Wind River paid $9.8 million for non-exclusive, restricted, perpetual rights to
the technology and $200,000 for Liberate Technologies, Inc. engineering services
incurred prior to source code delivery. In addition, selected elements of the
Liberate Technologies, Inc. technology require Wind River to pay additional per
unit royalties in the event Wind River's future sales of products that include
the modified Liberate Technologies, Inc. technology exceed specified volume
levels. The licensed source code will be ported by Wind River to its VxWorks,
IxWorks, WiSP and other real time embedded operating systems and will become a
component of future products. At the date the source code was acquired, there
were no working models of such products incorporating the licensed technology
and because of the restrictive nature of the license agreement, there were no
alternative future uses for such technology in research and development.
Accordingly, the aggregate purchase price of $10.0 million was expensed
immediately as in-process research and development.
On January 30, 1998, Wind River acquired Objective Software
Technology, Ltd. ("OST"), a privately held Scotland-based company that designs
and markets visualization tools for development of embedded systems. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based upon the fair values at the date of acquisition.
The excess of the purchase price over the fair market value of the net tangible
assets acquired aggregated approximately $6.1 million, of which $4.1 million was
allocated to in-process research and development and expensed immediately. Wind
River used the discounted cash flow ("DCF") approach to determine the fair value
of OST and its identifiable assets, including the value of the products in the
development stage which were not considered to have reached technological
feasibility. The DCF approach includes an analysis of the markets, completion
costs, cash flows, other required assets, contributions made by core technology,
and risks associated with achieving such cash flows. The balance of the excess
acquisition cost was allocated to acquired technology ($2.0 million) which is
being amortized over three years.
AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLES
Amortization of goodwill and purchased intangibles increased from
$0.7 million in fiscal year 1998 to $1.3 million in fiscal year 1999, as a
result of the acquisition of OST.
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OTHER INCOME AND EXPENSE
Interest income was $18.6 million for fiscal year 1999 compared to
$11.7 million for fiscal year 1998. The increase is primarily due to higher
average cash and investment balances, primarily due to the cash received from
the issuance of the Notes, and to the transition of Wind River's investment
portfolio from tax-free investments to taxable investments.
Interest expense and other was $8.9 million for fiscal year 1999 compared to
$4.3 for fiscal year 1998. The increase in interest expense is primarily related
to the interest incurred for the entire year in fiscal year 1999 on the Notes
and amortization of certain issuance costs associated with the Notes. The
interest on the Notes is payable on February 1 and August 1 of each year
commencing February 1, 1998. The Notes mature on August 1, 2002.
PROVISION FOR TAXES
The effective tax rate was 32.3% for fiscal year 1999 compared to 53.5% for
fiscal year 1998. The higher tax rate in fiscal year 1998 was attributable to a
portion of the write-off of certain acquired in-process research and development
being non-deductible. The overall changes in the effective tax rates is also
attributable to the difference between foreign and domestic tax rates and the
ratio of foreign taxable income to domestic taxable income, varying levels of
available research and development credits, and varying levels of tax-exempt
interest income.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly information for
Wind River's last eight fiscal quarters, which has been restated to include the
historical financial information of RouterWare and Integrated Systems. Wind
River believes that this information has been prepared on the same basis as the
audited supplemental consolidated financial statements appearing in of this
Form S-3 and believes that all necessary adjustments (consisting only of normal
recurring adjustments) have been included in the amounts stated below and
present fairly the results of such periods when read in conjunction with the
audited supplemental consolidated financial statements and notes thereto.
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All share and per share amounts in this report have been adjusted to give
effect to three-for-two stock splits by means of stock dividends paid on
February 4, 1999.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
-------------------
JAN. 31, OCT. 31, JUL. 31, APR. 30, JAN. 31, OCT. 31, JUL. 31, APR. 30,
2000 1999 1999 1999 1999 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenues:
Products................................ $63,629 $56,143 $47,978 $42,928 $49,883 $45,393 $40,705 $35,811
Services................................ 27,578 27,698 24,746 25,354 24,252 23,715 23,052 22,345
------- ------- ------- ------- ------- ------- ------- -------
Total revenues............................ 91,207 83,841 72,724 68,282 74,135 69,108 63,757 58,156
======= ======= ======= ======= ======= ======= ======= =======
Cost of revenues:
Products................................ 8,260 6,277 7,514 5,675 7,582 6,064 4,964 4,917
Services................................ 12,461 10,853 10,247 9,801 7,258 9,933 9,979 8,768
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues.................... 20,721 17,130 17,761 15,476 14,840 15,997 14,943 13,685
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 70,486 66,711 54,963 52,806 59,295 53,111 48,814 44,471
======= ======= ======= ======= ======= ======= ======= =======
Operating Expenses:
Selling and marketing................... 37,589 31,305 28,147 26,224 26,134 23,483 22,232 21,837
Product development and engineering..... 16,554 14,506 12,609 11,632 9,645 9,164 9,365 9,598
General and administrative.............. 11,381 8,937 7,217 6,411 7,655 5,292 5,354 5,038
Acquisition related and other........... 602 1,740 7,254 302 5,130 1,117 1,060 --
Amortization of goodwill and purchased
intangibles........................... 2,771 2,527 763 283 302 303 331 367
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 68,897 59,015 55,990 44,852 48,866 39,359 38,342 36,840
======= ======= ======= ======= ======= ======= ======= =======
Income (loss) from operations............. 1,589 7,696 (1,027) 7,954 10,429 13,752 10,472 7,631
Other income, net......................... 3,021 1,998 2,561 1,916 2,784 2,584 2,533 1,862
------- ------- ------- ------- ------- ------- ------- -------
Income before provision for income
taxes................................... 4,610 9,694 1,534 9,870 13,213 16,336 13,005 9,493
Provision for income taxes................ 5,758 3,495 2,603 3,489 4,780 6,033 4,803 1,175
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)..................... $(1,148) $ 6,199 $(1,069) $ 6,381 $ 8,433 $10,303 $ 8,202 $ 8,318
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share:
Basic................................... $ (0.02) $ 0.10 $ (0.02) $ 0.10 $ 0.14 $ 0.17 $ 0.13 $ 0.14
Diluted................................. $ (0.02) $ 0.09 $ (0.02) $ 0.10 $ 0.13 $ 0.16 $ 0.12 $ 0.13
Weighted average common and common
equivalent shares:
Basic................................... 64,489 63,477 62,253 62,162 61,684 61,597 61,854 61,079
Diluted................................. 64,489 65,976 62,253 65,557 65,926 65,223 66,167 65,789
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2000, Wind River had working capital of approximately
$103.8 million and cash and investments of approximately $289.6 million, which
include investments with maturities of greater than one year of $208.9 million
and excludes restricted cash of $39.7 million. Wind River invests primarily in
instruments that are highly liquid and of investment grade.
In fiscal year 2000, Wind River's operating activities provided net cash of
$35.5 million due primarily to net income, the non-cash impact of depreciation
and amortization, and an increase in deferred revenue. These sources of cash
were partially offset by increases in accounts receivable and prepaid and other
assets. The increase in accounts receivable is due to the increased sales
activities in response to higher customer demand for Wind River's products and
services and the implementation of Oracle which caused certain delays in our
collection process. The increase in prepaid and other current assets is
primarily due to a receivable relating to an equity investment sale, interest
receivable on investments, prepaid integration costs, prepaid royalty costs and
prepaid sales expenses.
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In fiscal year 1999, Wind River's operating activities provided net cash of
$53.8 million due primarily to net income, the tax benefit related to employee
stock option exercises, and the non-cash impact of depreciation and
amortization. These sources of cash were partially offset by increases in
accounts receivable and prepaids and other assets. The increase in accounts
receivable is due to the increased sales activities in response to higher
customer demand for Wind River's products and services. The increase in prepaids
and other current assets is primarily due to interest receivable on investments
and prepaid foreign and state taxes.
In fiscal year 2000, Wind River's investing activities used net cash of
$23.2 million. Uses of cash relating to the purchases of investments, purchases
of investments held as collateral for the second operating lease, the
acquisition of SDS, and the acquisition of equipment were partially offset by
cash provided from the sale of investments. Restricted cash increased due to the
new collateral funding for the second operating lease of the two additional
buildings that are under construction at Wind River's headquarters. The
collateral consists of direct obligations of the United States government, with
the majority being long-term investments.
In fiscal year 1999, Wind River's investing activities used net cash of
$101.5 million. Uses of cash relating to the acquisition of equipment, purchases
of investments and purchases of investments held as collateral for the operating
lease and an accreting interest rate swap agreements were partially offset by
cash provided from the sale of investments. As Wind River transitioned its
investment portfolio from short-term to long-term investments, its long-term
investments increased by $101.7 million. Restricted cash increased primarily due
to the increased collateral funding for the operating lease of Wind River's new
headquarters. The collateral consists of direct obligations of the Unites States
government, with the majority being long-term securities.
In fiscal year 2000, Wind River's financing activities provided net cash of
$9.7 million. Cash provided by the issuance of Common Stock for stock option
exercises and the line of credit were offset by Common Stock repurchases,
treasury stock repurchases and a loan to a member of the Board of Directors for
the purchase of Wind River stock. During fiscal 2000, Wind River repurchased
approximately 165,000 shares of Common Stock at an aggregate cost of
approximately $4.0 million, which was accounted for as treasury stock. 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 January 31, 2000, the CEO had borrowed
$1.9 million against this note.
In fiscal year 1999, Wind River's financing activities used net cash of
$6.0 million. Cash provided by the issuance of Common Stock for stock option
exercises was offset by treasury stock repurchases and Integrated Systems'
repurchase of common stock.
In July 1997, Wind River issued $140 million of 5% Convertible Subordinated
Notes (the "Notes"), which mature on August 1, 2002. The Notes are subordinated
to all existing and future senior debt and are convertible into shares of Wind
River's Common Stock at a conversion price of $32.33 per share. The Notes are
redeemable at the option of Wind River, in whole or in part, at any time on or
after August 2, 2000 at 102% of the principal amount initially, and thereafter
at prices declining to 100% at maturity, in each case plus accrued interest.
Each holder of these Notes has the right, subject to certain conditions and
restrictions, to require Wind River to offer to repurchase all outstanding
Notes, in whole or in part, owned by such holder, at specified repurchase prices
plus accrued interest upon the occurrence of certain events. The $5.1 million of
costs incurred in connection with the offering are included in prepaid and other
assets. These unamortized costs are being amortized to interest expense over the
5-year term of the Notes using the straight-line method, which approximates the
effective interest method. Interest on the Notes began accruing July 31, 1997
and is payable semi-annually on February 1 and August 1, commencing on
February 1, 1998.
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In fiscal year 2000, Wind River entered into a second operating lease
agreement for the construction of two additional buildings at its headquarters
facility. As of January 31, 2000, the lessor has funded a total of $4.0 million
of construction costs and has committed to fund up to a maximum of
$26.0 million. Construction of the buildings is currently expected to be
completed in January 2001. The operating lease payments will vary based upon the
total construction costs of the property, which include capitalized interest and
LIBOR.
In fiscal year 1998, Wind River entered into an operating lease for its
current headquarters facility constructed on land owned by Wind River in
Alameda, California. Construction was completed in the second quarter of fiscal
year 2000. The lease was finalized in August 1999 and the lessor has funded a
total of $32.4 million of construction costs. The operating lease payments began
in August 1999 and are based on the total construction costs of the property,
including capitalized interest, and LIBOR.
In connection with the lease of Wind River's new headquarters, Wind River is
obligated to enter into a ground 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 ground lease provides Wind
River with the option at the end of the lease terms to either acquire the
buildings at the lessor's original cost or arrange for the buildings to be
acquired. Wind River has guaranteed the residual value associated with the
buildings under the first operating lease and second operating lease to the
lessor of approximately 82% and 84.5%, respectively, of the lessor's actual
funding of $32.4 million on the first operating lease and obligated funding of
$26.0 million on the second operating lease, respectively. Wind River is also
required to deposit fixed income securities with a custodian as a deposit to
secure the performance of its obligations under the lease. In addition, under
the terms of the lease, Wind River must maintain compliance with certain
financial covenants. As of January 31, 2000, Wind River was in compliance with
these covenants. Management believes that the contingent liability relating to
the residual value guarantee will not have a material adverse effect on Wind
River's financial condition or results of operations.
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 the one month LIBOR to a fixed rate of 5.9%. The differential to be
paid or received under this agreement will be recognized as an adjustment to
rent expense related to the operating lease. The agreement matures at the same
time as the operating lease expires. The amounts potentially subject to credit
risk (arising from the possible inability of counterparty to meet the term of
the contract) are generally limited to the amounts, if any, by which the
counterparty's obligations exceed the obligations of Wind River. Wind River
manages potential counterparty credit risk prior to entering into transactions
by requiring that all counterparties have at least a AA Standard and Poor's, or
Moody's equivalent, long-term senior debt rating.
Wind River has an investment portfolio of fixed income securities that are
classified as available-for-sale securities. These securities, like all fixed
income instruments, are subject to interest rate risk and will decline in value
if market interest rates increase. Wind River attempts to limit this exposure by
investing primarily in high-grade securities.
Management believes that Wind River's working capital and cash flow
generated from operations are sufficient to meet its working capital
requirements for planned expansion, product development and capital expenditures
for at least the next twelve months.
"YEAR 2000" ISSUES
We reviewed and tested our internal programs and those of our newly acquired
businesses and determined that there are no significant Year 2000 issues within
our or their mission critical systems or
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<PAGE>
services. Our review of the third-party software we and our subsidiaries use
identified certain software "patches" for third-party software that needed to be
implemented for Year 2000 compliance. All of these patches were implemented
prior to January 1, 2000. We have not experienced any problems with our computer
systems relating to such systems being unable to recognize appropriate dates
related to the year 2000. We are also not aware of any material problems with
our customers or suppliers. Accordingly, we do not anticipate incurring material
expenses or experiencing any material operational disruption as a result of any
year 2000 issues.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS No. 137, in which it agreed to defer for one year the implementation date
of SFAS No. 133.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition," which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the SEC. The Company believes the adoption of SAB 101 will not have a
material impact on the Company's financial position and results of operations.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
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<PAGE>
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying this Interpretation are recognized on a prospective basis from July 1,
2000. Wind River has not yet determined the impact, if any, of adopting this
interpretation.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Wind River Systems, Inc.
In our opinion, the accompanying consolidated balance sheets, and the
related consolidated statements of income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of Wind
River Systems, Inc. and its subsidiaries at January 31, 1999 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Note 17, on February 15, 2000, Wind River Systems, Inc.
merged with Integrated Systems, Inc. in a transaction accounted for as a pooling
of interests. The accompanying supplemental consolidated financial statements
give retroactive effect to the merger of Wind River Systems, Inc. with
Integrated Systems, Inc. Generally accepted accounting principles proscribe
giving effect to a consummated business combination accounted for by the pooling
of interests method in financial statements that do not include the date of
consummation. These financial statements do not extend through the date of
consummation; however, they will become the historical consolidated financial
statements of Wind River System, Inc. and subsidiaries after financial
statements covering the date of consummation of the business combination are
issued.
