<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report: March 31, 2000
(Date of Earliest Event Reported)
WIND RIVER SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-21342 94-2873391
(State of jurisdiction) (Commission File No.) (IRS Employer
Identification No.)
500 WIND RIVER WAY
ALAMEDA, CA 94501
(Address of principal executive offices and zip code)
(510) 748-4100
Registrant's telephone number, including area code:
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
On April 14, 2000, Wind River Systems, Inc. filed a Form 8-K to report
its acquisition of Embedded Support Tools Corporation ("EST"), which was
completed on March 31, 2000. Pursuant to Item 7 of Form 8-K, Wind River
indicated that it would file certain financial information no later than the
date required by Item 7 of Form 8-K. This Amendment No. 1 is filed to provide
the required financial information.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Embedded Support Tools Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Embedded Support Tools Corporation and its subsidiaries at December 31, 1998 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, 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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 31, 2000
2
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
------ -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $2,440 $ 1,552
Accounts receivable, net of allowance for doubtful accounts of $90
and $105 at December 31, 1998 and 1999, respectively............... 2,778 5,915
Inventory, net (Note 3)............................................ 1,757 3,658
Prepaid expenses and other current assets.......................... 84 199
------ -------
Total current assets............................................... 7,059 11,324
Property and equipment, net (Note 4)............................... 505 1,240
Other assets....................................................... 40 697
------ -------
Total assets....................................................... $7,604 $13,261
====== =======
LIABILITIES, REDEEMABLE COMMON STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... 964 1,766
Accrued expenses (Note 5).......................................... 1,692 2,530
Deferred revenue................................................... 555 1,227
Note payable (Note 6).............................................. -- 2,400
Distribution payable............................................... -- --
------ -------
Total current liabilities.......................................... 3,211 7,923
------ -------
Commitments and contingencies (Note 11)
Redeemable common stock (Note 7):
Common stock, $0.10 par value; 45,000,000 shares
authorized; shares issued and outstanding: 0 and 10,111,000 at
December 31, 1998 and 1999, respectively........................... -- 1,893
Note receivable from stockholder (Note 8).......................... -- (550)
------ -------
Total redeemable common stock...................................... -- 1,343
------ -------
Stockholders' equity:
Common stock, $0.10 par value; 45,000,000 shares authorized; shares
issued and outstanding: 10,111,000 and 2,783,000 at December 31,
1998 and 1999, respectively...................................... 1,011 278
Additional paid-in capital......................................... -- 8,206
Deferred compensation.............................................. -- (942)
Note receivable from stockholders (Note 8)......................... -- (472)
Retained earnings (accumulated deficit)............................ 3,441 (2,986)
Accumulated other comprehensive loss............................... (59) (89)
------ -------
Total stockholders' equity....................................... 4,393 3,995
------ -------
Total liabilities, redeemable common stock and
stockholders' equity....................................... $7,604 $13,261
====== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues................................................................ $11,766 $18,250 $28,451
Cost of revenues........................................................ 2,874 3,823 5,349
------- ------- -------
Gross profit......................................................... 8,892 14,427 23,102
------- ------- -------
Operating expenses:
Selling and marketing................................................ 4,052 7,236 10,595
Research and development............................................. 2,150 3,085 4,838
General and administrative........................................... 721 1,040 1,815
Stock-related compensation expense................................... -- -- 9,437
------- ------- -------
Total operating expenses........................................... 6,923 11,361 26,685
------- ------- -------
Income (loss) from operations........................................... 1,969 3,066 (3,583)
Interest income......................................................... 22 42 238
------- ------- -------
Income (loss) before provision for income taxes......................... 1,991 3,108 (3,345)
Provision for income taxes.............................................. 131 218 402
------- ------- -------
Net income (loss)....................................................... 1,860 2,890 (3,747)
Accretion of redeemable common stock to redemption value................ -- -- (1,893)
------- ------- -------
Net income (loss) to common stockholders................................ $ 1,860 $ 2,890 $(5,640)
======= ======= =======
Historical net income (loss) per share--basic and diluted............... $ 0.18 $ 0.29 $ (0.49)
Shares used in computing historical net income (loss) per share
--basic and diluted.................................................. 10,111 10,111 11,621
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
-------------------- PAID-IN DEFERRED FROM
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
--------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 . 10,111 $ 1,011
Distribution paid to
shareholders .............
