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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-23649
ARTISAN COMPONENTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 77-0278185
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1195 BORDEAUX DRIVE
SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 734-5600
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant as of September 30, 1998 was $45,405,817. Shares of Common Stock
held by each executive officer, director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares of the registrant's Common Stock outstanding as of
September 30, 1998 was 13,367,906.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Annual
Report on Form 10-K portions of its Proxy Statement for the 1999 Annual Meeting
of Stockholders to be held February 25, 1999.
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PART I
CERTAIN FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K, the exhibits hereto and the information
incorporated by reference herein contain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and such forward-looking statements involve risks
and uncertainties. When used in this Report, the words "expects," "anticipates"
and "estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those predicted. These risks and
uncertainties include those discussed below and those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results" or incorporated by
reference herein. Artisan Components, Inc. undertakes no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date this Report is filed with the Securities and
Exchange Commission or to reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
GENERAL
Artisan Components, Inc. (the "Company" or "Artisan") is a leading
developer of high performance, low power and high density embedded memory and
other intellectual property ("IP") components for the design and manufacture of
complex integrated circuits ("ICs"). The Company offers highly differentiated
memory, standard cell and input/output ("I/O") components that meet the acute
needs of complex single chip system ("System-on-a-Chip") ICs for performance,
power and density. Together, memory, standard cell and I/O components constitute
approximately 80% of the silicon area on a typical System-on-a-Chip IC. The
Company's products are optimized for each customer's manufacturing process and
are delivered ready for use with industry standard and proprietary IC design
tools. The Company licenses its products to semiconductor manufacturers and
fabless semiconductor companies for the design of ICs used in complex, high
volume applications, such as portable computing devices, cellular phones,
consumer multimedia products, automotive electronics, personal computers and
workstations.
The Company primarily licenses its products on a nonexclusive, worldwide
basis to major semiconductor manufacturers and grants these manufacturers the
right to distribute its IP components to their internal design teams and to
fabless semiconductor companies that manufacture at the same facility. The
Company believes that this licensing approach encourages proliferation of the
Company's products and provides a highly efficient distribution channel for its
IP components. The Company's revenue increased from $4.1 million in fiscal 1996
to $8.9 million in fiscal 1997 and to $16.6 million in fiscal 1998. Artisan has
licensed its products to many leading semiconductor manufacturers including
Chartered Semiconductor Manufacturing, Inc. ("Chartered"), Fujitsu
Microelectronics, Inc. ("Fujitsu"), Hitachi, Ltd. ("Hitachi"), NEC Electronics,
Inc. ("NEC"), Newport Wafer-Fab Limited ("NWL"), OKI Electric Industry Co., Ltd.
("OKI"), ST-MICROELECTRONICS S.r.l. ("ST"; formerly known as SGS-THOMSON
Microelectronics, S.r.l.), Siemens AG ("Siemens"), Taiwan Semiconductor
Manufacturing Corporation ("TSMC"), Toshiba International Corporation
("Toshiba"), UMC Group ("UMC Group") and VLSI Technology, Inc. ("VLSI
Technology").
The Company was incorporated in California in April 1991 as VLSI Libraries
Incorporated and changed its name to Artisan Components, Inc. in March 1997. The
Company reincorporated in Delaware in January 1998. The Company's principal
executive offices are located at 1195 Bordeaux Drive, Sunnyvale, California
94089, and its telephone number is (408) 734-5600. Artisan, Process-Perfect,
SAGE, Integral and the Artisan logo are trademarks of the Company. This Annual
Report on Form 10-K also includes product names and other trade names and
trademarks of the Company and of other organizations.
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INDUSTRY BACKGROUND
The development of the merchant IP component market has resulted from the
continuing trend toward horizontal specialization in the semiconductor industry,
a trend that has been driven by a growth in manufacturing capacity and an
increasing focus on core competencies. In the 1970s, semiconductor companies
were vertically integrated and responsible for all aspects of IC production,
including IC design, electronic design automation ("EDA") tool design, IP
component design and IC manufacturing. In the 1980s, application specific
integrated circuit ("ASIC") companies developed a new approach that allowed
their customers to perform the logic design of an IC while they performed the
detailed physical implementation of the design and manufactured the IC. In
addition, standalone EDA tool vendors achieved success by providing software
design tools to complement those developed by internal divisions of
semiconductor companies. The early 1990s saw the emergence of a number of
fabless semiconductor companies that chose to focus on specific design
expertise, take advantage of the availability of excess semiconductor
manufacturing capacity and avoid the capital expenditures necessary to build
fabrication facilities. Throughout this period, semiconductor manufacturers
continued to focus on their core competencies: semiconductor design and
manufacturing processes. Today, with the emergence of System-on-a-Chip ICs,
semiconductor manufacturers are beginning to outsource the design of particular
IP components critical to the successful development of System-on-a-Chip ICs.
Over the past three decades, advances in semiconductor manufacturing
processes have enabled the transistor density on ICs to double every 18 months.
Today, it is possible to place approximately 40 million transistors on a single
IC, a number that is widely expected to increase to nearly 100 million
transistors by the end of the decade. State of the art fabrication facilities of
the 1980s produced ICs using process geometries of 1.0m (one millionth of a
meter). Current state of the art fabrication facilities use 0.25m process
geometries, and many semiconductor manufacturers are transitioning to facilities
using 0.18m processes. These advances enable the manufacture of highly complex
System-on-a-Chip ICs, resulting in substantial performance, power, cost and
reliability improvements over conventional multi-chip systems on printed circuit
boards ("PCB Systems"). System-on-a-Chip ICs combine all of the functionality of
PCB Systems onto a single IC and are optimal for use in complex, high volume
applications such as portable computing devices, cellular phones, consumer
multimedia products, automotive electronics, personal computers and
workstations.
[Graphic depiction of a printed circuit board system with its internal
components and the system-on-a-chip integrated circuit with the corresponding
functions.]
As shown above, in both a PCB System and in a System-on-a-Chip, the primary
building blocks include memory, standard cell (logic), I/O, microprocessor,
digital signal processor ("DSP"), mixed-signal and analog components. However,
integration of these components into System-on-a-Chip ICs at deep submicron
process geometries is far more complex than the design of a traditional PCB
System. With continuing advances in manufacturing processes, an increasing
number of individual transistors must be designed and tested and, consequently,
the gap is increasing between what can be manufactured and what can be designed
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within the time to market requirements of the semiconductor manufacturer. As a
result, the full value of today's semiconductor manufacturing processes is
rarely realized, with designers settling for partial utilization of the process
in the interest of meeting cost and schedule requirements. Given shorter product
life cycles and the importance of reducing time to market, the use of merchant
IP components to leverage design and manufacturing capabilities can be a
significant competitive advantage to semiconductor manufacturers.
Semiconductor manufacturers require solutions that fully utilize their
manufacturing processes in order to maximize performance, speed and density
while reducing time to market. Although the merchant EDA industry has
successfully developed partial solutions to increase design productivity, EDA
tools have not completely overcome the time constraints posed by the need to
create IP components for each IC design in a compressed time to market window.
Merchant suppliers of portable generic IP libraries have also improved design
productivity by offering products designed to work with many manufacturing
processes. However, these generic libraries do not fully utilize the depth and
strengths of a particular manufacturing process. Semiconductor manufacturers
have also tried to expand their design resources, but establishing and
maintaining a large internal design group may divert finite resources from a
semiconductor manufacturer's core competencies. Despite the development and use
of EDA tools and generic libraries and the expansion of internal design
resources, the rapid pace of manufacturing process improvements has continued to
outstrip design capabilities. As a result, the Company believes many
semiconductor manufacturers are using merchant IP components in order to
maximize the performance of their product offerings and improve their time to
market.
THE ARTISAN SOLUTION
Artisan is a leading developer of high performance, low power and high
density embedded memory, standard cell and I/O components for the design and
manufacture of complex ICs. The Company provides IP components that are
optimized for each customer's manufacturing process.
The Company's IP components are designed to offer customers the following
benefits:
PERFORMANCE, POWER AND RELIABILITY. Artisan delivers high performance, low
power and reliable IP components through a combination of design expertise and
proprietary technology and design tools. The Company's IP components, which are
customized, verified and tested for a particular manufacturing process, require
little or no integration by customers and have been proven by use in over 30
different manufacturing processes. Many of the Company's products are designed
to achieve speeds in excess of 500 MHz.
SIGNIFICANT TIME TO MARKET ADVANTAGES. The Company enables semiconductor
manufacturers to reduce the time required to bring new ICs to market by (i)
eliminating the customer's need to design IP components, (ii) delivering
products designed for a specific manufacturing process and (iii) delivering
products ready for use with industry standard and proprietary IC design tools.
The Company's products can be reused in multiple customer designs, which reduces
design time and decreases time to market for new ICs.
LONG TERM PRODUCT DEVELOPMENT PATH. Artisan's IP component technology
provides semiconductor manufacturers with reliable building blocks for future
generations of their complex IC designs. Artisan's ability to adapt and
customize IP components used in one process and one design for use in additional
designs and processes provides each customer with a ready source of reliable IP
components for future designs and processes. This enables the Company's
customers to standardize on Artisan products, accelerate their product
development and focus internal engineering resources on core competencies,
including semiconductor design and manufacturing processes.
COST EFFECTIVE SOLUTIONS. As semiconductor dies shrink and the complexity
of IC designs increases, the cost to design System-on-a-Chip ICs increases
significantly. By providing reliable products with significant time to market
benefits, Artisan enables customers to reduce design costs, minimize integration
costs and increase manufacturing yield. Moreover, by using the Company's
products, semiconductor manufacturers avoid the cost of recruiting and training
a significant group of engineers dedicated to IP component design.
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ARTISAN STRATEGY
The Company's objective is to be the leading supplier of high performance
IP components to the semiconductor industry. The Company's strategy is based
upon the following key elements:
FOCUS ON KEY COMPONENTS FOR HIGH VOLUME SYSTEM-ON-A-CHIP ICS. The Company
has targeted the rapidly growing System-on-a-Chip industry with high performance
memory, standard cell and I/O components. Together, these components constitute
approximately 80% of the silicon area on a typical System-on-a-Chip IC.
Improvements in the performance of these components, particularly memory, can
have a substantial impact on the overall performance of the IC.
TARGET LEADING SEMICONDUCTOR MANUFACTURERS. The Company focuses on
licensing its products to the world's leading semiconductor manufacturers. These
manufacturers represent the largest revenue potential for the Company because
they utilize the most advanced manufacturing processes, manufacture the largest
number of ICs, have the most pressing need for high performance IP components
and face the greatest time to market pressures. To date, the Company has
licensed its products to many leading semiconductor manufacturers including
Chartered, Fujitsu, Hitachi, NEC, NWL, OKI, ST, Siemens, TSMC, Toshiba, UMC
Group and VLSI Technology.
GENERATE REVENUE THROUGH INNOVATIVE BUSINESS MODEL. In late fiscal 1996,
the Company began implementation of a royalty based business model that is
intended to generate revenue from both license fees and future royalties. All of
the new licensees with whom the Company has contracted since August 1996 have
agreed to the Company's royalty based model. However, since certain licensees
which have previously contracted with the Company based on the older model have
resisted conversion to a royalty based model, the Company believes that the
introduction of such model can only be described as a limited success. The
Company currently generates revenue solely from license fees, but the Company
expects to recognize royalty revenue beginning in late fiscal 1999 when the
Company's customers that have entered royalty based licenses are expected to
begin the manufacture and sale of products incorporating the Company's
components. Royalties will be based on per unit sales of ICs and will generally
vary in proportion to the silicon area of an IC occupied by the Company's IP
components. In order to maximize royalties, the Company primarily licenses its
products on a nonexclusive, worldwide basis to major semiconductor manufacturers
and grants these manufacturers the right to distribute the Company's IP
components to their internal design teams and to fabless semiconductor companies
that manufacture at the same facility. As a result, the Company believes its
license agreements will facilitate the broad and rapid penetration of the
Company's products into multiple designs, and thereby increase potential royalty
revenue.
PROLIFERATE ARTISAN'S IP COMPONENTS THROUGHOUT CUSTOMER DESIGNS. The
Company intends to establish itself as the de facto supplier of key IP
components across multiple IC designs and new product generations for each
customer. By making its components easy to integrate into the customer's design
methodologies and supporting both industry standard and proprietary IC design
tools, Artisan facilitates the ready inclusion of its IP components in a large
number of designs.
LEVERAGE PRODUCT DEVELOPMENT PROCESS. Artisan has developed a large
portfolio of IP building blocks and design tools that allows the Company to
develop new products rapidly. As its customer relationships mature, the Company
believes that the development time for additional products for a customer will
decrease due to the Company's growing base of knowledge and understanding of the
customer's manufacturing processes. The Company intends to continue to improve
the efficiency of its product development process in order to decrease product
delivery time.
MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company believes that it provides
the fastest memory products and the most dense standard cell product currently
available in the merchant IP component market. The Company intends to maintain
its technological leadership position by continuing to develop a significant
portfolio of IP building blocks upon which it can base new generations of
products and by making enhancements to existing products. The Company also
intends to maintain its expertise in state of the art manufacturing processes by
working with customers during their new process development efforts.
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PRODUCTS
Artisan's current family of IP components includes high performance and low
power memory, standard cell and I/O components. Initial license fees typically
range from $300,000 to $700,000 per component, depending on the amount of
customization and the number of design views and models required.
Artisan's products are developed and delivered using a proprietary
methodology that includes a set of design tools, techniques and specific design
expertise that the Company calls "Process-Perfect." This methodology ensures
that the IP components produced by Artisan are designed to achieve the best
combination of performance, power, density and yield for a given manufacturing
process. In addition, the Company has created a flexible portfolio of IP
building blocks. This portfolio, combined with the Process-Perfect methodology,
allows the Company to satisfy its customers' schedule and quality requirements
in a cost-effective manner. Artisan's IP components are easily integrated into a
variety of customer design methodologies and support industry standard IC design
tools, including those from EDA tool vendors such as Cadence Design Systems,
Inc. ("Cadence"), Synopsys, Inc. ("Synopsys") and Avant! Corporation ("Avant!"),
as well as customers' proprietary IC design tools. To support these various IC
design tool environments, each of the Company's products includes a
comprehensive set of verified tool models.
MEMORY PRODUCTS. Artisan's embedded memory products include random access
memories ("RAMs"), read only memories ("ROMs") and register files. The Company's
High-Speed and Low-Power products include single- and dual-port RAM and ROM
products and two- and three-port register files. The Company's embedded memory
products are configurable and vary in size to meet the customer's specification.
For example, the Company's RAM products will support sizes from 2 to 128 bits
wide and from 16 to 8,192 words. All of the Company's memory products include
features such as a power down mode, low voltage data retention and fully static
operation. In addition, the Company's memory products include built-in test
interfaces that support popular test methodologies.
HIGH-SPEED MEMORY FAMILY. The High-Speed products are designed to
achieve speeds in excess of 500 MHz for 0.18m manufacturing processes. The
Company achieves this high performance through a combination of proprietary
design innovations that include latch based sense amplifiers, high speed
row select technology, precise core cell balancing and rapid recovery
bitlines.
LOW-POWER MEMORY FAMILY. The Low-Power products are designed to
operate at low power levels to prolong battery life when used in
battery-powered electronic systems. The Low-Power products can achieve
speeds in excess of 133 MHz for 0.25m manufacturing processes. The
Low-Power products achieve low power through a combination of proprietary
design innovations that include latch based sense amplifiers, a power
efficient banked memory architecture, precise core cell balancing and
unique address decoder and driver circuitry.
STANDARD CELL PRODUCT. Artisan's standard cell product includes over 400
cells optimized for each customer's manufacturing process and IC design tool
environment to result in greater density as compared to competitive standard
cell products. The Company has recently introduced its SAGE architecture that
includes several design improvements to produce smaller silicon areas and better
performance. The Company's standard cell product utilizes each customer's
proprietary manufacturing process rules, including stacked contact-via,
silicided diffusion and local interconnect layers. All functions are available
in at least four drive strengths, and the Company's inverters, buffers and
three-state drivers are each available in nine drive strengths.
I/O PRODUCTS. The Company's Integral I/O library includes over 600 standard
I/O functions. The Company also offers a wide variety of specialized I/O
products that are compatible with industry standard AGP, USB, PCI, GTL and PECL
interface specifications and many others. Every I/O product utilizes each
customer's proprietary manufacturing process rules, pad pitch and ESD
requirements, resulting in superior performance, reliability and
manufacturability.
