ARTISAN COMPONENTS INC
10-Q, 1999-08-09
SEMICONDUCTORS & RELATED DEVICES
Previous: LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M, 497, 1999-08-09
Next: UNITED PANAM FINANCIAL CORP, 10-Q, 1999-08-09


<PAGE>   1

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                ----------------
                                    FORM 10-Q
                                ----------------

(Mark One)

[X]   Quarterly report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the period ended June 30, 1999

                                       OR

[ ]   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

Commission file number:  000-23649

                            ARTISAN COMPONENTS, INC.
             (Exact name of registrant as specified in its charter)

               DELAWARE                                77-0278185
   (State or other jurisdiction of       (I.R.S. Employer Identification Number)
    incorporation or organization)

                               1195 Bordeaux Drive
                           Sunnyvale, California 94089
                    (Address of principal executive offices)

                         Telephone Number (408) 734-5600
              (Registrant's telephone number, including area code)


     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
                         -----             -----

As of June 30, 1999 there were 13,647,817 shares of the Registrant's Common
Stock outstanding.

================================================================================


<PAGE>   2


                            ARTISAN COMPONENTS, INC.

                                    Form 10-Q

                                      INDEX


<TABLE>
<CAPTION>
                                                                        Page No.
                                                                        --------
<S>                                                                        <C>
Cover Page..................................................................1
Index.......................................................................2

PART I - Financial Information

     ITEM 1 - Financial statements

     Condensed Balance Sheets - June 30, 1999 and September 30, 1998........3
     Condensed Statements of Operations
                Three Months and Nine Months Ended June 30, 1999 and 1998...4
     Condensed Statements of Cash Flows
                Nine Months Ended June 30, 1999 and 1998....................5
     Notes to Condensed Financial Statements................................6

     ITEM 2 - Management's Discussion and Analysis of Financial
                 Condition and Results of Operations........................9

PART II - Other Information

     ITEM 2 - Changes in Securities and Use of Proceeds....................29

     ITEM 6 - Exhibits.....................................................29

Signatures.................................................................30
</TABLE>




                                       2
<PAGE>   3


                            ARTISAN COMPONENTS, INC.

                            CONDENSED BALANCE SHEETS

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                       JUNE 30,    SEPTEMBER 30,
                                                         1999        1998(1)
                                                     ------------- -------------
                                                      (UNAUDITED)
<S>                                                     <C>           <C>
                       ASSETS
Current assets:
  Cash and cash equivalents.........................    $28,094       $36,516
  Contract receivables (net of allowance of
   $724 and $430 at June 30, 1999 and
   September 30, 1998, respectively)................      5,154         5,052
  Marketable securities.............................     19,907        10,688
  Prepaid expenses and other current assets.........      1,809         1,350
                                                        -------       -------
    Total current assets............................     54,964        53,606
Property and equipment, net.........................      6,478         5,387
Deferred tax asset..................................         82            82
Other assets........................................        333           414
                                                        -------       -------
    Total assets....................................    $61,857       $59,489
                                                        =======       =======
        LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses.............    $ 2,834       $ 1,704
  Deferred tax liability............................        976           976
  Deferred revenue..................................      2,775         1,052
                                                        -------       -------
    Total current liabilities.......................      6,585         3,732
Deferred rent.......................................         88            53
Deferred revenue and other long term liabilities....         98           165
                                                        -------       -------
    Total liabilities...............................      6,771         3,950
                                                        -------       -------
Stockholders' Equity:
 Convertible Preferred Stock, $0.001 par value:
  Authorized: 5,000 shares at June 30, 1999
   and September 30, 1998
  Issued and outstanding: None at June 30,
   1999 and September 30, 1998......................         --            --
 Common Stock, $0.001 par value:
  Authorized: 50,000 shares;
  Issued and outstanding: 13,648 and 13,368
   shares at June 30, 1999 and September 30,
   1998, respectively...............................         14            13
 Additional paid in capital.........................     52,776        52,235
 Retained earnings..................................      2,296         3,291
                                                        -------       -------
    Total stockholders' equity......................     55,086        55,539
                                                        -------       -------
    Total liabilities and stockholders' equity......    $61,857       $59,489
                                                        =======       =======
</TABLE>

- ------------
(1) Derived from the Registrant's audited balance sheet as of September 30,
    1998.

              The accompanying notes are an integral part of these
                        condensed financial statements.




                                       3
<PAGE>   4

                            ARTISAN COMPONENTS, INC.
                       CONDENSED STATEMENTS OF OPERATIONS

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                           THREE MONTHS             NINE MONTHS
                                           ENDED JUNE 30,           ENDED JUNE 30,
                                       --------------------      ---------------------
                                         1999        1998          1999          1998
                                       --------    --------      --------      --------
<S>                                    <C>         <C>            <C>          <C>
Revenue:
   License.......................      $  4,097    $  4,322       $ 10,037     $ 11,411
   Royalty.......................           206          --            206           --
                                       --------    --------       --------     --------
    Total revenue................         4,303       4,322         10,243       11,411
                                       --------    --------       --------     --------
Cost and expenses:
  Cost of license revenue........         1,635       1,283          4,183        3,383
  Product development............         1,192         915          3,580        2,629
  Sales and marketing............         1,416       1,122          3,605        2,924
  General and administrative.....           567         474          1,933        1,367
                                       --------    --------       --------     --------
    Total cost and expenses......         4,810       3,794         13,301       10,303
                                       --------    --------       --------     --------
Operating (loss) income..........          (507)        528         (3,058)       1,108
Other income.....................           555         429          1,398          736
                                       --------    --------       --------     --------
Income (loss) before provision
   for income taxes..............            48         957         (1,660)       1,844
(Benefit) provision for income
   taxes.........................          (339)        237           (664)         526
                                       --------    --------       --------     --------
Net income (loss)................      $    387    $    720       $   (996)    $  1,318
                                       ========    ========       ========     ========
Basic net income (loss) per share      $   0.03    $   0.06       $  (0.07)    $   0.14
                                       ========    ========       ========     ========
Diluted net income (loss) per share    $   0.03    $   0.05       $  (0.07)    $   0.11
                                       ========    ========       ========     ========
Shares used in computing:
  Basic net income (loss) per share      13,612      12,957         13,492       9,485
  Diluted net income (loss) per share    14,375      14,548         13,492      12,356
</TABLE>


              The accompanying notes are an integral part of these
                        condensed financial statements.


