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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, 1998
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)
1010 Atlantic Avenue, 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 by non-affiliates of the
registrant as of March 31, 1998 was $853,597,000. This calculation does not
reflect a determination that persons are affiliates for any other purposes.
Number of shares of Common Stock outstanding as of March 31, 1998: 26,005,000
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 June
25, 1998 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 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 4A. Executive Officers of the Registrant 15
- ---------------------------------------------------------------------------------------------------------------------------
Part II Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 16
Item 6. Selected Consolidated Financial Data 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
- ---------------------------------------------------------------------------------------------------------------------------
Part III Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management 44
Item 13. Certain Relationships and Related Transactions 44
- ---------------------------------------------------------------------------------------------------------------------------
Part IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 45
Signatures 48
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PART I
Except for the historical information contained herein, the discussion in
this Form 10-K contains forward-looking statements that involve risks and
uncertainties. When used herein, the words "believe," "anticipate," "expect"
and "estimate" and similar expressions are intended to identify such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the ability of the Company 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 "Business --
Additional Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company disclaims any
obligation to update any of the forward-looking statements contained herein
to reflect any future events or developments.
ITEM 1.
BUSINESS
Wind River Systems, Inc. ("Wind River" or the "Company") develops, markets and
supports advanced software operating systems and development tools that allow
customers to create complex, robust, real-time software applications for
embedded computers. An embedded computer 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. Some
examples of such devices are telecommunications products such as PBX, routers,
central office switches and call processing systems; office products such as fax
machines, laser printers and photocopiers; vehicle anti-lock brakes and
navigation systems; consumer products such as camcorders, video games and
set-top boxes; medical instrumentation and imaging systems; industrial
automation equipment such as robots; and NASA's Mars probe, Pathfinder. Wind
River's flagship product, Tornado-TM-, enables 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 application engineers. Wind River has seventeen licensed
international distributors principally to serve customers in regions not
serviced by the Company's direct sales force or its Japanese master
distributors. Wind River's customers include Boeing Company, Cisco Systems,
Inc., Digital Equipment Corporation, 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.,
Nippon Electric Corporation, Northern Telecom Ltd., Raytheon Company, Siemens
AG, Sun Microsystems, Inc., and TRW Inc.
During fiscal year 1998, Wind River received ISO 9001 certification. The
Company was incorporated in California in 1983 and reincorporated in Delaware in
April 1993. The Company's principal executive offices are located at 1010
Atlantic Avenue, 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 are facilitating the development of entirely new products. In
addition to the applications discussed above, emerging embedded Internet
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 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
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decreasing. More sophisticated development tools are required to develop
these more complex applications, frequently including a real-time operating
system ("RTOS") that provides developers far more features, higher
performance and greater productivity than that 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
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. The Company typically charges a one-time fee for a
development license and a run-time license fee for each copy of the Company's
operating system embedded in the customer's product. A key component of the
Company's strategy is to significantly increase revenue through run-time license
fees. Any increase in the percentage of revenues attributable to run-time
licenses will depend on the Company's successful negotiation of run-time license
agreements and on the successful commercialization by the Company's customers of
the underlying products.
Tornado
Wind River's flagship product is Tornado, a development environment for embedded
applications, which is available for UNIX, Windows NT and Windows 95 development
platforms. Tornado was introduced in September 1995 and subsequently won the
Electronic Design News award for Innovation of the Year. 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: the Tornado toolset, a set
of cross-development tools and utilities; the VxWorks-Registered Trademark-
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.
The Tornado development toolset consists of a launcher, a GNU compiler for
C and C++ programs, a remote source level debugger, a user-interface shell, a
browser, and a variety of other software tools that run on the development host.
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.
A set of application program interfaces ("APIs") is available and published
on the Internet for reference, from the graphical user interface ("GUI") to the
connection implementation. The Company believes that this open environment may
make Tornado the development foundation of choice for embedded and real-time
applications.
VxWorks
VxWorks is a high-performance, scalable RTOS based on an object-oriented
microkernel architecture that requires only 8 kilobytes, and can form the
foundation for memory-constrained applications as small as 20 kilobytes or
support large, complex applications. The run-time system offers over 1,100
utility routines such as buffer and list management for accelerating application
development. 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.
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 strategy, and the capabilities
of the toolset remains the same regardless of the target processor resources.
Tornado for DSP
To address the need for more sophisticated approaches to developing digital
signal processing ("DSP") applications in the context of embedded real-time
computing, the Company has developed Tornado for DSP, which features DSP
development
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and run-time software integrated into a comprehensive embedded systems
applications design and deployment environment. It consists of the WiSP-TM-
RTOS, Tornado for DSP tools and Tornado tools-to-WiSP connectivity
strategies. It currently supports development of DSP applications based on
the Motorola 563xx DSP chip architecture, with Tornado development tools
running on Sun Solaris workstations and Windows NT and Windows 95 PCs.
I(2)O Product Initiative
Wind River has entered into agreements with Intel Corporation ("Intel"),
Digital Equipment Corporation ("Digital") and Symbios Logic, Inc.("Symbios")
in which such companies will bundle Wind River's IxWorks-Registered
Trademark- operating system into their respective input/output platforms
("IOPs"). IxWorks - the Company's I(2)O real-time operating system ("IRTOS")
based on VxWorks -facilitates the development of I(2)O -capable products by
ensuring ongoing I(2)O compliance. It also permits 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. I(2)O
has been proposed by a consortium of leading enterprise computing vendors
with the intent of defining and promoting 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"), OS releases, and vendor OS
implementations. A license for IxWorks may be included with IOPs shipped.
This arrangement permits manufacturers to develop their products quickly,
since IxWorks is available immediately. The Company believes that its
relationships with Intel, Digital, and Symbios for the implementation of the
I(2)O specification may open up a new market opportunity for its products.
Embedded Internet Market Initiative
Wind River's Tornado for Embedded Internet-Registered Trademark- product suite
is a fully integrated package for bringing the advantages of the Internet to
embedded computers such as smart phones, TV set-top boxes, network computers,
networked printers, cable modems, and switches. With the introduction of Tornado
for Embedded Internet components, Wind River has provided a common technology to
build and deploy products throughout the Internet, including its infrastructure,
servers, and smart appliances. The Company believes there may be opportunities
to increase the market size and scope for its products, which incorporate, for
example, server technology for posting information to the Internet or corporate
intranets, browsers for viewing information on the World Wide Web, and "Java
compliant" products for developing "write once, run anywhere" applications. Wind
River's Embedded Internet product suite includes Tornado for Java, Tornado for
PersonalJava, Wind-Registered Trademark- Web Server and RtX-Windows.
UNIX, Windows NT and Windows 95 Support
The Company's Tornado environment supports Unix, Windows NT and Windows 95
development environments, and is the only RTOS to have earned the right to
use Microsoft's "Designed for Windows 95-Registered Trademark-" and "Designed
for Windows NT-Registered Trademark-" logos. The Company has maintained a
strong presence in providing development tools and the VxWorks RTOS for the
UNIX operating system.
Additional Products
In addition to the preceding core products, Wind River offers the following:
VXWORKS OPTIONS. VxWorks options include RtX-Windows, the VxVMI-TM- virtual
memory interface, and the VxMP-TM- multi-processing package. RtX-Windows, which
was specifically designed for VxWorks, is a scalable graphics package that
permits developers to build graphical VxWorks applications. VxVMI virtual memory
interface provides run-time memory management and debugging facilities and an
application program interface standardized across different microprocessing
architectures. The VxMP multiprocessing package allows applications to be scaled
beyond the performance of single microprocessors by allowing tasks on different
microprocessors to synchronize and communicate.
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WINDNET. WindNet-TM- is Wind River's networking environment, comprising
both core technology from Wind River such as TCP/IP, STREAMS, and the WindNet
SNMP network management product and numerous integrated products from third
party partners providing various communications protocols, as well as network
management, and distributed computing solutions.
