| | | | Additional
Paid in
Capital | | Loan to
Stockholder | | | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings
(Accumulated
Deficit) | | Total
Stockholders’
Equity |
| | Common Stock | Treasury Stock |
| |
|
|
| | Shares | | Amount | Shares | | Amount |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
| | (In thousands) |
| Balance at January 31, 2000 | 66,230 | | | $66 | | | $216,149 | | | $(1,900 | ) | | | (1,277 | ) | $(29,488 | ) | | $16,499 | | | | | $99,890 | | | | | $301,216 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| Net loss | — | | | — | | | — | | | — | | | | — | | — | | | — | | | | | (76,391 | ) | | | | (76,391 | ) | |
| Unrealized loss on investments | — | | | — | | | — | | | — | | | | — | | — | | | (19,218 | ) | | | | — | | | | | (19,218 | ) | |
| Currency translation adjustments | — | | | — | | | — | | | — | | | | — | | — | | | 2,008 | | | | | — | | | | | 2,008 | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | |
| Comprehensive loss | — | | | — | | | — | | | — | | | | — | | — | | | (17,210 | ) | | | | | | | | | (93,601 | ) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | |
| Common stock issued upon acquisitions | 7,677 | | | 8 | | | 432,585 | | | — | | | | — | | — | | | — | | | | | — | | | | | 432,593 | | |
| Common stock issued upon exercise of stock options | 3,665 | | | 4 | | | 44,844 | | | — | | | | — | | — | | | — | | | | | — | | | | | 44,848 | | |
| Common stock issued under stock purchase plan | 266 | | | — | | | 8,030 | | | — | | | | — | | — | | | — | | | | | — | | | | | 8,030 | | |
| Common stock issued for 401(k) match | 28 | | | — | | | 1,084 | | | — | | | | — | | — | | | — | | | | | — | | | | | 1,084 | | |
| Common stock issued for converted bonds | — | | | — | | | 6 | | | — | | | | — | | — | | | — | | | | | — | | | | | 6 | | |
| Tax benefit from stock plans | — | | | — | | | 12,000 | | | — | | | | — | | — | | | — | | | | | — | | | | | 12,000 | | |
| Compensation charge relating to common stock options | — | | | — | | | 458 | | | — | | | | — | | — | | | — | | | | | — | | | | | 458 | | |
| Loan to stockholder assumed in acquisition of EST | — | | | — | | | — | | | (1,181 | ) | | | — | | — | | | — | | | | | — | | | | | (1,181 | ) | |
| Repayment of loans to stockholders | — | | | — | | | — | | | 1,431 | | | | — | | — | | | — | | | | | — | | | | | 1,431 | | |
| Accrued interest on loans to stockholders | — | | | — | | | — | | | (137 | ) | | | — | | — | | | — | | | | | — | | | | | (137 | ) | |
| |
| | |
| | |
| | |
| | | |
| |
| | |
| | | | |
| | | | |
| | |
| Balance at January 31, 2001 | 77,866 | | | 78 | | | 715,156 | | | (1,787 | ) | | | (1,277 | ) | (29,488 | ) | | (711 | ) | | | | 23,499 | | | | | 706,747 | | |
| Fiscal year synchronization of subsidiaries | — | | | — | | | — | | | — | | | | — | | — | | | — | | | | | (1,253 | ) | | | | (1,253 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| Net loss | — | | | — | | | — | | | — | | | | — | | — | | | — | | | | | (375,634 | ) | | | | (375,634 | ) | |
| Unrealized gain on investments | — | | | — | | | — | | | — | | | | — | | — | | | 1,007 | | | | | — | | | | | 1,007 | | |
| Fair value remeasurement of interest rate swap | — | | | — | | | — | | | — | | | | — | | — | | | (2,557 | ) | | | | — | | | | | (2,557 | ) | |
| Currency translation adjustments | — | | | — | | | — | | | — | | | | — | | — | | | (2,504 | ) | | | | — | | | | | (2,504 | ) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | |
| Comprehensive loss | — | | | — | | | — | | | — | | | | — | | — | | | (4,054 | ) | | | | | | | | | (379,688 | ) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | |
| Common stock issued upon exercise of stock options | 1,291 | | | 1 | | | 11,385 | | | — | | | | — | | — | | | — | | | | | — | | | | | 11,386 | | |
| Common stock issued under stock purchase plan | 561 | | | 1 | | | 8,112 | | | — | | | | — | | — | | | — | | | | | — | | | | | 8,113 | | |
| Common stock issued for 401(k) match | 145 | | | — | | | 2,691 | | | — | | | | — | | — | | | — | | | | | — | | | | | 2,691 | | |
| Compensation charge relating to stock options | — | | | — | | | 251 | | | — | | | | — | | — | | | — | | | | | — | | | | | 251 | | |
| Accrued interest on loans to stockholders | — | | | — | | | | | | (106 | ) | | | — | | — | | | — | | | | | — | | | | | (106 | ) | |
| |
| | |
| | |
| | |
| | | |
| |
| | |
| | | | |
| | | | |
| | |
| Balance at January 31, 2002 | 79,863 | | | 80 | | | 737,595 | | | (1,893 | ) | | | (1,277 | ) | (29,488 | ) | | (4,765 | ) | | | | (353,388 | ) | | | | 348,141 | | |
| Net loss | — | | | — | | | — | | | — | | | | — | | — | | | — | | | | | (106,864 | ) | | | | (106,864 | ) | |
| Unrealized gain on investments | — | | | — | | | — | | | — | | | | — | | — | | | 1,078 | | | | | — | | | | | 1,078 | | |
| Fair value remeasurement of interest rate swap | — | | | — | | | — | | | — | | | | — | | — | | | 2,557 | | | | | — | | | | | 2,557 | | |
| Currency translation adjustments | — | | | — | | | — | | | — | | | | — | | — | | | 1,774 | | | | | — | | | | | 1,774 | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | |
| Comprehensive income (loss) | — | | | — | | | — | | | — | | | | — | | — | | | 5,409 | | | | | | | | | | (101,455 | ) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | |
| Common stock issued upon exercise of stock options | 577 | | | 1 | | | 3,936 | | | — | | | | — | | — | | | — | | | | | — | | | | | 3,937 | | |
| Common stock issued under stock purchase plan | 926 | | | 1 | | | 3,656 | | | — | | | | — | | — | | | — | | | | | — | | | | | 3,657 | | |
| Common stock issued for 401(k) match | 409 | | | — | | | 2,455 | | | — | | | | — | | — | | | — | | | | | — | | | | | 2,455 | | |
| Common stock repurchases | — | | | — | | | — | | | — | | | | (959 | ) | (4,697 | ) | | — | | | | | — | | | | | (4,697 | ) | |
| Accrued interest on loans to stockholders | — | | | — | | | — | | | (113 | ) | | | — | | — | | | — | | | | | — | | | | | (113 | ) | |
| |
| | |
| | |
| | |
| | | |
| |
| | |
| | | | |
| | | | |
| | |
| Balance at January 31, 2003 | 81,775 | | | $82 | | | $747,642 | | | $(2,006 | ) | | | (2,236 | ) | $(34,185 | ) | | $644 | | | | | $(460,252 ) | | | | | $251,925 | | |
| |
| | |
| | |
| | |
| | | |
| |
| | |
| | | | |
| | | | |
| | |
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF THE BUSINESS
Wind River is a leading supplier of embedded software and services for embedded systems. An embedded system consists of a microprocessor, or a series of microprocessors, and related software and is used to control, monitor or assist the operation of electronic devices, equipment and machinery. Embedded systems are used in diverse products such as digital imaging products, auto braking systems, internet routers, jet fighter control panels and factory automation devices. Wind River’s products help customers to enhance product performance, standardize designs across projects, reduce research and development costs and shorten product development cycles. Wind River sells its products to customers in a variety of markets, including the aerospace, automotive, digital imaging, industrial measurement and networking markets.
Wind River markets its products and services in North America, Europe (including the Middle East and Africa, “EMEA”), Japan and the Asia Pacific region, primarily through its own direct sales organization, which consists of sales persons and field engineers. Wind River also licenses distributors, primarily in international regions, to serve customers in regions not serviced by its direct sales force. Wind River was incorporated in California in February 1983 and reincorporated in Delaware in April 1993.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.Wind River has a reporting year ending January 31 while through December 31, 2001, its international subsidiaries had a reporting year ending December 31. Effective January 31, 2002, all of Wind River’s overseas subsidiaries changed their reporting year-end from December 31 to January 31. For the quarter ended January 31, 2002, a loss of $1.3 million recorded by the affected subsidiaries during the period between January 1, 2002 and January 31, 2002, has been recognized as a cumulative adjustment to accumulated deficit. The Consolidated Financial Statements for fiscal 2003, 2002 and 2001 include the international subsidiaries financial position as of January 31, 2003, January 31, 2002 and December 31, 2000, respectively, and include the international subsidiaries statements of operations for the year ended January 31, 2003, December 31, 2001 and December 31, 2000, respectively.
All historical financial information has been restated to reflect the acquisition of Integrated Systems, Inc., (“Integrated Systems”) in the first quarter of fiscal 2001, which was accounted for as a pooling of interests. Acquisitions that have been accounted for as purchase transactions have been included in the consolidated results from their date of purchase. Certain amounts have been reclassified to conform to the current years’ presentation.
Principles of Consolidation.The Consolidated Financial Statements include the accounts of Wind River Systems and its subsidiaries. All significant inter-company accounts and transactions have been eliminated.
Use of Estimates.The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, estimates are used for, but not limited to the accounting for the allowance for doubtful accounts, sales returns and other allowances, restructuring costs, valuation of investments, goodwill and purchased intangibles, deferred taxes and the outcome of litigation and other contingencies. Actual results could differ from those estimates and could affect future operating results.
Cash, Cash Equivalents and Investments.Cash equivalents consist of highly liquid investments with remaining maturity at the date of purchase of three months or less. These fixed income securities are readily convertible to cash and are stated at fair value. Fair value is determined based upon the quoted market prices of the securities as of the balance sheet date. Investments with remaining maturities greater than three months and less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments. Wind River accounts for its investments, including marketable equity securities, money market funds, municipal bonds, U.S. government and agency obligations, corporate bonds and
48
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
other debt securities, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Wind River determines the appropriate classification of its investments at the time of purchase and re-evaluates such classification at each balance sheet date. Wind River has classified all of its investments as available-for-sale and carries such investments at fair value, with unrealized gains and losses reported in the accumulated other comprehensive income (loss) component of stockholders’ equity until disposition. The cost of securities sold is based on the specific identification method. Realized gains or losses and declines in value, which are judged to be other-than-temporary, are reported in other income or expense. In fiscal 2003 and 2002, sales of investments were $144.0 million and $242.0 million, respectively, and maturities of investments were $70.3 million and $88.1 million, respectively. See also “Restricted Cash” below.
Other Assets.Current assets include inventory, prepaid expenses, investment interest and the current portion of deferred taxes. Other long-term assets include various investments in private companies (over which Wind River exerts no significant influence), security deposits, prepaid expenses, capitalized research and development costs and bond issuance costs. Investments in private companies are accounted for using the cost method of accounting and subject to adjustment for impairment.
Risks and Uncertainties.Wind River’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, investments, and accounts receivable. Wind River’s investments consist of investment grade securities managed by qualified professional investment managers. The investment policy is intended to limit Wind River’s exposure to concentrations of credit risk.
During the last two fiscal years, Wind River’s revenues have declined as a result of the effects of general economic conditions on its customer base. As a result Wind River has undertaken various restructuring plans and cost control measures in order to reduce operating expenditures to a level more closely aligned with anticipated revenues. In addition, during the fourth quarter of fiscal 2003, Wind River began transitioning portions of its software licensing from a perpetual model to a subscription-based model. In the short term, Wind River’s liquidity will be affected by the realization of anticipated revenues, the level of acceptance of its new model by current and potential customers and the need to settle remaining liabilities arising from the restructuring plans implemented in the last fiscal year.
Wind River’s accounts receivable results primarily from software sales to a broad customer base both domestically and internationally and are typically unsecured. As noted below under “Revenue Recognition,” Wind River performs on-going credit evaluations of its customers’ financial condition, limits the amount of credit when deemed necessary and maintains allowances for potential credit losses. Additions to the allowance for doubtful accounts were approximately $964,000, $4.4 million and $687,000 for the years ended January 31, 2003, 2002 and 2001, respectively. Charges against the allowance were approximately $1.9 million for both the years ended January 31, 2003 and 2002 and $420,000 for the year ended 2001.
No single customer accounted for more than 10% of Wind River’s total revenues in fiscal 2003, 2002 or 2001. Revenues from sales to customers outside of North America represented approximately 42%, 39% and 31% of total revenue in fiscal 2003, 2002 and 2001, respectively.
Fair Value of Financial Instruments.For certain of Wind River’s financial instruments, including cash and cash equivalents, short-term investments, accounts receivable and accounts payable, the carrying amounts approximate fair value due to their short maturities. Wind River has certain other minority investments in private companies. These investments are included in other long-term assets on Wind River’s balance sheet and are carried at cost, subject to adjustment for impairment. These investments are inherently risky because the markets for the technologies or products they have under development are typically in the early stages and may never develop. Wind River recorded impairment losses of $4.0 million and $6.9 million during fiscal 2003 and 2002, respectively, relating to these investments. As a result of these write-downs, Wind River has no remaining investment book value on its balance sheet relating to private companies as of January 31, 2003. These investments had previously been included as a component of other long-term assets on its balance sheet and were carried at cost.
49
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment.Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation on equipment is computed using the straight-line method over the estimated useful lives of the assets, which is generally two to four years for computer equipment and four to ten years for furniture and equipment. Leasehold improvements are amortized over the term of the related lease or useful economic life, which ever is shorter. Gains and losses on disposals are included in results of operations at amounts equal to the difference between the net book value of the disposed assets and the proceeds received upon disposal. Expenditures for replacements and improvements are capitalized, while expenditures for maintenance and repairs are charged to income as incurred.
Internal Use Software.Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” provides guidance for determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. Wind River capitalizes substantially all external costs and qualifying internal costs related to the purchase and implementation of software projects used for business operations and engineering design activities. Capitalized software costs primarily include purchased software and external consulting fees. Capitalized software projects are amortized over the estimated useful lives of the projects, typically a two to five year period.
Software Development Costs.Wind River accounts for software development costs in accordance with SFAS 86, “Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed.” Costs incurred to establish the technological feasibility of a computer software product are considered research and development costs and are expensed as incurred. When the technological feasibility of a software product has been established using the working model approach, development costs are capitalized. Capitalization of these costs ceases when the product is ready for production. The period of time between technological feasibility and general release of products to customers is generally extremely short. Amortization of capitalized software development costs is provided on a product-by-product basis at the greater of the amount computed using (a) the ratio of current gross revenues for a product to the total of current and anticipated future gross revenues or (b) the straight-line method over the remaining estimated economic life of the product. Generally, an original estimated economic life of two years is assigned to capitalized software development costs. Amortization of capitalized software development costs is charged to cost of product revenues. Research and development expenditures are charged to product development and engineering in the period incurred. The amortization of capitalized software development costs, which were charged to cost of product revenues during fiscal 2003, 2002 and 2001 were $988,000, $1.5 million and $2.4 million, respectively. As of January 31, 2003 and 2002, Wind River had capitalized software costs with a net book value of $846,000 and $1.1 million, respectively.