                                       4

<PAGE>   5

                            ARTISAN COMPONENTS, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                             NINE MONTHS
                                                                ENDED
                                                               JUNE 30,
                                                       ------------------------
                                                         1999            1998
                                                       --------        --------
<S>                                                    <C>             <C>
Cash flows from operating activities:
  Net (loss) income ............................       $   (996)       $  1,318
  Adjustments to reconcile net
   (loss) income to net cash provided
   by operating activities:
    Depreciation and
     amortization ..............................          1,767           1,330
    Gain on sale/disposal of
     fixed assets ..............................            (56)            (60)
    Provision for doubtful
     accounts ..................................            294              --
    Compensation expense for
     options granted ...........................             65              57
    Changes in assets and
     liabilities:
      Contract receivables .....................           (396)         (3,105)
      Deferred revenue .........................          1,723             508
      Prepaid expenses and other
       assets ..................................           (468)           (824)
      Deferred rent ............................             35             (11)
      Deferred taxes ...........................             --              --
      Accounts payable and
       other liabilities .......................          1,088           1,350
                                                       --------        --------
        Net cash provided by
         operating activities ..................          3,056             563
                                                       --------        --------
Cash flows from investing activities:
  Acquisition of property and
   equipment ...................................         (2,826)         (2,895)
  Proceeds from sale of property
   and equipment ...............................             90              80
  Purchase of marketable
   securities ..................................        (20,996)        (41,649)
  Proceeds from sale of
   marketable securities .......................         11,777              --
                                                       --------        --------
        Net cash used in
         investing activities ..................        (11,955)        (44,464)
                                                       --------        --------
Cash flows from financing activities:
  Proceeds from issuance of
   Common Stock ................................            477          43,175
                                                       --------        --------
        Net cash provided by
         financing activities ..................            477          43,175
                                                       --------        --------
Net (decrease) in cash and
 cash equivalents ..............................         (8,422)           (726)
Cash and cash equivalents,
 beginning of period ...........................         36,516           1,069
                                                       --------        --------
Cash and cash equivalents,
 end of period .................................       $ 28,094        $    343
                                                       ========        ========
CASH PAID FOR:
  Income taxes .................................       $     --        $     26
                                                       ========        ========
SUPPLEMENTAL DISCLOSURE OF
 NONCASH ACTIVITIES:
  Fixed asset acquisitions in
   exchange for accounts payable ...............       $     42        $      8
                                                       ========        ========
  Compensation expense for
   options granted .............................       $     65        $     57
                                                       ========        ========
</TABLE>


              The accompanying notes are an integral part of these
                         condensed financial statements.


                                        5

<PAGE>   6

                            ARTISAN COMPONENTS, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  (Unaudited)


1.   BASIS OF PRESENTATION:

         The accompanying unaudited condensed financial statements of ARTISAN
COMPONENTS, INC. (the "Company") have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and in
accordance with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. The year end
balance sheet data was derived from the audited financial statements and does
not include all disclosures required by GAAP. Operating results for the three
and nine month periods ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30, 1999 or
any other future period. The unaudited, condensed, interim financial statements
contained herein should be read in conjunction with the audited financial
statements and footnotes for the year ended September 30, 1998 included in the
Company's Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.

2. EARNINGS PER SHARE (EPS) DISCLOSURES:

         Basic and diluted earnings per share are computed in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"). 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. Dilutive potential common shares are not included
during periods in which the Company experienced a net loss as the impact would
be anti-dilutive.


<PAGE>   7

                            ARTISAN COMPONENTS, INC.

              NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
                                   (Unaudited)


2. EARNINGS PER SHARE (EPS) DISCLOSURES (con't):

         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>
                                       THREE MONTHS ENDED     NINE MONTHS ENDED
                                             JUNE 30,             JUNE 30,
                                       -----------------     ------------------
                                           1999     1998        1999      1998
                                         -------   -------   ---------   -------
                                           (Unaudited)             (Unaudited)
<S>                                      <C>       <C>       <C>         <C>
Numerator--Basic and Diluted EPS
  Net income (loss) ..................   $   387   $   720   $    (996)  $ 1,318
                                         =======   =======   =========   =======
Denominator--Basic EPS
  Common stock outstanding ...........    13,612    12,957      13,492     9,485
                                         -------   -------   ---------   -------
Basic net income (loss) per share ....   $  0.03   $  0.06   $ ($0.07)   $  0.14
                                         =======   =======   =========   =======
Denominator--Diluted EPS
  Denominator--Basic EPS .............    13,612    12,957      13,492     9,485
  Effect of Dilutive Securities:
    Common stock options
      and warrant ....................       763     1,591          --     1,309
    Convertible preferred stock ......        --        --          --     1,562
                                         -------   -------   ---------   -------
                                          14,375    14,548      13,492    12,356
                                         -------   -------   ---------   -------
Diluted net income (loss) per share ..   $  0.03   $  0.05   $ ($0.07)   $  0.11
                                         =======   =======   =========   =======
</TABLE>

         Stock options to purchase 2,516,558 shares of Common Stock at prices
ranging from $0.01 to $17.125 per share were outstanding at June 30, 1999 but
were not included in the computation of diluted net loss per share for the nine
month period, because they were anti-dilutive.