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PRODUCT DEVELOPMENT
The Company has targeted the rapidly growing System-on-a-Chip market with
high performance and low power memory, standard cell and I/O products. The
ability of the Company to compete in the future will be substantially dependent
on its ability to continually create competitive technologies to meet changing
market needs. To this end, the Company's engineers are involved in the
development of more advanced versions of the Company's products as well as in
the development of new products. The Company has assembled a team of highly
skilled engineers whose activities are focused on the development of IP
components for current and anticipated manufacturing processes. Because of the
complexity of these activities, the design and development process at Artisan is
a multidisciplinary effort requiring expertise in electronic circuit design,
process technology, physical layout, design software, model generation, data
analysis and processing and general IC design.
As of September 30, 1998, Artisan had 54 employees and full-time
equivalents in the engineering department. In fiscal 1996, 1997 and 1998, total
engineering costs were approximately $2.4 million, $4.8 million and $8.5
million, respectively. Engineering costs are allocated between cost of revenue
and product development expense. Engineering efforts devoted to developing
products for specific customer projects are recognized as cost of revenue while
the balance of engineering costs, incurred for general development of Artisan's
technology, is charged to product development. The Company expects that it will
continue to invest substantial funds for engineering activities. There can be no
assurance that the Company can develop and introduce new technology in a timely
fashion or that such new technology will be accepted by the market. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results -- New Product
Development and Technological Change."
The Company's customers compete in the semiconductor industry, which is
subject to rapid technological change, frequent introductions of new products,
short product life cycles, changes in customer demands and requirements and
evolving industry standards. Accordingly, the Company's future success will
depend on its ability to continue to enhance its existing products and to
develop and introduce new products that satisfy increasingly sophisticated
customer requirements and that keep pace with new product introductions,
emerging manufacturing processes and other technological developments in the
semiconductor industry. The development of new manufacturing processes,
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. Any
failure by the Company to anticipate or respond adequately to changes in
manufacturing processes or customer requirements, or any significant delays in
product development or introduction, would have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and sale of new or enhanced
products or that such new or enhanced products will achieve market acceptance.
Any delay in release dates of new or enhanced products could materially
adversely affect the Company's business, operating results and financial
condition. The Company also could be exposed to litigation or claims from its
customers in the event that it does not satisfy its delivery commitments. There
can be no assurance that any such claim would not have a material adverse effect
on the Company's business, operating results and financial condition. In
addition, the Company's customers may be adversely affected by downturns in the
demand for semiconductors. A general deterioration in the demand for
semiconductors or the financial condition of any of the Company's customers
could have a material adverse effect on the Company's business, operating
results and financial condition. For example, the Company expects its revenue to
be lower than previously anticipated and to incur an operating loss of between
$1.0 and $1.5 million in the fiscal quarter ending December 31, 1998 due to the
financial and/or business condition of two of its customers and a lower than
expected level of new bookings stemming from declines in the demand for
semiconductors.
CUSTOMERS
The Company is focused on licensing its products to manufacturers in the
semiconductor market. Many of the world's leading semiconductor manufacturers
are among the Company's customers, and since inception the Company has sold its
products to over 20 semiconductor manufacturers and fabless semiconductor
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companies. The following chart identifies all customers that initiated new
licenses of IP components from the Company since the beginning of fiscal 1995.
SELECTED CUSTOMERS FOR ARTISAN'S PRODUCTS
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ORIGINAL MANUFACTURING PROCESSES
LICENSE -------------------------------------------------------
CUSTOMER DATE PRODUCT(S)* 1.0m 0.8m 0.6m 0.5m 0.35m 0.25m 0.18m
-------- -------- ----------- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Analog Devices....... 3/94 SC X
ATI**................ 8/95 SC, I/O X X X X
Chartered............ 2/97 M X
DOD.................. 4/93 SC X X X
Fujitsu.............. 5/96 M, SC, I/O X X
GEC Plessey.......... 7/94 SC X X
Hitachi.............. 1/98 M X
ITT Electronics...... 1/97 SC X
LSI Logic............ 1/95 M X X X
NEC.................. 6/94 M X X X
NWL.................. 3/98 M, SC, I/O X X+
OKI.................. 6/96 M, SC X X X
Quickturn............ 8/91 M X X
ST................... 3/92 M X X X X
Siemens.............. 1/98 M, SC X
Toshiba.............. 8/96 M X
TSMC................. 12/97 M, SC X X+
UMC Group............ 7/98 M, SC, I/O X+ X+
VLSI Technology...... 11/97 M X
</TABLE>
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* For purposes of this table, "M" refers to memory products, "SC" refers to
standard cell products and "I/O" refers to I/O cell products.
** The 0.6m process was licensed in November 1993 by Tseng Labs, the graphics
business of which was acquired by ATI in 1997.
+ The Company is currently in the process of completing delivery of an initial
product for this manufacturing process.
The Company has been dependent on a relatively small number of customers
for a substantial portion of its annual revenue, although the customers
comprising this group have changed from time to time. In fiscal 1996, ATI
Technologies, Inc. ("ATI"), ST, OKI and the United States' Department of Defense
(the "DOD") accounted for 37%, 20%, 15% and 10% of revenue, respectively. In
fiscal 1997, ST, Fujitsu, OKI and NEC accounted for 27%, 24%, 16% and 13% of
revenue, respectively. In fiscal 1998, TSMC, OKI and UMC Group accounted for
14%, 11% and 11% of revenue, respectively. The Company anticipates that its
revenue will continue to depend on a limited number of major customers for the
foreseeable future, although the companies considered to be major customers and
the percentage of revenue represented by each major customer may vary from
period to period depending on the addition of new contracts and the number of
designs utilizing the Company's products. None of the Company's customers has a
written agreement with the Company that obligates it to license additional
products, and there can be no assurance that any customer will license IP
components from the Company in the future. The loss of one or more of the
Company's major customers, or reduced orders by one or more of such customers,
could materially adversely affect the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors Affecting Future Operating
Results -- Customer Concentration."
There can be no assurance that the Company will be successful in continuing
to license its products to current customers or in entering into licenses with
additional semiconductor manufacturers. The Company faces numerous risks in
successfully obtaining orders from customers on terms consistent with the
Company's
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business model including, among others, the lengthy and expensive process of
building a relationship with a potential customer before reaching an agreement
with such party to license the Company's products; persuading large
semiconductor manufacturers to work with, disclose proprietary information to
and rely upon, a smaller company, such as the Company; and persuading potential
customers to bear certain development costs associated with development of
customized components. In addition, there are a relatively limited number of
semiconductor manufacturers to which the Company can license its technology in a
manner consistent with its business model. The Company also faces significant
competition from internal design groups of semiconductor manufacturers as well
as other commercial suppliers of IP components. The limited number of
semiconductor manufacturers to which the Company can license its products may
also have a material adverse effect on the Company's business, operating results
and financial condition if any of the Company's customers suffers a
deterioration in financial condition or there is a decline in the demand for the
semiconductors produced by such manufacturers. For example, the Company expects
its revenue to be lower than previously anticipated and to incur an operating
loss of between $1.0 and $1.5 million in the fiscal quarter ending December 31,
1998 due to the financial and/or business condition of two of its customers and
a lower than expected level of new bookings stemming from declines in the demand
for semiconductors. See "-- Competition" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
Future Operating Results -- Competition."
SALES, MARKETING AND DISTRIBUTION
The Company primarily licenses its products on a nonexclusive, worldwide
basis to major semiconductor manufacturers and grants these manufacturers the
right to distribute its IP components to their internal design teams and to
fabless semiconductor companies that manufacture at the same facility. The
Company believes its sales, marketing and distribution approach gives it an
advantage over its competitors since the Company is able to leverage its
customers' sales and marketing organizations and avoid the costs associated with
hiring, training and compensating the large sales force necessary to sell
directly to each end user customer. As of September 30, 1998, the Company's
sales and marketing organization was comprised of 12 sales and 6 marketing
employees and full-time equivalents. Additionally, the Company relies in part on
a consulting company in Japan to assist its sales efforts in that market.
A substantial portion of the Company's revenue is derived from customers
outside the United States. In fiscal 1996, 1997 and 1998, revenue derived from
customers outside the United States, primarily in Asia and Europe, represented
84%, 73% and 84%, respectively, of the Company's revenue. The Company
anticipates that international revenue will remain a substantial portion of its
revenue in the future. To date, all of the revenue from international customers
has been denominated in U.S. dollars. In the event that the Company's
competitors denominate their sales in a currency that becomes relatively
inexpensive in comparison to the U.S. dollar, the Company may experience fewer
orders from international customers whose business is based primarily on the
less expensive currency. During the second half of fiscal 1998, the Company
experienced delays in the receipt of orders expected from existing and
prospective customers, particularly in Japan. There can be no assurance that the
orders deferred by such customers will be placed in the future or at all. There
can be no assurance that present or future dislocations with respect to the
Asian financial markets will not have a material adverse effect on the Company's
business, operating results and financial condition. The Company intends to
continue to expand its sales and marketing activities in Asia and Europe. The
Company's expansion of its international business involves a number of risks
including the impact of possible recessionary environments in economies outside
the United States; political and economic instability; exchange rate
fluctuations; longer receivables collection periods and greater difficulty in
accounts receivable collection from customers; unexpected changes in regulatory
requirements; reduced or limited protection for intellectual property rights;
export license requirements; tariffs and other trade barriers; and potentially
adverse tax consequences. There can be no assurance that the Company will be
able to sustain or increase revenue derived from international customers or that
the foregoing factors will not have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results -- Risks Associated
with International Customers."
8
<PAGE> 10
COMPETITION
The Company's strategy of targeting semiconductor manufacturers that
participate in, or may enter, the System-on-a-Chip market requires the Company
to compete in intensely competitive markets. Within the merchant segment of the
IP market, the Company competes primarily against Aspec Technology, Inc.
("Aspec"), Avant!, Duet Corporation ("Duet"), Mentor Graphics Corporation
("Mentor Graphics") and the Silicon Architects group of Synopsys. In addition,
the Company may face competition from consulting firms and companies that
typically have operated in the generic library segment of the IP market and that
now seek to offer customized IP components as an enhancement to their generic
solutions. The Company also faces significant competition from internal design
groups of the semiconductor manufacturers that are expanding their portfolio of
IP components to participate in the System-on-a-Chip market. These internal
design groups compete with the Company for access to the parent's IP component
requisitions and may eventually compete with the Company to supply IP components
to third parties on a merchant basis. There can be no assurance that internal
design groups will not expand their product offerings to compete directly with
those of the Company or will not actively seek to participate as merchant
vendors in the IP component market by selling to third party semiconductor
manufacturers or, if they do, that the Company will be able to compete against
them successfully. In addition to competition from companies in the merchant IP
component market, the Company faces competition from vendors that supply EDA
software tools, including certain of those mentioned above, and there can be no
assurance that the Company will be able to compete successfully against them.
The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less costly
than the Company's IP components or that may provide better performance or
additional features not currently provided by the Company. The Company believes
that the principal competitive factors for IP components are speed, power usage,
density, quality, reliability and price. The Company believes that, on balance,
it competes favorably with respect to the above factors.
Many of the Company's current and potential competitors have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, certain of the Company's
principal competitors offer a single vendor solution, since, in the case of EDA
companies, they maintain their own EDA design tools and IP component libraries,
or, in the case of internal design groups, they provide IP components developed
to utilize the qualities of a given manufacturing process, and may therefore
benefit from certain capacity, cost and technical advantages. The Company's
ability to compete successfully in the emerging market for IP components will
depend upon certain factors, many of which are beyond the Company's control
including, but not limited to, success in designing new products; implementing
new designs at smaller process geometries; access to adequate EDA tools (many of
which are licensed from the Company's current or potential competitors); the
price, quality and timing of new product introductions by the Company and its
competitors; the emergence of new IP component interchangeability standards; the
widespread licensing of IP components by semiconductor manufacturers or their
design groups to third party manufacturers; the ability of the Company to
protect its intellectual property; market acceptance of the Company's IP
components; success of competitive products; market acceptance of products using
System-on-a-Chip ICs; and industry and general economic conditions. There can be
no assurance that the Company will be able to compete successfully in the
emerging merchant IP component market. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Factors Affecting Future
Operating Results -- Competition."
PATENTS AND INTELLECTUAL PROPERTY PROTECTION
The Company relies primarily on a combination of nondisclosure agreements
and other contractual provisions and patent, trademark, trade secret, and
copyright law to protect its proprietary rights. The Company has an active
program to protect its proprietary technology through the filing of patents. As
of September 30, 1998, the Company had applications for 14 patents on file with
the United States Patent and Trademark Office (the "USPTO"). To date, the USPTO
has issued notices of allowance with respect to two
9
<PAGE> 11
patent applications relating to reducing power consumption and increasing the
speed of the Company's memory products. There can be no assurance, however, that
such patents will actually be issued. As of September 30, 1998, the Company had
no filings for foreign patents, but the Company intends to file such foreign
patent applications as appropriate in the future. The Company has filed 11
applications under the Patent Cooperation Treaty relating to 11 patents
previously filed with the USPTO. There can be no assurance that the Company's
pending patent applications will be approved, that any issued patents will
protect the Company's intellectual property or will not be challenged by third
parties, or that the patents of others will not have an adverse effect on the
Company's ability to do business. Furthermore, there can be no assurance that
others will not independently develop similar or competing technology or design
around any patents that may be issued to the Company.
The Company also relies on trademark and trade secret laws to protect its
intellectual property. The Company protects its trade secrets and other
proprietary information through confidentiality agreements with its employees
and customers and other security measures. Despite these efforts, there can be
no assurance that others will not gain access to the Company's trade secrets,
that such trade secrets will not be independently discovered by competitors or
that the Company can meaningfully protect its intellectual property. In
addition, effective trade secret protection may be unavailable or limited in
certain foreign countries. Although the Company intends to protect its rights
vigorously, there can be no assurance that such measures will be successful.
Failure of the Company to enforce its patents, trademarks or copyrights or
to protect its trade secrets could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that such intellectual property rights can be successfully asserted in
the future or will not be invalidated, circumvented or challenged. From time to
time, third parties, including competitors of the Company, may assert patent,
copyright and other intellectual property rights to technologies that are
important to the Company. There can be no assurance that third parties will not
assert infringement claims against the Company in the future, that assertions by
third parties will not result in costly litigation or that the Company would
prevail in any such litigation or be able to license any valid and infringed
patents from third parties on commercially reasonable terms. Litigation,
regardless of the outcome, could result in substantial cost and would divert
resources of the Company. Any infringement claim or other litigation against or
by the Company could materially adversely affect the Company's business,
operating results and financial condition.
In addition, there can be no assurance that competitors of the Company,
many of which have substantial resources and have made significant investments
in competing technologies, do not have, or will not seek to apply for and
obtain, patents that will prevent, limit or interfere with the Company's ability
to make, use or sell its products either in the United States or in
international markets. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference proceedings declared by the USPTO to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Any such suit or proceeding involving the
Company could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
Future Operating Results -- Risks Associated with Protection of Intellectual
Property."
EMPLOYEES
As of September 30, 1998, the Company had 86 employees and full-time
equivalents. Of this total, 54 were in engineering, 18 were in sales and
marketing and 14 were in finance and administration. None of the Company's
employees are represented by a labor union or are subject to a collective
bargaining agreement. The Company has never experienced a work stoppage and
believes that its relations with employees are good.
The Company's success depends in large part on the continued contributions
of its key management, engineering, sales and marketing personnel, many of whom
are highly skilled and would be difficult to replace. None of the Company's
senior management or key technical personnel are bound by an employment
contract. In addition, the Company does not currently maintain key man life
insurance covering its key personnel. The
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<PAGE> 12
Company believes that its success depends to a significant extent on the ability
of its management to operate effectively, both individually and as a group. The
Company must also attract and retain highly skilled managerial, engineering,
sales and marketing and finance personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The loss of the services of any of the
key personnel, the inability to attract or retain qualified personnel in the
future or delays in hiring required personnel, particularly engineers, could
have a material adverse effect on the Company's business, operating results and
financial condition.
