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ANNUAL REPORT AND FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21342
WIND RIVER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2873391
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
500 Wind River Way, Alameda, California 94501
(510) 748-4100
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes / X / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 2000 was $2,149,951,000.
Number of shares of Common Stock outstanding as of March 31, 2000: 70,692,511
DOCUMENTS INCORPORATED BY REFERENCE:
Part III - Portions of the registrant's definitive proxy statement to be
issued in conjunction with registrant's annual stockholders' meeting to be
held on July 26, 2000 are incorporated by reference into Part III of this
Form 10-K.
TABLE OF CONTENTS
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Part I Item 1. Business 3
Item 2. Properties 22
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 4A. Executive Officers of the Registrant 23
- ------------------------------------------------------------------------------------------
Part II Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 26
Item 6. Selected Consolidated Financial Data 27
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 40
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 42
- ------------------------------------------------------------------------------------------
Part III Item 10. Directors and Executive Officers of the Registrant 64
Item 11. Executive Compensation 64
Item 12. Security Ownership of Certain Beneficial Owners
and Management 64
Item 13. Certain Relationships and Related Transactions 64
- ------------------------------------------------------------------------------------------
Part IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 65
Signatures 68
PART I
This report contains forward-looking statements. In some cases, these
statements may be identified by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of such terms and other comparable
expressions. These statements involve known and unknown risks and
uncertainties that may cause the results, levels of activity, performance or
achievements of Wind River Systems, Inc. or its industry to be materially
different from those expressed or implied by the forward-looking statements.
Factors that may cause
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or contribute to such differences include, but are not limited to, Wind
River's ability to compete successfully in its industry, to continue to
develop products for new and rapidly changing markets, to integrate acquired
businesses and technologies and others discussed below and under the captions
"Additional Risk Factors That May Affect Future Results of Operations" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations." Wind River disclaims any obligation to update any of the
forward-looking statements contained in this report to reflect any future
events or developments.
ITEM 1.
BUSINESS
Wind River Systems, Inc. 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 flagship products, the Tornado-Registered Trademark- II development
platform and the VxWorks-Registered Trademark- real-time operating system,
enable customers to enhance product performance, standardize designs across
projects, reduce research and development costs and shorten product
development cycles.
Wind River markets its products and services in North America and Europe
primarily through its own direct sales organization, which consists of
salespersons and field engineers. Wind River has eighteen licensed
international distributors principally to serve customers in regions not
serviced by its direct sales force or its Japanese master distributors. Wind
River's customers include Boeing Company, Cisco Systems, Inc., Ericsson Radio
Systems AB, General Motors Corporation, Hewlett-Packard Company, Hitachi,
Ltd., Hughes Aircraft Company, Lucent Technologies Inc., Intel Corporation,
Lockheed-Martin Corporation, McDonnell Douglas Corporation, Mitsubishi
Electric Corporation, Motorola, Inc., Liberate Technologies, Nippon Electric
Corporation, Northern Telecom Ltd., Raytheon Company, Siemens AG, Sun
Microsystems, Inc., and TRW Inc.
During April 1999, Wind River entered into an asset purchase agreement with
XACT Inc. ("XACT"), a network software developer, 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.
On June 30, 1999, Wind River acquired RouterWare, Inc. RouterWare develops
and markets a suite of software modules used in data communications products
such as bridges, routers, gateways, and remote access servers. In the
acquisition, 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.
On February 15, 2000, Wind River acquired Integrated Systems, Inc., pursuant
to a merger agreement entered into on October 21, 1999. Integrated Systems
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.
Integrated Systems' products help users accelerate the design, development,
debugging, implementation and maintenance of embedded software. Integrated
Systems' products and services are intended to reduce the expense associated
with embedded software and system development and enable customers to develop
systems with a wide variety of features characterized by greater
functionality, enhanced performance, improved reliability and ease of use. In
connection with the acquisition, 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
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stock options became options to purchase approximately 4,133,000 shares of
Wind River stock. The acquisition was accounted for as a pooling of interests.
On March 13, 2000, Wind River announced a definitive agreement to acquire
AudeSi Technologies Inc., a privately held supplier of innovative embedded
Java technology based tools and other components for building flexible,
multi-application consumer devices. Wind River will acquire AudeSi for
approximately 1.075 million shares of Wind River common stock. The closing of
the acquisition is subject to Canadian regulatory approvals. The merger
agreement provides that Wind River will account for this transaction using
the purchase accounting method.
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 5,474,792 shares of its common stock in exchange for all
outstanding common shares of Embedded Support Tools Corporation and reserved an
additional 1,122,855 shares for issuance upon exercise of outstanding employee
stock options assumed in the transaction. The acquisition was accounted for as
a purchase.
Wind River was incorporated in California in February 1983 and reincorporated
in Delaware in April 1993. Its principal executive offices are located at 500
Wind River Way, Alameda, California 94501, and its telephone number at that
location is (510) 748-4100.
BACKGROUND
Embedded systems consist of a microprocessor and related software incorporated
into a larger device, dedicated to performing a specific set of tasks. Embedded
systems provide an immediate, predictable response to an unpredictable sequence
of external events. As more powerful microprocessors have become available and
have decreased in price, embedded systems are being used in a wider range of
applications and digital appliances and are facilitating the development of
entirely new products. In addition, emerging Embedded Internet-Registered
Trademark- applications for interactive entertainment network computers, remote
maintenance, and other areas may offer significant additional opportunities for
embedded systems.
To succeed in today's increasingly competitive markets, manufacturers using
embedded computers must bring complex applications for embedded systems to
market rapidly and economically. Developing real-time embedded software
applications has evolved from a relatively modest programming task to a
complex engineering effort. As more powerful and affordable 32-bit
microprocessors have become available, products based on them have become
richer in features and functions. In addition, the complexity of embedded
software is increasing dramatically, while the time available for product
development is decreasing. More sophisticated software is required to develop
these more complex applications, frequently including a real-time operating
system that provides developers far more features, higher performance and
greater productivity than that was necessary or feasible for programming
prior generations of microprocessors. Wind River's flexible operating systems
and powerful development tools allow customers to create and standardize
complex real-time embedded software applications quickly and efficiently.
As real-time embedded applications increase in complexity, the costs associated
with providing software development, support and training of engineers are
rising rapidly. In addition, time-to-market, conformance to standards, and
product reliability have become critical issues for companies developing
real-time embedded applications.
PRODUCTS AND SERVICES
Wind River's operating systems and development tools allow customers to
create complex real-time embedded software applications more quickly, more
economically and with less risk than creating such applications using
internally developed systems and tools. Wind River typically charges a
one-time fee for a development license and a run-time license fee for each
copy of its operating system embedded in the customer's product. In addition,
for certain large customers, we will charge an annual fee to use our
development license and provide renewal options that reflect the future needs
of our customers. A key component of Wind River's strategy is to increase
revenue through run-time license fees. Any increase in the percentage of
revenues attributable to run-time licenses will depend on our continued
efforts to successfully negotiate run-time license
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agreements and on the successful commercialization by its customers of the
underlying products. Our core family of products consists of our Tornado
development environment and VxWorks real-time operating systems.
TORNADO
Tornado is a development platform for embedded applications and is available
for UNIX, Windows NT, Windows 95, and Windows 98 host development
workstations. Tornado was introduced in September 1995 and subsequently won
the Electronic Design News award for Innovation of the Year. In November
1998, Wind River introduced Tornado II. Tornado II provides significant
technical advances for accelerated productivity, advanced networking
connectivity, and a platform for HTML, Java, and C++ graphics development.
Tornado is a scalable cross-development environment that enables engineers to
develop embedded applications on a host workstation or PC and download the
code via a network or other communications channel to an RTOS that runs on
all significant 32- and 64- bit embedded target microprocessors.
Tornado consists of three integrated components: Tornado tools, which
comprise a comprehensive suite of core and optional cross-development tools
and utilities; the VxWorks run-time system, a high-performance, scalable RTOS
that executes on the target processor; and a full range of communications
options for the target connection to the host.
Tornado core development and debugging tools include an integrated simulator
(VxSim-Lite-TM-), WindView-TM- for the integrated simulator, project facility
and configuration tools, an integrated, high-performance debugger, C and C++
cross-compilers, a launcher, the interactive WindSh-TM- user-interface shell,
a browser that is a graphical companion to the shell, and the
WindNavigator-TM-multilanguage browsing tool for evaluating source code.
Optional Tornado tools address a particular aspect of application development
for C, C++, and Java developers. Tornado also offers a completely open and
extensible environment that facilitates the integration of a wide variety of
third-party tools as well as the customization of Tornado tools by the
developer. Wind River believes that this open environment may make Tornado
the development foundation of choice for embedded and real-time applications.
VxWorks is a high-performance, scalable RTOS based on an object-oriented
microkernel architecture that can form the foundation for memory-constrained
applications as small as 20 kilobytes or support large, complex applications.
VxWorks provides broad portability over a wide variety of commercial
processors and custom target hardware boards and adheres to a variety of
computing standards, including POSIX 1003.1/1b, ANSI C, and TCP/IP. VxWorks
is flexible, with more than 1,800 powerful application program interfaces
("APIs") available and published on the Internet for reference, from the
graphical user interface ("GUI") to the connection implementation.
For communications between the development platform and the embedded target,
Tornado provides a variety of options, including Ethernet, serial line,
in-circuit emulator, ROM emulator, or custom backend. Tornado eliminates many
of the dependencies of a traditional cross-development environment. With
Tornado, developers can use any host-target communications and the
capabilities of the toolset remain the same regardless of target processor
resources.
TORNADO FOR INTELLIGENT I/O
A consortium of leading enterprise computing vendors has proposed an
architecture, known as I(2)O, to define and promote an open, standard set of
interface specifications for high-performance I/O subsystems. These
specifications will be used to simplify the task of building and maintaining
those subsystems for interface cards and PC server platforms. The I(2)O
specification makes it possible for systems to distribute I/O functions
across multiple processors, dramatically improving I/O and overall system
performance. Additionally, the specification allows vendors of network and
peripheral interface cards to write a single device driver that will be
compatible with a comprehensive range of operating systems, OS releases, and
vendor OS implementations. Wind River has entered into agreements with Intel
Corporation, under which Intel will bundle Wind River's IxWorks-Registered
Trademark- operating system into their input/output processors ("IOPs").
IxWorks, Wind River's I(2)O real-time operating system ("IRTOS") based on
VxWorks, is a component of Wind River's Tornado for Intelligent I/O products
and facilitates the development of I(2)O-capable products by ensuring ongoing
I(2)O compliance. It also permits
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companies to get their products to market faster by offering immediate
availability of the IRTOS, the most significant software building block of an
I(2)O-ready system. A license for IxWorks may be included with IOPs shipped.
This arrangement permits manufacturers to develop their products quickly,
since IxWorks is available immediately. Wind River believes that its
relationships with Intel and LSI Logic for the implementation of the I(2)O
specification may open up a new market opportunity for its products.
CENTER OF EXCELLENCE PROGRAM
Wind River's Center of Excellence program was initiated to enable Wind River
and key microprocessor manufacturers to work closely together in order to
facilitate the porting, optimization, and distribution of Wind River software
across various families of microprocessors. For example, Intel Corporation
and Wind River agreed to work closely together to optimize Wind River's
development software for Intel's family of embedded Pentium microprocessors.
Pentium family microprocessors have traditionally been used in desktop-based
applications. This joint initiative so far has produced new software drivers
and evaluation board support packages ("BSPs").
ADDITIONAL PRODUCT FAMILIES
In addition to the preceding core products and market initiatives, Wind River
offers a variety of products in the following product families:
OPERATING SYSTEM AND RUN-TIME PRODUCTS:
MULTIPROCESSING OPTIONS: Wind River offers a suite of multiprocessing
options: The VxVMI-TM- virtual memory interface provides run-time memory
management and debugging facilities and an application program interface
standardized across different microprocessing architectures. The
VxMP-TM-multiprocessing package allows applications to be scaled beyond the
performance of single microprocessors by allowing tasks on different
microprocessors to synchronize and communicate. The VxFusion-TM-
multiprocessing option permits VxWorks message queues to operate over any
loosely coupled, distributed hardware configuration. VxFusion is tailored to
complement emerging standards-based solutions such as CORBA and DCOM.
VXDCOM. VxDCOM-TM- implements the DCOM standard - scaled for embedded
applications - on the Tornado II development platform.
GOAHEAD FIELDUPGRADER 2.1. GoAhead FieldUpgrader 2.1 permits
manufacturers of VxWorks-based embedded devices to automatically upgrade
their products in the field.
TORNADO BOARD SUPPORT PACKAGE DEVELOPER'S KIT. The VxWorks operating
system can be used with a wide variety of processor types and target
environments that isolate all hardware-specific features into a special
section of code called a board support package. The Tornado BSP Developer's
Kit provides assistance to the developer porting Tornado or VxWorks to custom
hardware or to a commercial board not supported by Wind River. It includes
comprehensive documentation, a software validation suite, project management
tools and a template BSP to provide a convenient starting point.
TRUEFFS FOR TORNADO. TrueFFS for Tornado is an integrated flash file
system for embedded products built with Tornado. TrueFFS for Tornado is based
on the data format of M-Systems Flash Disk Pioneers' TrueFFS patented core
technology, which implements the PCMCIA Flash Translation Layer (FTL)
standard.
TORNADO FOR AUTOMOTIVE CONTROL. Tornado for Automotive Control
implements the open OSEK/VDX standard as a development platform and real-time
operating system for automotive electronic control units (ECUs). As a result,
automotive manufacturers can write application code on a standard interface
that facilitates portability and makes it easier to interconnect ECUs from
different vendors.
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OPTIONAL TORNADO DEVELOPMENT TOOLS:
CODETEST FOR TORNADO. CodeTEST for Tornado is a software-only version of
Applied Microsystems' CodeTEST family of embedded software verification
tools. CodeTEST for Tornado enables developers to identify software errors
easily, reliably, and cost effectively.
ESPIAL ARCHITECT. Espial (formerly Kalos) Architect provides an
easy-to-use environment for developing graphical Internet appliances based on
Sun Microsystems' PersonalJava specification.
LOOK! FOR TORNADO. Look! for Tornado is a C++ visualization and
debugging tool designed to graphically explore a C++ program as it executes.
PERFORMANCEPAK. PerformancePak provides Tornado developers two important
visualization tools for developing fast, reliable real-time systems. The
ScopeProfile tool helps developers optimize system performance, while MemScope
quickly locates memory problems.
STETHOSCOPE. StethoScope is a real-time data visualization, profiling and
debugging tool that lets the end user examine and analyze an embedded
application while it is running. StethoScope features a multi-window environment
that allows program variables to be plotted dynamically on a workstation.
TURBOJ. Wind River's TurboJ ahead-of-time compiler dramatically speeds
up the execution of Java applications on embedded devices.
VISUAL SLICKEDIT - TORNADO EDITION. Visual SlickEdit - Tornado Edition
provides extensive software editing features that help developers improve
their productivity.
VXSIM EMBEDDED SYSTEM SIMULATOR. VxSim-TM- is a comprehensive
prototyping and simulation tool that provides full VxWorks simulation on a
UNIX or Windows NT workstation. VxSim enables application development to
begin before hardware becomes available and allows software testing to occur
early in the development cycle.
WIND FOUNDATION CLASSES. Wind Foundation Classes-TM- enable embedded
systems developers to use and reuse highly optimized and extensively tested
code to create real-time embedded applications.
WINDVIEW. WindView-TM- is a diagnostic and analysis tool that provides
detailed visibility into the dynamic operation of an embedded system. With
WindView, the user can quickly and easily visualize the complicated
interaction among tasks and interrupt service routines and system objects in
an application. This information is presented through a GUI.
EMBEDDED INTERNET AND USER INTERFACE TECHNOLOGIES:
Wind River's Embedded Internet technologies enable customers to build and
deploy products throughout the Internet, including its infrastructure,
servers, and smart appliances. Wind River's user interface technologies make
it possible for customers to incorporate graphical user interfaces ("GUIs")
and to render, or display, rich graphical content on traditional embedded
devices and leading-edge information and Internet-based appliances. Examples
of products employing Wind River's user interface technologies include
process visualization terminals, front panels for digital imaging devices,
instrumentation and medical equipment, point-of-sale terminals and
information kiosks, as well as graphics and Internet-centric devices such as
screen phones, television set-top boxes, and car navigation systems. Products
include:
PERSONAL JWORKS. Personal JWorks-TM- is the first RTOS port of Sun
Microsystems' PersonalJava - a Java application environment targeted at
personal consumer devices - to be certified for full compatibility. The
Personal JWorks is also bundled into a product suite which integrates Java
technology-based components with Wind River's Personal JWorks. Components
include a full deployment and execution environment, an optimized GUI tool
kit, a complete application operating environment, and out-of-box solutions
for building Internet appliances.
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WIND WEB SERVER. Wind-Registered Trademark- Web Server displays timely,
dynamic information on an embedded device running VxWorks by means of a
standard Web browser.
ZINC FOR VXWORKS. Zinc-Registered Trademark- for VxWorks is a
comprehensive tool suite for developing small-footprint, natively compiled
GUIs for performance-driven embedded devices. Zinc for VxWorks provides a
complete, object-oriented C++ API for the creation of graphical user
interfaces and event-driven applications.
NETWORKING PRODUCTS:
TORNADO FOR MANAGED SWITCHES. Tornado for Managed Switches provides a
software solution for building management capabilities into layer 2 and layer
3 Ethernet switches.
WINDNET. The WindNet-TM- networking environment comprises Wind River
core technology such as TCP/IP, as optional products such as SNMP, STREAMS,
and OSPF and numerous integrated products from third-party partners that
provide various communications protocols and network management and
distributed computing solutions.
ROUTERWARE PRODUCTS. Wind River's RouterWare-Registered Trademark-
product line provides standard ANSI C source code for a wide range of
internetworking protocol stacks.
VXWORKS NETWORK STACK. The VxWorks Network Stack is a real-time,
full-featured, BSD 4.4-compliant TCP/IP suite within the VxWorks RTOS.
PRODUCTS OF INTEGRATED SYSTEMS
Wind River provides a number of additional products and services as a result
of its acquisition of Integrated Systems. These products and services are
suitable for a wide variety of applications and are sold to a broad range of
customers across key markets comprising telecommunications, data
communications, automotive, aerospace, office products and point-of-sale, and
consumer electronics. A complete suite of products has been developed that
addresses these markets, and provides products that reduce the time and
expense associated with system development.
PRISM+. pRISM+-TM- is a software development environment optimized for
embedded systems development with the pSOSystem-Registered Trademark-
real-time operating system. Tools within pRISM+ cover each aspect of embedded
application development: team development across mixed UNIX and PC platforms;
software configuration management interfaces; source code comprehension tools
for effective reuse of legacy code; highly optimized compilers and debuggers;
and real-time systems analysis tools. pRISM+ speeds time to market by
providing network development teams a comprehensive set of
pSOSystem-integrated protocol products for the majority of embedded
networking needs: bringing up target hardware platforms, developing real-time
application software, and implementing networking support for embedded
devices. pRISM+ supports Microsoft Windows NT, Windows 95, UNIX Solaris, and
Hewlett-Packard (HP) host platforms and a wide variety of 32-bit target
microprocessors.
PSOSYSTEM. pSOSystem is a modular, high-performance, real-time operating
system designed specifically for embedded microprocessors. It provides a
complete multitasking environment, offering performance, reliability, and
ease of use on custom and commercial hardware. pSOSystem is a priority-based,
interrupt-oriented multitasking kernel requiring as little as 16KB of
storage, operating on either tightly or loosely coupled microprocessors. With
companion software components such
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as a remote procedure call library, a file system manager, and an ANSI C
library, as well as third-party products from partner companies, pSOSystem
gives developers a full palette of options, tools, and support that extends
far beyond the kernel.
SNIFF+. SNiFF+-TM- is an integrated object-oriented development environment
for UNIX and Windows programmers working with C, C++, Java, Fortran, CORBA,
IDL, and other programming languages. Available as part of pRISM+ for
pSOSystem, SNiFF+ provides advanced, object-oriented comprehensive source
code analysis capabilities such as symbol, hierarchy and class browsers,
component analyzers and cross-referencing tools to assist the developer in
developing application code. The SNiFF+ tool is ideally suited for large
teams and complex application development.
DIAB COMPILERS. Diab-TM- high-performance compiling solutions for 32-bit
embedded microprocessors include Diab C/C++ compiler suites, which are
available for the most demanding embedded applications. The Diab FastJ-TM-
cross compiler enables developers to use the Java language in a manner
similar to C/C++ while offering the performance and code size required for
both high performance and deeply embedded applications. Drawing on
information generated by the compiler suites, the Diab RTA Suite provides
visual run-time analysis tools for enhancing program performance,
reliability, and memory usage in embedded applications, enabling developers
to create faster, higher quality code in less time.
SINGLESTEP DEBUGGERS. The SingleStep-TM- hardware/software debugging solution
provides developers a mix of debugging and diagnostic capabilities, including
real-time trace, advanced run control, high-speed code downloading, and C/C++
and Java source-level debugging.
BETTERSTATE. The BetterState-TM- graphical programming product supports the
pSOSystem and OSEK/VDX operating systems. Once designs have been drawn,
BetterState automatically generates consistent, maintainable and accurate
ready-to-use code in a wide range of programming languages, including C/C++,
Java, C++ for MFC, Visual Basic, Perl, and CGI. BetterState also eases the
debugging process through full-featured visual debugging facilities.
MATRIXx. The MATRIXx-Registered Trademark- product family provides a complete
solution for graphical design, simulation, automatic code and document
generation, and testing of real-time dynamic systems. Using these tools,
applications are developed, analyzed, validated, implemented, and documented
by way of a single graphical representation. The product family features
SystemBuild-TM- for graphical modeling and simulation; Xmath-Registered
Trademark- for object-oriented mathematical analysis and visualization;
AutoCode-TM- for automatic C and Ada source code generation; DocumentIt-TM-
for automatic document generation; and the RealSim-TM- AC-104 rapid
prototyping computer.
NETWORKING PRODUCTS. A comprehensive suite of networking products enables
users to develop applications for device management, security, monitoring,
and routing technologies. The networking product suite supports the
development of communications devices with networked management and security
capabilities and integrates SNMP, TCP/IP, and HTTP capabilities into the
pRISM+ development environment and pSOSystem RTOS.
SERVICES AND SUPPORT
Wind River provides comprehensive customer service and support to help
customers realize the most benefit from its products.
TRAINING CLASSES. Wind River offers several training courses and
workshops relating to the use of its products. The courses are provided
several times each month at Wind River's training facilities in Alameda,
California. Outside North America, the courses are given under license from
Wind River by distributors and training contractors.
TECHNICAL SUPPORT. Wind River's technical support staff assists
customers with problems and questions in the installation and use of Wind
River's products. Technical support is provided by Wind River's staff of
support engineers in North America, by staff support engineers and /or local
distributors in Europe and by Wind River's Japanese subsidiary. Technical
support is bundled with product updates and maintenance and is offered on an
annual fee basis. Wind River's Tornado includes a tool for submitting problem
reports and receiving responses via the Internet.
ENGINEERING SERVICES. A number of services are provided on a
fee-for-service basis, including board support package validation,
application-level consulting, customization, and porting to strategic
semiconductor architectures. These
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are coordinated and performed by the Engineering Services Group in North
America and Japan, though they may on occasion be supported by the
Engineering Group or outside subcontractors in North America and Europe.
PROFESSIONAL SERVICES. Through its Professional Services organization,
and through the acquisition of Integrated Systems' Doctor Design professional
services unit, Wind River offers consulting, design, integration, and
maintenance services to assist customers in developing applications for
embedded devices.
STRATEGIC ALLIANCES
Wind River believes that strategic relationships with semiconductor
manufacturers and embedded device manufacturers are significant strengths
that are key to its future success in the embedded systems marketplace. Wind
River has strategic relationships with most of the major semiconductor
companies including Advanced RISC Machines Limited, Fujitsu Limited, Hitachi,
Ltd., Intel Corporation, MIPS Technologies, Inc., Mitsubishi Electric
Corporation, Motorola, Inc., NEC Corporation, ST Microelectronics, Siemens AG
and Sun Microsystems, Inc. Wind River has ported its VxWorks technology to
their semiconductors, allowing Wind River to leverage its partners' sales
channels to give its products broad market exposure. Wind River also enters
into joint marketing and sales agreements with certain developers of
third-party applications as a means to enhance its products with
industry-specific features. In addition, Intel and Wind River have a
strategic relationship pursuant to which Intel supplies an evaluation copy of
Tornado for Intelligent I/O to each customer purchasing an Intel i960Rx I/O
microprocessor and a license for IxWorks for each such microprocessor sold.
Wind River also has developed strategic relationships with Liberate
Technologies, Inc. and Sun Microsystems for Embedded Internet applications
ranging from network computers to handheld and intelligent phones.
CUSTOMERS
Wind River's products have been deployed by a broad range of organizations,
including companies in the following industries: global communications (both
data and voice), digital imaging, consumer electronics, computers and
peripherals, medical instrumentation, defense electronics and aerospace,
research, automotive control, and industrial measurement and control. No
single customer accounted for more than 10% of our total revenues in fiscal
2000, 1999 or 1998.
MARKETING, SALES AND DISTRIBUTION
In North America and Europe, Wind River markets products and services
primarily through our own direct sales organization, which consists of
salespersons and field application engineers. Wind River's sales force
presents Wind River and its products for licensing to prospective customers,
while application engineers provide technical pre-sales and post-sales
support. As of January 31, 2000, Wind River had 183 domestic direct
salespersons and field application engineers located throughout North
America, 70 direct salespersons and field application engineers throughout
Europe and 16 sales employees in Japan.
Wind River distributes products in Japan through Wind River Systems,
K.K.("WRSKK"), a subsidiary in which we own a 70% equity interest. Innotech
Corporation, Kobe Steel Ltd. and Nissin Electric Ltd., each owns a 10% equity
interest. We have licensed our products to WRSKK for distribution in Japan.
WRSKK has in turn entered into master distributor agreements with its three
joint venture partners that provide the right to appoint sub-distributors.
See Note 13 of Notes to Consolidated Financial Statements.
Wind River has licensed six international distributors, principally to serve
customers in regions not serviced by our direct sales force or its Japanese
master distributors. We also have established strategic relationships with
computer, semiconductor and software vendors and work closely with a number
of system integrators worldwide that enable us to further broaden the
geographic and market scope for our products.
Revenues from international sales represented $57.3 million, $41.6 million, and
$26.9 million or approximately 33%, 32% and 29% of total revenue in fiscal
2000, 1999 and 1998, respectively. See Note 14 of Notes to Consolidated
Financial Statements for a summary of operations by geographic region, and
"Additional Risk Factors That May Affect Future Results of Operations".
Prices for international customers are quoted in local currency and are based
on U.S. dollar prices as adjusted
10
to reflect the higher cost of doing business outside the United States.
International customers are invoiced either in the local currency using
current exchange rates, or U.S. dollars.
Wind River has experienced, and expects to continue to experience,
significant seasonality resulting primarily from customer buying patterns and
product development cycles. We have generally experienced the strongest
demand for our products in the fourth quarter of each fiscal year and the
weakest demand in the first quarter of each fiscal year. Quarterly revenue
levels have increased over the levels for like quarters in the prior fiscal
years but have typically decreased in the first quarter of each fiscal year
from the fourth quarter of the prior fiscal year.
COMPETITION
The embedded real-time software industry is highly competitive. 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 through its introduction of Windows CE,
Microware Systems Corporation, QNX Software Systems, Ltd., Sun Microsystems,
Inc. through its acquisition of Chorus, Motorola, Inc., and Symbian Inc. As
well as a number of other vendors that address one or more segments of the
system design process.
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 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.
PRODUCT DEVELOPMENT AND ENGINEERING
Wind River believes that our success will continue to depend primarily on our
ability to maintain and enhance our current product line, develop new
products, maintain technological competitiveness and meet an ever-expanding
range of customer and market requirements. Wind River's product development
and engineering group, at January 31, 2000, includes 265 full-time employees.
During fiscal 2000, 1999 and 1998, product development and engineering
expenses were $29.7 million, $19.1 million, and $12.9 million, respectively,
excluding capitalized software development costs. In fiscal years 2000 and
1999, Wind River did not incur any material capitalizable costs. In fiscal
year 1998, costs capitalized for software development were $803,000. See
"Notes to Consolidated Financial Statements" for a more complete description
of Wind River's capitalization of certain software development costs. We
anticipate that we will continue to commit substantial resources to research
and product development in the future.
The market for embedded real-time software is characterized by ongoing
technological developments, evolving industry standards and rapid changes in
customer requirements. Our success depends upon our ability to adapt and
respond to these changes. We must continuously update our existing products
to keep them current with customer needs, and must develop new products to
take advantage of new technologies, emerging standards, and expanding
customer requirements that could render our existing products obsolete. We
have from time to time experienced delays in the development of new products
and the enhancement of existing products, including, most recently, a delay
in the development of our new product "Tornado for
11
Managed Switches." Such delays are commonplace in the software industry. We
must achieve design wins with key customers because once a customer has
designed a product with a particular operating system, that customer
typically is reluctant to change its supplier, due to the significant costs
associated with selecting a new supplier. If we cannot adapt or respond in a
cost effective and timely manner to new technologies and new customer
requirements, the market for our products would suffer. From time to time, we
or our competitors may announce new products, capabilities or technologies
that have the potential to replace or shorten the life cycles of our existing
products. We cannot provide assurance that announcements of currently planned
or other new products by Wind River or others will not cause customers to
defer purchasing existing Wind River products. Any failure to anticipate or
respond adequately to changing market conditions, or any significant delays
in product development or introduction, would have a material adverse effect
on our business, financial condition and results of operations. See
"Additional Risk Factors That May Affect Future Results of Operations".
Wind River is continuously engaged in product development for new or changing
markets. In particular, we have invested significant time and effort,
together with a consortium of industry participants, in the development of
I(2)O, a specification that is intended to create an open standard set of
interface specifications for high performance I/O systems. The specification
is intended to be used by system, network and peripheral interface card and
operating systems vendors to simplify the task of building and maintaining
high-performance I/O subsystems. Wind River also has developed IxWorks, a
real-time operating system for use in conjunction with the I(2)O
specification. The success of the I(2)O specification and the IxWorks product
line depends heavily on its adoption by a broad segment of the industry. We
have also expended, and continue to expend, substantial time and financial
resources to develop embedded operating software and development tools for
Internet applications. The commercial Internet market is rapidly changing and
is characterized by an increasing number of new entrants with competitive
products. Moreover, there is an increasing number of new Internet protocols
to which our products must be ported. It is unclear which of these competing
protocols ultimately will achieve market acceptance. If the protocols upon
which our Internet products are based ultimately fail to be widely adopted,
Wind River's business, financial condition and results of operations may be
materially and adversely affected. It is difficult to predict with any
assurance whether demand for any of these products will develop or increase
in the future. If these markets, or any other new market targeted by Wind
River in the future, fail to develop, develop more slowly than anticipated or
become saturated with competitors, if our products are not developed in a
timely manner, or if Wind River's products and services do not achieve or
sustain market acceptance, our business, financial condition and results of
operations would be materially and adversely affected.
Like all software products, Wind River's products may contain undetected
errors that could cause loss or delay in market acceptance or cause failures
in the products containing the embedded systems. Damages and injury from such
failures could result in product liability claims against Wind River. See
"Additional Risk Factors That May Affect Future Results of Operations."
PROPRIETARY RIGHTS
Wind River's success is heavily dependent upon our proprietary technology. To
protect our proprietary rights, we rely on a combination of copyright, trade
secret, patent and trademark laws, nondisclosure and other contractual
restrictions on copying, distribution and technical measures. Wind River
seeks to protect our software, documentation and other written materials
through trade secret and copyright laws, which provide only limited
protection. In addition, Wind River has seven registered U.S. patents. We
cannot provide assurance that the claims allowed will be of sufficient scope
or strength (or be upheld in all countries where our products can be sold) to
provide meaningful protection or any commercial advantage. As a part of our
confidentiality procedures, we generally enter into nondisclosure agreements
with our employees, consultants, distributors and corporate partners and
limit access to and distribution of our software, documentation and other
proprietary information. End user licenses of our software are frequently in
the form of shrink wrap license agreements, which are not signed by
licensees, and therefore may be unenforceable under the laws of many
jurisdictions. Despite Wind River's efforts to protect our proprietary
rights, it may be possible for unauthorized third parties to copy our
products or to reverse engineer or obtain and use information that we regard
as proprietary. Our competitors could independently develop technologies that
are substantially equivalent or superior to our technologies. 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
12
persistent problem. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain countries. The
status of U.S. patent protection in the software industry is not well defined
and is likely to evolve as the U.S. Patent and Trademark Office grants
additional patents. Patents have been granted on fundamental technologies in
software, and patents may issue in the future that relate to fundamental
technologies incorporated into our products.
As the number of patents, copyrights, trademarks, trade secrets and other
intellectual property rights in our industry increases, products based on our
technology may increasingly become the subject of infringement claims. Wind
River has received in the past and may receive in the future letters from
third parties asserting infringement claims. Any such claims, whether with or
without merit, could result in costly litigation, cause product shipment
delays or require Wind River to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to Wind River, or at all, which could have a material
adverse effect on our business, financial condition and results of
operations. In the event of an adverse ruling in any such litigation, we
might be required to pay substantial damages, discontinue the use and sale of
infringing products and expend significant resources to develop
non-infringing technology or obtain licenses to infringing technology. In
addition, 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 and divert the efforts of our technical and management
personnel from productive tasks.
MANUFACTURING AND BACKLOG
Wind River's manufacturing operation consists of assembling, packaging and
shipping the software products and documentation needed to fulfill each
order. Limited manufacturing is currently performed in our Alameda,
California facility. Outside vendors provide tape and CD duplication,
printing of documentation and manufacturing of packaging materials.
Wind River does not believe that backlog is a meaningful indicator of sales
that can be expected in future periods, particularly in view of the fast pace
of technological change in the software industry. Wind River's order
fulfillment process is intended to efficiently manage the flow of products to
customers, often resulting in a number of weeks of backlog. At January 31,
2000, and 1999, backlog was approximately 8 to 11 weeks and 9 to 12 weeks of
sales. Backlog includes orders that may be filled at various times throughout
the fiscal year.
EMPLOYEES
Wind River had, at January 31, 2000, 818 employees, including 436 in sales,
marketing and support activities, 265 in product development and engineering
and 117 in management, operations, finance and administration. Of these
employees, 619 were located in North America and 199 were located outside of
North America. No employees of Wind River are represented by a labor union or
are subject to a collective bargaining agreement. Wind River has never
experienced a work stoppage. See "Additional Risk Factors That May Affect
Future Results of Operations- Failure to Manage Our Growth Could
Significantly Strain Our Personnel and Other Resources; We Depend on Our Key
Personnel and On Attracting Qualified Employees for Our Future Success."
In connection with the acquisition of Integrated Systems on February 15,
2000, Wind River hired approximately 800 employees of Integrated Systems.
13
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.
14
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. 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'
15
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' 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 price 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
16
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.
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 I(2)O, 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 I(2)O specification. The success of
the I(2)O specification and the IxWorks product line depends heavily on its
adoption by a broad segment of the industry. 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 commercialization of the underlying products. We cannot control
17
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 recruiting and retaining
such personnel. Our failure to do so could impair our ability to compete
successfully.
18
OUR SIGNIFICANT INTERNATIONAL BUSINESS ACTIVITIES SUBJECT US TO ECONOMIC
RISKS.
During the fiscal years ended January 31, 2000 and 1999, we derived
approximately 33% and 32%, respectively, 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 believe that
revenues from sales of products designed for
19
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 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.
20
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;
- pricing pressures;
- general market conditions;
21
- 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.
ITEM 2.
PROPERTIES
During the fourth quarter in fiscal 1999, Wind River relocated its principal
administrative, sales, marketing, product development and engineering
facilities to a new headquarters facility consisting of two buildings in
Alameda, California. The new facility provides approximately 148,000 square
feet of space. Lease payments for the new facility began in August 1999. In
March 1998, Wind River entered into an accreting interest rate swap agreement
to reduce the impact of changes in interest rates on its floating rate
operating lease for the new corporate headquarters. This agreement
effectively changes Wind River's interest rate exposure on its operating
lease to a fixed rate of 5.9%. In addition, Wind River has entered into a
second lease agreement for the construction of two additional buildings. The
new buildings will provide approximately 125,000 square feet of space and are
scheduled to be completed by January 2001. Wind River leases a customer
training facility in Alameda, California, which provides approximately 11,300
square feet of office space as well as a 3,300 square foot facility in the
Washington D.C. area. In addition, Wind River leases two research and
development offices in Dallas, Texas and Newport, California. Wind River also
leases other domestic sales offices in the United States and international
sales and/or service facilities in Canada, France, Germany, Israel, Italy,
Japan, Korea, Scotland, Singapore, Sweden, Taiwan and the United Kingdom.
In connection with the acquisition of Integrated Systems, Wind River acquired
approximately 150,000 square feet of owned space, located in Sunnyvale,
California. In addition, Integrated Systems leases a number of sales and
services as well as research and development offices in North America,
Europe, Asia and Israel.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, Wind River is subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
patents and other intellectual property rights. Wind River is not currently
aware of any legal proceedings or claims that Wind River believes will have,
individually or in the aggregate, a material adverse affect on Wind River's
business, financial position or results of operations.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
22
Item 4A.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Wind River, and certain information about them as of
April 1, 2000, are as follows:
Name Age Position with Wind River
Jerry L. Fiddler 48 Chairman of the Board
Thomas St. Dennis 46 President, Chief Executive Officer and Director
David G. Fraser 36 Vice President and General Manager, Wind River Networks business unit
Richard W. Kraber 59 Vice President of Finance, Chief Financial Officer and Secretary
Peter J. Richards 52 Vice President of Americas Sales
Curtis B. Schacker 39 Vice President of Marketing and Corporate Development
Marla A. Stark 47 Vice President, Intellectual Property and Legal Affairs
John C. Fogelin 34 Vice President and Co-General Manager, Wind River Platforms business unit
David E. Stepner 55 Vice President and Co-General Manager, Wind River Platforms business unit
Kamran Sokhanvari 39 Vice President and General Manager, Wind River Services business unit
Scot J. Morrison 37 Vice President and General Manager, Wind River Transportation, Defense and Industrial
business unit
Jean-Claude Sarner 41 Vice President and General Manager, Wind River Consumer business unit
Peter S. Dawson 45 Vice President and General Manager, Wind River Hardware Software
Integration business unit
Mr. Fiddler co-founded Wind River in February 1983, and currently serves as
chairman of the board. From February 1983 to March 1994 he served as chief
executive officer of Wind River. He served as interim CEO from April to
September 1999. Prior to founding Wind River, he was a computer scientist in the
Real-Time Systems Group at Lawrence Berkeley Laboratory. Mr. Fiddler holds a
B.A. in music and photography and an M.S. in computer science from the
University of Illinois.
Mr. St. Dennis joined Wind River in September 1999 as chief executive officer.
From July 1992 to September 1999, Mr. St. Dennis was at Applied Materials, Inc.,
a supplier of semiconductor processing equipment, where he last served as group
vice president and president of the Planarization and Dielectric Deposition
Product business group. From 1987 to 1992, Mr. St. Dennis was vice president of
technology at the Silicon Valley Group, a supplier of automated wafer processing
equipment for the semiconductor industry. From 1983 to 1987 he served as vice
president of sales and marketing at Semiconductor Systems, Inc., a manufacturer
of photoprocessing tools for the semiconductor industry. Mr. St. Dennis has an
M.S. and a B.S. in physics from the University of California at Los Angeles.
Mr. Fraser joined Wind River in September 1991 and currently serves as vice
president and general manager of the Wind River Networks business unit. From
1988 to 1991, he served as a product marketing manager at Unisys/Convergent.
From 1985 to 1988, he was a software engineer at Hewlett-Packard in England. Mr.
Fraser holds a B.S. in computing science from Glasgow University, Scotland.
23
Mr. Kraber joined Wind River in August 1995 and has been serving as vice
president of finance and chief financial officer and secretary. From 1991 to
1995, he served as chief operating officer and chief financial officer of
Peerless Lighting, an industrial lighting products company. Prior to then, he
was chief financial officer for GardenAmerica and a consultant and engagement
manager for McKinsey & Company. Mr. Kraber has a B.S. in mathematics from
Stanford University and an M.B.A. from Harvard University.
Mr. Richards joined Wind River in September 1998 as vice president of sales.
From March 1997 to August 1998, he served as president and chief executive
officer for Toronto, Canada-based King Products Inc., which builds
Internet-enabled products. From December 1979 to March 1997, Mr. Richards
held various positions at Tandem Computers, a manufacturer of computer and
related products, where he last served as vice president and general manager.
Mr. Richards studied at Westminster College, United Kingdom, and has an
equivalent B.A. in marketing management.
Mr. Schacker joined Wind River in 1990 and has served as vice president of
marketing and corporate development since November 1997. He has also served as a
customer engineering manager, a sales representative and sales manager for Wind
River's northwest region in the United States. Prior to joining Wind River, he
was an engineer for Ready Systems and for Lockheed Missile and Space Company.
Mr. Schacker has a B.S. in computer science from Wright State University.
Ms. Stark joined Wind River in September 1999 as vice president of intellectual
property and legal affairs. From 1995 to 1999, she served as the managing
director of intellectual property litigation at Applied Materials. Prior to
then, Ms. Stark was an attorney at Wilson Sonsini Goodrich & Rosati, and Brown &
Bain, law firms that specialize in the high technology business sector. Ms.
Stark holds a B.A. from Stanford University and a J.D. from the University of
California, Hastings School of Law.
Mr. Fogelin joined Wind River in May 1987 and currently serves as vice president
and co-general manager of the Wind River Platforms business unit. He has held a
number of positions at Wind River, including chief technologist, director of
application environments, vice president of core technology, vice president of
technology, and vice president of platform engineering.
Dr. Stepner has served as vice president and co-general manager of the Wind
River Platforms business unit since February 2000. From December 1993 until
February 2000 Dr. Stepner was vice president, research and development for
Integrated Systems. From April 1984 to March 1993 he served as founder,
president and chief executive officer of Greyhawk Systems, Inc., a manufacturer
of high-resolution liquid crystal displays. In March 1993 Greghawk Systems, Inc.
was sold to AmPro Corporation. Dr. Stepner served as executive vice president of
AmPro Corporation and general manger of the AmPro/Greyhawk division from March
1993 to December 1993. Dr. Stepner holds a B.S. in general engineering from
Brown University and an M.S. and a Ph.D., both in electrical engineering, from
Stanford University.
Mr. Sokhanvari joined Wind River in 1998 and currently serves as vice
president and general manager of the Wind River Services business unit. From
1995 to 1998 Mr. Sokhanvari was a senior program manger for the Global
Commercial Enterprise business unit at Silicon Graphics, a manufacturer of
high-performance computing technology. Mr. Sokhanvari started his career at
Imperial Chemical Industries (ICI) (Wales, U.K.) as the plant chemical
engineer, then became senior project engineer at Swiss Life International
(Zurich, Switzerland) at the Advanced Technologies Laboratory. Mr. Sokhanvari
holds a B.S. in chemical engineering from the University of Glamorgan in
Wales and an M.S. in computer science from the University of Maryland.
Mr. Morrison has served as vice president and general manager of the Wind River
Transportation, Defense and Industrial business unit since February 2000. From
1986 until the present, Mr. Morrison held numerous positions at Integrated
Systems, where he last served as a vice president and general manager of the
Design Automation Solutions business unit. Mr. Morrison holds a B.S. in applied
science from the University of Toronto and an M.S. in aerospace engineering from
the Massachusetts Institute of Technology.
Mr. Sarner has served as vice president and general manager of the Wind River
Consumer business unit since February 2000. From December 1995 until February
2000 Mr. Sarner was vice president and general manager of the Embedded Platforms
Group business unit at Integrated Systems, and previously, vice president of
sales and marketing for Diab Data, Inc., a subsidiary of Integrated Systems. Mr.
Sarner had joined Diab Data in April 1994,
24
prior to the company's acquisition by Integrated Systems. From January 1992
to February 1994 Mr. Sarner served as vice president of marketing at Ready
Systems. From September 1984 to January 1992 he was employed at Intel
Corporation. Mr. Sarner holds an M.B.A. from the Harvard Graduate School of
Business Administration.
Mr. Dawson has served as vice president of the Wind River Hardware Software
Integration business unit since April 2000. In January 1989, Mr. Dawson founded
Embedded Support Tools Corporation where he served as chairman of the board of
directors, president and chief executive officer until the company's acquisition
by Wind River in April 2000. Prior to 1989, Mr. Dawson served as principal
engineer, software engineer, and project leader at various high technology
companies, including EMC Co., Foxboro Co., and Taylor Instruments. Mr. Dawson
holds a B.S. in electrical engineering from the University of Hull in England.
25
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Wind River's Common Stock is traded on the Nasdaq National Market under the
symbol WIND. All share and per share amounts below have been adjusted to give
effect to a three-for-two stock split by means of a stock dividends paid on
February 4, 1999.
The closing price of Wind River's common stock as reported by the Nasdaq
National Market on March 31, 2000 was $36.25 per share. The prices per share
in the following table sets forth the low and high prices on the Nasdaq
National Market for the quarters indicated:
LOW HIGH
- --------------------------------------------------------
Fiscal 1999
First quarter ended April 30, 1998 $21.58 $28.08
Second quarter ended July 31, 1998 19.00 25.92
Third quarter ended October 31, 1998 18.67 34.42
Fourth quarter ended January 31, 1999 20.17 33.42
LOW HIGH
- --------------------------------------------------------
Fiscal 2000
First quarter ended April 30, 1999 $11.25 $25.50
Second quarter ended July 31, 1999 13.69 22.75
Third quarter ended October 31, 1999 13.38 21.00
Fourth quarter ended January 31, 2000 20.88 45.00
Wind River has not paid cash dividends and does not plan to pay dividends on
its common stock in the foreseeable future. Wind River presently intends to
retain all of its earnings for use in its business.
At March 31, 2000, there were approximately 849 stockholders of record of
Wind River. Certain record holders are represented by brokers and other
institutions on behalf of stockholders. Wind River has estimated the total
number of such stockholders to be 52,844.
26
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with the more detailed financial statements presented in Item 8
of this Form 10-K. The consolidated financial data for periods prior to the
financial statements presented in Item 8 of this Form 10-K are derived from
audited consolidated financial statements not included herein.
YEARS ENDED JANUARY 31,
(In thousands, except per share data) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Revenues $171,110 $131,902 $ 93,770 $ 65,804 $44,000
Operating income 30,641 36,610 9,713(1) 16,372 8,130
Net income 22,471 25,623 4,326(1) 11,524 5,383
Net income per share:
Basic .54 .64 .11(1) .33 .17
Diluted .50 .58 .10(1) .28 .15
Working capital 90,271 58,134 152,277 58,336 27,701
Total assets 423,210 329,713 290,841 132,111 45,480
Convertible subordinated notes
and long-term debt 140,000 140,000 140,000 - -
Stockholders' equity 202,705 151,892 114,892 112,199 32,813
- ---------------------------------------------------------------------------------------------------
(1) Operating income, net income and net income per share includes the
effect of the one-time write-offs of $15,159 ($13,353 after tax) which
resulted from the acquisition of in-process technologies from Liberate
Technologies, Inc. and Objective Software Technology, Ltd. during the fiscal
year ended January 31, 1998.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Wind River's actual results could differ materially
from those discussed in any forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to,
those discussed in this section, as well as under the caption "Business",
including "-Additional Risk Factors That May Affect Future Results of
Operations." All forward-looking statements included in this document are
based on information available to Wind River on the date hereof, and Wind
River assumes no obligation to update any such forward-looking statements.
The following discussion should be read in conjunction with the consolidated
financial statements and notes included elsewhere 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. 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
27
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. ("XACT") that was accounted
for under the cost method. During April 1999, Wind River entered into an
asset purchase agreement with XACT pursuant to which Wind River acquired
certain office and other equipment from XACT and revised the terms of an
existing distribution agreement with XACT. Subsequently, but not pursuant to
the asset purchase agreement, Wind River hired a significant number of XACT
employees. As a result of these events, Wind River believes the future
operations and cash flows of XACT have become uncertain and that Wind River's
original investment is not recoverable. Accordingly, Wind River recognized a
charge totaling $500,000 for the difference between the carrying amount of
its investment and the net realizable value during the first quarter of
fiscal year 2000.
On June 30, 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 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, an embedded
operating systems and development tool software developer, in a transaction
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
stock. In connection with the merger of Integrated Systems, Wind River had
incurred approximately $2.2 million in deferred merger related costs as of
January 31, 2000. These costs are to be charged in the period the acquisition
was completed. For additional details on the consummation of the merger, see
"Notes to Consolidated Financial Statements-Subsequent Events."
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
million shares of Wind River common stock. Consummation of the acquisition is
subject to Canadian regulatory approvals. Upon completion of the acquisition,
certain AudeSi's 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 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 5,474,792 shares of common stock in exchange for all
outstanding shares of Embedded Support Tools Corporation common stock and
reserved an additional 1,122,855 shares for issuance upon exercise of
employee stock options assumed in the merger. The acquisition is being
accounted for as a purchase.
28
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. The
results of operations do not include any of the financial information of
Integrated Systems, a company acquired by Wind River subsequent to year end.
As such, Wind River believes that these operating results are not necessarily
indicative of results for any future periods. The acquisition of Integrated
Systems was accounted for as a pooling of interests, and Wind River will,
beginning with the first quarter of fiscal year ending January 31, 2001,
restate all historical financial data of Wind River to include the historical
financial information of Integrated Systems. For Form 8-K filings relating to
this transaction, see Item 14: Exhibits, Financial Statements Schedules, and
Reports on Form 8-K(b). The following table sets forth certain consolidated
income statement data and its percentage of revenues for the periods
indicated:
YEARS ENDED JANUARY 31,
(In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Revenues:
Products $125,529 73% $ 98,844 75% $68,380 73%
Services 45,581 27 33,058 25 25,390 27
- ------------------------------------------------------------------------------------------------------
Total revenues 171,110 100 131,902 100 93,770 100
- ------------------------------------------------------------------------------------------------------
Cost of revenues:
Cost of revenues:
Products 11,124 7 8,224 6 6,349 7
Services 20,508 12 12,999 10 9,633 10
- ------------------------------------------------------------------------------------------------------
Total cost of revenues 31,632 19 21,223 16 15,982 17
- ------------------------------------------------------------------------------------------------------
Gross profit 139,478 81 110,679 84 77,788 83
- ------------------------------------------------------------------------------------------------------
Operating expenses:
Operating Expenses:
Selling and marketing 60,962 36 45,968 35 33,226 35
Product development and engineering 29,659 17 19,147 15 12,898 14
General and administrative 15,964 9 8,174 6 6,792 7
Acquisition related and other 1,436 1 - 0 15,159 16
Amortization of goodwill &
purchased intangibles 816 - 780 1 - 0
- ------------------------------------------------------------------------------------------------------
Total operating expenses 108,837 63 74,069 57 68,075 73
- ------------------------------------------------------------------------------------------------------
Income from operations 30,641 18 36,610 28 9,713 10
Other income, net 5,939 3 4,801 4 3,442 4
- ------------------------------------------------------------------------------------------------------
Income before provision for income taxes 36,580 21 41,411 31 13,155 14
Provision for income taxes 14,109 8 15,788 12 8,829 9
- ------------------------------------------------------------------------------------------------------
Net income $ 22,471 13% $ 25,623 19% $ 4,326 (1) 5%
======================================================================================================
(1) Net income before the effect of the adjustment for acquisition related
and other charges of $15,159 ($13,353 after tax) was $17,679 or 19% 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.
29
YEARS ENDED JANUARY 31, 2000 AND 1999
REVENUES
Revenues for fiscal year 2000 were $171.1 million compared to $131.9 million
for fiscal 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 30% is due to increases in both product revenues and service
revenues. Product revenues accounted for approximately 73% and 75% of the
total revenues in fiscal 2000 and 1999, respectively, with service revenues
accounting for the balance of total revenue over this period.
Product revenues were $125.5 million for fiscal 2000 compared to $98.8
million for fiscal 1999. The increase of 27% 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, and the integration of products from acquired
companies, including Tornado for Managed Switches from XACT and Network
Protocols from RouterWare. 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 $45.6 million for fiscal 2000 compared to $33.1 million
for fiscal 1999. The increase of 38% 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 software development environments and software applications provided
to customers. In addition, revenue from professional services increased as
Wind River placed additional strategic emphasis in this area. In addition,
through the acquisition of Integrated Systems, we expect the percentage of
revenue from services to increase. 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 and
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 $57.3 million for fiscal 2000 compared
to $41.6 million for fiscal 1999. International revenues accounted for 33%
and 32% of total revenues for the fiscal years ended January 31, 2000 and
1999, respectively. Revenues from European sources increased 23% from fiscal
1999 to 2000 while revenues from Japan increased 55% 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. Revenues derived from indirect sales channels worldwide represented
22% and 26% of total revenues in fiscal 2000 and 1999, respectively.
Significant portions of these indirect revenues are attributable to revenues
from WRSKK, a Japanese subsidiary in which we own 70% and three distributors
own 10% each. Wind River sells products to WRSKK at discounts that
approximate those offered to other independent distributors of Wind River's
products. Wind River's international sales are denominated in the local
currencies, and an increase in the relative value of the dollar against such
currencies would reduce Wind River's revenues in dollar terms or make Wind
River's products more expensive and, therefore, potentially less competitive
in foreign markets. Wind River actively monitors its foreign currency
exchange exposure; and to date such exposures have not had a material impact
on Wind River's results of operations to date. Wind River enters into forward
contracts to hedge the short-term impact of foreign currency fluctuations.
Revenues from Asia Pacific sources including Japan represented 47% of
international revenues for both fiscal 2000 and 1999. See "Business
- -Additional Risk Factors That May Affect Future Results of Operations". Our
International Business Activities Subject Us To Risks That Could Adversely
Affect Our Business".
30
COST OF PRODUCTS
Cost of products was $11.8 million for fiscal 2000 compared to $8.9 million
for fiscal 1999. Product-related cost of revenues as a percentage of product
revenues remained at 9% for both fiscal 2000 and 1999. As a result, gross
profit margins for products remained constant at 91%. 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. 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 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 $446,000 and
$530,000 in fiscal 2000 and 1999, respectively. Capitalized software
development costs were fully amortized as of January 31, 2000. Through our
acquisition of Integrated Systems, 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 $20.5 million for fiscal 2000 compared to $13.0 million
for fiscal 1999. Service related cost of revenues as a percentage of service
revenues was 45% and 39% for fiscal 2000 and 1999, respectively. Service
related cost of revenue 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 costs of service revenues is
due to our investment in developing new services offerings and the addition
of new personnel and certified third party contractors to our professional
services organization. We expect 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 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 $61.0 million for fiscal 2000 compared to
$46.0 million for fiscal 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 36% and 35% for fiscal 2000 and 1999, respectively.
The increase in absolute dollars and as a percentage of total revenues from
fiscal 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 $29.7 million for fiscal
2000 compared to $19.1 million for fiscal 1999, an increase of 55%. As a
percentage of revenues, product development and engineering expenses
increased from 15% to 17% from fiscal 1999 to 2000, respectively. The
increase in product development and engineering expenses is primarily due to
the increase in staff and associated support for engineers to expand and
enhance Wind River's product line, including the costs associated with
integrating the XACT engineering team Wind River hired in April 1999 and
integrating the engineering staff added as a result of the acquisition of
RouterWare in June 1999. In addition, Wind River had $594,000 of funded
research and development for fiscal year 2000 related to our Center of
Excellence initiative. We believe that product development and engineering
expenses will continue to increase in absolute dollars as a result of the
investment in the internal
31
development of new products, technologies, and through acquisitions of
companies and technologies. See "Business--Additional Risk Factors That May
Affect Future Results of Operations."
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $16.0 million for fiscal 2000
compared to $8.2 million for fiscal 1999, an increase of 95%. As a percentage
of revenues, general and administrative expenses increased to 9% in fiscal
2000 from 6% in fiscal 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 backbone to support
integration of acquired company's 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 COSTS
Acquisition related costs were $1.4 million for fiscal 2000. These costs
relate to the integration of Integrated Systems into Wind River, 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. As a result of future
events, Wind River believes the future operations and cashflows of XACT have
become uncertain and that Wind River's original investment is not
recoverable. Accordingly, Wind River has recognized a charge totaling
$500,000 for the difference between the carrying amount of its investment and
the net realizable value.
In connection with the acquisition of Integrated Systems, we expect to incur
integration costs in fiscal 2001. The costs estimated to be incurred in
fiscal 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 technology increased to $816,000 in
fiscal 2000 from $780,000 in fiscal 1999. Amortization of goodwill and
purchased technology includes the amortization of goodwill and other
purchased intangible assets relating to various purchase acquisitions. In the
first quarter of fiscal year 2001, we expect to expense approximately $6.8
million of goodwill and purchased technology and write off approximately $3.7
million of in process research and development as a result of recent
acquisitions. During the following 16 quarters, we expect to expense
approximately $19.5 million of goodwill and purchased intangibles. The $19.5
million per quarter primarily consists of amortization of goodwill and
purchased technology relating to the acquisition of Embedded Support Tools
Corporation. The increase is primarily due to our recent 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 issued in July 1997, gains and losses related
to inter-company foreign
32
currency transactions and income and losses related to the 30% minority
interest held by the Japanese participants in WRSKK.
Interest income was $15.4 million for fiscal 2000 compared to $13.7 million
for fiscal 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 $308.3 million and $246.7 million,
respectively.
Net interest expense and other was $9.1 million for fiscal 2000 compared to
$8.7 million for fiscal 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. The Company 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.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
Minority interest in consolidated subsidiary increased to $327,000 in fiscal
2000 from $151,000 in fiscal 1999. This amount represent the 30% minority
interest held by the Japanese participants in WRSKK. Wind River distributes
its products in Japan through WRSKK, a joint venture in which Wind River owns
a 70% equity interest. Innotech Corporation, Kobe Steel Ltd. and Nissin
Electric Ltd., the other partners in the joint venture, each owns a 10%
equity interest.
PROVISION FOR TAXES
The effective tax rate was 38.6% for fiscal 2000 compared to 38.1% for fiscal
1999. The overall changes in the effective tax rates result primarily from
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 certain non-deductible acquisition costs
related to RouterWare.
YEARS ENDED JANUARY 31, 1999 AND 1998
REVENUES
Revenues for fiscal 1999 were $131.9 million compared to $93.8 million for
fiscal 1998. The increase in revenues of 41% is due to increases in both Wind
River's product revenue and services revenues. Product revenues accounted for
approximately 75% and 73% of the total revenues in fiscal 1999 and 1998,
respectively, with service revenues accounting for the balance of total
revenue over this period.
Revenues from the sale of products were $98.8 million for fiscal 1999
compared to $68.4 million for fiscal 1998. The increase of 45% in product
revenues was due primarily to the continued acceptance of Wind River's
products and increased run-time license revenues. Tornado was first
introduced in fiscal 1996, and its sales have continued to grow, as Tornado
has become available for use with more host platforms and microprocessor
targets. In addition, demand grew for Tornado in Windows-based customer
development environments. Run-time license revenue has increased each year in
conjunction with growing shipments of customers' products and systems that
incorporate the VxWorks operating system.
Wind River's service revenues were $33.1 million for fiscal 1999 compared to
$25.4 million for fiscal 1998. The increase of 30% was primarily due to an
increase in maintenance support agreements and training resulting from the
increase in Wind
33
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 $41.6 million for fiscal 1999 compared
to $26.9 million for fiscal 1998. International revenues accounted for 32%
and 29% of total revenues for the fiscal years ended January 31, 1999 and
1998, respectively. Revenues from European sources increased 34% from fiscal
1998 to 1999 while revenues from Japan increased over 100% over the same
periods. Revenues derived from indirect sales channels worldwide represented
26% and 21% of total revenues in fiscal 1999 and 1998, respectively.
Significant portions of these indirect revenues are attributable to revenue
from WRSKK. Revenues from Asia Pacific sources including Japan represented
47% and 38% of international revenues for the year ended January 31, 1999 and
1998, respectively. (See "Business - Additional Risk Factors That May Affect
Future Results of Operations.")
COST OF PRODUCTS
Cost of products was $8.9 million for fiscal 1999 compared to $6.3 million
for fiscal 1998. Product-related cost of revenues as a percentage of product
revenues remained constant at 9% in both fiscal years 1998 and 1999. As a
result, gross profit margins for products remained constant at 91%. Product
costs also include license and other direct purchase costs of third-party
software that is distributed by or integrated into Wind River's products and
the amortization of capitalized software development costs. Amortization of
capitalized software development costs included in cost of products amounted
to $530,000 and $654,000 in fiscal 1999 and 1998 respectively.
COST OF SERVICES
Cost of services was $13.0 million for fiscal 1999 compared to $9.6 million
for fiscal 1998. Service related cost of revenues as a percentage of service
revenues was 39% and 38% for fiscal 1999 and 1998, respectively. 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 $46.0 million for fiscal 1999 compared to
$33.2 million for fiscal 1998 or 35% of total revenues for both fiscal years.
The increase of 38% from fiscal 1998 to 1999 in absolute dollars resulted
primarily from the growth of sales and marketing personnel and field
engineers and related costs and increases in expenses related to marketing
and advertising programs and third-party marketing costs for product
introductions and promotions. During the fourth quarter of fiscal year 1999,
Wind River announced and launched the introduction of Tornado II, an enhanced
version of its integrated development environment.
PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Product development and engineering expenses were $19.1 million for fiscal
1999 compared to $12.9 million for fiscal 1998, an increase of 48%. As a
percentage of revenues, product development and engineering expenses
increased from 14% to 15% from fiscal 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 Wind
River's product line, including the Tornado II integrated development
environment.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $8.2 million for fiscal 1999
compared to $6.8 million for fiscal 1998, an increase of 20%. As a percentage
of revenues, general and administrative expenses decreased to 6% in fiscal
1999 from 7% in fiscal 1998. The increase in absolute dollars was primarily
due to the growth in worldwide staff and infrastructure investments in the
areas of information systems, finance and administration. In 1997, Wind River
commenced a worldwide financial business and production systems replacement
project that uses software primarily from Oracle. The new systems were
implemented, in part, to bring Wind River's business and production computer
systems into compliance with Year 2000 requirements.
34
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 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 to $780,000 in
fiscal 1999 from $0 in fiscal 1998. Amortization of goodwill and purchased
intangible assets include the amortization of goodwill and other purchased
intangible assets relating to various purchase acquisitions.
OTHER INCOME AND EXPENSE
Interest income was $13.7 million for fiscal 1999 compared to $7.7 million
for fiscal 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.
Net interest expense and other was $8.7 million for fiscal 1999 compared to
$4.2 for fiscal 1998. The net increase in interest expense and other 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 38.1% for fiscal 1999 compared to 67.1% for fiscal
1998. The higher tax rate in fiscal 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.
35
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. Wind River believes that this
information has been prepared on the same basis as the audited consolidated
financial statements appearing in Item 8 of this Form 10-K and believes that all
necessary adjustments (consisting only of normal recurring adjustments) have
been included in the amounts stated below and present fairly the results of such
periods when read in conjunction with the audited consolidated financial
statements and notes thereto.
All share and per share amounts in this report have been adjusted to give effect
to a three-for-two stock split by means of a stock dividend paid on February 4,
1999.
THREE MONTHS ENDED,
- ----------------------------------- ------------------------------------------------------------------------------------------
(In thousands, JAN. 31 OCT. 31 JUL. 31 APR. 30 JAN. 31 OCT. 31 JUL. 31 APR. 30
except per share amounts) 2000 1999 1999 1999 1999 1998 1998 1998
- ----------------------------------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
Revenues:
Products $40,885 $32,403 $28,702 $23,539 $29,725 $25,716 $23,737 $19,666
Services 12,544 12,198 10,902 9,937 9,452 8,483 8,065 7,058
- ----------------------------------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
Total revenues 53,429 44,601 39,604 33,476 39,177 34,199 31,802 26,724
- ----------------------------------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
Cost of revenues:
Products 4,038 3,077 2,766 1,691 2,349 2,062 2,315 1,946
Services 6,395 5,189 4,708 4,216 3,576 3,343 3,245 2,835
- ----------------------------------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
Total cost of revenues 10,433 8,266 7,474 5,907 5,925 5,405 5,560 4,781
- ----------------------------------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
Gross profit 42,996 36,335 32,130 27,569 33,252 28,794 26,242 21,943
- ----------------------------------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
Operating Expenses:
Selling and marketing 18,476 15,931 14,269 12,286 13,156 11,596 11,229 9,987
Product development and
Engineering 8,290 7,580 7,306 6,483 5,518 4,765 4,707 4,157
General and administrative 5,339 4,810 3,606 2,209 2,771 1,908 1,896 1,599
Acquisition related and other 205 - 929 302 - - - -
Amortization of goodwill &
purchased intangibles 95 95 95 83 83 83 83 83
- ----------------------------------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
Total operating expenses 32,405 28,416 26,205 21,363 21,528 18,352 17,915 15,826
- ----------------------------------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
Income from operations 10,591 7,919 5,925 6,206 11,724 10,442 8,327 6,117
Other income, net 2,373 1,510 1,497 559 1,397 1,230 1,225 949
- ----------------------------------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
Income before provision for
income taxes 12,964 9,429 7,422 6,765 13,121 11,672 9,552 7,066
Provision for income taxes 4,897 3,535 3,180 2,497 4,751 4,541 3,698 2,798
- ----------------------------------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
Net income $8,067 $5,894 $4,242 $4,268 $8,370 $7,131 $5,854 $4,268
=================================== ========== ========== ========== =========== =========== ========== ========== ===========
Net income per share:
Basic $0.19 $0.14 $0.10 $0.10 $0.20 $0.18 $0.15 $0.11
Diluted $0.17 $0.13 $0.10 $0.10 $0.19 $0.16 $0.13 $0.10
=================================== ========== ========== ========== =========== =========== ========== ========== ===========
Weighted average common and common equivalent shares:
Basic 42,207 41,837 41,385 41,265 40,840 40,466 40,233 39,527
Diluted 47,416 44,043 43,735 43,918 44,391 43,841 43,833 43,308
=================================== ========== ========== ========== =========== =========== ========== ========== ===========
36
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2000, Wind River had working capital of approximately $90.3
million and cash and investments of approximately $268.6 million, which
include investments with maturities of greater than one year of $181.6
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 2000, Wind River's operating activities provided net cash of $32.5
million due primarily to net income, the non-cash impact of depreciation and
amortization, the increase in income taxes payable, an increase in deferred
revenue and the tax benefit related to employee stock option exercises. 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 certain delays in the collection of
invoices as a result of the implementation of Oracle Financial System. 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 merger costs, prepaid royalty costs and prepaid sales expenses.
In fiscal 2000, Wind River's investing activities used net cash of $23.8
million. Uses of cash relating to the purchases of investments, purchases of
investments held as collateral for the second operating lease and the
acquisition of equipment 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
$23.0 million. Restricted cash increased due to the new collateral funding
for the second corporate facility operating lease discussed further below.
The collateral consists of direct obligations of the United States
government, with the majority being long-term investments.
In fiscal 2000, Wind River's financing activities provided net cash of $8.1
million. Cash provided by the issuance of common stock for stock option
exercises and the line of credit through a Japanese subsidiary were offset by
a treasury stock repurchase 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. 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 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 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.
On February 15, 2000, Wind River acquired Integrated Systems, Inc. In
connection with the acquisition, Wind River issued 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 stock.
On March 31, 2000, Wind River acquired Embedded Support Tools Corporation. In
connection with the acquisition, Wind River issued an aggregate of 5,474,792
shares of its common stock in exchange for all outstanding common shares of
Embedded Support Tools Corporation and reserved an additional 1,122,855
shares for issuance upon exercise of outstanding employee stock options
assumed in the transaction.
37
In fiscal 1998, Wind River entered into an operating lease for its new
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 fiscal 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 connection with the lease of Wind River's current 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 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
38
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 Euros, 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. See Note 1 of Notes to Consolidated
Financial Statements included in "Item 8-Financial Statements and
Supplementary Data."
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 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.
39
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
Wind River's exposure to market risk for changes in interest rates relate
primarily to its investment portfolio and long-term debt obligations.
Wind River places its investments with high quality credit issuers and, by
policy, limits the amount of credit exposure to any one issuer. As stated in
its policy, Wind River's first priority is to reduce the risk of principal
loss. Consequently, Wind River seeks to preserve its invested funds by
limiting default risk, market risk and reinvestment risk. Wind River
mitigates default risk by investing in only high quality credit securities
that it believes to be low risk and by positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. Wind River
believes an immediate 100 basis point move in interest rates affecting Wind
River's floating and fixed rate financial instruments as of January 31, 2000
would have an immaterial effect on Wind River's pretax earnings. Wind River
also believes the immediate 100 basis point move in interest rates would have
an immaterial effect on the fair value of Wind River's financial instruments.
FOREIGN CURRENCY RISK
Wind River transacts business in various foreign currencies, primarily in
Japanese yen and certain European currencies. Wind River has established a
foreign currency-hedging program, utilizing foreign currency exchange
contracts for its foreign currency transaction exposures in Japan and certain
European countries. Under this program, increases or decreases in Wind
River's foreign currency transactions are partially offset by gains and loses
on the forward contracts, so as to mitigate the possibility of foreign
currency transaction gains and losses. Wind River does not use forward
contracts for trading purposes. All outstanding forward contracts at the end
of a period are marked-to-market with unrealized gains and losses included in
other income, net, and thus are recognized in income in advance of the actual
foreign currency cash flows. As these forward contracts mature the realized
gains and losses are recorded and are included in net income as a component
of other income, net. Wind River's ultimate realized gain or loss with
respect to currency fluctuations will depend on the currency exchange rates
and other factors in effect as the contracts mature. At January 31, 2000,
Wind River had outstanding forward contracts to hedge Japanese Yen with
notional amounts totaling approximately $0.9 million.
The unrealized gains and losses on the outstanding forward contracts at
January 31, 2000 were immaterial to Wind River's consolidated financial
statements. Due to the short-term nature of the forward contracts, the fair
value at January 31, 2000 was negligible. The realized gains and losses on
these contracts as they matured were not material to the consolidated
operations of Wind River.
INTEREST RATE SWAP RISK
In March 1998, Wind River entered into a 5.9% accreting interest rate swap to
reduce the impact of changes in interest rates on its floating interest rate
operating lease for its new headquarters. At January 31, 2000, the notional
amount of the accreting interest rate swap was $28.5 million. The estimated
fair value at January 31, 2000 was negligible.
EQUITY PRICE RISK
Wind River owns 433,752 shares of common stock of e-Sim, Inc., an Israeli
corporation. Wind River purchased the common stock prior to e-Sim's public
offering of $7.50 per share. e-Sim went public in July 1998, and at January
31, 2000, the closing price of e-Sim's stock was $19.63 per share. In
addition, Wind River owns 416,666 shares of common stock of Liberate
Technologies, Inc, a Delaware corporation. Wind River purchased the stock
prior to Liberate's public offering. Liberate went public in July 1999 at
$16.00 per share, and at January 31, 2000, the closing price of Liberate's
stock was $78.81 per share. Wind River values these investments using the
closing price of the stock at the end of each month. As a result, Wind River
reflects these investment on its balance sheet at January 31, 2000 at their
market value of approximately $41.4 million
40
in aggregate, with the unrealized gains and losses excluded from earnings and
reported in accumulated other comprehensive income component of stockholders'
equity. At April 20, 2000, the closing prices of e-Sim's and Liberate's stock
were $16.75 and $33.00, respectively.
41
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
- ---------------------------------------------------------------------------------------------------------------------------
Financial Statements:
Report of Independent Accountants 43
Consolidated Statements of Income for
the years ended January 31, 2000, 1999, and 1998 44
Consolidated Balance Sheets
at January 31, 2000 and 1999 45
Consolidated Statements of Cash Flows
for the years ended January 31, 2000, 1999, and 1998 46
Consolidated Statements of Stockholders' Equity
for the years ended January 31, 2000, 1999, and 1998 47
Notes to Consolidated Financial Statements 48
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 70
All other schedules have been omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Wind River Systems, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Wind River Systems, Inc. and its subsidiaries at January 31, 2000
and 1999, 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. In addition,
in our opinion, the financial statement schedule identified in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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
San Jose, California
March 2, 2000
43
WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 31,
(In thousands, except per share amounts) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
44
WIND RIVER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
(In thousands, except par value) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
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
===========================================================================================================================
See accompanying notes to consolidated financial statements.
45
WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31,
(In thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
46
WIND RIVER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED TOTAL
ADDITIONAL OTHER STOCK-
COMMON STOCK PAID IN LOAN TO TREASURY STOCK COMPREHENSIVE RETAINED HOLDERS'
(In thousands) SHARES AMOUNT CAPITAL STOCKHOLDER SHARES AMOUNT INCOME (LOSS) EARNINGS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1997 38,805 39 92,127 - (169) (3,121) (663) 23,817 112,199
---------------- ---------
Net income - - - - - - - 4,326 4,326
Unrealized gain on investments - - - - - - 856 - 856
Currency translation - - - - - - (1,390) - (1,390)
adjustments
---------------- ---------
Comprehensive income - - - - - - (534) - 3,792
---------------- ---------
Common Stock issued
upon exercise of stock 1,080 1 2,403 - - - - - 2,404
options
Common Stock issued under
stock purchase plan 96 - 1,861 - - - - - 1,861
Tax benefit from stock plans - - 7,000 - - - - - 7,000
Purchase of treasury stock - - - - (546) (12,364) - - (12,364)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 39,981 40 103,391 - (715) (15,485) (1,197) 28,143 114,892
---------------- ---------
Net income - - - - - - - 25,623 25,623
Unrealized loss on investments - - - - - - (1,115) - (1,115)
Currency translation - - - - - - 157 - 157
adjustments
---------------- ---------
Comprehensive income - - - - - - (958) - 24,665
---------------- ---------
Common Stock issued upon
acquisition of Zinc 339 - 582 - - - - (1,125) (543)
Software, Inc.
Common Stock issued
upon exercise of a warrant 337 - 1,109 - - - - - 1,109
Common Stock issued
upon exercise of stock 1,671 2 5,926 - - - - - 5,928
options
Common Stock issued under
stock purchase plan 121 - 2,447 - - - - - 2,447
Tax benefit from stock plans - - 13,400 - - - - - 13,400
Purchase of treasury stock - - - - (397) (10,006) - - (10,006)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1999 42,449 42 126,855 - (1,112) $(25,491) $(2,155) $52,641 $151,892
---------------- ---------
Net income - - - - - - - 22,471 22,471
Unrealized gain on investments - - - - - - 21,299 - 21,299
Currency translation
adjustments - - - - - - (844) - (844)
---------------- ---------
Comprehensive income - - - - - - 20,455 - 42,926
---------------- ---------
Common Stock issued
upon exercise of stock 955 1 3,917 - - - - - 3,918
options
Common Stock issued under
stock purchase plan 226 - 3,075 - - - - - 3,075
Tax benefit from stock plans - - 5,000 - - - - - 5,000
Accelerated vesting of
stock options 218 218
Loan to stockholder - - - (1,900) - - - - (1,900)
Effect of fiscal year end
change for acquired subsidiary - - - - - - - (77) (77)
Purchase of treasury stock - - - - (165) (3,997) - - (3,997)
Sale of Treasury Stock 100 - 1,650 - - - - - 1,650
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2000 43,730 $43 $140,715 $(1,900) (1,277) $(29,488) $18,300 $75,035 $202,705
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
47
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 agreement. Fair value is determined based
upon the quoted market prices of the securities as of the balance sheet date.
48
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.
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
49
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 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
50
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.
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.
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
51
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 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.
52
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".
NOTE 3: LAND AND EQUIPMENT
Land and equipment consist of the following:
JANUARY 31,
(In thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
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
===========================================================================================================================
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.
53
NOTE 4: INVESTMENTS
Cash equivalents and investments consist of the following:
JANUARY 31,
(In thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------
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.
The contractual maturities of marketable securities, regardless of their balance
sheet classification, were as follows:
JANUARY 31,
(In thousands) 2000
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
===========================================================================================================================
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
54
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.
NOTE 6: PROVISION FOR INCOME TAXES
The provision for income taxes was composed as follows:
YEARS ENDED JANUARY 31,
(In thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
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
===========================================================================================================================
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
YEARS ENDED JANUARY 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
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%
===========================================================================================================================
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.
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:
55
- ---------------------------------------------------------------------------------------------------------------------------
JANUARY 31,
(In thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
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
===========================================================================================================================
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
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.
56
NOTE 9: NET INCOME PER SHARE
In accordance with SFAS 128, the calculation of basic and diluted net income
per share is presented below:
YEARS ENDED JANUARY 31,
(In thousands, except per share information) 2000 1999 1998
- ----------------------------------------------------------------------------------------------
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
==============================================================================================
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.
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.
57
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.
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.
58
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.
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:
FISCAL 2000 FISCAL 1999 FISCAL 1998
-------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
(In thousands, AVERAGE NUMBER AVERAGE NUMBER AVERAGE
except per share NUMBER OF PRICE PER OF PRICE PER OF PRICE PER
amounts) SHARES SHARE SHARES SHARE SHARES SHARE
---------------------------------------------------------------------------------------------------
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
===================================================================================================
The following table summarizes information about fixed stock options outstanding
at January 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
RANGE OF EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
(In thousands) (In years) (In thousands)
- --------------------------------------------------------------------------------------------------------------
$.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
==============================================================================================================
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 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.
59
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:
YEARS ENDED JANUARY 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
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 - - -
- ---------------------------------------------------------------------------------------------------------------------------
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:
(In thousands except YEARS ENDED JANUARY 31,
per share amounts) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
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)
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.
60
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:
(In thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Year ending January 31,
2001 2,665
2002 1,812
2003 699
2004 632
2005 516
Thereafter 0
- ---------------------------------------------------------------------------------------------------------------------------
$6,324
===========================================================================================================================
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 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.
61
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 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:
(In thousands) REVENUES ASSETS
- ----------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------
Other International consists of the revenues and assets of operations in Europe
and Asia Pacific excluding Japan.
62
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.
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
Year Ended January 31, 2000 PRO FORMA PRO FORMA
(in 000s) WIND RIVER ISI ADJUSTMENTS COMBINED EST ADJUSTMENTS COMBINED
- ----------------------------------------------------------------------------------------------------------------------------------
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)
- ----------------------------------------------------------------------------------------------------------------------------------
63
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to the registrant's executive
officers is included in Item 4A of this 10-K. The information required by the
item relating to the registrant's directors is incorporated by reference from
Wind River's proxy statement related to the annual stockholders' meeting to
be held on July 26, 2000, to be filed by Wind River with the Securities and
Exchange Commission ("Proxy Statement").
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Proxy Statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Proxy Statement.
64
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements and Schedules
Schedules - See Index to Consolidated Financial Statements at Item 8
of this report.
All other schedules are omitted because they were not required or the
required information is included in the Consolidated Financial
Statements or Notes thereto.
2. Exhibits
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission:
EXHIBIT
NUMBER EXHIBIT TITLE
- -------------------------------------------------------------------------------------------------------------------------------
3.1 (xi) Certificate of Incorporation of Wind River, as amended to date.
3.2 (i) By-laws of Wind River.
10.1* (i) Form of Indemnity Agreement entered into between the
Registrant and its officers and directors.
10.2* (iv) 1987 Equity Incentive Plan, as amended to date.
10.3* (i) Form of Incentive Stock Option Grant under the 1987 Equity
Incentive Plan.
10.4* (i) Form of Nonstatutory Stock Option Grant under the 1987 Equity
Incentive Plan.
10.5* (iv) 1993 Employee Stock Purchase Plan, as amended to date.
10.6 (i) Master Technology License Agreement between the Registrant and
Wind River Systems, K.K., dated as of September 11, 1990.
10.7 (i) Amended Joint Venture Agreement for Wind River Systems, K.K.
between the Registrant and the parties named herein, dated as
of October 1, 1991.
10.9 (i) Marina Village Industrial Gross Lease between the Registrant
and Alameda Real Estate Investments, dated as of March 15,
1990, as amended.
10.12* (iii) Amended and restated Deferred Compensation Agreement between
the Registrant and Ronald A. Abelmann.
10.14* (iv) 1995 Non-Employee Directors' Stock Option Plan.
10.15* (v) Form of Nonstatutory Stock Option Grant under the
Non-Employee Director's Stock Option Plan.
10.16 (vi) Indenture between Wind River and Deutschebank AG as Trustee,
dated as of July 31, 1997.
10.17 (vi) Convertible Subordinated Notes Purchase Agreement between the
Registrant and Deutsche Morgan Grenfell Inc., Hambrecht &
Quist LLC, and Wessels, Arnold & Henderson, L.L.C., dated as
of July 31, 1997.
10.18 (vi) Registration Rights Agreement between the Registrant and
Deutsche Morgan Grenfell Inc., Hambrecht & Quist LLC and
Wessels, Arnold & Henderson, L.L.C., dated as of July 31,
1997.
10.19 (vii) Lease Agreement between Deutsche Bank AG, New York Branch,
and Wind River Systems, Inc., dated as of September 12, 1997.
10.13* (viii) Executive Officers' Change of Control Incentive and Severance
Benefit Plan dated as of November 16, 1995.
10.20* (viii) Form of Performance Option under the Amended and Restated
Wind River Systems, Inc. 1987 Equity Incentive Plan.
10.21 (xvii) 1998 Non-Officer Stock Option Plan as amended.
10.22* (xviii) 1998 Equity Incentive Plan as amended.
10.23* (x) Form of Stock Option Agreement under the 1998 Equity Incentive Plan.
10.24 (xii) Retirement and Consulting Agreement between the Registrant
and Ronald A. Abelmann, dated as of July 29, 1999.
10.25 (xiii) Executive Employment Agreement between the Company and Thomas
St. Dennis, dated as of September 7, 1999.
10.26 (xiii) Secured Promissory Note, dated as of September 7, 1999
between the Company and Thomas St. Dennis.
65
10.27 (xiii) Investment Propriety Security Agreement by Thomas St. Dennis
in favor of the Company.
10.28 (xiii) Non-Statutory Stock Option Agreement between the Company and
Marla A. Stark.
10.29 (xiv) Agreement and Plan of Merger and Reorganization dated as of
October 21, 1999, among Wind River Systems, Inc., University
Acquisition Corp. and Integrated Systems, Inc.
10.30 (xiv) Stock Option Agreement dated as of October 21, 1999 between
Wind River Systems, Inc. and Integrated Systems, Inc.
10.31 (xiv) Form of Voting Agreement between Wind River Systems. Inc. and
certain shareholders of Integrated Systems, Inc.
10.32 (xiv) Form of Voting Agreement between Integrated Systems, Inc. and
certain stockholders of Wind River Systems, Inc.
10.33 (xv) Stockholder Rights Plan
10.34 (xvi) Lease Agreement between Deutsche Bank AG, and Wind River
Systems, Inc., dated as of November 30, 1999.
21 Subsidiaries of Registrant.
23 Consent of Independent Accountants.
27.1 Financial Data Schedule.
- -------------------------------------------------------------------------------------------------------------------------------
(i) Incorporated by reference from Wind River's Registration
Statement on Form S-1 (No. 33-59146), filed with the Commission
on March 5, 1993, as amended through the date hereof.
(ii) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended January 31, 1994 and incorporated herein by
reference.
(iii) Filed as an exhibit to Form 10-Q/A, Amendment No. 2, for the
quarter ended April 30, 1996 and incorporated herein by
reference.
(iv) Incorporated by reference from Wind River's Registration
Statement on Form S-8 (No. 333-06921) filed with the
Commission on June 18, 1996.
(v) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended January 31, 1997 and incorporated herein by
reference.
(vi) Filed as an exhibit to Form 10-Q for the quarter ended July
31, 1997 and incorporated herein by reference.
(vii) Filed as an exhibit to Form 10-Q for the quarter ended
October 31, 1997 and incorporated herein by reference.
(viii) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended January 31, 1998 and incorporated herein by
reference.
(ix) Filed as an exhibit to Form 10-Q for the quarter ended April
30, 1998 and incorporated herein by reference.
(x) Filed as an exhibit to Form 10-Q for the quarter ended July
31, 1998 and incorporated herein by reference.
(xi) Filed as an exhibit to Form 10-Q for the quarter ended
October 31, 1998 and incorporated herein by reference.
(xii) Filed as an exhibit to Form 10-Q for the quarter ended July
31, 1999 and incorporated herein by reference.
(xiii) Filed as an exhibit to Form 10-Q for the quarter ended
October 31, 1999 and incorporated herein by reference.
(xiv) Incorporated by reference to the Company's Registration
Statement on Form S-4 filed November 23, 1999 (No. 333-91545).
(xv) Incorporated by reference to the Company's Form 8-K, dated
November 4, 1999.
(xvi) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended January 31, 2000.
(xvii)* Filed as an exhibit to the Company's Registration Statement on Form S-8
dated April 14, 2000 (No. 33-34874).
(xviii) Filed as an exhibit to the Company's Registration Statement on Form S-8
dated March 27, 2000 (No. 33-33348).
* Indicates management contracts or compensatory arrangements
filed pursuant to Item 601(b) (10) of Regulations S-K.
(b) Reports on Form 8-K
The Company has filed no report on Form 8-K during the fourth
quarter of fiscal 2000.
66
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Wind River Systems, E.C., S.A.R.L, a French corporation.
Wind River Systems GmbH, a German corporation.
Wind River Systems UK, Ltd., a United Kingdom corporation.
Wind River Systems Scotland Ltd., a Scottish corporation
Wind River Systems Italia, S.r.l., a Italian corporation.
Wind River Systems K.K., a Japanese corporation, a majority (70%)-owned
subsidiary.
Wind River Systems International, Inc., a U.S. corporation.
Zinc Software, Incorporated, a Utah corporation.
RouterWare, Incorporated, a California corporation
Integrated Systems, Inc., a California corporation
Embedd Support Tools Corp., a Massachusetts Corporation
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-34874, 333-33348, 333-86367, 333-82109,
33-63796, 33-59146, 333-06921, 333-66245 and 333-61053) and the Prospectuses
constituting part of Form S-3 (Nos. 333-59311 and 333-38987) of Wind River
Systems, Inc. of our report dated March 2, 2000, relating to the consolidated
financial statements and financial statement schedule, which appear in this
10-K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 28, 2000
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Wind River Systems, Inc.
Dated: April 28, 2000 /S/ RICHARD W. KRABER
---------------------
Richard W. Kraber
Vice President of Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities indicated, on April 28, 2000.
NAME TITLE
/S/ JERRY L. FIDDLER Chairman of the Board
- ----------------------------------
Jerry L. Fiddler
/S/ THOMAS ST. DENNIS President, Chief Executive Officer
- ---------------------------------- and Director
Thomas St. Dennis (principal executive officer)
/S/ RICHARD W. KRABER Vice President of Finance, Chief Financial
- ---------------------------------- Officer and Secretary
Richard W. Kraber (principal financial and accounting officer)
/S/ RONALD A. ABELMANN Director
- ----------------------------------
Ronald A. Abelmann
/S/ JOHN C. BOLGER Director
- ----------------------------------
John C. Bolger
/S/ WILLIAM B. ELMORE Director
- ----------------------------------
William B. Elmore
/S/ NAREN K. GUPTA Director
- ----------------------------------
Naren K. Gupta
68
/S/ GRANT INMAN Director
- ----------------------------------
Grant Inman
/S/ DAVID B. PRATT Director
- ----------------------------------
David B. Pratt
69
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO END OF
(In thousands) THE YEAR EXPENSES(1) WRITE-OFFS THE YEAR
- ---------------------------------------------------------------------------------------
Year ended January 31, 2000:
Allowance for doubtful accounts $ 752 $ 640 $ (287) $1,105
Allowance for sales returns 798 502 - 1,300
- ---------------------------------------------------------------------------------------
$1,550 $1,142 $(287) $2,405
- ---------------------------------------------------------------------------------------
Year ended January 31, 1999:
Allowance for doubtful accounts $ 800 $ - $ (48) $ 752
Allowance for sales returns 660 288 (150) 798
- ---------------------------------------------------------------------------------------
$1,460 $288 $(198) $1,550
- ---------------------------------------------------------------------------------------
Year ended January 31, 1998:
Allowance for doubtful accounts $ 589 $223 $ (12) $ 800
Allowance for sales returns 615 114 (69) 660
- ---------------------------------------------------------------------------------------
$1,204 $337 $ (81) $1,460
- ---------------------------------------------------------------------------------------
(1) Additions resulting from increase in allowance for sales returns were
offset against revenue.
70