Goodwill and Purchased Intangibles.Intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. These include acquired customer base, technological know-how, trademarks and goodwill. Intangible assets are amortized over the estimated useful lives ranging from one year to four years on a straight-line basis. Intangible assets acquired subsequent to June 30, 2001 have been accounted for in accordance with the provisions of SFAS No. 141 “Business Combinations” (“SFAS 141”) and have been amortized in accordance with the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). For all other intangible assets, Wind River adopted the provisions of SFAS 142 on February 1, 2002, which requires that goodwill be no longer amortized, but continue to be evaluated for impairment. Wind River performs its annual impairment assessment of goodwill during its second fiscal quarter.
Impairment of Long-Lived Assets.Wind River evaluates the recoverability of its property and equipment and intangible assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets ” (“SFAS 144”). SFAS 144 requires recognition of impairment of long-lived assets when circumstances
50
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
indicate an impairment has occurred and in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. Accordingly, Wind River evaluates asset recoverability when an event occurs that may impair recoverability of the asset. Wind River determines the recoverability of the carrying amount of each asset by reviewing the following factors: the undiscounted value of expected operating cash flows in relation to its net capital investments, the estimated useful or contractual life of the asset, the contract or product supporting the asset. In the case of purchased intangibles and capitalized software development costs, Wind River periodically reviews the recoverability of the asset’s value by evaluating its products with respect to technological advances, competitive products and the needs of its customers. See Note 3, “Acquisitions and Dispositions.”
Restricted Cash.As of January 31, 2003, restricted cash consisted of the investments held as collateral under the operating lease of Wind River’s headquarters. Fair value is determined based upon the quoted market prices of the securities as of the balance sheet date. See Note 16, “Subsequent Events.”
Derivative Financial Instruments.In the first quarter of fiscal 2002, Wind River adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends upon the intended use of the derivative and the resulting designation.
Wind River designates its derivatives based upon criteria established by SFAS 133. For a derivative designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified to earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For a derivative not designated as a hedging instrument, the gain or loss is recognized in the period of change.
Wind River enters into foreign currency forward exchange contracts to manage foreign currency exposures related to certain foreign currency denominated inter-company balances. Additionally, Wind River may adjust its foreign currency hedging position by taking out additional contracts or by terminating or offsetting existing forward contracts. These adjustments may result from changes in the underlying foreign currency exposures or from fundamental shifts in the economics of particular exchange rates. Gains and losses on terminated forward contracts, or on contracts that are offset, are recognized in income in the period of contract termination or offset. As of January 31, 2003, Wind River had outstanding forward contracts with notional amounts of $7.9 million. The fair value of these contracts as of January 31, 2003 was not significant. Wind River does not enter into derivative financial instruments for trading or speculative purposes.
Revenue Recognition.Wind River derives revenue from two sources: (i) product revenue and (ii) service revenue. Product revenues consist of royalties and fees for operating systems and fees for the use of development tools. Wind River licenses its software products under perpetual licenses as well as time-based term licenses, such as the subscription-based arrangements in its newly introduced Integrated Embedded Platform products. Service revenues are derived from fees from professional services, which include design and development fees, software maintenance contracts, and customer training and consulting. Maintenance contract renewals are generally sold separately from Wind River’s products. Wind River’s customers consist of end users, distributors, original equipment manufacturers, system integrators and value-added resellers. Agreements generally do not allow the right of return or sales price adjustments.
Wind River recognizes revenue in accordance with SOP 97-2, “Software Revenue Recognition,” as amended (“SOP 97-2”); SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”); and Staff Accounting Bulletin 101 “Revenue Recognition” (“SAB 101”).
51
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Wind River recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the vendor’s fee is fixed or determinable and vendor-specific objective evidence (“VSOE”) exists to allocate the total fee to all undelivered elements of the arrangement and collection is determined to be probable. These four criteria are further defined as follows:
Persuasive evidence of an arrangement exists.It is Wind River’s customary practice to have written non-cancelable contracts and a customer purchase order prior to recognizing revenue on an arrangement.
Delivery has occurred.Product revenues for software and hardware are recognized at the time of shipment or upon the delivery of a product master, with standard transfer terms of FOB shipping point. If undelivered products or services exist that are essential to the functionality of the delivered product in an arrangement, delivery is not considered to have occurred. If only non-essential products or services are undelivered and if evidence of fair value of all undelivered elements exists, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.
Wind River recognizes revenues from one-year, time-based licenses and subscription-based licenses ratably over the term of the agreement. For multi-year time-based licenses, Wind River defers recognition of the fees associated with the VSOE of the maintenance and support over the term of the license and recognizes the residual contract amount in the period in which the agreement is signed, so long as it has VSOE for undelivered elements, which typically consist of maintenance and support. Where VSOE does not exist for undelivered elements, Wind River recognizes the fees ratably over the term of the multi-year license.
Wind River recognizes fees from its enterprise license model subscriptions ratably over the term of the subscription license agreement.
Sales to distributors, original equipment manufacturers, system integrators and value-added resellers are recognized either at the time the risks of ownership have transferred or upon receipt of royalty reports related to the sale of product to an end-user, depending on Wind River’s historical experience with these customers.
Professional service revenues are separately priced, are generally available from a number of suppliers, and are typically not essential to the functionality of its software products. Revenue from these services is recognized separately from the license fee because the arrangements qualify as “service transactions” as defined by SOP 97-2. Generally, revenue from time-and-materials consulting contracts are recognized as services are performed.
Contract accounting is utilized for services revenues from fixed-price contracts and those requiring significant software modification, development or customization. In such instances, the arrangement fee is accounted for in accordance with SOP 81-1, whereby the arrangement fee is recognized, generally using the percentage-of-completion method measured on labor input costs. If increases in projected costs-to-complete are sufficient to create a loss contract, the entire estimated loss is charged to operations in the period the loss first becomes known. The complexity of the estimation process and judgment related to the assumptions, risks and uncertainties inherent with the application of the percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in its consolidated financial statements. A number of internal and external factors can affect its estimates, including labor rates, utilization, changes to specification and testing requirements and collectibility of unbilled receivables.
Service revenues from time-and-materials professional services contracts are recognized as the services are performed.
52
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Service revenues from software maintenance, support and update fees are recognized ratably over the contract period, which in most instances is one year. Service revenues from training and consulting are recognized when the services are provided.
The vendor’s fee is fixed or determinable.At the time of each transaction, Wind River assesses whether the fee associated with a revenue transaction is fixed or determinable based on the payment terms associated with the transaction. If any portion of a fee is due after Wind River’s standard payment terms, which are generally no greater than 90 days from invoice date, Wind River accounts for the fee as not being fixed or determinable. In these cases, revenue is recognized as the fees become due.
Collection is probable.Wind River assesses probability of collection based on a number of factors, including its past transaction history with the customer and the credit-worthiness of the customer. New customers and certain existing customers are subject to a credit review process that evaluates the customers’ financial position and ultimately their ability to pay according to the original terms of the arrangement. Based on Wind River’s review process, if it is determined from the outset of an arrangement that collection of the resulting receivable is not probable, then revenue is recognized on a cash-collected basis.
Significant management judgments and estimates are made in connection with the revenues recognized in any accounting period. Wind River must assess whether the fee associated with a revenue transaction is fixed or determinable and whether or not collection is probable and, for fixed-price contracts, make estimates of costs to complete. Material differences could result in the amount and timing of revenues for any period if management were to make different judgments or utilize different estimates.
Funded Research and Development.Wind River accounts for funded research and development from its Center of Excellence program and other similar arrangements as an offset to gross research and development expenses. Funded research and development was $4.5 million in both fiscal 2003 and 2002 and $1.0 million in fiscal 2001.
Restructuring charges.Restructuring charges are comprised primarily of severance and associated employee termination costs related to the reduction of Wind River’s workforce in fiscal 2003 and 2002, and costs associated with the consolidation of excess facilities. Wind River accounts for each of these costs in accordance with Staff Accounting Bulletin 100, “Restructuring and Impairment Charges” (“SAB 100”). In addition, Wind River accounts for the individual components of its restructuring activities as discussed further below.
Wind River accounts for the costs associated with the reduction of its workforce in accordance with Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”) and SAB 100. Accordingly, Wind River records the liability related to these termination costs when the following conditions have been met: (i) management with the appropriate level of authority approves a termination plan that commits Wind River to such plan and establishes the benefits the employees will receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their locations and their job classifications; and (iv) the period of time to implement the plan does not indicate changes to the plan are likely. The termination costs recorded by Wind River are not associated with nor do they benefit continuing activities.
Wind River accounts for the costs associated with the consolidation of excess facilities in accordance with EITF 88-10, “Costs Associated with Lease Modification or Termination” (“EITF 88-10”). Accordingly, Wind River records the costs associated with excess facilities when the related leased property has no substantive future use or benefit to us. Wind River’s estimated excess facility costs represent the remaining lease payments and estimated costs less estimated proceeds from sub-leasing certain facilities. The estimated proceeds from sub-leasing these facilities are based on current comparable rates for leases in the respective markets. The adoption of SFAS No. 146,
53
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
“Accounting for Exit or Disposal Activities” (“SFAS 146”), on January 1, 2003 had no impact on Wind River’s previously accrued costs associated with its restructuring plans.
Wind River reviews the status of restructuring activities on a quarterly basis and, if appropriate, record changes to restructuring obligations as part of operating expenses based on management’s most current estimates.
Stock-Based Compensation.Wind River accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), Financial Accounting Standards Board Interpretations (“FIN”) 44, “Accounting for Certain Transactions Involving Stock Compensation — An Interpretation of APB No. 25” (“FIN 44”), FIN No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans” and complies with the disclosure provisions of SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of SFAS No. 123” (“SFAS 148”).
Under APB 25, compensation expense is based on the difference, if any, on the date of the grant between the fair value of the Wind River’s stock and the exercise price. SFAS 123 defines a “fair value” based method of accounting for an employee stock option or similar equity instruments. The pro forma disclosures of the difference between compensation expense included in net income (loss) and the related cost measured by the fair value method are presented in Note 11, “Stock-based Compensation Plans.”
Wind River accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123 and EITF No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” Wind River uses the Black-Scholes option-pricing model to value options granted to non-employees.
Pro Forma Disclosures.Under SFAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants during the fiscal years ended January 31, 2003, 2002 and 2001:
| | Years Ended January 31, |
| |
|
| | 2003 | | 2002 | | 2001 |
| |
| |
| |
|
| Risk free interest rates | 3.06 | % | | 4.53 | % | | 5.65 | % |
| Expected volatility | 104.8 | % | | 74.5 | % | | 70.0 | % |
| Expected option life (in years) | 5.0 | | | 5.2 | | | 5.0 | |
| Expected dividends | — | | | — | | | — | |
The weighted average fair value per share of options granted in fiscal years 2003, 2002 and 2001 was $4.35, $9.61 and $22.51, respectively.
Wind River has also estimated the fair value for the purchase rights under the Employee Stock Purchase Plan using the Black-Scholes option-pricing model, with the following assumptions for rights granted in fiscal years 2003, 2002 and 2001.
| | Years Ended January 31, |
| |
|
| | 2003 | | 2002 | | 2001 |
| |
| |
| |
|
| Risk free interest rates | 4.38 | % | | 4.62 | % | | 5.65 | % |
| Expected volatility | 101.2 | % | | 76.9 | % | | 70.0 | % |
| Expected option life (in years) | 0.5 | | | 0.5 | | | 0.5 | |
| Expected dividends | — | | | — | | | — | |
54
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Wind River applies the provisions of APB 25 and related Interpretations in accounting for stock based compensation arrangements. Had compensation expense under these arrangements been determined pursuant to SFAS 123, Wind River’s net loss and net loss per share would have been:
| | Years Ended January 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands, except per share amounts) | |
| Net loss: | | | | | | |
| As reported | $ | (106,864 | ) | $ | (375,634 | ) | $ | (76,391 | ) |
| Pro forma | | (163,230 | ) | | (444,153 | ) | | (125,762 | ) |
| Net loss per share: | | | | | | | | | |
| Basic and diluted: | | | | | | | | | |
| As reported | $ | (1.35 | ) | $ | (4.84 | ) | $ | (1.05 | ) |
| Pro forma | | (2.07 | ) | | (5.73 | ) | | (1.74 | ) |
The pro forma amounts include compensation expense related to fiscal 2003, 2002 and 2001 stock option grants and purchases of common stock under the Purchase Plan only. The effects of applying SFAS 123 on pro forma disclosures of net loss and net loss per share in fiscal 2003, 2002 and 2001 are not likely to be representative of the pro forma effects on net income (loss) and net income (loss) per share in future years.
Income Taxes.Income taxes are computed using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in Wind River’s Consolidated Financial Statements or tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated. Deferred tax assets are reduced, if necessary, by the amount of any tax benefits that are not expected to be realized based on available evidence.
Net Income (Loss) Per Share.Net income (loss) per share includes basic net income (loss) per share, which is based on the weighted-average number of common shares outstanding, and diluted net income (loss) per share, which is based on the weighted-average number of common shares outstanding and all dilutive potential common shares outstanding. Dilutive potential common shares consist of stock options and warrants (using the treasury stock method) and convertible subordinated notes (using the if-converted method). Dilutive potential common shares are excluded from the computation if their effect is anti-dilutive. See Note 9, “Net Loss Per Share Computation.”
Comprehensive Income (Loss).Comprehensive income (loss) is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. The primary difference between net income (loss) and comprehensive income (loss), for Wind River, results from foreign currency translation adjustments, unrealized gains and losses on available-for-sale securities and fair value remeasurement of interest rate swap.
The financial position of foreign subsidiaries is translated using the exchange rates in effect at the end of the period, while income and expense items are translated at average rates of exchange during the period. Gains or losses from translation of foreign operations where the local currency is the functional currency are included as other comprehensive income or loss. The net gains and losses resulting from foreign currency transactions are recorded in net income (loss) in the period incurred and were not significant for any of the periods presented. Certain inter-company balances are designated as long term. Accordingly, exchange gains and losses associated with these long-term inter-company balances are recorded as a component of other comprehensive income (loss), along with translation adjustments.
Recent Accounting Pronouncements.In May 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
55
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds the automatic treatment of gains or losses from extinguishment of debt as extraordinary unless they meet the criteria for extraordinary items as outlined in APB Opinion No. 30, “Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” In addition, SFAS 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and makes various technical corrections to existing pronouncements. SFAS 145 is effective for all financial statements issued subsequent to May 15, 2002. The adoption of the statement did not have a material impact on Wind River’s results of operations, financial position or cash flows.
In June 2002, the FASB issued SFAS No. 146, which addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF 94-3. The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The effect on adoption of SFAS 146 will change on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred. The adoption of SFAS 146 may result in Wind River’s recognizing the cost of future restructuring activities, if any, over a period of time rather than in one reporting period. Wind River adopted SFAS 146 in January 2003, which is effective for any restructuring activities initiated from January 1, 2003 onwards.
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires a guarantor to recognize a liability for obligations it has undertaken in relation to the issuance of a guarantee in addition to providing additional disclosures on such guarantees. The liability would be recorded at fair value on the date the guarantee is issued. The disclosure requirements of FIN 45 are effective for the interim and annual periods ending after December 15, 2002. The recognition and measurement provisions of FIN 45 are effective after December 31, 2002. As of January 31, 2003, Wind River adopted the disclosure requirements of FIN 45. See Note 13, “Commitments and Contingencies — Guarantor Arrangements.” Wind River adopted the recognition and measurement provisions of FIN 45 for contracts entered into after January 1, 2003. See Note 3, “Acquisitions and Dispositions.” The adoption of FIN 45 did not have a material impact on Wind River’s results of operations, financial position or cash flows.