3.  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 financial statements. The Company implemented SFAS No. 130 during the first
quarter of fiscal 1999 and has restated the prior periods presented to comply
with SFAS No. 130. There was no difference between the Company's net income
(loss) and its total comprehensive income (loss) for the three and nine month
periods ended June 30, 1999 and June 30, 1998.



<PAGE>   8


                            ARTISAN COMPONENTS, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS--CONTINUED
                                   (Unaudited)


         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,
with interim reporting required in the second year of application. The Company
currently operates in only one industry segment, and therefore considers that
SFAS No. 131 will not have any impact on the disclosures in the financial
statements.

         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.

4. STOCKHOLDERS' EQUITY:

         On February 6, 1998, the Company completed the public offering of
3,015,000 shares of Common Stock under a registration statement declared
effective by the Securities and Exchange Commission on February 2, 1998 that
resulted in aggregate proceeds of $30,150,000 and underwriting commissions and
discounts of $2,110,500. In connection with such public offering, certain
stockholders of the Company sold an additional 320,000 shares of the Company's
Common Stock.

         On May 5, 1998, the Company completed the public offering of 956,190
shares of Common Stock under a registration statement declared effective by the
Securities and Exchange Commission on April 29, 1998 that resulted in aggregate
proceeds of $17,211,420 and underwriting commissions and discounts of $946,628.
In connection with such offering, certain stockholders of the Company sold an
additional 2,343,810 shares of the Company's Common Stock.

         During the first nine months of fiscal 1999, the Company issued 279,911
shares of Common Stock that resulted in aggregate proceeds of $477,000.


<PAGE>   9



                            ARTISAN COMPONENTS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

         The following discussion should be read in conjunction with the
Condensed Unaudited Financial Statements and the Notes thereto included
elsewhere herein and the audited financial statements contained in the Company's
Annual Report on Form 10-K for the year ended September 30, 1998 as filed with
the Securities and Exchange Commission. The following Management's Discussion
and Analysis of Financial Condition and Results of Operations contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. 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 Components, Inc. ("Artisan" or the "Company") 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 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 primarily 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. See "--Factors Affecting Future Operating
Results--Lengthy Sales Cycle and Design Process."

         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
generally 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.



<PAGE>   10
         Currently, license fees represent the majority of the Company's
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 royalties. Royalties are generally based on
per unit sales of ICs and may vary in proportion to the silicon area of an IC
occupied by the Company's IP components. 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 distribute and sublicense to
semiconductor design companies that manufacture at the same facility. There can
be no assurance that the Company will be successful in expanding the number of
royalty bearing contracts with customers. Given that Artisan provides its
products early in the customer's IC design process, there is a significant delay
between the delivery of a product and the generation of royalty revenue. In the
third fiscal quarter ended June 30, 1999, the Company recognized its first
royalty revenue totaling $206,000. There can be no assurance that the Company
will receive any future royalty revenue or that, if it does, the amount will be
significant. See "--Factors Affecting Future Operating Results--Dependence on
New Business Model."

         The Company has been dependent on a relatively small number of
customers for a substantial portion of its revenue, although the customers
comprising this group have changed from time to time. In the three month period
ended June 30, 1999, NEC Electronics, Inc. ("NEC"), Conexant Systems, Inc.
("Conexant") and Chartered Semiconductor Manufacturing ("Chartered") accounted
for 36%, 13% and 12% of revenue, respectively. In the nine month period ended
June 30, 1999, NEC, Taiwan Semiconductor Manufacturing Corporation ("TSMC"),
Conexant, and UMC Group ("UMC Group") accounted for 24%, 18%, 18%, and 12% of
revenue, respectively. In the three month period ended June 30, 1998, Siemens AG
("Siemens"), Newport Wafer-Fab, Ltd. ("Newport") and ATI Technologies, Inc.
("ATI") accounted for 17%, 14% and 13% of revenue, respectively. In the nine
month period ended June 30, 1998, Newport, TSMC, ATI, OKI Electric Industry Co.,
Ltd. ("OKI") and STMicroelectronics N.V. ("ST") accounted for 12%, 12%, 11%, 10%
and 10% 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. The Company's business, operating results and
financial condition may also be materially adversely affected if customers
experience project delays and/or new or existing customers delay new bookings or
fail to place anticipated orders. See "--Factors Affecting Future Operating
Results--Customer Concentration; Limited Customer Base."

         Historically, a substantial portion of the Company's revenue has been
derived from customers outside the United States ("international revenue"). In
the three and nine month periods ended June 30, 1999, international revenue,
primarily from Asia and Europe, represented approximately 65% and 64%,
respectively, of the Company's revenue. In the three and nine month periods
ended June 30, 1998, international revenue represented approximately 86% and
83%, respectively, of the Company's revenue. The Company anticipates that



<PAGE>   11

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. See "--Factors Affecting Future Operating
Results--Risks Associated with International Customers."