EXECUTIVE OFFICERS
The executive officers of the Company, their positions and their ages (as
of September 30, 1998) are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark R. Templeton.... 39 President, Chief Executive Officer and Director
Scott T. Becker...... 38 Chief Technical Officer and Director
Vice President, Finance and Chief Financial
Robert D. Selvi...... 42 Officer
Larry J. Fagg........ 52 Vice President, Worldwide Sales
Dhrumil Gandhi....... 41 Vice President, Engineering
Jeffrey A. Lewis..... 38 Vice President, Marketing
</TABLE>
Mark R. Templeton has served as President, Chief Executive Officer and a
director of the Company since April 1991 when he co-founded the Company. From
April 1990 to March 1991, Mr. Templeton was director of the Custom IC Design
Group at Mentor Graphics, an EDA company. From October 1984 to March 1990, he
held a variety of positions with Silicon Compilers Systems Corporation ("Silicon
Compilers"), an EDA company, with the last position being Director of the Custom
IC Design Group. Mr. Templeton received a B.S.E.E. from Boston University.
Scott T. Becker has served as Chief Technical Officer and a director of the
Company since April 1991 when he co-founded the Company. From April 1990 to
April 1991, he was the manager of the library development group at the IC
Division of Mentor Graphics. From May 1985 to April 1990, he was responsible for
library development at Silicon Compilers. Mr. Becker received a B.S.E.E. from
the University of Illinois and an M.S.E.E. from Santa Clara University.
Robert D. Selvi has served as Vice President, Finance and Chief Financial
Officer of the Company since June 1997. From May 1995 until May 1997, Mr. Selvi
served as Vice President and Chief Financial Officer of Cooper & Chyan
Technology, Inc., an EDA company. From February 1992 to April 1995, he served as
Senior Vice President, Operations and Finance and Chief Financial Officer of
Claris Corp., a software subsidiary of Apple Computer, Inc. ("Apple"), a
computer hardware and software company. From October 1982 to January 1992, Mr.
Selvi served in a variety of managerial capacities at Apple, including, among
others, Senior Manager of Corporate Development, Assistant Treasurer and Manager
of Financial Services. Mr. Selvi received a B.S. in Finance and an M.B.A. from
Santa Clara University.
Larry J. Fagg has served as Vice President of Worldwide Sales of the
Company since August 1997. From May 1995 to August 1997, he served as Director,
North American Sales at the Silicon Architects group of Synopsys, an EDA
company. From May 1994 to May 1995, he served as Vice President of North
American Sales at CrossCheck Technology, Inc., an EDA company. From December
1988 to May 1994, he served as Vice President, Strategic Alliances of Cadence,
an EDA company.
Dhrumil Gandhi has served as Vice President of Engineering of the Company
since May 1993. From July 1983 to May 1993, he served as Senior Manager for
Advanced ASIC Design Systems at Mentor Graphics. He received a B.S.E.E. from the
Indian Institute of Technology and an M.S.E.E. from the California Institute of
Technology.
Jeffrey A. Lewis has served as Vice President of Marketing of the Company
since September 1996. From August 1994 to September 1996, he served in several
managerial capacities at Compass Design Automation,
11
<PAGE> 13
Inc. ("Compass"), an EDA company, the most recent of which was Vice President of
Corporate Marketing. Prior to joining Compass, from April 1992 to August 1994,
Mr. Lewis was Director of Marketing at Redwood Design Automation, Inc., an EDA
company. Mr. Lewis received a B.S.E.E., a B.A. in Economics and an M.B.A., all
from the University of California, Berkeley.
ITEM 2. PROPERTIES
The Company's executive, administrative and technical offices currently
occupy 32,660 square feet in Sunnyvale, California, under a lease that expires
in 2004. The Company sublets to a third party the 16,797 square foot space it
formerly occupied in San Jose, California. The lease on the San Jose space
expires in 2001. The Company believes that its existing facilities are adequate
to meet its current needs but that it may need to seek additional space in the
future. The Company believes that suitable additional space will be available on
commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "ARTI" since the Company's initial public offering on February
3, 1998. Prior to such time, there was no public market for the Common Stock of
the Company. The following table sets forth for the periods indicated the high
and low sale prices per share of the Common Stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal Year 1998
Second Quarter (from February 3, 1998).................... $20.250 $15.250
Third Quarter............................................. $23.375 $11.875
Fourth Quarter............................................ $15.500 $ 6.500
</TABLE>
On December 18, 1998, the reported last sale price of the Common Stock on
the Nasdaq National Market was $5.0625 per share. As of September 30, 1998,
there were approximately 153 stockholders of record of the Common Stock.
DIVIDEND POLICY
Since March 1996, when the Company converted to a C corporation from a
subchapter S corporation, the Company has not declared or paid any cash
dividends on its Common Stock or other securities. The Company presently intends
to retain future earnings, if any, for use in the operation and expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future.
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
On February 6, 1998, the Company completed the sale of 3,015,000 Common
Shares at a per share price of $10.00 in a firm commitment underwritten public
offering, and certain stockholders of the Company sold 320,000 shares of the
Company's Common Stock in connection with the offering. The offering was
effected
12
<PAGE> 14
pursuant to a Registration Statement on Form S-1 (Registration No. 333-41219),
which the United States Securities and Exchange Commission declared effective on
February 2, 1998. The offering was underwritten by Deutsche Morgan Grenfell
Inc., Hambrecht & Quist LLC and Wessels, Arnold & Henderson, L.L.C.
Of the $30,150,000 in aggregate proceeds raised by the Company in
connection with the February 1998 offering, (i) approximately $2,110,500 was
paid to the underwriters in connection with underwriting discounts, and (ii)
approximately $954,000 was paid by the Company in connection with offering
expenses, including legal, printing, and filing fees. The Company did not
receive any of the proceeds of or pay the underwriting discount in connection
with the shares sold by the selling stockholders. There were no direct or
indirect payments to directors or officers of the Company or any other person or
entity. None of the offering proceeds have been used for the construction of
plant, building or facilities or the purchase or installation of machinery or
equipment or for purchases of real estate or the acquisition of other
businesses. The Company is currently investing the net offering proceeds for
future use as additional working capital. Such net proceeds have been invested
in short-term, interest-bearing, investment grade securities. A portion of the
net proceeds may be used for the acquisition of technologies, businesses or
products that are complementary to those of the Company.
RECENT SALES OF UNREGISTERED SECURITIES
Between June 30, 1998 and October 1, 1998, the Company issued 10,206 shares
of unregistered common stock upon the exercise of outstanding options to eight
employees at an average exercise price of $0.92 per share. The sale of the above
securities was deemed to be exempt from registration under the Securities Act in
reliance on Rule 701 promulgated under Section 3(b) of the Securities Act, as
transactions not involving a public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. Each recipient had adequate access, through his or her
relationship with the Company, to information about the Company.
13
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Annual Report on Form 10-K. The balance sheet data as of September 30, 1997
and 1998 and the statement of operations data for the fiscal years ended
September 30, 1996, 1997 and 1998 are derived from the financial statements that
have been audited by PricewaterhouseCoopers LLP, independent accountants,
included elsewhere in this Annual Report on Form 10-K. The balance sheet data as
of September 30, 1995 and 1996 and the statement of operations data for the
fiscal year ended September 30, 1995 are derived from the financial statements
that have been audited by PricewaterhouseCoopers LLP, independent accountants,
not included in this Annual Report on Form 10-K. The balance sheet data as of
September 30, 1994 and the statement of operations data for the fiscal year
ended September 30, 1994 are derived from unaudited financial statements not
included in this Annual Report on Form 10-K. All unaudited financial statements
have been prepared on the same basis as the audited financial statements and, in
the opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position and results of operations for such periods. Historical
results are not necessarily indicative of results to be expected in the future.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1994 1995 1996 1997 1998
----------- ------ ------ ------ -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................... $2,768 $2,718 $4,147 $8,912 $16,568
Costs and expenses:
Cost of revenue................................. 910 984 1,280 2,855 4,962
Product development............................. 847 1,044 1,080 1,955 3,580
Sales and marketing............................. 314 272 603 2,019 4,030
General and administrative...................... 304 415 611 1,340 1,922
------ ------ ------ ------ -------
Total cost and expenses................. 2,375 2,715 3,574 8,169 14,494
------ ------ ------ ------ -------
Operating income.................................. 393 3 573 743 2,074
Other income (expense), net....................... (3) -- 96 297 1,175
------ ------ ------ ------ -------
Income before provision for income taxes.......... 390 3 669 1,040 3,249
Provision for income taxes........................ -- 36 137 356 923
------ ------ ------ ------ -------
Net income (loss)................................. $ 390 $ (33) $ 532 $ 684 $ 2,326
====== ====== ====== ====== =======
Diluted earnings per share (historical)(1)........ $ 0.07 $ 0.18
====== =======
Pro forma net income data (unaudited)(2):
Pro forma net income............................ $ 274 $ 21 $ 409
====== ====== ======
Diluted earnings per share (pro forma)(1)....... $ 0.05 $ 0.00 $ 0.06
====== ====== ======
Shares used in computing diluted earnings per
share(1)........................................ 5,832 5,018 7,010 9,657 12,917
====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------------
1994 1995 1996 1997 1998
----------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities...................................... $ 80 $ 6 $2,958 $4,554 $47,204
Working capital................................... 450 141 2,268 4,352 49,874
Total assets...................................... 2,524 1,261 5,172 12,011 59,489
Long term liabilities, net of current
portion(3)...................................... -- -- 15 49 218
Total stockholders' equity........................ 586 410 4,292 9,348 55,539
</TABLE>
- ---------------
(1) For an explanation of net income (loss) per share and shares used in per
share calculations, see Notes 2 and 14 of the Notes to Financial Statements
included elsewhere in this Annual Report on Form 10-K.
(2) Prior to March 1996, the Company was a subchapter S corporation and,
therefore, was not subject to entity level taxation. Pro forma net income
includes pro forma tax expense as if the Company were taxed as a C
corporation from fiscal 1994 to 1996.
(3) Long term liabilities consist of deferred rent and deferred revenue. See
Note 8 of the Notes to Financial Statements.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Annual Report on
Form 10-K. Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward looking statements.
The forward looking statements contained herein are based on current
expectations and entail various risks and uncertainties that could cause actual
results to differ materially from those expressed in such forward looking
statements. For a more detailed discussion of these and other business risks,
see "-- Factors Affecting Future Operating Results."
OVERVIEW
Artisan is a leading developer of high performance, low power and high
density embedded memory and other IP components for the design and manufacture
of complex ICs. The Company licenses its products to semiconductor manufacturers
and fabless semiconductor companies for the design of ICs used in complex, high
volume applications, such as portable computing devices, cellular phones,
consumer multimedia products, automotive electronics, personal computers and
workstations.
Revenue consists of license fees received under the terms of license
agreements with customers to provide the Company's IP component products.
Typically, a customer licenses one or more products that are accompanied by
layout databases, views to support a customer's IC design tool environment and
design methodology documentation. The license of the Company's products
typically involves a sales cycle of six to 12 months and often coincides with a
customer's migration to a new manufacturing process. The Company's contracts
generally require a customer to pay a license fee to Artisan ranging from
approximately $300,000 to $700,000 for each product delivered under a contract.
A contract typically calls for an upfront payment of approximately one third of
the full contract value with the remainder due upon delivery, generally three to
six months later.
To date, the substantial majority of the Company's revenue has been
recognized on a percentage of completion method. Provisions for estimated losses
on the uncompleted contracts are recognized in the period in which the
likelihood of such losses is determined. As the completion period for a project
ranges from three to six months, revenue in any quarter is dependent on the
Company's progress toward completion of the project. There can be no assurance
that the Company's estimates will be accurate, and, in the event they are not,
the Company's business, operating results and financial condition in subsequent
periods could be materially adversely affected.
Currently, license fees represent substantially all of revenue. Beginning
in late fiscal 1996, however, the Company began implementation of a royalty
based business model that is intended to generate revenue from both license fees
and future royalties. Royalties will be based on per unit sales of ICs and will
generally vary in proportion to the silicon area of an IC occupied by the
Company's IP components. To date, the Company has received no royalty revenue,
and it does not anticipate receiving any until late fiscal 1999 due to the
typical length of time required for the Company to design a component for a
customer and for such customer to design, manufacture and bring to market a
product incorporating such component. There can be no assurance that the Company
will be successful in expanding the number of royalty bearing contracts with
customers. The Company generally licenses its products on a nonexclusive,
worldwide basis to major semiconductor manufacturers and grants these
manufacturers the right to distribute the Company's IP components to their
internal design teams and to fabless semiconductor companies that manufacture at
the same facility. Given that Artisan provides its products early in the
customer's IC design process, there will be a significant delay between the
delivery of a product and the generation of royalty revenue. There can be no
assurance that the Company will receive any royalty revenue or that, if it does,
the amount will be significant.
The Company has been dependent on a relatively small number of customers
for a substantial portion of its annual revenue, although the customers
comprising this group have changed from time to time. In fiscal 1996, ATI, ST,
OKI and the DOD accounted for 37%, 20%, 15% and 10% of revenue, respectively. In
fiscal 1997, ST, Fujitsu, OKI and NEC accounted for 27%, 24%, 16% and 13% of
revenue, respectively. In fiscal
15
<PAGE> 17
1998, TSMC, OKI and UMC Group accounted for 14%, 11% and 11% of revenue,
respectively. The Company anticipates that its revenue will continue to depend
on a limited number of major customers for the foreseeable future, although the
companies considered to be major customers and the percentage of revenue
represented by each major customer may vary from period to period depending on
the addition of new contracts and the number of designs utilizing the Company's
products. The limited number of semiconductor manufacturers to which the Company
can license its products may also have a material adverse effect on the
Company's business, operating results and financial condition if any of the
Company's customers suffers a deterioration in financial condition or there is a
decline in the demand for the semiconductors produced by such manufacturers. For
example, on December 16, 1998, the Company announced that it expects revenue in
the fiscal quarter ending December 31, 1998 to be lower than industry analysts'
expectations and to range from $2.7 million to $3.3 million for the quarter. The
Company also announced that it expected to incur an operating loss of $1.0
million to $1.5 million for the quarter ending December 31, 1998. The decline in
revenue and operating loss are the result of project delays due to the financial
and/or business condition of two of the Company's customers and the decline in
new bookings stemming from a decline in the demand for semiconductors. There can
be no assurance that the expected bookings will occur in the future or at all.
In addition, the Company's business, operating results and financial condition
may be materially adversely affected if the aforementioned project delays
continue and/or new bookings fail to materialize.
A substantial portion of the Company's revenue is derived from customers
outside the United States. In fiscal 1996, 1997 and 1998, revenue from customers
outside the United States, primarily in Asia and Europe, represented
approximately 84%, 73% and 84%, respectively of the Company's revenue. The
Company anticipates that international revenue will remain a substantial portion
of its revenue in the future. To date, all of the revenue from international
customers has been denominated in U.S. dollars.
The Company derives substantially all of its revenue from sales of its
memory and standard cell products that together accounted for 79%, 94% and 94%
of revenue in fiscal 1996, 1997 and 1998, respectively. The Company expects that
memory products, in combination with standard cell products, will continue to
account for a substantial portion of the Company's revenue for the foreseeable
future. There can be no assurance that the Company will continue to derive
revenue from memory or standard cell products and a decline in revenue from such
products would have a material adverse effect on the Company's business,
operating results and financial condition. The Company's future financial
performance will depend in significant part on the successful development,
introduction and customer acceptance of new products.
Since the Company's inception in April 1991, each of the Company's cost and
expense categories has progressively increased as the Company has added
personnel and increased its activities in these areas. The Company intends to
continue making significant expenditures, particularly those associated with
engineering and sales and marketing, and expects that these costs and expenses
will continue to be a significant percentage of revenue in future periods.
Whether such expenses increase or decrease as a percentage of revenue will be
substantially dependent upon the rate of change of the Company's revenue.
The Company in the past has experienced delays in the progress of certain
projects, and there can be no assurance that such delays will not occur in the
future. Any delay or failure to achieve such progress could result in damage to
customer relationships and the Company's reputation, under-utilization of
engineering resources or a delay in the market acceptance of the Company's
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the Company's
contracts with customers may generally be canceled without cause, and if a
customer cancels or delays performance under any such contracts, the Company's
business, operating results and financial condition could be materially
adversely affected. The Company's costs and expenses will be based in part on
the Company's expectations of future revenue from license fees. Accordingly, if
the Company does not realize its expected revenue, its business, operating
results and financial condition could be materially adversely affected.