In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Wind River is currently assessing the impact of the adoption of this pronouncement on its consolidated financial statements.
In December 2002, the FASB issued SFAS 148, which encourages the adoption of the accounting provisions of SFAS 123 and requires additional disclosures, including interim financial statements, for all companies regardless of whether or not they adopt the accounting provisions of SFAS 123. This annual disclosures required by this statement are effective for Wind River’s consolidated financial statements for the year ended January 31, 2003 and the new interim disclosure provisions are effective for the first quarter of fiscal 2004. Wind River’s adoption of SFAS 148 had no material impact on its results of operations, financial position or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional
56
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Wind River is currently assessing the impact of the pronouncement on its consolidated financial statements.
NOTE 3: ACQUISITIONS AND DISPOSITIONS
Pooling of Interest Combinations
On February 15, 2000, Wind River completed its acquisition of Integrated Systems in a stock-for-stock merger transaction. In connection with the merger: (a) each outstanding share of Integrated Systems common stock was exchanged for 0.92 of a share of Wind River common stock, resulting in the issuance of an aggregate of 22,499,895 shares of Wind River common stock for all outstanding shares of Integrated Systems common stock; and (b) all options to purchase shares of Integrated Systems common stock outstanding immediately prior to the consummation of the merger were converted into options to purchase 4,133,128 shares of Wind River common stock. The merger has been accounted for as a pooling of interests, and all financial data of Wind River has been restated to include the historical financial information of Integrated Systems. Wind River and Integrated Systems incurred approximately $25.2 million of costs associated with the merger. In fiscal 2003 and 2002, $406,000 and $1.1 million, respectively, of previously accrued excess facility costs were reversed due to Wind River’s ability to exit leases earlier than anticipated.
A summary of the acquisition costs is outlined as follows:
| | Original
Charges | | Non-Cash
Charges | | Cash
Payments | | Acquisition
Accruals at
January 31, 2001 | | Cash
Payments | | Reversals in
Fiscal Year
2002 | | Acquisition
Accruals at
January 31, 2002 |
| |
| |
| |
| |
| |
| |
| |
|
| | (In thousands) |
| Investment banking fees | $ | 11,100 | | | $ | — | | | $ | 11,100 | | | $ | — | | | | $ | — | | | | $ | — | | | | | $ | — | |
| Workforce reduction | | 6,842 | | | | — | | | | 6,401 | | | | 441 | | | | | 306 | | | | | (135 | ) | | | | | — | |
| Consolidation of excess | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| facilities | | 3,100 | | | | 647 | | | | 1,122 | | | | 1,331 | | | | | 249 | | | | | (128 | ) | | | | | 954 | |
| Legal, accounting and other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| professional fees | | 3,600 | | | | — | | | | 2,858 | | | | 742 | | | | | 353 | | | | | (389 | ) | | | | | — | |
| General integration costs | | 600 | | | | 104 | | | | — | | | | 496 | | | | | 37 | | | | | (459 | ) | | | | | — | |
| |
| | |
| | |
| | |
| | | |
| | | |
| | | | |
| |
| | $ | 25,242 | | | $ | 751 | | | $ | 21,481 | | | $ | 3,010 | | | | $ | 945 | | | | $ | (1,111 | ) | | | | $ | 954 | |
| |
| | |
| | |
| | |
| | | |
| | | |
|
| | | |
| |
During the year ended January 31, 2003, Wind River made payments of $109,000 and reversed approximately $406,000 related to accrued excess facility costs. As of January 31, 2003, acquisition accruals totaled $439,000.
Purchase Combinations
Wind River has completed a number of acquisitions accounted for as purchase transactions. The Consolidated Financial Statements include the operating results of each business from the date of acquisition. The purchase price for each acquisition is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of the estimated fair values on the effective date of their acquisition.
On March 31, 2000, Wind River completed its acquisition of Embedded Support Tools Corporation (“Embedded Support Tools”) in a stock-for-stock merger transaction. Embedded Support Tools is a provider of integrated hardware and software for programming, testing and debugging embedded systems. In connection with the acquisition: (a) each outstanding share of Embedded Support Tools common stock was exchanged for 0.4246
57
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3: ACQUISITIONS AND DISPOSITIONS (Continued)
of a share of Wind River common stock, resulting in the issuance of an aggregate of 5,474,788 shares of Wind River common stock for all outstanding shares of Embedded Support Tools common stock; and (b) all options to purchase shares of Embedded Support Tools common stock outstanding immediately prior to the consummation of the acquisition were converted into options to purchase 1,122,855 shares of Wind River common stock. The total purchase price of $331.6 million consisted of common stock with a fair market value of $275.7 million, options assumed with a fair market value of $51.5 million, assumed liabilities of $6.2 million and merger costs of $1.9 million. Wind River recorded an expense of $3.7 million for in-process research and development, which was charged against earnings in the first quarter of fiscal year 2001.
On May 1, 2000, Wind River acquired AudeSi Technologies Inc. (“AudeSi”) in a transaction involving Canadian exchangeable shares. AudeSi is a supplier of Java™ based tools and other components for building flexible, multi-application consumer devices. In connection with the acquisition: (a) each outstanding share of AudeSi common stock was exchanged for 0.0927 of an exchangeable share in AudeSi and each such exchangeable share is or will be by its terms, exchangeable on a share-for-share basis for a share of Wind River common stock (the exchange of all such exchangeable shares requiring the ultimate issuance of an aggregate of 957,169 shares of Wind River common stock); and (b) all options to purchase AudeSi common stock outstanding immediately prior to the consummation of the acquisition were converted into options to purchase 119,488 shares of Wind River common stock. The total purchase price of $52.4 million consisted of common stock with a fair market value of $47.2 million, options assumed with a fair market value of $4.7 million and merger costs of $500,000. In connection with the acquisition, Wind River recorded an expense of $1.0 million for in-process research and development, which was charged against earnings in the second quarter of fiscal year 2001.
On July 14, 2000, Wind River acquired ICESoft AS (“ICESoft”), a developer of embedded Internet browsing technologies for intelligent devices. The total purchase price of $24.6 million consisted of cash consideration of $24.5 million and acquisition costs of approximately $100,000. ICESoft was located in Norway and is considered an international entity; therefore, the results of its operations were included from the date of acquisition.
On October 24, 2000, Wind River completed its acquisition of Rapid Logic, Inc. (“Rapid Logic”) in a stock-for-stock merger transaction. Rapid Logic is a provider of advanced device management technologies for networking equipment and other intelligent devices. In connection with the acquisition: (a) each outstanding share of Rapid Logic common stock was exchanged for 0.0730 of a share of Wind River common stock, resulting in the issuance of an aggregate of 1,244,940 shares of Wind River common stock for all outstanding shares of Rapid Logic common stock; and (b) all options to purchase shares of Rapid Logic common stock outstanding immediately prior to the consummation of the acquisition were converted into fully-vested options to purchase 126,298 shares of Wind River common stock. The total purchase price of approximately $57.5 million consisted of common stock with a fair market value of $51.8 million, options assumed with a fair market value of $5.0 million and merger costs of $700,000. In connection with the acquisition, Wind River recorded an expense of $3.25 million for in-process research and development, which was charged against earnings in the fourth quarter of fiscal year 2001.
On April 18, 2001, Wind River purchased certain identified software products, including an operating system for digital signal processors from Eonic Systems, NV (“Eonic”). The total purchase price of $15.5 million consisted of $15.0 million in cash and $542,000 in acquisition related costs.
On May 4, 2001, Wind River purchased from Berkeley Software Design, Inc. (“BSDI”) certain identified software assets, including the BSDI operating system, a UNIX based code suitable for various Internet applications. The total purchase price of $23.4 million consisted of $22.9 million in cash and $507,000 in acquisition related costs. Prior to the closing of the transaction, Wind River loaned $7.5 million to BSDI to repay BSDI creditors.
On October 10, 2001, Wind River purchased the assets of the Telenetworks division of Next Level Communications, Inc. (“Telenetworks”). The assets acquired in the transaction include software stacks that implement the signaling and control mechanisms used in voice-over-IP networks, customer lists and other assets.
58
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3: ACQUISITIONS AND DISPOSITIONS (Continued)
The purchase allows Wind River to further develop their presence in the voice/data convergence area and in wireless space. The total net purchase price of $5.6 million consisted of $5.5 million in net cash and $100,000 in acquisition related costs.
The table below sets forth the amortization expense, foreign currency translation and other adjustments for the cumulative period from the date of acquisition through January 31, 2003 and the net book value of goodwill and purchased intangibles as of January 31, 2003 for certain acquisitions completed during fiscal years ended January 31, 2002, 2001 and 2000:
| | Tele-
networks | | BSDI | | Eonic | | Rapid
Logic | | ICESoft | | AudeSi | | Embedded
Support Tools | | Software
Development
Systems | | Other | | Total | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | (In thousands) | | | | | | | | |
| Total at acquisition | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | $ | 2,354 | | $ | 20,073 | | $ | 11,664 | | $ | 49,028 | | $ | 23,961 | | $ | 50,180 | | $ | 317,393 | | | $ | 23,018 | | | $ | 5,447 | | $ | 503,118 | |
| Purchased intangibles | | 2,875 | | | 3,410 | | | 3,870 | | | 7,000 | | | 750 | | | 1,100 | | | 15,800 | | | | 12,100 | | | | 4,172 | | | 51,077 | |
| |
| |
| |
| |
| |
| |
| |
| | |
| | |
| |
| |
| | | 5,229 | | | 23,483 | | | 15,534 | | | 56,028 | | | 24,711 | | | 51,280 | | | 333,193 | | | | 35,118 | | | | 9,619 | | | 554,195 | |
| Dispositions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | — | | | 215 | | | — | | | — | | | 3,062 | | | — | | | — | | | | — | | | | — | | | 3,277 | |
| Purchased Technology | | — | | | — | | | — | | | — | | | 468 | | | — | | | — | | | | — | | | | — | | | 468 | |
| |
| |
| |
| |
| |
| |
| |
| | |
| | |
| |
| |
| | | — | | | 215 | | | — | | | — | | | 3,530 | | | — | | | — | | | | — | | | | — | | | 3,745 | |
| Impairments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | — | | | — | | | — | | | 24,024 | | | 15,255 | | | 35,397 | | | 167,481 | | | | 13,811 | | | | — | | | 255,968 | |
| Purchased intangibles | | 1,996 | | | — | | | 2,257 | | | — | | | — | | | 440 | | | — | | | | 977 | | | | — | | | 5,670 | |
| |
| |
| |
| |
| |
| |
| |
| | |
| | |
| |
| |
| | | 1,996 | | | — | | | 2,257 | | | 24,024 | | | 15,255 | | | 35,837 | | | 167,481 | | | | 14,788 | | | | — | | | 261,638 | |
| Accumulated amortization, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| foreign translation and other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| adjustments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | — | | | 3,960 | | | 2,187 | | | 14,841 | | | 5,644 | | | 14,632 | | | 107,474 | | | | 7,385 | | | | 4,022 | | | 160,145 | |
| Purchased intangibles | | 879 | | | 1,492 | | | 1,613 | | | 3,970 | | | 282 | | | 552 | | | 11,192 | | | | 10,837 | | | | 3,474 | | | 34,291 | |
| |
| |
| |
| |
| |
| |
| |
| | |
| | |
| |
| |
| | | 879 | | | 5,452 | | | 3,800 | | | 18,811 | | | 5,926 | | | 15,184 | | | 118,666 | | | | 18,222 | | | | 7,496 | | | 194,436 | |
| Net book value as of Jan. 31, 2003 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | 2,354 | | | 15,898 | | | 9,477 | | | 10,163 | | | — | | | 151 | | | 42,438 | | | | 1,822 | | | | 1,425 | | | 83,728 | |
| Purchased intangibles | | — | | | 1,918 | | | — | | | 3,030 | | | — | | | 108 | | | 4,608 | | | | 286 | | | | 698 | | | 10,648 | |
| |
| |
| |
| |
| |
| |
| |
| | |
| | |
| |
| |
| | $ | 2,354 | | $ | 17,816 | | $ | 9,477 | | $ | 13,193 | | $ | — | | $ | 259 | | $ | 47,046 | | | $ | 2,108 | | | $ | 2,123 | | $ | 94,376 | |
| |
| |
| |
| |
| |
| |
| |
| | |
| | |
| |
| |
| Fiscal year acquired | | 2002 | | | 2002 | | | 2002 | | | 2001 | | | 2001 | | | 2001 | | | 2001 | | | | 2000 | | | various | | | | |
Impairment of Goodwill and Purchased Intangibles
During the second and fourth quarters of both fiscal 2003 and fiscal 2002, Wind River identified indicators of possible impairment of goodwill and other acquired intangible assets relating to previous acquisitions. These indicators included the deterioration in the business climate, recent changes in sales and cash flow forecasts, strategic plans for some of the acquired businesses and significant declines in the market values of companies in the embedded software industry. Accordingly, Wind River compared the undiscounted cash flows associated with the acquired businesses and long-lived assets with the respective carrying amounts and determined that an impairment of certain of these assets existed. As a result, Wind River recorded aggregate charges of $4.3 million and $257.4 million during fiscal 2003 and 2002, respectively. The entire charge for fiscal 2003 and $1.4 million of the charge for fiscal 2002 related to the impairment of purchased intangible assets; and $256.0 million of the charge for fiscal 2002 related to the impairment of goodwill. The impaired amount was measured as the amount by which the carrying amount exceeded the present value of the estimated future cash flows for goodwill and purchased intangible assets, as follows:
59
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3: ACQUISITIONS AND DISPOSITIONS (Continued)
| | Impairment Expense
For Years Ended January 31, |
| |
|
| | 2003 | | 2002 |
| |
| |
|
| | (In thousands) |
| Eonic | $ | 2,257 | | $ | — |
| Telenetworks | | 1,996 | | | — |
| Embedded Support Tools | | — | | 167,481 |
| AudeSi | | — | | | 35,837 |
| Rapid Logic | | — | | | 24,024 |
| ICESoft | | — | | | 15,255 |
| Software Development Systems, Inc | | — | | | 14,788 |
| |
| |
|
| Total | $ | 4,253 | | $ | 257,385 |
| |
| |
|
The impairment review of those assets held for use was determined based upon the estimated discounted cash flows over the remaining useful life of the goodwill and purchased intangibles using discount rates ranging from 17% to 30% and 17% to 23% for fiscal 2003 and 2002, respectively. The assumptions supporting the cash flows, including the discount rates, were determined using Wind River’s best estimates as of the date of the impairment review. The impairment charge for those assets held for disposal was determined based on the expected proceeds of disposition. As of January 31, 2003 and 2002, Wind River had net book values of goodwill and purchased intangible assets of approximately $94.4 million and $108.4 million, respectively. Accumulated amortization for intangibles as of January 31, 2003 and 2002 was $194.4 million and $183.4 million, respectively. Amortization expense relating to completed technology for fiscal years ended January 31, 2003, 2002 and 2001 was $6.7 million, $8.1 million and $7.7 million, respectively. Other than goodwill, all identifiable intangible assets of approximately $10.6 million in net book value as of January 31, 2003 will continue to be amortized in accordance with SFAS 142.