In our opinion, the accompanying supplemental consolidated balance sheets
and the related supplemental consolidated statements of income, of changes in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Wind River Systems, Inc. and its subsidiaries at
January 31, 1999 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 2000, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
March 2, 2000
39
<PAGE>
WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Products.................................................. $125,529 $ 98,844 $68,380
Services.................................................. 45,581 33,058 25,390
-------- -------- -------
Total revenues.......................................... 171,110 131,902 93,770
-------- -------- -------
Cost of revenues:
Products.................................................. 11,124 8,224 6,349
Services.................................................. 20,508 12,999 9,633
-------- -------- -------
Total cost of revenues.................................. 31,632 21,223 15,982
-------- -------- -------
Gross profit.......................................... 139,478 110,679 77,788
-------- -------- -------
Operating expenses:
Selling and marketing..................................... 60,962 45,968 33,226
Product development and engineering....................... 29,659 19,147 12,898
General and administrative................................ 15,964 8,174 6,792
Acquisition related costs................................. 1,436 -- 15,159
Amortization of goodwill and purchased intangibles........ 816 780 --
-------- -------- -------
Total operating expenses................................ 108,837 74,069 68,075
-------- -------- -------
Income from operations...................................... 30,641 36,610 9,713
-------- -------- -------
Other income (expense):
Interest income........................................... 15,378 13,679 7,743
Interest expense and other, net........................... (9,112) (8,727) (4,213)
Minority interest in consolidated subsidiary.............. (327) (151) (88)
-------- -------- -------
Total other income...................................... 5,939 4,801 3,442
-------- -------- -------
Income before provision for income taxes.................... 36,580 41,411 13,155
Provision for income taxes.................................. 14,109 15,788 8,829
-------- -------- -------
Net income.............................................. $ 22,471 $ 25,623 $ 4,326
======== ======== =======
Net income per share:
Basic..................................................... $ .54 $ .64 $ .11
Diluted................................................... $ .50 $ .58 $ .10
-------- -------- -------
Weighted average common and common equivalent shares:
Basic..................................................... 41,674 40,267 38,915
Diluted................................................... 44,778 43,843 43,567
-------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
WIND RIVER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PAR VALUE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 58,621 $ 42,837
Short-term investments.................................... 28,355 11,043
Accounts receivable, net of allowances of $2,405 and
$1,550.................................................. 48,621 30,926
Prepaid and other current assets.......................... 21,893 10,598
-------- --------
Total current assets.................................... 157,490 95,404
Investments................................................. 181,600 158,628
Land and equipment, net..................................... 35,755 31,513
Other assets................................................ 8,621 10,011
Restricted cash............................................. 39,744 34,157
-------- --------
Total assets.......................................... $423,210 $329,713
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,393 $ 3,472
Line of credit............................................ 5,094 --
Accrued liabilities....................................... 11,059 10,005
Accrued compensation...................................... 10,335 6,030
Income taxes payable...................................... 9,862 445
Deferred revenue.......................................... 24,476 17,318
-------- --------
Total current liabilities............................... 67,219 37,270
Deferred taxes payable...................................... 12,408 --
Convertible subordinated notes.............................. 140,000 140,000
-------- --------
Total liabilities....................................... 219,627 177,270
-------- --------
Minority interest in consolidated subsidiary................ 878 551
-------- --------
Commitments and contingencies (Note 12)
Stockholders' equity:
Common Stock, par value $.001; 125,000 authorized; 43,730
and 42,449 shares issued; 42,453 and 41,337 shares
outstanding............................................. 43 42
Additional paid in capital................................ 140,715 126,855
Loan to stockholder....................................... (1,900) --
Treasury stock, 1,277 and 1,112 shares at cost............ (29,488) (25,491)
Accumulated other comprehensive income (loss)............. 18,300 (2,155)
Retained earnings......................................... 75,035 52,641
-------- --------
Total stockholders' equity.............................. 202,705 151,892
-------- --------
Total liabilities and stockholders' equity.............. $423,210 $329,713
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 22,471 $ 25,623 $ 4,326
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization......................... 10,523 8,531 4,806
Tax benefit from stock plan........................... 5,000 13,400 7,000
Write-off of impaired assets.......................... 500 -- --
Deferred income taxes................................. (92) (244) (2,894)
Minority interest in consolidated subsidiary.......... 327 151 88
Acquired in-process research and development.......... -- -- 15,159
Change in assets and liabilities:
Accounts receivable................................. (17,695) (12,552) (4,449)
Prepaid and other assets............................ (13,415) (5,318) (5,670)
Accounts payable.................................... 2,921 (487) 2,015
Accrued liabilities................................. 1,054 (235) 4,387
Accrued compensation................................ 4,305 489 1,050
Income taxes payable................................ 9,417 (729) 2,368
Deferred revenue.................................... 7,158 2,164 8,883
-------- -------- --------
Net cash provided by operating activities........... 32,474 30,793 37,069
-------- -------- --------
Cash flows from investing activities:
Acquisition of land and equipment......................... (11,755) (12,770) (19,704)
Capitalized software development costs.................... -- -- (803)
Acquisitions, net of cash acquired........................ -- -- (20,553)
Purchases of investments.................................. (124,907) (232,193) (264,048)
Sales and maturities of investments....................... 118,422 188,231 236,010
Restricted cash........................................... (5,587) (31,647) (2,510)
-------- -------- --------
Net cash used in investing activities............... (23,827) (88,379) (71,608)
-------- -------- --------
Cash flows from financing activities:
Line of credit............................................ 5,094 -- --
Issuance of Common Stock, net............................. 8,861 9,484 4,265
Purchase of treasury stock................................ (3,997) (10,006) (12,364)
Loan to stockholder....................................... (1,900) -- --
Issuance of convertible subordinated notes, net........... -- -- 134,925
-------- -------- --------
Net cash provided by (used in) financing
activities........................................ 8,058 (522) 126,826
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (844) 157 (1,390)
Effect of changing fiscal year of acquired subsidiary....... (77) -- --
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 15,784 (57,951) 90,897
Cash and cash equivalents at beginning of year.............. 42,837 100,788 9,891
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 58,621 $ 42,837 $100,788
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest................................ $ 9,414 $ 7,000 --
Cash paid for income taxes............................ $ 1,995 $ 1,897 $ 3,372
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID IN LOAN TO TREASURY STOCK COMPREHENSIVE
SHARES AMOUNT CAPITAL STOCKHOLDER SHARES AMOUNT INCOME (LOSS)
-------- -------- ---------- ----------- -------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31,
1997....................... 38,805 39 92,127 -- (169) (3,121) (663)
--------
Net income................... -- -- -- -- -- -- --
Unrealized gain on
investments................ -- -- -- -- -- -- 856
Currency translation
adjustments................ -- -- -- -- -- -- (1,390)
--------
Comprehensive income..... -- -- -- -- -- -- (534)
--------
Common Stock issued upon
exercise of stock
options.................... 1,080 1 2,403 -- -- -- --
Common Stock issued under
stock purchase plan........ 96 -- 1,861 -- -- -- --
Tax benefit from stock
plans...................... -- -- 7,000 -- -- -- --
Purchase of treasury stock... -- -- -- -- (546) (12,364) --
------ --- -------- -------- ------- --------- --------
Balance at January 31,
1998....................... 39,981 40 103,391 -- (715) (15,485) (1,197)
--------
Net income................... -- -- -- -- -- -- --
Unrealized loss on
investments................ -- -- -- -- -- -- (1,115)
Currency translation
adjustments................ -- -- -- -- -- -- 157
--------
Comprehensive income..... -- -- -- -- -- -- (958)
--------
Common Stock issued upon
acquisition of Zinc
Software, Inc.............. 339 -- 582 -- -- -- --
Common Stock issued upon
exercise of a warrant...... 337 -- 1,109 -- -- -- --
Common Stock issued upon
exercise of stock
options.................... 1,671 2 5,926 -- -- -- --
Common Stock issued under
stock purchase plan........ 121 -- 2,447 -- -- -- --
Tax benefit from stock
plans...................... -- -- 13,400 -- -- -- --
Purchase of treasury stock... -- -- -- -- (397) (10,006) --
------ --- -------- -------- ------- --------- --------
Balance at January 31,
1999....................... 42,449 42 126,855 -- (1,112) $ (25,491) $ (2,155)
--------
Net income................... -- -- -- -- -- -- --
Unrealized gain on
investments................ -- -- -- -- -- -- 21,299
Currency translation
adjustments................ -- -- -- -- -- -- (844)
--------
Comprehensive income..... -- -- -- -- -- -- 20,455
--------
Common Stock issued upon
exercise of stock
options.................... 955 1 3,917 -- -- -- --
Common Stock issued under
stock purchase plan........ 226 -- 3,075 -- -- -- --
Tax benefit from stock
plans...................... -- -- 5,000 -- -- -- --
Accelerated vesting of stock
options.................... 218 218
Loan to stockholder.......... -- -- -- (1,900) -- -- --
Effect of fiscal year end
change for acquired
subsidiary................. -- -- -- -- -- -- --
Purchase of treasury stock... -- -- -- -- (165) (3,997) --
Sale of Treasury Stock....... 100 -- 1,650 -- -- -- --
------ --- -------- -------- ------- --------- --------
Balance at January 31,
2000....................... 43,730 $43 $140,715 $ (1,900) (1,277) $ (29,488) $ 18,300
------ --- -------- -------- ------- --------- --------
<CAPTION>
TOTAL
STOCK-
RETAINED HOLDERS'
EARNINGS EQUITY
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance at January 31,
1997....................... 23,817 112,199
--------
Net income................... 4,326 4,326
Unrealized gain on
investments................ -- 856
Currency translation
adjustments................ -- (1,390)
--------
Comprehensive income..... -- 3,792
--------
Common Stock issued upon
exercise of stock
options.................... -- 2,404
Common Stock issued under
stock purchase plan........ -- 1,861
Tax benefit from stock
plans...................... -- 7,000
Purchase of treasury stock... -- (12,364)
------- --------
Balance at January 31,
1998....................... 28,143 114,892
--------
Net income................... 25,623 25,623
Unrealized loss on
investments................ -- (1,115)
Currency translation
adjustments................ -- 157
--------
Comprehensive income..... -- 24,665
--------
Common Stock issued upon
acquisition of Zinc
Software, Inc.............. (1,125) (543)
Common Stock issued upon
exercise of a warrant...... -- 1,109
Common Stock issued upon
exercise of stock
options.................... -- 5,928
Common Stock issued under
stock purchase plan........ -- 2,447
Tax benefit from stock
plans...................... -- 13,400
Purchase of treasury stock... -- (10,006)
------- --------
Balance at January 31,
1999....................... $52,641 $151,892
--------
Net income................... 22,471 22,471
Unrealized gain on
investments................ -- 21,299
Currency translation
adjustments................ -- (844)
--------
Comprehensive income..... -- 42,926
--------
Common Stock issued upon
exercise of stock
options.................... -- 3,918
Common Stock issued under
stock purchase plan........ -- 3,075
Tax benefit from stock
plans...................... -- 5,000
Accelerated vesting of stock
options....................
Loan to stockholder.......... -- (1,900)
Effect of fiscal year end
change for acquired
subsidiary................. (77) (77)
Purchase of treasury stock... -- (3,997)
Sale of Treasury Stock....... -- 1,650
------- --------
Balance at January 31,
2000....................... $75,035 $202,705
------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, the Tornado-Registered Trademark- II-TM- development platform and the
VxWorks-Registered Trademark- real-time operating systems ("RTOS"), enable
customers to enhance product performance, standardize designs across projects,
reduce research and development costs and shorten product development cycles.
In June 1999, Wind River issued 730,923 shares of its common stock in
exchange for all of the outstanding common stock of RouterWare, Inc.
("RouterWare") in a transaction accounted for as a pooling of interests and,
accordingly, Wind River's consolidated financial statement have been restated
for all periods prior to the acquisition to include the results of operations,
financial position and cash flows of both Wind River and RouterWare.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Wind River and
its wholly owned subsidiaries: Wind River Systems International, Inc., a United
States corporation; Wind River Systems, E.C., S.A.R.L., a French corporation;
Wind River Systems GmbH, a German corporation; Wind River Systems Italia, S.r.l,
an Italian corporation; Wind River Systems UK, Ltd., a United Kingdom
corporation; Wind River Systems Scotland Ltd., a Scottish corporation; Zinc
Software, Incorporated, a United States Corporation; RouterWare, Incorporated, a
United States Corporation; and its majority-owned subsidiary Wind River Systems
K.K. ("WRSKK"), a Japanese corporation. All significant inter-company accounts
and transactions have been eliminated.
Wind River has a fiscal year end of January 31. The international
subsidiaries have fiscal year-ends of December 31. The consolidated financial
statements include the subsidiaries' financial information as of December 31.
Certain amounts in the fiscal 1999 financial statements have been
reclassified to conform to the fiscal 2000 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a remaining
maturity of three months or less. These investments consist of fixed income
securities, which are readily convertible to cash and are stated at cost, which
approximates fair value. Restricted cash consists of the investments held as
collateral under the operating lease of Wind River's headquarters and an
accreting interest rate swap
44
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
agreement. Fair value is determined based upon the quoted market prices of the
securities as of the balance sheet date.
INVESTMENTS
Investments with original maturities greater than three months and less than
one year are classified as short-term investments. Investments with original
maturities greater than one year are classified as long-term investments. Wind
River accounts for its investments, including money market funds, municipal
bonds, U.S. government and agency obligations, corporate bonds and other debt
securities, in accordance with Statement of Financial Accounting Standards No.
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities." Wind River determines the appropriate classification of its
marketable securities at the time of purchase and re-evaluates such
classification as of each balance sheet date. Wind River has classified all of
its investments as available-for-sale and carries such investments at fair
value, with unrealized gains and losses reported in stockholders' equity until
disposition. Fair value is determined based upon the quoted market prices of the
securities as of the balance sheet date. The cost of securities sold is based on
the specific identification method. Realized gains or losses and declines in
value, if any, judged to be other than temporary on available-for-sale
securities are reported in other income or expense.
CONCENTRATION OF CREDIT RISK
Wind River's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash, cash equivalents, investments, and
accounts receivable. Wind River's investments consist of investment grade
securities managed by qualified professional investment managers. The investment
policy is intended to limit Wind River's exposure to concentration of credit
risk. Wind River's accounts receivable results primarily from software sales to
a broad customer base both domestically and internationally and are typically
unsecured. Wind River performs on-going credit evaluations of its customers'
financial condition, limits the amount of credit when deemed necessary and
maintains allowances for potential credit losses; historically, such losses have
been immaterial. As a consequence, concentrations of credit risk are limited.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of Wind River's financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable and accounts payable,
the carrying amounts approximate fair value due to their short maturities. The
estimated fair value for the convertible subordinated notes (with a carrying
amount of $140 million at January 31, 2000) is approximately $152.8 million at
January 31, 2000. The fair value for the convertible subordinated notes is based
on quoted market prices.
LAND AND EQUIPMENT
Land and equipment are stated at cost. Depreciation on equipment is computed
using the straight-line method over the estimated useful lives of the assets,
which is generally two to four years for computer equipment and four to ten
years for furniture and equipment. Leasehold improvements are amortized over the
term of the related lease or useful economic life, if shorter.
45
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERNAL USE SOFTWARE
SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", provides guidance for determining whether computer
software is internal-use software and on accounting for the proceeds of computer
software originally developed or obtained for internal use and then subsequently
sold to the public. It also provides guidance on capitalization of the costs
incurred for computer software developed or obtained for internal use. The
Company capitalizes substantially all external costs related to the purchase and
implementation of software projects used for business operations and engineering
design activities. Capitalized software costs primarily include purchased
software and external consulting fees. Capitalized software projects are
amortized over the estimated useful lives of the projects, typically a two to
five year period. The Company had $6.9 million and $4.2 million of capitalized
software costs and $0.8 million and $0.4 million of accumulated amortization
included in land and equipment at January 31, 2000 and 1999, respectively.
SOFTWARE DEVELOPMENT COSTS
Wind River accounts for software development costs in accordance with SFAS
86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed." Costs incurred to establish the technological feasibility
of a computer software product are considered research and development costs and
are expensed as incurred. When the technological feasibility of a software
product has been established using the working model approach, development costs
are capitalized. Capitalization of these costs ceases when the product is
considered available for general release to customers. Amortization of
capitalized software development costs is provided on a product-by-product basis
at the greater of the amount computed using (a) the ratio of current gross
revenues for a product to the total of current and anticipated future gross
revenues or (b) the straight-line method over the remaining estimated economic
life of the product. Generally, an original estimated economic life of eighteen
months is assigned to capitalized software development costs. Amortization of
capitalized software costs is charged to cost of product revenues. Research and
development expenditures are charged to research and development in the period
incurred. The amortization of capitalized software costs which were charged to
cost of product revenues during fiscal 2000, 1999 and 1998 were $446,000,
$530,000 and $654,000, respectively. At January 31, 2000 and 1999, Wind River
had capitalized software costs of $0 and $446,000, respectively.