         The Company derives substantially all of its revenue from sales of its
memory and standard cell products that, together, accounted for 81% and 86% of
revenue in the three and nine month periods ended June 30, 1999, respectively.
In each of the three and nine month periods ended June 30, 1998, memory and
standard cell products together accounted for 98% of revenue. The decrease in
percentage of total revenues derived from memory and standard cell products in
the three and nine month periods ended June 30, 1999, as compared to the same
periods in fiscal 1998, was due to decreased license revenue from these products
and to increases in percentages of total revenue and in absolute revenue dollars
from input/output ("I/O") products, support contracts and royalty revenue. The
Company expects that memory products and 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 large 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 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. The Company's costs and expenses will be based in part on
the Company's expectations of future revenue. Accordingly, if the Company does
not realize its expected revenue, its business, operating results and financial
condition could be materially adversely affected. The Company has recently
experienced periods of negative growth as well as declines in the rate of growth
of its revenue as compared with prior periods, due primarily to deterioration in
the demand for semiconductors generally. There can be no assurance that the
Company will experience positive revenue growth in the future. See "--Factors
Affecting Future Operating Results--Fluctuations in Operating Results."

         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



<PAGE>   12

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 $11,000 and $34,000 were amortized during the
three and nine month periods ended June 30, 1999. All of such amounts were
recorded in product development expenses. In addition, the amortization will
result in charges over the next seven quarters aggregating approximately $11,000
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>
                                           THREE MONTHS ENDED   NINE MONTHS ENDED
                                                JUNE 30,            JUNE 30,
                                           ------------------   -----------------
                                            1999        1998      1999       1998
                                            -----      -----     -----      -----
<S>                                          <C>       <C>        <C>       <C>
Revenue:
  License ............................       95.0%     100.0%     98.0%     100.0%
  Royalty ............................        5.0       --         2.0       --
                                            -----      -----     -----      -----
    Total revenue ....................      100.0      100.0     100.0      100.0

Cost and expenses:
  Cost of license revenue ............       38.0       29.7      40.8       29.7
  Product development ................       27.7       21.2      35.0       23.0
  Sales and marketing ................       32.9       26.0      35.2       25.6
  General and
   administrative ....................       13.2       10.9      18.9       12.0
                                            -----      -----     -----      -----
    Total cost and expenses ..........      111.8       87.8     129.9       90.3
                                            -----      -----     -----      -----
Operating (loss) income ..............      (11.8)      12.2     (29.9)       9.7
Other income, net ....................       12.9       10.0      13.7        6.5
                                            -----      -----     -----      -----
Income (loss) before provision
 for income taxes ....................        1.1       22.2     (16.2)      16.2
(Benefit) provision for income
 taxes ...............................       (7.9)       5.5      (6.5)       4.6
                                            -----      -----     -----      -----
Net income (loss) ....................        9.0%      16.7%     (9.7)%     11.6%
                                            =====      =====     =====      =====
</TABLE>


Revenue

         Revenue of $4.3 million for the three month period ended June 30, 1999
was essentially unchanged from the same period last year. Revenue decreased by
10.2% from $11.4 million in the nine month period ended June 30, 1998 to $10.2
million in the nine month period ended June 30, 1999. For the three month period
ended June 30, 1999, as compared to the three month period ended June 30, 1998,
decreases in license revenue for the Company's memory and standard cell products
was offset by increases in license revenue from I/O products and the recognition
of royalty revenue and revenue from support contracts. The decline in revenue in
the nine month period ended June 30, 1999, as compared with the same period



<PAGE>   13

in fiscal 1998, was primarily attributable to decreased licensing of the
Company's memory products, which was partially offset by an increase in revenue
from I/O products and the recognition of royalty revenue and revenue from
support contracts.

Cost and Expenses

         Engineering Costs. 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
generally are charged as incurred and do not necessarily correspond to the
recognition of revenue under related contracts. Engineering costs increased by
28.6% from $2.2 million in the three month period ended June 30, 1998 to $2.8
million in the three month period ended June 30, 1999. Engineering costs
increased by 29.1% from $6.0 million in the nine month period ended June 30,
1998 to $7.8 million in the nine month period ended June 30, 1999. Engineering
costs as a percentage of revenue increased from 50.9% and 52.7% in the three and
nine month periods ended June 30, 1998, respectively, to 65.7% and 75.8% in the
three and nine month periods ended June 30, 1999, respectively. The absolute
dollar increase in engineering costs of $629,000 in the three month period ended
June 30, 1999, as compared with the same period in fiscal 1998, was primarily
due to increases in headcount and personnel expenses of approximately $266,000;
computer and networking equipment maintenance and expenses, depreciation and
facility expense of approximately $248,000 and increased usage of subcontractor
and other outside services of $84,000. Increased equipment maintenance and
expenses, depreciation and facility expense of approximately $764,000, increased
headcount-related expenses of approximately $683,000 and higher usage of
contractors and other outside services of approximately $145,000 largely
comprised the increase in absolute dollars in engineering costs of $1.8 million
for the nine month period ended June 30, 1999, as compared to the same period in
fiscal 1998.

          Cost of License Revenue. Cost of license revenue increased by 27.4%
     from $1.3 million in the three month period ended June 30, 1998 to $1.6
     million in the three month period ended June 30, 1999. Cost of license
     revenue increased by 23.6% from $3.4 million in the nine month period ended
     June 30, 1998 to $4.2 million in the nine month period ended June 30, 1999.
     Cost of license revenue as a percentage of revenue was 29.7% and 38.0% for
     the three month periods ended June 30, 1998 and 1999, respectively. Cost of
     license revenue as a percentage of revenue was 29.7% and 40.8% for the nine
     month periods ended June 30, 1998 and 1999, respectively. The absolute
     dollar increase in cost of license revenue in the three and nine month
     periods ended June 30, 1999, as compared with the same periods of fiscal
     1998, was due to an increase in headcount and costs associated with
     delivering product to, and supporting, a growing customer base.