Wind River adopted SFAS 142 on February 1, 2002, and accordingly, ceased amortizing goodwill with net book value totaling $83.7 million, including $8.5 million of acquired workforce previously classified as purchased intangibles. The following table presents the impact of SFAS 142 on net loss and net loss per share had SFAS 142 been applicable for the years ended January 31, 2003, 2002 and 2001:
| | Fiscal Years Ended |
| |
|
| | 2003 | | 2002 | | 2001 |
| |
| |
| |
|
| | (In thousands, except per share amounts) | |
| Reported loss | $ | (106,864 | ) | | $ | (375,634 | ) | | $ | (76,391 | ) |
| Adjustments: | | | | | | | | | | | |
| Amortization of goodwill and other | | — | | | | 65,634 | | | | 84,704 | |
| Amortization of acquired workforce previously classified as | | | | | | | | | | | |
| purchased intangible assets | | — | | | | 3,119 | | | | 1,367 | |
| |
| | |
| | |
| |
| Net adjustments | | — | | | | 68,753 | | | | 86,071 | |
| |
| | |
| | |
| |
| Adjusted net income (loss) | $ | (106,864 | ) | | $ | (306,881 | ) | | $ | 9,680 | |
| |
|
| |
|
| |
| |
| Reported net loss per share — basic and diluted | $ | (1.35 | ) | | $ | (4.84 | ) | | $ | (1.05 | ) |
| Adjusted net income (loss) per share: | | | | | | | | | | | |
| Basic | $ | (1.35 | ) | | $ | (3.96 | ) | | $ | 0.13 | |
| Diluted | $ | (1.35 | ) | | $ | (3.96 | ) | | $ | 0.12 | |
60
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3: ACQUISITIONS AND DISPOSITIONS (Continued)
The estimated future amortization expense of purchased intangible assets is as follows:
| Fiscal Year Ended January 31, | Amount
(In thousands) |
|
|
| 2004 | | $ | 6,923 | |
| 2005 | | | 2,812 | |
| 2006 | | | 913 | |
| 2007 | | | — | |
| | |
| |
| Total | | $ | 10,648 | |
| | |
| |
As of the date of adoption of SFAS 142, Wind River was required to perform an assessment of whether there was an indication that goodwill was impaired. To accomplish this, Wind River was required to identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of February 1, 2002. Wind River currently operates in one reportable segment, which is also the only reporting unit for purposes of SFAS 142. Since Wind River currently only has one reporting unit, all of the goodwill has been assigned to the enterprise as a whole. In July 2002, Wind River completed the transitional goodwill impairment tests required by SFAS 142 with the assistance of a third-party valuation consultant, and determined that the goodwill was not impaired at February 1, 2002. The discounted cash flow method was the primary method used to determine the fair values for SFAS 142 impairment purposes.
SFAS 142 also requires that Wind River test goodwill for impairment on an annual basis as well as when circumstances indicate a possible impairment. Wind River has determined that it will conduct its annual impairment tests during its second fiscal quarter. The deterioration in the business climate, recent changes in sales and cash flow forecasts, strategic plans for some of the acquired businesses and significant declines in market values of companies in the embedded software industry, as well as the decline in Wind River’s current product sales in the second quarter and fourth quarter of fiscal 2003 were factors that also required Wind River to evaluate the fair value of the goodwill. Therefore, during the quarter ended July 31, 2002, Wind River completed its annual impairment test and its second quarter trigger test with the assistance of a third-party valuation consultant, and concluded that there was no impairment of goodwill. In addition, during the quarter ended January 31, 2003 Wind River completed its fourth quarter trigger test and again concluded that there was no impairment of goodwill. The discounted cash flow method was the primary method used to determine the fair values for SFAS 142 impairment purposes. The assumptions supporting the cash flows, including the discount rate, which was assumed to be 17%, were determined using Wind River’s best estimates as of the date of the impairment review.
Dispositions
During fiscal 2002, Wind River sold ICESoft for $1.0 million in cash and a maximum of $4.0 million to be paid quarterly over three years. The sale of ICESoft resulted in a net loss of approximately $1.3 million, which has been included in other income and expense in the consolidated statements of operations. During fiscal 2003, Wind River recorded a further charge of $1.3 million related to the write-down of its receivable from ICESoft for disposal proceeds.
61
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4: CERTAIN BALANCE SHEET COMPONENTS
Cash Equivalents and Investments
Cash equivalents and investments consist of the following:
| | As of January 31, | |
| |
| |
| | 2003 | | 2002 | |
| |
| |
| |
| | (In thousands) | |
| Money market funds | $ | 22,673 | | $ | 68,447 | |
| U.S. government and agency obligations | | 45,798 | | | 49,356 | |
| Corporate bonds | | 61,515 | | | 74,497 | |
| Other debt securities | | 86,159 | | | 57,305 | |
| |
| |
| |
| Total available-for-sale securities | | 216,145 | | | 249,605 | |
| Less amounts classified as cash equivalents | | (23,674 | ) | | (104,944 | ) |
| |
| |
| |
| Marketable securities sub-total | | 192,471 | | | 144,661 | |
| Publicly traded securities | | 214 | | | 839 | |
| |
| |
| |
| Total market value of investments | | 192,685 | | | 145,500 | |
| Unrealized gain on marketable securities | | 2,391 | | | 892 | |
| Unrealized gain (loss) on publicly traded securities | | (41 | ) | | 117 | |
| |
| |
| |
| Total unrealized gain on investments | | 2,350 | | | 1,009 | |
| |
| |
| |
| Total cost of investments | $ | 190,335 | | $ | 144,491 | |
| |
| |
| |
The principal source of the unrealized gains on marketable securities was corporate bonds. Publicly traded securities as of January 31, 2003 and 2002 are composed of the market value of Wind River’s stock holdings in Insignia, e-Sim and Tvia.
Gross realized gains and losses from the sale of securities classified as available-for-sale and publicly held investments were a loss of $500,000 in fiscal 2003 and gains of $3.0 million and $10.9 million in fiscal 2002 and 2001, respectively. The loss in fiscal 2003 was primarily attributable to pay downs on its available-for-sale investments. These losses and gains have been recognized within other income and expense in the period to which they relate. For the purposes of determining gross realized gains and losses, the cost of securities is based upon specific identification.
Wind River recorded an impairment on its publicly traded securities of $467,000 and $4.4 million during fiscal 2003 and 2002, respectively. In each case the impairment represented the amount of other-than-temporary decline as of the date of impairment.
The contractual maturities of marketable fixed-income securities, regardless of their balance sheet classification, were as follows:
| | As of
January 31, 2003 |
| |
|
| | (In thousands) |
| Due in 1 year or less | | $ | 31,110 | |
| Due in 1–2 years | | | 65,622 | |
| Due in 2–5 years | | | 70,204 | |
| Due in 5 years or more | | | 25,535 | |
| | |
| |
| Total marketable securities | | $ | 192,471 | |
| | |
| |
62
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4: CERTAIN BALANCE SHEET COMPONENTS (Continued)
Private Investments
Wind River also has certain other minority investments in private companies. These investments are included in other long-term assets on Wind River’s balance sheet and are carried at cost, subject to adjustment for impairment. These investments are inherently risky because the markets for the technologies or products they have under development are typically in the early stages and might never develop. Wind River recorded losses of $4.0 million and $6.9 million during fiscal 2003 and 2002, respectively, relating to these investments. As a result of these write-downs, Wind River has no remaining investment book value on its balance sheet relating to private companies as of January 31, 2003. These investments had previously been included as a component of other long-term assets on its balance sheet and were carried at cost.
Accounts Receivable
Accounts receivable consist of the following:
| | As of January 31, | |
| |
| |
| | 2003 | | 2002 | |
| |
| |
| |
| | (In thousands) | |
| Billed receivables | $ | 44,935 | | $ | 67,344 | |
| Unbilled receivables | | 4,102 | | | 1,055 | |
| |
| |
| |
| | | 49,037 | | | 68,399 | |
| Less allowance for doubtful accounts | | (6,908 | ) | | (7,290 | ) |
| |
| |
| |
| Accounts receivable, net of allowances | $ | 42,129 | | $ | 61,109 | |
| |
| |
| |
Unbilled receivables primarily consist of amounts recognized as revenue under percentage of completion contracts.
Property and Equipment
Property and equipment consist of the following:
| | As of January 31, | |
| |
| |
| | 2003 | | 2002 | |
| |
| |
| |
| | (In thousands) | |
| Land and buildings | $ | 27,751 | | $ | 27,751 | |
| Computer equipment and software | | 86,840 | | | 82,132 | |
| Furniture and equipment | | 18,568 | | | 18,040 | |
| Leasehold improvements | | 8,459 | | | 7,561 | |
| |
| |
| |
| | | 141,618 | | | 135,484 | |
| Less accumulated depreciation and amortization | | (96,000 | ) | | (75,680 | ) |
| |
| |
| |
| Property and equipment, net | $ | 45,618 | | $ | 59,804 | |
| |
| |
| |
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
In March 1998, Wind River entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its first floating rate operating lease for its corporate headquarters. The interest rate swap effectively changed Wind River’s interest rate exposure on its operating lease, which based on the one-month London Interbank offering rate (“LIBOR”), to a fixed rate of 5.9%. In January 2001, Wind River entered into a second interest rate swap agreement to mitigate the impact of changes in interest rates on its second floating rate operating lease for additional construction at its headquarters facility. This second interest rate swap changes Wind River’s interest rate exposure on its second operating lease, which is based on the one-month LIBOR, to a fixed rate of 5.6%. During
63
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
the periods in which the interest rate swap agreements were outstanding the fair value of these interest rate swap liabilities were recorded as an other long-term liability and as a component of comprehensive loss in stockholders’ equity. In November 2002, Wind River settled each swap agreement and recorded a charge of $3.9 million for both instruments.
Wind River enters into foreign currency forward exchange contracts to manage foreign currency exposures related to certain foreign currency denominated inter-company balances. Additionally, Wind River may adjust its foreign currency hedging position by taking out additional contracts or by terminating or offsetting existing forward contracts. These adjustments may result from changes in the underlying foreign currency exposures or from fundamental shifts in the economics of particular exchange rates. Gains and losses on terminated forward contracts, or on contracts that are offset, are recognized in income in the period of contract termination or offset. As of January 31, 2002, Wind River had no outstanding forward contracts. As of January 31, 2003, Wind River had outstanding contracts with the following terms:
| Buy / Sell: | Sell | Sell | Sell |
| Currency: | GBP | EURO | JPY |
| Amount: | 1.9 million | 1.5 million | 384.3 million |
| Rate: | 1.6085 | 1.0563 | 119.4800 |
| USD Equivalent: | $3,049,310 | $1,582,050 | $3,220,258 |
| Maturity Date: | 2/14/03 | 2/14/03 | 2/14/03 |
Contract amounts are representative of the expected amounts to be paid under the terms of these instruments. As of January 31, 2003 the fair value of the above contracts was not significant.
NOTE 6: RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges consists of costs of $32.7 million and $21.7 million in the years ended January 31, 2003 and 2002, respectively, associated with restructuring programs implemented by Wind River in those years, and costs of $3.7 million in the year ended January 31, 2003 associated with the settlement of litigation and related remediation efforts. There were no restructuring and other charges in fiscal 2001.
Restructuring Costs.In response to market conditions and the decline in its revenues, in both fiscal 2003 and 2002, Wind River implemented restructuring plans that were designed to align its anticipated revenues more closely with its cost structure. Wind River’s restructuring plans have been based on certain assumptions regarding the cost structure of its business and the nature and severity of the current industry adjustment and general economic trends, and involved the implementation of a number of initiatives, including headcount reductions, facilities closures, and other cost-control measures such as employing a program of office closure days and reducing discretional spending on items such as consulting and travel. As a result of the headcount reductions, Wind River eliminated an aggregate of 1,066 employee positions in fiscal 2003 and 2002, which represented approximately one-half of its employee base as of the beginning of fiscal 2002. Wind River’s restructuring programs for fiscal 2003 were initiated prior to Wind River’s adoption of SFAS 146 and have been accounted for in accordance with the provisions of SAB 100, EITF 94-3 and EITF 88-10.
As a result of the decision to restructure its business, Wind River recorded net restructuring charges of $32.7 million and $21.7 million during fiscal 2003 and 2002, respectively, which in each case were classified as operating expenses. As of January 31, 2003, the remaining restructuring liabilities related to the fiscal 2003 restructuring programs totaled $18.7 million. As of January 31, 2003, there were no remaining restructuring liabilities related to the restructuring programs for fiscal 2002. The following table provides detailed restructuring liabilities for the years ended January 31, 2003 and 2002, and the aggregate remaining restructuring liabilities as of January 31, 2003:
64
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6: RESTRUCTURING AND OTHER CHARGES (Continued)
| | Work Force
Reduction | | Consolidation
of Excess Facilities | | Other | | Total | |
| |
| |
| |
| |
| |
| | (In thousands) | |
| Fiscal 2002: | | | | | | | | | | |
| Cash charges | $ | 19,367 | | | $ | 8,383 | | | | $ | — | | $ | 27,750 | |
| Non-cash charges | | 765 | | | | 100 | | | | | — | | | 865 | |
| Reversals | | — | | | | (6,947 | ) | | | | — | | | (6,947 | ) |
| |
| | |
| | | |
| |
| |
| Total charges | | 20,132 | | | | 1,536 | | | | | — | | | 21,668 | |
| Cash payments | | (15,073 | ) | | | (487 | ) | | | | — | | | (15,560 | ) |
| Non-cash write-offs | | (765 | ) | | | (100 | ) | | | | — | | | (865 | ) |
| |
| | |
| | | |
| |
| |
| Restructuring liabilities as of January 31, 2002 | | 4,294 | | | | 949 | | | | | — | | | 5,243 | |
| Fiscal 2003: | | | | | | | | | | | | | | | |
| Cash charges | | 26,457 | | | | 3,246 | | | | | 1,353 | | | 31,056 | |
| Non-cash charges | | 206 | | | | 355 | | | | | 2,119 | | | 2,680 | |
| Reversals | | (994 | ) | | | (76 | ) | | | | — | | | (1,070 | ) |
| |
| | |
| | | |
| |
| |
| Total charges | | 25,669 | | | | 3,525 | | | | | 3,472 | | | 32,666 | |
| Cash payments | | (14,602 | ) | | | (1,454 | ) | | | | (456 | ) | | (16,512 | ) |
| Non-cash write-offs | | (206 | ) | | | (355 | ) | | | | (2,119 | ) | | (2,680 | ) |
| |
| | |
| | | |
| |
| |
| Restructuring liabilities as of January 31, 2003 | $ | 15,155 | | | $ | 2,665 | | | | $ | 897 | | $ | 18,717 | |
| |
| | |
| | | |
| |
| |
The worldwide work force reductions implemented by Wind River in fiscal 2002 resulted in the reduction of 475 employees, and were fully completed during fiscal 2003. The worldwide work force reductions implemented by Wind River during fiscal 2003 will be substantially completed in the first half of fiscal 2004. When completed, the fiscal 2003 restructurings will result in the reduction of 591 regular employees from our operations in North America, EMEA, Asia Pacific and Japan. Each workforce reduction affected, and will affect, all business functions, including sales and marketing, professional services, product development and engineering, and finance and administration. In addition, Wind River reduced the number of contractors and temporary workers used by it as a result of the fiscal 2003 and 2002 restructuring programs. Wind River recorded net work force reduction charges of approximately $25.7 million and $20.1 million in fiscal 2003 and 2002, respectively, relating primarily to severance payments and the continuation of benefits. Equipment disposed of or removed from operations as a result of the work force reduction resulted in non-cash charges of $206,000 and $765,000 in fiscal 2003 and 2002, respectively, and consisted primarily of computer equipment.
