-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DS761D+wywVm/ERJxctRha/Zn+wHy+o+Y0PZAFsSSRXgvW9q6mBPv0k4DQ2ylD+O BbV59Ho7V9aaAI12uxEdXA== 0000912057-99-009358.txt : 19991215 0000912057-99-009358.hdr.sgml : 19991215 ACCESSION NUMBER: 0000912057-99-009358 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WIND RIVER SYSTEMS INC CENTRAL INDEX KEY: 0000833829 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 942873391 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21342 FILM NUMBER: 99774440 BUSINESS ADDRESS: STREET 1: 500 WIND RIVER WAY CITY: ALAMEDA STATE: CA ZIP: 94501 BUSINESS PHONE: 5107484100 MAIL ADDRESS: STREET 1: 1010 ATLANTIC AVE STREET 2: 1010 ATLANTIC AVE CITY: ALAMEDA STATE: CA ZIP: 94501 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended October 31, 1999. [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to ____. Commission file number 0-21342 WIND RIVER SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-2873391 (State of incorporation) (I.R.S. Employer Identification No.) 500 WIND RIVER WAY, ALAMEDA, CALIFORNIA 94501 (Address of principal executive office) (510) 748-4100 (Telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. 42,105,633 shares of Common Stock, $.001 par value, as of November 30, 1999 WIND RIVER SYSTEMS, INC. FORM 10-Q QUARTER ENDED OCTOBER 31, 1999 INDEX Part I: FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Income for the three and nine month periods ended October 31, 1999 and 1998 Condensed Consolidated Balance Sheets at October 31, 1999 and January 31, 1999 Condensed Consolidated Statements of Cash Flows for the nine month periods ended October 31, 1999 and 1998 Notes to the Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Part II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Signature
2 WIND RIVER SYSTEMS, INC. PART I - FINANCIAL INFORMATION Item 1. Financial Statements WIND RIVER SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three months ended Nine months ended October 31, October 31, 1999 1998 1999 1998 -------- --------- --------- -------- Revenues: Products $32,403 $25,716 $ 84,644 $69,119 Services 12,198 8,483 33,037 23,606 -------- --------- --------- -------- Total revenues 44,601 34,199 117,681 92,725 -------- --------- --------- -------- Cost of revenues: Products 3,133 2,118 7,702 6,491 Services 5,189 3,343 14,113 9,423 -------- --------- --------- -------- Total cost of revenues 8,322 5,461 21,815 15,914 -------- --------- --------- -------- Gross margin 36,279 28,738 95,866 76,811 -------- --------- --------- -------- Operating expenses: Selling and marketing 15,931 11,596 42,486 32,812 Product development and engineering 7,580 4,765 21,369 13,629 General and administrative 4,849 1,935 11,961 5,484 -------- --------- --------- -------- Total operating expenses 28,360 18,296 75,816 51,925 -------- --------- --------- -------- Operating income 7,919 10,442 20,050 24,886 -------- --------- --------- -------- Other income (expense): Interest income 3,743 3,393 11,202 10,027 Interest expense and other, net (2,233) (2,163) (7,636) (6,623) -------- --------- --------- -------- Total other income 1,510 1,230 3,566 3,404 -------- --------- --------- -------- Income before provision for income taxes 9,429 11,672 23,616 28,290 Provision for income taxes 3,535 4,541 9,210 11,037 -------- --------- --------- -------- Net income $ 5,894 $ 7,131 $ 14,406 $17,253 -------- --------- --------- -------- -------- --------- --------- -------- Net income per share: Basic $ 0.14 $ 0.18 $ 0.35 $ 0.43 Diluted $ 0.13 $ 0.16 $ 0.33 $ 0.40 Weighted average shares: Basic 41,837 40,466 41,496 40,075 Diluted 43,989 43,841 43,881 43,661
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 WIND RIVER SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE)
October 31, January 31, 1999 1999 ----------- ---------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 49,413 $ 42,837 Short-term investments 24,436 11,043 Accounts receivable, net 33,329 30,926 Prepaid and other current assets 12,081 10,598 ----------- ---------- Total current assets 119,259 95,404 Investments 172,972 158,628 Land and equipment, net 35,505 31,513 Other assets 9,546 10,011 Restricted cash 35,544 34,157 ----------- ---------- Total assets $372,826 $329,713 ----------- ---------- ----------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,914 $ 3,472 Accrued liabilities 12,002 10,005 Accrued compensation 11,098 6,030 Income taxes payable 8,605 445 Deferred revenue 19,951 17,318 ----------- ---------- Total current liabilities 56,570 37,270 Convertible subordinated notes 140,000 140,000 ----------- ---------- Total liabilities 196,570 177,270 ----------- ---------- Minority interest in consolidated subsidiary 820 551 ----------- ---------- Stockholders' equity: Common stock, par value $.001; 125,000 shares authorized; 43,219 and 42,449 shares issued; 41,942 and 41,337 shares outstanding 43 42 Additional paid in capital 130,949 126,855 Loan to stockholder (1,000) - Treasury stock, 1,277 and 1,112 shares, at cost (29,488) (25,491) Accumulated other comprehensive income (loss) 7,962 (2,155) Retained earnings 66,970 52,641 ----------- ---------- Total stockholders' equity 175,436 151,892 ----------- ---------- Total liabilities and stockholders' equity $372,826 $329,713 ----------- ---------- ----------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 WIND RIVER SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine months ended October 31, 1999 1998 ----------- ---------- Cash flows from operating activities: Net income $ 14,406 $ 17,253 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,856 4,980 Minority interest in consolidated subsidiary 269 92 Write-off of investment 500 - Change in assets and liabilities: Accounts receivable, net (2,403) (5,484) Prepaid and other assets (3,813) (1,535) Accounts payable 1,442 (895) Accrued liabilities 1,997 1,222 Accrued compensation 5,068 741 Income taxes payable 8,160 7,828 Deferred revenue 2,633 854 ----------- ---------- Net cash provided by operating activities 36,115 25,056 ----------- ---------- Cash flows from investing activities: Acquisition of equipment (9,553) (8,514) Purchases of investments (109,519) (188,505) Sales and maturities of investments 92,396 145,219 Restricted cash (1,387) (26,353) ----------- ---------- Net cash used in investing activities (28,063) (78,153) ----------- ---------- Cash flows from financing activities: Proceeds from issuance of Common Stock, net 4,095 7,696 Purchase of treasury stock (3,997) (7,506) Loan to stockholder (1,000) - ----------- ---------- Net cash provided by (used in) financing activities (902) 190 ----------- ---------- Effect of exchange rate changes on cash and cash equivalents (497) 32 ----------- ---------- Effect of changing fiscal year of acquired subsidiary (77) - ----------- ---------- Net increase (decrease) in cash and cash equivalents 6,576 (52,875) Cash and cash equivalents at beginning of period 42,837 100,788 ----------- ---------- Cash and cash equivalents at end of period $ 49,413 $ 47,913 ----------- ---------- ----------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 WIND RIVER SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The accompanying condensed consolidated financial statements and related notes of Wind River Systems, Inc. ("Wind River"or the "Company") are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended January 31, 1999 included in Wind River's Annual Report on Form 10-K. The results of operations for the three and nine months ended October 31, 1999 are not necessarily indicative of results to be expected for the entire fiscal year, which ends on January 31, 2000 or for any future period. In accordance with the rules and regulations of the Securities and Exchange Commission, unaudited condensed consolidated financial statements may omit or condense certain information and disclosures normally required for a complete set of financial statements prepared in accordance with generally accepted accounting principles. However, Wind River believes that the notes to the condensed consolidated financial statements contain disclosures adequate to make the information presented not misleading. The condensed consolidated financial statements include the accounts of Wind River and its wholly- owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. A change in the facts and circumstance surrounding these estimates could result in a change to the estimates and impact future operating results. Certain amounts in the fiscal 1999 condensed consolidated financial statements have been reclassified to conform to the fiscal 2000 presentation. 2. Write-Off of Investment During the fiscal year ended January 31, 1999, Wind River paid $500,000 for a 10% interest in the common stock of XACT, Inc. ("XACT") that was accounted for under the cost method. During April 1999, Wind River entered into an asset purchase agreement with XACT pursuant to which Wind River acquired certain office and other equipment from XACT and revised the terms of an existing distribution agreement with XACT. Subsequently, but not pursuant to the asset purchase agreement, Wind River hired a significant number of XACT employees. As a result of these events, Wind River believes the future operations and cash flows of XACT have become uncertain and that Wind River's original investment is not recoverable. Accordingly, Wind River recognized a charge totaling $500,000 for the difference between the carrying amount of its investment and the net realizable value during the first quarter of fiscal year 2000. 6 3. Acquisitions On June 30, 1999, Wind River completed the acquisition of RouterWare, Inc., ("RouterWare") a California corporation. RouterWare develops and markets a suite of software modules used in data communications products such as bridges, routers, gateways, and remote access servers. Pursuant to the merger agreement, Wind River issued 730,923 shares of its common stock and reserved an additional 634,065 shares for issuance upon exercise of outstanding employee stock options in exchange for all of the outstanding shares of RouterWare common stock and shares issuable upon exercise of employee stock options assumed in the merger. Wind River recorded this transaction using the pooling-of-interests accounting method, and all financial data of Wind River has been restated to include the historical financial information of RouterWare. The results of operations for the three and nine months ended October 31, 1998, are summarized as follows:
Three months Ended Nine months Ended October 31, October 31, 1998 1998 ---------------------- ---------------------- (In thousands) Revenues: Wind River $ 33,600 $ 91,200 RouterWare 599 1,525 ---------------------- ---------------------- Total revenues $ 34,199 $ 92,725 ---------------------- ---------------------- ---------------------- ---------------------- Net income (loss): Wind River 7,165 17,531 RouterWare (34) (278) ---------------------- ---------------------- Total net income $ 7,131 $ 17,253 ---------------------- ---------------------- ---------------------- ----------------------
Because the fiscal year ends of Wind River and RouterWare differ, the statements of operations date for RouterWare have been recast as shown below:
Wind River RouterWare Fiscal year ended January 31, 1999 Fiscal year ended December 31, 1998 Fiscal year ended January 31, 1998 Fiscal year ended December 31, 1997 Fiscal year ended January 31, 1997 Fiscal year ended December 31, 1996
RouterWare's net loss of $77,000 for the month of January 1999 has been recorded as a decrease to stockholders' equity for the quarter ended April 30, 1999. In connection with the acquisition of RouterWare, Wind River incurred approximately $930,000 in merger related expenses consisting primarily of transaction fees. On October 21, 1999, Wind River entered into an agreement to merge with Integrated Systems, Inc., an embedded operating systems and development tool software developer, in a transaction to be accounted for as a pooling of interests. Under the terms of the agreement, each issued and outstanding common share of Integrated Systems will be exchanged for .92 shares of Wind River common stock. Additionally, approximately 4,847,000 Integrated Systems stock options will become options to purchase approximately 4,459,000 shares of Wind River stock. Consummation of the transactions is subject to certain conditions, including approval by the stockholders of each company. 7 4. Revenue Recognition Wind River adopted the provisions of Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-2," effective February 1, 1998. SOP 97-2 and SOP 98-4 provide guidance on recognizing revenue on software transactions and supersede SOP 91-1. In December 1998, the American Institute of Certified Public Accountants ("AICPA") released SOP 98-9, "Modification of SOP 97-2, `Software Revenue Recognition' with Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an entity recognize revenue for multiple element arrangements by means of the "residual method" when (1) there is Vendor-Specific Objective Evidence ("VSOE") of the fair values of all the undelivered elements that are not accounted for by means of long-term contract accounting, (2) VSOE of fair value does not exist for one or more of the delivered elements, and (3) all revenue recognition criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of each delivered element) are satisfied. The provisions of SOP 98-9 that extend the deferral of certain paragraphs of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9 became effective for transactions entered into in fiscal years beginning after March 15, 1999. Retroactive application is prohibited. We have evaluated the requirements of SOP 98-9 and the effects, if any, on our current revenue recognition policies and believe the effects of adopting SOP 98-9 will be immaterial to our financial statements. 5. Cash and Cash Equivalents, Investments and Restricted Cash Cash equivalents consist of highly liquid investments with an original maturity of three months or less. These investments consist of fixed income securities, which are readily convertible to cash and are stated at cost, which approximates fair value. Fair value is determined based upon the quoted market prices of the securities as of the balance sheet date. Investments with maturities greater than three months and less than one year are classified as short-term investments. Investments with maturities greater than one year are classified as long-term investments. Wind River accounts for its investments, including equity securities, money market funds, municipal bonds, U.S. government and agency obligations, corporate bonds and other debt securities, in accordance with Statement of Financial Accounting Standards No. ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities." Wind River determines the appropriate classification of its investments at the time of purchase and re-evaluates such classification as of each balance sheet date. Wind River has classified all of its investments as available-for-sale and carries such investments at fair value, with unrealized gains and losses reported in accumulated other comprehensive income component of stockholders' equity until disposition. Fair value is determined based upon the quoted market prices of the securities as of the balance sheet date. The cost of securities sold is based on the specific identification method. Realized gains or losses and declines in value, if any, judged to be other than temporary on available-for-sale securities are reported in other income or expense. Restricted cash consists of the investments held as collateral under the operating lease of Wind River's headquarters and an accreting interest rate swap agreement. 6. Comprehensive Income Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. The difference between net income and comprehensive income, for Wind River, results from foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. 8 Comprehensive income for the three and nine months ended October 31, 1999 and 1998 is as follows:
Three Months Ended Nine months Ended October 31, October 31, ----------------------------- ------------------------------ (In thousands) 1999 1998 1999 1998 ------------- -------------- ------------- --------------- Net income $ 5,894 $ 7,131 $ 14,406 $ 17,253 ------------- -------------- ------------- --------------- Other comprehensive income Foreign currency translation adjustments 84 (70) (497) 32 Unrealized gain (loss) on investments 6,796 (621) 10,614 (2,074) ------------- -------------- ------------- --------------- Other comprehensive income (loss) 6,880 (691) 10,117 (2,042) ------------- -------------- ------------- --------------- Total comprehensive income $ 12,774 $ 6,440 $ 24,523 $ 15,211 ------------- -------------- ------------- --------------- ------------- -------------- ------------- ---------------
7. Net Income Per Share Wind River reports both basic net income per share, which is based on the weighted-average number of common shares outstanding and diluted net income per share, which is based on the weighted-average number of common shares outstanding and all dilutive potential common shares outstanding. Potential dilutive common shares consist of stock options and warrants (using the treasury stock method) and convertible subordinated notes (using the if converted method). The following is a reconciliation of the number of shares used in the basic and diluted earnings per share computations for the periods presented:
Three Months Ended Nine months Ended October 31, October 31, --------------------------- ------------------------- (In thousands, except per share information) 1999 1998 1999 1998 ------------- ------------ ----------- ------------ Shares used in basic net income per share computation 41,837 40,466 41,496 40,075 Effect of dilutive potential common shares 2,152 3,375 2,385 3,586 ------------- ------------ ----------- ------------ Shares used in diluted net income per share computation 43,989 43,841 43,881 43,661 ------------- ------------ ----------- ------------ ------------- ------------ ----------- ------------
The effect of assumed conversion of the convertible subordinated notes is anti-dilutive and is therefore excluded from the above computations. Options to purchase approximately 4.9 million and 1.8 million common shares which were outstanding at October 31, 1999 and 1998, respectively, were not included in the calculation because the exercise prices were greater than the average market price of common shares in each respective quarter and the effect would be anti-dilutive. The exercise prices of these options ranged from $17.44 to $31.92 and $26.46 to $31.92 at October 31, 1999 and 1998, respectively. 8. Treasury Stock In June 1999, Board of Directors rescinded the $25.0 million increase in stock repurchases authorized in April 1999 and Wind River's ongoing stock repurchase program of $4.0 million per quarter. Wind River has not repurchased any shares since March 17, 1999. 9 9. Derivative Financial Instruments Wind River enters into foreign currency forward exchange contracts to manage exposure related to certain foreign currency transactions. Wind River does not enter into derivative financial instruments for trading purposes. All outstanding forward contracts at the end of a period are marked-to-market with unrealized gains and losses included in other income, net, and thus are recognized in income in advance of the actual foreign currency cash flows. Wind River may, from time to time, adjust its foreign currency hedging position by taking out additional contracts or by terminating or offsetting existing forward contracts. These adjustments may result from changes in the underlying foreign currency exposures or from fundamental shifts in the economics of particular exchange rates. Gains and losses on terminated forward contracts, or on contracts that are offset, are recognized in income in the period of contract termination or offset. At October 31, 1999, Wind River had outstanding forward contracts to hedge certain foreign currency transaction exposures in certain European currencies. The difference between cost and estimated fair value at October 31, 1999 was immaterial. On March 18, 1998, Wind River entered into an accreting interest rate swap agreement (the "Swap Agreement") to reduce the impact of changes in interest rates on its floating rate operating lease for its new corporate headquarters. The Swap Agreement effectively changes Wind River's interest rate exposure on its operating lease, which is at one month London interbank offering rate ("LIBOR"), to a fixed rate of 5.9%. At October 31, 1999, the notional amount of the accreting interest rate swap was $28.5 million. The differential to be paid or received under the Swap Agreement will be recognized as an adjustment to rent expense related to the operating lease. The Swap Agreement matures at the same time as the operating lease expires. The amounts potentially subject to credit risk (arising from the possible inability of the counterparties to meet the term of their contracts) are generally limited to the amounts, if any, by which the counterparties' obligations exceed the obligations of Wind River. 10. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the fair values of those derivatives would be accounted for in current earnings unless specific hedge criteria are met. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. Wind River must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. In July 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133." SFAS 137 deferred the effective date of SFAS 133 until the first fiscal quarter beginning after June 15, 2000. Wind River has not yet determined the impact, if any, of adopting this statement. 11. Segment and Geographic Information Wind River operates in one industry segment --technology for embedded operating systems, and management used one measurement of profitability for its business. 10 Wind River markets its products and related services to customers in the United States, Canada, Europe and the Asia Pacific region. Internationally, Wind River markets its products and services primarily through its subsidiaries and various distributors. Revenues are attributed to geographic areas based on the country in which the customer is domiciled. The distribution of revenues and assets by geographic location is as follows:
Revenue Assets --------------------------------------------------- --------------------------------- Three months ended Nine months ended (In thousands) October 31, October 31, October 31, January 31, ------------------------ -------------------------- ----------------- ---------------- 1999 1998 1999 1998 1999 1999 ------------ ----------- ------------ ------------- ----------------- ---------------- United States $ 28,683 $ 23,715 $ 75,277 $ 63,843 $ 343,762 $ 298,739 Japan 7,859 4,489 19,423 11,540 10,167 12,043 Other International 8,059 5,995 22,981 17,342 18,897 18,931 ---------- --------- ---------- ----------- -------------- ------------ Consolidated $ 44,601 $ 34,199 $ 117,681 $ 92,725 $ 372,826 $ 329,713 ------------ ----------- ------------ ------------- ------------------ ------------ ------------ ----------- ------------ ------------- ------------------ ------------
Other International consists of the revenues and assets of operations in Europe and Asia Pacific excluding Japan. 12. Special Charges During the fiscal year ended January 31, 1999, Wind River paid $500,000 for a 10% interest in the common stock of XACT, Inc, which was accounted for under the cost method. During April 1999, Wind River entered into an asset purchase agreement with XACT pursuant to which Wind River acquired certain office and other equipment from XACT and revised the terms of an existing distribution agreement wtih XACT. Subsequently, but not pursuant to the asset purchase agreement, Wind River hired a significant number of XACT employees. As a result of these events, Wind River recognized a charge totaling $500,000 for the difference between the carrying amount of its investment and the net realizable value during the first quarter of fiscal year 2000. This charge is included in interest expense and other for the nine months ended October 31, 1999. In addition, the Company wrote-off $302,000 in connection with the costs associated with hiring the XACT employees, acquiring equipment and other assets of XACT and revising a second distribution agreement for another product wtih XACT. This charge is included in general and administrative expenses for the nine months ended October 31, 1999. During the second quarter of fiscal year 2000, Wind River incurred approximately $1.2 million associated with the retirement package of its former chief executive officer, who relinquished his responsibilities as president and chief executive officer as of June 24, 1999. This charge, which was incurred in the quarter ended July 31, 1999, is included in general and administrative expenses for the nine months ended October 31, 1999. Additionally, in connection with the acquisition of RouterWare, Wind River incurred approximately $930,000 in merger related expenses consisting primarily of transaction fees. During the third quarter of fiscal year 2000, Wind River incurred approximately $1.3 million in connection with hiring its new chief executive officer, and approximately $975,000 related to non-capitalizable costs associated with the implementation of an enterprise resource planning system. These charges are included in general and administrative expenses for the three months ended October 31, 1999. 11 13. Secured Promissory Note with a Stockholder On September 7, 1999, the Company's Chief Executive Officer, signed a secured promissory note ("Note") to borrow up to $2.4 million from the Company to purchase shares of Wind River's common stock. The note accrues interest at the rate of 5.98% per year, and is due on September 7,2008. As of October 31, 1999, Mr. St. Dennis had borrowed $1.0 million against the Note. This loan is full recourse and is secured by a pledge of shares of Wind River common stock owned by Mr. St. Dennis. The loan amount is outstanding as of October 31, 1999 and is reflected as a reduction of equity in the accompanying consolidated balance sheet. WIND RIVER SYSTEMS, INC. This report contains forward-looking statements. In some cases, these statements may be identified by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative of such terms and other comparable expressions. These statements involve known and unknown risks and uncertainties that may cause the results, levels of activity, performance or achievements of Wind River Systems, Inc. or its industry to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, Wind River's ability to compete successfully in its industry, to continue to develop products for new and rapidly changing markets, to integrate acquired business and technologies and others are discussed in Wind River's Annual Report on Form 10-K for the fiscal year ended January 31, 1999. Wind River disclaims any obligation to update any of the forward-looking statements contained in this report to reflect any future events or developments. The following discussions should be read in conjunction with the unaudited condensed consolidated financial statements and notes included elsewhere herein. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Wind River develops, markets, supports and provides consulting services for advanced software operating systems and development tools that allow customers to create complex, robust, real-time software applications for embedded computers. An embedded computer is a microprocessor that is incorporated into a larger device and is dedicated to responding to external events by performing specific tasks quickly, predictably and reliably. Wind River's flagship products, Tornado II(TM) and VxWorks, enable customers to enhance product performance, standardize designs across projects, reduce research and development costs and shorten product development cycles. On October 21, 1999, Wind River entered into an agreement to merge with Integrated Systems, Inc., an embedded operating systems and development tool software developer, in a transaction to be accounted for as a pooling of interests. Under the terms of the agreement, each issued and outstanding common share of Integrated Systems will be exchanged for .92 shares of Wind River common stock. Additionally, shares of approximately 4,847,000 Integrated Systems stock options will become options to purchase approximately 4,459,000 shares of Wind River stock. Consummation of the transaction is subject to certain conditions, including approval by the stockholders of each company. During the fiscal year ended January 31, 1999, Wind River paid $500,000 for a 10% interest in the common stock of XACT, Inc. which was accounted for under the cost method. During April 1999, Wind River entered into an asset purchase agreement with XACT pursuant to which Wind River acquired certain office and other equipment from XACT and revised the terms of an existing distribution agreement with XACT. Subsequently but not pursuant to the asset purchase agreement, Wind River hired a significant number of XACT employees. As a result of these events, Wind River believes the future operations and cash flows of XACT have become uncertain and that its original investment is not recoverable. Accordingly, Wind River has recognized a charge totaling $500,000 for the difference between the carrying amount of its investment and the net realizable value. On June 30, 1999, Wind River completed the acquisition of RouterWare, Inc., a California corporation. RouterWare develops and markets a suite of software modules used in data communications products such as bridges, routers, gateways, and remote access servers. Pursuant to the merger agreement, Wind River issued 730,923 shares of its common stock and reserved an additional 634,065 shares for issuance upon exercise of 12 outstanding employee stock options in exchange for all of the outstanding shares of RouterWare common stock including shares issuable upon exercise of employee stock options. Wind River recorded this transaction using the pooling-of-interests accounting method and all financial data of Wind River has been restated to include the historical financial information of RouterWare. In connection with the acquisition of RouterWare, Wind River incurred approximately $930,000 in merger related expenses consisting primarily of transaction fees. Results of Operations Operating results as a percentage of revenue for the three and nine month periods ended October 31, 1999 and 1998 are summarized in the following table:
Three months ended Nine months ended October 31, October 31, 1999 1998 1999 1998 ------------ ----------- ------------ ----------- Revenues: Products 73% 75% 72% 75% Services 27 25 28 25 -------------- -------------- -------------- ------------- Total revenues 100 100 100 100 -------------- -------------- -------------- ------------- Cost of revenues: Products 7 6 7 7 Services 12 10 12 10 -------------- -------------- -------------- ------------- Total cost of revenues 19 16 19 17 -------------- -------------- -------------- ------------- Gross margin 81 84 81 83 -------------- -------------- -------------- ------------- Operating expenses: Selling and marketing 36 34 36 35 Product development and engineering 17 14 18 15 General and administrative 11 6 10 6 -------------- -------------- -------------- ------------- Total operating expenses 64 54 64 56 -------------- -------------- -------------- ------------- Operating income 17 30 17 27 -------------- -------------- -------------- ------------- Other income (expense): Interest income 8 10 10 11 Interest expense and other, net (5) (6) (6) (7) -------------- -------------- -------------- ------------- Total other income 3 4 4 4 -------------- -------------- -------------- ------------- Income before provision for income taxes 20 34 21 31 Provision for income taxes 8 13 8 12 -------------- -------------- -------------- ------------- Net income 12% 21% 13% 19% -------------- -------------- -------------- ------------- -------------- -------------- -------------- -------------
13 REVENUES Total revenues for the three and nine months ended October 31, 1999 were $44.6 million and $117.7 million, respectively, compared to $34.2 million and $92.7 million for the same periods in fiscal 1999. The increase in total revenues of 30% and 27% , for the three and nine months ended October 31, 1999, respectively, is due to increases in revenues from both products and services. Revenues from the sale of products increased 26% and 22%, to $32.4 million and $84.6 million, for the three and nine months ended October 31, 1999, respectively, compared to $25.7 million and $69.1 million for the same periods in fiscal 1999. Product revenues primarily consist of development, OEM and run-time license fees. Wind River typically charges a one-time fee for development licenses, a separate OEM licenses fee for each customer development project and a run-time license fee for each copy of Wind River's operating system embedded in the customer's product. The increase in product revenues was due primarily to an increase in run-time license revenues, as customer developed products continue to be accepted by end-users, and to the expansion of our product lines resulting from research and development and the integration of products from acquired companies. Services revenue increased 44% and 40%, to $12.2 million and $33.0 million, for the three and nine months ended October 31, 1999, respectively, compared to $8.5 million and $23.6 million for the same periods in the prior fiscal year. The increase was primarily due to increases in revenue from (1) maintenance support agreements, both new and recurring, (2) professional services as the new business unit attracts additional customers; and (3) training resulting from the increase in Wind River's installed base of Tornado(TM) software development environment and software applications provided to customers. These increases were partially offset by a decline in revenues from engineering services. Total revenues from international sales for the three and nine months ended October 31, 1999 were $15.9 million and $42.4 million, respectively, compared to $10.5 million and $28.9 million for the same periods in the prior fiscal year. The increase of 52% and 47% for the three and nine months ended October 31, 1999 was primarily due to increased demand for our products and services in Japan and Europe. International revenues accounted for 36% of total revenues for both the three and nine months ended October 31, 1999, compared to 31% for both the same periods in the prior fiscal year. We expect international sales to continue to represent a significant portion of revenues, although the actual percentage may fluctuate from period to period. Wind River's international sales are denominated in the local currencies, and an increase in the relative value of the dollar against such currencies would reduce our revenues and backlog in dollar terms or make our products more expensive and, therefore, potentially less competitive in foreign markets. Wind River actively monitors its foreign currency exchange exposure and to date such exposures have not had a material impact on our results of operations. We enter into forward contracts to hedge the short-term impact of foreign currency fluctuations. In recent years, economic uncertainty and related fluctuations of certain foreign currencies against the dollar have occurred. These factors could adversely affect our future sales and operating expenses, which could have a material adverse effect on our business, results of operations and financial condition. Revenues from Asia Pacific sources including Japan represented 56% and 54% of international revenues for the three and nine months ended October 31, 1999, compared to 47% and 46% for the same periods in the prior fiscal year. See "Additional Risk Factors that may affect Future Results of Operations-Our International Business Activities Subject Us to Risks That Could Adversely Affect Our Business." COSTS OF REVENUES The overall cost of products and services as a percentage of total revenues was 19% for both the three and nine month periods ended October 31, 1999, compared to 16% and 17% for the same periods of fiscal 1999. 14 Product-related cost of sales as a percentage of product revenues was 10% and 9% for the three and nine month periods ended October 31, 1999, compared to 8% and 9% for each of the corresponding periods of the prior fiscal year. Product-related costs consist primarily of salaries and benefits for production employees, product media, and royalty payments to third parties for the use of their software and documentation and packaging. Amortization of technology purchased through acquisition of companies for the three and nine month periods ended October 31, 1999, was $168,000 and $504,000, respectively. We expect to expense approximately $168,000 on technology acquired through acquisitions over each of the next five quarters. Future acquisitions, including our contemplated acquisition of Integrated Systems, would increase this amount. Wind River's cost of revenue as a percentage of product revenues may be affected in the future by the amortization of purchased technology and distribution rights related to the introduction of new products, including Tornado II, Tornado for Embedded Internet products and Tornado for Managed Switches and by royalty payments to other third parties for sales related to their products. Service related cost of revenue as a percentage of service revenue was 43% for each of the three and nine month period ended October 31, 1999, compared to 39% and 40% for the same periods in fiscal year 1999. Service related cost of revenue consist primarily of personnel related costs associated with providing services to customers and the infrastructure to manage a services organization as well as costs to recruit, develop, and retain services professionals. The increase in costs of service revenues is due to our investment in developing new services offerings and the addition of new personnel and certified third party contractors to our professional services organization. We expect that cost of service revenues will increase in absolute dollars as we continue to increase our customer support staff, customer support capabilities and professional services organization. OPERATING EXPENSES Selling and marketing expenses were $15.9 million and $42.5 million for the three and nine month periods ended October 31, 1999, compared to $11.6 million and $32.8 million for the same periods in the prior fiscal year. As a percentage of total revenue, selling and marketing expenses were 36% for both the three and nine months ended October 31, 1999, compared to 34% and 35% for the corresponding periods in the prior fiscal year. The increase resulted primarily from the growth in the number of sales and marketing personnel and field engineers and related costs and increases in expenses related to marketing and advertising programs including costs for new product introductions, promotions and trade shows. We expect that sales and marketing expenses will continue to increase in absolute dollars as we continue to expand our sales and marketing staff. Product development and engineering expenses were $7.6 million and $21.4 million for the three and nine month periods ended October 31, 1999, compared to $4.8 million and $13.6 million for the same periods in the prior fiscal year. As a percentage of total revenue, product development and engineering expenses were 17% and 18% for the three and nine month periods ended October 31, 1999, compared to 14% and 15% for each of the corresponding periods in the prior fiscal year. The increase in product development and engineering expenses is primarily due to the increase in staff and associated support for engineers to expand and enhance Wind River's product line, including the costs associated with integrating the XACT engineering team Wind River hired in April 1999 and with the additional engineering staff as a result of the acquisition of RouterWare in June 1999. In addition, Wind River had $148,000 and $223,000 of funded research and development for the second and third quarters of fiscal year 2000. We believe that product development and engineering expenses will continue to increase in absolute dollars as we continue to invest in the development of new products, technologies, applications and product enhancements. General and administrative expenses were $4.8 million and $12.0 million for the three and nine months ended October 31, 1999, compared to $1.9 million and $5.5 million, respectively, for the corresponding periods in 15 the prior fiscal year. As a percentage of total revenue, general and administrative expenses were 11% and 10% for the three and nine months ended October 31, 1999, compared to 6% for each of the corresponding periods in the prior fiscal year. The increase during the third quarter of fiscal year 2000 was due primarily to (1) a charge of $1.3 million incurred in connection with hiring a chief executive officer; (2) the non-capitalizable costs associated with the implementation of an enterprise resource planning system ("ERP") of approximately $975,000; and (3) the growth in worldwide staff and infrastructure investments in the areas of information systems, finance and administration. We expect to continue to incur expenses related to our ERP system in the fourth quarter as we complete data conversions and maintain support during the start-up months of the system. The increase for the nine month period was attributed, in addition to the above, to (1) a charge of $1.2 million associated with the retirement package of the former chief executive officer during the second quarter; (2) the costs incurred for the acquisition of RouterWare of approximately $930,000; (3) the write-off of a distribution agreement with XACT because XACT is unable to complete the development of their product that is subject to the distribution agreement; and (4) the costs associated with hiring the XACT employees, acquiring equipment and other assets of XACT and revising a second distribution agreement for another product with XACT. Even excluding the charges related to the retirement of the former chief executive officer and the search for and hire of a new chief executive officer, RouterWare and XACT, we believe that general and administrative expenses will continue to increase in absolute dollars as we continue to invest in worldwide staff and infrastructure in the areas of information systems, finance and administration. Amortization of goodwill totaled $39,000 and $105,000 for the three and nine month periods ended October 31, 1999 compared to $27,000 and $80,000 for the same periods ended October 31, 1998. OTHER INCOME AND EXPENSES Interest income was $3.7 million and $11.2 million for the three and nine months ended October 31, 1999, respectively, compared to $3.4 million and $10.0 million for the same periods in the prior fiscal year. The increase in interest income was primarily due to a larger investment portfolio and restricted cash accounts as well as higher interest rates on invested balances. Total cash and cash equivalents, investments and restricted cash at October 31, 1999 and 1998 was approximately $282.4 million and $246.7 million, respectively. Interest expense and other, net was $2.2 million and $7.6 million for the three and nine months ended October 31, 1999, compared to $2.2 million and $6.6 million for the same periods in the prior fiscal year. During the first quarter of fiscal year 2000, Wind River recognized a charge totaling $500,000 relating to the difference between the carrying amount of our investment in XACT and the net realizable value. Wind River pays interest on the 5.0% Convertible Subordinated Notes, due in 2002 and maturities of certain issuance costs associated with these Notes. The interest on the Notes is payable on February 1 and August 1 of each year commencing February 1, 1998. The Notes mature on August 1, 2002. PROVISION FOR INCOME TAXES The effective tax rate for the three and nine months ended October 31, 1999 was 37.5% and 39.0%, compared to 38.9% and 39.0% for the same periods in the prior fiscal year. The overall changes in the effective tax rates result primarily from certain non-deductible acquisition costs related to RouterWare. In addition, the changes are attributed to the difference between foreign and domestic tax rates, the ratio of foreign taxable income to domestic taxable income and varying levels of available research and development credits. 