In connection with the grant of options for the purchase 96,200 shares of
Common Stock to employees during the period from December 1996 through March
1997, the Company recorded aggregate deferred compensation of approximately
$198,000, representing the difference between the deemed fair value of the
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<PAGE> 18
Common Stock and the option exercise price at the date of grant. Such deferred
compensation is amortized over the vesting period relating to the options, of
which approximately $41,000 and approximately $48,000 were amortized during
fiscal 1997 and 1998, respectively. All of such amounts were recorded in product
development expenses. In addition, the amortization will result in charges over
the next 10 quarters aggregating approximately $12,000 per quarter, all of which
will be recorded in product development expenses.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data as a percentage of revenue:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenue..................................................... 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue........................................... 30.9 32.0 30.0
Product development....................................... 26.0 22.0 21.6
Sales and marketing....................................... 14.6 22.7 24.3
General and administrative................................ 14.7 15.0 11.6
----- ----- -----
Total cost and expenses........................... 86.2 91.7 87.5
----- ----- -----
Operating income............................................ 13.8 8.3 12.5
Other income, net........................................... 2.3 3.3 7.1
----- ----- -----
Income before provision for income taxes.................... 16.1 11.6 19.6
Provision for income taxes.................................. 3.3 4.0 5.6
----- ----- -----
Net income (loss)........................................... 12.8% 7.6% 14.0%
===== ===== =====
Pro forma net income data:
Income before provision for income taxes.................. 16.1%
Pro forma income tax benefit (expense).................... (6.3)
-----
Pro forma net income...................................... 9.8%
=====
</TABLE>
YEARS ENDED SEPTEMBER 30, 1997 AND 1998
Revenue
Revenue increased by 85.9% from $8.9 million in fiscal 1997 to $16.6
million in fiscal 1998. The growth in revenue in fiscal 1998 as compared with
fiscal 1997 was primarily attributable to increased licensing of the Company's
memory, standard cell and I/O products. The Company does not expect that the
rate of growth of its revenues will be sustained in fiscal 1999 due to
deterioration in the demand for semiconductors generally, leading to a decline
in new bookings, and delays in current bookings due to the financial and/or
business condition of two of its customers.
Cost and Expenses
Engineering costs are allocated between cost of revenue and product
development expenses. Engineering efforts devoted to developing products for
specific customer projects are recognized as cost of revenue. The balance of
engineering costs, incurred for general development of Artisan's technology, is
charged to product development. Engineering costs are generally charged as
incurred and do not necessarily correspond to the recognition of revenue under
related contracts. Engineering costs increased by 77.6% from $4.8 million in
fiscal 1997 to $8.5 million in fiscal 1998. Engineering costs as a percentage of
revenue declined from 54.0% in fiscal 1997 to 51.6% for fiscal 1998. The
absolute dollar increase in engineering costs in fiscal 1998, as
17
<PAGE> 19
compared with fiscal 1997, was primarily due to an increase in engineering
personnel and, to a lesser extent, purchases of computer equipment, software
tools and networking infrastructure and equipment.
Cost of Revenue. Cost of revenue increased by 73.8% from $2.9 million
in 1997 to $5.0 million in fiscal 1998. Cost of revenue as a percentage of
revenue was 32.0% and 30.0% in fiscal 1997 and fiscal 1998, respectively.
The absolute dollar increase in cost of revenue in fiscal 1998, as compared
with fiscal 1997, was due to increases in headcount and costs related to
consulting with and delivering product to a growing customer base.
Product Development Expenses. Product development expenses increased
by 83.1% from $2.0 million in fiscal 1997 to $3.6 million in fiscal 1998.
Product development expenses as a percentage of revenue declined from 22.0%
to 21.6% in fiscal 1997 and fiscal 1998, respectively. The absolute dollar
increase in product development expenses in fiscal 1998, as compared with
fiscal 1997, was attributable to an increase in engineering personnel and,
to a lesser extent, purchases of computer equipment, software tools and
networking infrastructure and equipment. The Company expects that product
development expenses will continue to increase in absolute dollars. Whether
such expenses increase or decrease as a percentage of revenue will be
substantially dependent upon the rate of change of the Company's revenue.
Sales and Marketing Expenses. Sales and marketing expenses include
salaries, commissions, travel expenses and costs associated with trade
shows, advertising and other marketing efforts. Costs of pre-sale customer
support are also charged to sales and marketing. Sales and marketing
expenses increased by 99.6% from $2.0 million in fiscal 1997 to $4.0
million in fiscal 1998. Sales and marketing expense as a percentage of
revenue increased from 22.7% in fiscal 1997 to 24.3% in fiscal 1998. The
increase in absolute dollars in sales and marketing expenses in fiscal
1998, as compared with fiscal 1997, was primarily attributable to increases
in sales and marketing headcount and commissions expense to support an
expanded customer coverage model. The Company expects sales and marketing
expenses to increase in absolute dollars in the future as the Company
increases headcount to expand account coverage and provide increased
customer support. The rate of increase of, and the percentage of revenue
represented by, sales and marketing expenses in the future will vary from
period to period based on the trade show, advertising, promotional and
other sales and marketing activities undertaken, the change in sales and
marketing headcount in any given period and the rate of change in the
Company's revenue.
General and Administrative Expenses. General and administrative
expenses increased by 43.4% from $1.3 million in fiscal 1997 to $1.9
million in fiscal 1998. As a percentage of revenue, general and
administrative expenses decreased from 15.0% to 11.6% in fiscal 1997 and
fiscal 1998, respectively. The absolute dollar increases in general and
administrative expenses in fiscal 1998, as compared with fiscal 1997, were
primarily due to increases in the number of general and administrative
personnel and increases in professional services fees. The Company expects
general and administrative expenses to grow in absolute dollars in future
periods as the Company expands its operations and as a result of expenses
associated with being a public company. The rate of increase of and the
percentage of revenue represented by general and administrative expenses in
the future will depend on the rate of change of the Company's revenue.
Other Income
Other income increased by 295.6% from $297,000 in fiscal 1997 to $1.2
million in fiscal 1998. Other income as a percentage of revenue increased from
3.3% to 7.1% in fiscal 1997 and fiscal 1998, respectively. The growth in other
income in fiscal 1998, as compared with fiscal 1997, primarily reflects interest
income earned on the proceeds from the Company's initial public offering and
secondary public offering which were completed in February 1998 and April 1998,
respectively.
Income Taxes
The provision for income taxes was $356,000 and $923,000 in fiscal 1997 and
fiscal 1998, respectively. The effective tax rate decreased to 28.4% in fiscal
1998, as compared with 34.2% in fiscal 1997. The change in
18
<PAGE> 20
effective tax rate for the respective periods was primarily due to the Company
investing the proceeds from its initial public offering and follow-on public
offering in securities that are exempt from federal taxation.
YEARS ENDED SEPTEMBER 30, 1996 AND 1997
Revenue
Revenue increased by 114.9% from $4.1 million in fiscal 1996 to $8.9
million in fiscal 1997. The growth in revenue in fiscal 1997 resulted primarily
from increases in the number of licenses of, and prices for, the Company's
memory products and, to a lesser extent, from increases in the number of
licenses of, and prices for, standard cell products. The increase in the number
of licenses for memory products in fiscal 1997 corresponded to the introduction
of new products.
Cost and Expenses
Engineering costs increased by 103.8% from $2.4 million in fiscal 1996 to
$4.8 million in fiscal 1997. Engineering costs as a percentage of revenue were
56.9% and 54.0% for fiscal 1996 and 1997, respectively. The growth in
engineering costs was due primarily to an increase in engineering personnel, and
the decrease as a percentage of revenue stemmed from revenue growth in excess of
the growth in engineering expenses.
Cost of Revenue. Cost of revenue increased by 123.0% from $1.3 million
in fiscal 1996 to $2.9 million in fiscal 1997. As a percent of revenue,
cost of revenue was 30.9% and 32.0% in fiscal 1996 and 1997, respectively.
The growth in cost of revenue in 1997 was due to increases in headcount and
in costs related to consulting with and developing products for a growing
customer base.
Product Development Expenses. Product development expenses increased
by 81.0% from $1.1 million in fiscal 1996 to $2.0 million in fiscal 1997.
Product development expenses as a percentage of revenue were 26.0% and
22.0% in fiscal 1996 and 1997, respectively. The increase in absolute
dollars from fiscal 1996 to fiscal 1997 was attributable to increased
headcount and infrastructure investments, including workstations and EDA
tool purchases necessary for the development of a new generation of high
speed memory products and enhancements to the Company's standard cell
product. The decrease in product development expense as a percentage of
revenue was primarily the result of the growth in revenue.
Sales and Marketing Expenses. Sales and marketing expenses increased
by 234.8% from $603,000 in fiscal 1996 to $2.0 million in fiscal 1997.
Sales and marketing expenses as a percentage of revenue were 14.6% and
22.7% in fiscal 1996 and 1997, respectively. The growth in sales and
marketing expenses in absolute dollars was primarily attributable to
increased trade show participation and headcount as well as advertising and
costs associated with the Company's name change in March 1997. The increase
in sales and marketing expense as a percentage of revenue was due to
expense growth in this category which exceeded the growth of revenue.
General and Administrative Expenses. General and administrative
expenses increased by 119.3% from $611,000 in fiscal 1996 to $1.3 million
in fiscal 1997. General and administrative expenses as a percentage of
revenue were 14.7% and 15.0% in fiscal 1996 and 1997, respectively. The
growth in general and administrative expenses was the result of increases
in headcount and in legal, accounting and other professional expenses.
Other Income
Other income increased by 209.4% from $96,000 in fiscal 1996 to $297,000 in
fiscal 1997. Other income as a percentage of revenue was 2.3% and 3.3% in fiscal
1996 and 1997, respectively. The growth in other income in fiscal 1997 reflected
interest income earned on the proceeds of the Company's Series B Preferred Stock
financing in December 1996.
19
<PAGE> 21
Income Taxes
The provision for income taxes was $137,000 and $356,000 in fiscal 1996 and
1997, respectively. The Company's effective tax rate was 34.2% in fiscal 1997.
Prior to March 1996, the Company was a subchapter S corporation and, therefore,
was not subject to entity level taxation. In March 1996, the Company converted
to a C corporation and thereafter has been a cash basis taxpayer for federal and
state income tax purposes. Pro forma net income includes pro forma tax expense
as if the Company were taxed as a C corporation in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from license revenue
received from inception to September 30, 1998, the net proceeds of $27.1 million
from its February 1998 initial public offering of Common Stock, the net proceeds
of $15.8 million from its April 1998 secondary offering of Common Stock and, to
a lesser extent, the proceeds of approximately $7.7 million from the sale of
Preferred Stock and a warrant.
The Company's operating activities provided net cash of $566,000, $757,000
and $1.9 million in fiscal 1996, 1997 and 1998, respectively. Net cash provided
by operating activities in fiscal 1996, 1997 and 1998 was due primarily to net
income plus depreciation and amortization offset by contract receivables and
prepaid expenses and other assets.
Net cash used in investing activities was $3.0 million, $4.6 million and
$10.2 million in fiscal 1996, 1997 and 1998, respectively. Investing activities
have consisted primarily of net purchases of marketable securities and purchases
of property and equipment. See Notes 5 and 6 of the Notes to Financial
Statements.
Net cash provided by financing activities was $3.2 million, $4.2 million
and $43.8 million in fiscal 1996, 1997 and 1998, respectively. In fiscal 1996
and 1997, financing activities consisted primarily of sales of Preferred Stock
partially offset, in 1996, by payments on the Company's line of credit. In
fiscal 1998, financing activities consisted primarily of sales of the Company's
Common Stock in its initial public offering and secondary public offering.
As of September 30, 1998, the Company had cash, cash equivalents and
current marketable securities of $47.2 million. As of September 30, 1998, the
Company had retained earnings of $3.3 million and working capital of $50.0
million that includes the current portion of deferred revenue of $1.1 million.
The Company anticipates spending at least $451,000 for office lease payments and
approximately $4.9 million for capital expenditures over the next 12 months.
The Company intends to continue to invest heavily in the development of new
products and enhancements to its existing products. The Company's future
liquidity and capital requirements will depend upon numerous factors, including
the costs and timing of expansion of product development efforts and the success
of these development efforts, the costs and timing of expansion of sales and
marketing activities, the extent to which the Company's existing and new
products gain market acceptance, competing technological and market
developments, the costs involved in maintaining and enforcing patent claims and
other intellectual property rights, the level and timing of license revenue,
available borrowings under line of credit arrangements and other factors. The
Company believes that the Company's current cash and investment balances and any
cash generated from operations and from available or future debt financing will
be sufficient to meet the Company's operating and capital requirements for at
least the next 12 months. However, from time to time, the Company may be
required to raise additional funds through public or private financing,
strategic relationships or other arrangements. There can be no assurance that
such funding, if needed, will be available on terms attractive to the Company,
or at all. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional funds, may
require the Company to relinquish its rights to certain of its technologies or
products. The failure of the Company to raise capital when needed could have a
material adverse effect on the Company's business, operating results and
financial condition. See "-- Factors Affecting Future Operating
Results -- Future Capital Needs; Uncertainty of Additional Funding."
20
<PAGE> 22
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and displaying comprehensive income and its components in the
financial statements. It does not require a specific format for the financial
statement but requires the Company to display an amount representing total
comprehensive income for the period in the financial statement. SFAS No. 130 is
effective for the Company's 1999 fiscal year that commenced October 1, 1998. The
Company is currently studying the impact of this pronouncement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to stockholders. SFAS No. 131 is effective for
the Company's 1999 fiscal year that commenced October 1, 1998. The Company is
currently studying the impact of this pronouncement.
In March 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" which is effective for fiscal years beginning after December 15,
1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The adoption of SOP 98-1 is not
expected to have a material impact on the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit issuers and by policy limits the amount of credit
exposure to any one issuer. As stated in its policy, the Company is averse to
principal loss and seeks to preserve its invested funds by limiting default
risk, market risk and reinvestment risk.
The Company mitigates default risk by investing in high credit quality
securities 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.
The table below presents the carrying value and related weighted average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at September 30, 1998. All investments mature in one
year or less.
<TABLE>
<CAPTION>
AVERAGE RATE OF
RETURN AT
CARRYING VALUE SEPTEMBER 30, 1998
-------------- ------------------
(IN THOUSANDS) (ANNUALIZED)
<S> <C> <C>
INVESTMENT SECURITIES:
Cash equivalents -- variable rate..................... $ 2,205 3.10%
Money market funds -- variable rate................... 145 1.73%
Short-term investments -- fixed rate.................. 44,854 3.76%
-------
Total investment securities................. $47,204
=======
</TABLE>
YEAR 2000 READINESS
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. In other
words, date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. The Company is currently reviewing its products and
its internal use systems and software in order to identify and modify those
products, systems and software that are not Year 2000 compliant. The costs
associated with this review effort are not incremental to the Company and
represent a reallocation of existing resources. Additionally, in the normal
course of business, the Company has made capital investments in certain third
party software and hardware systems to address its operational needs.
21
<PAGE> 23
These systems, which are intended to improve efficiency and productivity, have
been certified Year 2000 compliant by the respective vendors and have been or
will be installed by July 31, 1999. To date, all of these capital projects were
part of the Company's capital plan and their timing was not accelerated as a
result of the Year 2000 issue. Total estimated expenditures related to these
capital projects for fiscal 1998 were $1.5 million. While the Company believes
it has made substantial progress in resolving all identified Year 2000 issues,
additional testing is planned during fiscal 1999 to reasonably ensure Year 2000
readiness. Irrespective of the outcome of such testing, the Company believes it
will be able to continue to conduct its business, possibly at reduced volume,
using its existing Year 2000 compliant systems and software until any remaining
Year 2000 issues have been resolved. The Company is also reviewing its building
and utility systems (heat, light, phones, etc.) for the impact of the Year 2000
issue. Many of these systems are Year 2000 ready. Although there can be no
assurance that the Company will be able to complete any required modifications
prior to the year 2000, that unanticipated events will not occur, or that the
Company will be able to identify any remaining Year 2000 issues before problems
manifest themselves, it is management's belief that the Company is taking
adequate action to address all related issues. Management does not expect the
financial impact of Year 2000 compliance to be material to the Company's
financial position, results of operations or cash flows.
The Company has begun to conduct an analysis to determine the extent to
which its major suppliers' systems (insofar as they relate to the Company's
business) are subject to the Year 2000 issue. The Company is currently unable to
predict the extent to which the Year 2000 issue will affect its suppliers or the
extent to which it would be vulnerable to its suppliers' failure to remediate
any Year 2000 issues on a timely basis. The failure of a major supplier to
convert its systems on a timely basis to those that are Year 2000 compliant or a
conversion that is incompatible with the Company's systems could have a material
adverse effect on the business, financial condition or results of operations of
the Company.
The Company's products work in combination with semiconductor designs and
planning tools in environments developed by other vendors and interact with
other operating environments. It is likely that, commencing in the year 2000,
the functionality of certain operating environments will be adversely affected
when one or more component products of the environment is unable to process
four-digit characters representing years and, therefore, the operating
environment would not be Year 2000 compliant. There can be no assurance that the
Company's fully compliant products will be able to function properly when
integrated with other vendors' noncompliant component products. Nor can there be
any assurance that the failure of certain operating environments with which the
Company's products work in combination will not have a material adverse effect
on the business, financial condition or results of operation of the Company.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Fluctuations in Operating Results. The Company's operating results have
fluctuated in the past as a result of a number of factors including the
relatively large size and small number of customer orders during a given period;
the timing of customer orders; delays in the design process due to changes by a
customer to its order after it is placed; the Company's ability to achieve
progress on percentage of completion contracts; the length of the Company's
sales cycle; the Company's ability to develop, introduce and market new products
and product enhancements; the timing of new product announcements and
introductions by the Company and its competitors; market acceptance of the
Company's products; the demand for semiconductors and end user products that
incorporate semiconductors; and general economic conditions. The Company's
future operating results may fluctuate from quarter to quarter and on an annual
basis as a result of these and other factors, in particular the relatively large
size and small number of customer orders during a given period and the rate of
royalties recognized in a given period. Accordingly, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely decline, perhaps substantially. The limited number of
semiconductor manufacturers to which the Company can license its products may
also have a material adverse effect on the Company's business, operating results
and financial condition if any of the Company's customers suffers a
deterioration in financial condition or there is a decline in the demand for the
semiconductors produced by such manufacturers. For example, on December 16,
1998, the Company announced that it
22
<PAGE> 24
expects revenue in the fiscal quarter ending December 31, 1998 to be lower than
industry analysts' expectations and to range from $2.7 million to $3.3 million
for the quarter. The Company also announced that it expected to incur an
operating loss of $1.0 million to $1.5 million for the quarter ending December
31, 1998. The decline in revenue and operating loss are the result of project
delays due to the financial and/or business condition of two of the Company's
customers and the decline in new bookings stemming from a decline in the demand
for semiconductors. There can be no assurance that the expected bookings will
occur in the future or at all. In addition, the Company's business, operating
results and financial condition may be materially adversely affected if the
aforementioned project delays continue and/or new bookings fail to materialize.
Revenue in any quarter is dependent on a number of factors, and is not
predictable with any degree of certainty. Since the Company's expense levels are
based in part on management's expectations regarding future revenue, if revenue
is below expectations in any quarter, the adverse effect may be magnified by the
Company's inability to adjust spending in a timely manner to compensate for any
revenue shortfall. The Company also intends to increase its sales and marketing
expenses in an attempt to broaden its market coverage. The Company's costs and
expenses will be based in part on the Company's expectations of future revenue
from product licenses. Accordingly, if the Company does not realize its expected
revenue, its business, operating results and financial condition could be
materially adversely affected.
The Company's sales cycle can be lengthy and is subject to a number of
risks over which the Company has little or no control. As a result of the
significant dollar amounts represented by a single customer order, the timing of
the receipt of an order can have a significant impact on the Company's revenue
for a particular period. In addition, because the Company's revenue is
concentrated among a small number of customers, a decline or a delay in the
recognition of revenue from one customer in a period may cause the Company's
business, operating results and financial condition in such period to be
materially adversely affected and may lead to significant fluctuations from
quarter to quarter. Any significant or ongoing failure to obtain new orders from
customers or to collect outstanding accounts receivable would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company does not expect that the rate of growth of its revenues
will be sustained in fiscal 1999 due to deterioration in the demand for
semiconductors generally, leading to a decline in new bookings, and delays in
current bookings due to the financial and/or business condition of two of its
customers.
To date, a substantial majority of the Company's revenue has been
recognized on a percentage of completion method. Provisions for estimated losses
on the uncompleted contracts are recognized in the period in which the
likelihood of such losses is determined. As the completion period ranges from
three to six months, the revenue in any quarter is dependent on the Company's
progress toward completion of the project. There can be no assurance that the
Company's estimates will be accurate, and, in the event they are not, the
Company's business, operating results and financial condition in subsequent
periods could be materially adversely affected. From time to time, the Company
experiences delays in the progress of certain projects, and there can be no
assurance that such delays will not occur in the future. Any delay or failure to
achieve such progress could result in damage to customer relationships and the
Company's reputation, under-utilization of engineering resources or a delay in
the market acceptance of the Company's products, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company's contracts with customers
generally may be canceled without cause, and, if a customer cancels or delays
performance under any such contracts, the Company's business, operating results
and financial condition could be materially adversely affected. See "-- Results
of Operations."
Dependence on Emergence of Merchant IP Component Market and Broad Market
Acceptance of the Company's Products. The market for merchant IP components has
only recently begun to emerge. The Company's ability to achieve sustained
revenue growth and profitability in the future will depend on the continued
development of this market and, to a large extent, on the demand for
System-on-a-Chip ICs. There can be no assurance that the merchant IP component
and System-on-a-Chip markets will continue to develop or grow at a rate
sufficient to support the Company's business. If either of these markets fails
to grow or develops slower than expected, the Company's business, operating
results and financial condition would be materially adversely affected. To date,
the Company's IP products have been licensed only by a limited
23
<PAGE> 25
number of customers. The vast majority of the Company's existing and potential
customers currently rely on components developed internally and/or by other
vendors. The Company's future growth, if any, is dependent on the adoption of,
and increased reliance on, merchant IP components by both existing and potential
customers. Moreover, if the Company's products do not achieve broad market
acceptance, the Company's business, operating results and financial condition
would be materially adversely affected.
Competition. The Company's strategy of targeting semiconductor
manufacturers that participate in, or may enter, the System-on-a-Chip market
requires the Company to compete in intensely competitive markets. Within the
merchant segment of the IP component market, the Company competes primarily
against Aspec, Avant!, Duet, Mentor Graphics and the Silicon Architects division
of Synopsys. In addition, the Company may face competition from consulting firms
and companies that typically have operated in the generic library segment of the
IP market and that now seek to offer customized IP components as enhancements to
their generic solutions. The Company also faces significant competition from the
internal design groups of the semiconductor manufacturers that are expanding
their manufacturing capabilities and portfolio of IP components to participate
in the System-on-a-Chip market. These internal design groups compete with the
Company for access to the parent's IP component requisitions and may eventually
compete with the Company to supply IP components to third parties on a merchant
basis. There can be no assurance that internal design groups will not expand
their product offerings to compete directly with those of the Company or will
not actively seek to participate as merchant vendors in the IP component market
by selling to third party semiconductor manufacturers or, if they do, that the
Company will be able to compete against them successfully. In addition to
competition from companies in the merchant IP component market, the Company
faces competition from vendors that supply EDA software tools, including certain
of those mentioned above, and there can be no assurance that the Company will be
able to compete successfully against them.
The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less
expensive than the Company's IP components or that may provide better
performance or additional features not currently provided by the Company. Many
of the Company's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, certain of the Company's
principal competitors offer a single vendor solution, since, in the case of EDA
tools companies, they maintain their own EDA design tools and IP libraries or,
in the case of internal design groups, they provide IP components developed to
utilize the qualities of a given manufacturing process, and may therefore
benefit from certain capacity, cost and technical advantages. The Company's
ability to compete successfully in the emerging market for IP components will
depend upon certain factors, many of which are beyond the Company's control
including, but not limited to, success in designing new products; implementing
new designs at smaller process geometries; access to adequate EDA tools (many of
which are licensed from the Company's current or potential competitors); the
price, quality and timing of new product introductions by the Company and its
competitors; the emergence of new IP component interchangeability standards; the
widespread licensing of IP components by semiconductor manufacturers or their
design groups to third party manufacturers; the ability of the Company to
protect its intellectual property; market acceptance of the Company's IP
components; success of competitive products; market acceptance of products using
System-on-a-Chip ICs; and industry and general economic conditions. There can be
no assurance that the Company will be able to compete successfully in the
emerging merchant IP component market. See "Business -- Competition."
Dependence on Semiconductor Manufacturers; Dependence on Semiconductor and
Electronics Industries. The Company's success is substantially dependent both on
the adoption of the Company's technology by semiconductor manufacturers and on
an increasing demand for products requiring complex System-on-a-Chip ICs, such
as portable computing devices, cellular phones, consumer multimedia products,
automotive electronics, personal computers and workstations. The Company is
subject to many risks beyond its control that influence the success of its
customers, including, among others, competition faced by each customer in its
particular industry, market acceptance of the customer's products that
incorporate the Company's technology,
24
<PAGE> 26
the engineering, sales and marketing capabilities of the customer, and the
financial and other resources of the customer.
The semiconductor and electronics products industries are characterized by
rapid technological change, frequent introductions of new products, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. Each of these industries is highly cyclical and has
periodically experienced significant downturns, often in connection with or in
anticipation of declines in general economic conditions during which the number
of new IC design projects often decreases. Revenue from licenses of the
Company's products is influenced by the level of design efforts by its
customers, and factors negatively affecting these industries could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's business, operating results and financial
condition may fluctuate in the future from period to period as a consequence of
general economic conditions in the semiconductor and electronics industries.
Dependence on New Business Model. The Company has historically generated
revenue from license fees. Beginning in late fiscal 1996, however, the Company
began implementation of a royalty based business model that is intended to
generate revenue from both license fees and future royalties. The Company is
still in the process of implementing this royalty based business model. The
Company believes the introduction, as opposed to the operation, of the royalty
based business model has been a limited success in that the majority of the
Company's licensees, including all new licensees with whom the Company has
contracted since August 1996, have agreed to a royalty based model. However,
certain licensees that have previously contracted with the Company based on the
older model have resisted conversion to a royalty based model. As a result, the
Company believes that until all of its customers have adopted the royalty based
model, the introduction of such model can only be described as a limited
success. There can be no assurance that the Company will be able to complete the
implementation of the royalty based model successfully, or that, when fully
implemented, this model will have the anticipated benefits. The failure of the
Company to implement its new business model successfully could have a material
adverse effect on the Company's business, operating results and financial
condition. To date, the Company has received no royalty revenue, and it does not
anticipate receiving any prior to late fiscal 1999 due to the typical length of
time required for the Company to design a component for a customer and for such
customer to design, manufacture and bring to market a product incorporating such
component. There can be no assurance that the Company will ever receive any
royalty revenue or that, if it does, that the amount will be significant. See
"-- Dependence on Semiconductor Manufacturers; Dependence on Semiconductor and
Electronics Industries" and "-- Customer Concentration; Limited Customer Base."
The Company believes that its long term success will be substantially
dependent on future royalties. However, even if the Company successfully
implements its new business model, the Company will face risks inherent in such
a model. In particular, the Company's ability to forecast royalty revenue will
be limited by factors that are beyond the Company's ability to control or assess
in advance. Royalties, if any, will be recognized in the quarter in which the
Company receives a royalty report from its customers and will be dependent upon
fluctuating sales volumes. In addition, under the royalty based business model,
the Company's revenue will be dependent upon the sales by its customers of
products that incorporate the Company's technology. Even if the Company's
technology is adopted, there can be no assurance that it will be used in a
product that is ultimately brought to market, achieves commercial acceptance or
results in significant royalties to the Company. The Company will also face
risks relating to the accuracy and completeness of the royalty collection
process. See "-- Results of Operations."
Customer Concentration; Limited Customer Base. The Company has been
dependent on a relatively small number of customers for a substantial portion of
its annual revenue, although the customers comprising this group have changed
from time to time. In fiscal 1996, ATI, ST, OKI and the DOD accounted for 37%,
20%, 15% and 10% of revenue, respectively. In fiscal 1997, ST, Fujitsu, OKI and
NEC accounted for 27%, 24%, 16% and 13% of revenue, respectively. In fiscal
1998, TSMC, OKI and UMC Group accounted for 14%, 11% and 11% of revenue,
respectively. The Company anticipates that its revenue will continue to depend
on a limited number of major customers for the foreseeable future, although the
companies considered to be major customers and the percentage of revenue
represented by each major customer may vary from period to period depending on
the addition of new contracts and the number of designs utilizing the Company's
products. None
25
<PAGE> 27
of the Company's customers has a written agreement with the Company that
obligates it to license future generations of products or new products, and
there can be no assurance that any customer will license IP components from the
Company in the future. In addition, there can be no assurance that any of the
Company's customers will ship products incorporating the Company's technology or
that, if such shipments occur, they will generate significant revenue. The loss
of one or more of the Company's major customers, reduced orders by one or more
of such customers, the failure of one or more customers to pay license fees due
to the Company or the failure of a customer to ship products containing the
Company's IP components could materially adversely affect the Company's
business, operating results and financial condition. For example, on December
16, 1998, the Company announced that it expects revenue in the fiscal quarter
ending December 31, 1998 to be lower than industry analysts' expectations and to
range from $2.7 million to $3.3 million for the quarter. The Company also
announced that it expected to incur an operating loss of $1.0 million to $1.5
million for the quarter ending December 31, 1998. The decline in revenue and
operating loss are the result of project delays due to the financial and/or
business condition of two of the Company's customers and the decline in new
bookings stemming from a decline in the demand for semiconductors. There can be
no assurance that the expected bookings will occur in the future or at all. In
addition, the Company's business, operating results and financial condition may
be materially adversely affected if the aforementioned project delays continue
and/or new bookings fail to materialize. See "Business -- Customers."
The Company faces numerous risks in successfully obtaining orders from
customers on terms consistent with the Company's business model, including,
among others, the lengthy and expensive process of building a relationship with
a potential customer before reaching an agreement with such party to license the
Company's products; persuading large semiconductor manufacturers to work with,
to rely for critical technology on, and to disclose proprietary information to,
a smaller company, such as the Company; and persuading potential customers to
bear certain development costs associated with development of customized
components. There are a relatively limited number of semiconductor manufacturers
to which the Company can license its technology in a manner consistent with its
business model and there can be no assurance that such manufacturers will rely
on merchant IP components or adopt the Company's products. See "-- Competition"
and "Business -- Customers."
Product Concentration. The Company derives substantially all of its revenue
from sales of its memory and standard cell products that, together, accounted
for 79%, 94% and 94% of revenue in fiscal 1996, 1997 and 1998, respectively. The
Company expects that memory products, in combination with standard cell
products, will continue to account for a substantial portion of the Company's
revenue for the foreseeable future. There can be no assurance that the Company
will continue to derive revenue from memory or standard cell products and a
decline in revenue from such products would have a material adverse effect on
the Company's business, operating results and financial condition. The Company's
future financial performance will depend in significant part on the successful
development, introduction and customer acceptance of new products. See "-- New
Product Development and Technological Change."
Lengthy Sales Cycle and Design Process. The license of the Company's
products typically involves a significant commitment of capital by the customer
and a purchase will often be timed to coincide with a customer's migration to a
new manufacturing process. Potential customers generally commit significant
resources to an evaluation of available IP solutions and require the Company to
expend substantial time, effort and resources to educate them about the value of
the Company's products. A variety of factors, including factors over which the
Company has little or no control, may cause potential customers to favor an
alternate solution or to delay or forego a license of the Company's products. As
a result of these and other factors, the sales cycle for the Company's products
is long, typically ranging from six to 12 months. The Company's ability to
forecast the timing and scope of specific sales is limited, and delay of or
failure to complete one or more large contracts could have a material adverse
effect on the Company's business, operating results and financial condition and
could cause the Company's operating results to fluctuate significantly from
quarter to quarter.
Once the Company receives and accepts an order from a customer, the Company
must commit significant resources to customizing its products for the customer's
manufacturing process. This customization is complex and time consuming and is
subject to a number of risks over which the Company has little or no
26
<PAGE> 28
control, including the customer's adjustments and alterations of its
manufacturing process or the timing of migration to a new process. Typically,
this customization takes from three to six months to complete. Delays in product
customization could have a material adverse effect on the Company's business,
operating results and financial condition and could cause the Company's
operating results to vary significantly from quarter to quarter.
Risks Associated with International Customers. A substantial portion of the
Company's revenue is derived from customers outside the United States. In fiscal
1996, 1997 and 1998, revenue derived from customers outside the United States,
primarily in Asia and Europe, represented approximately 84%, 73% and 84%,
respectively, of the Company's revenue. The Company anticipates that
international revenue will remain a substantial portion of revenue in the
future. To date, all of the revenue from international customers has been
denominated in U.S. dollars. In the event that the Company's competitors
denominate their sales in a currency that becomes relatively inexpensive in
comparison to the U.S. dollar, the Company may experience fewer orders from
international customers whose business is based primarily on the less expensive
currency. During the second half of fiscal 1998, the Company experienced delays
in the receipt of orders expected from existing and prospective customers,
particularly in Japan. There can be no assurance that the deferred orders will
be placed in the future or at all. There can be no assurance that present or
future dislocations with respect to the Asian financial markets will not have a
material adverse effect on the Company's business, operating results and
financial condition. The Company intends to continue to expand its sales and
marketing activities in Asia and Europe. The Company's expansion of its
international business involves a number of risks including the impact of
possible recessionary environments in economies outside the United States;
political and economic instability; exchange rate fluctuations; longer accounts
receivable collection periods; greater difficulty in accounts receivable
collection; unexpected changes in regulatory requirements; reduced or limited
protection for intellectual property rights; export license requirements;
tariffs and other trade barriers and potentially adverse tax consequences. There
can be no assurance that the Company will be able to sustain or increase revenue
derived from international customers or that the foregoing factors will not have
a material adverse effect on the Company's business, operating results and
financial condition. See "-- Results of Operations" and "Business -- Sales,
Marketing and Distribution."
New Product Development and Technological Change. The Company's customers
compete in the semiconductor industry, which is subject to rapid technological
change, frequent introductions of new products, short product life cycles,
changes in customer demands and requirements and evolving industry standards.
The development of new manufacturing processes, the introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. Accordingly, the Company's
future success will depend on its ability to continue to enhance its existing
products and to develop and introduce new products that satisfy increasingly
sophisticated customer requirements and that keep pace with new product
introductions, emerging manufacturing process technologies and other
technological developments in the semiconductor industry. Any failure by the
Company to anticipate or respond adequately to changes in manufacturing
processes or customer requirements, or any significant delays in product
development or introduction, would have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and sale of new or enhanced
products or that such new or enhanced products will achieve market acceptance.
Any delay in release dates of new or enhanced products could materially
adversely affect the Company's business, operating results and financial
condition. The Company could also be exposed to litigation or claims from its
customers in the event that it does not satisfy its delivery commitments. There
can be no assurance that any such claim would not have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business -- Product Development."
Dependence on Key Personnel. The Company's success depends in large part on
the continued contributions of its key management, engineering, sales and
marketing personnel, many of whom are highly skilled and would be difficult to
replace. None of the Company's senior management or key technical personnel is
bound by an employment contract. In addition, the Company does not currently
maintain key man life insurance covering its key personnel. The Company believes
that its success depends to a significant
27
<PAGE> 29
extent on the ability of its management to operate effectively, both
individually and as a group. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. The loss of the services of any of the key personnel,
the inability to attract or retain qualified personnel in the future or delays
in hiring required personnel, particularly engineers, could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business -- Employees."
Management of Growth. The ability of the Company to license its products
and manage its business successfully in a rapidly evolving market requires an
effective planning and management process. The Company's rapid growth has
placed, and is expected to continue to place, a significant strain on the
Company's managerial, operational and financial resources. From September 30,
1996 to September 30, 1998, the Company grew from 28 to 86 employees or
full-time equivalents. The Company's customers rely heavily on the Company's
technological expertise in designing, testing and manufacturing products
incorporating the Company's IP components. Relationships with new customers
generally require significant engineering support. As a result, any increase in
the demand for the Company's products will increase the strain on the Company's
personnel, particularly its engineers. The Company's financial and management
controls, reporting systems and procedures are also limited. Although some new
controls, systems and procedures have been implemented, the Company's future
growth, if any, will depend on its ability to continue to implement and improve
operational, financial and management information and control systems on a
timely basis, together with maintaining effective cost controls, and any failure
to do so would have a material adverse effect on the Company's business,
operating results and financial condition. Further, the Company will be required
to manage multiple relationships with various customers and other third parties
and must successfully implement its new business model. There can be no
assurance that the Company's systems, procedures or controls will be adequate to
support the Company's operations or that the Company's management will be able
to achieve the rapid execution necessary to offer its services and products
successfully and to implement its business plan. The Company's inability to
manage any future growth effectively would have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business -- Employees."
Risks Associated with Protection of Intellectual Property. The Company
relies primarily on a combination of nondisclosure agreements and other
contractual provisions and patent, trademark, trade secret and copyright law to
protect its proprietary rights. Failure of the Company to enforce its patents,
trademarks or copyrights or to protect its trade secrets could have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that such intellectual property rights can
be successfully asserted in the future or will not be invalidated, circumvented
or challenged. From time to time, third parties, including competitors of the
Company, may assert patent, copyright and other intellectual property rights to
technologies that are important to the Company. There can be no assurance that
third parties will not assert infringement claims against the Company in the
future, that assertions by third parties will not result in costly litigation or
that the Company would prevail in any such litigation or be able to license any
valid and infringed patents from third parties on commercially reasonable terms.
Litigation, regardless of the outcome, could result in substantial cost and
diversion of resources of the Company. Any infringement claims or other
litigation against or by the Company could materially adversely affect the
Company's business, operating results and financial condition.
In certain instances, the Company has elected to rely on trade secret law
rather than patent law to protect its proprietary technology. However, trade
secrets are difficult to protect. The Company seeks to protect its proprietary
technology and processes, in part, by confidentiality agreements with its
employees and customers. There can be no assurance that these contracts will not
be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known or be
independently discovered by competitors. In addition, effective trade secret
protection may be unavailable or limited in certain foreign countries.
In addition, there can be no assurance that competitors of the Company,
many of which have substantial resources and have made significant investments
in competing technologies, do not have, or will not seek to apply for and
obtain, patents that will prevent, limit or interfere with the Company's ability
to make, use or sell its products either in the United States or in
international markets. There can be no assurance that the
28
<PAGE> 30
Company will not in the future become subject to patent infringement claims and
litigation or interference proceedings declared by the USPTO to determine the
priority of inventions. The defense and prosecution of intellectual property
suits, USPTO interference proceedings and related legal and administrative
proceedings are both costly and time consuming. Any such suit or proceeding
involving the Company could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business -- Patents
and Intellectual Property Protection."
Future Capital Needs; Uncertainty of Additional Funding. The Company
intends to continue to invest heavily in the development of new products and
enhancements to its existing products. The Company's future liquidity and
capital requirements will depend upon numerous factors, including the costs and
timing of expansion of product development efforts and the success of these
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which the Company's existing and new products gain
market acceptance, competing technological and market developments, the costs
involved in maintaining and enforcing patent claims and other intellectual
property rights, the level and timing of license revenue, available borrowings
under line of credit arrangements and other factors. The Company believes that
the Company's current cash balances together with any cash generated from
operations will be sufficient to meet the Company's operating and capital
requirements for at least the next 12 months. However, from time to time, the
Company may be required to raise additional funds through public or private
financing, strategic relationships or other arrangements. There can be no
assurance that such funding, if needed, will be available on terms attractive to
the Company, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Strategic arrangements, if necessary to raise additional
funds, may require the Company to relinquish its rights to certain of its
technologies or products. The failure of the Company to raise capital when
needed could have a material adverse effect on the Company's business, operating
results and financial condition. See "-- Liquidity and Capital Resources."
Potential Volatility of Stock Price. The trading price of the Company's
Common Stock has in the past been and could in the future be subject to
significant fluctuations in response to quarterly variations in the Company's
results of operations; announcements regarding the Company's product
developments; announcements of technological innovations or new products by the
Company, its customers or competitors; release of reports by securities
analysts; changes in security analysts' recommendations; developments or
disputes concerning patents or proprietary rights or other events. Also, at some
future time, the Company's revenues and results of operations may be below the
expectations of public market securities analysts or investors, resulting in
significant fluctuations in the market price of the Company's Common Stock. For
example, on December 16, 1998, the Company announced that it expects revenue in
the fiscal quarter ending December 31, 1998 to be lower than industry analysts'
expectations and to range from $2.7 million to $3.3 million for the quarter. In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations which have particularly affected the market prices
for high technology companies and which are often unrelated and disproportionate
to the operating performance of particular companies. These broad market
fluctuations, as well as general economic, political and market conditions, may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a company's stock,
securities class action litigation has occurred against that company. Such
litigation could result in substantial costs and would at a minimum divert
management's attention and resources, which could have a material adverse effect
on the Company's business, financial condition and results of operations. Any
adverse determination in such litigation could also subject the Company to
significant liabilities. See "Market for Registrant's Common Equity and Related
Stockholder Matters -- Price Range of Common Stock."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the independent accountants' report
appear on pages F-1 through F-18 of this Report.
29
<PAGE> 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item concerning the Company's directors is
incorporated by reference to the sections captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's proxy statement relating to the Annual Meeting of Stockholders to be
held February 25, 1999 to be filed by the Company with the Securities and
Exchange Commission within 120 days of the end of the Company's fiscal year
pursuant to General Instruction G(3) of Form 10-K (the "Proxy Materials").
Certain information required by this item concerning executive officers is set
forth in Part I of this Report under the caption "Business -- Executive
Officers" and certain other information required by this item is incorporated by
reference from the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in the Proxy Materials.
ITEM 11. EXECUTIVE COMPENSATION
The Information required by this item is incorporated by reference to the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Materials.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
sections captioned "Record Date and Principal Share Ownership" contained in the
Proxy Materials.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
sections captioned "Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions" contained in the Proxy Materials.
30
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements are incorporated by reference in Item 8
of this Report:
Independent Accountants' Report
Balance Sheets, September 30, 1998 and 1997
Statements of Operations for the years ended September 30, 1998, 1997
and 1996
Statements of Stockholders' Equity for the years ended September 30,
1998, 1997 and 1996
Statements of Cash Flows for the years ended September 30, 1998, 1997
and 1996
Notes to Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts and
Reserves.................................................. S-1
Independent Accountants' Report............................. S-2
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the financial statements or notes thereto.
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.3* Bylaws of the Registrant.
4.2* First Amended and Restated Registration Rights Agreement
dated December 17, 1996 by and among the Registrant and the
Shareholders named therein.
10.1* Form of Indemnification Agreement for directors and
executive officers.
10.2* 1993 Stock Option Plan and form of agreement thereunder.
10.3* 1997 Employee Stock Purchase Plan.
10.4* 1997 Director Stock Option Plan.
10.5* Lease Agreement dated December 13, 1995 between Registrant
and Spieker Properties, L.P. for 2077 Gateway Place, San
Jose, California office.
10.5.1* Sublease dated October 10, 1997 between the Registrant and
Unison Software, Inc.
10.5.2* First Addendum to Sublease dated October 14, 1997 between
the Registrant and Unison Software, Inc.
10.5.3* Fixed Asset Purchase Agreement dated October 10, 1997
between the Registrant and Unison Software, Inc.
10.6* Series A Preferred Stock Purchase Agreement dated March 21,
1996 by and among the Registrant and the Purchasers named
therein.
10.7*+ Purchase and License Agreement dated April 9, 1996 between
the Registrant and OKI Electric Industry Co., Ltd. and
amendments thereto.
10.8* Business Loan Agreement dated May 8, 1996 between the
Registrant and Union Bank of California, N.A. and
attachments thereto.
10.9* Offer Letter dated August 29, 1996 between the Registrant
and Jeffrey A. Lewis and letter amendment dated September 5,
1996 thereto.
10.10+* Collaboration Agreement dated December 4, 1996 between the
Registrant and SGS-THOMSON MICROELECTRONICS S.r.l.
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
10.11* Series B Preferred Stock Purchase Agreement dated December
17, 1996 by and among the Registrant and the Purchasers
named therein.
10.12+* OEM Agreement dated December 6, 1996 between the Registrant
and Synopsys, Inc.
10.13+* License Agreement dated June 16, 1997 between the Registrant
and Fujitsu Microelectronics, Inc.
10.14* Lease Agreement dated June 16, 1997 between Registrant,
Richard Bowling and Katherine Bowling for 1195 Bordeaux
Drive, Sunnyvale, California office.
10.15* Severance Agreement dated June 20, 1997 between the
Registrant and Robert D. Selvi.
10.16* Offer Letter dated July 31, 1997 between the Registrant and
Larry J. Fagg.
10.17** Confidential Mutual Release and Settlement Agreement
effective as of April 15, 1998 between the Registrant and
Daniel I. Rubin.
10.18** Form of License Agreement.
10.19+** License Agreement dated as of November 30, 1997 between the
Registrant and Taiwan Semiconductor Manufacturing
Corporation, as amended.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-41219) which was declared
effective on February 2, 1998.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.
** Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-50243) which was declared
effective on April 29, 1998.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the registrant during the quarter
ended September 30, 1998.
32
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
ARTISAN COMPONENTS, INC.
By: /s/ MARK R. TEMPLETON
------------------------------------
Mark R. Templeton
President and Chief Executive
Officer
Dated: December 23, 1998
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature appears
below constitutes and appoints Mark R. Templeton and Robert D. Selvi, jointly
and severally, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MARK R. TEMPLETON President and December 23, 1998
- ----------------------------------------------------- Chief Executive Officer
Mark R. Templeton
/s/ ROBERT D. SELVI Senior Vice President, December 23, 1998
- ----------------------------------------------------- Finance and Chief
Robert D. Selvi Financial Officer
/s/ SCOTT T. BECKER Chief Technology Officer December 23, 1998
- ----------------------------------------------------- and Director
Scott T. Becker
/s/ LUCIO L. LANZA Chairman of the Board December 23, 1998
- ----------------------------------------------------- of Directors
Lucio L. Lanza
/s/ DR. ELI HARARI Director December 23, 1998
- -----------------------------------------------------
Dr. Eli Harari
</TABLE>
33
<PAGE> 35
ARTISAN COMPONENTS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 36
REPORT OF INDEPENDENT ACCOUNTANTS
October 20, 1998
To the Board of Directors and Stockholders of
Artisan Components, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations and stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Artisan Components, Inc. at
September 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
F-2
<PAGE> 37
ARTISAN COMPONENTS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $36,516 $ 1,069
Contract receivables (net of allowance of $430 and $275 at
September 30, 1998 and 1997, respectively)............. 5,052 2,834
Marketable securities..................................... 10,688 2,499
Prepaid expenses and other current assets................. 1,350 564
------- -------
Total current assets.............................. 53,606 6,966
Marketable securities....................................... -- 986
Property and equipment, net................................. 5,387 3,969
Deferred tax asset.......................................... 82 6
Other assets................................................ 414 84
------- -------
Total assets...................................... $59,489 $12,011
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 1,704 $ 796
Deferred tax liability.................................... 976 384
Deferred revenue.......................................... 1,052 1,434
------- -------
Total current liabilities......................... 3,732 2,614
Deferred rent............................................... 53 49
Deferred revenue............................................ 165 --
------- -------
Total liabilities................................. 3,950 2,663
------- -------
Commitments (Note 8)
Stockholders' Equity:
Convertible Preferred Stock, $0.001 par value:
Authorized: 5,000 and 3,436 shares at September 30,
1998 and 1997, respectively
Issued and outstanding: none and 3,386 at September 30,
1998 and 1997, respectively........................... -- 7,564
(Liquidation value: $9,995 at September 30, 1997)
Common Stock, $0.001 par value:
Authorized: 50,000 shares;
Issued and outstanding: 13,368 and 5,644 shares at
September 30, 1998 and 1997, respectively............. 13 6
Warrant................................................... -- 125
Additional paid in capital................................ 52,235 688
Retained earnings......................................... 3,291 965
------- -------
Total stockholders' equity........................ 55,539 9,348
------- -------
Total liabilities and stockholders' equity........ $59,489 $12,011
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 38
ARTISAN COMPONENTS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Revenue..................................................... $16,568 $8,912 $4,147
Cost and expenses:
Cost of revenue........................................... 4,962 2,855 1,280
Product development....................................... 3,580 1,955 1,080
Sales and marketing....................................... 4,030 2,019 603
General and administrative................................ 1,922 1,340 611
------- ------ ------
Total cost and expenses........................... 14,494 8,169 3,574
------- ------ ------
Operating income............................................ 2,074 743 573
Other income................................................ 1,175 297 98
Interest expense............................................ -- -- 2
------- ------ ------
Income before provision for income taxes.................... 3,249 1,040 669
Provision for income taxes.................................. 923 356 137
------- ------ ------
Net income.................................................. $ 2,326 $ 684 $ 532
======= ====== ======
Basic earnings per share (historical)....................... $ 0.22 $ 0.13
======= ======
Diluted earnings per share (historical)..................... $ 0.18 $ 0.07
======= ======
Pro forma net income data (unaudited):
Income before provision for income taxes.................. $ 669
Pro forma income tax expense.............................. $ (260)
------
Pro forma net income...................................... $ 409
======
Basic earnings per share (pro forma)...................... $ 0.08
======
Diluted earnings per share (pro forma).................... $ 0.06
======
Shares used in computing:
Basic earnings per share.................................. 10,457 5,456 5,040
======= ====== ======
Diluted earnings per share................................ 12,917 9,657 7,010
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 39
ARTISAN COMPONENTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- --------------- PAID IN RETAINED
SHARES AMOUNT SHARES AMOUNT WARRANT CAPITAL EARNINGS TOTAL
------ ------- ------ ------ ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1995....................... -- -- 5,029 $ 1 -- -- $ 409 $ 410
Options exercised.......... -- -- 85 -- -- $ 1 -- 1
Issuance of Series A
Preferred Stock, net of
issuance costs of $22.... 2,264 $ 3,478 -- -- -- -- -- 3,478
Distributions to
stockholders............. -- -- -- -- -- -- (129) (129)
Undistributed earnings of S
corporation reflected as
additional paid in
capital of the Company... -- -- -- 4 -- 527 (531) --
Net income................. -- -- -- -- -- -- 532 532
------ ------- ------ --- ----- ------- ------ -------
Balance at September 30,
1996....................... 2,264 $ 3,478 5,114 $ 5 -- $ 528 $ 281 $ 4,292
Options exercised.......... -- -- 510 1 -- 16 -- 17
Issuance of Series B
Preferred Stock, net of
issuance costs of $19.... 1,122 4,086 -- -- -- -- -- 4,086
Issuance of Common Stock to
employees as a stock
bonus.................... -- -- 20 -- -- 103 -- 103
Compensation expense for
options granted.......... -- -- -- -- -- 41 -- 41
Issuance of Warrant........ -- -- -- -- $ 125 -- -- 125
Net income................. -- -- -- -- -- -- 684 684
------ ------- ------ --- ----- ------- ------ -------
Balance at September 30,
1997....................... 3,386 $ 7,564 5,644 $ 6 $ 125 $ 688 $ 965 $ 9,348
Common Stock issued upon
conversion of Series A
and Series B Preferred
Stock.................... (3,386) (7,564) 3,386 3 -- 7,561 -- --
Common Stock issued upon
exercise of warrant...... -- -- 50 -- (125) 313 -- 188
Common Stock issued upon
initial public
offering................. -- -- 3,015 3 -- 27,083 -- 27,086
Common Stock issued upon
secondary offering....... 956 1 15,845 -- 15,846
Options exercised.......... -- -- 271 -- -- 78 -- 78
Common Stock issued
pursuant to employee
stock purchase plan...... -- -- 46 -- -- 391 -- 391
Compensation expense for
options granted.......... -- -- -- -- -- 80 -- 80
Tax benefit for
disqualifying
dispositions............. -- -- -- -- -- 196 -- 196
Net income................. -- -- -- -- -- -- 2,326 2,326
------ ------- ------ --- ----- ------- ------ -------
Balance at September 30,
1998....................... -- $ -- 13,368 $13 $ -- $52,235 $3,291 $55,539
====== ======= ====== === ===== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 40
ARTISAN COMPONENTS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 2,326 $ 684 $ 532
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 1,845 777 250
Gain on sale of fixed assets...................... (82) -- --
Provision for doubtful accounts................... 155 275 --
Issuance of Common Stock to employees as a stock
bonus........................................... -- 103 --
Compensation expense for options granted.......... 80 41 --
Changes in assets and liabilities:
Contract receivables......................... (2,373) (2,277) 86
Deferred revenue............................. (217) 1,107 (250)
Prepaid expenses and other assets............ (1,116) (267) (297)
Deferred rent................................ 4 34 15
Deferred taxes............................... 516 243 135
Accounts payable and other liabilities....... 745 37 95
-------- ------- -------
Net cash provided by operating
activities............................ 1,883 757 566
-------- ------- -------
Cash flows from investing activities:
Acquisition of property and equipment.................. (3,128) (3,389) (777)
Proceeds from sale of property and equipment........... 110 -- 12
Purchase of marketable securities...................... (11,498) (5,692) (4,255)
Proceeds from sales of marketable securities........... 4,295 4,456 2,007
-------- ------- -------
Net cash used in investing activities... (10,221) (4,625) (3,013)
-------- ------- -------
Cash flows from financing activities:
Borrowings from line of credit......................... -- -- 445
Repayments on line of credit........................... -- -- (645)
Net proceeds from issuance of Series A Preferred
Stock................................................ -- -- 3,478
Net proceeds from issuance of Series B Preferred Stock
and Warrant.......................................... -- 4,211 --
Proceeds from issuance of Common Stock................. 43,589 17 1
Distributions to stockholders.......................... -- -- (129)
Tax benefits from disqualifying dispositions of Common
Stock................................................ 196 -- --
-------- ------- -------
Net cash provided by financing
activities............................ 43,785 4,228 3,150
-------- ------- -------
Net increase in cash and cash equivalents................... 35,447 360 703
Cash and cash equivalents, beginning of period.............. 1,069 709 6
-------- ------- -------
Cash and cash equivalents, end of period.................... $ 36,516 $ 1,069 $ 709
======== ======= =======
Cash paid for:
Income taxes........................................... $ 370 $ 2 $ 2
======== ======= =======
Interest paid.......................................... $ -- $ -- $ 2
======== ======= =======
Supplemental disclosure of noncash activities:
Fixed asset acquisitions in exchange for accounts
payable.............................................. $ 163 $ 384 $ 208
======== ======= =======
Issuance of Common Stock to employees as a stock
bonus................................................ $ -- $ 103 $ --
======== ======= =======
Compensation expense for options granted............... $ 80 $ 41 $ --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 41
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Artisan Components, Inc. (the "Company") develops high performance, low
power and high density embedded memories and other intellectual property ("IP")
components for the design and manufacture of complex integrated circuits
("ICs"). The Company licenses its products to semiconductor manufacturers and
fabless semiconductor companies for the design of ICs used in complex, high
volume applications, such as portable computing devices, cellular phones,
consumer multimedia products, automotive electronics, personal computers and
workstations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and to
disclose contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
Revenue and cost of revenue
Revenue consists of license fees received under the terms of license
agreements with customers to provide the Company's IP component products which
are customized to each customer's manufacturing process. IP component products
consist of data and/or software and related documentation which enable a
customer to design and manufacture complex ICs. The software, if any, included
in the Company's IP component products is incidental. The purpose of the license
is to permit the customer to use the Company's IP in connection with the design
and manufacture of the customer's products. The customization of the IP
component products generally takes up to six months to complete and the customer
obtains ownership rights to the in-process customization as well as the
completed customization. The license period is typically twenty years. Under the
terms of a typical license agreement, a portion of the fees are paid on signing
of the agreement with the final payment due within 30 days of completion of
customization. The Company warrants that the licensed products shall be free
from defects and conform to customer's specifications. In addition, the Company
generally provides telephonic and e-mail support to its customers through the
warranty period, which is typically 90 days. In some instances, the Company has
agreed to provide limited support beyond the warranty period, although the
Company believes its products are not support intensive and the experience to
date would indicate such support requires a relatively minor resource
commitment. Customers are also able to purchase support contracts that provide
for a continuation of the telephonic and e-mail support mentioned above. No
upgrades or modifications to the licensed product are provided under these
contracts. Other than warranty and ongoing product support, the Company has no
further obligations subsequent to completion of the customization. Revenue from
license fees is recognized based on the percentage of completion method over the
period that the Company completes customization for the majority of the
Company's contracts. Under certain contracts where the costs cannot be
estimated, the completed contract method is utilized whereby revenue and costs
are recognized when the Company completes customization. Under the percentage of
completion and completed contract methods, provisions for estimated losses on
uncompleted contracts are recognized in the period in which the likelihood of
such losses is determined.
Cost of revenue is primarily comprised of salaries and benefits of
employees assigned to the contracts, is allocated based on the amount of time
devoted to each contract by the employees, includes an accrual for warranty and
product support costs and is recognized using the percentage of completion
method.
F-7
<PAGE> 42
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Product Development
Product development expenses are charged to operations as incurred.
Earnings Per Share ("EPS")
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128") effective December 31, 1997.
SFAS 128 requires the presentation of basic and diluted earnings per share.
Basic EPS is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
is computed giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares consist of the
incremental common shares issuable upon the conversion of convertible preferred
stock (using the "if converted" method) and exercise of stock options and
warrants for all periods. All prior period earnings per share amounts have been
restated to comply with the SFAS 128.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at date of acquisition to be cash equivalents.
The Company maintains its cash and cash equivalents in accounts with two major
financial institutions.
Marketable Securities
Marketable securities are classified as available-for-sale securities and
are carried at fair value, based on quoted market prices, with the unrealized
gains or losses, net of tax, reported in stockholders' equity. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity, both of which are included in interest income.
Realized gains and losses are recorded using the specific identification method.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Property and equipment are depreciated on a straight line basis over their
respective estimated useful lives of three to five years. Leasehold improvements
are amortized on a straight line basis over the shorter of their respective
estimated useful lives or the terms of their respective leases. Upon disposal,
assets and related accumulated depreciation are removed from the accounts and
the related gain or loss is included in results from operations.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and displaying comprehensive income and its components in the
financial statements. It does not require a specific format for the statement,
but requires the Company to display an amount representing total comprehensive
income for the period in the financial statement. SFAS No. 130 is effective for
the Company's 1999 fiscal year that commenced October 1, 1998. The Company is
currently studying the impact of this pronouncement.
F-8
<PAGE> 43
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to stockholders. SFAS No. 131 is effective for
the Company's 1999 fiscal year that commenced October 1, 1998. The Company is
currently studying the impact of this pronouncement.
In March 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after December 15,
1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The adoption of SOP 98-1 is not
expected to have a material impact on the Company.
3. BUSINESS RISKS AND CREDIT CONCENTRATION
The Company operates in an intensely competitive industry that has been
characterized by rapid technological change, short product life cycles, cyclical
market patterns and heightened foreign and domestic competition. Significant
technological changes in the industry could affect operating results adversely.
The Company markets and sells its technology to a narrow base of customers
and generally does not require collateral. At September 30, 1998, three
customers accounted for 36%, 18% and 12% of gross contract receivables. At
September 30, 1997, four customers accounted for 36%, 20%, 15% and 14%, of gross
contract receivables. As of September 30, 1998, the Company's cash and cash
equivalents were deposited with two major financial institutions in the form of
demand deposits, money market accounts and municipal government agency
securities. Financial instruments that potentially subject the Company to
concentrations of credit risk were principally comprised of cash and cash
equivalents, marketable securities and contract receivables. The Company invests
its excess cash primarily in municipal government agency securities that mature
within one year.
4. CONTRACT RECEIVABLES
Contract receivables were comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1998 1997
------ ------
<S> <C> <C>
Accounts receivable................................ $3,379 $1,092
Unbilled contract receivables...................... 2,103 2,017
------ ------
5,482 3,109
Allowance for doubtful accounts.................... (430) (275)
------ ------
$5,052 $2,834
====== ======
</TABLE>
F-9
<PAGE> 44
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment were comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Computer equipment and software.................. $ 5,100 $ 3,969
Office furniture................................. 744 288
Leasehold improvements........................... 2,367 1,096
------- -------
8,211 5,353
Accumulated depreciation and amortization........ (2,824) (1,384)
------- -------
$ 5,387 $ 3,969
======= =======
</TABLE>
6. MARKETABLE SECURITIES
Marketable securities, classified as available-for-sale securities,
included the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1998 1997
------- ------
<S> <C> <C>
Short term investments:
U.S. government securities.................... -- $2,499
------- ------
Municipal government obligations.............. $10,688 --
------- ------
Long term investments:
U.S. government securities.................... $ -- $ 986
------- ------
</TABLE>
All short term investments have maturities of less than one year from the
respective balance sheet date. The cost of marketable securities approximates
fair value of the securities and there are no unrealized holding gains or
losses.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1998 1997
------ ----
<S> <C> <C>
Accounts payable.................................... $ 368 $399
Accrued expenses.................................... 877 112
Accrued payroll..................................... 408 120
Accrued warranty.................................... 51 165
------ ----
$1,704 $796
====== ====
</TABLE>
8. COMMITMENTS
The Company rents its office facility in Sunnyvale, California under a
noncancelable operating lease that expires in 2004. Under the terms of the
lease, the Company is responsible for its share of taxes, insurance and common
area maintenance costs.
F-10
<PAGE> 45
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At September 30, 1998, future minimum annual lease payments under this
lease were as follows (in thousands):
<TABLE>
<S> <C>
Fiscal 1999................................................. $ 451
Fiscal 2000................................................. 470
Fiscal 2001................................................. 490
Fiscal 2002................................................. 509
Thereafter.................................................. 1,078
------
$2,998
======
</TABLE>
The Company continues to lease its previous office facility in San Jose,
California under a non-cancelable lease that expires in 2001. In October 1997,
the Company entered into a sublease arrangement with respect to the San Jose
office facility. This sublease expires in 2001 and provides that the subtenant
assumes the lease obligation of the Company.
Future minimum annual lease payments and future minimum annual rental
income with respect to the San Jose property are as follows (in thousands):
<TABLE>
<CAPTION>
LEASE RENTAL
PAYMENT INCOME
------- ------
<S> <C> <C>
Fiscal 1999.......................................... $330 $330
Fiscal 2000.......................................... 347 347
Fiscal 2001.......................................... 148 148
---- ----
$825 $825
==== ====
</TABLE>
Net rent expense was $511,000, $442,000 and $324,000 for the fiscal years
ended September 30, 1998, 1997 and 1996, respectively.
9. STOCKHOLDERS' EQUITY
Stock Splits
In January 1997, the Board of Directors declared a two-for-one Common Stock
and convertible Series A and Series B Preferred Stock split. In November 1997,
the Board of Directors declared a one-for-two reverse Common Stock and
convertible Series A and Series B Preferred Stock split. All share data
including stock option plan information is restated to reflect the stock splits.
Convertible Preferred Stock
At September 30, 1998 and 1997, convertible Preferred Stock consisted of
the following (in thousands):
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES ISSUED AND
AUTHORIZED OUTSTANDING PROCEEDS, NET
---------------- ---------------- -------------
SERIES 1998 1997 1998 1997 1998 1997
- ------------ ------ ------- ------ ------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Undesignated 5,000 -- -- -- -- --
A -- 2,264 -- 2,264 -- $3,478
B -- 1,172 -- 1,122 -- 4,086
---- ----- ---- ----- ---- ------
-- 3,436 -- 3,386 -- $7,564
==== ===== ==== ===== ==== ======
</TABLE>
All of the Series A and the Series B Preferred Stock was converted to
Common Stock immediately prior to the closing of the Company's initial public
offering ("IPO") in February 1998.
F-11
<PAGE> 46
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Authorized Preferred Stock
The Company is authorized to issue 5,000,000 shares of undesignated
preferred stock, $0.001 par value per share, of which no shares were issued and
outstanding as of September 30, 1998. Preferred stock may be issued from time to
time in one or more series. The Board of Directors is authorized to determine
the rights, preferences, privileges and restrictions granted to and imposed upon
any wholly unissued series of preferred stock and to fix the number of shares of
any series of preferred stock and the designation of any such series without any
vote or action by the Company's stockholders.
Warrant
In connection with the issuance of the Series B Preferred Stock the Company
issued a warrant to purchase an aggregate of 50,000 shares of Series B Preferred
Stock at an exercise price of $3.77 and an additional, variable amount of Series
B Preferred Stock, at a price to be determined at the time of issuance of such
shares.
The warrant was exercised immediately prior to the closing of the Company's
IPO in February 1998 at which time 50,000 shares of Series B Preferred Stock
were issued upon exercise and converted to Common Stock immediately prior to the
closing of the Company's IPO.