LOOK! FOR TORNADO. Look! for Tornado is a C++ visualization and debugging
tool designed to graphically explore a C++ program as it executes.
VXSIM EMBEDDED SYSTEM SIMULATOR. VxSim-TM- is a comprehensive prototyping
and simulation tool that provides full VxWorks simulation on a UNIX workstation.
VxSim enables application development to begin before hardware becomes available
and allows software testing to occur early in the development cycle, when errors
are less costly to correct.
WINDVIEW. WindView-TM- is a diagnostic and analysis tool that provides
detailed visibility into the dynamic operation of an embedded system. With it,
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.
STETHOSCOPE. The Company is a reseller of StethoScope, 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.
TORNADO FOR JAVA. Tornado for Java brings all of the advantages of Java --
cross-platform compatibility, Internet-readiness, security -- to the embedded
world. Tornado for Java enables Java applets and applications to be executed as
easily as C, C++, Ada, FORTRAN, or assembly language applications. Any Java
applet may be loaded from a network or from local disk or ROM. Tornado for Java
also provides the HotJava browser and Applet Viewer.
TORNADO FOR PERSONALJAVA. Tornado for PersonalJava is a subset of Tornado
for Java that makes PersonalJava -- a Java application environment targeted at
personal consumer devices -- available on a commercial real-time operating
system for the first time. Tornado for PersonalJava specifically addresses the
requirements of consumer-oriented devices such as PDAs, Internet phones or
hand-held terminals.
WIND WEB SERVER. Wind Web Server turns embedded devices into Web servers
that can provide a powerful interface to the Internet or to a corporate
intranet. It displays timely, dynamic information on an embedded device running
VxWorks by means of an standard Web browser.
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 in less time, with fewer errors, and
at lower cost.
WINDNAVIGATOR. A multi-language browsing tool, WindNavigator-TM- enables
developers to see the relationships between objects and functions, and easily
build programs using existing, proven modules.
WILLOWS RT FOR TORNADO. Willows RT for Tornado enables developers to write
their applications to the standard Win32 application programming interface and
deploy them on top of VxWorks.
RTX-WINDOWS. RtX-Windows is a scalable, real-time graphics package that
gives developers maximum flexibility and a wide range of functions to choose
from when designing graphical application. RtX-Windows is specifically designed
for VxWorks and provides the graphics engine for the Java Virtual Machine
implemented in Tornado for Java.
BOARD SUPPORT PACKAGE DEVELOPER'S KIT. The VxWorks operating system can be
used with a wide variety of processor types and target environments. They
isolate all hardware-specific features into a special section of code called a
board support package ("BSP"). The 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. To assist third-party developers, Wind
River also offers a service in which it tests and validates the resulting BSP.
SERVICES AND SUPPORT
Wind River provides comprehensive customer service and support that help
customers realize the value and potential of the Company's 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 and are taught by Wind River trainers at the Company's training facilities
in Alameda, California. Outside North America, the courses are given under
license from the Company by distributors and training contractors. Training
courses can also be provided at a customer site.
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TECHNICAL SUPPORT. The Company's technical support staff assists customers
with problems and questions in the installation and use of the Company'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 the Company'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 via the Internet.
ENGINEERING SERVICES. A number of services are provided on a
fee-for-service basis, including BSP validation, application-level consulting,
customization, and porting to strategic semiconductor architectures. These are
coordinated and performed by the Engineering Services Group in North America and
Japan, though they may on occasion be supported by Engineering or outside
subcontractors in North America and Europe.
STRATEGIC ALLIANCES
The Company believes that strategic relationships with semiconductor
manufacturers and embedded device manufacturers are significant strengths of the
Company and key to future success in the embedded systems marketplace. Wind
River has strategic relationships with most of the major semiconductor companies
including ARM, Hewlett-Packard, Hitachi, Intel, Mitsubishi, Motorola, NEC,
Siemens, Silicon Graphics and Sun Microsystems. This strategy has allowed the
Company to leverage its partners' sales channels to give its products the widest
possible market exposure. The Company 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 I(2)O to each customer purchasing an Intel i960Rx
I/O microprocessor and a copy of IxWorks on each such microprocessor sold. In
addition, Wind River has developed strategic relationships with Network
Computer, Inc. and Sun Microsystems for Embedded Internet applications ranging
from network computers to hand-held and intelligent phones.
CUSTOMERS
The Company's products have been deployed by a broad range of organizations,
including companies in the following industries: global communications, imaging,
consumer electronics, computers, medical and industrial, aerospace, research and
defense. No single customer accounted for more than 10% of the Company's total
revenues in fiscal 1998.
MARKETING, SALES AND DISTRIBUTION
In North America and Europe, Wind River markets its products and services
primarily through its own direct sales organization, which consists of
salespersons and field application engineers. As of January 31, 1998, Wind River
had 88 domestic direct salespersons and field application engineers located
throughout North America, 35 direct salespersons and field application engineers
throughout Europe and 10 sales and marketing employees in Japan.
The Company distributes its products in Japan through Wind River Systems,
K.K.("WRSKK"), a joint venture in which the Company 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. The
Company has licensed its products exclusively 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 11 of Notes to Consolidated Financial Statements.
Wind River has licensed seventeen international distributors, principally
to serve customers in regions not serviced by the Company's direct sales force
or its Japanese master distributors. The Company also has established strategic
relationships with computer, semiconductor and software vendors and works
closely with a number of system integrators worldwide that enable Wind River to
further broaden the geographic and market scope for its products.
Revenues from international sales represented approximately 29%, 34% and
37% of the Company's total revenue in fiscal 1998, 1997 and 1996, respectively.
See Note 12 of Notes to Consolidated Financial Statements for a summary of
operations by geographic region, and "-- Additional Risk Factors -- Risks
Associated with International Operations."
The Company has experienced, and expects to continue to experience,
significant seasonality resulting primarily from customer buying patterns and
product development cycles. The Company has generally experienced the strongest
demand for its 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.
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COMPETITION
The embedded real-time software industry is highly competitive and is
characterized by rapidly advancing technology. The Company believes that it
competes favorably in its markets on the basis of product capabilities,
price/performance characteristics, product portability, ease of use, sales and
marketing strength, financial stability, support services and corporate
reputation. In order to maintain or improve its position in the industry, the
Company must continue to enhance its current products and rapidly develop new
products and product extensions. The Company believes that its principal
competition comes from companies that develop real-time embedded software
development systems in-house rather than purchasing such systems from
independent software vendors such as the Company. Many of these organizations
have substantial internal programming resources with the capability to develop
specific products for their needs. The Company also competes with other
independent software vendors, including Integrated Systems, Inc., Mentor
Graphics, Inc. (through its acquisition of Microtec/Ready Systems), Microware
Systems Corporation, and Microsoft Corporation. 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 the
Company's products. Many of the Company's existing and potential competitors
have substantially greater financial, technical, marketing and sales resources
than the Company. In addition, the Company is aware of ongoing efforts by
competitors to emulate the performance and features of the Company's products
and there can be no assurance that competitors will not develop equivalent or
superior technology to that of the Company. Because a substantial percentage of
the Company's revenues has been derived from sales of the Tornado and VxWorks
family of products and services, the effects of competition could be more
adverse than would be the case if the Company had a broader product offering. In
addition, competitive pressures could cause the Company to reduce the prices of
its products, which would result in reduced profit margins. There can be no
assurance that the Company will be able to compete effectively against its
current and future competitors. If the Company is unable to compete
successfully, its business, financial condition and results of operations would
be materially and adversely affected.