16 LIQUIDITY AND CAPITAL RESOURCES At October 31, 1999, Wind River had working capital of approximately $62.7 million and cash and investments, excluding restricted cash of $35.5 million, of approximately $246.8 million, which include investments with maturities greater than one year of $173.0 million. During the first nine months of fiscal 2000, Wind River's operating activities provided net cash of $36.1 million due primarily to net income adjusted for depreciation and amortization, and changes in accrued compensation, income taxes payable and deferred revenue. These sources of cash were partially offset by the changes in accounts receivable and prepaid and other assets. During the first nine months of fiscal 2000, investing activities used net cash of $28.1 million due primarily to purchases of investments, the acquisition of equipment, and changes in restricted cash. These uses of cash were partially offset by cash provided relating to the sales of investments. During the nine months ended October 31, 1999, Wind River purchased fixed assets of $9.6 million including $3.3 million for its new financial databases, applications, and reporting systems. Restricted cash increased primarily due to the increased collateral funding required for the operating lease of Wind River's headquarters. The collateral consists of direct obligations of the United States government. Wind River's financing activities used net cash of $902,000 primarily for stock repurchases of approximately $4.0 million in the first quarter, substantially offset by cash provided by the issuance of common stock from employee stock option exercises and a purchase of stock by a member of the Board of Directors. During the nine months ended October 31, 1999, Wind River repurchased as part of its systematic stock repurchase program, 165,000 shares of its common stock at a cost of approximately $4.0 million. In June 1999, the Board of Directors rescinded all stock repurchase authorizations. We have not made any repurchases since March 17, 1999. On September 7, 1999, our chief executive officer signed a secured promissory note with the Company to borrow up to $2.4 million. As of October 31, 1999, the CEO had borrowed $1.0 million against this note. In fiscal 1998, Wind River entered into an operating lease agreement for its headquarters facility in Alameda, California. The building construction was completed in August 1999 and the final balance on the commitment amounted to $32.4 million. Operating lease payments commenced upon completion of construction and will vary based on the London interbank offering rate ("LIBOR".) In connection with the lease, Wind River was obligated to enter into a lease of its land in Alameda, California with the lessor of the building at a nominal rate and for a term of 55 years. If Wind River terminates or does not negotiate an extension of the building lease, the ground lease converts to a market rental rate. The lease provides Wind River with the option at the end of the lease term to either acquire the building at the lessor's original cost or arrange for the building to be acquired. Wind River has guaranteed the residual value associated with the building to the lessor of approximately 82% of the lessor's funding obligation. Wind River is also required to maintain fixed income securities with a custodian as a deposit to secure the performance of its obligations under the lease. In addition, under the terms of the lease, Wind River must maintain compliance with certain financial covenants. As of October 31, 1999, Wind River was in compliance with these covenants. Management believes that the contingent liability relating to the residual value guarantee will not have a material effect on Wind River's financial condition or results of operations. On March 18, 1998, Wind River entered into an accreting interest rate swap agreement to reduce the impact of changes in interest rates on its floating rate operating lease for its new corporate headquarters. This agreement effectively changes Wind River's interest rate exposure on its operating lease, which is based on one month LIBOR to a fixed rate of 5.9%. At October 31, 1999, the notional amount of the accreting interest rate swap was $28.5 million. The differential to be paid or received under this agreement will be recognized as an adjustment to rent expense related to the operating lease. The swap agreement matures at the same time as the 17 operating lease expires. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the term of their contracts) are generally limited to the amounts, if any, by which the counterparties' obligations exceed the obligations of Wind River. Wind River manages potential counterparty credit risk prior to entering into transactions by requiring that all counterparties have at least a AA Standard and Poor's, or Moody's equivalent, long-term senior debt rating. Wind River has an investment portfolio of fixed income securities that are classified as available-for-sale securities. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. Wind River attempts to limit this exposure by investing primarily in high-grade securities. Management believes Wind River's working capital and the cash flow from operations will be sufficient to meet its working capital requirements for planned expansion, product development and capital expenditures for the next twelve months. "YEAR 2000" ISSUES Many currently installed computer systems and software products include coding to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish dates prior to January 1, 2000, from dates on and after January 1, 2000. As a result, in approximately two weeks, computer systems and/or software used by many companies will need to be upgraded to comply with such "Year 2000" requirements. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. Wind River has conducted Year 2000 compliance reviews for current versions of its products. The review has included assessment, implementation, validation testing and contingency planning. Although Wind River believes the most current releases of its products will neither cease to perform nor generate incorrect or ambiguous data or results solely due to a change in date on or after January 1, 2000 and will calculate any information dependent on such dates in the same manner, and with the same functionality, data integrity and performance as such products on or before December 31, 1999 (collectively "Year 2000 Compliance"), Wind River provides no assurance that its software products contain all the necessary software routines and programs for the accurate calculation, display, storage and manipulation of data involving dates. Failure of Wind River's software products to contain all the necessary software routines and programs for the accurate calculation, display, storage and manipulation of data involving dates would have a material adverse effect on Wind River's business, financial condition and results of operation. The majority of Wind River's products are combined by its customers with other software programs or hardware devices not provided by Wind River. Such combination with other products that are not Year 2000 Compliant or modifications of Wind River's products by its customers may introduce Year 2000 Compliance issues for its customers. Wind River's customers' inability to remedy their own Year 2000 Compliance issues could affect their demand for Wind River's products, which may materially and adversely affect Wind River's business, financial condition and results of operations. Wind River continues to respond to customer concerns about prior versions of Wind River's products on a case-by-case basis. For certain older versions of Wind River's products which may not be Year 2000 compliant, Wind River is providing a patch to bring the product into compliance. To address Year 2000 issues, Wind River has an ongoing program designed to address the most critical Year 2000 items that would affect its products, its worldwide business systems, and the operations of research and development, finance, sales and marketing, manufacturing, and human resources. Assessment and remediation efforts regarding these critical items are proceeding in parallel. 18 Wind River has tested software obtained from third parties that is integrated into or with Wind River's products, and seeks assurances from vendors that licensed software is Year 2000 Compliant. Despite testing by Wind River, current customers and potential customers, and assurances from developers of products incorporated into Wind River's products, such products may contain undetected errors or defects associated with Year 2000 date functions. Known or unknown errors or defects in Wind River's products or third party products may result in delay or loss of revenue, diversion of development resources, damage to Wind River's reputation, or increased service and warranty costs. The occurrence of any of the foregoing could materially adversely affect Wind River's business, financial condition and results of operations. Wind River has worked with critical suppliers to determine that such suppliers' operations and the products and services they provide Wind River are Year 2000 Compliant and has monitored their progress towards Year 2000 Compliance. Wind River has obtained from its critical suppliers completed questionnaire that provides information regarding Year 2000 Compliance. The suppliers have rated themselves as currently Year 2000 Compliant or are engaged in programs to become Year 2000 Compliant. Wind River will continue to monitor the status of suppliers who have not completed their Year 2000 Compliance programs. Wind River has reviewed information published by its largest customers regarding Year 2000 Compliance. According to their statements, the customers believe that they will not incur any business interruptions related to Year 2000 Compliance issues. However, as is the case with other software companies, if Wind River's current or future outside customers or suppliers fail to achieve Year 2000 Compliance or if they divert technology expenditures to address their own Year 2000 Compliance problems, Wind River's business, financial condition or results of operations could be materially adversely affected. In 1997, Wind River commenced a worldwide financial business and production systems replacement project that uses software primarily from Oracle. The new systems are targeted at bringing Wind River's business and production computer systems into Year 2000 Compliance. Wind River anticipates its financial and production systems will be operational in the fourth quarter of fiscal 2000. In January 1998, Wind River initiated an analysis of the condition of Year 2000 readiness for the programs it uses for internal development. Wind River will modify or replace programs that were determined not to be Year 2000 Compliant. Wind River believes the software and hardware it uses internally or will have installed for internal use will comply with Year 2000 requirements and is not aware of any material operational issues or costs associated with preparing its internally used software and hardware for the Year 2000. However, Wind River provides no assurances that it will not experience serious, unanticipated negative consequences, including material costs caused by undetected errors or defects in the technology used in its internal systems. The occurrence of any of the foregoing could have a material adverse effect on Wind River's business, operating results or financial condition. Wind River has funded its Year 2000 Compliance review from operating cash flows and, except for its new financial reporting system, has not separately accounted for these costs. Wind River will incur additional amounts related to the Year 2000 Compliance review including administrative personnel to manage the review, outside contractors to provide technical advice and technical support for its products, product engineering and customer satisfaction. Excluding the implementation of our financial reporting system, we believe that we have completed approximately 95% of the work required to obtain Year 2000 Compliance. As of October 31, 1999, we have incurred approximately $240,000 on the Year 2000 Compliance project. We have incurred approximately $4.4 million to implement our financial reporting system, which was implemented on November 1, 1999. We believe the total cost incurred to implement this system will be approximately $5.7 million. Wind River's Year 2000 budget will be modified as necessary to address correction of any additional systems identified to be non-compliant. However, management does not anticipate that Wind River will incur other significant operating expenses or be required to invest heavily in computer systems improvements to be Year 2000 Compliant. 19 Wind River has developed contingency plans to be implemented as part of its efforts to identify and correct Year 2000 problems affecting its internal systems. Wind River expects to complete its contingency plans by the fourth quarter of fiscal 2000. Depending on the systems affected, these plans could include accelerated replacement of affected equipment or software, short to medium-term use of backup equipment and software, increased work hours for Company personnel or use of contract personnel to correct (on an accelerated schedule) any Year 2000 problems that arise or to provide manual workarounds for information systems, and similar approaches. If Wind River is required to implement any of these contingency plans, it could have a material adverse effect on Wind River's financial condition and results of operations. Wind River's ability to achieve Year 2000 Compliance and the level of incremental costs associated therewith could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to modify propriety software, and unanticipated problems identified in the ongoing compliance review. Such failures could have a material adverse affect on Wind River's business, financial condition and results of operations. EURO CURRENCY On January 1, 1999, several member countries of the European Union established fixed conversion rates between their sovereign currencies and adopted the Euro as their new common legal currency. Since that date, the Euro has traded on currency exchanges. The legacy currencies will remain legal tender in the participating countries for a transition period between January 1999 and January 1, 2002. During the transition period, non-cash payments can be made in the Euro, and parties can elect to pay for goods and services and transact business using either the Euro or a legacy currency. Between January 1, 2002 and July 1, 2002, the participating countries will introduce Euro notes and coins and withdraw all legacy currencies from circulation. The Euro conversion may affect cross-border competition by creating cross-border price transparency. Wind River is assessing its pricing and marketing strategy in order to insure that it remains competitive in a broader European market and is reviewing whether certain existing contracts will need to be modified. Wind River has assessed the ability of information technology systems to allow for transactions to take place in both the legacy currencies and the Euro and the eventual elimination of the legacy currencies and believes that its information technology systems will not be affected by the transition to the Euro. Wind River does not presently expect that introduction and use of the Euro will materially affect Wind River's foreign exchange exposures and hedging activities or will result in any material increase in costs to Wind River. Wind River's currency risk and risk management for operations in participating countries may be reduced as the legacy currencies are converted to the Euro. Final accounting, tax and governmental, legal and regulatory guidance is not available. Wind River will continue to evaluate issues involving introduction of the Euro. Based on current information and our current assessment, we do not expect that the Euro conversion will have a material adverse effect on our business, financial condition or results of operations. 20 ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS WIND RIVER'S BUSINESS FACES SIGNIFICANT RISKS. IF ANY OF THE EVENTS OR CIRCUMSTANCES DESCRIBED IN THE FOLLOWING RISKS ACTUALLY OCCURS, WIND RIVER'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED. THESE RISKS SHOULD BE READ IN CONJUNCTION WITH THE OTHER INFORMATION SET FORTH IN THIS REPORT. NUMEROUS FACTORS MAY CAUSE OUR REVENUES AND OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY FROM PERIOD TO PERIOD. Our revenues and operating results have fluctuated significantly in the past and may continue to do so in the future. If our quarterly or annual operating results do not meet the expectations of securities analysts and investors, the market price of our common stock could decline significantly. A number of factors, many of which are outside our control, may cause or contribute to these fluctuations, including: - the amount and timing of orders we receive; - changes in the length of our products' sales cycles, which increase as our customers' purchase decisions become more strategic and are made at higher management levels; - the success of our customers' products from which we derive our royalty revenues; - the mix of our revenues from the sale of services (which have lower margins than our revenue from the sale of products) as compared to products; - our ability to control our operating expenses, which we anticipate will continue to increase during the current fiscal year; - our ability to continue to develop, introduce and ship competitive new products and product enhancements quickly; - announcements, new product introductions and price reductions by our competitors; - our ability to manage costs for fixed-price consulting engagements; - changes in business cycles that affect the markets in which we sell our products; - economic conditions generally and in international markets, which historically have provided a significant portion of our revenues; and - foreign currency exchange rates. In addition, we often recognize a significant portion of our quarterly revenues from orders we receive and ship in the last month of the quarter and, as a result, we may not be able to forecast our revenues until late in the period. Further, our customers historically have purchased more of our products in our fourth fiscal quarter than in other quarters. A decrease in orders is likely to adversely and disproportionately affect our operating results, because a significant portion of our expenses are fixed and are based, in part, on our expectations of future revenues. Therefore, we have a limited ability to reduce expenses in response to a shortfall in anticipated revenues. We believe that period-to-period comparisons of our operating results may not be meaningful, and should not be relied on as an indication of our future performance. As part of our business strategy, we have acquired or made investments in several businesses, products and technologies that complement ours, and we anticipate that we will continue to do so in the future. We may experience difficulties integrating an acquired company's operations into ours. As a result, we may 21 divert management attention to the integration that would otherwise be available for the ongoing development of our business. Acquisitions have additional inherent risks, including: - difficulties assimilating acquired operations, technologies or products; - unanticipated costs; and - adverse effects on relationships with customers, suppliers and employees. ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE OUR STOCKHOLDERS AND INCREASE OUR INDEBTEDNESS. On October 21, 1999, Wind River entered into an agreement to merge with Integrated Systems, Inc., an embedded operating systems and development tool software developer, in a transaction to be accounted for as a pooling of interests. Under the terms of the agreement, each issued and outstanding common share of Integrated Systems will be exchanged for .92 shares of Wind River common stock. Additionally, approximately 4,847,000 Integrated Systems stock options will become options to purchase approximately 4,459,000 Wind River stock. Consummation of the transactions is subject to certain conditions, including approval by the stockholders of each company. The issuance of Wind River common stock in the merger could dilute our earnings per share. We have incurred and will continue to incur significant costs in connection with the proposed merger whether or not it actually occurs. The merger may not be completed in a timely manner or at all. If the merger does occur, we will face significant challenges integrating the two companies and other risks, including: - possible customer or supplier confusion; - a decrease in our stock price if the combined company fails to meet revenue and earnings expectations; - loss of key Integrated Systems employees critical to the ongoing success of Integrated Systems products and to the integration of the two companies' product lines; - the potential effect on the combined company of the lower rates of Integrated Systems' revenue and earnings growth relative to Wind River's over the last two years. In any acquisition, we may not be successful in integrating the businesses, products, technologies or personnel we acquire, and our failure to do so could materially adversely affect our business, financial condition and results of operations. Similarly, we cannot guarantee that our investments will yield a significant return if any. In addition, to finance acquisitions, we may issue equity securities, which may dilute our earnings per share, or incur significant indebtedness, which could materially adversely affect our results of operations. Certain of our acquisitions have been accounted for under the pooling-of-interests accounting method and financial reporting rules. To qualify these acquisitions as pooling-of-interests for accounting purposes, certain criteria established in opinions by the Accounting Principles Board and interpreted by the Financial Accounting Standards Board and the Securities and Exchange Commission must be met. These opinions are complex and the interpretation of them is subject to change. In addition, the availability of pooling-of-interests accounting treatment depends in part upon circumstances and events occurring after the acquisition. The failure of an acquisition to qualify for pooling-of-interests accounting treatment for financial reporting purposes for any reason would materially adversely affect our reported earnings and likely, the price of our common stock. 