Comprehensive income:
Net income ...............
Foreign currency
translation
adjustments ............
Comprehensive income .....
--------- ----------
Balance at December 31, 1997 . 10,111 1,011
Distribution paid to
shareholders .............
Comprehensive income:
Net income ...............
Foreign currency
translation
adjustments ............
Comprehensive income .....
--------- ----------
Balance at December 31, 1998 . 10,111 1,011
Distribution paid to
shareholders .............
Reclassification of
common stock to
redeemable common
stock .................. (10,111) (1,011)
Accretion of redeemable
common stock to
redemption value .......
Issuance of common
stock under
stock-based
compensation program ... 2,783 $ 278 $ (278)
Deferred compensation
associated with stock
and stock option
awards to employees .... 8,484 $ (8,484)
Amortization of
deferred compensation .. 7,542
Notes receivable from
stockholders ........... $ (472)
Comprehensive income:
Net loss ...............
Foreign currency
translation
adjustments ..........
Comprehensive income ...
--------- ---------- ------------ ----------- ------------
Balance at December 31, 1999 . 2,783 $ 278 $ 8,206 $ (942) $ (472)
========= ========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
EARNINGS OTHER COMPREHENSIVE TOTAL
(ACCUMULATED COMPREHENSIVE INCOME STOCKHOLDERS'
DEFICIT) LOSS (LOSS) EQUITY
------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 . $ 584 $ 14 $ 1,609
Distribution paid to
shareholders ............. (735) (735)
Comprehensive income:
Net income ............... 1,860 $ 1,860 1,860
Foreign currency
translation
adjustments ............ (49) (49) (49)
--------------
Comprehensive income ..... 1,811
------------- --------------- ============== -------------
Balance at December 31, 1997 . 1,709 (35) 2,685
Distribution paid to
shareholders ............. (1,158) (1,158)
Comprehensive income:
Net income ............... 2,890 2,890 2,890
Foreign currency
translation
adjustments ............ (24) (24) (24)
--------------
Comprehensive income ..... 2,866
------------- --------------- ============== -------------
Balance at December 31, 1998 . 3,441 (59) 4,393
Distribution paid to
shareholders ............. (1,798) (1,798)
Reclassification of
common stock to
redeemable common
stock .................. 1,011 --
Accretion of redeemable
common stock to
redemption value ....... (1,893) (1,893)
Issuance of common
stock under
stock-based
compensation program ... --
Deferred compensation
associated with stock
and stock option
awards to employees .... --
Amortization of
deferred compensation .. 7,542
Notes receivable from
stockholders ........... (472)
Comprehensive income:
Net loss ............... (3,747) (3,747) (3,747)
Foreign currency
translation
adjustments .......... (30) (30) (30)
--------------
Comprehensive income ... $ (3,777)
------------- --------------- ============== ------------
Balance at December 30, 1999 . $ (2,986) $ (89) $ 3,995
============= =============== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $1,860 $ 2,890 $(3,747)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 98 250 249
Stock-related compensation expense....................... -- -- 7,542
Changes in operating assets and liabilities:
Accounts receivable.................................... (829) (597) (3,139)
Inventory.............................................. 42 (876) (1,907)
Prepaid expenses and other current assets.............. (97) (2) (707)
Accounts payable....................................... (135) 527 687
Accrued expenses....................................... 553 582 862
Deferred revenue....................................... 175 71 690
------ ------- -------
Net cash provided by operating activities................ 1,667 2,845 530
------ ------- -------
Cash flows from investing activities:
Purchases of property and equipment........................ (366) (401) (926)
Other assets............................................... -- -- (79)
------ ------- -------
Net cash used in investing activities.................... (366) (401) (1,005)
------ ------- -------
Cash flows from financing activities:
Notes receivable from stockholders......................... -- -- (1,022)
Borrowings on demand note payable.......................... -- -- 2,400
Distributions paid to stockholders......................... (735) (1,158) (1,798)
------ ------- -------
Net cash used in financing activities.................... (735) (1,158) (420)
------ ------- -------
Effect of exchange rate changes on cash....................... (26) (4) 7
------ ------- -------
Net increase (decrease) in cash and cash equivalents.......... 540 1,282 (888)
Cash and cash equivalents, beginning of year.................. 618 1,158 2,440
------ ------- -------
Cash and cash equivalents, end of year........................ $1,158 $ 2,440 $ 1,552
====== ======= =======
Supplemental disclosure of cash flow information:
Cash paid for income taxes................................. $ 116 $ 131 $ 218
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Embedded Support Tools Corporation (the "Company" or "EST") and its
subsidiaries operate in one segment. EST designs, manufactures, sells and
supports hardware and software tools used for developing and debugging embedded
systems. Embedded systems are programmable semiconductor chips that are used in
a wide variety of data communications, computer networking, automotive and
consumer electronic applications. EST was incorporated in the Commonwealth of
Massachusetts on January 5, 1989 and is located in Canton, Massachusetts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Embedded
Support Tools Corporation and its wholly-owned subsidiaries: E.S.T. Corp. Europe
SARL, a French corporation; Embedded Support Tools Corp. Nordic AB, a Swedish
corporation; E.S.T. KK, a Japanese corporation; E.S.T. Corp., UK Ltd., a United
Kingdom corporation; E.S.T. GmbH, a German corporation, and Embedded Support
Tools (Canada) Corp., a Canadian corporation. All significant intercompany
accounts and transactions have been eliminated.