OTHER ASSETS
Other assets include bond issuance costs, purchased intangibles, capitalized
software development costs, equity investments, and deposits. Bond issuance
costs are amortized over five years and purchased intangibles is amortized over
three years.
Wind River evaluates the recoverability of its property and equipment and
intangible assets in accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. Accordingly, Wind River evaluates asset
recoverability at each balance sheet date or when an event occurs that may
impair recoverability of the asset. Wind River determines the recoverability of
the carrying amount of each intangible asset by reviewing the following factors:
the undiscounted value of expected operating cash flows in relation to its net
capital investments, the estimated useful or
46
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contractual life of the intangible asset, the contract or product supporting the
intangible asset, and in the case of purchased intangibles and capitalized
software development costs, Wind River periodically reviews the recoverability
of the assets value by evaluating its products with respect to technological
advances, competitive products and the needs of its customers.
INTANGIBLE ASSETS
Intangible assets resulting from the acquisitions of entities accounted for
using the purchase method of accounting are estimated by management based on the
fair value of assets received. These include acquired customer lists, workforce,
technological know how, covenants not to compete and goodwill. Intangible assets
are amortized over the periods from eight months to ten years on a straight-
line basis.
REVENUE RECOGNITION
Wind River recognizes revenue in accordance with Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4, "Deferral
of the Effective Date of Certain Provisions of SOP 97-2," effective February 1,
1998. SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supersede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did
not have a material impact on Wind River's existing licensing or revenue
recognition practices.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition," which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the SEC. The Company believes the adoption of SAB 101 will not have a
material impact on the Company's financial position and results of operations.
Product revenues consist of licensing fees from operating system and
software development tool products and fees from embedded system run-time
licenses. Service revenues are derived from fees from professional services,
software porting and development contracts, software maintenance and support
contracts, customer training and consulting. Maintenance contracts are generally
sold separately from the products. Wind River's customers consist of end users,
distributors, original equipment manufacturers, system integrators and
value-added resellers.
Product revenues are generally recognized at the time of shipment or upon
the delivery of a product master in satisfaction of non-cancelable contractual
agreements provided that collection of the resulting receivable is probable, the
fee is fixed or determinable and vendor-specific objective evidence ("VSOE")
exists to allocate the total fee to all delivered and undelivered elements of
the arrangement. Any maintenance included in these arrangements is deferred
based on VSOE and recognized ratably over the term of the arrangement. Service
revenues from engineering services contracts are generally recognized on the
percentage-of-completion basis. Service revenues from software maintenance,
support and update fees (post-contract support) are recognized ratably over the
contract period. Services revenue from training and consulting are recognized
when the services are provided.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") released SOP 98-9, "Modification of SOP 97-2, 'Software Revenue
Recognition' with Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to
require that an entity recognize revenue for multiple element arrangements by
means of the "residual method" when (1) there is Vendor-Specific Objective
47
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FOREIGN CURRENCY TRANSLATION
The functional currency of foreign subsidiaries is the local currency.
Accordingly, assets and liabilities of the subsidiaries are translated using the
exchange rates in effect at the end of the period, while income and expense
items are translated at average rates of exchange during the period. Gains or
losses from translation of foreign operations where the local currency is the
functional currency are included as other comprehensive income or loss. The net
gains and losses resulting from foreign currency transactions are recorded in
net income in the period incurred and were not significant for any of the
periods presented.
STOCK-BASED COMPENSATION PLANS
Wind River accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and complies with the
disclosure provisions of SFAS 123, "Accounting for Stock Based Compensation."
Under APB 25, compensation cost is recognized over the vesting period based on
the difference, if any, on the date of grant between the fair market value of
Wind River's stock and the amount an employee must pay to acquire the stock.
Wind River's policy is to grant options with an exercise price equal to the
quoted market price of Wind River's stock on the grant date. Accordingly, no
compensation expense has been recognized for its stock option plans.
NET INCOME PER SHARE
Net income per share includes basic net income per share, which is based on
the weighted-average number of common shares outstanding, and diluted net income
per share, which is based on the weighted-average number of common shares
outstanding and all dilutive potential common shares outstanding. Dilutive
common equivalent shares consist of stock options and warrants (using the
treasury stock method) and convertible subordinated notes (using the if
converted method). Common equivalent shares are excluded from the computation if
their effect is anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognizes all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, The FASB
issued Statement No. 137, in which it agreed to defer for one year the
implementation date of SFAS No. 133. SFAS No. 133, as amended, is effective for
all fiscal years beginning after June 15, 2000. The Company is assessing the
impact of SFAS No. 133 on its consolidated financial statements.
48
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting
for Certain Transactions Involving Stock compensation--an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000.
Wind River has not yet determined the impact, if any, of adopting this
interpretation.
NOTE 2: ACQUISITIONS
On December 31, 1997, Wind River entered into an OEM license agreement with
Liberate Technologies, Inc. to license the right to access and modify the source
code version of certain Liberate Technologies, Inc. technology and to duplicate,
distribute and sublicense the object code version of such modified source code
included with certain of Wind River's future products. Under the agreement, Wind
River paid $9.8 million for non-exclusive, restricted, perpetual rights to the
technology and $200,000 for Liberate Technologies, Inc. engineering services
incurred prior to source code delivery. In addition, selected elements of the
Liberate Technologies, Inc. technology require Wind River to pay additional per
unit royalties in the event Wind River's future sales of products that include
the modified Liberate Technologies, Inc. technology exceed specified volume
levels. The licensed source code will be ported by Wind River to its VxWorks,
IxWorks, WiSP and other real time embedded operating systems and will become a
component of future products. At the date the source code was acquired, there
were no working models of such products incorporating the licensed technology
and because of the restrictive nature of the license agreement, there were no
alternative future uses for such technology in research and development.
Accordingly, the aggregate purchase price of $10 million was expensed
immediately as in-process research and development.
On January 30, 1998, Wind River acquired Objective Software Technology, Ltd.
("OST"), a privately held Scotland-based company that designs and markets
visualization tools for development of embedded systems. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price has been allocated to the assets purchased and the liabilities assumed
based upon the fair values at the date of acquisition. The excess of the
purchase price over the fair market value of the net tangible assets acquired
aggregated approximately $6.1 million, of which $4.1 million was allocated to
in-process research and development and expensed immediately. Wind River used
the discounted cash flow ("DCF") approach to determine the fair value of OST and
its identifiable assets, including the value of the products in the development
stage which were not considered to have reached technological feasibility. The
DCF approach includes an analysis of the markets, completion costs, cash flows,
other required assets, contributions made by core technology, and risks
associated with achieving such cash flows. The balance of the excess acquisition
cost was allocated to acquired technology ($2.0 million) which is being
amortized over three years.
In May 1998, Wind River acquired Zinc Software, Incorporated, a privately
held company that develops, markets and supports graphical application software.
In connection therewith, Wind River
49
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: ACQUISITIONS (CONTINUED)
issued 339,917 shares of common stock in exchange for all of the outstanding
stock of Zinc. The acquisition was accounted for as a pooling of interests. As
the operations of Zinc were not material to Wind River's consolidated operations
and financial position, the financial statements of Zinc have been recorded in
the consolidated financial statements as of May 1, 1998.
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.
In June 1999, Wind River acquired RouterWare, Incorporated, a California
corporation that 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. In connection with
the acquisition of RouterWare, Wind River incurred approximately $930,000 in
merger related expenses consisting primarily of transaction fees.
In October 1999, Wind River entered into an agreement to merge with
Integrated Systems, Incorporation ("ISI"), an embedded operating systems and
development tool software developer, in a transaction accounted for as a pooling
of interests. The merger was consummated on February 15, 2000. In connection
with the merger, each outstanding share of ISI common stock was exchanged for
.92 of a share of Wind River common stock, resulting in the issuance of an
aggregate of 22,499,895 shares of Wind River common stock for all outstanding
shares of ISI common stock. In addition, approximately 4,493,000 of ISI stock
options became options to purchase approximately 4,133,000 shares of Wind River
common stock. As of January 31, 2000, Wind River incurred approximately $205,000
in one-time integration related expenses consisting primarily of transaction
fees. Wind River's financial statements will be combined with those of
Integrated Systems beginning with the first quarter of fiscal year ending
January 31, 2001. For additional details on the merger, see "Note 17."
50
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: LAND AND EQUIPMENT
Land and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................... $ 13,643 $ 13,640
Computer equipment...................................... 34,964 28,103
Furniture and equipment................................. 5,766 4,552
Leasehold improvements.................................. 1,648 1,127
-------- --------
56,021 47,422
Less accumulated depreciation........................... (20,266) (15,909)
-------- --------
$ 35,755 $ 31,513
======== ========
</TABLE>
In fiscal 2000 Wind River made virtually no land improvements on its real
property for its headquarters located in the City of Alameda, California. In
fiscal 1999, Wind River made $2.2 million of related land improvements.
NOTE 4: INVESTMENTS
Cash equivalents and investments consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Money market fund....................................... $ 6,745 $ 8,903
Municipal bonds......................................... -- 4,935
U.S. government and agency obligations.................. 33,277 43,267
Corporate bonds......................................... 68,133 85,326
Other debt securities................................... 106,760 61,423
-------- --------
Total available-for-sale securities..................... 214,915 203,854
Less amounts classified as cash equivalents............. (46,311) (37,193)
-------- --------
Total marketable securities............................. $168,604 $166,661
-------- --------
Equity investments...................................... 41,351 3,010
-------- --------
Total market value of investments....................... $209,955 $169,671
======== ========
Unrealized gain (loss) on marketable securities......... (2,254) 339
Unrealized gain (loss) on equity investments............ 36,587 (1,016)
-------- --------
Total unrealized gain (loss) on investments............. $ 34,333 $ (677)
-------- --------
Total cost of investments............................... $175,622 $170,348
-------- --------
</TABLE>
Fiscal 2000 equity investments are composed of the market value of Wind
River's stock holdings on Liberate and e-Sim. Fiscal 1999 equity investments are
composed of the market value of Wind River's stock holdings on e-Sim.
51
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INVESTMENTS (CONTINUED)
The contractual maturities of marketable securities, regardless of their
balance sheet classification, were as follows:
<TABLE>
<CAPTION>
JANUARY 31, 2000
----------------
(IN THOUSANDS)
<S> <C>
Due in 1 year or less....................................... $ 28,355
Due in 1-2 years............................................ 52,883
Due in 2-5 years............................................ 52,490
Due in 5 years or more...................................... 34,876
--------
Total marketable securities................................. $168,604
========
</TABLE>
Gross realized gains and losses from the sale of securities classified as
available-for-sale were not material for the years ended January 31, 2000, 1999
and 1998. For the purpose of determining gross realized gains and losses, the
cost of securities is based upon specific identification.
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
Wind River enters into foreign currency forward exchange contracts to manage
exposure related to certain foreign currency transactions. Wind River does not
enter into derivative financial instruments for trading purposes. Wind River
may, from time to time, adjust its foreign currency hedging position by taking
out additional contracts or by terminating or offsetting existing forward
contracts. These adjustments may result from changes in the underlying foreign
currency exposures or from fundamental shifts in the economics of particular
exchange rates. Gains and losses on terminated forward contracts, or on
contracts that are offset, are recognized in income in the period of contract
termination or offset. At January 31, 2000, Wind River had outstanding forward
contracts with notional amounts totaling approximately $0.9 million. These
contracts, which mature in less than ninety days, are hedges of certain foreign
currency transaction exposures in certain European currencies. The difference
between cost and estimated fair value at January 31, 2000 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 January 31, 2000, 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.
52
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: PROVISION FOR INCOME TAXES
The provision for income taxes was composed as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $ 6,878 $11,754 $ 7,405
State.......................................... 1,972 1,839 1,610
Foreign........................................ 4,985 2,439 2,708
------- ------- -------
13,835 16,032 11,723
------- ------- -------
Deferred:
Federal........................................ 257 (245) (1,901)
State.......................................... 17 1 (207)
Foreign........................................ 0 0 (786)
------- ------- -------
274 (244) (2,894)
------- ------- -------
$14,109 $15,788 $ 8,829
======= ======= =======
</TABLE>
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Expected Rate........................................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit..................... 3.6 4.1 7.1
Foreign taxes........................................... 4.0 1.3 8.8
In-process technology write-off......................... -- -- 26.2
Research and development, net........................... (1.8) (1.3) (0.7)
Tax exempt interest..................................... -- (0.3) (8.0)
Foreign sales corporation benefit....................... (1.4) (0.5) (1.3)
Other................................................... (0.8) (0.2) --
---- ---- ----
38.6% 38.1% 67.1%
==== ==== ====
</TABLE>
The effective consolidated tax rate in fiscal 1998 was higher due to the
permanent difference resulting from the write-off of in-process research and
development during the fourth quarter of fiscal 1998. In fiscal 2000, 1999 and
1998, tax benefits resulting from the exercise of employee stock options
amounting to $5.0 million, $13.4 million, and $7.0 million, respectively, were
credited to stockholders' equity and reduced income taxes payable.
53
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: PROVISION FOR INCOME TAXES (CONTINUED)
Deferred tax assets which result from temporary differences in the
recognition of certain revenues and expenses for financial and income tax
reporting purposes consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Amortization.............................................. $ 1,300 $1,898
Employee benefit accruals................................. 1,063 737
Accounts receivable reserves.............................. 891 524
Accrued expenses and other................................ 972 1,253
-------- ------
Gross deferred tax assets................................. 4,226 4,412
-------- ------
Depreciation.............................................. (800) (589)
Unrealized gains on investments........................... (12,500) --
Other..................................................... (408) (401)
-------- ------
Gross deferred tax liabilities............................ (13,708) (990)
-------- ------
Net deferred tax assets................................... $ (9,482) $3,422
======== ======
</TABLE>
The tax effect on comprehensive income totaled $12.5 million for fiscal
2000.
NOTE 7: CONVERTIBLE SUBORDINATED NOTES AND OTHER BORROWINGS
In July 1997, Wind River issued $140 million of 5% Convertible Subordinated
Notes, which mature on August 1, 2002. The Notes are subordinated to all
existing and future senior debt and are convertible into shares of Wind River's
Common Stock at a conversion price of $32.33 per share. The Notes are redeemable
at the option of Wind River, in whole or in part, at any time on or after August
2, 2000 at 102% of the principal amount initially, and thereafter at prices
declining to 100% at maturity, in each case plus accrued interest. Each holder
of these Notes has the right, subject to certain conditions and restrictions, to
require Wind River to offer to repurchase all outstanding Notes, in whole or in
part, owned by such holder, at specified repurchase prices plus accrued interest
upon the occurrence of certain events. The $5.1 million of costs incurred in
connection with the offering are included in prepaid and other assets. These
unamortized costs are being amortized to interest expense over the 5-year term
of the Notes using the straight-line method, which approximates the effective
interest method. Interest on the Notes began accruing July 31, 1997 and is
payable semi-annually on February 1 and August 1, commencing on February 1,
1998.
In December 1999, the Company borrowed approximately $5.1 million from its
$5.9 million line of credit through a subsidiary. The amount borrowed bears an
annual interest rate of 0.81% and was outstanding as of January 31, 2000. The
amount borrowed was paid in full during February 2000.
NOTE 8: COMPREHENSIVE INCOME
In February 1998, Wind River adopted SFAS 130, "Reporting Comprehensive
Income." Comprehensive income is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
The primary difference between net income and comprehensive
54
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: COMPREHENSIVE INCOME (CONTINUED)
income, for Wind River, results from foreign currency translation adjustments
and unrealized gains and losses on available-for-sale securities. The adoption
of SFAS 130 had no impact on Wind River's results of operations.
Wind River's comprehensive income has been presented in the Consolidated
Statements of Stockholders' Equity. As of January 31, 2000, accumulated other
comprehensive income consisted of foreign currency translation adjustments of
$2,387,000 and unrealized gain on investments of $20,687,000, net of tax.