22 WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MAINTAIN OR INCREASE SALES OF OUR PRODUCTS. The embedded real-time software industry is highly competitive. We believe that our principal competition comes from companies that develop real-time operating systems in-house rather than purchase these systems from independent software vendors such as Wind River. We also compete with other independent software vendors, including Accelerated Technology, Inc., Mentor Graphics, Inc., Microsoft Corporation, Microware Systems Corporation, QNX Software Systems, Ltd., Integrated Systems, Inc., Sun Microsystems, Inc. and Symbian Inc. In addition, hardware or other software vendors could seek to expand their product offerings by designing and selling products that directly compete with or adversely affect sales of our products. Many of our existing and potential competitors have substantially greater financial, technical, marketing and sales resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, sale and support of their products. Moreover, our competitors may foresee the course of market developments more accurately than we do and could in the future develop new technologies that compete with our products or even render our products obsolete. Although we believe we presently have certain technological and other advantages over our competitors, maintaining these advantages will require a continued high level of investment in research and development, marketing and customer service and support. In addition, competitive pressures could cause us to reduce the prices of our products, run-time royalties and services, which would result in reduced profit margins. If we were unable to compete successfully, our business, financial condition and results of operations would be materially and adversely affected. OUR FAILURE TO RESPOND QUICKLY TO RAPID TECHNOLOGICAL CHANGE WITH PRODUCT OFFERINGS WILL ADVERSELY AFFECT OUR ABILITY TO COMPETE. The market for embedded real-time software is characterized by ongoing technological developments, evolving industry standards and rapid changes in customer requirements. Our success depends upon our ability to adapt and respond to these changes. We must continuously update our existing products to keep them current with customer needs, and must develop new products to take advantage of new technologies, emerging standards, and expanding customer requirements that could render our existing products obsolete. We have from time to time experienced delays in the development of new products and the enhancement of existing products, including, most recently, a delay in the development of our recently introduced product Tornado for Managed Switches. Such delays are commonplace in the software industry. We must achieve design wins with key customers because once a customer has designed a product with a particular operating system, that customer typically is reluctant to change its supplier, due to the significant costs associated with selecting a new supplier. If we cannot, for technical, legal, financial or other reasons, adapt or respond in a cost effective and timely manner to changing market conditions or customer requirements, our business and operating results would suffer. OUR OPERATING RESULTS ARE DEPENDENT UPON SALES OF A SMALL NUMBER OF PRODUCTS. Revenue from sales of our Tornado and VxWorks family of products and services has historically accounted for substantially all of our revenue, and we expect this concentration will continue in the foreseeable future. Any reduction in the demand for our Tornado or VxWorks family of products and services could materially adversely affect our operating results and cause the price of our common stock to decline. IF OUR NEW PRODUCTS ARE NOT ACCEPTED, OUR BUSINESS WOULD BE MATERIALLY ADVERSELY AFFECTED. Our future success is substantially dependent upon whether our new products gain wide market acceptance. We are continuously engaged in product development for new or changing markets. It is difficult to predict whether demand for any of these products will develop or increase in the future. In particular, we have invested significant time and effort, together with a consortium of industry participants, in the development of I2O, a new specification that is intended to create an open standard set of 23 interface specifications for high performance Input Output (I/O) systems. In parallel with this effort, we have developed IxWorks, a real-time operating system for use in conjunction with the I2O specification. The success of the I2O specification and the IxWorks product line depends heavily on its adoption by a broad segment of the industry. We have also spent, and continue to spend, substantial time and financial resources to develop software for Internet appliances and Internet infrastructure, including "Tornado for Managed Switches." The commercial Internet market has only recently begun to develop, is rapidly changing and is characterized by an increasing number of new entrants with competitive products. Moreover, there are an increasing number of new Internet protocols to which our products must be ported. It is unclear which of these competing protocols ultimately will achieve market acceptance. If the protocols upon which our Internet products are based ultimately fail to be widely adopted, our business, financial condition and results of operations may be materially and adversely affected. If these markets, or any other new market we target in the future, fail to develop, develop more slowly than anticipated or become saturated with competitors, if our products are not developed in a timely manner, or if our products and services do not achieve or sustain market acceptance, our business, financial condition and results of operations would suffer. A SIGNIFICANT PORTION OF OUR REVENUE IS DEPENDENT UPON THE MARKET ACCEPTANCE OF OUR CUSTOMERS' PRODUCTS. One of the key components of our business strategy is to increase revenue through royalty fees for each copy of our operating system embedded in the products our customers sell. Success of this strategy depends upon our ability to successfully negotiate royalty agreements with our customers and, in turn, their successful commercialization of the underlying products. To the extent that our customers are not successful, for whatever reason, our revenues may be reduced significantly and our business, financial condition and results of operations could be materially adversely affected. FAILURE TO MANAGE OUR GROWTH COULD SIGNIFICANTLY STRAIN OUR PERSONNEL AND OTHER RESOURCES. We have experienced, and expect to continue to experience, significant growth in our headcount and in the scope, complexity and geographic reach of our operations. Our future success will depend, in part, on our ability to continue to integrate new operations and personnel. To support this expansion, we must continue to hire, train, motivate and manage our workforce and improve our management controls, reporting systems and procedures. Our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. Failure to forecast our needs accurately or to manage our growth appropriately could materially adversely affect our business, financial condition and results of operations. OUR INTERNATIONAL BUSINESS ACTIVITIES SUBJECT US TO RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS. During the three and nine month period ended October 31, 1999 and the fiscal year ended January 31, 1999, we derived approximately 36%, 36% and 32%, respectively, of our total revenue from sales outside of North America. We expect that international sales will continue to generate a significant percentage of our total revenue in the foreseeable future, and we also expect to continue to make investments to further expand our international operations and to increase our direct sales force in Europe and Asia. Risks inherent in international operations include: - the imposition of governmental controls and regulatory requirements; - the costs and risks of localizing products for foreign countries; - unexpected changes in tariffs, import and export restrictions and other barriers and restrictions; 24 - greater difficulty in accounts receivable collection; - the restrictions of repatriation of earnings; - the burdens of complying with a variety of foreign laws; and - difficulties in staffing and managing foreign subsidiaries and branch operations. In addition, sales by Wind River's foreign subsidiaries are denominated in the local currency, and an increase in the relative value of the dollar against such currencies would reduce our revenues in dollar terms or make our products more expensive and, therefore, potentially less competitive in foreign markets. Gains and losses on the conversion to dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations. Although we enter into forward contracts to hedge the short-term impact of foreign currency fluctuations, foreign currency fluctuations could materially adversely affect Wind River's business, financial condition and results of operations. We rely on distributors for sales of our products in certain foreign countries. Accordingly, we are dependent on their ability to promote and support our products and, in some cases, to translate them into foreign languages. Wind River's international distributors generally offer products of several different companies, including in some cases products that are competitive with Wind River's products. We cannot predict that our international distributors will continue to market our products or provide them with adequate levels of support. Any changes in the relationships we have with our international distributors may have a material adverse effect on our business, financial condition and results of operations. WE SELL A SIGNIFICANT PORTION OF OUR PRODUCTS TO CUSTOMERS DEPENDENT UPON GOVERNMENT FUNDING, WHICH MAY NOT CONTINUE TO BE AVAILABLE. We have derived a portion of our revenues historically from sales of systems built to the VME (versabus module eurocard) standard. These systems typically are used in high cost, low volume applications, including military, telecommunications, space and research applications. Although we believe that revenues from sales of products designed for embedded systems applications (non-VME customers) will account for an increasing percentage of our revenues in the future, we do expect revenues from the VME market to continue to be significant for the foreseeable future. Academic institutions and defense industry participants, which generate most of our VME revenues, are dependent on government funding. Any unanticipated future termination of government funding of VME customers could have a material adverse effect on our business, financial condition and results of operations. WE ONLY RECENTLY BEGAN TO FOCUS ON OFFERING SOFTWARE CONSULTING SERVICES AND THEREFORE, MAY NOT BE AS EXPERIENCED IN THIS BUSINESS AS OTHERS. To be successful with our professional services business, we must overcome several factors, including: - services contracts can be fixed-price commitments, and if our cost of performing the services consistently and significantly exceeds the amount the customer has agreed to pay, it could materially adversely affect our business, financial condition and results of operations; and - our cost of services personnel and certified consultants is high which results in lower gross margins than our software business. If we cannot accurately estimate our costs and achieve milestones during consulting engagements and retain competent services personnel, our business, financial condition and results of operations could be materially adversely affected. 25 WE DEPEND ON OUR KEY PERSONNEL AND ON ATTRACTING QUALIFIED EMPLOYEES FOR OUR FUTURE SUCCESS. Our success depends to a significant degree upon the continued contributions of our senior management and key technical personnel, any of whom would be difficult to replace. The loss of these individuals could materially adversely affect our operations. We believe our future success will also depend on our ability to attract and retain additional highly skilled managerial, product development, marketing, sales, customer support and operations personnel to support our growing business. Competition for these personnel is intense, especially for engineers and especially in the San Francisco Bay Area where we maintain our headquarters. We cannot be certain that we will be successful in recruiting and retaining such personnel. Our failure to do so could materially adversely affect our business, financial condition and results of operations. OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY WOULD IMPAIR OUR COMPETITIVE POSITION. We believe that our continued success depends primarily upon continuing innovation, marketing, and technical expertise, as well as the quality of product support and customer relations. At the same time, our success is partially dependent upon the proprietary technology contained in our products. We currently rely on a combination of patents, copyrights, trademarks, trade secret laws, and contractual provisions to establish and protect our intellectual property rights in our products. We cannot be certain that the steps we take to protect our intellectual property will adequately protect our rights, that others will not independently develop or otherwise acquire equivalent or superior technology, or that we can maintain such technology as trade secrets. End user licenses of our software are frequently in the form of shrink wrap or click wrap license agreements, which are not signed by licensees, and these may be unenforceable in some cases. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which software piracy of our products exists, software piracy can be expected to be a persistent problem. In addition, employees, consultants, and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for any such breach. Finally, the laws of some of the countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as the laws of the United States or at all. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation to determine the validity of any claims, whether or not such litigation is determined in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks. Our failure to protect our intellectual property rights could have a material adverse effect on our business, and financial condition and results of operations. THIRD PARTY CLAIMS OF PATENT INFRINGEMENT COULD RESULT IN SUBSTANTIAL COSTS. We occasionally receive communications from third parties alleging patent infringement, and there is always the chance that third parties may assert infringement claims against us. Any such claims, with or without merit, could result in costly litigation, expense of significant resources to develop non-infringing technology, cause product shipment delays or require us to enter into royalty or licensing agreements. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner and on reasonable terms, our business, financial condition and results of operations would be materially adversely affected. We believe that our products and technology do not infringe on the intellectual property rights of others or upon intellectual property rights that may be granted in the future pursuant to pending applications. We also believe that we will not be required to obtain licenses of technology owned by other parties. DEFECTS IN OUR PRODUCTS COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND EXPOSE US TO SIGNIFICANT PRODUCT LIABILITY CLAIMS. Because of their complexity, software products, including Wind River's, have in the past and may in the future contain undetected or unresolved errors, particularly when first introduced or as new versions are released. Despite extensive testing, errors may be found in our current or future products or enhancements after commencement of commercial shipments. If this occurs, we may experience delay in or loss of market 26 acceptance and sales, product returns, diversion of development resources, injury to our reputation, and increased service and warranty costs, any of which could materially adversely affect our business, financial condition and results of operations. Our products are increasingly used in applications, such as network infrastructure, transportation, medical and mission-critical business systems, in which the failure of the embedded system could cause property damage, personal injury or economic loss resulting in product liability claims against us. Although our agreements with our customers typically contain provisions intended to limit our exposure to liability claims, these provisions may not be effective in doing so in all circumstances or in all jurisdictions. We maintain product liability insurance covering certain damages arising from use of our products, however such insurance may not adequately cover claims brought against us. Liability claims against us could require us to spend significant time and money in litigation and, if successful, to pay significant damages. As a result, such claims could damage our reputation and materially adversely affect our business, financial condition and results of operations. THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The "year 2000 problem" is typically the result of limitations of certain software written using two digits rather than four digits to define the applicable year resulting in certain programs recognizing "00" as the year 1900 rather than the year 2000. If software does not correctly recognize date information when the year changes to 2000, there could be an adverse impact on our operations. The risk exists primarily in four areas: - potential warranty or other claims from our customers, which may result in significant expense to Wind River; - failure of systems we use to run our business, which could disrupt our business operations; - failure of systems used by our suppliers, which could delay or affect the quality of our manufacturing or products; and - the potential failure of our products due to year 2000 problems, which may require that we replace any such products and potentially incur significant unexpected expenses. Although we believe our most current releases of our products, including third party software integrated into certain products, are year 2000 compliant, because all customer situations cannot be anticipated, we may see an increase in warranty and other claims as a result of the year 2000 transition. In addition, litigation regarding year 2000 compliance issues may increase. Significant customer claims or litigation, even if decided in our favor, could have a material adverse impact on our business, financial condition, or results of operations. The majority of our products are combined by our customers with other software programs or hardware devices not provided by us. These combinations with other products that are not year 2000 compliant or modifications of our products by our customers may introduce year 2000 issues for our customers. Our customers' inability to remedy their own year 2000 problems could affect their demand for our products which could materially and adversely affect our business, financial condition and results of operations. WE HAVE SUBSTANTIAL DEBT SERVICE AND PRINCIPAL REPAYMENT OBLIGATIONS, WHICH COULD MAKE IT DIFFICULT FOR US TO OBTAIN FINANCING. We sold $140 million of 5% convertible subordinated notes in 1997, which mature in 2002. This debt financing increased significantly both the ratio of our long-term debt to our total capitalization and our interest expenses. The degree to which we are leveraged could materially adversely affect our ability to obtain financing for working capital or acquisitions, should we need to do so. The notes are convertible into our 27 common stock at a price of $32.33 per share, and no notes have been converted to date. On August 1, 2002, we will be required either to pay off or refinance any unconverted notes. We do not know if we will be able to refinance the notes on favorable terms or at all. If a significant amount of the notes remains unconverted at maturity and we are unable to refinance the notes, the repayment would deplete our cash reserves significantly. OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE. The trading price of our common stock has been and is likely to be volatile. It could fluctuate widely in response to a variety of factors, including: - actual or anticipated variations in our operating results; - announcements of new products or significant events or transactions by us or our competitors; - changes in our industry; - changes in financial estimates by securities analysts; - pricing pressures; - general market conditions; - events affecting other companies that investors believe to be comparable to us; and - other events or factors that may be beyond our control. In recent years, the stock markets in general and the shares of technology companies in particular have experienced extreme price fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of the companies affected. Any change in investors' perception of our prospects could depress our stock price regardless of our results. Other broad market and industry factors may decrease our stock price, as may general political or economic conditions such as recessions or interest rate or currency fluctuations. In the past, following declines in the market price of a company's securities, securities class action litigation often has been instituted against the company. Litigation of this type, even if ultimately unsuccessful, could result in substantial costs and a diversion of management's time and focus, which could materially affect our business, financial condition and results of operations. 28 Item 3. Quantitative and Qualitative Disclosures about Market Risk INTEREST RATE SENSITIVITY Wind River's exposure to market risk for changes in interest rates relate primarily to its investment portfolio and long-term debt obligations. Wind River places its investments with high quality credit issuers and, by policy, limits the amount of credit exposure to any one issuer. As stated in its policy, Wind River's first priority is to reduce the risk of principal loss. Consequently, Wind River seeks to preserve its invested funds by limiting default risk, market risk and reinvestment risk. Wind River mitigates default risk by investing in only high quality credit securities that it believes to be low risk and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. Wind River believes an immediate 10 percent point move in interest rates affecting Wind River's floating and fixed rate financial instruments as of October 31, 1999 would have an immaterial effect on Wind River's pretax earnings. Wind River also believes the immediate 10 percent move in interest rates would have an immaterial effect on the fair value of Wind River's financial instruments. FOREIGN CURRENCY RISK Wind River transacts business in various foreign currencies, primarily in Japanese yen and certain European currencies. Wind River has established a foreign currency hedging program, utilizing foreign currency exchange contracts for its foreign currency transaction exposures in Japan and certain European countries. Under this program, increases or decreases in Wind River's foreign currency transactions are partially offset by gains and loses on the forward contracts, so as to mitigate the possibility of foreign currency transaction gains and losses. Wind River does not use forward contracts for trading purposes. All outstanding forward contracts at the end of a period are marked-to-market with unrealized gains and losses included in other income, net, and thus are recognized in income in advance of the actual foreign currency cash flows. As these forward contracts mature, the realized gains and losses are recorded and are included in net income as a component of other income, net. Wind River's ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature. The unrealized gains and losses on the outstanding forward contracts at October 31, 1999 were immaterial to Wind River's consolidated financial statements. Due to the short-term nature of the forward contracts, the fair value at October 31, 1999 was negligible. The realized gains and losses on these contracts as they matured were not material to the consolidated operations of Wind River. INTEREST RATE SWAP RISK Wind River entered into a 5.9% accreting interest rate swap to reduce the impact of changes in interest rates on its floating interest rate operating lease for its new headquarters. At October 31, 1999, the notional amount of the accreting interest rate swap was $28.5 million. The estimated fair value at October 31, 1999 was negligible. 30 EQUITY PRICE RISK Wind River owns 633,752 shares of common stock of e-SIM Ltd., formerly known as Emultek, Inc., an Israeli corporation. Wind River purchased the common stock prior to e-SIM's public offering. e-SIM went public in July 1998 at $7.50 per share, and at October 31, 1999, the closing price of e-SIM's stock was $6.13 per share. Wind River also owns 208,333 shares of common stock of Liberate Technologies, Inc, a Delaware corporation. Wind River purchased the stock prior to Liberate's public offering. Liberate went public in July 1999 at $16.00 per share, and at October 31, 1999, the closing price of Liberate's stock was $68.13 per share. Wind River values these investments using the closing price of the stock at the end of each month. As a result, Wind River reflects these investment on its balance sheet at October 31, 1999 at their market value of approximately $18.1 million in aggregate, with the unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income component of stockholders' equity. 31 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.25 Executive Employment Agreement between the Company and Thomas St. Dennis, dated as of September 7, 1999. 10.26 Secured Promissory Note, dated as of September 7, 1999 between the Company and Thomas St. Dennis. 10.27 Investment Propriety Security Agreement by Thomas St. Dennis in favor of the Company. 10.28 Non-Statutory Stock Option Agreement between the Company and Marla A. Stark. 10.29(1) Agreement and Plan of Merger and Reorganization dated as of October 21, 1999, among Wind River Systems, Inc., University Acquisition Corp. and Integrated Systems, Inc. 10.30(1) Stock Option Agreement dated as of October 21, 1999 between Wind River Systems, Inc. and Integrated Systems, Inc. 10.31(1) Form of Voting Agreement between Wind River Systems. Inc. and certain shareholders of Integrated Systems, Inc. 10.32(1) Form of Voting Agreement betweeen Integrated Systems, Inc. and certain stockholders of Wind River Systems, Inc. 10.33(2) Stockholder Rights Plan. 27.1 Financial Data Schedule (1) Incorporated by reference to the Company's Registration Statement on Form S-4 filed November 23, 1999 (No. 333-91545). (2) Incorporated by reference to the Company's Form 8-K, dated November 4, 1999. (b) REPORTS ON FORM 8-K The Company filed a report on Form 8-K, dated September 13, 1999, reporting the appointment of Thomas St. Dennis as Chief Executive Officer. The Company filed a report on Form 8-K, dated October 21, 1999, reporting the execution of a definitive merger agreement to acquire Integrated Systems, Inc. The Company filed a report on Form 8-K, dated November 4, 1999, reporting the Stockholder Rights Plan adopted by the Company on October 21, 1999 32 SIGNATURE Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized. WIND RIVER SYSTEMS, INC. Date: December 14, 1999 \s\ RICHARD W. KRABER ---------------------------- Richard W. Kraber Vice President and Chief Financial Officer 33 EX-10.25 2 EXHIBIT 10.25 WIND RIVER SYSTEMS, INC. EXECUTIVE EMPLOYMENT AGREEMENT FOR THOMAS ST. DENNIS THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is entered into as of September 7, 1999 (the "Effective Date"), by and between THOMAS ST. DENNIS ("Executive") and WIND RIVER SYSTEMS, INC. (the "Company"), a Delaware corporation. WHEREAS, the Company desires to employ Executive to provide personal services to the Company, and wishes to provide Executive with certain compensation and benefits in return for his services; and WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company in return for certain compensation and benefits, including the benefits provided in this Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, it is hereby agreed by and between the parties hereto as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 TITLE AND RESPONSIBILITIES. Subject to terms set forth herein, the Company agrees to employ Executive in the position of President and Chief Executive Officer and Executive hereby accepts employment effective as of September 7, 1999. During his employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods as set forth herein and reasonable periods of illness or other incapacity permitted by the Company's general employment policies) to the business of the Company. Notwithstanding the foregoing, the Company hereby agrees that Executive can devote a reasonable amount of his time during September 1999 in order to complete an orderly transition from his prior employer. 1.2 EXECUTIVE POSITION. Executive will serve in an executive capacity and shall perform such duties as are reasonably assigned from time to time by the Company's Board of Directors (the "Board"), consistent with the Bylaws of the Company and as are consistent with Executive's title and position. The Company shall use its best efforts to elect Executive to the Board for as long as Executive holds the position of President and Chief Executive Officer. 1.3 COMPANY EMPLOYMENT POLICIES. The employment relationship between the parties shall also be governed by the general employment policies and procedures of the Company, including those relating to protection of confidential information and assignment of inventions, except that when the terms of this Agreement differ from or are in conflict with the Company's general employment policies or procedures, this Agreement shall control. 1. 2. COMPENSATION AND BENEFITS. 2.1 SALARY. For services rendered hereunder, Executive shall receive an annualized base salary of four hundred thousand dollars ($400,000), less standard withholdings and deductions, payable in accordance with the Company's standard payroll procedures. Executive will be considered for annual changes in base salary in accordance with Company policy and subject to review and approval by the Board. 2.2 ANNUAL PERFORMANCE BONUS. Executive shall be eligible for an Annual Performance Bonus for each fiscal year Executive is employed by the Company as President and Chief Executive Officer. (a) DETERMINATION OF BONUS. The amount of Executive's Annual Performance Bonus will be determined by the Board based on certain measurable goals, including a target for on-plan performance and performance in excess of plan, established by mutual agreement between the Board and Executive within 90 days of the commencement of the Fiscal Year beginning February 1, 2000 and prior to 30 days before the commencement of each Fiscal Year thereafter (the "Performance Criteria"). If the Board and Executive cannot reach agreement within 90 days, reasonable Performance Criteria may be established in good faith by the Board. Executive's bonus will be paid out in accordance with the Company's standard practice. To be eligible to receive a bonus, Executive must remain in employment with the Company as President and Chief Executive Officer throughout the entire fiscal year, except as provided in Sections 2.2(b), and 6.6 below and except as provided under the terms of the Executive Officers' Change of Control Incentive and Severance Benefit Plan ("Change of Control Incentive Plan") attached hereto as Exhibit A. This bonus will be paid at the same time as other senior executive bonuses for the applicable fiscal year. (b) TARGET BONUS FOR ON-PLAN PERFORMANCE. Executive shall receive an annualized bonus of eight hundred thousand dollars ($800,000) for on-plan performance for the fiscal year ending January 31, 2000, prorated for the portion of the fiscal year during which the Executive is an employee of the Company. For Fiscal Year 2001 and subsequent years, Executive shall receive a bonus equal to two hundred percent (200%) of his then current base salary for on-plan performance as determined by the Board in accordance with the Performance Criteria. Bonuses paid for less than on-plan performance will be determined based on the degree of satisfaction of Performance Criteria on a pro-rated basis in the reasonable good faith determination of the Board. (c) BONUS FOR EXCEEDING PLAN. If Executive's performance exceeds plan, Executive will receive an additional performance bonus of up to fifty percent (50%) of the on-plan performance target bonus for that fiscal year as determined by the Board in accordance with the Performance Criteria. (d) BONUS FOR FISCAL YEAR 2001 AND SUBSEQUENT YEARS. For Fiscal Year 2001 and subsequent years, any bonus paid to Executive shall be subject to the provisions of a CEO Bonus Plan which shall be submitted to the Company's shareholders for approval in order to allow the Company to take a federal income tax deduction for all cash payments under the CEO Bonus Plan without being limited by Section 162(m) of the Internal Revenue Code. Failure to obtain such approval will not reduce any bonus required to be paid as set forth herein. 2. (e) GUARANTEED BONUS. With respect to the fiscal year ending January 31, 2000, Executive's bonus is guaranteed to be not less than three hundred twenty-two thousand two hundred dollars ($322,200). No other minimum bonus is guaranteed to Executive. 2.3 STOCK OPTIONS. Upon commencement of employment, Executive will be granted options to purchase an aggregate of 1,100,000 shares of common stock of the Company, subject to the terms of the Company's 1998 Equity Incentive Plan (the "Plan") and the Company's standard form of stock option agreement. These options will be incentive stock options to the maximum extent permissible under applicable law, with the remainder to be granted as nonstatutory stock options. The exercise price of the options shall be the closing price of the Company's common stock on September 3, 1999. The options shall vest over a four-year period, with one-fourth of the shares vesting on the first anniversary of Executive's date of hire with the Company and the remaining three-fourths of the shares vesting in equal shares on a monthly basis during years two through four of the Executive's employment with the Company. Vesting is subject to acceleration as provided in Section 6.6(e)(ii) below and under the terms of the Change of Control Incentive Plan. 2.4 LOAN AVAILABILITY FOR STOCK PURCHASE. The Company will loan Executive an amount, not to exceed $2,397,802.40 in aggregate principal amount, solely for the purpose of purchasing the Company's common stock in the public market, subject to the Company's insider trading policies for senior executives and directors of the Company. Executive may determine to draw the loan and purchase the Company's common stock at any time during the first six (6) months of his employment with the Company. The loan shall be governed by a Secured Promissory Note and Investment Property Security Agreement in the form of Exhibits B and C attached hereto. None of the common stock purchased by Executive under this Section 2.4 shall be subject to any purchase rights in favor of the Company; PROVIDED, HOWEVER, that the common stock purchased by Executive under this Section is encumbered pursuant to the terms of the Investment Property Security Agreement. 2.5 SIGN-ON BONUS. Within ten (10) days of the date that Executive signs this Agreement, the Company will pay Executive a sign-on bonus of nine hundred and fifty-nine thousand, one hundred and twenty dollars and ninety-six cents ($959,120.96), less standard withholdings and deductions. This amount represents forty percent (40%) of a stock purchase made by Executive totaling $2,397,802.40. 2.6 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which he is eligible under the terms and conditions of the standard Company benefits and compensation plans which may be in effect from time to time and provided by the Company to its executive level employees generally. 2.7 LIFE INSURANCE POLICY. The Company will provide Executive, at the Company's expense, with a five million dollar ($5,000,000) split dollar life insurance policy with joint survivorship, with terms substantially the same as those applied to the Company's prior Chief Executive Officer. 3. 2.8 BUSINESS EXPENSE REIMBURSEMENT. The Company shall reimburse Executive for all reasonable travel, entertainment or other expenses incurred by him in furtherance of or in connection with the performance of his duties hereunder, in accordance with the Company's expense reimbursement policy as in effect from time to time. 2.9 INDEMNIFICATION. The Company shall defend at its expense and indemnify Executive for claims, causes of action, demands, or suits relating to his employment or to any acts taken by him as an employee, officer, director and agent of the Company, to the fullest extent permitted by applicable law. In furtherance of this obligation, the Company and Executive have entered into an indemnity agreement in the form attached hereto as Exhibit D. 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 PROPRIETARY INFORMATION AGREEMENT. Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement, attached hereto as Exhibit E. 3.2 REMEDIES. Executive's duties under the Proprietary Information and Inventions Agreement shall survive termination of Executive's employment with the Company. Executive acknowledges that a remedy at law for any breach or threatened breach by Executive of the provisions of the Proprietary Information and Inventions Agreement would be inadequate and Executive therefore agrees that the Company shall be entitled to seek injunctive relief in case of any such breach or threatened breach. 4. OUTSIDE ACTIVITIES. 4.1 ACTIVITIES. Except with the prior written consent of the Board, and except as set forth in Section 1.1, Executive will not during his employment with the Company undertake or engage in any other employment, occupation or business enterprise, other than ones in which Executive is a passive investor or for which Executive serves as an outside member of the board of directors. Executive may engage in civic and not-for-profit activities so long as such activities do not materially interfere with the performance of his duties hereunder. 4.2 NON-COMPETITION. During his employment by the Company, except on behalf of the Company, Executive will not directly or indirectly, whether as an officer, director, stockholder, partner, proprietor, associate, representative, consultant, or in any capacity whatsoever engage in, become financially interested in, be employed by or have any business connection with any other person, corporation, firm, partnership or other entity whatsoever known by him to compete directly with the Company, anywhere in the world, in any line of business engaged in (or planned to be engaged in) by the Company; PROVIDED, HOWEVER, that anything above to the contrary notwithstanding, Executive may own, as a passive investor, securities of any entity, so long as Executive's direct holdings in any one such entity shall not in the aggregate constitute more than one percent (1%) of the voting securities of a public entity or more than five percent (5%) of the voting securities of a private entity. 5. OTHER AGREEMENTS. Executive represents and warrants that his employment by the Company will not conflict with and will not be constrained by any prior agreement or relationship with any third 4. party. Executive represents and warrants that he will not disclose to the Company or use on behalf of the Company any confidential information governed by any agreement with any third party except in accordance with an agreement between the Company and any such third party. During Executive's employment by the Company, Executive may use, in the performance of his duties, all information generally known and used by persons with training and experience comparable to his own and all information which is common knowledge in the industry or otherwise legally in the public domain. 6. TERMINATION OF EMPLOYMENT. 6.1 AT-WILL EMPLOYMENT. Executive's relationship with the Company is at-will. Both Executive and the Company shall have the right to terminate Executive's employment with the Company at any time with or without Cause and with or without notice, provided that Executive may be removed from any position he holds as a member of the Company's Board only in the manner provided by the Bylaws of the Company and applicable law. 6.2 TERMINATION BY COMPANY FOR CAUSE. If the Company terminates Executive's employment at any time for Cause (as defined below), Executive's salary shall cease on the date of termination and Executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation other than payment of accrued salary and vacation and such other benefits as are expressly required in such event by applicable law or the terms of applicable benefit plans. All stock options and any stock awards held by Executive shall cease vesting as of the date of termination and shall be exercisable thereafter only pursuant to the terms of the Company's applicable compensatory stock plans and the corresponding stock award agreements. (a) DEFINITION. For purposes of this Agreement, "Cause" shall mean the occurrence of one or more of the following: (i) Executive's conviction of a felony or a crime involving moral turpitude or dishonesty; (ii) Executive's participation in a fraud or act of dishonesty against the Company; (iii) Executive's intentional and material damage to the Company's property; (iv) material breach of this Agreement, the Company's written policies, or the Proprietary Information and Inventions Agreement that is not remedied by Executive within fourteen (14) days of written notice of such breach from the Board; or (v) conduct by Executive which demonstrates Executive's gross unfitness to serve the Company as President and Chief Executive Officer that is not remedied by Executive within fourteen (14) days of written notice of such unfitness from the Board. Executive's physical or mental disability or death shall not constitute Cause hereunder. 6.3 EXECUTIVE'S VOLUNTARY RESIGNATION. Executive may voluntarily terminate his employment with the Company at any time with or without notice, and with or without Good Reason (as defined below). In the event that Executive voluntarily terminates his employment other than for Good Reason, he will not be entitled to severance pay, pay in lieu of notice or any other such compensation other than payment of accrued salary and vacation and such other benefits as expressly required in such event by applicable law or the terms of applicable benefit plans. All stock options and any other stock awards held by Executive shall cease vesting as of the date of termination and shall be exercisable thereafter only pursuant to the 5. terms of the Company's applicable compensatory stock plans and the corresponding stock award agreements. 6.4 TERMINATION FOR DEATH OR DISABILITY. Executive's employment with the Company will be terminated in the event of Executive's death, or any illness, disability or other incapacity that renders Executive physically or mentally unable regularly to perform his duties hereunder for a period in excess of one hundred twenty (120) consecutive days or more than one hundred eighty (180) days in aggregate in any consecutive twelve (12) month period. Executive's inability to be physically present on the Company's premises shall not constitute a presumption that Executive is unable to perform such duties. In the event that Executive's employment with the Company is terminated for death or disability as described in this Section 6.4, Executive or Executive's heirs, successors, and assigns shall not receive any compensation or benefits other than payment of accrued salary and vacation and such other benefits as expressly required in such event by applicable law or the terms of applicable benefit plans. All stock options and any other stock awards held by Executive shall cease vesting as of the date of termination and shall be exercisable thereafter only pursuant to the terms of the Company's applicable compensatory stock plans and the corresponding stock award agreements. Notwithstanding the foregoing, the Board may elect, in its discretion, to deem the termination of Executive's employment under this Section 6.4 to be a termination by the Company without Cause and subject to the severance benefits as set forth in Section 6.6 below. 6.5 EXECUTIVE'S RESIGNATION FOR GOOD REASON. Executive may resign his employment for Good Reason so long as Executive tenders his resignation to the Company within ninety (90) days after the occurrence of the event which forms the basis for his termination for Good Reason. If Executive terminates his employment for Good Reason, Executive shall be eligible for severance benefits as set forth in Section 6.6 of this Agreement. (a) DEFINITION OF "GOOD REASON." For purposes of this Agreement, "Good Reason" shall mean any one of the following events which occurs on or after the commencement of Executive's employment without Executive's consent: (i) any reduction of Executive's then existing annual base salary or annual bonus target except such percentage reductions which are applied equally to all senior executives of the Company which the Board in good faith determines are necessary; (ii) any material reduction in the package of benefits and incentives, taken as a whole, provided to the Executive (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would materially and adversely affect the Executive's participation or reduce the Executive's benefits under any such plans, except to the extent that such benefits and incentives of all other senior executive officers of the Company are similarly reduced; (iii) any material diminution of the Executive's duties, responsibilities, authority, reporting structure, titles or offices, which is not cured within fourteen (14) days after Executive has provided written notice to the Board; (iv) any request that the Executive relocate to a work site that would increase the Executive's one-way commute distance by more than thirty-five (35) miles from his then principal residence, unless the Executive accepts such relocation opportunity; (v) any material breach by the Company of its obligations under this Agreement or any other written agreement with Executive that is not remedied by Company within thirty (30) days of written notice of such breach from Executive; or (vi) the indviduals who, at the beginning of any period of two (2) consecutive years, constitute the Board (the "Incumbent Directors") cease for any reason during such period to constitute at least a majority of the Board, unless the election or the nomination for election by the Company's stockholders of a Director first elected during such period was approved by the vote of at least two-thirds of the Incumbent Directors, whereupon such Director shall also be classified as an Incumbent Director. 6. 6.6 CONSULTING PERIOD, FEES, AND BENEFITS. In the event that the Company terminates Executive's employment without Cause, or if Executive terminates his employment with the Company for Good Reason, Executive agrees to provide services as a consultant under the terms set forth below, in exchange for the payment of certain consulting fees and severance benefits as described below. This Section 6.6 shall not apply if Executive's employment is terminated in a Change of Control Termination as defined in the Change of Control Incentive Plan. (a) CONSULTING PERIOD. As a condition to receiving any severance benefits, Executive agrees to make himself available to perform consulting services for a period of one (1) year following the termination of Executive's employment (the "Consulting Period"). (b) CONSULTING DUTIES. For purposes of this Agreement, "Consulting Services" refers to Executive's services to the Company in any area of his expertise, but Consulting Services will not include any services which are otherwise required in the discharge of Executive's duties as a member of the Company's Board. During the first three months of the Consulting Period, Executive agrees to provide Consulting Services for up to twenty (20) hours per month as reasonably scheduled by Executive and the Board. For the remainder of the Consulting Period, Executive agrees to provide Consulting Services for up to five (5) hours per month as reasonably scheduled by Executive and the Board. Executive further agrees to exercise the highest degree of professionalism and utilize his expertise and creative talents in performing Consulting Services. Executive agrees not to represent or purport to represent the Company in any manner whatsoever to any third party during the Consulting Period unless authorized by the Company in writing to do so. (c) CONSULTING FEES. During the Consulting Period, the Company will pay Executive fees equal to one (1) year of Executive's annual salary as of the termination of Executive's employment with the Company, in equal monthly installments during the Consulting Period ("Consulting Fees"). The Company will not deduct or withhold any amount from the Consulting Fees for taxes, social security, or other payroll deductions, but will instead issue Executive an IRS Form 1099 with respect to the Consulting Fees. Executive acknowledges that in performing Consulting Services, he will be serving as an independent contractor, not a Company employee, and he will be entirely responsible for the payment of all employment taxes and any other taxes due and owing as a result of the payment of Consulting Fees. Executive hereby indemnifies the Company and holds it harmless from any liability for any taxes, penalties, and interest that may be assessed by any taxing authority with respect to the Consulting Fees, with the exception of the employer's share of employment taxes subsequently determined to be applicable, if any. (d) NONCOMPETITION AND OTHER WORK ACTIVITIES. During the Consulting Period, in order to protect the trade secrets and confidential and proprietary information of the Company, except on behalf of the Company, Executive agrees that he will not, whether as an officer, director, stockholder, partner, proprietor, associate, representative, consultant, or in any capacity whatsoever engage in, become financially interested in, be employed by or have any business connection with any other person, corporation, firm, partnership or other entity whatsoever which directly competes with the Company, anywhere in the world, in the business of embedded software (including, but not limited to, Microsoft 7. Corporation, Integrated Systems, Inc., Accelerated Technology, Inc., Lynx Real Time Systems, Inc., Mentor Graphics, Inc., Microware Systems Corporation, QNX Software Systems, Ltd., and Sun Microsystems, Inc.); PROVIDED, HOWEVER, that Executive may own, as a passive investor, securities of any entity, so long as Executive's direct holdings in any such entity shall not in the aggregate constitute more than one percent (1%) of the voting securities of a public entity, or more than five percent (5%) of the voting securities of a private entity. Except as provided in the preceding sentence, during the Consulting Period Executive may engage in employment, consulting or other work relationships or professional or non-professional activities in addition to providing Consulting Services to the Company. The Company agrees to make reasonable arrangements to enable Executive to perform Consulting Services at such times and in such manner so that it does not unreasonably interfere with Executive's other such activities. (e) CONSULTING BENEFITS. During the Consulting Period, in addition to the Consulting Fees, Executive shall receive the following benefits ("Consulting Benefits"): (i) A bonus payment equal to a pro rata share of the target on-plan bonus for the fiscal year in which the termination of employment occurs, less standard or authorized withholdings and deductions, payable according to the Company's standard practice at the end of the Company's fiscal year; and (ii) Continued vesting of all unvested stock options held by Executive during the Consulting Period. (f) CESSATION. If Executive materially violates any provision of Sections 3, 6.6(b) or 6.6(d) of this Agreement or the Proprietary Information and Inventions Agreement, any severance payments or other benefits being provided to Executive will cease immediately and Executive will not be entitled to any further compensation from the Company. 7. CHANGE OF CONTROL. In the event of a Change of Control or a Change of Control Termination, as defined in the Change of Control Incentive Plan, Executive will be entitled to all benefits as set forth in the Change of Control Incentive Plan. The Company will not amend or discontinue the Change of Control Incentive Plan to adversely effect Executive's rights thereunder without Executive's express written consent. 8. RELEASE. Upon his termination of employment by the Company without Cause or by Executive for Good Reason, Executive shall enter into and execute a release substantially in the form attached hereto as Exhibit F (the "Release"), as a condition of Executive's receipt of any severance or consulting fees or benefits provided under this Agreement. Additionally, unless the Release is executed by Executive and becomes fully effective under the terms set forth in the Release, any acceleration of Executive's stock awards as provided in this Agreement shall not apply and Executive's stock awards in such event may be exercised following the date of Executive's termination only to the extent provided under their original terms in accordance with the applicable stock option plan, and the applicable option agreements. 9. GENERAL PROVISIONS. 9.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including, personal delivery by facsimile transmission or the third day after mailing by first class mail, to the Company at its primary 8. office location and to Executive at his address as listed on the Company payroll (which address may be changed by written notice). 9.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but such invalid, illegal or unenforceable provision will be reformed, construed and enforced in such jurisdiction so as to render it valid, legal, and enforceable consistent with the intent of the parties insofar as possible. 9.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 9.4 ENTIRE AGREEMENT. This Agreement, together with the Secured Promissory Note, Investment Property Security Agreement, Indemnity Agreement, Proprietary Information and Inventions Agreement, Executive Officers' Change of Control Incentive and Severance Benefit Plan, the Release Agreement and the stock option grants and agreements constitute the entire agreement between Executive and the Company and supersede any prior agreement, promise, representation, or statement written or otherwise between Executive and the Company with regard to the subject matters thereof. It is entered into without reliance on any promise, representation, statement or agreement other than those expressly contained or incorporated herein, and it cannot be modified or amended except in a writing signed by Executive and a duly authorized officer of the Company. 9.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 9.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 9.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and their respective successors, assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and he may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 9.8 ARBITRATION. To provide a mechanism for rapid and economical dispute resolution, Executive and the Company agree that any and all disputes, claims, or causes of action, in law or equity, arising from or relating to this Agreement (including the Release) or its enforcement, performance, breach, or interpretation, will be resolved, to the fullest extent permitted by law, by final, binding, and confidential arbitration held in San Francisco, California and conducted by Judicial Arbitration & Mediation Services/Endispute ("JAMS"), under its then-existing Rules and Procedures. Nothing in this Section 9.8 or in this Agreement is intended 9. to prevent either the Executive or the Company from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. The prevailing party in any such arbitration shall be entitled to recover his or its attorneys' fees and costs. 9.9 REMEDIES. Executive's duties under Sections 3, 6.6, and the Proprietary Information and Inventions Agreement shall survive termination of Executive's employment with the Company. Executive acknowledges that a remedy at law for any breach or threatened breach by Executive of the provisions of these sections and the Proprietary Information and Inventions Agreement would be inadequate, and Executive therefore agrees that the Company shall be entitled to seek injunctive relief in case of any such breach or threatened breach. 9.10 GOVERNING LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California as applied to contracts made and to be performed entirely within California. 10. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the Effective Date above written. WIND RIVER SYSTEMS, INC. By: /s/ Richard W. Kraber ------------------------------ [Name] Richard W. Kraber [Title] Vice President and Chief Financial Officer THOMAS ST. DENNIS /s/ Thomas St. Dennis - --------------------------------- 11. EXHIBIT A EXECUTIVE OFFICERS' CHANGE OF CONTROL INCENTIVE AND SEVERANCE BENEFITS PLAN (Previously filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended January 31, 1998) EXHIBIT B SECURED PROMISSORY NOTE (Included herein as Exhibit 10.26) EXHIBIT C INVESTMENT PROPERTY SECURITY AGREEMENT (Included herein as Exhibit 10.27) EXHIBIT D INDEMNITY AGREEMENT (Previously filed as Exhibit 10.1 to the Company's Form S-1 dated March 5, 1993, as amended) EXHIBIT E INVENTION ASSIGNMENT AND PROPRIETARY INFORMATION AGREEMENT In consideration of my employment or continued employment by Wind River Systems, Inc. (the "Company") and the compensation now and hereafter paid to me, I hereby represent and agree as follows: 1. I understand that the Company is engaged in a continuous program of research, development, production and marketing in connection with its business and that, as an essential part of my employment with the Company, I am expected to make new contributions to and create inventions of value for the Company. 2. I will promptly disclose in confidence to the Company all inventions, improvements, original works of authorship, formulas, processes, computer programs, databases and trade secrets ("Inventions"), whether or not patentable, copyrightable or protectable as trade secrets, that are made or conceived or first reduced to practice or created by me, either alone or jointly with others, during the period of my employment, whether or not in the course of my employment, which are related in any way to the business of the Company, similar to or competitive with the products or research and development activities of the Company, or sold to the Company's customers or potential customers. 3. I agree that all Inventions that (a) are developed using equipment, supplies, facilities or trade secrets of the Company, (b) result from work performed by me for the Company or (c) relate to the business or the actual or anticipated research or development of the Company, will be the sole and exclusive property of and are hereby assigned to the Company. I understand that the provisions of this paragraph do not apply to any Invention that qualifies fully under Section 2870 of the California Labor Code, which is set forth in the Appendix to this Agreement. 4. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act (17 U.S.C. Section 101). 5. I agree to assist the Company in every proper way to obtain for the Company and enforce patents, copyrights and other legal protections for the Company's Inventions in any and all countries. I will execute any documents that the Company may reasonably request for use in obtaining or enforcing such patents, copyrights and other legal protections. My obligations under this paragraph will continue beyond the termination of my employment with the Company, provided that the Company will compensate me at a reasonable rate after such termination for time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to E-1 secure my signature on any document needed in connection with the actions specified in this paragraph, I hereby irrevocably appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company. 6. I understand that my employment by the Company creates a relationship of confidence and trust with respect to any information of a confidential or secret nature that may be disclosed to me by the Company that relates to the business of the Company or to the business of any parent, subsidiary, affiliate, customer or supplier of the Company or other third party ("Proprietary Information"). Such Proprietary Information includes but is not limited to Inventions, ideas, data, know-how, developments, designs, techniques, marketing plans, product plans, business strategies, financial information, forecasts, personnel information and customer lists. 7. At all times, both during my employment and after its termination, I will keep all such Proprietary Information in confidence and trust, and I will not use or disclose any of such Proprietary Information without the written consent of the Company, except as may be necessary to perform my duties as an employee of the Company. Upon termination of my employment with the Company, I will promptly deliver to the Company all documents and materials of any nature pertaining to my work with the Company and I will not take with me any documents or materials or copies thereof containing any Proprietary Information. 8. I agree that during the period of my employment by the Company I will not, without the Company's express written consent, engage in any employment or business activity other than for the Company. I agree further that for the period of my employment with the Company and for one (l) year after the date of termination of my employment with the Company, I will not (i) induce any employee of the Company to leave the employ of the Company or (ii) solicit the business of any client or customer of the Company (other than on behalf of the Company). 9. I represent that my performance of all terms of this Agreement and my duties as an employee of the Company will not breach any invention assignment or proprietary information agreement with any former employer or other party. I represent that I will not bring with me to the Company or use in the performance of my duties for the Company any documents or materials of a former employer that are not generally available to the public. 10. To preclude any possible uncertainty, I have set forth on Exhibit A attached hereto a E-2 complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement. If disclosure of any such Invention on Exhibit A would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Inventions in Exhibit A but am to inform the Company that all such Inventions have not been listed for that reason. 11. This Agreement will be governed by and construed according to the laws of the State of California. If any provision of this Agreement is deemed unenforceable by law, then such provision will be deemed stricken from this Agreement, unless it can be modified by a court so as to render it enforceable consistent with the intent of the Agreement, and the remaining provisions will continue in full force and effect. I understand that in the event of a breach or threatened breach of this Agreement by me the Company may suffer irreparable harm and will therefore be entitled to injunctive relief to enforce this Agreement. 12. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes all prior representations. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. 13. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 14. I understand that this Agreement does not constitute a contract of employment or obligate the Company to employ me for any stated period of time. This Agreement shall be effected as of the first day of my employment by the Company. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT. EMPLOYEE COMPANY By: By: ---------------------------- --------------------------- Title: Title: ------------------------- ------------------------ Date: Date: -------------------------- ------------------------- E-3 EXHIBIT A PRIOR INVENTIONS The following is a complete list of all inventions or improvements relevant to the subject matter of my employment by Wind River Systems, Inc. (the "Company") that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company: / / No inventions or improvements. / / See below: ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- / / Due to confidentiality agreements with prior employer, I cannot disclose certain inventions that would otherwise be included on the above-described list. / / Additional sheets attached. ------------------------------- Employee Signature ------------------------------- Employee -- Print Name ------------------------------- Date 1. APPENDIX CALIFORNIA LABOR CODE SECTION 2870 (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable. EXHIBIT F RELEASE AGREEMENT I understand that my position with Wind River Systems, Inc. (the "Company") terminated effective ___________, _____ (the "Separation Date"). The Company has agreed that if I choose to sign this Release, the Company will pay me certain severance or consulting benefits pursuant to the terms of the Executive Employment (the "Agreement") between myself and the Company, and any agreements incorporated therein by reference. I understand that I am not entitled to such benefits unless I sign this Release and it becomes fully effective. I understand that, regardless of whether I sign this Release, the Company will pay me all of my accrued salary and vacation through the Separation Date, to which I am entitled by law. In consideration for the severance benefits I am receiving under the Agreement, I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, parents, subsidiaries, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are now known or unknown, arising at any time prior to the date I sign this Release. This general release includes, but is not limited to: all federal and state statutory and common law claims related to my employment or the termination of my employment or related to all claims for breach of contract, tort, wrongful termination, discrimination, wages or benefits, or claims for any form of equity or compensation. Notwithstanding the release in the preceding sentence, I am not releasing any right of indemnification I may have in my capacity as an employee, officer and/or director of the Company pursuant to any express indemnification agreement, nor am I releasing any rights I may have as an owner and/or holder of the Company's common stock and stock options. In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." If I am forty (40) years of age or older as of the Separation Date, I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"). I also acknowledge that the consideration given for the waiver in the above paragraph is in addition to anything of value to which I was already entitled. I have been advised by this writing, as required by the ADEA that: (a) my waiver and release do not apply to any claims that may arise after my signing of this Release; (b) I should consult with an attorney prior to executing this Release; (c) I have twenty-one (21) days within which to consider this Release (although I may choose to voluntarily execute this Release earlier); (d) I have seven (7) days following the execution of this release to revoke the Release; and (e) this Release will not be effective until the eighth day after this Release has been signed both by me and by the Company ("Effective Date"). Agreed: WIND RIVER SYSTEMS, INC. THOMAS ST. DENNIS By: --------------------------- ---------------------------------- [Name] [Title] Date: Date: ----------------- --------------------- EX-10.26 3 EXHIBIT 10.26 SECURED PROMISSORY NOTE $2,397,802 September 7, 1999 Alameda, California FOR VALUE RECEIVED, THOMAS ST. DENNIS ("BORROWER"), an employee of WIND RIVER SYSTEMS, INC. (the "COMPANY"), hereby unconditionally promises to pay to the order of the Company, in lawful money of the United States of America and in immediately available funds, the principal sum of Two Million Three Hundred Ninety Seven Thousand Eight Hundred Two and No/100 Dollars ($2,397,802) (the "LOAN"), or such lesser amount as shall have been advanced by the Company to the Borrower hereunder, together with accrued and unpaid interest thereon, each due and payable on the dates and in the manner set forth below. This Secured Promissory Note is the Note referred to in and is executed and delivered in connection that certain Executive Employment Agreement (the "EMPLOYMENT AGREEMENT") dated as of September 7, 1999, between Borrower and the Company, and is secured by the collateral identified and described as security therefor in that certain Investment Property Security Agreement dated as of even date herewith, and executed and delivered by Borrower in favor of the Company (as the same may from time to time be amended, modified or supplemented or restated, the "SECURITY AGREEMENT"). Additional rights of the Company are set forth in the Security Agreement. All capitalized terms used herein and not otherwise defined herein shall have the respective meanings given to them in the Security Agreement. It is the intent of Borrower and the Company that the purpose of this Note is not for consumer, family or household purposes. 1. PRINCIPAL REPAYMENT. The outstanding principal amount of the Loan shall be due and payable on September 7, 2008; PROVIDED, HOWEVER, that (a) Borrower may prepay the outstanding principal amount of the Loan at any time without premium, and (b) in the event Borrower sells or otherwise disposes of any of the shares of common stock constituting Collateral, as permitted under the Security Agreement, Borrower shall prepay that portion of the principal amount of the Loan, together with accrued interest thereon, equal to $19.03 multiplied by the number of shares of common stock constituting Collateral sold or otherwise disposed of. 2. INTEREST RATE. Borrower further promises to pay interest on the outstanding principal amount hereof from the date hereof until payment in full, which interest shall be payable at the rate of five and ninety-eight hundredths percent (5.98%) PER ANNUM or the maximum rate permissible by law (which under the laws of the State of California shall be deemed to be the laws relating to permissible rates of interest on commercial loans), whichever is less. Interest shall be due and payable annually in arrears on each anniversary date hereof, and shall be calculated on the basis of a 365 day year for the actual number of days elapsed. 3. PLACE/MANNER OF PAYMENT. All amounts payable hereunder shall be payable at the office of the Company unless another place of payment shall be specified in writing by the Company. 4. APPLICATION OF PAYMENTS. Payment on this Note shall be applied first to accrued interest, if any, and thereafter to the outstanding principal balance hereof. 5. DEFAULT. Each of the following events shall be an "EVENT OF DEFAULT" hereunder: (a) Borrower fails to pay timely any of the principal amount due under this Note or any accrued interest or other amounts due under this Note within fourteen (14) days after receipt of written notice of such failure; (b) Borrower files a petition or action for relief under any bankruptcy, insolvency or moratorium law or any other law for the relief of, or relating to, debtors, now or hereafter in effect, or makes any assignment for the benefit of creditors or takes any action in furtherance of any of the foregoing; (c) An involuntary petition is filed against Borrower (unless such petition is dismissed or discharged within sixty (60) days) under any bankruptcy statute now or hereafter in effect, or a custodian, receiver, trustee, assignee for the benefit of creditors (or other similar official) is appointed to take possession, custody or control of any property of Borrower; (d) Borrower defaults on any material obligation contained in the Security Agreement and fails to cure such default within fourteen (14) days after receipt of written notice of such default; or (e) Borrower's employment by or association with the Company is terminated for any reason or no reason, including, without limitation, death of Borrower. Upon the occurrence of an Event of Default hereunder, all unpaid principal, accrued interest and other amounts owing hereunder shall, at the option of the Company, and, in the case of an Event of Default pursuant to (b) or (c) above, automatically, be immediately due, payable and collectible by the Company pursuant to applicable law. Notwithstanding the foregoing, if an Event of Default has occurred under (e) above, this Note shall be accelerated only after six (6) months after such termination; PROVIDED, HOWEVER, that if an Event of Default has occurred under (e) above by reason of death or disability, this Note shall be accelerated only after twelve (12) months after such termination. The Company shall have all rights and may exercise any remedies available to it under law, successively or concurrently. Upon the occurrence of an Event of Default hereunder, Borrower expressly acknowledges and agrees that the Company shall have the right to offset any obligations of Borrower hereunder against salaries, bonuses or other amounts that may be payable to Borrower by the Company. 6. WAIVER. Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note, and shall pay all costs of collection when incurred, including, without limitation, reasonable attorneys' fees, costs and other expenses. The right to plead any and all statutes of limitations as a defense to any demands hereunder is hereby waived to the full extent permitted by law. 7. GOVERNING LAW. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction. 2. 8. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the benefit of and be binding on any successor to Borrower and shall extend to any holder hereof. Borrower shall not, without the prior written consent of holder, assign any of its rights or obligations hereunder. BORROWER: /s/ Thomas St. Dennis ---------------------------- THOMAS ST. DENNIS 3. EX-10.27 4 EXHIBIT 10.27 INVESTMENT PROPERTY SECURITY AGREEMENT THIS INVESTMENT PROPERTY SECURITY AGREEMENT ("SECURITY AGREEMENT") is made by THOMAS ST. DENNIS, an individual with a residence at _________________________________ ("PLEDGOR"), in favor of WIND RIVER SYSTEMS, INC., with its principal place of business at 1010 Atlantic Avenue, Alameda, California 94501 ("PLEDGEE"). WHEREAS, Pledgor has concurrently herewith executed that certain Secured Promissory Note (the "NOTE") in favor of Pledgee in the stated principal amount of Two Million Three Hundred Ninety-Seven Thousand Eight Hundred Two and No/100 Dollars ($2,397,802) to evidence the loan made to Pledgor for the purpose of purchasing one hundred twenty-six thousand (126,000) shares of Common Stock of Pledgee; and WHEREAS, Pledgee is willing to accept the Note from Pledgor, but only upon the condition, among others, that Pledgor shall have executed and delivered to Pledgee this Security Agreement; NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound, Pledgor hereby agrees as follows: ARTICLE 1 DEFINITIONS As used herein, the following terms shall have the following meanings: SECTION 1.1 "ACCOUNT" means the securities account No. _________, in the name of Thomas St. Dennis, held by Broker, as such securities account exists on the date hereof and as it may be constituted in the future. SECTION 1.2 "BROKER" means SG Cowen Securities, with an address at ________________________. SECTION 1.3 "COLLATERAL" means the Account, together with (a) any free credit balance or other money, now or hereafter credited to, or owing from Broker to Pledgor in respect of, the Account; (b) any money, securities (certificated or uncertificated), commodity contracts, instruments, documents, general intangibles, financial assets or other investment property distributed from the Account, now or in the future; (c) all books and records relating thereto; (d) all the proceeds of the sale, exchange, redemption or exercise of any of the foregoing thereof, including, without limitation, any dividend, interest payment or other distribution of cash or property in respect thereof; and (e) any rights incidental to the ownership of any of the foregoing, such as voting, conversion and registration rights and rights of recovery for violations of applicable securities laws. 1. ARTICLE 2 SECURITY INTEREST SECTION 2.1 GRANT OF SECURITY INTEREST. Pledgor hereby grants a security interest in all of Pledgor's right, title and interest in and to the foregoing Collateral, whether now or hereafter acquired or existing and wheresoever located. SECTION 2.2 SECURED OBLIGATIONS. The security interest granted by Pledgor to Pledgee herein secures all of Pledgor's obligations arising out of the Note and this Agreement (the "SECURED OBLIGATIONS"), and extends to any renewal, refinancing, refunding, extension or modification of any Secured Obligations on one or more and to any interest that accrues on any Secured Obligations before or after the bankruptcy of Pledgor. SECTION 2.3 CONTROL AGREEMENT. Simultaneously with the execution and delivery of this Agreement, Pledgor, Pledgee and Broker are parties to that certain Account Control Agreement of even date herewith (the "CONTROL AGREEMENT") for the purpose of perfecting the security interest granted by Pledgor to Pledgee herein. SECTION 2.4 VOTING AND TRADING RIGHTS. If no event of default as described in Section 5.1 below (an "EVENT OF DEFAULT") has occurred or is continuing, Pledgor may (a) exercise any voting or consensual rights that he may have as to any of the Collateral for any purpose which is not inconsistent with this Agreement; and (b) so long as Pledgor complies with Section 1 of the Note and uses proceeds of such sale or other disposition to prepay all or a portion of the Note, as the case may be, Pledgor may sell or otherwise dispose of any of the Collateral. If an Event of Default has occurred and is continuing, Pledgor shall cease making trades in the Account, Pledgee may exercise all voting or consensual rights as to any of the Collateral and Pledgor shall deliver to Pledgee all notices, proxy statements, proxies and other information and instruments relating to the exercise of such rights received by Pledgor from the issuers of any of the Collateral promptly upon receipt thereof and shall at the request of Pledgee execute and deliver to Pledgee any proxies or other instruments which are, in the reasonable judgment of Pledgee, necessary for Pledgee to validly exercise such voting and consensual rights. SECTION 2.5 SUBSEQUENT CHANGES AFFECTING COLLATERAL. Pledgor acknowledges that he has made his own arrangements for keeping informed of changes or potential changes affecting the Collateral (including, but not limited to, conversions, subscriptions, exchanges, reorganizations, dividends, offers, mergers, consolidations and shareholder meetings) and Pledgor agrees that Pledgee has no responsibility to inform Pledgor of such matters or to take any action with respect thereto even if any of the Collateral has been registered in the name of Pledgee or its agent or nominee. SECTION 2.6 RETURN OF COLLATERAL. The security interest panted to Pledgee hereunder shall not terminate and Pledgee shall not be required to return the Collateral to Pledgor or to terminate its security interest therein unless and until (a) the Secured Obligations have been fully paid or performed, (b) all of Pledgor's obligations hereunder have been fully paid or performed, and (c) Pledgor has reimbursed Pledgee for any expenses of returning the Collateral and filing 2. any termination statements and other instruments as are required to be filed in public offices under applicable laws. SECTION 2.7 TAX REPORTING. All items of income, gain, expense and loss recognized in the Account shall be reported to the Internal Revenue Service and all state and local taxing authorities under the name and taxpayer identification number of Pledgor. ARTICLE 3 REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and warrants to Pledgee as follows: SECTION 3.1 ENFORCEABILITY. This Agreement and the Control Agreement have been duly executed and delivered by Pledgor, constitute his valid and legally binding obligations and are enforceable in accordance with their respective terms against Pledgor. SECTION 3.2 NO CONFLICT. The execution, delivery and performance of this Agreement and the Control Agreement, the grant of the security interest in the Collateral hereunder and the consummation of the transactions contemplated hereby and thereby will not, with or without the giving of notice or the lapse of time, (a) violate any material law applicable to Pledgor, (b) violate any judgment, writ, injunction or order of any court or governmental body or officer applicable to Pledgor, (c) violate or result in the breach of any material agreement to which Pledgor is a party or by which any of his properties, including the Collateral, is bound, nor (d) violate any restriction on the transfer of any of the Collateral. SECTION 3.3 NO CONSENTS. No consent, approval, license, permit or other authorization of any third party (other than Broker) or any governmental body or officer is required for the valid and lawful execution and delivery of this Agreement and the Control Agreement, the creation and perfection of Pledgee's security interest in the Collateral or the valid and lawful exercise by Pledgee of remedies available to it under this Agreement, the Control Agreement or applicable law or of the voting and other rights granted to it in this Agreement or the Control Agreement except as may be required for the offer or sale of those items of Collateral which are securities under applicable securities laws. SECTION 3.4 ACCOUNT. The Account is a valid and legally binding obligation of Broker, the securities entitlements credited thereto are valid and genuine and Pledgor has provided Pledgee with a complete and accurate statement of the financial assets and the money credited to the account as of the date hereof SECTION 3.5 SECURITY INTEREST. Pledgor is the sole owner of the Collateral free and clear of all liens, encumbrances and adverse claims (other than those created by this Agreement) has the unrestricted right to grant the security interest provided for herein to Pledgee and has granted to Pledgee a valid and perfected first priority security interest in the Collateral free of all liens, encumbrances, transfer restrictions and adverse claims. 3. ARTICLE 4 COVENANTS. Pledgor hereby covenants and agrees with Pledgee that Pledgor shall: SECTION 4.1 DEFEND TITLE. Defend his title to the Collateral and the security interest of Pledgee therein against the claims of any person claiming rights in the Collateral against or through Pledgor and maintain and preserve such security interest so long as this Agreement shall remain in effect. SECTION 4.2 NO TRANSFER. Except as permitted under Section 2.4, neither withdraw any money or property from the Account; nor sell nor offer to sell nor otherwise transfer nor encumber any portion of the Collateral. SECTION 4.3 CONTROL AND CUSTOMER AGREEMENTS. Neither attempt to modify nor attempt to terminate the Control Agreement or the customer agreement with Broker under which the Account was established. SECTION 4.4 FURTHER ASSURANCES. (a) At Pledgor's expense, do such further acts and execute and deliver such additional conveyances, certificates, instruments, and other assurances as Pledgee may at any time request or require to protect, assure or enforce its interest, rights and remedies under this Agreement. (b) Promptly deliver any certificate or instrument constituting or representing any of the Collateral he may obtain possession of from time to time, to Broker for credit to the Account, forthwith duly endorsed in blank without restriction. (c) Promptly deliver to Broker any endorsements or instruments which may be necessary or convenient to transfer any financial assets held by Broker, which are registered in the name of, payable to the order of, or specially endorsed to Pledgor, to Broker or its securities intermediary or to one of their respective nominees. SECTION 4.5 NAME AND ADDRESS. Notify Pledgee at least thirty (30) days before he changes the address of his principal residence. SECTION 4.6 STATEMENTS. Cause Broker to send to Pledgee a complete and accurate copy of every statement, confirmation, notice or other communication concerning the Account that Broker sends to Pledgor. All information furnished by Pledgor concerning the Collateral or otherwise in connection with this Agreement, is or shall be at the time the same is furnished, accurate, correct and complete in all material respects, to Pledgor's knowledge. 4. ARTICLE 5 DEFAULT. SECTION 5.1 EVENTS OF DEFAULT. (a) If an Event of Default under and as defined in the Note occurs; or (b) If Pledgor fails to perform any obligation or violates any covenant contained in this Agreement or the Control Agreement, and such failure or violation continues for a period of fourteen (14) days after Pledgee requests Pledgor to remedy such failure or violation; or (c) If any representation or warranty made by Pledgor in this Agreement or the Control Agreement or any other document delivered to Pledgee by contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein not misleading in light of the circumstances in which they were made; Pledgor shall be in default and Pledgee shall have, in addition to any other remedies available to it under Section 5.2 below and under the law or any agreement, the rights and remedies of a secured party under Article 9 of the Uniform Commercial Code of California (the "UNIFORM COMMERCIAL CODE"). SECTION 5.2 REMEDIES. (a) If an Event of Default has occurred and is continuing, Pledgee may, in its discretion: (i) deliver a notice of exclusive control under the Control Agreement to Broker; (ii) cause the Account to be reregistered in its sole name or transfer the Account to another broker/dealer in its sole name; (iii) remove any Collateral from the Account and register such Collateral in its name or in the name of its broker/dealer, agent or nominee or any of the nominees; (iv) exchange certificates representing any of the Collateral for certificates of larger or smaller denominations; (v) exercise any voting, conversion, registration, purchase or other rights of a holder of any of the Collateral and any reasonable expense of such exercise shall be deemed to be an expense of preserving the value of such Collateral; and (vi) collect, including by legal action, any notes, checks or other instruments for the payment of money included in the Collateral and compromise or settle with any obligor of such instruments. (b) If notice of time and place of any public sale of the Collateral or the time after which any private sale or other intended disposition is required by the Uniform Commercial Code, Pledgor acknowledges that five (5) days' advance notice thereof will be a reasonable notice. Pledgee shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (c) If, under the Uniform Commercial Code, Pledgee may purchase any part of the Collateral, it may in payment of any part of the purchase price thereof, cancel any part of the Secured Obligations. 5. (d) If any of the Collateral is sold on credit or for future delivery, it need not be retained by Pledgee until the purchase price is paid and Pledgee shall incur no liability if the purchaser fails to take up or pay for such Collateral. In case of any such failure, such Collateral may be sold again. (e) Pledgor shall execute and deliver to the purchasers of the Collateral all instruments and other documents necessary or proper to sell, convey and transfer title to such Collateral and, if approval of any sale of Collateral by any governmental body or officer is required, Pledgor shall prepare or cooperate fully in the preparation of and cause to be filed with such governmental body or officer all necessary or proper applications, reports and forms and do all other things necessary or proper to expeditiously obtain such approval. (f) Any cash held by Pledgee as Collateral and all cash proceeds of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of Pledgee, be held by Pledgee as collateral for, or then or at any time thereafter be applied (after payment of any amounts payable to Pledgee pursuant to Article 4 above) in whole or in part against, all or any part of the Secured Obligations in such order as Pledgee may elect. Any surplus of such cash or cash proceeds held by Pledgee and remaining after payment in full of all of Pledgee's expenses hereunder and the Secured Obligations shall be paid over to Pledgor or to whomever may be lawfully entitled to receive such surplus. SECTION 5.3 APPOINTMENT OF PLEDGEE AS AGENT. Pledgor hereby appoints and constitutes Pledgee, its successors and assigns, as his agent and attorney-in-fact with the power, after and during the continuance of an Event of Default, to carry out the provisions of this Agreement and take any action or execute any instrument that Pledgee considers necessary or convenient for such purpose, including the power to endorse and deliver checks, notes and other instruments for the payment of money in the name of and on behalf of Pledgor, to endorse and deliver in the name of and on behalf of Pledgor securities certificates and execute and deliver in the name of and on behalf of Pledgor instructions to the issuers of uncertificated securities, and to execute and deliver in the name of and on behalf of Pledgor financing statements (which may be photocopies of this Agreement) and continuations and amendments to financing statements in the State of California or elsewhere and Forms 4, 5, 144 and Schedules 13D and 13G with the United States Securities and Exchange Commission. This appointment is coupled with an interest and is irrevocable and will not be affected by the death or bankruptcy of Pledgor nor by the lapse of time. If Pledgor fails to perform any act required by this Agreement, Pledgee may perform such act in the name of and on behalf of Pledgor and at his expense. Pledgor hereby consents and agrees that the issuers of or obligors of the Collateral or any registrar or transfer agent or trustee for any of the Collateral shall be entitled to accept the provisions hereof as conclusive evidence of the rights of Pledgee to effect any transfer pursuant to this Agreement and the authority granted to Pledgee herein, notwithstanding any other notice or direction to the contrary heretofore or hereafter given by Pledgor, or any other person, to any of such issuers, obligors, registrars, transfer agents, or trustees. SECTION 5.4 IMPACT OF REGULATIONS. Pledgor acknowledges that compliance with the Securities Act of 1933 and the rules and regulations thereunder and any relevant state securities laws and other applicable laws may impose limitations on the right of Pledgee to sell or otherwise dispose of securities included in the Collateral. For this reason, Pledgor hereby 6. authorizes Pledgee to sell any securities included in the Collateral in such manner and to such persons as would, in the judgment of Pledgee, help to ensure that the transfer of such securities will be given prompt and effective approval by any relevant regulatory authorities and will not require any of the securities to be registered or qualified under any applicable securities laws. Pledgor understands that a sale under the foregoing circumstances may yield a substantially lower price for such Collateral than would otherwise be obtainable if the same were registered and sold in the open market, and Pledgor shall not attempt to hold Pledgee responsible for selling any of the Collateral at an inadequate price even if Pledgee accepts the first offer received or if only one possible purchaser appears or bids at any such sale. If Pledgee shall sell any securities included in the Collateral at such sale, Pledgee shall have the right to rely upon the advice and opinion of any qualified appraiser or investment banker as to the commercially reasonable price obtainable on the sale thereof but shall not be obligated to obtain such advice or opinion. Pledgor hereby assigns to Pledgee any registration rights or similar rights Pledgor may have from time to time with respect to any of the Collateral. ARTICLE 6 MISCELLANEOUS. SECTION 6.1 ENTIRE AGREEMENT. This Agreement, the schedules and exhibits hereto and the agreements and instruments required to be executed and delivered hereunder set forth the entire agreement of the parties with respect to the subject matter hereof and supersede and discharge all prior agreements (written or oral) and negotiations and all contemporaneous oral agreements concerning such subject matter and negotiations. There are no oral conditions precedent to the effectiveness of this Agreement. SECTION 6.2 NON-WAIVER. Neither the failure of nor any delay by any party to this Agreement to enforce any right hereunder or to demand compliance with its terms is a waiver of any right hereunder. No action taken pursuant to this Agreement on one or more occasions is a waiver of any right hereunder or constitutes a course of dealing that modifies this Agreement. SECTION 6.3 WAIVERS. No waiver of any right or remedy under this Agreement shall be binding on any party unless it is in writing and is signed by the party to be charged. No such waiver of any right or remedy under any term of this Agreement shall in any event be deemed to apply to any subsequent default under the same or any other term contained herein. SECTION 6.4 AMENDMENTS. No amendment, modification or termination of this Agreement shall be binding on any party hereto unless it is in writing and is signed by the party to be charged. SECTION 6.5 SEVERABILITY. If any term or provision set forth in this Agreement shall be invalid or unenforceable, the remainder of this Agreement, or the application of such terms or provisions to persons or circumstances, other than those held invalid or unenforceable, shall be construed in all respects as if such invalid or unenforceable term or provision were omitted. SECTION 6.6 SUCCESSORS. The terms of this Agreement shall be binding upon Pledgor, his heirs and personal representatives, and shall inure to the benefit of Pledgee, its corporate 7. successors and any holder, owner or assignee of any rights in the Note and will be enforceable by them as their interest may appear. SECTION 6.7 NOTICES. Any notice, request or other communication required or permitted to be given under this Agreement shall be in writing and deemed to have been properly given when delivered in person, or when sent by telecopy or other electronic means and electronic confirmation of error free receipt is received or two days after being sent by certified or registered United States mail, return receipt requested, postage prepaid, addressed to the party at the address set forth next to such parties' signature hereto and with such copies delivered, transmitted or mailed to such persons as are specified therein. Any party may change his address for notices in the manner set forth above. SECTION 6.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing and delivering one or more counterparts. SECTION 6.9 GOVERNING LAW, ETC.This Agreement shall be governed by and construed in accordance with the law of the State of California. [Remainder of page intentionally left blank 8. IN WITNESS WHEREOF, the Pledgor has signed this Investment Property Security Agreement as of the date first written above. THOMAS ST. DENNIS /s/ Thomas St. Dennis --------------------------- Residence: --------------------------- --------------------------- --------------------------- Accepted as of this 7th day of September 1999 WIND RIVER SYSTEMS, INC. By: /s/ Richard W. Kraber -------------------------------------------- Name: Richard W. Kraber -------------------------------------------- Title: Vice President and Chief Financial Officer -------------------------------------------- 9. EX-10.28 5 EXHIBIT 10.28 WIND RIVER SYSTEMS, INC. STOCK OPTION GRANT NOTICE (OUTSIDE OF THE 1998 EQUITY INCENTIVE PLAN) WIND RIVER SYSTEMS, INC. (the "Company") hereby grants to Optionee a nonstatutory stock option to purchase the number of shares of the Company's common stock (the "Shares") set forth below. This option is not intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). This option is not subject to, and is granted outside of the Company's 1998 Equity Incentive Plan. This option is subject to all of the terms and conditions as set forth herein and in Attachments I and II, which are incorporated herein in their entirety. OPTIONEE: Marla Ann Stark DATE OF GRANT: October 8, 1999 SHARES SUBJECT TO OPTION: 400,000 EXERCISE PRICE PER SHARE: $18.375 EXPIRATION DATE: October 7, 2009 - ------------------------------------------------------------------------------- VESTING SCHEDULE 25% of the shares subject to this option shall vest on October 8, 2000. 1/48th of the shares shall vest monthly thereafter. - ------------------------------------------------------------------------------- PAYMENT: Payment of the option exercise price may be made in cash, check or any other method provided in the Stock Option Agreement. ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionee acknowledges receipt of, and understands and agrees to, this Grant Notice and the Stock Option Agreement. Optionee further acknowledges that as of the Date of Grant, this Grant Notice and the Stock Option Agreement set forth the entire understanding between Optionee and the Company regarding the acquisition of Shares pursuant to the option and supersedes all prior oral and written agreements on that subject with the exception of the following agreements only: OTHER AGREEMENTS: _______________________________________________ _______________________________________________ _______________________________________________ WIND RIVER SYSTEMS, INC. OPTIONEE By:/S/ Richard W. Kraber /S/Marla Ann Stark - ---------------------------------- ----------------------------------- Signature Title: CFO ---------------------------- Date: 12-3-99 ----------------------------- Attachment I: Stock Option Agreement Attachment II: Notice of Exercise WIND RIVER SYSTEMS, INC. STOCK OPTION AGREEMENT Pursuant to the Grant Notice and this Stock Option Agreement, Wind River Systems, Inc. (the "Company") has granted you an option to purchase the number of shares of the Company's common stock ("Shares") indicated in the Grant Notice at the exercise price indicated in the Grant Notice. This option is granted in connection with and in furtherance of the Company's compensatory benefit plan for the Company's employees (including officers), directors or consultants. The details of this option are as follows: 1. VESTING. Subject to the limitations contained herein, this option will vest as provided in the Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. For purposes of this Option Agreement, Continuous Service shall mean that your service with the Company or an affiliate of the Company, whether as an employee, director or consultant, is not interrupted or terminated. Furthermore, your Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which you render service to the Company or an affiliate as an employee, director or consultant or a change in the entity for which you render such service, provided that there is no interruption or termination of your Continuous Service. For example, a change in status from an employee to a consultant will not constitute an interruption of Continuous Service. The Board of Directors or the Chief Executive Officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. 2. METHOD OF PAYMENT. Payment of the exercise price by cash or check is due in full upon exercise of all or any part of this option, provided that you may elect, to the extent permitted by applicable law and the Grant Notice, to make payment of the exercise price under the following alternatives, (i) provided that at the time of exercise the Company's stock is publicly traded and quoted regularly in the Wall Street Journal: payment by delivery of already-owned Shares, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interests, which Shares shall be valued at their fair market value on the date of exercise, or (ii) payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Shares, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. 3. WHOLE SHARES. This option may be exercised only for whole Shares. 4. TERM. The term of this option commences on the Date of Grant and expires upon the earliest of: 1. (a) the tenth (10th) anniversary of the Date of Grant; (b) eighteen (18) months after your death, if you die while an employee, director or consultant of the Company or within three (3) months after termination of your Continuous Service; (c) twelve (12) months after the termination of your Continuous Service due to your permanent and total disability (within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended); or (d) three (3) months after the termination of your Continuous Service for any reason other than death or disability. 5. EXERCISE. (a) You may exercise the vested portion of this option during its term by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. (b) By exercising this option you agree that: (i) As a condition to any exercise of this option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of this option; (2) the lapse of any substantial risk of forfeiture to which the Shares are subject at the time of exercise; or (3) the disposition of Shares acquired upon such exercise. (ii) Regardless of whether the offer and sale of Shares subject to this option have been registered under the Securities Act of 1933, as amended (the "1933 Act") or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates) if in the judgment of the Company and its counsel such restrictions are necessary or desirable in order to achieve compliance with the provisions of the 1933 Act, the securities laws of any state or any other law. 6. TRANSFERABILITY. This option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your lifetime only by you. 7. CAPITALIZATION ADJUSTMENTS. If any change is made in the Shares subject to this option without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the option will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such option. Such adjustments shall be made by the Board of Directors of the Company, determination of which shall be final, binding and conclusive. (The 2. conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) 8. CHANGE OF CONTROL. Your option is subject to accelerated vesting in accordance with the provision of the Wind River Systems, Inc. Executive Officers' Change of Control Incentive and Severance Benefit Plan, as such Plan may apply to you. 9. PURCHASE FOR INVESTMENT; RIGHTS OF HOLDER ON SUBSEQUENT REGISTRATION. Unless the Shares to be issued upon exercise of your option have been effectively registered under the 1933 Act, the Company shall be under no obligation to issue any Shares covered by the option unless the person who exercises such option, whether such exercise is in whole or in part, shall give a written representation and undertaking to the Company which is satisfactory in form and scope to counsel for the Company and upon which, in the opinion of such counsel, the Company may reasonably rely, that he or she is acquiring the Shares issued to him or her pursuant to such exercise of the option for his or her own account as an investment and not with a view to, or for sale in connection with, the distribution of any such Shares, and that he or she will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the 1933 Act, or any other applicable law, and that if Shares are issued without such registration a legend to this effect may be endorsed on the securities so issued. In the event that the Company shall, nevertheless, deem it necessary or desirable to register under the 1933 Act or other applicable statutes any Shares with respect to which an option shall have been exercised, or to qualify any such Shares for exemption from the 1933 Act or other applicable statutes, then the Company shall take such action at its own expense and may require from each participant such information in writing for use in any registration statement, prospectus, preliminary prospectus or offering circular as is reasonably necessary for such purpose and may require reasonable indemnity to the Company and its officers and directors from such holder against all losses, claims, damages and liabilities arising from such use of the information so furnished and caused by any untrue statement of any material fact required to be stated therein or necessary to make the statement therein not misleading in light of the circumstances under which they were made. 10. OPTION NOT AN EMPLOYMENT CONTRACT. This option is not an employment contract, and nothing in this option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. The Company may terminate your employment at any time, for any reason or no reason, with or without cause. 11. NOTICES. Any notices provided for in this option shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 12. CHOICE OF LAW. This option shall be governed by, and construed in accordance with the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. 3. 13. GOVERNING AUTHORITY. This option is subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted by the Company. This authority shall be exercised by the Board, or by a committee of one or more members of the Board in the event that the Board delegates its authority to a committee. The Board, in the exercise of this authority, may correct any defect, omission or inconsistency in this option in a manner and to the extent the Board shall deem necessary or desirable to make this option fully effective. References to the Board also include any committee appointed by the Board to administer and interpret this option. Any interpretations, amendments, rules and regulations promulgated by the Board shall be final and binding upon the Company and its successors in interest as well as you and your heirs, assigns, and other successors in interest. Dated the 4th day of December, 1999. Very truly yours, WIND RIVER SYSTEMS , INC. By: /S/Richard W. Kraber ------------------------------- Duly authorized on behalf of the Board of Directors 4. NOTICE OF EXERCISE Wind River Systems, Inc. 1010 Atlantic Avenue Alameda, CA 94501 Date of Exercise: _________________ Ladies and Gentlemen: This constitutes notice under my nonstatutory stock option that I elect to purchase the number of shares for the price set forth below. Stock option dated: October 8, 1999 -------------------- Number of shares as to which option is exercised: -------------------- Certificate to be issued in name of: -------------------- Total exercise price: $ -------------------- Cash payment (or check) delivered herewith: $ -------------------- Value of ______ shares of Wind River Systems, Inc. common stock delivered herewith(1): $ -------------------- By this exercise, I agree to provide such additional documents as you may reasonably require. I understand that my right to receive the shares otherwise issuable to me upon the exercise of the option is contingent upon my satisfaction of these requirements. I hereby make the following statements with respect to the shares of common stock (the "Shares"), which are being acquired by me for my own account upon this exercise of the option as set forth above: - ------------------------ (1) Shares must meet the public trading requirements set forth in the option. Shares must be valued in accordance with the terms of the option being exercised, must have been owned for the minimum period required in the option, and must be owned free and clear of any liens, claims, encumbrances or security interests. Certificates must be endorsed or accompanied by an executed assignment separate from certificate. 1. I acknowledge and agree that as a condition to this exercise of the option, the Company may require me to enter an arrangement providing for the payment by me to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of the option; (2) the lapse of any substantial risk of forfeiture to which the Shares are subject at the time of exercise; or (3) the disposition of Shares acquired upon such exercise. I further acknowledge and agree that regardless of whether the offer and sale of Shares subject to the option have been registered under the Securities Act of 1933, as amended (the "1933 Act") or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of the Shares (including the placement of appropriate legends on stock certificates) if in the judgment of the Company and its counsel such restrictions are necessary or desirable in order to achieve compliance with the provisions of the 1933 Act, the securities laws of any state or any other law. Very truly yours, ___________________________________ 2. EX-27.1 6 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1999, AND THE CONSOLIDATED STATEMENTS IF INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED OCTOBER 31, 19991 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-31-2000 FEB-01-1999 OCT-31-1999 49,413 24,436 35,481 2,152 0 119,259 53,819 18,314 372,826 56,570 140,000 0 0 43 175,436 372,826 32,403 44,601 3,133 8,322 28,360 0 2,130 9,429 3,535 5,894 0 0 0 5,894 .14 .13
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