HISTORICAL NET INCOME (LOSS) PER SHARE
EST computes basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per
Share." SFAS 128 requires both basic and diluted earnings per share, which is
based on the weighted average number of common shares outstanding, and diluted
earnings per share, which is based on the weighted average number of common
shares outstanding and all dilutive potential common equivalent shares
outstanding. The dilutive effect of options is determined under the treasury
stock method using the average fair value for the period. Common equivalent
shares are included in the per share calculations where the effect of their
inclusion would be dilutive. The stock rights and stock options granted under
stock-based compensation plans in years prior to 1999 have been excluded from
the computation of diluted earnings per share because the employees' right to
the stock was exercisable only upon a future event.
The following is a comparison of basic and diluted historical net income
(loss) per share (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) to common
stockholders.................... $ 1,860 $ 2,890 $(5,640)
======= ======= =======
Shares used in net income (loss)
per common share, basic and
diluted.........................
Weighted average common shares
outstanding..................... 10,111 10,111 11,621
======= ======= =======
Net income (loss) per common
share, basic and diluted........ $ 0.18 $ 0.29 $ (0.49)
======= ======= =======
</TABLE>
CASH AND CASH EQUIVALENTS
EST considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. EST invests its excess
cash primarily in an overnight investment account that invests primarily in
money market accounts, commercial paper and treasury bills. The carrying value
of EST's cash and cash equivalents approximates their fair value. Accordingly,
these investments are subject to minimal credit and market risk.
7
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FINANCIAL INSTRUMENTS
The carrying value of EST's financial instruments, which include cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
notes payable, approximate their fair values.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment provided that no
uncertainties regarding customer acceptance exist and collection of the related
receivable is probable. Revenue from maintenance services is recognized ratably
over the contract period, generally one year. Revenue from consulting and
training services is recognized when the services are provided.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose EST to concentrations of
credit risk consist primarily of trade accounts receivable. Management considers
its concentration of credit risk with respect to accounts receivable to be
limited due to its credit evaluation policies, relatively short payment terms,
and geographical dispersion of sales. EST obtains letters of credit for sales to
foreign customers based on management's credit evaluation.
EST maintains reserves for potential credit losses. Such losses
historically have been minimal and within management's expectations.
INVENTORY
Inventory is stated at the lower of cost or market value, with cost being
determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets or, where
applicable, over the lease term. The cost of additions and improvements are
capitalized, while expenditures for maintenance and repairs are charged to
expense as incurred. Upon retirement or sale, the cost of the disposed assets
and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is credited or charged to income.
RESEARCH AND DEVELOPMENT AND COMPUTER SOFTWARE DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Software
development costs are expensed until technological feasibility is established at
which time, and until the product is available for general release to customers,
costs are capitalized. No software development costs were capitalized during the
years ended December 31, 1997, 1998 and 1999, since costs incurred subsequent to
establishment of technological feasibility were not material.
FOREIGN CURRENCY TRANSLATION
The functional currency of EST's foreign subsidiaries is the local
currency. Accordingly, the assets and liabilities of EST's foreign subsidiaries
are translated into U.S. dollars at exchange rates in effect at the balance
sheet date. Income and expense items are translated at average exchange rates
for the period. Foreign currency translation adjustments are included in
accumulated other comprehensive income as a separate component of stockholders'
deficit. Foreign currency transaction gain or losses are recorded in operating
expenses and were not significant for the years ended December 31, 1997, 1998
and 1999.
PRODUCT WARRANTY COSTS
8
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EST provides three months hardware warranty as part of its product sales.
Estimated future costs for initial product warranties are provided for at the
time of sale.
ADVERTISING EXPENSE
EST recognizes advertising expense as incurred. Advertising expense was
approximately $256,000, $310,000 and $669,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
EST accounts for its stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations. EST
has adopted the disclosure only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
INCOME TAXES
EST is a Subchapter S corporation and is not required to pay federal
income taxes. Subchapter S corporation shareholders are required to report
their respective share of EST's taxable income or loss on their individual
tax returns and are personally liable for the related tax.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) 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.
At December 31, 1998 and 1999, accumulated other comprehensive income was
comprised solely of cumulative foreign currency translation adjustments.
USE OF ESTIMATES
The preparation of consolidated 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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Areas particularly subject to estimation include the allowance
for doubtful accounts, inventory reserves and revenue reserves. Actual results
could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. EST will adopt SFAS No. 133 as required
by SFAS 137, "Deferral of the Effective Date of FASB Statement No. 133," in
fiscal year 2001. The adoption of SFAS No. 133 is not expected to have an impact
on EST's financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements." SAB 101
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements. EST will apply the accounting and
disclosure requirements of SAB 101 and does not expect that its application will
have a material effect on its results of operations.
9
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVENTORY
Inventory consists of the following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
------ ------
<S> <C> <C>
Raw material........................................................ $ 765 $1,857
Work-in-process..................................................... 864 1,031
Finished goods...................................................... 128 770
------ ------
$1,757 $3,658
====== ======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in 000's):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE --------------------
(YEARS) 1998 1999
----------- ------ ------
<S> <C> <C> <C>
Computer software and equipment............................... 3 $ 839 $1,357
Furniture and fixtures........................................ 7 110 116
Office equipment.............................................. 5 79 356
Leasehold improvements........................................ 5 23 61
------ ------
1,051 1,890
Less: accumulated depreciation................................ (546) (650)
------ ------
Property and equipment, net................................... $ 505 $1,240
====== ======
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
------ ------
<S> <C> <C>
Wages and benefits.................................................. $974 $1,759
Taxes............................................................... 262 274
Commissions......................................................... 248 339
Professional fees................................................... 132 106
Other............................................................... 76 52
------ ------
$1,692 $2,530
====== ======
</TABLE>
6. LINE OF CREDIT
At December 31, 1999, EST had a $2,500,000 revolving line of credit with
BankBoston, N.A. Borrowings under the line are payable on demand and bear
interest at the Base Rate determined by BankBoston N.A. (8.5% at December 31,
1999). Borrowings are collateralized by all of the assets of EST. Interest is
payable monthly in arrears. Under the terms of the agreement, EST is required to
comply with certain covenants, the most restrictive of which are cash flow
requirements and debt to tangible net worth. EST was in compliance with all
restrictive covenants at December 31, 1999. At December 31, 1999, $2,400,000 of
borrowings were outstanding under the line of credit.
7. REDEEMABLE COMMON STOCK
10
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On January 1, 1998, EST's stockholders approved an increase in the
authorized shares of common stock, $0.10 par value, to 7,500,000. Also on
January 1, 1998, EST effected a five hundred-for-one stock split of its common
stock in the form of a stock dividend. Accordingly, all share amounts have been
adjusted to give retroactive effect to this stock split. In December 1999, the
Board of Directors approved an increase in the authorized capital of the Company
to 45,000,000 shares of common stock and 5,000,000 shares of preferred stock.
The Board of Directors also approved a two-for-one stock split effected in the
form of a stock dividend. All share and per share amounts in these consolidated
financial statements have been adjusted to give retroactive effect to this stock
split.
EST had an agreement with certain of its shareholders under which EST had
the right to repurchase all or part of the founders' shares of common stock at a
stated value per share, as defined, upon certain events including death,
termination of employment by EST, permanent disability or retirement. On July 1,
1999, EST executed the First Amended and Restated Founding Shareholders
Agreement ("Amended Shareholders Agreement") which amended and restated the
Shareholders Agreement. Under the Amended Shareholders Agreement, in addition to
EST's right to repurchase the founders' shares, during the period beginning on
July 1, 1999 and ending on the earlier of either an initial public offering or a
change in control, at the election of each individual founder, EST shall be
required to purchase up to 10% per year of the founder's respective shares of
common stock at a redemption price in accordance with a redemption formula, as
defined. Alternately, and in lieu of the right to redeem shares of common stock,
each founder is entitled to obtain loans from EST which are collateralized by a
pledge of shares of common stock. Accordingly, the carrying value for the common
stock has been recorded at its redemption value at December 31, 1999. On July 1,
1999, a loan totaling $550,000 was issued to a founder, which is collateralized
by a pledge of 220,000 shares of common stock.
8. STOCK-BASED COMPENSATION
The 1998 Stock Option Plan ("the 1998 Plan") provided for the grant of
nonqualified stock options to employees. Options granted under the 1998 Plan
were exercisable only upon notification by the Company prior to a change in
control, and expired on the earlier of the day prior to a change in control,
whether or not notification had occurred, and termination of employment. Options
to purchase 202,000 shares of common stock were granted under the 1998 Plan
through the year ended December 31, 1998. In addition, prior to 1998, EST had
issued an option, not pursuant to a plan, to an employee to purchase 659,000
shares of common stock and issued common stock rights to employees pursuant to
"mirror stock" agreements under which the employees had rights to cash or common
stock totaling 2,124,000 shares. The employees' rights to common stock under
this option and the "mirror stock" agreements were exercisable only upon a
change in control, registration of the common stock of EST under the Securities
Act of 1933 or liquidation of EST. No compensation expense had been recorded in
the years ended December 31, 1997, 1998 and 1999 with respect to any stock
options or common stock rights granted in years prior to 1999 because the stock
options or common stock rights were contingent and forfeitable upon the
occurrence of certain future events.
During 1999, EST's Board of Directors approved the 1999 Stock Option Plan
(the "1999 Plan"). The 1999 Plan provides for the granting of incentive and
nonqualified stock options and stock bonus awards to officers, directors,
employees and consultants of EST. The exercise price of stock options granted
under the 1999 Plan is determined by the Board of Directors. The maximum number
of common shares that may be issued pursuant to the 1999 Plan is 4,000,000.
During the year ended December 31, 1999, EST granted 2,462,000 options under the
1999 Plan to employees, officers and directors. No options have been granted to
consultants. All options granted under the 1999 Plan expire ten years from the
date of grant and generally vest over a five-year period beginning on the date
of hire.
In June 1999, EST cancelled all outstanding stock options and common stock
rights granted prior to December 31, 1998 and terminated the 1998 Plan and the
"mirror stock" agreements. Also in June 1999, EST granted 2,783,000 shares of
common stock to certain employees, in lieu of the rights to 2,124,000 shares of
common stock under the "mirror stock" agreements and the stock option for
659,000 shares of common stock not pursuant to a plan. EST has a right of first
refusal in any proposed transfer of the shares by the employee until EST
completes an initial public offering. Additionally, EST has a right, but not an
obligation, to repurchase the shares in the event of
11
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
termination of employment with EST at the fair value of the common stock as
determined by the Board of Directors. In addition, included in the 2,462,000
stock options granted in 1999, 202,000 stock options were granted in lieu of
stock options granted under the 1998 Plan.
In connection with the June 1999 grant of 2,783,000 shares of common stock,
at no cost to the grantees, and 1,692,000 stock options, at an exercise price of
$1.73, in June 1999, EST recorded deferred compensation of $8,484,000
representing the difference between the fair value of the common stock of $2.55
at the grant date and the purchase or exercise prices of the common stock and
stock options. During 1999, EST amortized to expense $7,542,000 based on the
vesting provisions. In connection with the issuance of the common stock, EST
agreed to pay a portion of the employees' tax liability resulting from the
issuance of common stock. As a result, an additional charge of $1,895,000 was
also recorded in June 1999. At December 31, 1999, holders of the 2,783,000
shares of common stock issued promissory notes to the Company in the amount of
$472,000, collateralized by the common stock. Payment of these notes will be due
no later than April 1, 2005.
The following table summarizes the activity of the Company's stock options
plans:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
---------------------- ------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ---------- ------------ ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of period.. 659,000 $0.10 861,000 $0.19
Granted below fair value......... -- -- 1,692,000 1.73
Granted at fair value............ 659,000 $0.10 202,000 0.50 770,000 5.83
Exercised........................ -- -- -- -- -- --
Canceled......................... -- -- -- -- 861,000 0.19
------- ----- ------- ----- --------- -----
Outstanding-end of period........ 659,000 $0.10 861,000 $0.19 2,462,000 $3.01
======= ======= =========
Exercisable at end of period..... 473,600 $1.16
Weighted average grant date fair
value......................... $0.03 $0.12 $1.44
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------ ------------- ------------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$1.73 1,692,000 9.5 $1.73 456,000 $1.73
2.55 426,000 9.7 2.55 17,600 2.55
9.90 344,000 10.0 9.90 -- 9.90
--------- -------
$1.73 - $9.90 2,462,000 9.6 $3.01 473,600 $3.01
========= =======
</TABLE>
The Company has adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company continues to recognize
compensation costs using the intrinsic value based method described in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation expense recognized was different than what
would have been otherwise recognized
12
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
under the fair value based method defined in SFAS No. 123. Had the Company
accounted for these plans under SFAS No. 123, the Company's pro forma net loss
to common shareholders and net loss per share would have been the same for the
two years ended December 31, 1997 and 1998 because none of the common stock
rights or stock options were exercisable, and for the year ended December 31,
1999 would have been as follows:
<TABLE>
<S> <C>
Net loss to common stockholders-as reported (000's)............................. ($5,640)
Net loss to common stockholders-pro forma (000's)............................... ($6,929)
Net loss per common share-basic and diluted as reported......................... $ (0.49)
Net loss per common share-basic and diluted pro forma........................... $ (0.57)
</TABLE>
Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are expected
to be made.
For the purpose of providing pro forma disclosures, the fair values of
options granted were estimated using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1999: no dividend
yield; risk free interest rates of 6.33%, 5.49% and 5.87% for the years ended
December 31, 1997, 1998 and 1999; no volatility; and an expected option term of
6 years.
9. EMPLOYEE BENEFIT PLANS
EST maintains a defined contribution plan incorporating features under
section 401(a) of the Internal Revenue Code which covers substantially all
employees. Under the money purchase pension feature of the plan, employer
contributions are determined at a rate of eligible employees' salary. Under the
profit sharing feature of the plan, EST may make annual discretionary
contributions at a rate determined by the Board of Directors. Under the 401(k)
feature of the plan, eligible employees can elect to contribute up to 12% of
their salary limited to a total contribution of $10,000 a year. EST matches
these contributions at a rate of 33% for each dollar contributed by its
employees up to a maximum of 3% of the eligible employee's annual salary. During
the years ended December 31, 1997, 1998 and 1999, EST made contributions of
approximately $300,000, $500,000 and $800,000, respectively.
10. INCOME TAXES
The components of the income tax provision are as follows at December 31
(000's):
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
State................................................... $ 28 $ 59 $ --
Foreign................................................. 103 159 402
---------- ----------- -----------
$131 $218 $402
========== =========== ===========
</TABLE>
The Company has elected to be taxed as a Subchapter S Corporation for
federal and certain state income tax purposes and, as a result, is not subject
to federal taxation, but is subject to state taxation on income in certain
states. The stockholders are liable for individual federal and certain state
income taxes on their allocated portion of the Company's taxable income. The
foreign taxes primarily represent income taxes of EST's foreign subsidiaries
based upon the income reported in the respective jurisdictions.
As EST is not subject to federal income taxes, a reconciliation of the
effective tax rate to the federal statutory rate is not meaningful.
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
EST and its subsidiaries lease their facilities and certain office
equipment under operating leases in excess of one year.
13
<PAGE>
EMBEDDED SUPPORT TOOLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments due under noncancellable operating leases are
as follows at December 31, 1999 (000's):
<TABLE>
<S> <C>
2000.......................................................................... $ 775
2001.......................................................................... 683
2002.......................................................................... 629
2003.......................................................................... 167
------
Total minimum lease payments.................................................. $2,254
======
</TABLE>
Total rent expense under operating leases was $164,000, $288,000 and
$524,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
CONTINGENCIES
EST outsources the assembly of its product components to a limited number
of subcontractors. Although there are several available vendors for assembly of
its products, management believes that the nature of its business requires
outsourcing to vendors who have expertise in assembling the components for EST's
products. A change in or loss of one or more of these subcontractors could cause
delays in meeting customer orders, delays in revenue recognition or the loss of
sales which could adversely affect results of operations.
12. SEGMENT INFORMATION
EST operates in one reportable segment: the design, development,
manufacture, sale and support of development tools for embedded systems.
During the years ended December 31, 1997 and 1998, no single customer
accounted for greater than 10% of revenues. During the year ended December 31,
1999, EST had one customer that accounted for approximately 12% of revenues.
Information by geographic area as of December 31, 1997, 1998 and 1999 and
for the years then ended, is summarized below (in thousands):
<TABLE>
<CAPTION>
OTHER
UNITED FOREIGN
YEAR ENDED DECEMBER 31, 1997 STATES FRANCE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------- -------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Unaffiliated Customers...... $8,958 $2,449 $359 $-- $11,766
Intercompany................ 2,222 -- -- (2,222) --
Property and equipment, net... 320 23 11 -- 354
</TABLE>
<TABLE>
<CAPTION>
OTHER
UNITED FOREIGN
YEAR ENDED DECEMBER 31, 1998 STATES FRANCE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------- -------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Unaffiliated Customers...... $12,936 $2,771 $2,543 $-- $18,250
Intercompany................ 3,292 -- -- (3,292) --
Property and equipment, net... 436 17 52 -- 505
</TABLE>
<TABLE>
<CAPTION>
OTHER
UNITED FOREIGN
YEAR ENDED DECEMBER 31, 1999 STATES FRANCE SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------- -------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Unaffiliated Customers...... $19,254 $3,055 $6,142 $-- $28,451
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Intercompany................ 5,429 -- -- (5,429) --
Property and equipment, net... 1,059 28 153 -- 1,240
</TABLE>
Revenue is presented geographically based on the country in which the sale
is recorded. Inventories are transferred to the Company's foreign subsidiaries
at previously established transfer prices, resulting in intercompany revenue and
receivables for the United States operations.
Other foreign subsidiaries is comprised of the United Kingdom, Sweden,
Japan, Germany and Canada at December 31, 1999, the United Kingdom, Sweden and
Japan at December 31, 1998 and the United Kingdom and Sweden at December 31,
1997. None of these foreign subsidiaries were significant during the periods
presented.
13. SUBSEQUENT EVENTS - UNAUDITED
On December 22, 1999 EST had filed a registration statement on Form S-1 for
an initial public offering of its common stock. However, on March 31, 2000, EST
was acquired by Wind River Systems, Inc. ("Wind River") pursuant to an Agreement
and Plan of Merger and Reorganization, dated February 28, 2000 (the "Agreement")
between EST and Wind River. Accordingly, EST withdrew plans to complete its
initial public offering. Under the terms of the Agreement (a) each outstanding
share of EST's common stock was exchanged for .4246 of a share of Wind River
common stock, resulting in the issuance of an aggregate of approximately
5,474,792 shares of Wind River common stock for all outstanding shares of EST's
common stock, and (b) all options to purchase shares of EST common stock
outstanding immediately prior to the consummation of the acquisition were
converted into options to purchase shares of Wind River's common stock.
15
<PAGE>
(b) PRO FORMA COMBINED FINANCIAL INFORMATION
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.
16
<PAGE>
WIND RIVER SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, 2000 EST
----------------------- PRO FORMA PRO FORMA DECEMBER PRO FORMA PRO FORMA
WIND RIVER ISI ADJUSTMENTS COMBINED 31, 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........ 28,355 328 28,683 -- 28,683
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........ 157,490 64,827 (744) 221,573 11,324 (517) 232,380
Investments..................... 181,600 24,345 205,945 -- 205,945
Land and Equipment, net......... 35,755 20,576 56,331 1,240 57,571
Intangible Assets, net.......... 1,248 34,480 35,728 -- 337,818 (g) 373,546
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 $337,301 $919,652
----------- ----------- ------------- ---------- ------------ -------------- -----------
----------- ----------- ------------- ---------- ------------ -------------- -----------
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 8,297 (h) 31,016
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 7,780 130,527
----------- ----------- ------------- ---------- ------------ -------------- -----------
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 17,105 292,024
----------- ----------- ------------- ---------- ------------ -------------- -----------
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)(j)(k) 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 $337,301 $919,652
----------- ----------- ------------- ---------- ------------ -------------- -----------
----------- ----------- ------------- ---------- ------------ -------------- -----------
</TABLE>
See the accompanying notes to unaudited pro forma combined
financial statements.
17
<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
----------------------- PRO FORMA PRO FORMA DECEMBER PRO FORMA PRO FORMA
WIND RIVER ISI ADJUSTMENTS COMBINED 31, 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) 75,722
---------- ----------- ------------- --------- ----------- -------------- ----------
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.... 15,964 17,982 (1,580)(b) 32,366 1,815 34,181
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 -- 88,898 (g) 95,386
Stock Related Compensation
Expense...................... -- -- -- 9,437 9,437
---------- ----------- ------------- --------- ----------- -------------- ----------
Total Operating Expenses.... 108,837 119,894 23 228,754 26,685 88,898 344,337
Income (Loss) from Operations... 30,641 (13,685) (744) 16,212 (3,583) (88,898) (76,269)
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) (88,898) (66,535)
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) (87,656) (81,040)
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) $ (85,763) $(81,040)
---------- ----------- ------------- --------- ----------- -------------- ----------
---------- ----------- ------------- --------- ----------- -------------- ----------
Net Income (Loss) per Share:
Basic......................... $0.54 $(0.50) $0.16 $(0.49) $ (1.18)
Diluted....................... $0.50 $(0.50) $0.16 $(0.49) $ (1.18)
Weighted average common and
common equivalent shares:
Basic......................... 41,674 23,285 63,096 11,621 68,571
Diluted....................... 44,778 23,285 66,200 11,621 68,571
</TABLE>
See the accompanying notes to unaudited pro forma combined
financial statements.
18
<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.
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 developing 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
19
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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................................................................... 316,368
--------
Total purchase price....................................................... $335,399
--------
--------
</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 and analysis conducted
by an independent third party, 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 $27.0 million of
costs associated with the merger, including $3.6 million for legal, accounting
and other professional consulting fees, $11.1 million for investment banking
fees, $7.2 million in severance payments, and $5.1 million in facility closures
and integration costs.
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.
20
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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
AMOUNT PERIOD FOR 12 MONTH PERIOD
----------- -------------- ----------------------
<S> <C> <C> <C>
Goodwill................................. $335,399 4 years $83,850
Trademark................................ 650 5 years 130
Workforce................................ 5,650 5 years 1,130
Completed technology..................... 15,150 4 years 3,788
----------- ----------------------
$356,849 $88,898
----------- ----------------------
----------- ----------------------
</TABLE>
(h) To record the Embedded Support Tools merger costs incurred and
liabilities assumed.
(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.
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:
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<PAGE>
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 $337,301 $817,073
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 $337,301 $919,652
</TABLE>
Other International consists of the revenues and assets of operations in
Europe and Asia Pacific, excluding Japan.
22
<PAGE>
(c) EXHIBITS
The following exhibits are incorporated by reference to exhibits previously
filed with the Commission.
2.1 Agreement and Plan of Merger and Reorganization, dated as of February 28,
2000, among Wind River Systems, Inc., Boat Acquisition Corp. and Embedded
Support Tools Corporation.
99.1 Press Release titled "Wind River Completes its Acquisition of Embedded
Support Tools Corporation" dated April 3, 2000.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WIND RIVER SYSTEMS, INC.
Dated: June 6, 2000 By: /s/ Richard W. Kraber
-------------------------------------
Richard W. Kraber
Vice President and Chief Financial Officer
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
--------------- ------------------------------------------------------------------------------------------
<S> <C>
*2.1 Agreement and Plan of Merger and Reorganization, dated as of February 28, 2000, among Wind
River Systems, Inc., Boat Acquisition Corp. and Embedded Support Tools Corporation.
*99.1 Press Release titled "Wind River completes its Acquisition
of Embedded Support Tools Corporation" dated April 3,
2000.
</TABLE>
*Previously filed.
25