Stock Option Plans
The Company had reserved 4,291,396 shares of its Common Stock under its
1993 Stock Option Plan, as amended (the "1993 Plan") for issuance upon the
exercise of incentive and nonstatutory stock options to employees, directors and
consultants as of September 30, 1998. The 1993 Plan expires in 2003. Incentive
stock options may be granted with exercise prices of no less than fair market
value, and non-statutory stock options may be granted with exercise prices of no
less than 85% of the fair market value of the common stock on the grant date, as
determined by the Board of Directors. Options become exercisable as determined
by the Board of Directors but generally at a rate of 25% after the first year
and 6.25% each quarter thereafter. Options expire as determined by the Board of
Directors but not more than ten years after the date of grant.
In November 1997, the Company adopted the 1997 Director Option Plan (the
"Director Plan"). The Director Plan provides for the granting of options of up
to 200,000 shares of Common Stock of the Company. The option grants under the
Director Plan are automatic and nondiscretionary, and the exercise price of the
options is 100% of the fair market value of the Company's Common Stock on the
date of grant. The Director Plan provides for an initial grant of options to
purchase 25,000 shares of Common Stock to each new nonemployee director. In
addition, each nonemployee director will automatically be granted an option to
purchase 5,000 shares of Common Stock annually. Options granted under the
Director Plan become exercisable over a four year period with the 25,000 share
grants vesting one-fourth on the first anniversary of the date of grant and then
monthly thereafter and the 5,000 share grants vesting monthly. At September 30,
1998, options to purchase a total of 50,000 shares of Common Stock were
outstanding under the Director Plan. The Director Plan expires in November 2008.
F-12
<PAGE> 47
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Activity under the 1993 Plan and the Director Plan was as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
WEIGHTED
SHARES OPTIONS OUTSTANDING AVERAGE
AVAILABLE ------------------------------------ EXERCISE
FOR NUMBER PRICE PER PRICE
GRANT OF SHARES SHARE TOTAL PER SHARE
--------- --------- -------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995............ 764 577 $0.01 $ 6 $0.01
Additional shares reserved for
issuance............................ 422 -- -- -- --
Granted................................ (598) 598 $0.01 - $0.15 47 $0.0784
Exercised.............................. -- (85) $0.01 (1) $0.01
Canceled............................... 4 (4) $0.01 -- $0.01
------ ----- -------
Balance at September 30, 1996............ 592 1,086 $0.01 - $0.15 52 $0.0477
Additional shares reserved for
issuance............................ 400 -- -- -- --
Granted................................ (831) 831 $0.15 - $5.00 2,165 $2.6052
Exercised.............................. -- (510) $0.01 - $0.15 (17) $0.034
------ ----- -------
Balance at September 30, 1997............ 161 1,407 $0.01 - $5.00 2,200 $1.5635
Additional shares reserved for
issuance............................ 2,200 -- -- -- --
Granted................................ (1,166) 1,166 $5.00 - $17.63 9,293 $7.9723
Exercised.............................. -- (271) $0.01 - $7.00 (78) $0.2892
Canceled............................... 101 (101) $0.15 - $17.63 (547) $5.4375
------ ----- -------
Balance at September 30, 1998............ 1,296 2,201 $10,868 $4.9371
====== ===== ======= =========
</TABLE>
At September 30, 1998, 1997 and 1996, options to purchase 450,692, 291,011
and 425,999 shares of Common Stock, respectively, were exercisable pursuant to
the 1993 Plan and the Director Plan. The weighted average remaining contract
life was 8.2, 8.9 and 8.7 years as of September 30, 1998, 1997 and 1996,
respectively.
The options outstanding and currently exercisable pursuant to the 1993 Plan
and the Director Plan by exercise price at September 30, 1998 are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OF SHARES REMAINING EXERCISE OF SHARES EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01 - $ 0.25....................... 648 7.64 $0.12 321 $0.12
$2.00 - $ 3.50....................... 38 8.51 $2.46 8 $2.24
$4.50 - $ 5.00....................... 458 8.80 $4.70 116 $4.65
$6.00 - $17.13....................... 1,057 8.27 $8.08 6 $7.00
----- ---
2,201 8.20 $4.94 451 $1.42
===== ===
</TABLE>
The fair value of option grants related to the above plans is estimated on
the date of grant using the Black-Scholes pricing model with the following
assumptions for the years ended September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... 5.37% 6.25% 5.65%
Expected average life........................... 5 years 5 years 5 years
Expected dividends.............................. -- -- --
Expected volatility............................. 79% 0% 0%
</TABLE>
F-13
<PAGE> 48
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The expected average life is based upon the assumption that the stock
options, on average, are exercised one year after they are fully vested.
In connection with the grant of options for the purchase of 96,200 shares
of Common Stock to employees during the period from December 1996 through March
1997, the Company recorded aggregate deferred compensation of approximately
$198,000 representing the difference between the deemed fair value of the Common
Stock and the option exercise price at date of grant. Such deferred compensation
will be amortized over the vesting period relating to these options, of which
$48,000 and $41,000 was amortized during the years ended September 30, 1998 and
1997, respectively.
Employee Stock Purchase Plan
In November 1997, the Company adopted the 1997 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 600,000 shares of common stock for issuance
under the Purchase Plan. The Purchase Plan authorizes the granting of stock
purchase rights to eligible employees during two-year offering periods with
exercise dates approximately every six months. The first offering period
commenced in February 1998 and ended on July 31, 1998. Shares are purchased
through employee payroll deductions at purchase prices equal to 85% of the
lesser of the fair market value of the Company's common stock at either the
first day of each offering period or the date of purchase. As of September 30,
1998, 45,987 shares had been issued under the Purchase Plan at a price of $8.50
per share.
The estimated fair value of purchase rights under the Company's Purchase
Plan is determined using the Black-Scholes pricing model with the following
assumptions for the year ended September 30, 1998:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Risk-free interest rate.................................. 5.25%
Expected average life.................................... 0.74 years
Expected dividends....................................... --
Expected volatility...................................... 79%
</TABLE>
For the year ended September 30, 1998, the weighted average fair value of
purchase rights under the Purchase Plan was $4.23 per share.
F-14
<PAGE> 49
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for the 1993 Plan, the Director Plan or the Purchase Plan. Had compensation
expense been determined at the fair value on the grant dates for awards under
the plans consistent with the method of SFAS No. 123, the Company's net income
in fiscal 1998, 1997 and 1996 would have been reduced to the pro forma amounts
indicated below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------------
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Net income
As reported, historical in 1998 and 1997 and pro forma in
1996.................................................. $2,326 $ 684 $ 409
Pro forma................................................ $1,399 $ 658 $ 405
Net income per share
As reported, historical in 1998 and 1997 and pro forma in
1996
Basic earnings per share.............................. $ 0.22 $0.13 $0.08
Diluted earnings per share............................ $ 0.18 $0.07 $0.06
Pro forma
Basic earnings per share.............................. $ 0.13 $0.12 $0.08
Diluted earnings per share............................ $ 0.11 $0.07 $0.06
</TABLE>
The effects of SFAS No. 123 on pro forma disclosures of net income and net
income per share for fiscal 1998, 1997 and 1996 are not likely to be
representative of the pro forma effects on net income and earnings per share in
future years.
10. INCOME TAXES
Prior to March 1996, the Company was organized as a subchapter S
corporation and profits and losses flowed through to the stockholders. Deferred
tax assets and liabilities associated with temporary differences at the
termination of S corporation status were recorded with a corresponding charge to
provision for income taxes.
The provision for income taxes was comprised of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal:
Current............................................. $126 $ -- $ --
Deferred............................................ 403 181 114
---- ---- ----
529 181 114
State:
Current............................................. 42 -- 3
Deferred............................................ 113 49 20
---- ---- ----
155 49 23
Foreign:
Current............................................. 239 126 --
---- ---- ----
Total....................................... $923 $356 $137
==== ==== ====
</TABLE>
F-15
<PAGE> 50
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's effective tax rate on pretax income differed from the U.S.
federal statutory regular tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997 1996
----- ----- ------
<S> <C> <C> <C>
Provision at U.S. federal statutory rate.............. 34.0% 34.0% 34.0%
State tax net of federal benefit...................... 4.3 4.2 3.4
Non-taxable S corporation earnings.................... -- -- (16.0)
Research and experimentation credits.................. (4.0) (4.0) (0.9)
Tax exempt interest................................... (9.9) -- --
Other................................................. 4.0 -- --
---- ---- -----
Effective tax rate:................................... 28.4% 34.2% 20.5%
==== ==== =====
</TABLE>
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1998 1997
------- -----
<S> <C> <C>
DEFERRED TAX ASSETS:
Current:
Net operating losses.................................... $ 67 $ --
Research and experimentation credits.................... 213 85
Foreign tax credits..................................... 239 --
Other credits........................................... -- 8
------- -----
519 93
Non current:
Depreciation and amortization........................... 82 6
------- -----
601 99
DEFERRED TAX LIABILITIES:
Current:
Accrual to cash conversion.............................. (1,495) (477)
------- -----
Net deferred tax liability................................ $ (894) $(378)
======= =====
</TABLE>
As of September 30, 1998, the Company had federal net operating loss
carryforwards ("NOLs") of approximately $197,000 available to offset future
taxable income. These NOLs expire in the year 2018. The Company had federal and
state credits of $449,000 and $2,000, respectively. The credits expire between
2003 and 2013 if not utilized.
11. SEGMENT REPORTING
The Company operates in one industry segment.
F-16
<PAGE> 51
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The distribution of revenues by geographic area was as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
REVENUE FROM UNAFFILIATED CUSTOMERS:
North America................................... $ 3,976 $2,923 $2,180
Europe.......................................... 3,848 2,873 944
Asia............................................ 8,744 3,116 1,023
------- ------ ------
$16,568 $8,912 $4,147
======= ====== ======
</TABLE>
Revenue from individual customers equal to 10% or more of revenue was as
follows (in thousands, except percent data):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
A............................. -- -- 27% $2,362 20% $ 836
B............................. -- -- 13 1,145 -- --
C............................. -- -- -- -- 10 395
D............................. 11% $1,889 16 1,388 15 627
E............................. -- -- -- -- 37 1,533
F............................. -- -- 24 2,167 -- --
G............................. 14 2,284 -- -- -- --
H............................. 11 1,845 -- -- -- --
</TABLE>
12. BENEFIT PLAN
The Company sponsors a 401(k) profit sharing plan (the "401(k) Plan") for
substantially all employees. The 401(k) Plan provides for profit sharing
contributions to be made at the discretion of the Company's Board of Directors.
The Company did not elect to make a profit sharing contribution for fiscal 1998,
1997 or 1996.
The 401(k) Plan also provides for elective employee salary reduction
contributions and Company matching of employees' contributions. Employees may
contribute up to 20% of elective compensation. The Company's matching
contribution is at the discretion of the Company's Board of Directors. The
Company's matching contributions were $136,664, $74,017 and $39,756 for fiscal
1998, 1997 and 1996, respectively.
F-17
<PAGE> 52
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. UNAUDITED PRO FORMA DATA
The statement of operations includes pro forma tax expense to reflect tax
expense as if the Company had been a C corporation in fiscal 1996. The
components of the pro forma tax expense consisted of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1996
-------------
<S> <C>
Federal:
Deferred.............................................. $(222)
State:
Current............................................... (1)
Deferred.............................................. (37)
Foreign:
Current............................................... --
Deferred.............................................. --
-----
Tax expense........................................ $(260)
=====
</TABLE>
14. EARNINGS PER SHARE
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Numerator -- Basic and diluted EPS
Net income (historical)............................... $ 2,326 $ 684
======= ======
Pro forma net income (unaudited)...................... $ 409
======
Denominator -- Basic EPS
Common stock outstanding.............................. 10,457 5,456 5,040
======= ====== ======
Basic earnings per share................................ $ 0.22 $ 0.13 $ 0.08
======= ====== ======
Denominator -- Diluted EPS
Denominator -- Basic EPS.............................. 10,457 5,456 5,040
Effect of dilutive securities:
Common stock options............................... 1,279 1,052 773
Warrant............................................ 12 -- --
Convertible preferred stock........................ 1,169 3,149 1,197
------- ------ ------
12,917 9,657 7,010
======= ====== ======
Diluted earnings per share.............................. $ 0.18 $ 0.07 $ 0.06
======= ====== ======
</TABLE>
F-18
<PAGE> 53
ARTISAN COMPONENTS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
September 30, 1996.......................... $ -- $ -- $ -- $ --
September 30, 1997.......................... -- 275 -- 275
September 30, 1998.......................... 275 155 -- 430
</TABLE>
S-1
<PAGE> 54
ARTISAN COMPONENTS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
October 20, 1998
To the Board of Directors and Stockholders of
Artisan Components, Inc.
Our report on the financial statements of Artisan Components, Inc. is
included on page F-2 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
S-2
<PAGE> 55
ARTISAN COMPONENTS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBIT PAGE NUMBER
------ ---------------------- -----------
<S> <C> <C>
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.3* Bylaws of the Registrant.
4.2* First Amended and Restated Registration Rights Agreement
dated December 17, 1996 by and among the Registrant and the
Shareholders named therein.
10.1* Form of Indemnification Agreement for directors and
executive officers.
10.2* 1993 Stock Option Plan and form of agreement thereunder.
10.3* 1997 Employee Stock Purchase Plan.
10.4* 1997 Director Stock Option Plan.
10.5* Lease Agreement dated December 13, 1995 between Registrant
and Spieker Properties, L.P. for 2077 Gateway Place, San
Jose, California office.
10.5.1* Sublease dated October 10, 1997 between the Registrant and
Unison Software, Inc.
10.5.2* First Addendum to Sublease dated October 14, 1997 between
the Registrant and Unison Software, Inc.
10.5.3* Fixed Asset Purchase Agreement dated October 10, 1997
between the Registrant and Unison Software, Inc.
10.6* Series A Preferred Stock Purchase Agreement dated March 21,
1996 by and among the Registrant and the Purchasers named
therein.
10.7*+ Purchase and License Agreement dated April 9, 1996 between
the Registrant and OKI Electric Industry Co., Ltd. and
amendments thereto.
10.8* Business Loan Agreement dated May 8, 1996 between the
Registrant and Union Bank of California, N.A. and
attachments thereto.
10.9* Offer Letter dated August 29, 1996 between the Registrant
and Jeffrey A. Lewis and letter amendment dated September 5,
1996 thereto.
10.10+* Collaboration Agreement dated December 4, 1996 between the
Registrant and SGS-THOMSON MICROELECTRONICS S.r.l.
10.11* Series B Preferred Stock Purchase Agreement dated December
17, 1996 by and among the Registrant and the Purchasers
named therein.
10.12+* OEM Agreement dated December 6, 1996 between the Registrant
and Synopsys, Inc.
10.13+* License Agreement dated June 16, 1997 between the Registrant
and Fujitsu Microelectronics, Inc.
10.14* Lease Agreement dated June 16, 1997 between Registrant,
Richard Bowling and Katherine Bowling for 1195 Bordeaux
Drive, Sunnyvale, California office.
10.15* Severance Agreement dated June 20, 1997 between the
Registrant and Robert D. Selvi.
10.16* Offer Letter dated July 31, 1997 between the Registrant and
Larry J. Fagg.
10.17** Confidential Mutual Release and Settlement Agreement
effective as of April 15, 1998 between the Registrant and
Daniel I. Rubin.
10.18** Form of License Agreement.
10.19+** License Agreement dated as of November 30, 1997 between the
Registrant and Taiwan Semiconductor Manufacturing
Corporation, as amended.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-41219) which was declared
effective on February 2, 1998.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.
** Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-50243) which was declared
effective on April 29, 1998.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Artisan Components, Inc. on Form S-8 (File No. 333-60239) of our report dated
October 20, 1998, on our audits of the financial statements and the financial
statement schedule of Artisan Components, Inc. as of September 30, 1997 and
1998, and for the three years in the period ended September 30, 1998, which
reports are included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
December 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 36,516
<SECURITIES> 10,688
<RECEIVABLES> 5,482
<ALLOWANCES> (430)
<INVENTORY> 0
<CURRENT-ASSETS> 53,606
<PP&E> 8,211
<DEPRECIATION> (2,824)
<TOTAL-ASSETS> 59,489
<CURRENT-LIABILITIES> 3,732
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 55,526
<TOTAL-LIABILITY-AND-EQUITY> 59,489
<SALES> 16,568
<TOTAL-REVENUES> 16,568
<CGS> 4,962
<TOTAL-COSTS> 14,494
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,175)
<INCOME-PRETAX> 3,249
<INCOME-TAX> 923
<INCOME-CONTINUING> 2,326
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,326
<EPS-PRIMARY> .22
<EPS-DILUTED> .18
</TABLE>