Wind River recorded a net restructuring charge of $3.5 million and $1.5 million during fiscal 2003 and 2002, respectively, relating to the consolidation of certain excess facilities primarily in the United States, Japan and Europe. The consolidation of excess facilities includes the closure of certain leased corporate facilities and sales offices that related to business activities that were restructured. The estimated excess facility costs represent the remaining lease payments and estimated costs less estimated proceeds from sub-leasing certain facilities. The estimated proceeds from sub-leasing these facilities are based on current comparable rates for leases in the respective markets. If rental rates for Wind River’s leased facilities continue to decrease in these markets or it takes longer than expected to find a suitable tenant to sublease these facilities, the actual loss could exceed this estimate. Cash and non-cash charges relate primarily to lease terminations, non-cancelable lease costs and impairment of leasehold improvements related to the excess facilities. In the fourth quarter of fiscal 2002, Wind River recorded a reversal of $6.9 million against the original $8.4 million charge recorded in the second quarter of fiscal 2002 after it determined that it would be more efficient and cost-effective if certain of such excess facilities continued to be used by Wind River personnel. The decision to maintain such facilities was based on changes in the local business environment and lack of competitive leasing rates for new sites. As a result, Wind River
65
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6: RESTRUCTURING AND OTHER CHARGES (Continued)
recorded a net charge for excess facilities of $1.5 million for fiscal 2002, which primarily related to excess facilities located in the United States. As of January 31, 2003, there were no remaining liabilities relating to excess facilities provided for during the fiscal 2002 restructuring. Amounts accrued due to the consolidation of excess facilities as a result of the fiscal 2003 restructuring programs will be paid through fiscal 2007, unless Wind River successfully negotiates to exit the leases at an earlier date.
During fiscal 2003, Wind River recorded a restructuring charge of $3.5 million from other items primarily relating to research and development activities that management decided to discontinue during the quarter.
Litigation-related costs.During fiscal 2003, Wind River recorded a charge of $3.7 million relating to the settlement of litigation with a third party and related remediation efforts. There were no litigation costs for fiscal 2002 and 2001.
NOTE 7: CONVERTIBLE SUBORDINATED NOTES AND OTHER BORROWINGS
In July 1997, Wind River issued $140.0 million of 5.0% convertible subordinated notes, which were due to mature on August 1, 2002. The notes were subordinated to all existing and future senior debt and were convertible into shares of Wind River’s common stock at a conversion price of $32.33 per share. During fiscal 2002, Wind River repurchased and retired $81.9 million in face value of these convertible subordinated notes. In January 2002, Wind River redeemed all of the remaining convertible subordinated notes, or $58.1 million in face value, at a redemption price of 101% of the principal. The net impact of gains and losses on the repurchase, retirement and redemption of the 5.0% convertible subordinated notes was a gain of $252,000, net of taxes, which has been reflected in net other income and expense for the year ended January 31, 2002.
In December 2001, Wind River issued $150.0 million of its 3.75% convertible subordinated notes due December 2006. The notes are subordinated to all existing and future senior debt and are convertible into shares of Wind River’s common stock. The notes mature on December 15, 2006, unless earlier redeemed or converted. Interest is payable in cash semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 2002. At the option of the holder, notes may be converted into Wind River’s common stock at any time, unless previously redeemed, at an initial conversion price of $24.115 per share. Based on the initial conversion price of $24.115 per share Wind River would be required to issue approximately 6.2 million shares of common stock to satisfy the conversion of all of the issued notes. Wind River may redeem all or a portion of the notes for cash at a redemption price of 100.75% of the principal amount between December 15, 2004 and December 14, 2005, and 100.0% of the principal amount beginning December 15, 2005 and thereafter. Additionally, under specified circumstances Wind River may redeem the notes prior to December 2004. The estimated fair value for the convertible subordinated notes (with a carrying amount of $150.0 million as of January 31, 2003) was approximately $112.5 million as of January 31, 2003.
The indenture under which the notes were issued provides that an event of default will occur if (i) Wind River fails to pay principal or premium on the notes, (ii) Wind River fails to pay interest on the notes and fails to cure such non-payment within 30 days, (iii) Wind River fails to perform any other covenant required of Wind River in the indenture and the failure is not cured or waived within 60 days, or (iv) Wind River or one of its significant subsidiaries fails to pay, at final maturity or upon acceleration, any indebtedness for money borrowed in an outstanding principal amount in excess of $35.0 million, including lease commitments, and the indebtedness is not discharged, or the default is not cured, waived or rescinded within 60 days after written notice is provided in accordance with the terms of the indenture. If any of these events of default occurs, either the trustee or the holders of at least 25% of the outstanding notes may declare the principal amount of the notes to be due and payable. In addition, an event of bankruptcy, insolvency or reorganization involving either Wind River or any of its significant subsidiaries will constitute an event of default under the indenture and, in that case, the principal amount of the notes will automatically become due and payable.
66
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7: CONVERTIBLE SUBORDINATED NOTES AND OTHER BORROWINGS (Continued)
As of January 31, 2002, Wind River had United States dollar equivalent net borrowings of $15.0 million from a line of credit obtained through its Japanese subsidiary for up to 2.1 billion Japanese yen or approximately $17.6 million. During the year ended January 31, 2003, Wind River repaid the entire line of credit obtained through its Japanese subsidiary.
NOTE 8: PROVISION FOR INCOME TAXES
Loss before income taxes is as follows:
| | Years Ended January 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands) | |
| Domestic | $ | (95,505 | ) | $ | (378,023 | ) | $ | (67,736 | ) |
| Foreign | | (9,352 | ) | | 4,200 | | | 3,700 | |
| |
| |
| |
| |
| Total | $ | (104,857 | ) | $ | (373,823 | ) | $ | (64,036 | ) |
| |
| |
| |
| |
The provision for income taxes was composed as follows:
| | Years Ended January 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands) | |
| Current | | | | | | |
| Federal | $ | — | | $ | — | | $ | 10,202 | |
| State | | 245 | | | — | | | 1,746 | |
| Foreign | | 1,762 | | | 3,645 | | | 2,770 | |
| |
| |
| |
| |
| | $ | 2,007 | | $ | 3,645 | | $ | 14,718 | |
| |
| |
| |
| |
| | | | | | | | | | |
| Deferred | | | | | | | | | |
| Federal | $ | — | | $ | (1,665 | ) | $ | (2,209 | ) |
| State | | — | | | (169 | ) | | (154 | ) |
| |
| |
| |
| |
| | | — | | | (1,834 | ) | | (2,363 | ) |
| |
| |
| |
| |
| Total | $ | 2,007 | | $ | 1,811 | | $ | 12,355 | |
| |
| |
| |
| |
The provision for income taxes differs from the amount computed using the statutory federal income tax rate as follows:
| | Years Ended January 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| Expected rate | (35.0 | )% | (35.0 | )% | (35.0 | )% |
| State taxes, net of federal benefit | 0.2 | | (0.7 | ) | 2.7 | |
| Goodwill amortization | — | | 5.7 | | 48.8 | |
| Foreign taxes | 0.3 | | 0.5 | | 3.0 | |
| In process technology write-off and impairment of goodwill | — | | 24.0 | | 4.4 | |
| Research and development, net | (3.9 | ) | — | | (2.4 | ) |
| Foreign sales corporation benefit | — | | — | | (1.0 | ) |
| Losses and expenses without tax benefit | 42.8 | | 7.1 | | — | |
| Other | (2.5 | ) | (1.1 | ) | (1.2 | ) |
| |
| |
| |
| |
| Total | 1.9 | % | 0.5 | % | 19.3 | % |
| |
| |
| |
| |
67
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8: PROVISION FOR INCOME TAXES (Continued)
Deferred tax assets and liabilities are recognized for the temporary differences between the tax basis and reported amount of assets and liabilities, tax losses, and credit carry-forwards. Their significant components are as follows:
| | As of January 31, | |
| |
| |
| | 2003 | | 2002 | |
| |
| |
| |
| | (In thousands) | |
| Depreciation and amortization | $ | 900 | | $ | 1,241 | |
| Net operating losses and tax credit carry-forwards | | 81,001 | | | 49,385 | |
| Employee benefit accruals | | 1,240 | | | 1,700 | |
| Accounts receivable reserves | | 3,962 | | | 2,266 | |
| Accrued expenses and other | | 16,273 | | | 3,602 | |
| Deferred revenues | | 488 | | | 400 | |
| |
| |
| |
| Gross deferred tax assets | | 103,864 | | | 58,594 | |
| |
| |
| |
| Software development costs | | 296 | | | 278 | |
| Purchased technology | | 5,440 | | | 3,949 | |
| |
| |
| |
| Gross deferred tax liabilities | | 5,736 | | | 4,227 | |
| |
| |
| |
| Net deferred tax assets | | 98,128 | | | 54,367 | |
| Less valuation allowance | | (98,128 | ) | | (54,367 | ) |
| |
| |
| |
| | $ | — | | $ | — | |
| |
| |
| |
As of January 31, 2003, the net operating loss carry-forwards for federal and state income tax purposes were approximately $67.5 million and $46.8 million that begin to expire in 2017 and 2005, respectively. As of January 31, 2003, Wind River had federal and state tax credit carry-forwards of approximately $10.4 million and $3.4 million, respectively, available to offset future taxable income. The federal credit carry-forwards will begin to expire in 2016 and the California tax credits will carry forward indefinitely.
Wind River has determined that it is more likely than not that the net deferred tax asset recorded as of January 31, 2003 would not be recoverable against future earnings prior to expiration. Accordingly, Wind River established a full valuation allowance against its deferred tax assets. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of January 31, 2003 will be allocated to income tax benefit and additional paid-in-capital in the amounts of $75.6 million and $22.5 million, respectively.
The valuation allowance increased approximately $43.8 million and $54.4 million during the years ended January 31, 2003 and 2002, respectively. There was no valuation allowance recorded as of January 31, 2001.
As of January 31, 2003, deferred tax assets of approximately $19.1 million consisting of certain net operating loss and credit carry-forwards resulting from the exercise of employee stock options had not been recognized in the financial statements. When utilized, the tax benefit of these loss and credit carry-forwards will be accounted for as a credit to additional paid-in capital.
68
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9: NET LOSS PER SHARE COMPUTATION
In accordance with the SFAS No. 128, “Earnings Per Share,” the calculation of shares used in basic and diluted net loss per share computation is presented below:
| | Years Ended January 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | (In thousands, except per share amounts) | |
| Basic and diluted computation: | | | | | | |
| Net loss | $ | (106,864 | ) | $ | (375,634 | ) | $ | (76,391 | ) |
| Weighted average common shares outstanding | | 79,035 | | | 77,544 | | | 72,467 | |
| |
| |
| |
| |
| Basic and diluted net loss per share | $ | (1.35 | ) | $ | (4.84 | ) | $ | (1.05 | ) |
| |
| |
| |
| |
The effect of assumed conversion of the 3.75% convertible subordinated notes for shares of 6.2 million for both the years ended January 31, 2003 and 2002 and the 5.0% convertible subordinated notes for shares of 4.3 million for the year ended January 31, 2001 is anti-dilutive, and is therefore excluded from the above computation. If Wind River had recorded net income for the years ended January 31, 2003, 2002 and 2001, Wind River would have included in the computation dilutive potential common shares from outstanding stock options totaling approximately 731,000, 2.0 million and 5.3 million as of January 31, 2003, 2002 and 2001, respectively. Since Wind River has a net loss for the years ended January 31, 2003, 2002 and 2001, there is no difference between basic and diluted net loss per share.
NOTE 10: COMMON STOCK
In October 1999, Wind River’s Board of Directors adopted a share purchase rights plan declaring a dividend of one preferred share purchase right for each share of Wind River’s common stock outstanding on November 15, 1999. Each right entitles the holder to purchase 1/100th of a share of Series A Junior Participating Preferred Stock, par value $.001 per share, at a price of $160.00 per 1/100th of a preferred share, subject to certain adjustments. The rights will not be distributed until the earlier of the date of a public announcement that a person or a group have acquired beneficial ownership of 15% or more of the outstanding common stock (“Acquiring Person”), or 10 business days following the commencement of, or announcement of an intention to commence a tender offer or exchange offer, the consummation of which would result in any person or entity becoming an Acquiring Person. The rights will expire on October 22, 2009, unless earlier redeemed or exchanged by Wind River.
In June 2002, the Board of Directors authorized a stock repurchase program to enable Wind River to acquire outstanding common stock in the open market or negotiated transactions. Under the program, Wind River may, but is not required to, purchase up to $30.0 million of Wind River common stock over two years. During the year ended January 31, 2003, Wind River repurchased 959,000 shares of Wind River common stock for an aggregate purchase price of approximately $4.7 million. Purchases were made on The Nasdaq National Market at prevailing open market prices and paid out of general corporate funds. Shares repurchased through the program are held as treasury stock.
NOTE 11: STOCK-BASED COMPENSATION PLANS
Employee Stock Option Plans
As of January 31, 2003, Wind River has three main stock option plans: the 1998 Equity Incentive Plan (the “1998 Plan”), the 1998 Non-Officer Stock Option Plan (the “NSO Plan”) and 1995 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”).
Wind River’s practice is to grant all options with exercise prices of at least 100% of the fair market value, although non-statutory options granted under the 1998 Plan and the NSO Plan may be granted with an exercise price equal to 85% of the fair market value on the date of grant. Under each of these plans, options expire no later than ten years from the grant date. Under the 1998 Plan and the NSO Plan, the Board of Directors has the authority
69
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11: STOCK-BASED COMPENSATION PLANS (Continued)
to set the terms of each option. Beginning in fiscal 2003, options generally become exercisable as to 50% of the option shares 18 months after the date of grant and as to the remaining 50% of the option shares 36 months after the date of grant; prior to fiscal 2003, options generally, became exercisable as to 25% of the option shares one year from the date of grant and then ratably over the following 36 months (1/48th per month). The Board of Directors may set different vesting schedules, including performance-based acceleration. Additionally, beginning in fiscal 2003, options generally had a term of 5 years; previously, options generally had a term of 10 years.
The 1998 Plan provides for grants of options and other stock awards to employees, directors and consultants. An aggregate of 4.1 million shares of common stock have been reserved for issuance under the 1998 Plan. Stock options granted under the 1998 Plan may be incentive stock options or non-statutory stock options. The NSO Plan provides for grants of non-statutory stock options to employees, excluding executive officers, and to consultants who are not officers or directors of Wind River. An aggregate of 14,750,000 shares of common stock have been reserved for issuance under the NSO Plan.
The Directors’ Plan provides for automatic grants of non-statutory stock options to purchase Wind River common stock to directors of Wind River who are not employees of, or consultants to, Wind River or any affiliate of Wind River (“Non-Employee Directors”). The Directors’ Plan allows for the issuance of options to purchase a maximum of 337,500 shares of common stock. Initial options granted under each of these plans vest in annual increments over a period of four years from the date of grant, commencing on the date one year after the date of grant of the initial options. Subsequent options shall become 100% vested at the end of the one-year period following the date of grant as long as the optionee has attended 75% of the meetings of the board and committees on which he serves.
In addition, in connection with the acquisitions of various companies, Wind River assumed the outstanding options issued under stock option plans of each acquired company. As of January 31, 2003, assumed options to purchase a total of 1.4 million shares of Wind River common stock were outstanding. No further grants may be made under any assumed plan. Additionally, Wind River entered into a non-statutory stock option agreement with an executive officer in October 1999 in connection with the hiring of such officer, under which the officer was granted an option to purchase 400,000 shares at an exercise price of $18.375, the fair market value on the date of grant. The option vests as to 25% of the shares on the first anniversary of the date of grant and thereafter at a rate of 1/48 per month. The assumed options and the executive officer’s option are included in the following table.
Activity under all stock option plans described above is summarized as follows:
| | Years Ended January 31, |
| |
|
| | 2003 | | 2002 | | 2001 |
| |
| |
| |
|
| | Number of
Shares | | | Weighted
Average Price
per Share | | Number of
Shares | | | Weighted
Average Price
per Share | | Number of
Shares | | Weighted
Average Price
per Share |
| |
| | |
| |
| | |
| |
| |
|
| | (In thousands, except for per share amounts) |
| Beginning balance | 18,504 | | | $ | 21.62 | | | 17,798 | | | | $ | 23.88 | | | 14,288 | | | $ | 16.61 | |
| Granted | 4,954 | | | | 5.66 | | | 4,955 | | | | | 14.75 | | | 8,658 | | | | 30.72 | |
| Exercised | (577 | ) | | | 6.89 | | | (1,291 | ) | | | | 9.05 | | | (3,665 | ) | | | 12.24 | |
| Canceled | (3,448 | ) | | | 21.98 | | | (2,958 | ) | | | | 29.30 | | | (1,483 | ) | | | 22.55 | |
| |
| | | | | | |
| | | | | | | |
| | | | | |
| Ending balance | 19,433 | | | | 17.92 | | | 18,504 | | | | | 21.62 | | | 17,798 | | | | 23.88 | |
| |
| | | | | | |
| | | | | | | |
| | | | | |
70
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11: STOCK-BASED COMPENSATION PLANS (Continued)
Options outstanding and exercisable as of January 31, 2003 from all option plans are as follows by exercise price ranges:
| | Year Ended January 31, 2003 |
| |
|
| | Options Outstanding | | Options Exercisable |
| |
| |
|
| Range of Exercise Prices | Number
Outstanding | | Weighted Avg.
Remaining
Contractual Life
(in years) | | Weighted
Average
Exercise
Price | | Number
Exercisable | | Weighted
Average
Exercise
Price |
|
| |
| |
| |
| |
|
| | (In thousands, except exercise price and contractual life data) |
| $ | 0.21 – $4.07 | | 492 | | 3.35 | | $ | 3.16 | | 476 | | $ | 3.19 |
| | 4.25 – 5.00 | | 4,118 | | 4.44 | | | 4.99 | | 38 | | | 4.69 |
| | 5.28 – 10.40 | | 3,245 | | 7.89 | | | 9.58 | | 1,353 | | | 9.46 |
| | 10.96 – 14.99 | | 2,030 | | 7.00 | | | 13.13 | | 1,250 | | | 13.17 |
| | 15.00 – 20.90 | | 2,446 | | 6.85 | | | 17.60 | | 1,828 | | | 17.51 |
| | 21.00 – 27.33 | | 2,321 | | 5.87 | | | 24.08 | | 1,914 | | | 24.33 |
| | 27.42 – 34.75 | | 2,519 | | 7.21 | | | 32.21 | | 1,751 | | | 32.18 |
| | 34.81 – 43.25 | | 2,075 | | 7.57 | | | 38.42 | | 1,423 | | | 38.24 |
| | 43.50 – 60.50 | | 187 | | 7.53 | | | 46.21 | | 116 | | | 46.31 |
| | | |
| | | | | | |
| | | |
| | 0.21 – 60.50 | | 19,433 | | 6.45 | | | 17.92 | | 10,149 | | | 22.23 |
| | | |
| | | | | | |
| | | |
As of January 31, 2002 and 2001, options to purchase 9,420,000 and 6,895,000 shares of common stock were exercisable at a weighted average exercise price of $21.68 and $16.19, respectively. As of January 31, 2003, an aggregate of 4,455,301 shares were available for grant under all of Wind River’s option plans.
Employee Stock Purchase Plan
In 1993, Wind River adopted the 1993 Employee Stock Purchase Plan (the “Purchase Plan”) under which 4.5 million shares of common stock have been reserved for issuance. Eligible employees may purchase a limited number of shares of Wind River common stock at a discount of up to 15% of the fair market value at certain plan-defined dates. In fiscal 2003, 2002 and 2001, Wind River issued 926,000 shares, 561,000 shares and 266,000 shares, respectively, under the Purchase Plan. As of January 31, 2003, 1,525,000 shares were available for issuance under the Purchase Plan.
Stock-based Compensation
For the fiscal year ended January 31, 2003, stock-based compensation was not significant. For the fiscal years ended January 31, 2002 and 2001, Wind River recognized stock-based compensation expense of $251,000 and $458,000, respectively. For options granted to non-employees in fiscal years 2002 and 2001, Wind River determined fair value using the Black-Scholes option-pricing model, with the following assumptions: expected volatility of 70%; risk-free interest rates of 5.50% and 6.49%, respectively; and deemed values of common stock between $14.99 and $30.00 per share.
NOTE 12: OTHER EMPLOYEE BENEFITS
Wind River operates a 401(k) Plan, which covers substantially all of Wind River’s full time employees. Under Wind Rivers 401(k) Plan, Wind River makes an employer matching contribution equal to 50% of an employee’s salary contributions up to a total of 6% of that employee’s compensation. These matching contributions are made in the form of Wind River common stock and become vested over a four-year period. An independent third party administers the 401(k) Plan.
During the years ended January 31, 2003, 2002 and 2001 Wind River contributed common stock with a fair value of approximately $2,455,000, $2,691,000 and $1,084,000 to the 401(k) Plan.
71
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13: COMMITMENTS AND CONTINGENCIES
Operating Leases
Wind River leases certain property consisting of subsidiary headquarters, customer training facilities and sales facilities that expire at various dates through January 2022. Future minimum rental payments under non-cancelable operating leases subsequent to January 31, 2003 are as follows:
| Years Ending January 31, | Operating
Lease Rental
Payments (1) | | Synthetic
Lease
Payments,
Net (2) | | Total |
|
| |
| |
|
| | (In thousands) |
| 2004 | | $ | 11,493 | | | | $ | 245 | | | $ | 11,738 |
| 2005 | | | 7,179 | | | | | — | | | | 7,179 |
| 2006 | | | 3,831 | | | | | — | | | | 3,831 |
| 2007 | | | 1,978 | | | | | — | | | | 1,978 |
| 2008 | | | 1,674 | | | | | — | | | | 1,674 |
| Thereafter | | | 10,063 | | | | | — | | | | 10,063 |
| |
| |
| |
|
| Total | | $ | 36,218 | | | | $ | 245 | | | $ | 36,463 |
| |
| |
| |
|
| (1) | Minimum future sublease income to be received under noncancelable subleases is approximately $3.1 million. As part of its restructuring reserve, Wind River has accrued approximately $1.4 million relating to future payments associated with leases for excess facilities.
|
| (2) | Does not include the payment of the purchase price for the buildings pursuant to the exercise of the purchase options for the synthetic leases for Wind River headquarters as discussed in Note 16, “Subsequent Events” below. |
Total operating lease rental payments, and net synthetic lease payments during the years ended January 31, 2003, 2002 and 2001 were $10.7 million, $16.2 million and $14.8 million, respectively.
In September 1997 and November 1999, Wind River entered into operating leases for its headquarters facility constructed on land owned by Wind River in Alameda, California. After consideration of various financing alternatives for the construction of its headquarters buildings on land owned by Wind River, the related economic impact of each alternative and the ability to retain control of the property, Wind River chose a form of financing that it believed offered beneficial economic terms, commonly referred to as a “synthetic lease.” These leases were treated as operating leases for accounting purposes and financing leases for tax purposes. A synthetic lease is a form of off-balance sheet financing under which an unrelated third party funds 100% of the costs for the acquisition and/or construction of the property and leases the asset back to the company, as lessee. None of Wind River’s officers or employees had any financial interest in these synthetic lease arrangements. The operating leases provided Wind River with the option, at the end of their terms, to either acquire the buildings at the lessor’s original cost or arrange for the buildings to be acquired.
Under the terms of the leases, Wind River was required to maintain compliance with certain financial covenants relating to minimum EBITDA, minimum tangible net worth and minimum net unencumbered cash. As of January 31, 2003, Wind River was not in compliance with the EBITDA covenant, which required that Wind River maintain a certain EBITDA level. The lessor waived the EBITDA covenant as of January 31, 2003 conditioned upon Wind River’s notification of its intent to exercise the purchase options under the leases prior to April 30, 2003. In January 2003, Wind River notified the lessor of its intent to exercise the purchase option under the leases by April 30, 2003. See Note 16, “Subsequent Events” for information regarding the completion of the purchase option.
72
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13: COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
From time to time, Wind River is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of patents and other intellectual property rights. Management believes the outcome of Wind River’s outstanding legal proceedings, claims and litigation will not have a material adverse effect on Wind River’s business, results of operations, cash flows or financial condition. However, such matters involve complex questions of fact and law and could involve significant costs and the diversion of resources to defend. Additionally, the results of litigation are inherently uncertain, and an adverse outcome is at least reasonably possible. Wind River is unable to estimate the range of possible loss from outstanding litigation and other legal proceedings and no amounts have been provided for such matters in the accompanying Consolidated Financial Statements.
Guarantor Arrangements
In November 2002, the FASB issued FIN 45, which requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. FIN 45 also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for all guarantees outstanding, regardless of when they were issued or modified, during the first quarter of fiscal 2003. The adoption of FIN 45 did not have a material effect on its consolidated financial statements. The following is a summary of the agreements that Wind River has determined are within the scope of FIN 45.
As permitted under Delaware law, Wind River has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was serving, at Wind River’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments Wind River could be required to make under these indemnification agreements is unlimited; however, Wind River has a director and officer insurance policy that limits its exposure and enables Wind River to recover a portion of any future amounts paid. As a result of its insurance policy coverage, Wind River believes the estimated fair value of these indemnification agreements is minimal. All of these indemnification agreements were grandfathered under the provisions of FIN 45 as they were in effect prior to December 31, 2002. Accordingly, Wind River had no liabilities recorded for these agreements as of January 31, 2003.
In the ordinary course of its business, Wind River enters into standard indemnification provisions in its license agreements with its customers and other licensees of its products. Pursuant to these provisions, Wind River indemnifies its customers and licensees for losses suffered or incurred in connection with any United States patent, or any copyright or other intellectual property, for claims of infringement by any third party with respect to Wind River’s products. Wind River generally limits such infringement indemnities to those claims directed solely to its products and not in combination with other software or products. Wind River also generally reserves the right to resolve such claims by designing a non-infringing alternative or by obtaining a license on reasonable terms, and failing that, to terminate its relationship with the licensee. When Wind River performs engineering design services to a customer’s specification, Wind River provides similar indemnification provisions in its professional services agreements. Wind River further limits such indemnities for design services to those third party intellectual property rights of which Wind River has specific knowledge before it begins the work. Subject to these limitations, the term of such indemnity provisions is generally perpetual after execution of the corresponding license or services agreement. While the maximum potential amount of future payments Wind River could be required to make under these indemnification provisions is unlimited, Wind River has never incurred costs to defend lawsuits or settle indemnified claims. As a result, Wind River believes the estimated fair value of these indemnity provisions is minimal. Accordingly, we have no liabilities recorded for such provisions as of January 21, 2003.
73
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13: COMMITMENTS AND CONTINGENCIES (Continued)
When as part of an acquisition Wind River acquires all of the stock or all of the assets and liabilities of a company, it assumes the liability for certain events or occurrences that took place prior to the date of acquisition. The maximum potential amount of future payments Wind River could be required to make for such obligations is undeterminable at this time. All of these obligations were grandfathered under the provisions of FIN 45 as they were in effect prior to December 31, 2002. Accordingly, Wind River had no liabilities recorded for these liabilities as of January 31, 2003.
In 1997 and 1999, Wind River entered into operating leases for its corporate headquarters buildings, as discussed above under “— Operating Leases.” In January 2003, Wind River notified the lessor of its intention to exercise the purchase option under the leases and, in April 2003, Wind River completed that purchase. These arrangements were grandfathered under the provisions of FIN 45 as they were in effect prior to December 31, 2002. Accordingly, Wind River has no liabilities recorded for these arrangements as of January 31, 2003.
Wind River has arrangements with certain vendors whereby it guarantees the expenses incurred by certain of its employees. The term is from execution of the arrangement until cancellation and payment of any outstanding amounts. Wind River would be required to pay any unsettled employee expenses upon notification from the vendor. The maximum potential amount of future payments Wind River could be required to make under these indemnification agreements is not significant. As a result, Wind River believes the estimated fair value of these agreements is minimal. Accordingly, Wind River had no liabilities recorded for these agreements as of January 31, 2003.
Wind River typically warrants that, for a period of 90 days from the date of delivery, the media on which its software is furnished is free from defects under normal use. Additionally, in some instances Wind River has warranted that its software products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the licensed products to the customer for the life of the product. Additionally, Wind River warrants that its professional services will be performed consistent with generally accepted industry standards through completion of the agreed upon services. If necessary, Wind River would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history, however, Wind River has never incurred significant expense under its product or services warranties. As a result, Wind River believes the estimated fair value on these agreements is minimal. Accordingly, Wind River has no liabilities recorded for these agreements as of January 31, 2003.
NOTE 14: RELATED-PARTY TRANSACTIONS
During fiscal year 2001, Wind River distributed its products in Japan through Wind River Systems, K.K. (“WRSKK”), a joint venture in which Wind River owned a 70% equity interest. Innotech Corporation (“Innotech”), Kobe Steel, Ltd. (“Kobe Steel”) and Nissin Electric Co., Ltd. (“Nissan Electric”), the other partners in the joint venture, each owned a 10% equity interest. Wind River entered into distributor agreements with Innotech, Kobe Steel, and Nissin Electric in March 1993, October 1991, and October 1991, respectively. In March 2000, Wind River notified the master distributors that their distributor agreements would terminate at the end of fiscal 2001. Wind River subsequently acquired the 30% minority interest on December 28, 2000 for an amount approximating $1.2 million, which was primarily accounted for as goodwill, so that it now owns 100% of WRSKK. On March 30, 2001, Wind River signed agreements with Kobe Steel and Nissin Electric for amounts approximating $2.4 million and $1.8 million, respectively, to purchase customer lists and other intangibles.
In September 1999, Wind River’s chief executive officer signed a promissory note to borrow up to $2.4 million from Wind River to purchase shares of common stock. The note accrues interest at the rate of 5.98% per year, and is due on September 7, 2008. This loan is full recourse and is collateralized by certain personal assets owned by the chief executive officer. The loan amount of $1.9 million and accrued interest of approximately $113,000 as of January 31, 2003 is reflected as a reduction of equity in the accompanying consolidated balance sheet.