          Product Development Expenses. Product development expenses increased
     by 30.3% from $915,000 in the three month period ended June 30, 1998 to
     $1.2 million in the three month period ended June 30, 1999. Product
     development expenses increased by 36.2% from $2.6 million in the nine month
     period ended June 30, 1998 to $3.6 million in the nine month period ended
     June 30, 1999. Product development expenses as a percentage of revenue
     increased from 21.2% to 27.7% in the three month periods ended June 30,
     1998 and 1999, respectively. Product development expenses as a percentage
     of revenue increased from 23.0% to 35.0% for the nine month periods ended
     June 30, 1998 and 1999, respectively. The absolute dollar increase in
     product development expenses in the three and nine month periods ended June
     30, 1999, as compared


<PAGE>   14
     with the same periods in fiscal 1998, was attributable to an increase in
     headcount and personnel related expenses, depreciation and maintenance
     expenses related to purchases of computer equipment, software tools and
     networking infrastructure and equipment, increased usage of contractors and
     other outside services and higher facility expenses.

         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
26.2% from $1.1 million in the three month period ended June 30, 1998 to $1.4
million in the three month period ended June 30, 1999. Sales and marketing
expenses increased by 23.3% from $2.9 million in the nine month period ended
June 30, 1998 to $3.6 million in the nine month period ended June 30, 1999.
Sales and marketing expense as a percentage of revenue increased from 26.0% to
32.9% in the three month periods ended June 30, 1998 and 1999, respectively.
Sales and marketing expenses as a percentage of revenue increased from 25.6% to
35.2% for the nine month periods ended June 30, 1998 and 1999, respectively. The
increase in absolute dollars in sales and marketing expenses in the three and
nine month periods ended June 30, 1999, as compared with the same periods in
fiscal 1998, was primarily attributable to increased headcount and
personnel-related expenses of approximately $148,000 for the three month period
and $460,000 for the nine month period, and increased trade show expenses for
travel and transportation, setup, staffing and promotions plus investment in new
marketing programs of approximately $114,000 for the three month period and
$167,000 for the nine month period.

         General and Administrative Expenses. General and administrative
expenses increased by 19.6% from $474,000 in the three month period ended June
30, 1998 to $567,000 in the three month period ended June 30, 1999. General and
administrative expenses increased by 41.4% from $1.4 million in the nine month
period ended June 30, 1998 to $1.9 million in the nine month period ended June
30, 1999. As a percentage of revenue, general and administrative expenses
increased from 10.9% to 13.2% in the three month periods ended June 30, 1998 and
1999, respectively. General and administrative expenses as a percentage of
revenue increased from 12.0% to 18.9% for the nine month periods ended June 30,
1998 and 1999, respectively. The absolute dollar increase in general and
administrative expenses in the third quarter of fiscal 1999 as compared with the
same period in fiscal 1998 was primarily due to increased costs of public
reporting, fees for additional accounting and legal services, increased
insurance costs and professional recruiting fees of $73,000. Increases in
general and administrative expenses for the first nine months of fiscal 1999 as
compared with the same period in fiscal 1998 were primarily due to an increase
in the provision for doubtful accounts receivable related to deterioration in
the financial and/or business condition of two of the Company's customers of
$294,000; fees for additional legal and accounting services, professional
recruiting fees and increased insurance and other services of approximately
$143,000 and increased personnel expenses of approximately $106,000.

Other Income

         Other income increased by 29.4% from $429,000 in the three month period
ended June 30, 1998 to $555,000 in the three month period ended June 30, 1999.
Other income increased by 89.9% from $736,000 in the nine month period ended
June 30, 1998 to $1.4 million in the nine month period ended June 30, 1999.
Other income as a percentage of revenue increased from 10.0% to 12.9% for the
three month periods ended June 30, 1998 and 1999, respectively. Other income as



<PAGE>   15

a percentage of revenue increased from 6.5% to 13.7% for the nine month periods
ended June 30, 1998 and 1999, respectively. The growth in other income in the
three month period ended June 30, 1999, as compared with the same period in
fiscal 1998, was primarily due to increased interest income on the Company's
investment portfolio resulting from a shift from tax-free investments into
taxable investments. The growth in other income for the nine month period ended
June 30, 1999, as compared with the same period in fiscal 1998, reflects
increased interest income earned on the Company's higher average cash balance in
fiscal 1999 due to the receipt of proceeds from the Company's February 1998
initial public offering and the Company's April 1998 public offering as well as
increased interest income due to the shift from tax-free investments into
taxable investments.

Income Taxes

         The income tax provision was $237,000 for the three month period ended
June 30, 1998, and for the three month period ended June 30, 1999, the income
tax benefit was $339,000. For the nine month period ended June 30, 1998, the
income tax provision was $526,000, and the income tax benefit for the nine month
period ended June 30, 1999 was $664,000. For the nine month periods ended June
30, 1998 and 1999, respectively, the effective tax rate increased from a
provision of 28.5% to a benefit of 40.0%. The increase in the effective tax rate
for the nine month period ended June 30, 1999, as compared to the same period of
fiscal 1998, was primarily due to the fully-taxable operating losses recorded by
the Company in the first nine months of fiscal 1999 offset by the Company's
tax-free interest income generated in the first two quarters of fiscal 1999. The
difference between the statutory and effective rates of income tax is due to the
impact of state taxes offset by tax-free interest income and tax credits.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has funded its operations primarily from license revenue
received from inception to June 30, 1999, 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 public 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 $563,000 and
$3.1 million in the nine month periods ended June 30, 1998 and 1999,
respectively. Net cash provided by operating activities in the nine month period
ended June 30, 1998 was due to net income plus depreciation and amortization and
an increase in accounts payable and other liabilities, partially offset by an
increase in contract receivables. Net cash provided by operating activities in
the nine month period ended June 30, 1999 was due to depreciation and
amortization, an increase in deferred revenue and an increase in accounts
payable and other liabilities, and was partially offset by the Company's net
loss.