NOTE 9: NET INCOME PER SHARE
In accordance with SFAS 128, the calculation of basic and diluted net income
per share is presented below:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
<S> <C> <C> <C>
Basic computation:
Net income.................................................. $22,471 $25,623 $4,326
Weighted average common shares outstanding.................. 41,674 40,267 38,915
------- ------- ------
Basic net income per share.................................. $ 0.54 $ 0.64 $ 0.11
------- ------- ------
Diluted computation:
Net income.................................................. $22,471 $25,623 $4,326
------- ------- ------
Weighted average common shares outstanding.................. 41,674 40,267 38,915
Incremental shares from assumed conversions:
Stock options............................................. 3,104 3,576 4,652
Convertible subordinated notes............................ -- -- --
Dilutive potential common shares............................ 3,104 3,576 4,652
------- ------- ------
Total dilutive average common shares outstanding............ 44,778 43,843 43,567
------- ------- ------
Diluted net income per share................................ $ 0.50 $ 0.58 $ 0.10
======= ======= ======
</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 4.0 million, 1.9 million and 0.8 million common shares
which were outstanding at January 31, 2000, 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 fiscal year and the
effect would be anti-dilutive. The exercise prices of these options ranged from
$21.88 to $42.88, $26.04 to $31.92 and $23.67 to $30.68 at January 31, 2000,
1999 and 1998, respectively.
55
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: COMMON STOCK
On each of March 10, 1997 and February 4, 1999, Wind River effected
three-for-two splits of its common stock in the form of stock dividends.
Accordingly, all share and per share amounts have been adjusted to give
retroactive effect to these stock splits.
During fiscal 1999, Wind River repurchased approximately 397,000 shares of
common stock at an aggregate cost of approximately $10.0 million. During fiscal
2000, Wind River repurchased approximately 165,000 shares of common stock at an
aggregate 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.
In May 1998, Wind River issued 339,917 unregistered shares of its common
stock to the shareholders of Zinc Software, Incorporated in exchange for all of
the then outstanding shares of Zinc. In January 1999 Wind River issued 337,500
of unregistered shares of its common stock to Innotech Corporation upon
Innotech's exercise of a warrant issued in January 1995, for an aggregate
exercise price of approximately $1.1 million. In June 1999, 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.
On February 15, 2000, Wind River issued an aggregate of 22,499,895 shares of
Wind River Systems common stock in conjunction with the acquisition of
Integrated Systems, Inc. Additionally, approximately 4,493,000 Integrated
Systems stock options became options to purchase approximately 4,133,000 shares
of Wind River common stock.
NOTE 11: STOCK BASED COMPENSATION PLANS
As of January 31, 2000, Wind River had six stock-based compensation plans
including the option plan assumed in connection with the acquisition of
RouterWare. Wind River accounts for its stock-based compensation plans in
conformity with APB 25 and related Interpretations and has adopted the
additional pro forma disclosure provisions of SFAS 123. Accordingly, no
compensation expense has been recognized for its five fixed stock option plans
and its stock purchase plan.
The Amended and Restated 1987 Equity Incentive Plan (the "1987 Plan") allows
for the issuance of options and other stock awards to Company employees and
consultants to purchase a maximum of 14,175,000 shares of Common Stock. Stock
options granted under the 1987 Plan may be incentive stock options or
nonstatutory stock options. Individuals owning more than 10% of Wind River's
stock are not eligible to receive incentive stock options under the 1987 Plan
unless the option's price is at least 110% of the fair market value of the
Common Stock at the date of grant and the term of the option does not exceed
five years from the date of grant. Nonstatutory stock options issued to holders
of less than 10% of Wind River's stock may be granted at prices of at least 85%
of the fair market value of the stock at the grant date and with expirations not
to exceed ten years from the grant date, although Wind River's current practice
is to grant options with exercise prices at least 100% of the fair market value.
Under the terms of the 1987 Plan, option vesting provisions are established by
the Board of Directors when options are granted. Options generally will vest
over four years, although options may be granted that vest upon achievement of
performance criteria. Unexercised options are automatically canceled three
months after termination of the optionee's employment or other service with Wind
River.
56
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: STOCK BASED COMPENSATION PLANS (CONTINUED)
In April 1995, Wind River adopted the 1995 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides for automatic
grants of nonstatutory stock options to purchase Common Stock of Wind River to
directors of Wind River who are not employees of, or consultants to, Wind River
or any affiliate of Wind River (Non-Employee Directors). The Directors' Plan
allows for the issuance of options to purchase a maximum of 337,500 shares of
Common Stock. Options issued are granted at prices of 100% of the fair market
value of the Common Stock at the date of grant and with expirations of ten years
from the grant date. Initial options granted to each Non-Employee Director vest
in annual increments over a period of four years from the date of grant,
commencing on the date one year after the date of grant of the initial options.
Subsequent options shall become 100% vested at the end of the one-year period
following the date of grant as long as the optionee has attended 75% of the
meetings of the board and committees on which he serves. Unexercised options
will terminate six months after such optionee's termination of all service with
Wind River and its affiliates.
In April 1998, Wind River adopted the 1998 Non-Officer Stock Option Plan
(the "Non-Officer Plan"). The Non-Officer Plan provides for grants of
nonstatutory stock options to employees and consultants who are not officers or
directors of Wind River. An aggregate of 3,450,000 shares of Common Stock have
been reserved for issuance under the Non-Officer Plan. The exercise price of
nonstatutory stock option granted under the Non-Officer Plan may not be less
than 85 percent of the fair market value of the Common Stock on the date of
grant. All nonstatutory stock options may be granted under the Non-Officer Plan
have a maximum term of 10 years. Options generally will vest over four years,
although options may be granted that vest upon achievement of performance
criteria. The Non-Officer Plan and options thereunder may be amended by the
Board from time to time. The Non-Officer Plan will terminate on April 22, 2008.
In June 1998, Wind River adopted the 1998 Equity Incentive Plan (the "1998
Plan"). The 1998 Plan provides for grants of options and other stock awards to
Company employees, directors and consultants to purchase a maximum of 4,100,000
shares of Common Stock. Stock options granted under the 1998 Plan may be
incentive stock options or nonstatutory stock options. Individuals owning more
than 10% of Wind River's stock are not eligible to receive incentive stock
options under the 1998 Plan unless the option's price is at least 110% of the
fair market value of the Common Stock at the date of grant and the term of the
option does not exceed five years from the date of grant. Nonstatutory stock
options issued to holders of less than 10% of Wind River's stock may be granted
at prices of at least 85% of the fair market value of the stock at the grant
date and with expirations not to exceed ten years from the grant date, although
Wind River's current practice is to grant options with exercise prices at least
100% of the fair market value. Under the terms of the 1998 Plan, option vesting
provisions are established by the Board of Directors when options are granted.
Options generally will vest over four years, although options may be granted
that vest upon achievement of performance criteria. Unexercised options are
automatically canceled three months after termination of the optionee's
employment or other service with Wind River.
In June 1999, Wind River assumed the 1994 RouterWare Stock Option Plan in
connection with the acquisition of RouterWare. Pursuant to the acquisition, Wind
River reserved 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
57
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: STOCK BASED COMPENSATION PLANS (CONTINUED)
method, and all financial data, including the number of options outstanding, of
Wind River has been restated to include the historical financial information of
RouterWare.
The number of shares for which options under these five plans were
exercisable was approximately 4,131,644, 2,338,000 and 2,603,000, at January 31,
2000, 1999, and 1998, respectively. Activity under the 1987 Plan, the Directors'
Plan, the 1998 Plan, the Non-Officer Plan and the 1994 RouterWare Stock Option
Plan is summarized as follows:
<TABLE>
<CAPTION>
FISCAL 2000 FISCAL 1999 FISCAL 1998
-------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
PRICE NUMBER PRICE NUMBER PRICE
NUMBER OF PER OF PER OF PER
SHARES SHARE SHARES SHARE SHARES SHARE
--------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Beginning balance.......... 7,614 $18.27 7,266 $12.30 5,948 $ 4.58
Granted.................... 3,887 16.85 2,498 24.52 2,986 22.36
Exercised.................. (956) 4.27 (1,671) 3.92 (1,080) 2.24
Canceled................... (471) 19.87 (479) 17.41 (588) 11.45
------ ------ ------ ------ ------ ------
Ending balance............. 10,074 $17.88 7,614 $18.27 7,266 $12.30
====== ====== ====== ====== ====== ======
</TABLE>
The following table summarizes information about fixed stock options
outstanding at January 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ---------------------------------
RANGE OF EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- -------------- ---------------- ---------------- -------------- ----------------
(IN THOUSANDS) (IN YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ .07--$ 4.69 1,133 4.0 $ 2.42 1,133 $ 2.42
$ 5.45--$ 9.88 569 5.2 $ 7.66 557 $ 7.65
$10.20--$14.99 2,017 8.1 $13.31 514 $12.22
$15.00--$19.75 1,832 9.5 $16.21 16 $16.19
$20.46--$24.96 1,472 7.7 $22.30 671 $22.35
$25.00--$29.58 2,632 7.1 $26.56 1,217 $26.44
$30.00--$34.81 382 9.7 $32.15 23 $30.74
$36.13--$39.19 29 9.9 $37.15 -- --
$40.69--$42.88 8 9.9 $41.81 -- --
------ --- ------ ----- ------
$ .07--$42.88 10,074 7.5 $17.88 4,131 $14.87
====== === ====== ===== ======
</TABLE>
In March 1993, Wind River adopted the Employee Stock Purchase Plan (the
"Purchase Plan"). In April 1999, the Board amended the Purchase Plan to increase
the aggregate shares from 1,350,000 to 1,500,000 shares of Common Stock, which
are authorized for issuance under the Purchase Plan. Under the Purchase Plan,
the Board of Directors may authorize participation by eligible employees,
including officers, in periodic offerings following the commencement of the
Purchase Plan. Employees who participate in an offering can have up to 15% of
their earnings withheld pursuant to the Purchase Plan. The amount withheld is
used to purchase shares of Common Stock on specified dates determined by
58
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: STOCK BASED COMPENSATION PLANS (CONTINUED)
the Board. The price of Common Stock purchased under the Purchase Plan is equal
to 85% of the lower of the fair market value of the Common Stock, determined by
the closing price on the Nasdaq National Market, at the commencement date or the
ending date of each six month offering period.
Shares issued under the Purchase Plan in fiscal 2000, 1999, and 1998 were
226,000, 121,000, and 96,000 shares of Common Stock, respectively, at an average
price of $27.20, $20.28, and $19.43, respectively. At January 31, 2000, 278,456
shares of Common Stock were available for future purchase.
PRO FORMA DISCLOSURES
Under SFAS 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes model with the following assumptions used for
grants during fiscal 2000, 1999 and 1998:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk free interest rates.............................. 5.70 5.30% 6.04%
Expected volatility................................... 54% 48% 54%
Expected option life.................................. 6.5 years 6.5 years 6.3 years
Expected dividends.................................... -- -- --
--------- --------- ---------
</TABLE>
Wind River applies the provisions of APB 25 and related Interpretations in
accounting for stock based compensation arrangements. Had compensation expense
under these arrangements been determined pursuant to SFAS 123, Wind River's net
income and net income per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net income:
As reported....................................... $22,471 $25,623 $ 4,326
Pro Forma......................................... $(8,876) $ 3,275 $(6,850)
Net income per share:
Basic:
As reported..................................... $ 0.54 $ 0.64 $ 0.11
Pro Forma....................................... $ (0.21) $ 0.08 $ (0.18)
Diluted:
------- ------- -------
As reported..................................... $ 0.50 $ 0.58 $ 0.10
------- ------- -------
Pro Forma....................................... $ (0.21) $ 0.07 $ (0.18)
</TABLE>
The pro forma amounts include compensation expense related to fiscal 2000,
1999 and 1998 stock option grants and sales of Common Stock under the Purchase
Plan only. The effects of applying SFAS 123 on pro forma disclosures of net
income and net income per share for fiscal 2000, 1999, and 1998 are not likely
to be representative of the pro forma effects on net income and net income per
share in future years.
59
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: COMMITMENTS AND CONTINGENCIES
Wind River leases certain property consisting of subsidiary headquarters,
customer training facilities, sales facilities and equipment under
non-cancelable operating leases that expire at various dates through March 2004.
Future minimum rental payments under non-cancelable operating leases subsequent
to fiscal 2000 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Year ending January 31,
2001....................................... 2,665
2002....................................... 1,812
2003....................................... 699
2004....................................... 632
2005....................................... 516
Thereafter..................................... 0
------
$6,324
======
</TABLE>
Rental expense for fiscal 2000, 1999 and 1998 was $4.9 million, $3.1 million
and $2.5 million, respectively.
In fiscal 1998, Wind River entered into an operating lease for its new
headquarters facility constructed on the land Wind River purchased in Alameda,
California. Construction of the buildings was completed in the first quarter of
fiscal year 2000. The lease was finalized in August 1999 and the lessor has
funded a total of $32.4 million of construction costs. The operating lease
payments began in August 1999 and will vary based on the total construction
costs of the property, including capitalized interest, and LIBOR.
In fiscal 2000, Wind River entered into a second operating lease agreement
for the construction of two additional buildings at its headquarter facility. As
of January 31, 2000, the lessor has funded a total of $4.0 million of
construction costs and has committed to fund up to a maximum of $26.0 million.
Construction of the building is currently expected to be completed in January
2001. The operating lease payments will vary based upon the total construction
costs of the property, including capitalized interest and LIBOR.
In connection with the lease of Wind River's current headquarters, Wind
River is obligated to enter into a lease of its land in Alameda, California with
the lessor of the building at a nominal rate and for a term of 55 years. If Wind
River terminates or does not negotiate an extension of the building leases, 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 buildings at
the lessor's original cost or arrange for the buildings to be acquired. Wind
River has guaranteed the residual value associated with the buildings under the
first operating lease and second operating lease to the lessor of approximately
82% and 84.5%, respectively, of the lessor's actual funding of $32.4 million on
the first operating lease and obligated funding of $26.0 million on the second
operating lease, respectively. Wind River is also required to deposit fixed
income securities with a custodian as a deposit to secure the performance of its
obligations under the leases. In addition, under the terms of the leases, Wind
River must maintain compliance with certain financial covenants. As of January
31, 2000, Wind River was in compliance with these covenants. Management believes
that the contingent liability relating to the residual value
60
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: COMMITMENTS AND CONTINGENCIES (CONTINUED)
guarantee will not have a material adverse effect on Wind River's financial
condition or results of operations.
From time to time, Wind River is subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
patents and other intellectual property rights. Wind River is not currently
aware of any legal proceedings or claims that Wind River believes will have,
individually or in the aggregate, a material adverse effect on Wind River's
financial position or results of operations.
NOTE 13: RELATED PARTY TRANSACTIONS
Wind River distributes its products in Japan through WRSKK, a joint venture
in which Wind River owns a 70% equity interest. Innotech Corporation
("Innotech"), Kobe Steel Ltd. and Nissin Electric Ltd., the other partners in
the joint venture, each owns a 10% equity interest. Wind River entered into
distributor agreements with the three minority interest owners of WRSKK,
Innotech, Kobe Steel, Ltd., and Nissin Electric Ltd., in March 1993, October
1991, and October 1991, respectively. The Innotech agreement was amended in
December 1995 to provide for an extended contract term and to issue to Innotech
a warrant to purchase 337,500 shares of Wind River's Common Stock for $3.29 per
share. The warrant was valued at $100,000 and charged to cost of sales in fiscal
1996. The warrant was exercised on January 26, 1999.
All products in Japan are sold through WRSKK's three master distributors.
Revenues derived from master distributor transactions in Japan amounted to $26.4
million, $17.0 million, and $8.5 million in fiscal 2000, 1999 and 1998,
respectively. The percentage of Japan revenues from Innotech in fiscal year
2000, 1999 and 1998 was 30%, 53% and 32%, respectively. The percentage of Japan
revenues from Kobe Steel Ltd. in fiscal year 2000, 1999 and 1998 was 27%, 34%
and 52%, respectively. The percentage of Japan revenues from Nissin Electric
Ltd. in fiscal year 2000, 1999 and 1998 was 9%, 13% and 16%, respectively.