74
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15: SEGMENT AND GEOGRAPHIC INFORMATION
Wind River reports in one industry segment — technology for embedded operating systems. Wind River markets its products and related services to customers in the United States, Canada, EMEA, Japan and Asia Pacific. Internationally, Wind River markets its products and services primarily through its subsidiaries and various distributors. Revenues are attributed to geographic areas based on the country in which the customer is domiciled. The distribution of revenues and long-lived assets, net of depreciation and amortization, by geographic location is as follows:
| | Revenues | | Long-lived
Assets |
| |
| |
|
| | (In thousands) |
| Fiscal year ended January 31, 2003 | | | |
| North America | $ | 145,488 | | $ | 140,823 |
| Japan | | 28,418 | | | 3,906 |
| EMEA | | 56,956 | | | 6,523 |
| Asia Pacific | | 18,259 | | | 387 |
| |
| |
|
| Consolidated | $ | 249,121 | | $ | 151,639 |
| |
| |
|
| Fiscal year ended January 31, 2002 | | | | | |
| North America | $ | 215,316 | | $ | 169,764 |
| Japan | | 37,256 | | | 7,386 |
| EMEA | | 72,235 | | | 6,121 |
| Asia Pacific | | 26,265 | | | 435 |
| |
| |
|
| Consolidated | $ | 351,072 | | $ | 183,706 |
| |
| |
|
| Fiscal year ended January 31, 2001 | | | | | |
| North America | $ | 300,676 | | | |
| Japan | | 40,835 | | | |
| EMEA | | 81,259 | | | |
| Asia Pacific | | 15,214 | | | |
| |
| | | |
| Consolidated | $ | 437,984 | | | |
| |
| | | |
Revenue information on a product and services basis is as follows:
| | Years Ended January 31, |
| |
|
| | 2003 | | 2002 | | 2001 |
| |
| |
| |
|
| | (In thousands) |
| Software licenses | $ | 94,183 | | $ | 157,525 | | $ | 209,558 |
| Production license revenues | | 69,716 | | | 80,478 | | | 100,107 |
| Maintenance revenues | | 51,224 | | | 63,916 | | | 70,373 |
| Other service revenues | | 33,998 | | | 49,153 | | | 57,946 |
| |
| |
| |
|
| Total | $ | 249,121 | | $ | 351,072 | | $ | 437,984 |
| |
| |
| |
|
No single customer accounted for more than 10% of Wind River’s total revenues in fiscal 2003, 2002 or 2001.
75
WIND RIVER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16: SUBSEQUENT EVENTS
In April 2003, Wind River completed the exercise of its purchase options under its synthetic leases for its headquarters facility in Alameda, California. See Note 13, “Commitments and Contingencies” for further information about the operating leases. As a result of Wind River’s completion of the purchase options, Wind River acquired the buildings for a purchase price of $57.4 million and will reflect the buildings as an asset on its balance sheet in the first quarter of fiscal 2004. Additionally, Wind River’s restricted cash of $60.3 million held under the leases was released. Prior to the exercise of the purchase options, Wind River reflected lease payments as a rental expense in its statement of operations. Having acquired the buildings, Wind River no longer records lease expense for the buildings and, commencing in the first quarter of fiscal 2004, Wind River will record depreciation expense for the buildings over their estimated useful lives of 30 years.
In connection with the termination of the synthetic leases, in April 2003, Wind River entered into a loan facility. The aggregate principal amount of the facility is $57.4 million, consisting of a $37.4 million term loan and $20.0 million term loan, both of which mature in April 2005. We have borrowed $40.0 million of the facility at an interest a rate equal to the London Interbank Offering Rate, or LIBOR, plus 0.4%. Under the terms of the facility, we are holding $46.1 million in marketable securities as restricted cash to secure performance of our obligations under the facility.
On March 21, 2003, Wind River announced a voluntary stock option exchange program for employees. Under the program, eligible employees were offered the opportunity to exchange outstanding options to purchase 7.7 million shares of Wind River common stock with exercise prices equal to or greater than $11.00 per share for new stock options to be granted at least six months and one day after the existing options are cancelled. The number of shares subject to the new options will depend on the applicable exchange ratio determined by the exercise price of the exchanged stock options. Participating employees will receive new stock options in exchange for outstanding stock options at an exchange ratio of either 3 for 4, 1 for 2, or 1 for 3, depending on exercise price of the exchanged stock option. In accordance with the program, on April 18, 2003, Wind River cancelled outstanding options to purchase approximately 7.4 million shares of Wind River common stock. Wind River expects to grant new options to purchase a total of approximately 3.8 million shares of Wind River common stock no earlier than October 20, 2003, which is the first business day that is six months and one day after the cancellation of the exchanged options, but no later than November 30, 2003. The exercise price per share of the new options will be equal to the fair market value of Wind River common stock on the date of grant as determined in accordance with Wind River’s option plans. The new stock options represent approximately 4.7% of the total shares of Wind River common stock outstanding as of April 25, 2003, and could have a dilutive impact on Wind River’s future earnings per share to the extent that the market price of its common stock exceeds the exercise price of the new stock options to be granted.
76
SUPPLEMENTARY FINANCIAL INFORMATION
UNAUDITED QUARTERLY RESULTS OF OPERATIONS
We believe that period-to-period comparisons of our financial results should not be relied upon as an indication of future performance. Our revenues and results of operations have been subject to significant fluctuations, particularly on a quarterly basis, and our revenues and results of operations could fluctuate significantly quarter-to-quarter and year-to-year. Significant quarterly fluctuations in revenues will cause significant fluctuations in our cash flows and the cash and cash equivalents, accounts receivable and deferred revenue accounts on our balance sheet. Causes of such fluctuations may include: the number and timing of orders we receive, including disproportionately higher receipt and shipment of orders in the last month of the quarter; changes in the length of our products’ sales cycles, which increase as our customers’ purchase decisions become more strategic and are made at higher management levels; the success of our customers’ products from which we derive our royalty revenue; the mix of our revenues as between sales of products and lower-margin sales of services; our ability to control our operating expenses; our ability to continue to develop, introduce and ship competitive new products and product enhancements quickly; possible deferrals of orders by customers in anticipation of new product introductions; announcements, product introductions and price reductions by our competitors; our ability to manage costs for fixed-price consulting agreements; seasonal product purchases by our customers, which historically have been higher in our fourth fiscal quarter; changes in business cycles that affect the markets in which we sell our products; economic conditions in the United States and international markets; foreign currency exchange rates; and the occurrence of unexpected events.
A summary of our quarterly results for the years ended January 31, 2003 and 2002 is as follows:
| | Three Months Ended |
| |
|
| | Jan. 31,
2003 | | Oct. 31,
2002 | | Jul. 31,
2002 | | Apr. 30,
2002 | | Jan. 31,
2002 | | Oct. 31,
2001 | | Jul. 31,
2001 | | Apr. 30,
2001 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | (Unaudited)
(In thousands, except per share amounts) | |
| |
| Total revenues | $ | 60,899 | | $ | 58,281 | | $ | 63,582 | | $ | 66,359 | | $ | 80,505 | | $ | 80,145 | | $ | 80,230 | | $ | 110,192 | |
| Gross profit | | 45,248 | | | 41,734 | | | 45,881 | | | 46,898 | | | 60,889 | | | 60,163 | | | 58,283 | | | 85,055 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Loss before provision (benefit) for
income taxes and extraordinary items | | (36,297 | ) | | (14,343 | ) | | (36,669 | ) | | (17,548 | ) | | (39,850 | ) | | (21,644 | ) | | (288,759 | ) | | (23,639 | ) |
| Net loss | | (37,529 | ) | | (14,343 | ) | | (36,944 | ) | | (18,048 | ) | | (50,001 | ) | | (19,233 | ) | | (281,559 | ) | | (24,841 | ) |
| Net loss per share, basic and diluted | | (0.47 | ) | | (0.18 | ) | | (0.47 | ) | | (0.23 | ) | | (0.64 | ) | | (0.25 | ) | | (3.64 | ) | | (0.32 | ) |
| Shares used in per share calculation | | 79,240 | | | 79,089 | | | 79,035 | | | 78,767 | | | 78,218 | | | 77,820 | | | 77,354 | | | 76,785 | |
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
77
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding our directors is incorporated by reference from the information contained under the caption “Election of Directors” in our Proxy Statement for the 2003 Annual Meeting of Stockholders. The information regarding current executive officers found under the caption “Executive Officers of the Registrant” in Part I, Item 4A hereof is also incorporated by reference into this Item 10. Information regarding Section 16 reporting compliance is incorporated by reference from information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 11. Executive Compensation
The information required by this item is incorporated by reference from the information contained under the caption “Executive Compensation” in our Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners and management required by this item is incorporated by reference from the information contained under the caption “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement for the 2003 Annual Meeting of Stockholders.
Equity Compensation Plan Information
The following table gives information about Wind River’s common stock that may be issued upon the exercise of options, warrants and rights under Wind River’s existing equity compensation plans as of January 31, 2003. The table does not include information with respect to shares subject to outstanding options granted under equity compensation plans assumed by Wind River in connection with mergers and acquisitions of the companies that originally granted those options. Footnote (1) to the table sets forth the total number of shares of Wind River’s common stock issuable upon the exercise of those assumed options as of January 31, 2003, and the weighted average exercise price of those options. No additional options may be granted under those assumed plans.
| Plan Category | (a)
Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights | | (b)
Weighted average
exercise price of
outstanding options,
warrants and rights | | (c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) |
|
| |
| |
|
| Equity compensation plans approved by | | | | | | | | |
| security holders | | 6,940,008 | (1) | | | $18.4310 | | 2,327,602 |
| Equity compensation plans not approved | | | | | | | | |
| by security holders | | 11,049,872 | (2) | | | $18.1161 | | 3,652,780 |
| | |
| | | | | |
|
| Total | | 17,989,880 | | | | $18.2376 | | 5,980,382 |
| | |
| | | | | |
|
| (1) | Excludes outstanding options to purchase an aggregate of 1,443,557 shares with a weighted average exercise price of $13.9995, which were assumed by Wind River in connection with the acquisitions of AudeSi Technologies, Inc., Embedded Support Tools Corporation, Integrated Systems, Inc., Rapid Logic, Inc. and RouterWare, Inc.
|
| (2) | Issued under our 1998 Non-Officer Stock Option Plan and the Non-Qualified Stock Option Agreement entered into between Wind River and Marla Ann Stark, Vice President and General Counsel. |
The equity compensation plans not approved by security holders have generally the same features as those approved by security holders. For further details regarding Wind River’s equity compensation plans, see Note 11, “Stock-based Compensation Plans” in Notes to Consolidated Financial Statements.
78
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the information contained under the captions “Executive Compensation — Employment, Severance and Change of Control Transactions” and “Certain Relationships and Related Party Transactions” in the Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 14: Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Wind River maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this annual report on Form 10-K, Wind River has carried out an evaluation, under the supervision and with the participation of its management, including Wind River’s principal executive officer and Wind River’s principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on such evaluation, our principal executive officer and principal financial officer concluded that Wind River’s disclosure controls and procedures are effective.
(b) Changes in internal controls.
There have been no significant changes in Wind River’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this annual report on Form 10-K.
79
PART IV
ITEM 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K
| | (a) | The following documents are filed as part of this report:
|
| | | 1. | Financial Statements and Schedules — See Index to Consolidated Financial Statements at Item 8 of this report.
|
| | | | All other schedules are omitted because they were not required or the required information is included in the Consolidated Financial Statements or Notes thereto.