         Net cash used in investing activities was $44.5 million and 12.0
million in the nine month periods ended June 30, 1998 and June 30, 1999,
respectively. In the nine month periods ended June 30, 1998 and 1999, investing
activities consisted primarily of net purchases of marketable securities and, to
a lesser extent, purchases of property and equipment.

         Net cash provided by financing activities was $43.2 million and
$477,000 in the nine month periods ended June 30, 1998 and 1999, respectively.
Net cash provided by financing activities in both periods consisted of proceeds
from the issuance of Common Stock.


<PAGE>   16

         At June 30, 1999, the Company had cash, cash equivalents and current
marketable securities of $48.0 million. As of June 30, 1999, the Company had
retained earnings of $2.3 million and working capital of $48.4 million,
including the current portion of deferred revenue of $2.8 million.

         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 anticipates spending approximately $3.2 million for capital expenditures
over the next 12 months. The Company believes that its 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."

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 financial statements. The Company implemented SFAS No. 130 during the first
quarter of fiscal 1999 and has restated all prior periods presented to comply
with SFAS No. 130. There was no difference between the Company's net income
(loss) and its total comprehensive income (loss) for the three and nine month
periods ended June 30, 1999 and June 30, 1998.

         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,
with interim reporting required in the second year of application. The Company
currently operates in only one industry segment, and therefore considers that
SFAS No. 131 will not have any impact on the disclosures in the financial
statements.

         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,



<PAGE>   17

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.

YEAR 2000 READINESS

         Overview. The Year 2000 problem is best defined as a product or process
that, when executed on date data, produces an incorrect result. The problem
occurs as a result of two-digit formatting of "year" data. Further program
errors may occur as a result of incorrect usage of "9/9/99" or because the year
2000 was not properly recognized as a leap year.

         The Year 2000 issue does create risk for the Company, the extent of
which cannot be fully known. To address these risks, the Company has created a
program for dealing with its internal products and processes, internal
information technology systems and non-information technology systems. The
Company has also requested information regarding Year 2000 readiness from its
major suppliers and customers. Responses received to date indicate the majority
of the Company's customers, suppliers, service providers and contractors are or
intend to be Year 2000 compliant. Where any supplier's response is deemed
unsatisfactory, the Company intends to change suppliers, service providers or
contractors to those that have demonstrated Year 2000 compliance. The Company
cannot be assured of finding alternative suppliers, service providers or
contractors.

         In the event any of the Company's significant customers, suppliers,
service providers or contractors do not achieve Year 2000 compliance and we are
unable to replace those customers, suppliers, service providers or contractors,
our business operations could be adversely affected. The effect of a loss of
customers, suppliers, services providers or contractors could include, but is
not limited to, losses in revenue, a loss of customers, suppliers, service
providers or contractors and the inability of the Company to deliver its
products and services.

         The cost of the Company's Year 2000 readiness program is not
incremental to the Company and it represents a re-allocation of existing
resources. During the normal course of business, the Company has made capital
investments in certain third party software and hardware to address its
operational needs. These systems, which were intended to improve efficiency and
productivity, have been certified as "Year 2000 Compliant" by the respective
vendors and have been or will be installed by October 31, 1999. To date these
projects have been a part of the Company's capital plan and were not accelerated
as a result of the Year 2000 issue. Total Year 2000 project expenditures are
expected to total approximately $4.4 million, of which $531,000 and $2.8 million
were expended in the three and nine month periods ended June 30, 1999.

         The Company believes it has made significant progress in the
remediation of its Year 2000 issues. Additional testing is planned for the
remainder of the calendar year to reasonably ensure Year 2000 readiness.
Regardless of the outcome of this testing, the Company believes it will be able
to conduct its business, possibly at reduced volume, using its existing Year
2000 compliant systems and software until remaining issues can be resolved.
Although there can be no assurance that all required modifications will be
complete prior to the year 2000, it is management's belief that the Company is
taking adequate action to ensure its Year 2000 readiness. Management does not
expect the financial impact of Year 2000 readiness to be material to the
Company's financial position, results of operations or cash flows.


<PAGE>   18

         Year 2000 Readiness Plan. Phases of the Company's readiness program
include: Inventory, Review and Assessment, Prioritization and Resolution.

         Inventory. The goal of this phase of the project is to identify
products and processes that may be impacted by the year 2000 date rollover. An
accurate inventory consists of product or process identification, specific
version information, importance and risk to the business, compliance status,
action required to make compliant, cost of the action, targeted fix dates and
verification information. Products and processes, regardless of their compliance
status, are listed on the inventory. The Company has conducted an inventory of
all telephone and voice mail systems and associated software, computer systems
hardware, operating systems and applications software and security systems.

         Review and Assessment. The goal of the Review and Assessment phase is
to identify those items needing remediation and to determine the extent of
impact of any item on the Company's ability to conduct business. The Company has
conducted a review of its processes, products and items from the Year 2000
Inventory, including operating systems, application software, internally
developed software and non-information technology systems including, but not
limited to, environmental control systems, fire suppression systems, postage
meters, copy machines and other embedded microprocessor controlled systems. The
Company has also contacted its major suppliers and customers to determine their
Year 2000 readiness as it relates to the Company's business.