PRODUCT DEVELOPMENT AND ENGINEERING
Wind River believes that its success will depend in large part on its ability
to maintain and enhance its current product line, develop new products,
maintain technological competitiveness and meet an ever-expanding range of
customer requirements. The Company's product development and engineering
group includes 132 full-time employees. During fiscal 1998, 1997 and 1996,
product development and engineering expenses were $12.0 million, $7.7 million
and $5.5 million, respectively, excluding capitalized software development
costs. Costs capitalized for software development for these periods were
$803,000, $707,000 and $490,000, respectively. During fiscal 1998, the
Company acquired certain technology from Network Computer, Inc. and all of
the outstanding stock of Objective Software Technology Ltd. In each of these
transactions, a portion of the purchase price was allocated to in-process
research and development and expensed at the time of the acquisition. The
amount of each write-off totaled $10 million and $4.1 million, respectively.
The Company incurred approximately $1.0 million of other non-merger
incremental costs associated with these acquisitions which were included in
the in-process research and development write-off. The Company anticipates
that it will continue to commit substantial resources to research and product
development in the future.
The embedded real-time software industry faces a fragmented market
characterized by ongoing technological developments, evolving industry standards
and rapid changes in customer requirements. The Company's success depends and
will continue to depend upon its ability to continue to develop and introduce in
a timely manner new products that take advantage of technological advances, to
identify and adhere to emerging standards, to continue to improve the
capabilities of its Tornado development environment and the scalability and
features of the VxWorks product, to offer its products across a spectrum of
microprocessor families used in the embedded systems market and to respond
promptly to customers' requirements. The Company has 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. There
can be no assurance that the Company will be successful in developing and
marketing, on a timely basis or at all, competitive products, product
enhancements and new products that respond to technological change, changes in
customer requirements and emerging industry standards, or that the Company's
enhanced or new products will adequately address the changing needs of the
marketplace. The inability of the Company, due to resource constraints or
technological or other reasons, to develop and introduce new products or product
enhancements in a timely manner could have a material adverse effect on the
Company's business, financial condition or results of operations. From time to
time, the Company or its competitors may announce new
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products, capabilities or technologies that have the potential to replace or
shorten the life cycles of the Company's existing products. There can be no
assurance that announcements of currently planned or other new products by
the Company or others will not cause customers to defer purchasing existing
Company products. Any failure by the Company 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
the Company's business, financial condition and results of operations.
As a result of their complexity, software products may contain undetected
errors or compatibility issues, particularly when first introduced or as new
versions are released. There can be no assurance that, despite testing by the
Company and testing and use by current and potential customers, errors will not
be found in new products after commencement of commercial shipments. The
occurrence of such errors could result in loss of or delay in market acceptance
of the Company's products, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The
increasing use of the Company's products for applications in systems that
interact directly with the general public, particularly applications in
transportation, medical systems and other markets where the failure of the
embedded system could cause substantial property damage or personal injury,
exposing the Company to significant product liability claims. In addition, the
Company's products may be used for applications in mission-critical business
systems where the failure of the embedded system could be linked to substantial
economic loss. Although the Company has not experienced any product liability or
economic loss claims to date, the sale and support of the Company's products
entails the risk of such claims.
The Company is continuously engaged in product development for new or
changing markets. In particular, the Company has 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 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. The Company also has developed IxWorks, an RTOS
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. The Company also is expending substantial time
and financial resources to develop embedded operating software and development
tools for Internet applications. The commercial Internet market has only
recently begun to develop, is rapidly changing and is characterized by an
increasing number of new entrants with competitive products. Moreover, there is
an increasing number of new Internet protocols to which the Company's products
must be ported. It is unclear which of these competing protocols ultimately will
achieve market acceptance. If the protocols upon which the Company's Internet
products are based ultimately fail to be widely adopted, the Company'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 the Company in the future, fail to develop,
develop more slowly than anticipated or become saturated with competitors, if
the Company's products are not developed in a timely manner, or if the Company's
products and services do not achieve or sustain market acceptance, the Company's
business, financial condition and results of operations would be materially and
adversely affected.
PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary technology. To
protect its proprietary rights, the Company relies on a combination of
copyright, trade secret, patent and trademark laws, nondisclosure and other
contractual restrictions on copying, distribution and technical measures. The
Company seeks to protect its software, documentation and other written materials
through trade secret and copyright laws, which provide only limited protection.
In addition, the Company has two United States patent applications pending.
There can be no assurance that patents will issue from the Company's pending
applications or that any claims allowed will be of sufficient scope or strength
(or be issued in all countries where the Company's products can be sold) to
provide meaningful protection or any commercial advantage to the Company. As a
part of its confidentiality procedures, the Company generally enters into
nondisclosure agreements with its employees, consultants, distributors and
corporate partners and limits access to and distribution of its software,
documentation and other proprietary information. End user licenses of the
Company's 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 the Company's efforts to protect its
proprietary rights, it may be possible for unauthorized third parties to copy
the Company's products or to reverse engineer or obtain and use information that
the Company regards as proprietary. There can
9
be no assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
software piracy of its products exists, software piracy can be expected to be
a 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 the Company's products. Wind River believes that, due to the
rapid pace of innovation within its industry, factors such as the technological
and creative skills of its personnel are more important to establishing and
maintaining a technology leadership position within the industry than are the
various legal protections of its technology.
As the number of patents, copyrights, trademarks, trade secrets and
other intellectual property rights in the Company's industry increases,
products based on the Company's technology may increasingly become the
subject of infringement claims. There can be no assurance that third parties
will not assert infringement claims against the Company in the future. Any
such claims with or without merit could be time consuming, result in costly
litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements,
if required, may not be available on terms acceptable to the Company, or at
all, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Litigation to determine the validity of any claims,
whether or not such litigation is determined in favor of the Company, could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks. In the
event of an adverse ruling in any such litigation, the Company might be
required to pay substantial damages, discontinue the use and sale of
infringing products, expend significant resources to develop non-infringing
technology or obtain license to infringing technology.
MANUFACTURING AND BACKLOG
The Company's manufacturing operation consists of assembling, packaging and
shipping the software products and documentation needed to fulfill each order.
All manufacturing is currently performed in the Company's Alameda, California,
facility. Outside vendors provide tape and CD duplication, printing of
documentation and manufacturing of packaging materials.
The Company 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. The Company's order
fulfillment process is intended to efficiently manage the flow of products to
customers, often resulting in a number of weeks of backlog. Backlog at January
31, 1998 was approximately 11 to 16 weeks of sales. Backlog includes orders that
may be filled at various times throughout the fiscal year.
EMPLOYEES
The Company has 438 employees, including 241 in sales, marketing and support
activities, 132 in product development and engineering and 65 in management,
operations, finance and administration. Of these employees, 330 were located in
North America and 108 were located outside of North America. None of the
Company's employees is represented by a labor union or is subject to a
collective bargaining agreement. Wind River has never experienced a work
stoppage. See "-- Additional Risk Factors -- Management of Growth; Dependence on
Key Personnel; Need for Additional Personnel."