Advances from the joint venture partners were approximately $1.5 million and
$310,000 million at January 31, 2000 and 1999, respectively.
NOTE 14: SEGMENT AND GEOGRAPHIC INFORMATION
Wind River has adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," effective beginning fiscal year 1999. SFAS
131 supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 changes current practice under SFAS 14 by establishing a
new framework on which to base segment reporting and also requires interim
reporting of segment information.
Wind River operates in one industry segment--technology for embedded
operating systems. Management uses one measurement of profitability for its
business. Wind River markets its products and related services to customers in
the United States, Canada, Europe and Asia Pacific. Internationally, Wind River
markets its products and services primarily through its subsidiaries and
61
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
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>
REVENUES ASSETS
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Fiscal year ended January 31, 2000
North America............................................. $113,799 $355,751
Japan..................................................... 26,411 25,596
Other International....................................... 30,900 41,863
-------- --------
Consolidated.............................................. $171,110 $423,210
-------- --------
Fiscal year ended January 31, 1999
North America............................................. $ 90,289 $298,739
Japan..................................................... 17,018 12,043
Other International....................................... 24,595 18,931
-------- --------
Consolidated.............................................. $131,902 $329,713
-------- --------
Fiscal year ended January 31, 1998
North America............................................. $ 66,845 $270,003
Japan..................................................... 8,504 7,196
Other International....................................... 18,421 13,642
-------- --------
Consolidated.............................................. $ 93,770 $290,841
-------- --------
</TABLE>
Other International consists of the revenues and assets of operations in
Europe and Asia Pacific excluding Japan.
NOTE 15: SECURED PROMISSORY NOTE WITH A STOCKHOLDER
On September 7, 1999, the Company's Chief Executive Officer signed a secured
promissory note to borrow up to $2.4 million from the Company to purchase shares
of common stock. The note accrues interest at the rate of 5.98% per year, and is
due on September 7, 2008. As of January 31, 2000, Mr. St. Dennis had borrowed
$1.9 million against the note. This loan is full recourse and is secured by
certain personal assets owned by the CEO. The loan amount as of January 31, 2000
is reflected as a reduction of equity in the accompanying consolidated balance
sheet.
NOTE 16: SPECIAL CHARGES
During the fiscal year ended January 31, 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. Subsequent to that, Wind River
incurred approximately $1.3 million in connection with the hiring of its new
chief executive officer. Furthermore, in connection with the acquisition of
RouterWare and planned merger with ISI, Wind River incurred approximately
$930,000 in merger related and $205,000 integration related expenses,
respectively, consisting primarily of transaction fees. All of these charges are
included in general and administrative expenses.
62
<PAGE>
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: SUBSEQUENT EVENTS (UNAUDITED)
On February 15, 2000, Wind River completed its acquisition of ISI in a
stock-for-stock transaction. As a result, ISI became a wholly owned subsidiary
of Wind River. In connection with the acquisition, each outstanding share of ISI
common stock was exchanged for .92 of a share of Wind River common stock,
resulting in the issuance of an aggregate of 22,499,895 shares of Wind River
common stock for all outstanding shares of ISI common stock, and all options to
purchase shares of ISI common stock outstanding immediately prior to the
consummation of the acquisition were converted into options to purchase shares
of Wind River common stock. The acquisition is being accounted for as a pooling
of interests. ISI provides solutions for embedded software development that
consist of real-time operating systems and software components for embedded
microprocessors; tools for designing, developing and optimizing embedded
applications; networking products for device connectivity and management; and
engineering design services for accelerated co-sourced product development.
On March 31, 2000, Wind River completed its acquisition of EST, a worldwide
provider of integrated hardware and software tools for programming, testing and
debugging embedded systems. In connection with the acquisition, Wind River
issued an aggregate of 5,474,792 shares of its common stock and reserved an
additional 1,122,855 shares for issuance upon exercise of outstanding employee
stock options in exchange for all outstanding shares of EST common stock,
including shares issuable upon exercise of employee stock options. The
acquisition was accounted for as a purchase method of accounting. Based on Wind
River's average shares price at the time the merger was announced, the
transaction was valued at approximately $327.1 million.
Presented below are condensed combined financial statements as of and for
the year ended January 31, 2000:
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, PRO FORMA PRO FORMA
2000 (IN 000S) WIND RIVER ISI ADJUSTMENTS COMBINED EST ADJUSTMENTS COMBINED
- ---------------------- ---------- -------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $171,110 $145,845 $(901) $316,054 $28,451 $ (578) $343,927
Net Income........... $ 22,471 $(11,645) $(463) $ 10,363 $(2,977) $(83,770) $(76,384)
-------- -------- ----- -------- ------- -------- --------
Net Income per share:
basic.............. $ 0.54 $ (0.50) $ 0.16 $ (0.25) $ (1.12)
-------- -------- -------- ------- --------
dilutive........... $ 0.50 $ (0.50) $ 0.15 $ (0.25) $ (1.12)
-------- -------- -------- ------- --------
</TABLE>
63
<PAGE>
WIND RIVER SYSTEMS, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1999 2000
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents................................. $ 61,916 $ 77,929
Short-Term Investments.................................... 20,597 25,711
Accounts Receivable, net of allowances.................... 59,357 79,586
Prepaid and Other Current Assets.......................... 18,213 35,375
-------- --------
Total Current Assets.................................... 160,083 218,601
Investments................................................. 208,326 208,917
Land and Equipment, net..................................... 50,146 56,331
Other Assets................................................ 20,036 45,497
Restricted Cash............................................. 34,157 39,744
-------- --------
Total Assets................................................ $472,748 $569,090
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable.......................................... $ 8,233 $ 10,551
Line of Credit............................................ -- 5,094
Accrued Liabilities....................................... 20,673 22,287
Accrued Compensation...................................... 12,280 17,910
Income Taxes Payable...................................... 3,007 9,581
Deferred Revenue.......................................... 35,321 49,401
-------- --------
Total Current Liabilities............................... 79,514 114,824
Deferred Taxes Payable...................................... 11,574
Long-Term Debt.............................................. 598
Convertible Subordinated Notes.............................. 140,000 140,000
-------- --------
Total Liabilities....................................... 219,514 266,996
-------- --------
Minority Interest in Consolidated Subsidiary................ 551 878
Stockholders' Equity:
Common Stock, par value $0.001; 125,000 authorized; 64,949
and 66,230 shares issued; 63,837 and 64,953 shares
outstanding............................................. 63 66
Additional Paid in Capital................................ 186,682 216,149
Loan to Stockholder....................................... -- (1,900)
Treasury Stock at Cost.................................... (25,491) (29,488)
Accumulated Other Comprehensive Income (Loss)............. (2,914) 16,499
Retained Earnings......................................... 94,343 99,890
-------- --------
Total Stockholders' Equity.............................. 252,683 301,216
-------- --------
Total Liabilities and Stockholders' Equity.............. $472,748 $569,090
======== ========
</TABLE>
See the accompanying notes to supplemental consolidated financial statements.
64
<PAGE>
WIND RIVER SYSTEMS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Products.................................................. $131,551 $171,792 $210,678
Services.................................................. 82,468 93,364 105,376
-------- -------- --------
Total revenues.......................................... 214,019 265,156 316,054
Cost of revenues:
Products.................................................. 20,502 23,526 27,726
Services.................................................. 37,063 35,938 43,362
-------- -------- --------
Total cost of revenues.................................. 57,565 59,464 71,088
-------- -------- --------
Gross profit............................................ 156,454 205,693 244,966
Operating expenses:
Selling and marketing..................................... 73,950 93,686 123,265
Product development and engineering....................... 31,721 37,772 55,301
General and administrative................................ 19,930 23,339 33,946
Acquisition related and other............................. 15,159 7,307 9,898
Amortization of goodwill and purchased intangibles........ 1,303 1,303 6,344
-------- -------- --------
Total operating expenses................................ 141,448 163,409 288,754
-------- -------- --------
Income from operations...................................... 15,006 42,284 16,212
-------- -------- --------
Other income (expense):
Interest income........................................... 11,651 18,641 18,935
Interest expense and other................................ (4,301) (8,878) (9,439)
-------- -------- --------
Total other income...................................... 7,350 9,763 9,496
-------- -------- --------
Income before provision for income taxes.................... 22,356 52,047 25,708
Provision for income taxes.................................. 11,957 16,791 15,345
-------- -------- --------
Net income.............................................. $ 10,399 $ 35,256 $ 10,363
======== ======== ========
Net income per share:
Basic..................................................... $ 0.17 $ 0.57 $ 0.16
Diluted................................................... $ 0.16 $ 0.54 $ 0.15
Weighted average common and common equivalent shares:
Basic..................................................... 62,152 61,554 63,096
Diluted................................................... 65,719 65,776 67,029
</TABLE>
See the accompanying notes to supplemental consolidated financial statements.
65
<PAGE>
WIND RIVER SYSTEMS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK ADDITIONAL TREASURY STOCK OTHER
------------------- PAID IN STOCKHOLDER ------------------- COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL LOAN SHARES AMOUNT INCOME EARNINGS
-------- -------- ---------- ----------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 31, 1997.... 60,002 $60 $153,264 -- (169) $ (3,121) $(1,645) $49,813
Net income...................... -- -- -- -- -- -- -- 10,399
Unrealized gain on
investments................... -- -- -- -- -- -- 856 --
Currency translation
adjustment.................... -- -- -- -- -- -- (1,698) --
-------
Comprehensive income............ -- -- -- -- -- -- (842) --
Common stock issued upon
exercise of stock options..... 1,348 1 3,811 -- -- -- -- --
Common stock issued under stock
purchase plans................ 228 -- 3,521 -- -- -- -- --
Tax benefit from stock plans.... -- -- 8,093 -- -- -- -- --
Repurchase of common stock...... (124) -- (1,672) -- -- -- --
Purchase of treasury stock...... -- -- -- -- (546) (12,364) -- --
------ --- -------- ------- ------ -------- ------- -------
BALANCES AT JANUARY 31, 1998.... 61,452 61 167,017 -- (715) (15,485) (2,487) 60,212
Net income...................... -- -- -- -- -- -- 35,256
Unrealized loss on
investments................... -- -- -- -- -- -- (1,055) --
Currency translation
adjustment.................... -- -- -- -- -- -- 628 --
-------
Comprehensive income............ -- -- -- -- -- -- (427) --
Common stock issued upon
acquisition of Zinc Software,
Inc........................... 339 -- 582 -- -- -- -- (1,125)
Common stock issued upon
exercise of warrant........... 337 -- 1,109 -- -- -- -- --
Common stock issued upon
exercise of stock options..... 1,945 2 7,761 -- -- -- -- --
Common stock issued under stock
purchase plans................ 231 1 3,892 -- -- -- -- --
Tax Benefit from stock plans.... -- -- 14,529 -- -- -- -- --
Repurchase of common stock...... (985) (1) (8,743) -- -- -- -- --
Compensation charge from common
stock options................. -- -- 535 -- -- -- -- --
Purchase of treasury stock...... -- -- -- -- (397) (10,006) -- --
------ --- -------- ------- ------ -------- ------- -------
BALANCES AT JANUARY 31, 1999.... 63,319 63 186,682 -- (1,112) (25,491) (2,914) 94,343
Effect of changing fiscal year
of acquired subsidiaries...... -- -- -- -- -- -- -- (4,816)
Net income...................... -- -- -- -- -- -- -- 10,363
Unrealized gain on
investments................... -- -- -- -- -- -- 20,474 --
Currency translation
adjustment.................... -- -- -- -- -- -- (1,061) --
-------
Comprehensive income............ -- -- -- -- -- -- 19,413 --
Common stock issued upon
acquisition of Software
Development Systems, Inc...... 1,316 1 13,940 -- -- -- -- --
Common stock issued upon
acquisition of Routerware,
Incorporated.................. 100 -- 1,650 -- -- -- -- --
Common stock issued upon
exercise of stock options..... 1,499 1 9,975 -- -- -- -- --
Common stock issued under stock
purchase plans................ 455 1 5,049 -- -- -- -- --
Tax benefit from stock plans.... -- -- 5,000 -- -- -- -- --
Compensation charge from common
stock options................. -- -- 218 -- -- -- -- --
Loan to stockholder............. -- -- -- $(1,900) -- -- -- --
Purchase of treasury stock...... -- -- -- -- (165) (3,997) -- --
Repurchase of common stock...... (590) -- (6,365) -- -- -- -- --
------ --- -------- ------- ------ -------- ------- -------
BALANCES AT JANUARY 31, 2000.... 66,100 $66 $216,149 $(1,900) (1,277) $(29,488) $16,499 $99,890
------ --- -------- ------- ------ -------- ------- -------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCES AT JANUARY 31, 1997.... $198,371
Net income...................... 10,399
Unrealized gain on
investments................... 856
Currency translation
adjustment.................... (1,698)
--------
Comprehensive income............ 9,557
Common stock issued upon
exercise of stock options..... 3,812
Common stock issued under stock
purchase plans................ 3,521
Tax benefit from stock plans.... 8,093
Repurchase of common stock...... (1,672)
Purchase of treasury stock...... (12,364)
--------
BALANCES AT JANUARY 31, 1998.... 209,318
Net income...................... 35,256
Unrealized loss on
investments................... (1,055)
Currency translation
adjustment.................... 628
--------
Comprehensive income............ 34,829
Common stock issued upon
acquisition of Zinc Software,
Inc........................... (543)
Common stock issued upon
exercise of warrant........... 1,109
Common stock issued upon
exercise of stock options..... 7,763
Common stock issued under stock
purchase plans................ 3,893
Tax Benefit from stock plans.... 14,529
Repurchase of common stock...... (8,744)
Compensation charge from common
stock options................. 535
Purchase of treasury stock...... (10,006)
--------
BALANCES AT JANUARY 31, 1999.... 252,683
Effect of changing fiscal year
of acquired subsidiaries...... (4,816)
Net income...................... 10,363
Unrealized gain on
investments................... 20,474
Currency translation
adjustment.................... (1,061)
--------
Comprehensive income............ 29,776
Common stock issued upon
acquisition of Software
Development Systems, Inc...... 13,941
Common stock issued upon
acquisition of Routerware,
Incorporated.................. 1,650
Common stock issued upon
exercise of stock options..... 9,976
Common stock issued under stock
purchase plans................ 5,050
Tax benefit from stock plans.... 5,000
Compensation charge from common
stock options................. 218
Loan to stockholder............. (1,900)
Purchase of treasury stock...... (3,997)
Repurchase of common stock...... (6,365)
--------
BALANCES AT JANUARY 31, 2000.... $301,216
--------
</TABLE>
See the accompanying notes to supplemental consolidated financial statements.
66
<PAGE>
WIND RIVER SYSTEMS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income:............................................... $ 10,399 $ 35,256 $ 10,363
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization............................. 10,400 14,723 23,579
Tax Benefit from stock plans.............................. 8,093 14,529 5,000
Deferred income taxes..................................... (3,891) (4,000) 1,646
Minority interest in consolidated subsidiary.............. 88 151 327
Acquired in-process research and development.............. 15,159 -- 6,300
Compensation charge....................................... -- 535 --
Write-off of impaired assets.............................. -- -- 500
Change in assets and liabilities:
Accounts receivable..................................... (5,716) (11,264) (19,266)
Prepaid and other assets................................ (6,082) (6,025) (15,495)
Accounts payable........................................ 2,015 (487) 2,921
Accrued liabilities..................................... 7,089 6,678 (2,206)
Accrued compensation.................................... 1,050 489 4,305
Income taxes payable.................................... 3,673 (914) 6,574
Deferred revenue........................................ 12,443 3,986 13,180
Other assets and liabilities............................ (553) 126 (2,186)
-------- -------- --------
Net cash provided by operating activities............... 54,167 53,783 35,542
-------- -------- --------
Cash flows from investing activities:
Acquisition of land and equipment......................... (23,972) (17,194) (17,950)
Disposals of land and equipment........................... 99 -- --
Capitalized software development costs.................... (2,147) (2,525) (1,550)
Acquisitions, net of cash acquired........................ (20,553) -- (24,872)
Purchases of investments.................................. (316,402) (258,229) (131,907)
Sales and maturities of investments....................... 264,482 208,107 158,626
Restricted cash........................................... (2,510) (31,647) (5,587)
-------- -------- --------
Net cash used in investing activities................... (101,003) (101,488) (23,240)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock, net............................. 7,333 12,765 16,894
Borrowings under line of credit........................... -- -- 5,094
Purchase of treasury stock................................ (12,364) (10,006) (3,997)
Sales of treasury stock................................... -- -- --
Repurchase of common stock................................ (1,672) (8,744) (6,365)
Issuance of convertible subordinated notes, net........... 134,925 -- --
Loan to Stockholder....................................... -- (1,900)
-------- -------- --------
Net cash provided by (used in) financing activities..... 128,222 (5,985) 9,726
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (1,620) 364 (1,199)
Effect of changing fiscal year of acquired subsidiaries..... -- -- (4,816)
Net increase (decrease) in cash and cash equivalents........ 79,766 (53,326) 16,013
Cash and cash equivalents at beginning of year.............. 35,476 115,242 61,916
-------- -------- --------
Cash and cash equivalents at end of year.................... $115,242 $ 61,916 $ 77,929
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid for interest.................................. $ -- $ 7,000 $ 9,414
Cash paid for income taxes.............................. $ 4,280 $ 5,189 $ 2,157
</TABLE>
See the accompanying notes to supplemental consolidated financial statements.
67
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wind River Systems, Inc. ("Wind River") develops, markets, supports and
provides consulting services for advanced software operating systems and
development tools that allow customers to create complex, robust, real-time
software applications for embedded computers. An embedded computer is a
microprocessor that is incorporated into a larger device and is dedicated to
responding to external events by performing specific tasks quickly, predictably
and reliably.
BASIS OF PRESENTATION
In June 1999, Wind River acquired RouterWare, Incorporated, a California
corporation that 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 for the fiscal years ended January 31, 1998, 1999 and
2000.
On February 15, 2000, Wind River completed its acquisition of Integrated
Systems, Inc. ("Integrated Systems" or "ISI") in a transaction accounted for as
a pooling of interests. Accordingly, these supplemental consolidated financial
statements have been restated for all periods prior to the merger to include
Integrated Systems. Under terms of the acquisition agreement, each outstanding
share of Integrated Systems' common stock was exchanged for .92 of a share of
Wind River's common stock, resulting in the issuance of an aggregate of
22,499,895 shares of Wind River common stock. Additionally, Wind River converted
all outstanding options to purchase Integrated Systems common stock into options
to purchase shares of Wind River common stock.
Prior to the acquisition, Integrated Systems' fiscal year ended on the last
day of February. In recording the business combination, Integrated Systems'
consolidated financial statements as of and for each of the three years in the
period ended February 28, 1999 have been combined with Wind River's consolidated
financial statements as of and for each of the three years in the period ended
January 31, 1999. Integrated Systems has changed its fiscal year-end to
January 31 to conform to Wind River's year-end. As a result, an adjustment has
been made to stockholders' equity as of January 31, 1999 to adjust for the net
results of Integrated Systems for the month of February 1999, which has been
included in the results of operations for the year ended January 31, 2000 in the
accompanying supplemental financial statements.
The consolidated financial statements include the accounts of Wind River and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. The accompanying consolidated
financial statements have been presented to reflect the acquisitions accounted
for as poolings of interests for all periods presented.
Wind River has a fiscal year end of January 31. The international
subsidiaries have fiscal year-ends of December 31. The consolidated financial
statements include the international subsidiaries' financial statements as of
December 31.
Certain amounts in the fiscal year 1999 financial statements have been
reclassified to conform to the fiscal year 2000 presentation.
68
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with an original
maturity of three months or less. These investments consist of fixed income
securities, which are readily convertible to cash and are stated at cost, which
approximates fair value. Restricted cash consists of the investments held as
collateral under the operating lease of Wind River's headquarters and an
accreting interest rate swap agreement. Fair value is determined based upon the
quoted market prices of the securities as of the balance sheet date.
INVESTMENTS
Investments with maturities greater than three months and less than one year
are classified as short-term investments. Investments with maturities greater
than one year are classified as long-term investments. Wind River accounts for
its investments, including money market funds, municipal bonds, U.S. government
and agency obligations, corporate bonds and other debt securities, in accordance
with Statement of Financial Accounting Standards No. ("SFAS") 115, "Accounting
for Certain Investments in Debt and Equity Securities." Wind River determines
the appropriate classification of its marketable securities at the time of
purchase and re-evaluates such classification as of each balance sheet date.
Wind River has classified all of its investments as available-for-sale and
carries such investments at fair value, with unrealized gains and losses
reported in stockholders' equity until disposition. Fair value is determined
based upon the quoted market prices of the securities as of the balance sheet
date. The cost of securities sold is based on the specific identification
method. Realized gains or losses and declines in value, if any, judged to be
other than temporary on available-for-sale securities are reported in other
income or expense.
CONCENTRATION OF CREDIT RISK
Wind River's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash, cash equivalents, investments, and
accounts receivable. Wind River's investments consist of investment grade
securities managed by qualified professional investment managers. The investment
policy is intended to limit Wind River's exposure to concentration of credit
risk. Wind River's accounts receivable results primarily from software sales to
a broad customer base both domestically and internationally and are typically
unsecured. Wind River performs on-going credit evaluations of its customers'
financial condition, limits the amount of credit when deemed necessary and
maintains allowances for potential credit losses; historically, such losses have
been immaterial. As a consequence, concentrations of credit risk are limited.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of Wind River's financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable and accounts payable,
the carrying amounts approximate fair value due to their short maturities. The
estimated fair value for the convertible subordinated notes (with a carrying
amount of $140 million at January 31, 2000) is approximately $135.8 million at
January 31, 2000. The fair value for the convertible subordinated notes is based
on quoted market prices.
LAND AND EQUIPMENT
Land and equipment are stated at cost. Depreciation on equipment is computed
using the straight-line method over the estimated useful lives of the assets,
which is generally two to four years
69
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for computer equipment, four to ten years for furniture and equipment and up to
twenty years for buildings. Leasehold improvements are amortized over the term
of the related lease or useful economic life, if shorter.
SOFTWARE DEVELOPMENT COSTS
Wind River accounts for software development costs in accordance with SFAS
86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed." Costs incurred to establish the technological feasibility
of a computer software product are considered research and development costs and
are expensed as incurred. When the technological feasibility of a software
product has been established using the working model approach, development costs
are capitalized. Capitalization of these costs ceases when the product is
considered available for general release to customers. Amortization of
capitalized software development costs is provided on a product-by-product basis
at the greater of the amount computed using (a) the ratio of current gross
revenues for a product to the total of current and anticipated future gross
revenues or (b) the straight-line method over the remaining estimated economic
life of the product. Generally, an original estimated economic life of eighteen
months is assigned to capitalized software development costs. Amortization of
capitalized software costs is charged to cost of product revenues. Research and
development expenditures are charged to research and development in the period
incurred. The amortization of capitalized software costs which were charged to
cost of product revenues during fiscal years 2000, 1999 and 1998 were
$2,397,000, $1,902,000 and $1,603,000, respectively. At January 31, 2000, 1999
and 1998, Wind River had capitalized software costs of $2,609,000, $3,743,000
and $3,426,000, respectively.
OTHER ASSETS
Other assets include bond issuance costs, purchased technology, capitalized
software development costs, equity investments, and deposits. Bond issuance
costs are amortized over five years and purchased technology is amortized over
three years.
Wind River evaluates the recoverability of its property and equipment and
intangible assets in accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. Accordingly, Wind River evaluates asset
recoverability at each balance sheet date or when an event occurs that may
impair recoverability of the asset. Wind River determines the recoverability of
the carrying amount of each intangible asset by reviewing the following factors:
the undiscounted value of expected operating cash flows in relation to its net
capital investments, the estimated useful or contractual life of the intangible
asset, the contract or product supporting the intangible asset, and in the case
of purchased technology and capitalized software development costs, Wind River
periodically reviews the recoverability of the assets value by evaluating its
products with respect to technological advances, competitive products and the
needs of its customers.
INTANGIBLE ASSETS
Intangible assets resulting from the acquisitions of entities accounted for
using the purchase method of accounting are estimated by management based on the
fair value of assets received using the discounted cash flow approach. These
intangible assets include acquired customer lists, workforce, technological know
how, covenants not to compete and goodwill. Intangible assets are amortized over
70
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
periods from eight months to 10 years on a straight-line basis, which represents
the estimated periods of benefit.
REVENUE RECOGNITION
Wind River recognizes revenue in accordance with Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4, "Deferral
of the Effective Date of Certain Provisions of SOP 97-2," effective February 1,
1998. SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue on software
transactions and supersede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did
not have a material impact on Wind River's existing licensing or revenue
recognition practices.
Product revenues consist of licensing fees from operating system and
software development tool products and fees from embedded system run-time
licenses. Service revenues are derived from fees from professional services,
software porting and development contracts, software maintenance and support
contracts, customer training and consulting. Maintenance contracts are generally
sold separately from the products. Wind River's customers consist of end users,
distributors, original equipment manufacturers, system integrators and
value-added resellers.
Product revenues are generally recognized at the time of shipment or upon
the delivery of a product master in satisfaction of non-cancelable contractual
agreements provided that collection of the resulting receivable is probable, the
fee is fixed or determinable and vendor-specific objective evidence ("VSOE")
exists to allocate the total fee to all delivered and undelivered elements of
the arrangement. Any maintenance included in these arrangements is deferred
based on VSOE and recognized ratably over the term of the arrangement. Service
revenues from engineering services contracts are generally recognized on the
percentage-of-completion basis. Service revenues from software maintenance,
support and update fees (post-contract support) are recognized ratably over the
contract period. Services revenue from training and consulting are recognized
when the services are provided.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") released SOP 98-9, "Modification of SOP 97-2, 'Software Revenue
Recognition' with Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to
require that an entity recognize revenue for multiple element arrangements by
means of the "residual method" when (1) there is 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.
FOREIGN CURRENCY TRANSLATION
The functional currency of foreign subsidiaries is the local currency.
Accordingly, assets and liabilities of the subsidiaries are translated using the
exchange rates in effect at the end of the period, while income and expense
items are translated at average rates of exchange during the period. Gains or
losses from translation of foreign operations where the local currency is the
functional currency are included as other comprehensive income or loss. The net
gains and losses resulting from foreign currency transactions are recorded in
net income in the period incurred and were not significant for any of the
periods presented.
71
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION PLANS
Wind River accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and complies with the
disclosure provisions of SFAS 123, "Accounting for Stock Based Compensation."
Under APB 25, compensation cost is recognized over the vesting period based on
the difference, if any, on the date of grant between the fair market value of
Wind River's stock and the amount an employee must pay to acquire the stock.
Wind River's policy is to grant options with an exercise price equal to the
quoted market price of Wind River's stock on the grant date. Accordingly, no
compensation expense has been recognized for its stock option plans.
NET INCOME PER SHARE
Net income per share includes basic net income per share, which is based on
the weighted-average number of common shares outstanding, and diluted net income
per share, which is based on the weighted-average number of common shares
outstanding and all dilutive potential common shares outstanding. Dilutive
common equivalent shares consist of stock options and warrants (using the
treasury stock method) and convertible subordinated notes (using the if
converted method). Common equivalent shares are excluded from the computation if
their effect is anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS No. 137, in which it agreed to defer for one year the implementation date
of SFAS No. 133.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition," which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the SEC. Wind River believes the adoption of SAB 101 will not have a
material impact on Wind River's financial position and results of operations.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting
for Certain Transactions Involving Stock compensation--an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying this Interpretation are recognized on a prospective basis from July 1,
2000. WindRiver has not yet determined the impact, if any, of adopting this
interpretation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets
72
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS
On December 31, 1997, Wind River entered into an OEM license agreement with
Liberate Technologies, Inc. to license the right to access and modify the source
code version of certain Liberate Technologies, Inc. technology and to duplicate,
distribute and sublicense the object code version of such modified source code
included with certain of Wind River's future products. Under the agreement, Wind
River paid $9.8 million for non-exclusive, restricted, perpetual rights to the
technology and $200,000 for Liberate Technologies, Inc. engineering services
incurred prior to source code delivery. In addition, selected elements of the
Liberate Technologies, Inc. technology require Wind River to pay additional per
unit royalties in the event Wind River's future sales of products that include
the modified Liberate Technologies, Inc. technology exceed specified volume
levels. The licensed source code will be ported by Wind River to its VxWorks,
IxWorks, WiSP and other real time embedded operating systems and will become a
component of future products. At the date the source code was acquired, there
were no working models of such products incorporating the licensed technology
and because of the restrictive nature of the license agreement, there were no
alternative future uses for such technology in research and development.
Accordingly, the aggregate purchase price of $10 million was expensed
immediately as in-process research and development.
On January 30, 1998, Wind River acquired Objective Software
Technology, Ltd. ("OST"), a privately held Scotland-based company that designs
and markets visualization tools for development of embedded systems. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based upon the fair values at the date of acquisition.
The excess of the purchase price over the fair market value of the net tangible
assets acquired aggregated approximately $6.1 million, of which $4.1 million was
allocated to in-process research and development and expensed immediately. Wind
River used the discounted cash flow ("DCF") approach to determine the fair value
of OST and its identifiable assets, including the value of the products in the
development stage which were not considered to have reached technological
feasibility. The DCF approach includes an analysis of the markets, completion
costs, cash flows, other required assets, contributions made by core technology,
and risks associated with achieving such cash flows. The balance of the excess
acquisition cost was allocated to acquired technology ($2.0 million) which is
being amortized over three years.
In May 1998, Wind River acquired Zinc Software, Incorporated, a privately
held company that develops, markets and supports graphical application software.
In connection therewith, Wind River issued 339,917 shares of common stock in
exchange for all of the outstanding stock of Zinc. The acquisition was accounted
for as a pooling of interests. As the operations of Zinc were not material to
Wind River's consolidated operations and financial position, the financial
statements of Zinc have been recorded in the consolidated financial statements
as of May 1, 1998.
During the fiscal year ended January 31, 1999, Wind River paid $500,000 for
a 10% interest in the common stock of XACT, Inc. 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
73
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
agreement with XACT. Subsequently, but not pursuant to the asset purchase
agreement, Wind River hired a significant number of XACT employees.
In June 1999, Wind River acquired RouterWare, Incorporated, a California
corporation that 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. In connection with the acquisition of RouterWare,
Wind River incurred approximately $930,000 in merger related expenses consisting
primarily of transaction fees.
In October 1999, Wind River entered into an agreement to merge with
Integrated Systems, an embedded operating systems and development tool software
developer, in a transaction accounted for as a pooling of interests and all
financial data of Wind River has been restated to include the historical
information of Integrated Systems. The merger was consummated on February 15,
2000. In connection with the merger, each outstanding share of Integrated
Systems common stock was exchanged for .92 of a share of Wind River common
stock, resulting in the issuance of an aggregate of 22,499,895 shares of Wind
River common stock for all outstanding shares of Integrated Systems common
stock. In addition, approximately 4,493,000 of Integrated Systems stock options
became options to purchase approximately 4,133,000 shares of Wind River common
stock. As of January 31, 2000, Wind River incurred approximately $205,000 in
one-time integration related expenses consisting primarily of transaction fees.
3. LAND AND EQUIPMENT
Land and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and Buildings........................................ $26,446 $26,333
Computer equipment........................................ 60,143 49,503
Furniture and equipment................................... 10,694 6,759
Leasehold improvements.................................... 2,968 1,545
------- -------
100,251 84,140
Less accumulated depreciation............................. (43,920) (33,994)
------- -------
$56,331 $50,146
======= =======
</TABLE>
In fiscal year 1999, Wind River made $2.2 million of related land
improvements.
74
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
Cash equivalents and investments consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Money market fund....................................... $ 31,418 $ 8,903
Municipal bonds......................................... -- 5,672
U.S. government and agency obligations.................. 33,277 101,782
Corporate bonds......................................... 68,133 85,326
Other debt securities................................... 106,760 61,423
-------- --------
Total available-for-sale securities..................... 239,588 263,106
Less amounts classified as cash equivalents............. (46,311) (37,193)
-------- --------
Total marketable securities............................. 193,277 $225,913
-------- --------
Equity investments...................................... 41,351 3,010
-------- --------
Total market value of investments....................... $234,628 $228,923
======== ========
</TABLE>
The contractual maturities of marketable securities, at January 31, 2000,
regardless of their balance sheet classification, were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Due in 1 year or less....................................... $ 28,683
Due in 1-2 years............................................ 55,190
Due in 2-5 years............................................ 74,528
Due in 5 years or more...................................... 34,876
--------
Total marketable securities................................. $193,277
========
</TABLE>
Gross realized gains and losses from the sale of securities classified as
available-for-sale were not material for the years ended January 31, 1999 and
2000. For the purpose of determining gross realized gains and losses, the cost
of securities is based upon specific identification.
5. DERIVATIVE FINANCIAL INSTRUMENTS
Wind River enters into foreign currency forward exchange contracts ("forward
contracts") to manage exposure related to certain foreign currency transactions.
Wind River does not enter into derivative financial instruments for trading
purposes. Wind River may, from time to time, adjust its foreign currency hedging
position by taking out additional contracts or by terminating or offsetting
existing forward contracts. These adjustments may result from changes in the
underlying foreign currency exposures or from fundamental shifts in the
economics of particular exchange rates. Gains and losses on terminated forward
contracts, or on contracts that are offset, are recognized in income in the
period of contract termination or offset. At January 31, 2000, Wind River had
outstanding forward contracts with notional amounts totaling approximately
$7.1 million. These contracts, which mature in less than ninety days, are hedges
of certain foreign currency transaction exposures in the Japanese yen. The
difference between cost and estimated fair value at January 31, 2000 was
negligible.
On March 18, 1998, Wind River entered into an accreting interest rate swap
agreement (the "Swap Agreement") to reduce the impact of changes in interest
rates on its floating rate operating lease for
75
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
its current corporate headquarters (see Note 12). The Swap Agreement effectively
changes Wind River's interest rate exposure on its operating lease which is at
one month LIBOR to a fixed rate of 5.9%. The notional amount under the Swap
Agreement is scheduled to increase in relation to the funds used to construct
Wind River's current headquarters. The differential to be paid or received under
the Swap Agreement will be recognized as an adjustment to rent expense related
to the operating lease. The Swap Agreement matures at the same time as the
operating lease expires. The amounts potentially subject to credit risk (arising
from the possible inability of the counterparty to meet the term of their
contracts) are generally limited to the amounts, if any, by which the
counterparty's obligations exceed the obligations of Wind River.
6. PROVISION FOR INCOME TAXES
The provision for income taxes was composed as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $ 9,020 $14,334 $10,188
State............................................ 1,972 2,112 2,051
Foreign.......................................... 7,275 4,350 3,725
------- ------- -------
18,267 20,796 15,894
======= ======= =======
Deferred:
Federal.......................................... (2,186) (3,196) (2,856)
State............................................ (736) (809) (295)
Foreign.......................................... -- -- (786)
------- ------- -------
(2,922) (4,005) (3,937)
------- ------- -------
$15,345 $16,791 $11,957
======= ======= =======
</TABLE>
76
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROVISION FOR INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Expected Rate........................................... 33.0% 35.0% 35.0%
State taxes, net of federal benefit..................... 2.91 4.0 6.0
Goodwill amortization................................... 3.8
Foreign taxes........................................... 14.0 1.0 5.2
In-process technology write-off......................... 8.3 -- 15.5
Research and development, net........................... (2.5) (2.1) (3.2)
Tax exempt interest..................................... (1.0) (5.3)
Foreign sales corporation benefit....................... (1.9) (0.4) (1.5)
Changes in tax rate of foreign subsidiary............... (4.6) --
Other................................................... 0.1 0.2 (0.3)
---- ---- ----
59.7% 32.2% 51.6%
==== ==== ====
</TABLE>
In May 1998, Integrated Systems made an election to treat Integrated
Systems' Austrian subsidiary, TakeFive Software GmbH, as a foreign branch of
Integrated Systems in its United States federal tax return. For financial
statement purposes, this election resulted in a one-time tax benefit of
$2.4 million in the first quarter of fiscal year 1999. The effective
consolidated tax rate in fiscal 1998 was higher due to the permanent difference
resulting from the write-off of in-process research and development during the
fourth quarter of fiscal 1998.
Deferred tax assets which result from temporary differences in the
recognition of certain revenues and expenses for financial and income tax
reporting purposes consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Depreciation and Amortization.............................. $4,122 $ 5,499
Tax credit carryforwards................................... 2,788 2,019
Employee benefit accruals.................................. 1,766 1,244
Accounts receivable reserves............................... 1,386 907
Accrued expenses and other................................. 2,697 2,517
Deferred revenue........................................... 1,572 753
Other...................................................... 571
------ -------
Gross deferred tax assets.................................. 14,912 12,939
------ -------
Software Development Costs................................. 1,272 1,296
Unrealized gain on investments............................. 12,500 138
Other...................................................... 4,544 401
------ -------
Gross deferred tax liabilities............................. 18,316 1,835
------ -------
Net deferred tax assets.................................... (3,404) $11,104
====== =======
</TABLE>
77
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CONVERTIBLE SUBORDINATED NOTES
In July 1997, Wind River issued $140 million of 5% Convertible Subordinated
Notes (the "Notes"), which mature on August 1, 2002. The Notes are subordinated
to all existing and future senior debt and are convertible into shares of Wind
River's Common Stock at a conversion price of $32.33 per share. The Notes are
redeemable at the option of Wind River, in whole or in part, at any time on or
after August 2, 2000 at 102% of the principal amount initially, and thereafter
at prices declining to 100% at maturity, in each case plus accrued interest.
Each holder of these Notes has the right, subject to certain conditions and
restrictions, to require Wind River to offer to repurchase all outstanding
Notes, in whole or in part, owned by such holder, at specified repurchase prices
plus accrued interest upon the occurrence of certain events. The $5.1 million of
costs incurred in connection with the offering are included in prepaid and other
assets. These unamortized costs are being amortized to interest expense over the
5-year term of the Notes using the straight-line method, which approximates the
effective interest method. Interest on the Notes began accruing July 31, 1997
and is payable semi-annually on February 1 and August 1, commencing on
February 1, 1998.
8. COMPREHENSIVE INCOME
In February 1998, Wind River adopted SFAS 130, "Reporting Comprehensive
Income." Comprehensive income is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
The primary difference between net income and comprehensive income, for Wind
River, results from foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities. The adoption of SFAS 130 had
no impact on Wind River's results of operations.
Wind River's comprehensive income has been presented in the Consolidated
Statements of Stockholders' Equity. As of January 31, 2000, accumulated other
comprehensive income consisted of foreign currency translation adjustments of
$3,571,000 and unrealized gain on investments of $20,070,000.
78
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. NET INCOME PER SHARE
In accordance with SFAS 128, the calculation of basic and diluted net income
per share is presented below:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
<S> <C> <C> <C>
Basic computation:
Net income....................................... $10,363 $35,257 10,339
Weighted average common shares outstanding....... 63,096 61,554 62,152
------- ------- -------
Basic net income per share....................... $ 0.16 $ 0.57 $ 0.17
======= ======= =======
Diluted computation:
Net income....................................... $10,363 $35,257 $10,339
------- ------- -------
Weighted average common shares outstanding....... 63,096 61,554 62,152
Incremental shares from assumed conversions:
Stock options.................................. 3,933 4,222 3,567
Convertible subordinated notes................. -- -- --
------- ------- -------
Dilutive potential common shares................. 3,933 4,222 5,426
------- ------- -------
Total dilutive average common shares
outstanding.................................... 67,029 65,776 65,719
------- ------- -------
Diluted net income per share..................... $ 0.15 $ 0.54 $ 0.16
======= ======= =======
</TABLE>
Effect of assumed conversion of the convertible subordinated notes is
anti-dilutive and therefore excluded from the above computations.
10. COMMON STOCK
On March 10, 1997 and February 4, 1999, Wind River effected three-for-two
splits of its Common Stock in the form of stock dividends. Par value remained at
$0.001 per share. Accordingly, all share and per share amounts have been
adjusted to give retroactive effect to these stock splits.
During fiscal year 1999, Wind River repurchased approximately 397,000 shares
of Common Stock at an aggregate cost of approximately $10.0 million. In
May 1998, Wind River issued 339,917 unregistered shares of its Common Sock to
the shareholders of Zinc Software, Incorporated in exchange for all of the then
outstanding shares of Zinc. In January 1999 Wind River issued 337,500 of
unregistered shares of its Common Stock to Innotech Corporation upon Innotech's
exercise of a warrant issued in January 1995, for an aggregate exercise price of
approximately $1.1 million. In June 1999, 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.
11. STOCK BASED COMPENSATION PLANS
Wind River accounts for its stock-based compensation plans in conformity
with APB 25 and related Interpretations and has adopted the additional pro forma
disclosure provisions of SFAS 123.
79
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK BASED COMPENSATION PLANS (CONTINUED)
Accordingly, no compensation expense has been recognized for its fixed stock
option plans and its stock purchase plans.
The Amended and Restated 1987 Equity Incentive Plan (the "1987 Plan") allows
for the issuance of options and other stock awards to Wind River employees and
consultants to purchase a maximum of 14,175,000 shares of Common Stock. Stock
options granted under the 1987 Plan may be incentive stock options or
nonstatutory stock options. Individuals owning more than 10% of Wind River's
stock are not eligible to receive incentive stock options under the 1987 Plan
unless the option's price is at least 110% of the fair market value of the
Common Stock at the date of grant and the term of the option does not exceed
five years from the date of grant. Nonstatutory stock options issued to holders
of less than 10% of Wind River's stock may be granted at prices of at least 85%
of the fair market value of the stock at the grant date and with expirations not
to exceed ten years from the grant date, although Wind River's current practice
is to grant options with exercise prices at least 100% of the fair market value.
Under the terms of the 1987 Plan, option vesting provisions are established by
the Board of Directors when options are granted. Options generally will vest
over four years, although options may be granted that vest upon achievement of
performance criteria. Unexercised options are automatically canceled three
months after termination of the optionee's employment or other service with Wind
River.
In April 1995, Wind River adopted the 1995 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides for automatic
grants of nonstatutory stock options to purchase Common Stock of Wind River to
directors of Wind River who are not employees of, or consultants to, Wind River
or any affiliate of Wind River (Non-Employee Directors). The Directors' Plan
allows for the issuance of options to purchase a maximum of 337,500 shares of
Common Stock. Options issued are granted at prices of 100% of the fair market
value of the Common Stock at the date of grant and with expirations of ten years
from the grant date. Initial options granted to each Non-Employee Director vest
in annual increments over a period of four years from the date of grant,
commencing on the date one year after the date of grant of the initial options.
Subsequent options shall become 100% vested at the end of the one-year period
following the date of grant as long as the optionee has attended 75% of the
meetings of the board and committees on which he serves. Unexercised options
will terminate six months after such optionee's termination of all service with
Wind River and its affiliates.
In April 1998, Wind River adopted the 1998 Non-Officer Stock Option Plan
(the "Non-Officer Plan"). The Non-Officer Plan provides for grants of
nonstatutory stock options to employees and consultants who are not officers or
directors of Wind River. An aggregate of 1,950,000 shares of Common Stock have
been reserved for issuance under the Non-Officer Plan. The exercise price of
nonstatutory stock option granted under the Non-Officer Plan may not be less
than 85 percent of the fair market value of the Common Stock on the date of
grant. All nonstatutory stock options may be granted under the Non-Officer Plan
have a maximum term of 10 years. Options generally will vest over four years,
although options may be granted that vest upon achievement of performance
criteria. The Non-Officer Plan and options thereunder may be amended by the
Board from time to time. The Non-Officer Plan will terminate on April 22, 2008.
In June 1998, Wind River adopted the 1998 Equity Incentive Plan (the "1998
Plan"). The 1998 Plan provides for grants of options and other stock awards to
employees, directors and consultants to purchase a maximum of 1,500,000 shares
of Common Stock. Stock options granted under the 1998 Plan may be incentive
stock options or nonstatutory stock options. Individuals owning more than 10% of
Wind River's stock are not eligible to receive incentive stock options under the
1998 Plan unless the
80
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK BASED COMPENSATION PLANS (CONTINUED)
option's price is at least 110% of the fair market value of the Common Stock at
the date of grant and the term of the option does not exceed five years from the
date of grant. Nonstatutory stock options issued to holders of less than 10% of
Wind River's stock may be granted at prices of at least 85% of the fair market
value of the stock at the grant date and with expirations not to exceed ten
years from the grant date, although Wind River's current practice is to grant
options with exercise prices at least 100% of the fair market value. Under the
terms of the 1998 Plan, option vesting provisions are established by the Board
of Directors when options are granted. Options generally will vest over four
years, although options may be granted that vest upon achievement of performance
criteria. Unexercised options are automatically canceled three months after
termination of the optionee's employment or other service with Wind River.
In June 1999, Wind River assumed the 1994 RouterWare Stock Option Plan in
connection with the acquisition of RouterWare. Pursuant to the acquisition, Wind
River reserved 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, including the number of options
outstanding, of Wind River has been restated to include the historical financial
information of RouterWare.
In connection with the acquisition of Integrated Systems, Wind River assumed
all of the outstanding stock options granted under various Integrated Systems
stock option plans. Outstanding options assumed generally vest over four or five
year terms and are exercisable for a period of 10 years. No further grants will
be made under the various Integrated Systems stock option plans.
Activity under all stock option plans described above is summarized as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR 2000 FISCAL YEAR 1999 FISCAL YEAR 1998
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER PRICE PER NUMBER PRICE PER NUMBER PRICE PER
OF SHARES SHARE OF SHARES SHARE OF SHARES SHARE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Beginning balance............................. 11,468 $16.41 9,969 $11.84 8,511 $ 7.80
Granted....................................... 5,223 $16.46 4,182 $20.89 5,071 $17.92
Exercised..................................... (1,439) $ 6.76 (1,945) $ 4.31 (1,348) $ 2.84
Canceled...................................... (964) $17.29 (738) $16.89 (2,265) $17.64
------ ------ ------ ------ ------ ------
Ending balance................................ 14,288 $16.61 11,468 $16.41 9,969 $11.84
====== ====== ====== ====== ====== ======
</TABLE>
81
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK BASED COMPENSATION PLANS (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at January 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE WEIGHTED- -------------------------------
NUMBER REMAINING AVERAGE NUMBER WEIGHTED-
RANGE OF OUTSTANDING CONTRACTUAL LIFE EXERCISE EXERCISABLE AVERAGE
EXERCISE PRICES (IN THOUSANDS) (IN YEARS) PRICE (IN THOUSANDS) EXERCISE PRICE
- --------------------- -------------- ---------------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.01--$4.99 1,286 4.60 $ 2.56 1,285 $ 2.56
$5.00--$9.99 1,319 6.36 $ 8.10 1,062 $ 7.94
$10.0--$14.99 4,324 8.63 $12.51 925 $11.83
$15.00--$19.99 2,200 9.22 $16.48 170 $18.35
$20.00--$24.99 1,838 8.03 $22.31 808 $22.28
$25.00--$29.99 2,759 7.92 $26.56 1,175 $26.46
$30.00--$34.99 383 9.63 $32.11 27 $30.73
$35.00--$39.99 27 9.79 $37.14 1 $38.72
$40.00--$44.99 152 9.87 $40.71 -- $ --
------ ---- ------ ----- ------
$0.01--$44.99 14,288 7.98 $16.61 5,453 $13.89
====== ==== ====== ===== ======
</TABLE>
In March 1993, Wind River adopted the Employee Stock Purchase Plan (the
"Purchase Plan"). An aggregate of 1,350,000 shares of Common Stock are
authorized for issuance under the Purchase Plan. Under the Purchase Plan, the
Board of Directors may authorize participation by eligible employees, including
officers, in periodic offerings following the commencement of the Purchase Plan.
Employees who participate in an offering can have up to 15% of their earnings
withheld pursuant to the Purchase Plan. The amount withheld is used to purchase
shares of Common Stock on specified dates determined by the Board. The price of
Common Stock purchased under the Purchase Plan is equal to 85% of the lower of
the fair market value of the Common Stock, determined by the closing price on
the Nasdaq National Market, at the commencement date or the ending date of each
six month offering period.
Shares issued under the Purchase Plan in fiscal years 2000, 1999 and 1998
were 226,000, 121,000 and 96,000 shares of Common Stock, respectively, at an
average price of $27.20, $20.28 and $19.43, respectively.
Integrated Systems' Employee Stock Purchase Plan was terminated on
February 15, 2000. Shares issued under this plan in fiscal years 2000, 1999 and
1998 were 229,000, 110,400 and 132,480 shares of Common Stock, respectively.
82
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK BASED COMPENSATION PLANS (CONTINUED)
PRO FORMA DISCLOSURES
Under SFAS 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes model with the following assumptions used for
grants during fiscal years 1998, 1999 and 2000:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk free interest rates...................... 5.83% 5.10% 6.16%
Expected volatility........................... 66% 60% 63%
Expected option life.......................... 5.3 years 5.3 years 5.4 years
Expected dividends............................ -- -- --
</TABLE>
Wind River applies the provisions of APB 25 and related Interpretations in
accounting for stock based compensation arrangements. Had compensation expense
under these arrangements been determined pursuant to SFAS 123, Wind River's net
income and net income per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net income:
As reported................................... $ 10,363 $35,256 $10,399
Pro Forma..................................... $(27,132) $ 8,936 $(3,879)
Net income per share:
Basic:
As reported................................... $ 0.16 $ 0.57 $ 0.17
Pro Forma..................................... $ (0.43) $ 0.15 $ (0.06)
Diluted:
As reported................................... $ 0.15 $ 0.54 $ .16
Pro Forma..................................... $ (0.43) $ 0.14 $ (0.06)
</TABLE>
The pro forma amounts include compensation expense related to fiscal years
1998, 1999 and 2000 stock option grants and sales of Common Stock under the
Purchase Plan. The effects of applying SFAS 123 on pro forma disclosures of net
income and net income per share for fiscal years 1998, 1999 and 2000 are not
likely to be representative of the pro forma effects on net income and net
income per share in future years.
12. COMMITMENTS AND CONTINGENCIES
Wind River leases certain property consisting of subsidiary headquarters,
customer training facilities, sales facilities and equipment under
non-cancelable operating leases that expire at various
83
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
dates through March 2004. Future minimum rental payments under non-cancelable
operating leases subsequent to fiscal year 2000 are as follows:
(In thousands)
<TABLE>
<S> <C>
Year ending January 31,
2001........................................................ $ 5,973
2002........................................................ 3,928
2003........................................................ 2,260
2004........................................................ 1,155
2005........................................................ 900
Thereafter.................................................. 354
-------
$14,570
=======
</TABLE>
Rental expense for fiscal years 1998, 1999 and 2000 was $4.9 million,
$5.7 million and $8.5 million, respectively.
In fiscal year 1998, Wind River entered into an operating lease for its
headquarters constructed on the land Wind River purchased in Alameda,
California. Construction of the buildings was completed in the first quarter of
fiscal year 2000. The lease was finalized in August 1999 and the lessor has
funded a total of $32.4 million of construction costs. The operating lease
payments began in August 1999 and will vary based on the total construction
costs of the property, including capitalized interest, and LIBOR.
In fiscal year 2000, Wind River entered into a second operating lease
agreement for the construction of two additional buildings at its headquarter
facility. As of January 31, 2000, the lessor has funded a total of $4.0 million
of construction costs and has committed to fund up to a maximum of
$26.0 million. Construction of the building is currently expected to be
completed in January 2001. The operating lease payments will vary based upon the
total construction costs of the property, including capitalized interest and
LIBOR.
In connection with the lease of Wind River's current headquarters, Wind
River is obligated to enter into a lease of its land in Alameda, California with
the lessor of the building at a nominal rate and for a term of 55 years. If Wind
River terminates or does not negotiate an extension of the building leases, 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 buildings at
the lessor's original cost or arrange for the buildings to be acquired. Wind
River has guaranteed the residual value associated with the buildings under the
first operating lease and second operating lease to the lessor of approximately
82% and 84.5%, respectively, of the lessor's actual funding of $32.4 million on
the first operating lease and obligated funding of $26.0 million on the second
operating lease, respectively. Wind River is also required to deposit fixed
income securities with a custodian as a deposit to secure the performance of its
obligations under the leases. In addition, under the terms of the leases, Wind
River must maintain compliance with certain financial covenants. As of
January 31, 2000, Wind River was in compliance with these covenants. Management
believes that the contingent liability relating to the residual value guarantee
will not have a material adverse effect on Wind River's financial condition or
results of operations.
From time to time, Wind River is subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
patents and other intellectual property rights.
84
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Wind River is not currently aware of any legal proceedings or claims that Wind
River believes will have, individually or in the aggregate, a material adverse
effect on Wind River's financial position or results of operations.
13. RELATED PARTY TRANSACTIONS
Wind River distributes a portion of its products in Japan through WRSKK, a
joint venture in which Wind River owns a 70% equity interest. Innotech
Corporation ("Innotech"), Kobe Steel Ltd. and Nissin Electric Ltd., the other
partners in the joint venture, each owns a 10% equity interest. Wind River
entered into distributor agreements with the three minority interest owners of
WRSKK, Innotech, Kobe Steel, Ltd., and Nissin Electric Ltd., in March 1993,
October 1991, and October 1991, respectively. The Innotech agreement was amended
in December 1995 to provide for an extended contract term and to issue to
Innotech a warrant to purchase 337,500 shares of Wind River's Common Stock for
$3.29 per share. The warrant was valued at $100,000 and charged to cost of sales
in fiscal year 1996. The warrant was exercised on January 26, 1999.
Revenues derived from master distributor transactions in Japan amounted to
$26.4 million, $17.0 million, and $8.5 million in fiscal 2000, 1999 and 1998,
respectively. The percentage of Japan revenues from Innotech in fiscal year
2000, 1999 and 1998 was 30%, 53% and 32%, respectively. The percentage of Japan
revenues from Kobe Steel Ltd. in fiscal year 2000 1999 and 1998 was 27%, 34% and
52%, respectively. The percentage of Japan revenues from Nissin Electric Ltd. in
fiscal year 2000, 1999 and 1998 was 9%, 13% and 16%, respectively. Advances from
the joint venture partners were approximately $1.5 million and $310,000 million
at January 31, 2000 and 1999, respectively.
14. SEGMENT AND GEOGRAPHIC INFORMATION
Wind River has adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," effective beginning fiscal year 1999.
SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 changes current practice under SFAS 14 by establishing a
new framework on which to base segment reporting and also requires interim
reporting of segment information.
Wind River operates in one industry segment--technology for embedded
operating systems. Management uses one measurement of profitability for its
business. Wind River markets its products and related services to customers in
the United States, Canada, Europe and Asia Pacific. Internationally, Wind River
markets its products and services primarily through its subsidiaries and
85
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
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>
REVENUES ASSETS
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Fiscal year ended January 31, 2000
North America............................................. $198,736 $471,199
Japan..................................................... 42,880 31,717
Other International....................................... 74,438 66,174
-------- --------
Consolidated.............................................. $316,054 $569,090
======== ========
Fiscal year ended January 31, 1999
North America............................................. $167,102 $421,768
Japan..................................................... 33,934 18,344
Other International....................................... 64,120 32,636
-------- --------
Consolidated.............................................. $265,156 $472,748
======== ========
Fiscal year ended January 31, 1998
North America............................................. $137,184
Japan..................................................... 26,977
Other International....................................... 49,858
--------
Consolidated.............................................. $214,019
========
</TABLE>
Other International consists of the revenues and assets of operations in
Europe and Asia Pacific excluding Japan.
15. SECURED PROMISSORY NOTE WITH A STOCKHOLDER
On September 7, 1999, Wind River's Chief Executive Officer signed a secured
promissory note ("Note") to borrow up to $2.4 million from Wind River to
purchase shares of our common stock. The note accrues interest at the rate of
5.98% per year, and is due on September 7, 2008. As of January 31, 2000,
Mr. St. Dennis had borrowed $1.9 million against the Note. This loan is full
recourse and is secured by certain personal assets owned by the CEO.
16. SPECIAL CHARGES
During 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. Subsequent to that, Wind River incurred approximately
$1.3 million in connection with the hiring of its new chief executive officer.
17. SUBSEQUENT EVENTS (UNAUDITED)
On March 31, 2000, Wind River completed its acquisition of Embedded Support
Tools, a worldwide provider of integrated hardware and software tools for
programming, testing and debugging embedded systems. In connection with the
acquisition, Wind River issued an aggregate of 5,474,788 shares of its common
stock and reserved an additional 1,122,855 shares for issuance upon exercise of
outstanding employee stock options in exchange for all outstanding shares of
Embedded Support Tools
86
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
common stock, including shares issuable upon exercise of employees stock
options. The acquisition was accounted for as a purchase method of accounting.
Based on Wind River's average share price at the time the merger was announced,
the transaction was valued at approximately $329,102,000.
The purchase price value of $329,102,000 is allocated as follows (in
thousands):
<TABLE>
<S> <C>
Completed technology........................................ $ 15,150
In-Process research and development......................... 3,700
Trade name.................................................. 650
Workforce................................................... 5,650
Assumed net assets/liabilities.............................. 3,206
Deferred tax liability...................................... (9,325)
Goodwill.................................................... 310,071
--------
Total....................................................... $329,102
========
</TABLE>
87
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The registrant will bear no expenses in connection with any sale or other
distribution by the selling stockholders of the shares being registered other
than the expenses of preparation and distribution of this registration statement
and the prospectus included in this registration statement. The extent of these
expenses is set forth in the following table. All of the amounts shown are
estimates except the SEC registration fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 51,942
Legal fees and expenses..................................... $100,000
Accounting fees and expenses................................ $ 50,000
Printing expenses........................................... $ 2,000
Miscellaneous expenses...................................... 1,058
--------
Total................................................... $205,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended ("Securities Act"). The Registrant's Bylaws also provide
that the Registrant will indemnify its directors and executive officers and may
indemnify its other officers, employees and other agents to the fullest extent
permitted by Delaware law.
The Registrant's Restated Certificate of Incorporation ("Restated
Certificate") provides that the liability of its directors for monetary damages
shall be eliminated to the fullest extent permissible under Delaware law.
Pursuant to Delaware law, this includes elimination of liability for monetary
damages for breach of the directors' fiduciary duty of care to the Registrant
and its stockholders. These provisions do not eliminate the directors' duty of
care and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for any transaction from which the director derived an improper personal
benefit, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
effect a director's responsibilities under any other laws, such as federal
securities laws or state or federal environmental laws.
The Registrant has entered into agreements with its directors and officers
that require Wind River to indemnify such persons to the fullest extent
authorized or permitted by the provisions of the Restated Certificate and
Delaware law against expenses, judgements, fines, settlements and other amounts
actually and responsibly incurred (including expenses of a derivative action) in
connection with any proceeding, whether actual or threatened, to which any such
person may be made a party by reason of the fact that such person is or was a
director, officer, employee or other agent of the Registrant or any of its
affiliated enterprises. Delaware law permits such indemnification, provided such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interest of the Registrant and, with respect to
any criminal proceeding, had no reasonable cause to believe his or her conduct
was unlawful. The indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification thereunder.
II-1
<PAGE>
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
ITEM 16. EXHIBITS.
EXHIBITS.
<TABLE>
<C> <S>
5.1 Opinion of Cooley Godward LLP
23.1 Consent of PricewaterhouseCoopers llp, Independent Auditors
23.2 Consent of Cooley Godward LLP (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-3)
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to that
information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act,
each post-effective amendment shall be deemed to be a new registration
statement relating to the securities it offers, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
this offering.
(4) That, for purposes of determining any liability under the Securities Act,
each filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC this form of indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against these
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of this issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-8 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Alameda, State of California, on May 1, 2000.
<TABLE>
<S> <C> <C>
WIND RIVER SYSTEMS, INC.
By: /s/ THOMAS ST. DENNIS
-----------------------------------------
Thomas St. Dennis
CHIEF EXECUTIVE OFFICER AND DIRECTOR
</TABLE>
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas St. Dennis and Richard W. Kraber, and each
or any one of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- --------------------------- ------------------
<C> <S> <C>
/s/ THOMAS ST. DENNIS Chief Executive Officer and
------------------------------------------- Director (Principal May 1, 2000
(Thomas St. Dennis) Executive Officer)
Vice President and Chief
/s/ RICHARD W. KRABER Financial Officer
------------------------------------------- (Principal Financial May 1, 2000
(Richard W. Kraber) Officer)
/s/ JERRY L. FIDDLER
------------------------------------------- Chairman of the Board May 1, 2000
(Jerry L. Fiddler)
/s/ NARENDRA K. GUPTA
------------------------------------------- Director May 1, 2000
(Narendra K. Gupta)
/s/ RONALD A. ABELMANN
------------------------------------------- Director May 1, 2000
(Ronald A. Abelmann)
/s/ JOHN C. BOLGER
------------------------------------------- Director May 1, 2000
(John C. Bolger)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- --------------------------- ------------------
<C> <S> <C>
/s/ WILLIAM B. ELMORE
------------------------------------------- Director May 1, 2000
(William B. Elmore)
/s/ GRANT M. INMAN
------------------------------------------- Director May 1, 2000
(Grant M. Inman)
/s/ DAVID B. PRATT
------------------------------------------- Director May 1, 2000
(David B. Pratt)
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
5.1.................. Opinion of Cooley Godward LLP
23.1................. Consent of PricewaterhouseCoopers LLP, Independent Auditors
23.2................. Consent of Cooley Godward LLP (included in Exhibit 5.1)
24.1................. Power of Attorney (see page II-3)
</TABLE>
<PAGE>
EXHIBIT 5.1
May 1, 2000
Wind River Systems, Inc.
500 Wind River Way
Alameda, CA 94501
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Wind River Systems, Inc. (the "Company") of a Registration
Statement on Form S-3 (the "Registration Statement") with the Securities and
Exchange Commission covering the offering for resale of 5,474,788 shares of the
Company's Common Stock (the "Shares"), with a par value of $0.001, issued in
connection with that certain Agreement and Plan of Reorganization and Merger,
dated February 28, 2000, by and between the Company, Boat Acquisition Corp., a
Massachusetts corporation, Embedded Support Tools Corporation, a Massachusetts
corporation, and certain stockholders of Embedded Support Tools Corporation.
In connection with this opinion, we have examined the Registration
Statement, the Company's Certificate of Incorporation and Bylaws, as amended,
the resolutions adopted by the Board of Directors of the Company on
February 17, 2000, and such other documents, records, certificates, memoranda
and other instruments as we deem necessary as a basis for this opinion. We have
assumed the genuineness and authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies thereof, and the due execution and delivery of all documents where due
execution and delivery are a prerequisite to the effectiveness thereof.
On the basis of the foregoing, and in reliance thereon, we are of the
opinion that the Shares, when issued and sold in accordance with the
Registration Statement and the related prospectus, will be validly issued, fully
paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "Legal Matters" in
the Prospectus included in the Registration Statement.
Sincerely,
COOLEY GODWARD LLP
By: /s/ ANDREA VACHSS
----------------------------------------------
Andrea Vachss
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report dated March 2, 2000 relating to the
consolidated financial statements and financial statement schedule, which
appears in Wind River Systems, Inc.'s Annual Report on Form 10-K for the year
ended January 31, 2000 and our report dated March 2, 2000 relating to the
supplemental consolidated financial statements of Wind River Systems, Inc., for
the year ended January 31, 2000 which appears in this Registration Statement on
Form S-3. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
PricewaterhouseCoopers LLP
San Jose, California
April 28, 2000