         Prioritization. The goal of the Prioritization phase is to produce an
ordered list of items needing remediation based upon their importance to the
Company's business. A general list of prioritized items includes, but is not
limited to, operating systems and software used to support the finance
organization, software used in the development of the Company's products and
services, networking equipment, telephone systems, data circuits associated with
the Company's Internet Service Provider, and hardware and software used to
secure the Company's facility.

         Resolution. The goal of the Resolution phase is to identify and apply
"fixes" to items needing remediation. The Company has developed plans to address
those items deemed to be non-compliant. No hardware systems need to be replaced
or upgraded as a result of non-compliance. However, the operating systems
software for almost all information technology systems will have "patches"
applied to achieve Year 2000 compliance. These upgrades are carried out as a
routine part of the Company's operations and are not expected to have a material
impact on the Company's expenses. The Company is currently 30% through the
upgrade process and expects to complete operating system and application
upgrades no later than August 31, 1999 for systems used for administration and
October 31, 1999 for those used in product development. The Company is currently
developing plans for final testing of compliance.

         Risks and Contingencies. The Company believes the most significant
risks to its business lie in two areas: the re-design or re-engineering of
products and services the Company has delivered using older versions of its
electronic design automation ("EDA") software and the non-compliance of its
suppliers and customers.

         During the product development process, specific versions of EDA tools
and processes are used to create products. If the Company were required to
correct a defect or re-design parts of a product produced with EDA tools that
are not Year 2000 compliant, the Company would have to create a development
environment in which the date were rolled back to the original design dates. It
is not known


<PAGE>   19

how much effort would be required to re-create the design environment for a
given product. The Company relies heavily on the Internet for distribution of
its products. Failure of the Company's Internet Service Provider or its ISP's
Local Exchange Carrier due to Year 2000 non-compliance could have a material
impact on the Company's business, operating results and financial condition. The
Company has based its Year 2000 readiness program actions upon standard
operating environments and processes used in the conduct of its business.
However, if a product or process outside the standard is used and that product
or process is not Year 2000 compliant, the Company may experience an impact on
its ability to conduct business until the product or process in question can be
made compliant. Statements made by third parties regarding Year 2000 compliance
are used by the Company to determine that party's Year 2000 readiness. The
Company relies on a limited number of customers for a significant portion of its
revenue. Should any customer experience difficulties as a result of Year 2000
non-compliance, the Company's revenues could be significantly impacted. Many of
the Company's customers are headquartered outside of the United States. As a
result, many of the Company's customers may be subject to a different Year 2000
disclosure requirements, making it difficult to ascertain the true nature of
Year 2000 compliance status. 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. Commencing in the year
2000, the functionality of certain operating environments will be adversely
affected if one or more component products of the environment is not Year 2000
compliant. The Company cannot provide assurance that its products will function
properly with respect to Year 2000 compliance when integrated with other
vendors' or customers' non-compliant component products. The Year 2000 readiness
project is currently staffed with the Company's employees. Should key members of
the Year 2000 readiness program leave the Company prior to completion of the
project, the project could suffer a significant setback. The Company plans to
maintain adequate documentation regarding all phases of the project and to hold
regular meetings to discuss the status of the project. Each of these risks, if
realized either independently or in combination, could have a material adverse
affect on the Company's business, operating results and financial condition.

         Worst-Case Scenarios. Worst-case scenarios of the Company's failure to
solve Year 2000 compliance issues could include: substantial purchasing costs to
develop alternative methods of managing our business and to replace noncompliant
equipment, temporary slowdowns or cessations of certain revenue-producing
operations, delays in delivery or distribution of products, delays in the
receipt of supplies and invoice and collection errors or delays. We are in the
process of developing our contingency plan to address each of these business
risks.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company is exposed to the impact of interest rate changes and
changes in the market values of its investments.

         Interest Rate Risk. The Company's exposure to market risk for changes
in interest rates relates primarily to the Company's investment portfolio. The
Company has not used derivative financial instruments in its investment
portfolio. The Company invests its excess cash in high-quality corporate issuers
and in debt instruments of the U.S. Government and its agencies 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



<PAGE>   20

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.

         Investments in both fixed and floating rate interest-earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if forced to sell securities which have declined
in market value due to changes in interest rates.

         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 June 30, 1999. All investments mature in one
year or less.

<TABLE>
<CAPTION>
                                                                       AVERAGE RATE OF
                                                                          RETURN AT
                                                     CARRYING VALUE     JUNE 30, 1999
                                                     --------------    ---------------
                                                     (IN THOUSANDS)      (ANNUALIZED)
<S>                                                      <C>                <C>
INVESTMENT SECURITIES:
Cash Equivalents - variable rate..................       $  2,254           4.46%
Money market funds - variable rate................       $    451           4.82%
Short-term investments - fixed rate...............       $ 45,296           4.94%
                                                        ---------
         Total investment securities..............       $ 48,001
                                                        =========
</TABLE>

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 that 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. The



<PAGE>   21

Company's business, operating results and financial condition may also be
materially adversely affected if customers experience project delays and/or new
or existing customers delay new bookings or fail to place anticipated orders.

         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 has recently experienced periods of negative growth as
well as declines in the rate of growth of its revenue as compared with prior
periods, due primarily to deterioration in the demand for semiconductors
generally. There can be no assurance that the Company will experience positive
revenue growth in the future.

         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, 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.

         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 emerged. The Company's ability to achieve sustained


<PAGE>   22

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 complex
single chip system ("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 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 Avant! Corporation, Mentor Graphics, the Silicon Architects division of
Synopsys, Inc. and Virage Logic. 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
tool 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



<PAGE>   23

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.