ADDITIONAL RISK FACTORS
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced from time to time significant period-to-period
fluctuations in revenues and operating results and anticipates that such
fluctuations could occur in the future. These fluctuations may be attributable
to a number of factors, including the volume and timing of orders received
during the quarter, the timing and acceptance of new products and product
enhancements by the Company or its competitors, unanticipated sales and buyouts
of run-time licenses, stages of product life cycles, purchasing patterns of
customers and distributors, market acceptance of products sold by the Company's
customers, competitive conditions in the industry, business cycles affecting the
markets in which the Company's products are
10
sold, extraordinary events, such as acquisitions, including related charges,
and economic conditions generally or in specific geographic areas. The future
operating results of the Company may fluctuate as a result of these and other
factors, including the Company's ability to continue to develop innovative
and competitive products. In addition, the Company generally does not enter
into long-term agreements with its customers, and the timing of license fees
is difficult to predict. The procurement process of the Company's customers
is often several months or longer from initial inquiry to order and may
involve competing considerations. Further, as licensing of the Company's
products increasingly becomes a more strategic decision made at higher
management levels, there can be no assurance that sales cycles for the
Company's product will not lengthen. Product revenue in any quarter depends
primarily on the volume and timing of orders received in that quarter. The
Company has at times recognized a substantial portion of its total revenue
from sales booked and shipped in the latter part of the quarter; thus, the
magnitude of quarterly fluctuations may not become evident until late in a
particular quarter. Because the Company's staffing and operating expenses are
based on anticipated total revenue levels and a high percentage of the
Company's costs are fixed in the short term, small variations between
anticipated orders and actual orders, as well as non-recurring or large
orders, could cause disproportionate variations in the Company's operating
results from quarter to quarter. Revenues also are typically higher in the
fourth quarter than in other quarters of the fiscal year, which ends on
January 31, primarily as a result of purchases by customers prior to the
calendar year end, as well as by customers who purchase at the commencement
of a new calendar year. These trends are expected to continue.
Because the software industry is intensely competitive, software vendors
have from time to time experienced price erosion on their products. As is
typical in the software industry, the Company's fixed costs as a percentage of
revenues are high, and significant price erosion could have a material adverse
effect on the Company's revenues and operations. A number of additional factors
may in the future cause the Company's revenues and operating results to vary
significantly from period to period. These factors include: software "bugs" or
other product quality problems; changes in operating expenses; changes in
Company strategy; personnel changes; foreign currency exchange rates; and mix of
products sold. Although the Company has been profitable for the last several
years on an annual basis, there can be no assurance that the Company will be
able to continue its growth in revenue or sustain its profitability on a
quarterly or annual basis. Due to all of the foregoing factors, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance. It is possible that, in some future quarters, the Company's
operating results could be below the expectations of stock market analysts and
investors. In such event, the price of the Common Stock could be materially and
adversely affected.
RELIANCE ON CORE FAMILY OF PRODUCTS
Revenue from sales of the Tornado and VxWorks family of products and services
accounted for a significant majority of the Company's revenues in each of the
fiscal years ended January 31, 1998, 1997 and 1996. The Company's future results
depend heavily on continued market acceptance of these products in the Company's
current markets and successful application in new markets. Any factor adversely
affecting the market for the Tornado and VxWorks family of products and services
could have a material adverse affect on the Company's business, financial
condition and results of operations. The Company typically charges a one-time
fee for a development license and a run-time license fee for each copy of the
Company's operating system embedded in the customer's products. A key component
of the Company'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 the Company's successful negotiation of run-time license
agreements and on the successful commercialization by the Company's customers of
the underlying products. To the extent that such customers are not successful,
the Company may not be able to meet its objectives, and its business, financial
condition and results of operations could be materially and adversely affected.
PRODUCT DEVELOPMENT
The embedded real-time software industry faces a fragmented market characterized
by ongoing technological developments, evolving industry standards and rapid
changes in customer requirements. The Company's success depends and will
continue to depend upon its ability to continue to develop and introduce in a
timely manner new products that take advantage of technological advances, to
identify and adhere to emerging standards, to continue to improve the
functionality of its Tornado development environment and the scalability and
functionality of the VxWorks product, to offer its products across a spectrum of
microprocessor families used in the embedded systems market and to respond
promptly to customers'
11
requirements. The Company has 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. There can be no assurance
that the Company will be successful in developing and marketing, on a timely
basis or at all, competitive products, product enhancements and new products
that respond to technological change, changes in customer requirements and
emerging industry standards, or that the Company's enhanced or new products
will adequately address the changing needs of the marketplace.
As a result of their complexity, software products may contain undetected
errors or compatibility issues, particularly when first introduced or as new
versions are released. There can be no assurance that, despite testing by the
Company and testing and use by current and potential customers, errors will not
be found in new products after commencement of commercial shipments. The
occurrence of such errors could result in loss of or delay in market acceptance
of the Company's products, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The
increasing use of the Company's products for applications in systems that
interact directly with the general public, particularly applications in
transportation, medical systems and other markets where the failure of the
embedded system could cause substantial property damage or personal injury,
could expose the Company to significant product liability claims. In addition,
the Company's products may be used for applications in mission-critical business
systems where the failure of the embedded system could be linked to substantial
economic loss. Although the Company has not experienced any product liability or
economic loss claims to date, the sale and support of the Company's products
entails the risk of such claims, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON VME MARKET
A significant amount of the Company's revenues historically has been derived
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 the Company believes that revenues from sales of products designed for
embedded systems applications will account for an increasing percentage of the
Company's revenues in the future, the Company expects revenues from the VME
market to continue to be significant for the foreseeable future. Academic
institutions and defense industry participants, which generate a significant
portion of the Company's VME revenues, are dependent on government funding, the
continued availability of which is uncertain. Typically, the Company's VME
customers have received government funding prior to placing its product orders
with Wind River. Any unanticipated future termination of government funding of
VME customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company has experienced, and expects to continue to experience, significant
growth in the number of employees, the scope and complexity of its operating and
financial systems and the geographic area of its operations. The Company's
continued success will depend significantly on its ability to integrate new
operations and new personnel. There can be no assurance that the Company will be
successful in achieving such integration efficiently. In addition, the Company
anticipates the need to relocate its management, engineering, marketing, sales
and customer support operation to a new facility within the next few years. On
October 24, 1997, the Company purchased real property in the City of Alameda,
California for $11.4 million. The property is being developed to construct the
Company's new headquarters facility. There can be no assurance that any such
relocation will be accomplished efficiently, or that the Company's operations
will not be materially and adversely affected by such relocation. The Company's
future performance depends to a significant degree upon the continued
contributions of its key management, product development, marketing, sales,
customer support and operations personnel, several of whom have joined the
Company only recently. In addition, the Company believes its future success will
depend in large part upon its ability to attract and retain highly-skilled
managerial, product development, marketing, sales, customer support and
operations personnel, many of whom are in great demand. Competition for such
personnel is particularly intense in the San Francisco Bay Area, where the
Company is headquartered, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The failure of the
Company to attract, integrate and retain the necessary personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations.
12
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company has recently completed the
acquisition of Objective Software Technology, Ltd., has acquired an equity
interest in Emultek, Ltd. and has also acquired certain technologies from
Network Computer, Inc. The Company expects to make acquisitions of, or
significant investments in, businesses that offer complementary products,
services and technologies. Any acquisitions or investments will be accompanied
by the risks commonly encountered in acquisitions of businesses and
technologies. Such risks include, among other things, the difficulty of
assimilating the operations and personnel of the acquired businesses, the
potential disruption of the Company's ongoing business, the inability to
integrate acquired technologies into new and existing products, the inability of
management to maximize the financial and strategic position of the Company, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and customers as a result of any
integration of new management personnel. These factors could have a material
adverse effect on the Company's business, results of operations or financial
condition. Consideration paid for future acquisitions, if any, could be in the
form of cash, stock, debt, rights to purchase stock or a combination thereof.
Dilution to existing stockholders and to earnings per share may result to the
extent that shares of stock or other rights to purchase stock are issued in
connection with any such future acquisitions.
