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Technology Stocks : Wind River going up, up, up! -- Ignore unavailable to you. Want to Upgrade?

To: MONACO who wrote (3408)	7/15/1998 11:10:00 PM
From: carolyn walder	Respond to of 10309

MONACO - I am not a technician, but I think that the recent moves can be very easily explained through classical technical analysis. WIND had a gap in the 32/34 area and the odds were that it would go back to fill the gap. Now that it has filled WIND is able to move up and test previous resistance (37 area?). [It also didn't hurt that NASDAQ has been moving very smartly lately.] If we go through 37 this time it looks like 40 will be tested, or so my feeble TA skills tell me...anyone more proficient care to comment?.... Carolyn

To: MONACO who wrote (3408)	7/15/1998 11:23:00 PM
From: Michael Greene	Read Replies (2) \| Respond to of 10309

TO ALL: I sent the following message to Dick Kraber (CFO) over a week ago but have not received any response to date. These seem like fair questions for shareholders to ask management and I hope that we can expect a reply soon. Subject: Shareholder Questions Date: Sun, 05 Jul 1998 20:16:27 -0400 From: Michael Greene <mfgreene@mediaone.net> To: Richard Kraber <dickk@wrs.com> CC: Ronald Abelmann <rona@wrs.com> Mr. Kraber, I am a shareholder with a few questions. You may or may not be aware that there has been a discussion on the Wind River thread at the Silicon Investor web site about the impact of employee stock options upon shareholder value. I would like to present a devil's advocate perspective on this issue and ask you to comment upon it. We understand that the granting of stock options to executives and other employees is common practice in the software industry. The objective here is not so much to question this practice but rather to evaluate its impact upon Wind River shareholders. It is my intention to share this request and your response with the other shareholders on the thread. As you know, on page 38 of the 1998 Annual Report there is a section entitled "Pro Forma Disclosures" introduced per FAS 123 requirements which reveals the cost of employee stock options not recognized as an expense under standard APB Opinion No. 25 reporting. These options, typically 10 year calls on the common stock, have considerable value which is estimated by application of the Black-Scholes model in order to place a value on these unrecognized compensation expenses. The table below contains selected financial data for the past three fiscal years which are pertinent to our discussion. In order to be consistent I have adjusted the reported 1998 numbers by ignoring the "Acquired in-process R and D" write-off and applying a 38% tax rate to get net income of 17,684,000 which is 0.63 per share fully diluted. This should be close enough for purposes of this discussion. 1998 1997 1996 Net Income: as reported 17,684 11,280 5,383 Pro Forma 7,032 7,296 4,248 Diluted EPS: as reported 0.63 0.43 0.23 Pro Forma 0.25 0.28 0.18 Pro Forma expense after tax effect 10,652 3,984 1,135 Pro Forma expense as percent of "as reported" net income 60% 35% 21% Diluted shares outstanding 28,153 26,129 23,435 Expenditures to repurchase shares 12,364 7,050 3,265 OBSERVATIONS AND CONCLUSONS There is a real and sizable cost associated with employee stock options which the "as reported" earnings fail to recognize. Therefore, Pro Forma earnings should be considered to be a better reflection of actual performance. Pro Forma compensation expense is rapidly escalating as a percentage of reported earnings. This quote from the Annual Report, "In future years, the annual compensation expense factor is expected to increase relative to the fair value of stock options granted in those years", suggests that this trend will continue. Earnings, after taking into account the unrecognized expense of employee options, have stopped growing. While we recognize that Pro Forma earnings are an accounting construct there are real costs associated with the employee stock options and for Wind River today this cost seems to be substantial. Pro Forma recognized costs may even be conservative in light of the eventual dilution and/or share repurchase premiums over exercise prices incurred to honor future redemption of currently granted options. Spending 60 to 70 percent of "as reported" earnings over each of the past three years on stock repurchases has not been sufficient to supply all of the shares required for the exercise of options. There has been significant share dilution and, in fact, spending all of "as reported" earnings would not be sufficient to avoid dilution. It appears that between spending cash to repurchase shares for option exercises and share dilution there is little prospect in the next few years of increasing intrinsic shareholder value. Do you agree with the above observations? If not, please share your thoughts with myself and the other concerned shareholders. Thank you in advance, Michael Greene