         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, 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
believes that, to date, the royalty based business model has been a limited
success in that a substantial majority of the Company's customers have agreed to
the royalty based business model. In the third fiscal quarter ended June 30,
1999, the Company recognized its first royalty revenue totaling $206,000. There
can be no assurance that the continued operation of the royalty based business
model will have the anticipated benefits and, if not, there could be a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that the Company will receive any future
royalty revenue or that, if it does, the amount will be significant. See
"--Dependence on Semiconductor Manufacturers; Dependence on Semiconductor and
Electronics Industries" and "--Customer Concentration; Limited Customer Base."


<PAGE>   24

         The Company believes that its long term success will be substantially
dependent on future royalties. However, even if the Company successfully
implements its royalty based 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.

         CUSTOMER CONCENTRATION; LIMITED CUSTOMER BASE. The Company has been
dependent on a relatively small number of customers for a substantial portion
of its revenue, although the customers comprising this group have changed from
time to time. In the three month period ended June 30, 1999, NEC, Conexant and
Chartered accounted for 36%, 13% and 12% of revenue, respectively. In the nine
month period ended June 30, 1999, NEC, TSMC, Conexant and UMC Group accounted
for 24%, 18%, 18% and 12% of revenue, respectively. In the three month period
ended June 30, 1998, Siemens, Newport and ATI accounted for 17%, 14% and 13% of
revenue, respectively. In the nine month period ended June 30, 1998, Newport,
TSMC, ATI, OKI and ST accounted for 12%, 12%, 11%, 10% and 10% 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 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. The
Company's business, operating results and financial condition may also be
materially adversely affected if customers experience project delays and/or new
or existing customers delay new bookings or fail to place anticipated orders.

         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


<PAGE>   25

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."

         PRODUCT CONCENTRATION. The Company derives substantially all of its
revenue from sales of its memory and standard cell products that, together,
accounted for 81% and 86% of revenue in the three and nine month periods ended
June 30, 1999, respectively. In each of the three and nine month periods ended
June 30, 1998, memory and standard cell products together accounted for 98% of
revenue. The decrease in percentage of total revenues derived from memory and
standard cell products in the three and nine month periods ended June 30, 1999,
as compared to the same periods in fiscal 1998, was due to decreased license
revenue from these products and to increases in percentages of total revenue and
in absolute revenue dollars from I/O products, support contracts and royalty
revenue. The Company expects that memory products and 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 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. Historically, a
substantial portion of the Company's revenue has been international revenue. In
the three and nine month periods ended June 30, 1999, international revenue,
primarily from Asia and Europe, represented approximately 65% and 64%,
respectively, of the Company's revenue. In the three and nine month periods
ended June 30, 1998,


<PAGE>   26

international revenue represented approximately 86% and 83%, 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. There can be no assurance
that present or future dislocations with respect to international 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.

         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.

         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



<PAGE>   27

maintain key man life insurance covering its key personnel. The 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. 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.

         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 June 30,
1997 to June 30, 1999, the Company grew from 48 to 95 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.

         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



<PAGE>   28

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 substantial 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 United States Patent and Trademark
Office ("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.

         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 anticipates
spending approximately $3.2 million for capital expenditures over the next 12
months. The Company believes that its 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.

         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



<PAGE>   29

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. 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 often are unrelated and disproportionate
to the operating performance of particular companies. For example, in the 1998
calendar year, the high and low sales prices of the Company's stock on the
Nasdaq National Market were $23.375 and $4.375. 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.


ITEM 2: Changes in Securities and Use of Proceeds

         Use of Proceeds. With respect to the requirements of Item 701(f) of
Regulation S-K regarding the reporting of use of proceeds, pursuant to the
information required to be reported by Item 701(f)(4)(viii), the Company funded
its operations in the quarter ended June 30, 1999 with cash provided by
operations and did not expend the proceeds of its initial public offering. The
proceeds have been invested in short and long term securities until such time as
the Company has need of them.


ITEM 6: Exhibits

         (a)  Exhibits

        27.1   Financial Data Schedule






<PAGE>   30


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated:  August 6, 1999

                             ARTISAN COMPONENTS, INC.
                                    (Registrant)

                             /s/ Mark R. Templeton
                             --------------------------------------------
                             Mark R. Templeton
                             President and Chief Executive Officer
                             (Principal Executive and Accounting Officer)

<PAGE>   31


                                INDEX TO EXHIBITS

EXHIBITS
- --------

27.1 Financial Data Schedule





<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          SEP-30-1999
<PERIOD-START>                             OCT-01-1998
<PERIOD-END>                               JUN-30-1999
<CASH>                                          28,094
<SECURITIES>                                    19,907
<RECEIVABLES>                                    5,878
<ALLOWANCES>                                     (724)
<INVENTORY>                                          0
<CURRENT-ASSETS>                                54,964
<PP&E>                                          10,984
<DEPRECIATION>                                 (4,506)
<TOTAL-ASSETS>                                  61,857
<CURRENT-LIABILITIES>                            6,585
<BONDS>                                              0
                                0
                                          0
<COMMON>                                            14
<OTHER-SE>                                      52,776
<TOTAL-LIABILITY-AND-EQUITY>                    61,857
<SALES>                                         10,243
<TOTAL-REVENUES>                                10,243
<CGS>                                            4,183
<TOTAL-COSTS>                                   13,301
<OTHER-EXPENSES>                                    15
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                             (1,413)
<INCOME-PRETAX>                                (1,660)
<INCOME-TAX>                                     (664)
<INCOME-CONTINUING>                              (996)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     (996)
<EPS-BASIC>                                      (.07)
<EPS-DILUTED>                                    (.07)


</TABLE>



© 2019 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission