WIND RIVER SYSTEMS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002 or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21342

WIND RIVER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Delaware		94-2873391
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
500 Wind River Way, Alameda, California 94501 (Address of principal executive offices, including zip code)
(510) 748-4100 (Registrant's telephone number, including area code)

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. ý Yes o No

As of September 10, 2002, there were 79,144,950 shares of the registrant's common stock outstanding.

WIND RIVER SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2002

INDEX

			Page
Part I—Financial Information
	Item 1. Financial Statements (Unaudited)		1
		Condensed Consolidated Statements of Operations for the three and six months ended July 31, 2002 and 2001	1
		Condensed Consolidated Balance Sheets as of July 31, 2002 and January 31, 2002	2
		Condensed Consolidated Statements of Cash Flows for the six months ended July 31, 2002 and 2001	3
		Notes to Condensed Consolidated Financial Statements	4
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		17
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		40
	Item 4: Controls and Procedures		41
Part II—Other Information
	Item 1. Legal Proceedings		42
	Item 2. Changes in Securities and Use of Proceeds		42
	Item 3. Defaults Upon Senior Securities		42
	Item 4. Submission of Matters to a Vote of Security Holders		42
	Item 5. Other Information		43
	Item 6. Exhibits and Report on Form 8-K		43
Signature			44
Certifications			45

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WIND RIVER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

				Three months ended July 31,						Six months ended July 31,
				2002			2001			2002			2001
Revenues, net:
	Products			$	42,301		$	54,550		$	86,026		$	128,220
	Services				21,281			25,680			43,915			62,202

		Total revenues			63,582			80,230			129,941			190,422

Cost of revenues:
	Products				4,709			6,809			10,182			13,766
	Services				12,992			15,138			26,980			33,318

		Total cost of revenues			17,701			21,947			37,162			47,084

			Gross profit		45,881			58,283			92,779			143,338

Operating expenses:
	Selling and marketing				32,747			38,773			66,562			83,195
	Product development and engineering				17,792			21,720			38,414			47,027
	General and administrative				8,397			9,796			17,681			19,840
	Amortization of goodwill and purchased intangibles				2,395			24,321			4,518			55,807
	Impairment of goodwill and purchased intangibles				—			225,418			—			225,418
	Restructuring and other nonrecurring costs				17,665			28,615			17,665			28,615

			Total operating expenses		78,996			348,643			144,840			459,902

			Loss from operations		(33,115	)		(290,360	)		(52,061	)		(316,564	)
Other income (expense):
	Interest income				3,147			4,336			6,539			9,288
	Interest expense				(1,773	)		(2,053	)		(3,560	)		(4,206	)
	Other expense, net				(4,928	)		(682	)		(5,135	)		(916	)

			Total other income (expense)		(3,554	)		1,601			(2,156	)		4,166

Loss before provision for (benefit from) income taxes					(36,669	)		(288,759	)		(54,217	)		(312,398	)
Provision for (benefit from) income taxes					275			(7,200	)		775			(5,998	)

			Net loss	$	(36,944	)	$	(281,559	)	$	(54,992	)	$	(306,400	)

Net loss per share:
	Basic			$	(0.47	)	$	(3.64	)	$	(0.70	)	$	(3.98	)
	Diluted			$	(0.47	)	$	(3.64	)	$	(0.70	)	$	(3.98	)
Shares used in per share calculation:
	Basic				79,035			77,354			78,901			77,070
	Diluted				79,035			77,354			78,901			77,070

The accompanying notes are an integral part of these condensed consolidated financial statements.

WIND RIVER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

				July 31, 2002			January 31, 2002
ASSETS
Current assets:
	Cash and cash equivalents			$	47,805		$	131,067
	Short-term investments				29,154			22,364
	Accounts receivable, net				45,505			61,109
	Prepaid and other current assets				13,038			18,404

		Total current assets			135,502			232,944
Investments					173,078			123,136
Property and equipment, net					52,379			59,804
Intangibles, net					104,576			108,409
Other assets					15,454			19,644
Restricted cash					63,683			63,683

			Total assets	$	544,672		$	607,620

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	4,331		$	7,191
	Line of credit				12,119			14,988
	Accrued liabilities				22,563			19,346
	Accrued restructuring costs				5,266			5,243
	Accrued compensation				13,575			17,575
	Income taxes payable				4,879			7,485
	Deferred revenue				31,067			34,656

		Total current liabilities			93,800			106,484
Convertible subordinated debt					150,000			150,000
Other long-term liabilities					4,066			2,995

		Total liabilities			247,866			259,479

Stockholders' equity:
	Common stock, par value $0.001; 325,000 shares authorized; 81,130 and 79,863 shares issued at July 31, 2002 and January 31, 2002, respectively; 79,090 and 78,586 shares outstanding at July 31, 2002 and January 31, 2002, respectively.				81			80
	Additional paid-in-capital				745,318			737,595
	Loan to stockholder				(1,949	)		(1,893	)
	Treasury stock, 2,040 shares at cost				(33,426	)		(29,488	)
	Accumulated other comprehensive loss				(4,838	)		(4,765	)
	Accumulated deficit				(408,380	)		(353,388	)

		Total stockholders' equity			296,806			348,141

			Total liabilities and stockholders' equity	$	544,672		$	607,620

The accompanying notes are an integral part of these condensed consolidated financial statements.

WIND RIVER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

				Six Months Ended July 31,
				2002			2001
Cash flows from operating activities:
		Net loss		$	(54,992	)	$	(306,400	)
		Adjustments to reconcile net loss to net cash provided by (used in) operations:
		Depreciation and amortization			15,306			64,938
		Non-cash charge for other-than-temporary decline in investment			4,259			3,275
		Non-cash restructuring charge			1,545			1,411
		Non-cash compensation, including 401(k) match			1,453			1,563
		Interest on loan to stockholder			(56	)		(52	)
		Impairment of goodwill and purchased intangibles			—			225,418
		Loss on asset dispositions			153			—
		Realized gain on repurchase of convertible subordinated notes			—			(293	)
		Deferred income taxes			69			(2,509	)
		Changes in assets and liabilities, net of acquired businesses:
			Accounts receivable, net		15,604			39,138
			Prepaid and other current assets		4,760			5,718
			Accounts payable		(2,860	)		(9,177	)
			Accrued restructuring costs		(126	)		20,644
			Accrued liabilities		3,217			(4,842	)
			Accrued compensation		(4,000	)		(3,931	)
			Income taxes payable		(2,633	)		(1,982	)
			Deferred revenue		(3,589	)		(14,110	)
			Other assets and liabilities		(61	)		(2,049	)

			Net cash provided by (used in) operating activities		(21,951	)		16,760

Cash flows from investing activities:
		Acquisition of property and equipment			(4,161	)		(12,052	)
		Capitalized software development costs			(969	)		(801	)
		Purchase of investments			(163,436	)		(194,637	)
		Sales of investments			83,600			115,003
		Maturities of investments			22,670			61,500
		Acquisitions, net of cash acquired			—			(37,771	)
		Restricted cash			—			(1,055	)

			Net cash used in investing activities		(62,296	)		(69,813	)

Cash flows from financing activities:
		Issuance of common stock			6,298			10,898
		Repurchase of convertible subordinated notes			—			(11,151	)
		Acquisition of treasury stock			(3,938	)		—
		Borrowings (repayment) of line of credit			(2,869	)		1,170

			Net cash provided by (used in) financing activities		(509	)		917

Effect of exchange rate changes on cash and cash equivalents					1,494			(1,787	)
	Net decrease in cash and cash equivalents				(83,262	)		(53,923	)
Cash and cash equivalents at beginning of period					131,067			92,431

Cash and cash equivalents at end of period				$	47,805		$	38,508

The accompanying notes are an integral part of these condensed consolidated financial statements.

WIND RIVER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

The accompanying condensed consolidated financial statements and related notes of Wind River Systems, Inc. ("Wind River") are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the financial position as of July 31, 2002 and January 31, 2002, the results of operations for the three and six months ended July 31, 2002 and 2001, and cash flows for the six months ended July 31, 2002 and 2001 have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Wind River's Annual Report on Form 10-K for the fiscal year ended January 31, 2002 filed with the Securities and Exchange Commission on April 30, 2002 ("2002 Form 10-K"). The results of operations for the three and six months ended July 31, 2002 are not necessarily indicative of results to be expected for the entire fiscal year, which ends on January 31, 2003, or for any future period.

In accordance with the rules and regulations of the Securities and Exchange Commission, unaudited condensed consolidated financial statements may omit or condense certain information and disclosures normally required for a complete set of financial statements prepared in accordance with generally accepted accounting principles ("GAAP"). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet at January 31, 2002 was derived from audited financial statements, but does not include all disclosures required by GAAP. Management of Wind River believes that the notes to the condensed consolidated financial statements contain disclosures adequate to make the information presented not misleading.

The condensed consolidated financial statements include the financial information of Wind River and its subsidiaries. All significant inter-company accounts and transactions have been eliminated. Wind River has a reporting year ending January 31 while, through December 31, 2001, its international subsidiaries (outside of North America) had reporting years ending December 31; thus, the condensed consolidated financial statements for the three and six months ended July 31, 2001 include such subsidiaries' results for the three and six months ended June 30, 2001. Effective January 31, 2002, each of Wind River's international subsidiaries (outside of North America) changed its reporting year to end on January 31 rather than December 31; thus, the condensed consolidated financial statements for the three and six months ended July 31, 2002 include such subsidiaries' results for the three and six months ended July 31, 2002.

Certain amounts have been reclassified to conform to the current period's presentation.

Note 2: Acquisitions

Wind River has completed a number of acquisitions accounted for as purchase transactions. The condensed consolidated financial statements include the operating results of each business from the date of acquisition. The purchase price for each acquisition is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of the estimated fair values on the effective date of the acquisition.

On April 18, 2001, Wind River purchased certain identified software products, including an operating system for digital signal processors from Eonic Systems, Inc. ("Eonic"). The total purchase price of $15.6 million consisted of $15.0 million in cash and approximately $642,000 in acquisition related costs.

On May 4, 2001, we purchased from Berkeley Software Design, Inc. ("BSDI") certain identified software assets, including the BSDI operating system, a UNIX-based code suitable for various Internet applications, for a total purchase price of $23.4 million, consisting of approximately $22.9 million in cash and $507,000 in acquisition-related costs. Prior to the closing of the transaction, we loaned $7.5 million to BSDI to repay BSDI creditors.

Pro forma results of the Eonic and BSDI purchases have not been presented because the effects were not material to the condensed consolidated financial statements of Wind River.

Refer to Note 3 of Notes to Consolidated Financial Statements in Wind River's 2002 Form 10-K for further details of acquisitions completed during the fiscal years ended January 31, 2002, 2001 and 2000.

The table below sets forth the amortization expense, foreign translation and other adjustments for the six months ended July 31, 2002 and the net book value of goodwill and purchased intangibles as of July 31, 2002 for certain acquisitions completed during fiscal years ended January 31, 2002, 2001 and 2000:

		Acquisitions
		Tele- networks		BSDI		Eonic		Rapid Logic		ICESoft		AudeSi			Embedded Support Tools		Software Development Systems		Other		Total
		(In thousands)
Total at acquisition
	Goodwill	$	2,354	$	20,073	$	11,664	$	49,028	$	23,961	$	50,180		$	317,393	$	23,018	$	8,964	$	506,635
	Purchased intangibles		2,875		3,410		3,870		7,000		750		1,100			15,800		12,100		655		47,560

			5,229		23,483		15,534		56,028		24,711		51,280			333,193		35,118		9,619		554,195
Disposition as of January 31, 2002
	Goodwill		—		215		—		—		3,062		—			—		—		—		3,277
	Purchased Technology		—		—		—		—		468		—			—		—		—		468

			—		215		—		—		3,530		—			—		—		—		3,745
Impairment as of January 31, 2002
	Goodwill		—		—		—		24,024		15,255		35,397			167,481		13,811		—		255,968
	Purchased intangibles		—		—		—		—		—		440			—		977		—		1,417

			—		—		—		24,024		15,255		35,837			167,481		14,788		—		257,385
Accumulated amortization as of January 31, 2002
	Goodwill		—		3,764		2,187		14,841		5,644		14,632			107,474		7,385		6,151		162,078
	Purchased intangibles		220		639		726		2,220		282		466			7,242		10,128		655		22,578
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