|
| | | 2. | Exhibits
|
| | | | The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission:
|
| | | | | | Incorporated by Reference
to Registrant’s Filing on: | | |
| | | | | |
| | |
| Exhibit No. | | Exhibit Title | | Form
(File No.) | | Date Filed | | As
Exhibit No. | | Filed
Herewith |
| |
| |
| |
| |
| |
|
| 3.1 | | | Amended and Restated Certificate of | | 10-Q | | December 15, 2000 | | 3.1(a)-(d) | | |
| | | | Incorporation of Wind River Systems, | | | | | | | | |
| | | | Inc., as amended. | | | | | | | | |
| 3.2 | | | Certificate of Designation of Series A | | 8-K | | November 4, 1999 | | 4.1 | | |
| | | | Junior Participating Preferred Stock. | | | | | | | | |
| 3.3 | | | Amended and Restated Bylaws of | | 10-K | | April 30, 2002 | | 3.3 | | |
| | | | Wind River Systems, Inc. | | | | | | | | |
| 4.1 | | | Indenture dated as of December 10, | | 10-Q | | December 17, 2001 | | 4.1 | | |
| | | | 2001 between Wind River Systems, | | | | | | | | |
| | | | Inc. and Bankers Trust Company, as | | | | | | | | |
| | | | Trustee. | | | | | | | | |
| 4.2 | | | Stockholder Rights Plan between Wind | | 8-K | | November 4, 1999 | | 99.2 and 99.3 | | |
| | | | River Systems, Inc. and American | | | | | | | | |
| | | | Stock Transfer and Trust Company, as | | | | | | | | |
| | | | rights agent, and form of Rights | | | | | | | | |
| | | | Certificate thereunder. | | | | | | | | |
| 4.3 | | | Registration Rights Agreement dated as | | 10-Q | | December 17, 2001 | | 10.54 | | |
| | | | of December 10, 2001 by and between | | | | | | | | |
| | | | Wind River Systems, Inc., Credit | | | | | | | | |
| | | | Suisse First Boston Corporation, UBS | | | | | | | | |
| | | | Warburg LLC and Thomas Weisel | | | | | | | | |
| | | | Partners LLC. | | | | | | | | |
| 10.1* | | | Form of Indemnity Agreement entered | | 10-K | | May 1, 2001 | | 10.1 | | |
| | | | into between Wind River Systems, Inc. | | | | | | | | |
| | | | and its officers and directors. | | | | | | | | |
| 10.2* | | | 1987 Equity Incentive Plan, as | | S-8 | | June 26, 1996 | | 99.1 | | |
| | | | amended. | | (No. 333-06921) | | | | | | |
| 10.3* | | | Form of Incentive Stock Option Grant | | S-1 | | March 5, 1993 | | 10.3 and 10.4 | | |
| | | | under the 1987 Equity Incentive Plan | | (No. 33-59146) | | | | | | |
| | | | and Form of Nonstatutory Stock | | | | | | | | |
| | | | Option Grant under the 1987 Equity | | | | | | | | |
| | | | Incentive Plan. | | | | | | | | |
| 10.4* | | | Form of Performance Option under the | | 10-K | | April 21, 1998 | | 10.20 | | |
| | | | Amended and Restated Wind River | | | | | | | | |
| | | | Systems, Inc. 1987 Equity Incentive | | | | | | | | |
| | | | Plan. | | | | | | | | |
80
| | | | | | Incorporated by Reference
to Registrant’s Filing on: | | |
| | | | | |
| | |
| Exhibit No. | | Exhibit Title | | Form
(File No.) | | Date Filed | | As
Exhibit No. | | Filed
Herewith |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | | |
| 10.5* | | | 1993 Employee Stock Purchase Plan, | | S-8 | | July 11, 2002 | | 99.2 | | |
| | | | as amended. | | (No. 333-92244) | | | | | | |
| 10.6* | | | 1995 Non-Employee Directors’ Stock | | 10-Q | | June 13, 2001 | | 10.14 | | |
| | | | Option Plan, as amended. | | | | | | | | |
| 10.7* | | | Form of Nonstatutory Stock Option | | 10-K | | April 21, 1997 | | 10.15 | | |
| | | | Grant under the Non-Employee | | | | | | | | |
| | | | Director’s Stock Option Plan. | | | | | | | | |
| 10.8* | | | 1998 Non-Officer Stock Option Plan, | | S-8 | | July 11, 2002 | | 99.1 | | |
| | | | as amended. | | (No. 333-92244) | | | | | | |
| 10.9* | | | Form of Stock Option Agreement | | 10-Q | | September 14, 2001 | | 10.45 | | |
| | | | under the Wind River Systems, Inc. | | | | | | | | |
| | | | 1998 Non-Officer Stock Option Plan. | | | | | | | | |
| 10.10* | | | Form of Stock Option Agreement for | | 10-Q | | September 14, 2001 | | 10.46 | | |
| | | | Belgian employees under the Wind | | | | | | | | |
| | | | River Systems, Inc. 1998 Non-Officer | | | | | | | | |
| | | | Stock Option Plan. | | | | | | | | |
| 10.11* | | | Form of Stock Option Agreement for | | | | | | | | X |
| | | | French employees under the Wind | | | | | | | | |
| | | | River Systems, Inc. 1998 Non-Officer | | | | | | | | |
| | | | Stock Option Plan. | | | | | | | | |
| 10.12* | | | Provisions Applicable to Persons | | 10-Q | | September 14, 2001 | | 10.48 | | |
| | | | Subject to the Laws of France under | | | | | | | | |
| | | | the Wind River Systems, Inc. 1998 | | | | | | | | |
| | | | Non-Officer Stock Option Plan. | | | | | | | | |
| 10.13* | | | 1998 Equity Incentive Plan, as | | S-8 | | March 27, 2000 | | 99.6 | | |
| | | | amended. | | (No. 333-33348) | | | | | | |
| 10.14* | | | Form of Stock Option Agreement | | 10-K | | May 1, 2001 | | 10.23 | | |
| | | | under the 1998 Equity Incentive Plan. | | | | | | | | |
| 10.15* | | | Executive Officers’ Change of Control | | 10-K | | April 21, 1998 | | 10.13 | | |
| | | | Incentive and Severance Benefit Plan | | | | | | | | |
| | | | dated as of November 16, 1995. | | | | | | | | |
| 10.16* | | | Vice Presidents’ Severance Benefit | | 10-Q | | June 13, 2001 | | 10.40 | | |
| | | | Plan. | | | | | | | | |
| 10.17* | | | Deferred Compensation Agreement | | 10-Q/A | | July 11, 1996 | | 10.12 | | |
| | | | between Wind River Systems, Inc. and | | | | | | | | |
| | | | Ronald A. Abelmann dated as of | | | | | | | | |
| | | | February 23, 1996. | | | | | | | | |
| 10.18* | | | Retirement and Consulting Agreement | | 10-Q | | September 13, 1999 | | 10.24 | | |
| | | | between Wind River Systems, Inc. and | | | | | | | | |
| | | | Ronald A. Abelmann, dated as of | | | | | | | | |
| | | | July 29, 1999. | | | | | | | | |
| 10.19*. | | | Executive Employment Agreement
between Wind River Systems, Inc. and
Thomas M. St. Dennis, dated as of
September 7, 1999 | | 10-Q | | December 14, 1999 | | 10.25 | | |
| 10.20* | | | Secured Promissory Note, dated as of | | 10-Q | | December 14, 1999 | | 10.26 | | |
| | | | September 7, 1999, between Wind | | | | | | | | |
| | | | River Systems, Inc. and Thomas M. | | | | | | | | |
| | | | St. Dennis. | | | | | | | | |
81
| | | | | | Incorporated by Reference
to Registrant’s Filing on: | | |
| | | | | |
| | |
| Exhibit No. | | Exhibit Title | | Form
(File No.) | | Date Filed | | As
Exhibit No. | | Filed
Herewith |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | | |
| 10.21* | | | Investment Property Security | | 10-Q | | December 14, 1999 | | 10.27 | | |
| | | | Agreement by Thomas M. St. Dennis | | | | | | | | |
| | | | in favor of Wind River Systems, Inc. | | | | | | | | |
| | | | dated as of September 7, 1999. | | | | | | | | |
| 10.22* | | | Non-Statutory Stock Option Agreement | | 10-Q | | December 14, 1999 | | 10.28 | | |
| | | | between Wind River Systems, Inc. and | | | | | | | | |
| | | | Marla Ann Stark. | | | | | | | | |
| 10.23* | | | Letter agreement dated June 27, 2001 | | 10-Q | | September 14, 2001 | | 10.49 | | |
| | | | by and between Wind River Systems, | | | | | | | | |
| | | | Inc. and Richard Kraber. | | | | | | | | |
| 10.24* | | | Separation Agreement and Release | | 10-Q | | December 17, 2001 | | 10.50 | | |
| | | | dated as of September 14, 2001 by and | | | | | | | | |
| | | | between Curt Schacker and Wind River | | | | | | | | |
| | | | Systems, Inc. | | | | | | | | |
| 10.25 | | | Marina Village Industrial Gross Lease | | S-1 | | March 5, 1993 | | 10.9 | | |
| | | | between Wind River Systems, Inc. and | | (No. 33-59146) | | | | | | |
| | | | Alameda Real Estate Investments, | | | | | | | | |
| | | | dated as of March 15, 1990, as | | | | | | | | |
| | | | amended. | | | | | | | | |
| 10.26 | | | Lease Agreement between Deutsche | | 10-Q | | December 15, 1997 | | 10.19 | | |
| | | | Bank AG, New York Branch, and | | | | | | | | |
| | | | Wind River Systems, Inc., dated as of | | | | | | | | |
| | | | September 12, 1997. | | | | | | | | |
| 10.27 | | | Lease Agreement between Deutsche | | 10-K | | April 28, 2000 | | 10.34 | | |
| | | | Bank AG, New York Branch and Wind | | | | | | | | |
| | | | River Systems, Inc., dated as of | | | | | | | | |
| | | | November 30, 1999. | | | | | | | | |
| 10.28 | | | First Amendment to Participation | | 8-K | | December 3, 2001 | | 99.2 | | |
| | | | Agreement and Certain Operative | | | | | | | | |
| | | | Agreements with Limited Waiver dated | | | | | | | | |
| | | | November 30, 2001 between Wind | | | | | | | | |
| | | | River Systems, Inc., Deutsche Bank | | | | | | | | |
| | | | AG, New York Branch and Deutsche | | | | | | | | |
| | | | Bank AG, New York and/or Cayman | | | | | | | | |
| | | | Islands Branch. | | | | | | | | |
| 10.29 | | | Eighth Amendment to Participation | | 8-K | | December 3, 2001 | | 99.3 | | |
| | | | Agreement and Certain Operative | | | | | | | | |
| | | | Agreements with Limited Waiver dated | | | | | | | | |
| | | | December 3, 2001 between Wind River | | | | | | | | |
| | | | Systems, Inc., Deutsche Bank AG, | | | | | | | | |
| | | | New York Branch, and Deutsche Bank | | | | | | | | |
| | | | AG, New York and/or Cayman Islands | | | | | | | | |
| | | | Branch. | | | | | | | | |
| 10.30 | | | Stock Purchase Agreement between | | 10-K | | May 1, 2001 | | 10.35 | | |
| | | | Wind River Systems, Inc. and Innotech | | | | | | | | |
| | | | Corporation dated as of December 28, | | | | | | | | |
| | | | 2000. | | | | | | | | |
82
| | | | | | Incorporated by Reference
to Registrant’s Filing on: | | |
| | | | | |
| | |
| Exhibit No. | | Exhibit Title | | Form
(File No.) | | Date Filed | | As
Exhibit No. | | Filed
Herewith |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | | |
| 10.31 | | | Stock Purchase Agreement between | | 10-K | | May 1, 2001 | | 10.36 | | |
| | | | Wind River Systems, Inc. and Kobe | | | | | | | | |
| | | | Steel, Ltd. dated as of December 28, | | | | | | | | |
| | | | 2000 (Incorporated by reference to the | | | | | | | | |
| | | | Form 10-K for the fiscal year ended | | | | | | | | |
| | | | January 31, 2001). | | | | | | | | |
| 10.32 | | | Stock Purchase Agreement between | | 10-K | | May 1, 2001 | | 10.37 | | |
| | | | Wind River Systems, Inc. and Nissin | | | | | | | | |
| | | | Electric Co., Ltd. dated as of | | | | | | | | |
| | | | December 28, 2000. | | | | | | | | |
| 10.33 | | | Settlement Agreement between Wind | | 10-K | | May 1, 2001 | | 10.38 | | |
| | | | River Systems K.K. and Kobe Steel, | | | | | | | | |
| | | | Ltd. dated as of March 30, 2001. | | | | | | | | |
| 10.34 | | | Settlement Agreement between Wind | | 10-K | | May 1, 2001 | | 10.39 | | |
| | | | River Systems K.K. and Nissin Electric | | | | | | | | |
| | | | Co., Inc. dated as of March 30, 2001. | | | | | | | | |
| 10.35 | | | Settlement Allocation Agreement | | 10-Q | | June 13, 2001 | | 10.41 | | |
| | | | between Wind River Systems K.K., | | | | | | | | |
| | | | Wind River Systems, Inc. and Kobe | | | | | | | | |
| | | | Steel, Ltd. dated as of April 27, 2001. | | | | | | | | |
| 10.36 | | | Settlement Allocation Agreement | | 10-Q | | June 13, 2001 | | 10.42 | | |
| | | | between Wind River Systems K.K. and | | | | | | | | |
| | | | Kobe Steel, Ltd. dated as of April 27, | | | | | | | | |
| | | | 2001. | | | | | | | | |
| 10.37 | | | Settlement Allocation Agreement | | 10-Q | | June 13, 2001 | | 10.43 | | |
| | | | between Wind River Systems K.K., | | | | | | | | |
| | | | Wind River Systems, Inc. and Nissin | | | | | | | | |
| | | | Electric Co., Ltd. Dated as of April 27, | | | | | | | | |
| | | | 2001. | | | | | | | | |
| 10.38 | | | Settlement Allocation Agreement | | 10-Q | | June 13, 2001 | | 10.44 | | |
| | | | between Wind River Systems K.K. and | | | | | | | | |
| | | | Nissin Electric Co., Ltd. Dated as of | | | | | | | | |
| | | | April 27, 2001. | | | | | | | | |
| 10.39 | | | Purchase Agreement dated as of | | 10-Q | | December 17, 2001 | | 10.53 | | |
| | | | December 5, 2001 by and among Wind | | | | | | | | |
| | | | River Systems, Inc., Credit Suisse First | | | | | | | | |
| | | | Boston Corporation, UBS Warburg | | | | | | | | |
| | | | LLC and Thomas Weisel Partners LLC. | | | | | | | | |
| 10.40 | | | Termination Agreement dated as of | | | | | | | | X |
| | | | April 15, 2003 by and between | | | | | | | | |
| | | | Deustche Bank AG, New York Branch, | | | | | | | | |
| | | | Deutsche Bank AG, New York Branch | | | | | | | | |
| | | | and/or Cayman Islands Branch and | | | | | | | | |
| | | | Wind River Systems, Inc. | | | | | | | | |
| 10.41 | | | Termination Agreement dated as of | | | | | | | | X |
| | | | April 15, 2003 by and between | | | | | | | | |
| | | | Deustche Bank AG, New York Branch, | | | | | | | | |
| | | | Deutsche Bank AG, New York Branch | | | | | | | | |
| | | | and/or Cayman Islands Branch and | | | | | | | | |
| | | | Wind River Systems, Inc. | | | | | | | | |
83
| Exhibit No. | | Exhibit Title | | Form
(File No.) | | Date Filed | | As
Exhibit No. | | Filed
Herewith |
| |
| |
| |
| |
| |
|
| 10.42 | | | Credit Agreement dated as of April 15, | | | | | | | | X |
| | | | 2003 between Wind River Systems, | | | | | | | | |
| | | | Inc. and Wells Fargo Bank, National | | | | | | | | |
| | | | Association | | | | | | | | |
| 10.43 | | | Security Agreement/Securities Account | | | | | | | | X |
| | | | dated as of April 15, 2003 between | | | | | | | | |
| | | | Wind River Systems, Inc. and Wells | | | | | | | | |
| | | | Fargo Bank, National Association | | | | | | | | |
| 12.1 | | | Statement re Computation of Ratios | | | | | | | | X |
| 21.1 | | | Subsidiaries of Registrant. | | | | | | | | X |
| 23.1 | | | Consent of Independent Accountants. | | | | | | | | X |
| 99.1 | | | Certification of Chief Executive Officer | | | | | | | | X |
| | | | pursuant to 18 U.S.C. Section 1350 | | | | | | | | |
| 99.2 | | | Certification of Chief Financial Officer | | | | | | | | X |
| | | | pursuant to 18 U.S.C. Section 1350 | | | | | | | | |
| 99.3 | | | Certification of Chief Executive | | | | | | | | X |
| | | | Officer pursuant to Section 302
of the Sarbanes-Oxley Act of
2002. | | | | | | | | |
| 99.4 | | | Certification of Chief Financial | | | | | | | | X |
| | | | Officer pursuant to Section 302
of the Sarbanes-Oxley Act of
2002. | | | | | | | | |
| * | Indicates management contracts or compensatory arrangements filed pursuant to Item 601(b)(10) of Regulation S-K.
|
| | (b) | Reports on Form 8-K
None. |
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: April 30, 2003 | WIND RIVER SYSTEMS, INC.
By:/s/ MICHAEL W. ZELLNER
Michael W. Zellner
Vice President of Finance, Chief Financial Officer
and Secretary |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Thomas St. Dennis and Marla Ann Stark, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him and in all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and does hereby ratify and confirm all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | | Title | | Date |
| |
| |
|
| | | | | |
| /s/ THOMAS M. ST. DENNIS | | President, Chief Executive Officer and Director | | April 30, 2003 |
| | (principal executive officer) | | |
| Thomas M. St. Dennis | | | | |
| | | | | |
| /s/ MICHAEL W. ZELLNER | | Vice President of Finance, Chief Financial Officer | | April 30, 2003 |
| | and Secretary (principal financial and accounting | | |
| Michael W. Zellner | | officer) | | |
| | | | | |
| | | | | |
| /s/ JERRY L. FIDDLER | | Chairman of the Board | | April 30, 2003 |
| | | | |
| Jerry L. Fiddler | | | | |
| | | | | |
| /s/ NARENDRA K. GUPTA | | Vice Chairman of the Board | | April 30, 2003 |
| | | | |
| Narendra K. Gupta | | | | |
| | | | | |
| /s/ JAMES W. BAGLEY | | Director | | April 30, 2003 |
| | | | |
| James W. Bagley | | | | |
| | | | | |
| /s/ JOHN C. BOLGER | | Director | | April 30, 2003 |
| | | | |
| John C. Bolger | | | | |
| | | | | |
| /s/ WILLIAM B. ELMORE | | Director | | April 30, 2003 |
| | | | |
| William B. Elmore | | | | |
| | | | | |
| /s/ GRANT M. INMAN | | Director | | April 30, 2003 |
| | | | |
| Grant M. Inman | | | | |
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