RISKS OF PRODUCT DEFECTS; PRODUCT AND OTHER LIABILITY
As a result of their complexity, software products may contain undetected errors
or compatibility issues, particularly when first introduced or as new versions
are released. There can be no assurance that, despite testing by the Company and
testing and use by current and potential customers, errors will not be found in
new products after commencement of commercial shipments. The occurrence of such
errors could result in loss of or delay in market acceptance of the Company's
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations. The increasing use of the
Company's products for applications in systems that interact directly with the
general public, particularly applications in transportation, medical systems and
other markets where the failure of the embedded system could cause substantial
property damage or personal injury, could expose the Company to significant
product liability claims. In addition, the Company's products may be used for
applications in mission-critical business systems where the failure of the
embedded system could be linked to substantial economic loss. Although the
Company has not experienced any product liability or economic loss claims to
date, the sale and support of the Company's products entails the risk of such
claims. The Company carries insurance against product liability risks and errors
or omissions coverage, although there can be no assurance that such insurance
will continue to be available to the Company on commercially reasonable terms or
at all. A product liability claim or claim for economic loss brought against the
Company in excess of or outside the limits of its insurance coverage, or a
product recall involving the Company's software, could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
In the fiscal years ended January 31, 1998, 1997 and 1996, the Company derived
approximately 29%, 34% and 37%, respectively, of its total revenue from sales
outside of North America. The Company expects that international sales will
continue to generate a significant percentage of its total revenue in the
foreseeable future. The Company also expects to make substantial investments to
expand further its international operations and to increase its direct sales
force in Europe and Asia. There can be no assurance that these investments will
result in commensurate increases in the Company's international sales.
International operations are subject to certain risks, including foreign
government regulation; more prevalent software piracy; longer payment cycles;
unexpected changes in, or imposition of, regulatory requirements, tariffs,
import and export restrictions and other barriers and restrictions; greater
difficulty in accounts receivable collection; potentially adverse tax
consequences; the burdens of complying with a variety of foreign laws; staffing
and managing foreign operations; political and economic instability; changes in
diplomatic and trade relationships; possible recessionary environments in
economies outside the United States; and other factors beyond the control of the
Company. Sales by the Company's foreign subsidiaries are denominated in the
local currency, and an increase in the relative value of the dollar against such
currencies would reduce the Company's revenues in dollar terms or make the
Company's products more expensive and, therefore, potentially less competitive
in foreign markets. There can be no assurance that the Company's future results
of operations will not be adversely affected by currency fluctuations. The
Company relies on distributors for sales of its products in certain foreign
countries and, accordingly, is dependent on their ability to promote and support
the Company's products and, in some cases,
13
to translate them into foreign languages. The Company's international
distributors generally offer products of several different companies,
including in some cases products that are competitive with the Company's
products, and such distributors are not subject to any minimum purchase or
resale requirements. There can be no assurance that the Company's
international distributors will continue to purchase the Company's products
or provide them with adequate levels of support.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has fluctuated in the past, and
is likely to fluctuate in the future. The Company believes that various factors,
including quarterly fluctuations in results of operations, announcements of new
products by the Company or by its competitors, and changes in the software
industry in general may significantly affect the market price of the Common
Stock. In addition, in recent years the stock market in general, and the shares
of technology companies in particular, have experienced extreme price
fluctuations. This volatility has had a substantial effect on the market prices
of securities issued by the Company and other high technology companies, often
for reasons unrelated to the operating performance of the specific companies.
The market prices of many high technology companies stocks, including the stock
of the Company, are at or near their historical highs and reflect price/earning
ratios substantially above historical norms. There can be no assurance that the
market price of the Common Stock will remain at or near its current level. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
that company. Such litigation, if instituted against the Company, could result
in substantial costs and a diversion of management attention and resources,
which could have a material adverse effect on the Company's business, financial
condition and results of operation, even if the Company is successful in such
suits. These market fluctuations, as well as general economic, political and
market conditions such as recessions, may adversely affect the market price of
the Common Stock.
ITEM 2.
PROPERTIES
The Company's principal administrative, sales, marketing, product development
and engineering facilities are located in leased buildings providing
approximately 74,000 square feet of office space in Alameda, California. Rental
expenses in fiscal 1998 amounted to approximately $1,123,000 for these
facilities. The leases expire on various dates from August 1998 through December
1999. The Company leases eighteen other domestic sales offices in the United
States. The Company leases international sales and/or service facilities in
Canada, the United Kingdom, France, Germany, Sweden, Israel, Italy, Korea and
Japan. The Company anticipates the need to relocate its management, engineering,
marketing, sales and customer support operation to a new facility within the
next few years. On October 24, 1997, the Company purchased real property in the
City of Alameda, California, for $11.4 million. The property is being developed
to construct the Company's new headquarters facility. There can be no assurance
that any such relocation will be accomplished efficiently, or that the Company's
operations will not be materially and adversely affected by such relocation.
ITEM 3.
LEGAL PROCEEDINGS
The Company is a party to litigation arising in the normal course of its
business. The Company believes that such litigation, even if resolved adversely
to the Company, would not have a material effect on its business, financial
condition or results of operations.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
ITEM 4A.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and certain information about them as of
April 1, 1998, are as follows:
NAME AGE POSITION WITH THE COMPANY
- -------------------------------------------------------------------------------
Jerry L. Fiddler 46 Chairman of the Board and Director
Ronald A. Abelmann 60 President, Chief Executive
Officer and Director
David N. Wilner 44 Chief Technical Officer and Director
Robert L. Wheaton 51 Senior Vice President of Sales
David G. Fraser 34 Vice President of Engineering
Richard W. Kraber 57 Vice President of Finance,
Chief Financial Officer and
Secretary
Curtis B. Schacker 37 Vice President of Marketing
Graham D. Shenton 58 Managing Director of
European Operations
Mr. Fiddler co-founded the Company in February 1983, and currently
serves as Chairman of the Board. From February 1983 to March 1994 he served
as Chief Executive Officer of the Company. Prior to founding the Company, 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. Abelmann joined the Company in March 1994 as President and Chief
Executive Officer and Director. From 1987 to 1993 he served as the founding
Chief Executive Officer of Vantage Analysis Systems, a developer of
VHDL-based simulation software for design automation. Prior to then, he
served as Group Vice President and General Manager for the Instrument
Division of Varian Associates. Mr. Abelmann holds B.S. and M.S. degrees in
applied physics from the University of California at Los Angeles, and an
M.B.A. from Stanford University.
Mr. Wilner co-founded the Company in February 1983 and currently serves
as Chief Technical Officer and Director. Prior to founding the Company, he
was a senior staff scientist in the Real-Time Systems Group at Lawrence
Berkeley Laboratory. Mr. Wilner holds a B.S. in computer science from the
University of California at Berkeley.
Mr. Wheaton joined the Company in March 1992 and currently serves as
Senior Vice President of Sales. From 1989 to 1991, he served as the Vice
President of Marketing for ShareBase Corporation, a relational database
hardware and software company. From 1988 to 1989, he served as the Western
Regional Manager of Powersoft Corporation, a computer software company.
Mr. Wheaton holds a B.S. in automotive engineering from Western Michigan
University.
Mr. Fraser joined the Company in September 1991 and currently serves as
Vice President of Engineering. 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.
Mr. Kraber joined the Company in August 1995 and currently serves as
Vice President of Finance and Chief Financial Officer. 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. Schacker joined the Company in 1990 and currently serves as Vice
President of Marketing. He joined the Company as a Customer Engineering
Manager. He became a sales representative and then served as Sales Manager
for the Northwest Region of the United States until he assumed his current
role in November of 1997. 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.
15
Mr. Shenton joined the Company in July 1994 and currently serves as
Managing Director of European Operations. From 1990 to 1994, he was Managing
Director of Vantage Analysis Systems Europe, Ltd., a developer of VHDL-based
simulation software for design automation. From 1986 to 1989, he was Managing
Director of IMP Europe, Ltd., a semiconductor design and application firm.
Mr. Shenton holds a B.E. degree from Sydney University, Australia and an M.E.
degree from the University of New South Wales, Australia.
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. On April 25, 1996, the Board of Directors declared a three-for-two
Common Stock split in the form of a stock dividend, payable May 24, 1996, to
stockholders of record on May 10, 1996. In addition, on February 13, 1997, the
Board of Directors declared a three-for-two stock split in the form of a stock
dividend, payable March 10, 1997, to stockholders of record on February 24,
1997. All share and per share amounts have been adjusted to give effect to these
stock splits.
The closing price of the Company's Common Stock as reported by the Nasdaq
National Market as of March 31, 1998 was $39.75 per share. The price per share
in the following table sets forth the low and high closing prices in the Nasdaq
National Market for the quarter indicated:
LOW HIGH
- --------------------------------------------------------------------------------
Fiscal 1997
First quarter ended April 30,1996 $12.56 $18.00
Second quarter ended July 31,1996 16.89 25.67
Third quarter ended October 31,1996 21.83 31.00
Fourth quarter ended January 31,1997 26.33 35.83
LOW HIGH
- --------------------------------------------------------------------------------
Fiscal 1998
First quarter ended April 30,1997 $19.63 $33.17
Second quarter ended July 31,1997 25.75 41.75
Third quarter ended October 31,1997 35.75 47.00
Fourth quarter ended January 31,1998 32.00 45.75
The Company has not paid dividends and does not plan to pay dividends on
its Common Stock in the foreseeable future. The Company presently intends to
reinvest earnings to fund future growth.
At March 31, 1998, there were approximately 463 stockholders of record of
the Company. Certain record holders are represented by brokers and other
institutions on behalf of stockholders. The Company has estimated the total
number of such stockholders to be 9,300.
16
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 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 92,400 $ 64,000 $44,000 $32,100 $27,341
Net income 4,870 (1) 11,280 5,383 2,460 332
Net income per share
Basic .19 (1) .49 .26 .12 .02
Diluted .17 (1) .43 .23 .11 .02
Working capital 149,604 55,219 27,701 24,220 21,486
Total assets 287,808 128,661 45,480 39,183 33,880
Long-term debt 140,000 -- -- 73 583
Stockholders' equity $111,986 $108,749 $32,813 $28,345 $24,612
- ---------------------------------------------------------------------------------------------------------------------------
(1) 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 Network Computer, 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
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
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." The following discussions
should be read in conjunction with the consolidated financial statements and
notes included elsewhere herein.
Wind River was founded in 1983 to provide consulting and custom software
development services for a variety of business clients. From its inception, the
Company directed its development efforts towards real-time and embedded system
applications and released its first commercial product, VxWorks, in 1987. Wind
River has subsequently broadened its product offerings and has become a leading
provider of operating systems and development tools for the real-time embedded
systems marketplace. In 1995, Tornado was introduced and became the Company's
flagship product. It consists of three integrated components: the Tornado
toolset, a set of 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. During the past five years, the
Company has invested heavily in the development and introduction of its products
and in the establishment of worldwide sales, distribution and customer support
capabilities. The Company markets its products on a worldwide basis through its
direct sales force, distributors and value-added resellers. The Company provides
sales, marketing and product support for foreign customers through wholly-owned
subsidiary companies in Europe and a majority-owned joint-venture company in
Japan. During fiscal year 1998, Wind River received ISO 9001 certification.
The Company typically charges a one-time fee for a development license and
a run-time license fee for each copy of the Company's operating system embedded
in the customer's product. A key component of the Company's strategy is to
significantly increase revenue through run-time license fees. Any increase in
the percentage of revenues attributable to run-
17
time licenses will depend on the Company's successful negotiation of run-time
license agreements and on the successful commercialization by the Company's
customers of the underlying products.
On December 31, 1997, the Company entered into an OEM License Agreement
(the "Agreement") with Network Computer, Inc. ("NCI") to license the right to
access and modify the source code version of certain NCI technology and to
duplicate, distribute and sublicense the object code version of such modified
source code included with certain of the Company's 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, the Company 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. 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. The balance of the
excess acquisition cost was allocated to acquired technology ($2 million) which
is being amortized over three years. In addition, the Company incurred
approximately $1.0 million of other non-merger incremental costs associated
with these acquisitions which were included in the in-process research and
development write-off.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated income statement data and
its percentage of revenues for the periods indicated. These operating results
are not necessarily indicative of results for any future periods.
YEARS ENDED JANUARY 31,
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Product $67,110 73% $46,354 72% $31,200 71%
Services 25,290 27 17,646 28 12,800 29
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue 92,400 100 64,000 100 44,000 100
- ---------------------------------------------------------------------------------------------------------------------------
Costs of revenues:
Products 6,245 7 4,580 7 3,746 9
Services 9,633 10 6,960 11 5,530 12
- ---------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 15,878 17 11,540 18 9,276 21
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 76,522 83 52,460 82 34,724 79
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling and marketing 33,066 36 23,900 37 17,905 41
Product development and engineering 11,970 13 7,722 12 5,531 13
General and administrative 6,261 7 5,021 8 3,158 7
Acquired in-process research and development 15,159 16 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 66,456 72 36,643 57 26,594 61
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 10,066 11 15,817 25 8,130 18
- ---------------------------------------------------------------------------------------------------------------------------
Other income (expense), net 3,298 4 2,140 3 661 2
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,364 15 17,957 28 8,791 20
Provision for income taxes 8,494 9 6,677 10 3,408 8
- ---------------------------------------------------------------------------------------------------------------------------
Net income $4,870 (1) 6% $11,280 18% $ 5,383 12%
- ---------------------------------------------------------------------------------------------------------------------------
(1) Net income before the effect of the adjustment for acquired in-process
research and development of $15,159 ($13,353 after tax) was $18,223 million or
20% of total revenue for the year ended January 31, 1998. The adjustment
resulted from the acquisition of in-process technologies from Network Computer,
Inc. and Objective Software Technology, Ltd.
18
REVENUES
The Company's overall revenue growth rate was 44% from fiscal 1997 to 1998 and
45% from fiscal 1996 to 1997. The Company's revenue results primarily from fees
for licenses of its software products, fees from run-time licenses for each copy
of the Company's operating system embedded in the customer's products and fees
for customer support, training, maintenance and engineering services. Product
revenues accounted for approximately 73%, 72% and 71% of the total revenues in
fiscal 1998, 1997 and 1996, respectively, with service revenues accounting for
the balance of total revenue over this period.
Product revenues increased 45% from fiscal 1997 to 1998 and 49% from fiscal
1996 to 1997. The Company derives product revenue primarily from one-time
development license fees and run-time license fees for each copy of the
Company's operating system embedded in the customer's products. The increases in
product revenues for both fiscal 1998 and fiscal 1997 were attributable
primarily to increased market acceptance of the Company's products, expansion of
the Company's sales and marketing efforts, and introductions of new products.
Tornado, the Company's flagship product, was first introduced in fiscal 1996 and
its sales have continued to grow as Tornado became 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.
International revenues represented 29%, 34% and 37% of total revenues in
fiscal 1998, 1997 and 1996, respectively. Revenues from European sources
increased 35% from fiscal 1997 to 1998 and 41% from fiscal 1996 to 1997 while
revenues from Asia Pacific sources increased 6% and 32% over the same
periods, respectively. The Company expects international sales to continue to
represent the significant portion of net product revenues although the
percentage may fluctuate from period to period. Revenues derived from
indirect sales channels worldwide represented 21%, 23% and 27% of total
revenues in fiscal 1998, 1997 and 1996, respectively. A significant portion
of these indirect revenues are attributable to the contribution of the
Company's majority-owned joint-venture company in Japan, Wind River Systems
K.K. ("WRSKK"). The Company sells products to WRSKK at discounts which
approximate those offered to other independent distributors of the Company's
products. The Company's international sales are denominated in the local
currencies and an increase in the relative value of the dollar against such
currencies would reduce the Company's revenues in dollar terms or make the
Company's products more expensive and, therefore, potentially less
competitive in foreign markets. The Company actively monitors its foreign
currency exchange exposure and to date such exposures have not had a material
impact on the Company's results of operations. To date, the Company has not
utilized derivative instruments to manage such exposure.
Service revenues increased 43% from fiscal 1997 to 1998 and 38% from fiscal
1996 to 1997. The increases were due primarily to increases in maintenance and
training resulting from increases in the installed customer base, as well as a
significant increase in the engineering services consulting business.
Maintenance contracts are generally prepaid, with the revenue recognized ratably
over the period of the contract. The deferred software support and development
revenue balance relates primarily to customer prepayments under software
maintenance and run-time agreements. Deferred revenue will be recognized as
revenue ratably over the life of the agreements..
COST OF PRODUCTS
Cost of products includes direct and indirect costs for the production and
duplication of manuals and media for software products, as well as those
relating to the packaging, shipping and delivery of the products to the
customer. Product costs also include license and other direct purchase costs
of third-party software that is distributed by or integrated into the
Company's products and the amortization of capitalized software development
costs. During the past three years, the cost of products has remained
relatively constant. As a result, gross profit margins for products have also
remained constant between 88% to 91%. Amortization of capitalized software
development costs included in cost of products amounted to $654,000, $600,000
and $360,000 in fiscal 1998, 1997 and 1996, respectively. The unamortized
portion of capitalized software development costs was $977,000 at January 31,
1998.
19
COST OF SERVICES
Cost of services includes customer technical support, engineering services
consulting, maintenance and training. The gross margin was at 62% in fiscal
1998 as compared to 61% and 57% in fiscal 1997 and 1996, respectively. The
improvement during this period is due primarily to the more efficient
utilization of resources as the Company's maintenance base grew, as well as
to improved margins in the Company's engineering services contracts.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased 38% from fiscal 1997 to 1998 and 33% from
fiscal 1996 to 1997. The increase in costs in fiscal 1998 and 1997 resulted
primarily from increases in sales and marketing personnel both domestically and
internationally and increased advertising and third-party marketing costs for
product introductions and promotions. Sales and marketing costs as a percentage
of revenues continued to decrease to 36% in fiscal 1998 from the 37% and 41%
experienced in fiscal 1997 and 1996, respectively. This decrease was
attributable to a growing revenue base and more effective utilization of
personnel.
PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Product development and engineering expenses have grown by 55% from fiscal
1997 to 1998 and 40% from fiscal 1996 to 1997. Product development and
engineering expense, as a percentage of revenues, increased from 12% to 13%
from fiscal 1997 to 1998 and decreased from 13% to 12% from fiscal 1996 to
1997. Over this period of time, the Company has made a concerted effort to
migrate its products across a wide range of system architectures including
Internet-related architectures and to improve its technological capabilities
and systems. While the Company has taken measures to improve the efficiency
of its product development and engineering efforts and to reduce its reliance
on third-party providers for key components of new products, the Company
expects that it will be necessary to continue to make significant investments
in engineering and product development for the foreseeable future.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 25% from fiscal 1997 to 1998 and
59% from fiscal 1996 to 1997. The increase in general and administrative expense
is attributable to worldwide investment in information systems and finance
staffing and infrastructure. General and administrative costs have decreased as
a percentage of revenues to 7% in fiscal 1998 from 8% in fiscal 1997. The
general and administrative expense increased as a percentage of revenue from 7%
in fiscal 1996 to 8% in fiscal 1997.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On December 31, 1997, the Company entered into an OEM License Agreement (the
"Agreement") with NCI to license the right to access and modify the source code
version of certain NCI technology and to duplicate, distribute and sublicense
the object code version of such modified source code included with certain of
the Company's future products. Under the Agreement, the Company paid or is
obligated to pay $9.8 million for non-exclusive, restricted, perpetual rights to
the technology and $200,000 for NCI engineering services to be incurred prior to
source code delivery. In addition, selected elements of the NCI technology
require the Company to pay additional per unit royalties in the event the
Company's future sales of products that include the modified NCI technology
exceed specified volume levels. The licensed source code will be ported by the
Company 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, the Company acquired 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. The Company used the
discounted cash flow ("DCF") approach to determine the
20
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 million) which is being amortized over three years.
The Company incurred approximately $1.0 million of other non-merger
incremental costs associated with these acquisitions which were included in
the in-process research and development write-off.
OTHER INCOME AND EXPENSE
Other income and expense includes interest income derived from the investment
of excess cash, interest expense incurred on the convertible subordinated
notes issued in July 1997, and income or loss related to the 30% minority
interest held by the Japanese participants in WRSKK. The increase in other
income in fiscal 1998 and fiscal 1997 was due to the increase in interest
income earned on the investment of excess cash received from the issuance of
the convertible subordinated notes and the investment of excess cash received
in a public offering of Common Stock in July 1996, respectively.
PROVISION FOR TAXES
The Company's effective consolidated tax rates amounted to 64%, 37% and 39%
in fiscal 1998, 1997 and 1996, respectively. The effective consolidated tax
rate increased in fiscal 1998 due 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 result primarily from 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.
21
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly information for the
Company's last eight fiscal quarters. The Company 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.
On May 24, 1996, a three-for-two stock split was effected by means of a
stock dividend with respect to all holders of the Company's Common Stock
outstanding on May 10, 1996. On March 10, 1997, a three-for-two stock split was
effected by a stock dividend with respect to all holders of the Company's Common
Stock outstanding on February 24, 1997. All share numbers and prices in this
Annual Report and Form 10-K have been adjusted to give effect to these stock
splits.
QUARTERS ENDED
JAN. 31 OCT. 31 JUL. 31 APR. 30 JAN. 31 OCT. 31 JUL. 31 APR. 30
In thousands, except per share amounts 1998 1997 1997 1997 1997 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Products $20,995 $16,932 $15,926 $13,257 $14,826 $12,297 $10,700 $8,531
Services 7,005 7,068 6,074 5,143 4,974 4,303 4,300 4,069
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 28,000 24,000 22,000 18,400 19,800 16,600 15,000 12,600
- ---------------------------------------------------------------------------------------------------------------------------------
Cost of revenues:
Products 1,674 1,564 1,601 1,406 1,119 1,126 1,246 1,089
Services 2,669 2,664 2,362 1,938 1,979 1,676 1,744 1,561
- ---------------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 4,343 4,228 3,963 3,344 3,098 2,802 2,990 2,650
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 23,657 19,772 18,037 15,056 16,702 13,798 12,010 9,950
- ---------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling and marketing 9,312 8,153 8,346 7,255 6,861 6,133 5,767 5,139
Product development and
engineering 3,654 2,877 3,005 2,434 2,331 1,883 1,913 1,595
General and administrative 1,628 1,531 1,565 1,537 1,646 1,224 1,133 1,018
Acquired in-process research
and development 15,159 -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 29,753 12,561 12,916 11,226 10,838 9,240 8,813 7,752
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (6,096) 7,211 5,121 3,830 5,864 4,558 3,197 2,198
Other income, net 662 930 926 780 920 835 193 192
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (5,434) 8,141 6,047 4,610 6,784 5,393 3,390 2,390
Provision for income taxes 1,726 2,931 2,177 1,660 2,524 1,933 1,300 920
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (7,160) $ 5,210 $ 3,870 $ 2,950 $ 4,260 $ 3,460 $ 2,090 $ 1,470
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share
Basic $ (0.28) $ 0.20 $ 0.15 $ 0.12 $ 0.17 $ 0.14 $ 0.10 $ 0.07
Diluted $ (0.28) $ 0.18 $ 0.14 $ 0.11 $ 0.15 $ 0.12 $ 0.08 $ 0.06
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average common and
common equivalent shares
Basic 25,597 25,480 25,384 25,364 25,184 24,959 21,607 20,816
Diluted 25,597 28,276 28,196 28,058 28,176 27,914 24,633 23,793
- ---------------------------------------------------------------------------------------------------------------------------------
22
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, the Company had working capital of approximately $150
million and cash and investments of approximately $222 million, which include
investments with maturities of greater than one year of $60 million. Wind
River invests primarily in instruments that are highly liquid and of
investment grade, which generally have maturities of less than one year with
the intent to make such funds readily available for operating purposes.
The Company's operating activities provided net cash of $37.9 million due
primarily to net income, a one-time write-off of acquired in-process research
and development and increases in deferred revenue and accounts payable and
accrued liabilities. These sources of cash were partially offset by increases in
accounts receivable and prepaids and other assets. Increased sales activities in
response to higher customer demand contributed to increases in accounts
receivable, accounts payable and deferred revenue.
The Company's investing activities used net cash of $72.6 million. During
fiscal year 1998, the Company acquired certain technologies and companies for
$20.6 million. Other investing activities included capital expenditures,
capitalization of software development costs and purchases of investments. These
were partially offset by sales of investments.
The Company's financing activities provided net cash of $126.8 million
primarily as a result of the issuance of convertible subordinated notes and the
issuance of Common Stock for stock option exercises. The increase in financing
activities was partially offset by treasury stock repurchases pursuant to the
Company's ongoing repurchase program. Under the current program, the Company
repurchases $2.5 million of its Common Stock per quarter on the open market at
prevailing market prices or in negotiated transactions off the market. The
current program is expected to continue for one year from the quarter ended
January 31, 1998. During fiscal 1998, the Company repurchased 364,000 shares of
Common Stock at a cost of $12.4 million.
In July 1997, the Company issued $140 million of 5.0% Convertible
Subordinated Notes (the "Notes"), due 2002. The Notes are subordinated to all
existing and future senior debt and are convertible into shares of the Company's
Common Stock at a conversion price of $48.50 per share. The Notes are redeemable
at the option of the Company, 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 the Company 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 February 1,
1998.
In fiscal 1998, the Company purchased real property in the City of Alameda,
California for $11.4 million cash. The property is being developed to construct
the Company's new headquarters facility.
In fiscal 1998, the Company entered into an operating lease agreement
for its new headquarters facility being constructed on the land the Company
purchased in Alameda, California. As of January 31, 1998, the lessor has
funded a total of $2.5 million of construction costs and has committed to
fund up to a maximum of $35 million. The operating lease payments will begin
upon completion of construction and will vary based on the total construction
costs of the property, including capitalized interest and the London
interbank offering rate ("LIBOR"). Construction of the building is currently
expected to be completed in December 1998. In connection with the lease, the
Company is obligated to enter into a lease of its land in Alameda, California
to the lessor of the building at a nominal rate and for a term of 55 years.
If the Company terminates or does not negotiate an extension of the building
lease, the ground lease converts to a market rental rate. The lease provides
the Company with the option at the end of the lease of either acquiring the
building at the lessor's original cost or arranging for the building to be
acquired. The Company has guaranteed the residual value associated with the
building to the lessor of approximately 82% of the lessor's $35 million
funding obligation. The Company is also required, periodically during the
construction period, 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, the Company must maintain compliance
with certain financial covenants. As of January 31, 1998, the Company was in
compliance with these covenants. Management believes that the contingent
liability relating to the residual value guarantees will not have a material
adverse effect on the Company's financial position or results of operations.
23
On March 18, 1998, the Company entered into an accreting interest rate
swap agreement (the "Agreement") to reduce the impact of changes in interest
rates on its floating rate operating lease for its new corporate headquarters
(See Note 10 to the consolidated financial statements). This agreement
effectively changes the Company's interest rate exposure on its operating
lease which is at one month LIBOR to a fixed rate of 5.9%. The notional
amount under the Agreement is scheduled to increase in relation to the funds
used to construct the Company's new headquarters. 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 their contracts) are generally limited to the amounts, if any, by
which the counterparty's obligations exceed the obligations of the Company.
Management believes that the Company'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
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as many computer systems will be affected in some way
by the rollover of the two-digit year value to 00. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The "Year 2000" issue creates risk for the Company from unforeseen
problems in its own computer systems and from third parties with whom the
Company deals on transactions worldwide. Failures of the Company's and/or third
parties' computer systems could have a material impact on the Company's ability
to conduct its business.
The Company is currently upgrading its financial information systems. The
Company believes it will complete the upgrade during fiscal 1999. These upgraded
financial information systems are believed to be "Year 2000" compliant. The
Company is analyzing its remaining computer systems to identify any potential
"Year 2000" issues and will take appropriate corrective action based on the
results of such analysis. Management does not believe the costs related to
achieving "Year 2000" compliance will be material.
The Company has initiated communications with its significant suppliers to
determine the extent to which the Company's operations are vulnerable to those
third parties' failure to solve their own "Year 2000" issues. Specific factors
that might cause suppliers to be vulnerable to "Year 2000" issues include, but
are not limited to, the availability and cost of personnel trained in this area,
the ability to locate and corrupt all relevant computer codes, and similar
uncertainties. There can be no assurance that the systems of other companies on
which the Company relies will be converted on a timely basis and will not have
an adverse effect on the Company's financial position or results of operations.
The "Year 2000" issue also could affect the products that the Company
sells. The Company believes that the current versions of its products are "Year
2000" compliant. The Company's products are subject to ongoing analysis and
review.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 ("FAS 130"). FAS 130 establishes
standards for reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in equity (net
assets) during a period from non-owner sources. Examples of items to be included
in comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains/losses on
available-for-sale securities. The disclosure prescribed by FAS 130 must be made
beginning with the first quarter of fiscal 1999.
Additionally in June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
Company has not yet determined the impact, if any, of adopting this new
standard. The disclosures prescribed by FAS 131 will be effective for the
year ending January 31, 1999 consolidated financial statements.
24
In October 1997 and March 1998, the American Institute of Certified
Public Accountants issued Statements of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2") and 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"), which the
Company currently is required to adopt for transactions entered into in the
fiscal year beginning February 1, 1998. SOP 97-2 and SOP 98-4 provides
guidance on recognizing revenue on software transactions and supersedes SOP
91-1. The Company believes that the adoption of SOP 97-2 and SOP 98-4 will
not have a significant impact on its current licensing or revenue recognition
practices. However, should the Company adopt new or change its existing
licensing practices, the Company's revenue recognition practices may be
subject to change to comply with the accounting guidance provided in SOP 97-2
and SOP 98-4.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
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 has not
yet determined the impact, if any, of adopting this statement. The
disclosures prescribed by SOP 98-1 will be effective for the year ending
January 31, 2000 consolidated financial statements.
25
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
- ------------------------------------------------------------------------------
Financial Statements:
Report of Independent Accountants 27
Consolidated Statements of Income
for the years ended January 31, 1998, 1997 and 1996 28
Consolidated Balance Sheets
at January 31, 1998 and 1997 29
Consolidated Statements of Cash Flows
for the years ended January 31, 1998, 1997, and 1996 30
Consolidated Statements of Changes
in Stockholders' Equity for the years
ended January 31, 1998, 1997 and 1996. 31
Notes to Consolidated Financial Statements 32
Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts 47
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.
26
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards 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.
PRICE WATERHOUSE LLP
San Jose, California
February 23, 1998, except for Note 13 which is as of March 18, 1998
27
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 31,
In thousands, except per share amounts 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Products $67,110 $46,354 $31,200
Services 25,290 17,646 12,800
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 92,400 64,000 44,000
- ---------------------------------------------------------------------------------------------------------------------------
Cost of revenues:
Products 6,245 4,580 3,746
Services 9,633 6,960 5,530
- ---------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 15,878 11,540 9,276
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 76,522 52,460 34,724
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling and marketing 33,066 23,900 17,905
Product development and engineering 11,970 7,722 5,531
General and administrative 6,261 5,021