ARTISAN COMPONENTS INC
10-Q, 1999-05-14
SEMICONDUCTORS & RELATED DEVICES
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<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 
                March 31, 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
      incorporation or organization)             Identification Number)

                               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 March 31, 1999 there were 13,536,066 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 - March 31, 1999 and September 30, 1998 ......................   3

     Condensed Statements of Operations
                Three Months and Six Months Ended March 31, 1999 and 1998 ..................   4

     Condensed Statements of Cash Flows
                Six Months Ended March 31, 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 ....................................  27

     ITEM 4 - Submission of Matters to a Vote of Security Holders...........................  27

     ITEM 6 - Exhibits......................................................................  27

Signatures..................................................................................  28
</TABLE>

                                        2

<PAGE>   3
                            ARTISAN COMPONENTS, INC.

                            CONDENSED BALANCE SHEETS

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                    MARCH 31,     SEPTEMBER 30,
                                                                      1999           1998(1)
                                                                    ---------     -------------
                                                                   (UNAUDITED)
<S>                                                                 <C>             <C>
                                          ASSETS
Current assets:
  Cash and cash equivalents ..................................      $ 42,905        $ 36,516
  Contract receivables (net of allowance of
   $724 and $430 at March 31, 1999 and
   September 30, 1998, respectively) .........................         5,361           5,052
  Marketable securities ......................................         3,495          10,688
  Prepaid expenses and other current assets ..................         1,702           1,350
                                                                    --------        --------
    Total current assets .....................................        53,463          53,606
Property and equipment, net ..................................         6,549           5,387
Deferred tax asset ...........................................            82              82
Other assets .................................................           479             414
                                                                    --------        --------
    Total assets .............................................      $ 60,573        $ 59,489
                                                                    ========        ========
                           LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses ......................      $  2,962        $  1,704
  Deferred tax liability .....................................           976             976
  Deferred revenue ...........................................         1,807           1,052
                                                                    --------        --------
    Total current liabilities ................................         5,745           3,732
Deferred rent ................................................            78              53
Deferred revenue and other long term liabilities .............           120             165
                                                                    --------        --------
    Total liabilities ........................................         5,943           3,950
                                                                    --------        --------
Stockholders' Equity:
 Convertible Preferred Stock, $0.001 par value:
  Authorized: 5,000 shares at March 31, 1999
   and September 30, 1998
  Issued and outstanding: None at March 31,
   1999 and September 30, 1998 ...............................            --              --
 Common Stock, $0.001 par value:
  Authorized: 50,000 shares;
  Issued and outstanding: 13,536 and 13,368
   shares at March 31, 1999 and September 30,
   1998, respectively ........................................            14              13
 Additional paid in capital ..................................        52,707          52,235
 Retained earnings ...........................................         1,909           3,291
                                                                    --------        --------
    Total stockholders' equity ...............................        54,630          55,539
                                                                    --------        --------
    Total liabilities and stockholders' equity ...............      $ 60,573        $ 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             SIX MONTHS
                                                   ENDED MARCH 31,          ENDED MARCH 31,
                                               ---------------------    ---------------------
                                                 1999         1998        1999         1998
                                               --------     --------    --------     --------
<S>                                            <C>          <C>         <C>          <C>
Revenue ...................................    $  2,904     $  3,760    $  5,940     $  7,089
Cost and expenses:
  Cost of revenue .........................       1,244        1,076       2,549        2,100
  Product development .....................       1,358          871       2,388        1,714
  Sales and marketing .....................       1,121        1,017       2,189        1,802
  General and administrative ..............         529          438       1,365          893
                                               --------     --------    --------     --------
    Total cost and expenses ...............       4,252        3,402       8,491        6,509
                                               --------     --------    --------     --------
Operating (loss) income ...................      (1,348)         358      (2,551)         580
Other income ..............................         388          192         843          307
                                               --------     --------    --------     --------
(Loss) income before provision
   for income taxes .......................        (960)         550      (1,708)         887
(Benefit) provision for income
   taxes ..................................        (250)         159        (325)         289
                                               --------     --------    --------     --------
Net (loss) income .........................    $   (710)    $    391    $ (1,383)    $    598
                                               ========     ========    ========     ========
Basic net (loss) income per share .........    $  (0.05)    $   0.04    $  (0.10)    $   0.08
                                               ========     ========    ========     ========
Diluted net (loss) income per share .......    $  (0.05)    $   0.03    $  (0.10)    $   0.05
                                               ========     ========    ========     ========
Shares used in computing:
  Basic net (loss) income per share .......      13,485        9,780      13,433        7,771
  Diluted net (loss) income per share .....      13,485       12,520      13,433       11,261
</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>
                                                                SIX MONTHS ENDED
                                                                    MARCH 31,
                                                             -----------------------
                                                               1999           1998
                                                             --------       --------
<S>                                                          <C>            <C>
Cash flows from operating activities:
  Net (loss) income .......................................  $ (1,383)      $    598
  Adjustments to reconcile net
   (loss) income to net cash provided
   by operating activities:
    Depreciation and
     amortization .........................................     1,158            829
    Gain on sale/disposal of
     fixed assets .........................................       (33)           (38)
    Provision for doubtful
     accounts .............................................       294             --
    Compensation expense for
     options granted ......................................        44             35
    Changes in assets and
     liabilities:
      Contract receivables ................................      (603)          (533)
      Deferred revenue ....................................       754            227
      Prepaid expenses and other
       assets .............................................      (477)          (613)
      Deferred rent .......................................        26            (26)
      Deferred taxes ......................................        --             --
      Accounts payable and
       other liabilities ..................................     1,115            517
                                                             --------       --------
        Net cash provided by
         operating activities .............................       895            996
                                                             --------       --------
Cash flows from investing activities:
  Acquisition of property and
   equipment ..............................................    (2,188)        (2,179)
  Proceeds from sale of property
   and equipment ..........................................        60             50
  Purchase of marketable
   securities .............................................    (2,095)       (25,656)
  Proceeds from sale of
   marketable securities ..................................     9,287             --
                                                             --------       --------
        Net cash provided by (used
         in) investing activities .........................     5,064        (27,785)
                                                             --------       --------
Cash flows from financing activities:
  Proceeds from issuance of
   Common Stock ...........................................       430         27,299
                                                             --------       --------
        Net cash provided by
         financing activities .............................       430         27,299
                                                             --------       --------
Net increase in cash
 and cash equivalents .....................................     6,389            510
Cash and cash equivalents,
 beginning of period ......................................    36,516          1,069
                                                             --------       --------
Cash and cash equivalents,
 end of period ............................................  $ 42,905       $  1,579
                                                             ========       ========
CASH PAID FOR:
  Income taxes ............................................  $     --       $     23
                                                             ========       ========
SUPPLEMENTAL DISCLOSURE OF
 NONCASH ACTIVITIES:
  Fixed asset acquisitions in
   exchange for accounts payable ..........................  $    143       $     23
                                                             ========       ========
  Compensation expense for
   options granted ........................................  $     44       $     35
                                                             ========       ========
</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 six month periods ended March 31, 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 on December 23, 1998.

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.


                                       6
<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        SIX MONTHS ENDED
                                                        MARCH 31,                MARCH 31,
                                                 ----------------------    ---------------------
                                                   1999          1998        1999          1998 
                                                 --------       -------    --------      -------
                                                       (Unaudited)               (Unaudited)
<S>                                              <C>            <C>        <C>           <C>
Numerator--Basic and Diluted EPS
  Net (loss) income ...........................  $   (710)      $   391    $ (1,383)     $   598
                                                 ========       =======    ========      =======
Denominator--Basic EPS
  Common stock outstanding ....................    13,485         9,780      13,433        7,771
                                                 --------       -------    --------      -------
Basic net (loss) income per share .............  $  (0.05)      $  0.04    $  (0.10)     $  0.08
                                                 ========       =======    ========      =======
Denominator--Diluted EPS
  Denominator--Basic EPS ......................    13,485         9,780      13,433        7,771
  Effect of Dilutive Securities:
    Common stock options and warrant ..........        --         1,432          --        1,158
    Convertible preferred stock ...............        --         1,308          --        2,332
                                                 --------       -------    --------      -------
                                                   13,485        12,520      13,433       11,261
                                                 --------       -------    --------      -------
Diluted net (loss) income per share ...........  $  (0.05)      $  0.03    $  (0.10)     $  0.05
                                                 ========       =======    ========      =======
</TABLE>

         Stock options to purchase 2,575,147 shares of Common Stock at prices
ranging from $0.01 to $17.125 per share were outstanding at March 31, 1999 but
were not included in the computation of diluted net loss per share, 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 (loss)
income and its total comprehensive income for the three and six month periods
ended March 31, 1999 and March 31, 1998.


                                       7
<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.


                                       8
<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 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.


                                       9
<PAGE>   10
     Currently, license fees represent substantially all 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 future royalties. Royalties will generally be
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
will be a significant delay between the delivery of a product and the generation
of royalty revenue. To date, the Company has received no royalty revenue due to
the typical length of time required for the Company to design a component for a
customer and for such customer to design, manufacture and bring to market a
product incorporating such component. There can be no assurance that the Company
will receive any 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 March 31,
1999, Conexant Systems, Inc. ("Conexant") and NEC Electronics, Inc. ("NEC")
accounted for 44% and 32% of revenue, respectively. In the six month period
ended March 31, 1999, Taiwan Semiconductor Manufacturing Corporation ("TSMC"),
Conexant, UMC Group ("UMC Group"), and NEC accounted for 27%, 22%, 20% and 16%
of revenue, respectively. In the three month period ended March 31, 1998,
Newport Wafer-Fab Ltd. ("Newport"), Hitachi, Ltd. ("Hitachi"), TSMC, VLSI
Technology, Inc. ("VLSI Technology") and NEC accounted for 20%, 18%, 16%, 11%
and 10% of revenue, respectively. In the six month period ended March 31, 1998,
TSMC, OKI Electric Industry Co., Ltd. ("OKI"), STMicroelectronics N.V. ("ST"),
NEC and Newport accounted for 13%, 13%, 12%, 12% and 11% of revenue,
respectively. The Company anticipates that its revenue will continue to depend
on a limited number of major customers for the foreseeable future, although the
companies considered to be major customers and the percentage of revenue
represented by each major customer may vary from period to period depending on
the addition of new contracts and the number of designs utilizing the Company's
products. The limited number of semiconductor manufacturers to which the Company
can license its products may also have a material adverse effect on the
Company's business, operating results and financial condition if any of the
Company's customers suffers a deterioration in financial condition or there is a
decline in the demand for the semiconductors produced by such manufacturers. 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 six month periods ended March 31, 1999, international revenue,
primarily from Asia and Europe, represented approximately 29% and 63%,
respectively, of the Company's revenue. In the three and six month periods ended


                                       10
<PAGE>   11
March 31, 1998, international revenue represented approximately 86% and 82%,
respectively, of the Company's revenue. The Company anticipates that
international revenue will remain a substantial portion of its revenue in the
future. To date, all of the revenue from international customers has been
denominated in U.S. dollars. 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 90% and 89% of
revenue in the three and six month periods ended March 31, 1999, respectively.
In each of the three and six month periods ended March 31, 1998, memory and
standard cell products together accounted for 98% of revenue, respectively. 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 return to 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 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,


                                       11
<PAGE>   12
of which approximately $11,000 and $23,000 were amortized during the three and
six month periods ended March 31, 1999. All of such amounts were recorded in
product development expenses. In addition, the amortization will result in
charges over the next eight 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          SIX MONTHS ENDED
                                                 MARCH 31,                  MARCH 31,
                                           --------------------       --------------------
                                            1999          1998         1999          1998
                                           ------        ------       ------        ------
<S>                                        <C>           <C>          <C>           <C>
Revenue ................................    100.0%        100.0%       100.0%        100.0%
Cost and expenses:
  Cost of revenue ......................     42.8          28.6         42.9          29.6
  Product development ..................     46.8          23.2         40.2          24.2
  Sales and marketing ..................     38.6          27.0         36.9          25.4
  General and
   administrative ......................     18.2          11.7         23.0          12.6
                                           ------        ------       ------        ------
    Total cost and expenses ............    146.4          90.5        143.0          91.8
                                           ------        ------       ------        ------
Operating (loss) income ................    (46.4)          9.5        (43.0)          8.2
Other income, net ......................     13.4           5.1         14.2           4.3
                                           ------        ------       ------        ------
(Loss) income before provision
 for income taxes ......................    (33.0)         14.6        (28.8)         12.5
(Benefit) provision for income
 taxes .................................     (8.6)          4.2         (5.5)          4.1
                                           ------        ------       ------        ------
Net (loss) income ......................    (24.4)%        10.4%       (23.3)%         8.4%
                                           ======        ======       ======        ======
</TABLE>

Revenue

     Revenue decreased by 22.8% from $3.8 million in the three month period
ended March 31, 1998 to $2.9 million in the three month period ended March 31,
1999. Revenue decreased by 16.2% from $7.1 million in the six month period ended
March 31, 1998 to $5.9 million in the six month period ended March 31, 1999. The
decline in revenue in the three and six month periods ended March 31, 1999 as
compared with the same periods in fiscal 1998 was primarily attributable to
decreased licensing of the Company's memory products, which was partially offset
by an increase in the sale of standard cell and I/O products and the recognition
of revenues 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


                                       12
<PAGE>   13
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 33.6% from $1.9
million in the three month period ended March 31, 1998 to $2.6 million in the
three month period ended March 31, 1999. Engineering costs increased by 29.4%
from $3.8 million in the six month period ended March 31, 1998 to $4.9 million
in the six month period ended March 31, 1999. Engineering costs as a percentage
of revenue increased from 51.8% and 53.8% in the three and six month periods
ended March 31, 1998, respectively, to 89.6% and 83.1% in the three and six
month periods ended March 31, 1999, respectively. The absolute dollar increase
in engineering costs in the three and six month periods ended March 31, 1999, as
compared with the same periods in fiscal 1998, was primarily due to an increase
in engineering headcount and, to a lesser extent, purchases of computer
equipment, software tools and networking infrastructure and equipment.

          Cost of Revenue. Cost of revenue increased by 15.6% from $1.1 million
     in the three month period ended March 31, 1998 to $1.2 million in the three
     month period ended March 31, 1999. Cost of revenue increased by 21.4% from
     $2.1 million in the six month period ended March 31, 1998 to $2.5 million
     in the six month period ended March 31, 1999. Cost of revenue as a
     percentage of revenue was 28.6% and 42.8% for the three month periods ended
     March 31, 1998 and 1999, respectively. Cost of revenue as a percentage of
     revenue was 29.6% and 42.9% for the six month periods ended March 31, 1998
     and 1999, respectively. The absolute dollar increase in cost of revenue in
     the three and six month periods ended March 31, 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 55.9% from $871,000 in the three month period ended March 31, 1998 to
     $1.4 million in the three month period ended March 31, 1999. Product
     development expenses increased by 39.3% from $1.7 million in the six month
     period ended March 31, 1998 to $2.4 million in the six month period ended
     March 31, 1999. Product development expenses as a percentage of revenue
     increased from 23.2% to 46.8% in the three month periods ended March 31,
     1998 and 1999, respectively. Product development expenses as a percentage
     of revenue increased from 24.2% to 40.2% for the six month periods ended
     March 31, 1998 and 1999, respectively. The absolute dollar increase in
     product development expenses in the three and six month periods ended March
     31, 1999, as compared with the same periods in fiscal 1998, was
     attributable to an increase in engineering headcount and, to a lesser
     extent, purchases of computer equipment, software tools and networking
     infrastructure and equipment.

     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
10.2% from $1.0 million in the three month period ended March 31, 1998 to $1.1
million in the three month period ended March 31, 1999. Sales and marketing
expenses increased by 21.5% from $1.8 million in the six month period ended
March 31, 1998 to $2.2 million in the six month period ended March 31, 1999.
Sales and marketing expense as a percentage of revenue increased from 27.0% to
38.6% in the three month periods ended March 31, 1998 and 1999, respectively.
Sales and marketing expenses as a percentage of revenue increased from 25.4% to
36.9% for the six month periods ended March 31, 1998 and 1999, respectively. The
increase in absolute dollars in sales and marketing expenses in the three and
six month periods ended March 31, 1999 as compared with the same periods in


                                       13
<PAGE>   14
fiscal 1998, was primarily attributable to headcount growth, increased travel
expense and new marketing programs to support an expanded customer coverage
model.

     General and Administrative Expenses. General and administrative expenses
increased by 20.8% from $438,000 in the three month period ended March 31, 1998
to $529,000 in the three month period ended March 31, 1999. General and
administrative expenses increased by 52.9% from $893,000 in the six month period
ended March 31, 1998 to $1.4 million in the six month period ended March 31,
1999. As a percentage of revenue, general and administrative expenses increased
from 11.6% to 18.2% in the three month periods ended March 31, 1998 and 1999,
respectively. General and administrative expenses as a percentage of revenue
increased from 12.6% to 23.0% for the six month periods ended March 31, 1998 and
1999, respectively. The absolute dollar increase in general and administrative
expenses in the second quarter of fiscal 1999 as compared with the same period
in fiscal 1998 was primarily due to increased costs of public reporting and
professional fees and, to a lesser extent, increased headcount costs. Increases
in general and administrative expenses for the first six 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 and, to a lesser extent, increased headcount and costs of public
reporting.

Other Income

     Other income increased by 102.1% from $192,000 in the three month period
ended March 31, 1998 to $388,000 in the three month period ended March 31, 1999.
Other income increased by 174.6% from $307,000 in the six month period ended
March 31, 1998 to $843,000 in the six month period ended March 31, 1999. Other
income as a percentage of revenue increased from 5.1% to 13.4% for the three
month periods ended March 31, 1998 and 1999, respectively. Other income as a
percentage of revenue increased from 4.3% to 14.2% for the six month periods
ended March 31, 1998 and 1999, respectively. The growth in other income in the
three and six month periods ended March 31, 1999, as compared with the same
periods in fiscal 1998, primarily reflects interest income earned on the
proceeds from the Company's February 1998 initial public offering and the
Company's May 1998 public offering.

Income Taxes

     The income tax provision was $159,000 for the three month period ended
March 31, 1998, and for the three month period ended March 31, 1999, the income
tax benefit was $250,000. For the six month period ended March 31, 1998, the
income tax provision was $289,000, and the income tax benefit for the six month
period ended March 31, 1999 was $325,000. The effective tax rate decreased from
28.9% to a benefit of 26.0% for the three month periods ended March 31, 1998 and
1999, respectively. For the six month periods ended March 31, 1998 and 1999,
respectively, the effective tax rate decreased from 32.6% to a benefit of 19.0%.
The decrease in effective tax rates for the respective periods was primarily due
to the operating losses recorded by the Company in the second quarter and first
half of fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has funded its operations primarily from license revenue
received from inception to March 31, 1999, the net proceeds of $27.1 million


                                       14
<PAGE>   15
from its February 1998 initial public offering of Common Stock, the net proceeds
of $15.8 million from its May 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 $1.0 million and
$895,000 in the six month periods ended March 31, 1998 and 1999, respectively.
Net cash provided by operating activities in the six month period ended March
31, 1998 was due to net income, depreciation and amortization, an increase in
deferred revenue and increases in accounts payable and other liabilities, and
was partially offset by an increase in contract receivables and an increase in
prepaid expenses and other assets. Net cash provided by operating activities in
the six month period ended March 31, 1999 was due to depreciation and
amortization, an increase in deferred revenue and increases in accounts payable
and other liabilities and was partially offset by the Company's net loss, an
increase in net contract receivables and an increase in prepaid expenses and
other assets.

     Net cash used in investing activities was $27.8 million in the six month
period ended March 31, 1998. Net cash generated from investing activities was
$5.1 million in the six month period ended March 31, 1999. In the six month
period ended March 31, 1998, investing activities consisted primarily of
purchases of marketable securities and, to a lesser extent, to purchases of
property and equipment. In the six month period ended March 31, 1999, cash was
generated from the sale of marketable securities which was largely offset by
purchases of marketable securities and purchases of property and equipment.

     Net cash provided by financing activities was $27.3 million and $430,000 in
the six month periods ended March 31, 1998 and 1999, respectively. Net cash
provided by financing activities in both periods consisted of proceeds from the
issuance of Common Stock.

     At March 31, 1999, the Company had cash, cash equivalents and current
marketable securities of $46.4 million. As of March 31, 1999, the Company had
retained earnings of $1.9 million and working capital of $47.7 million,
including the current portion of deferred revenue of $1.8 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 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. The Company anticipates spending approximately $2.8
million for capital expenditures over 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


                                       15
<PAGE>   16

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 (loss)
income and its total comprehensive income for the three and six month periods
ended March 31, 1999 and March 31, 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,
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

The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. The Company is currently reviewing its products and its
internal use systems and software in order to identify and modify those
products, systems and software that are not Year 2000 compliant. The costs
associated with this review effort are not incremental to the Company and
represent a reallocation of existing resources. Additionally, in the normal
course of business, the Company has made capital investments in certain third
party software and hardware systems to address its operational needs. These
systems, which are intended to improve efficiency and productivity, have been
certified Year 2000 compliant by the respective vendors and have been or will be
installed by July 31, 1999. To date, all of these capital projects were part of
the Company's capital plan and their timing was not accelerated as a result of
the Year 2000 issue. Total estimated expenditures related to these capital
projects for the three and six month periods ended March 31, 1999 were $300,000
and $2.3 million, respectively. While the Company believes it has made
substantial progress in resolving all identified Year 2000 issues, additional
testing is planned during fiscal 1999 to reasonably ensure Year 2000 readiness.
Irrespective of the outcome of such testing, the Company believes it will be


                                       16
<PAGE>   17
able to continue to conduct its business, possibly at reduced volume, using its
existing Year 2000 compliant systems and software until any remaining Year 2000
issues have been resolved. The Company is also reviewing its building and
utility systems (heat, light, phones, etc.) for the impact of the Year 2000
issue. Many of these systems are Year 2000 ready. Although there can be no
assurance that the Company will be able to complete any required modifications
prior to the year 2000, that unanticipated events will not occur, or that the
Company will be able to identify any remaining Year 2000 issues before problems
manifest themselves, it is management's belief that the Company is taking
adequate action to address all related issues. Management does not expect the
financial impact of Year 2000 compliance to be material to the Company's
financial position, results of operations or cash flows.

     The Company has begun the process of contacting its major suppliers to
determine the extent to which their systems (insofar as they relate to the
Company's business) are subject to the Year 2000 issue. The Company is currently
unable to predict the extent to which the Year 2000 issue will affect its
suppliers or the extent to which it would be vulnerable to its suppliers'
failure to remediate any Year 2000 issues on a timely basis. The failure of a
major supplier to convert its systems on a timely basis to those that are Year
2000 compliant or a conversion that is incompatible with the Company's systems
could have a material adverse effect on the business, financial condition or
results of operations of the Company.

     The Company's products work in combination with semiconductor designs and
planning tools in environments developed by other vendors and interact with
other operating environments. It is likely that, commencing in the year 2000,
the functionality of certain operating environments will be adversely affected
when one or more component products of the environment is unable to process
four-digit characters representing years and, therefore, the operating
environment would not be Year 2000 compliant. There can be no assurance that the
Company's fully compliant products will be able to function properly when
integrated with other vendors' noncompliant component products. Nor can there be
any assurance that the failure of certain operating environments with which the
Company's products work in combination will not have a material adverse effect
on the business, financial condition or results of operation of the Company.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit issuers and, by policy, limits the amount of credit
exposure to any one issuer. As stated in its policy, the Company is averse to
principal loss and seeks to preserve its invested funds by limiting default
risk, market risk and reinvestment risk.

     The Company mitigates default risk by investing in high credit quality
securities and by positioning its portfolio to respond appropriately to a
significant reduction in a credit rating of any investment issuer or guarantor.
The portfolio includes only marketable securities with active secondary or
resale markets to ensure portfolio liquidity.

     The table below presents the carrying value and related weighted average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at March 31, 1999. All investments mature in one year or
less.


                                       17
<PAGE>   18

<TABLE>
<CAPTION>
                                                                  AVERAGE RATE OF
                                                                     RETURN AT
                                              CARRYING VALUE      MARCH 31, 1999
                                              --------------     -----------------
                                              (IN THOUSANDS)        (ANNUALIZED)
<S>                                           <C>                <C>  
INVESTMENT SECURITIES:
Cash Equivalents - variable rate                 $ 1,254               4.24%
Money market funds - variable rate               $   897               4.37%
Short-term investments - fixed rate              $44,249               4.09%
                                                 -------
         Total investment securities             $46,400
                                                 =======
</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 such event, the price of the Company's
Common Stock would likely decline, perhaps substantially. The limited number of
semiconductor manufacturers to which the Company can license its products may
also have a material adverse effect on the Company's business, operating results
and financial condition if any of the Company's customers suffers a
deterioration in financial condition or there is a decline in the demand for the
semiconductors produced by such manufacturers. 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.

     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


                                       18
<PAGE>   19
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 return to 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 begun to emerge. The Company's ability to achieve sustained
revenue growth and profitability in the future will depend on the continued
development of this market and, to a large extent, on the demand for 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


                                       19
<PAGE>   20
merchant segment of the IP component market, the Company competes primarily
against Aspec Technology, Inc., Avant! Corporation, Duet Corporation, Mentor
Graphics Corporation and the Silicon Architects division of Synopsys, Inc. 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 electronic design automation ("EDA")
software tools, including certain of those mentioned above, and there can be no
assurance that the Company will be able to compete successfully against them.

     The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less
expensive than the Company's IP components or that may provide better
performance or additional features not currently provided by the Company.
Many of the Company's current and potential competitors have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, certain of the Company's
principal competitors offer a single vendor solution, since, in the case of EDA
tools companies, they maintain their own EDA design tools and IP libraries or,
in the case of internal design groups, they provide IP components developed to
utilize the qualities of a given manufacturing process, and may therefore
benefit from certain capacity, cost and technical advantages. The Company's
ability to compete successfully in the emerging market for IP components will
depend upon certain factors, many of which are beyond the Company's control
including, but not limited to, success in designing new products; implementing
new designs at smaller process geometries; access to adequate EDA tools (many of
which are licensed from the Company's current or potential competitors); the
price, quality and timing of new product introductions by the Company and its
competitors; the emergence of new IP component interchangeability standards; the
widespread licensing of IP components by semiconductor manufacturers or their
design groups to third party manufacturers; the ability of the Company to
protect its intellectual property; market acceptance of the Company's IP
components; success of competitive products; market acceptance of products using
System-on-a-Chip ICs; and industry and general economic conditions. There can be
no assurance that the Company will be able to compete successfully in the
emerging merchant IP component market.

     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


                                       20
<PAGE>   21
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. Although a substantial majority of the Company's customers have agreed
to the royalty based business model, the Company has not yet generated any
royalty revenue under these contracts. 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 ever receive any 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."

     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


                                       21
<PAGE>   22
of its revenue, although the customers comprising this group have changed from
time to time. In the three month period ended March 31, 1999, Conexant and NEC
accounted for 44% and 32% of revenue, respectively. In the six month period
ended March 31, 1999, TSMC, Conexant, UMC Group and NEC accounted for 27%, 22%,
20% and 16% of revenue, respectively. In the three month period ended March 31,
1998, Newport, Hitachi, TSMC, VLSI Technology and NEC accounted for 20%, 18%,
16%, 11% and 10% of revenue, respectively. In the six month period ended March
31, 1998, TSMC, OKI, ST, NEC and Newport accounted for 13%, 13%, 12%, 12% and
11% of revenue, respectively. The Company anticipates that its revenue will
continue to depend on a limited number of major customers for the foreseeable
future, although the companies considered to be major customers and the
percentage of revenue represented by each major customer may vary from period to
period depending on the addition of new contracts and the number of designs
utilizing the Company's products. None of the Company's customers has a written
agreement with the Company that obligates it to license 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 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 90% and 89% of revenue in the three and six month periods ended March 31,
1999, respectively. In each of the three and six month periods ended March 31,
1998, memory and standard cell products together accounted for 98% of revenue,
respectively. 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."


                                       22
<PAGE>   23
     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 six month periods ended March 31, 1999, international revenue, primarily
from Asia and Europe, represented approximately 29% and 63%, respectively, of
the Company's revenue. In the three and six month periods ended March 31, 1998,
international revenue represented approximately 86% and 82%, 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.


                                       23
<PAGE>   24
     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
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 March 31, 1998
to March 31, 1999, the Company grew from 74 to 93 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


                                       24
<PAGE>   25
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
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


                                       25
<PAGE>   26
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 believes that
its current cash balances 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. The Company anticipates spending approximately $2.8 million for capital
expenditures over 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
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.




                                       26
<PAGE>   27

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 March 31, 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 4:  Submission of Matters to a Vote of Security Holders

      On February 25, 1999, the Registrant held an Annual Meeting of
Stockholders for which it solicited votes by proxy. The following is a brief
description of the matters voted upon at the meeting and a statement of the
number of votes cast for and against, and the number of abstentions. There were
no broker non-votes with respect to items 1 and 3 below.

1.    To elect four directors to serve until the next Annual Meeting of
Stockholders and until their successors are elected.

<TABLE>
<CAPTION>
           Nominee              Votes For           Votes Withheld
<S>                              <C>                  <C>

       Mark R. Templeton         11,310,799            41,670
       Scott T. Becker           11,307,599            44,870
       Lucio L. Lanza            11,306,403            46,066
       Dr. Eli Harari            11,311,099            41,370
</TABLE>

2.    To approve amendments to the 1993 Stock Option Plan to (i) provide an
annual increase in the number of shares of Common Stock reserved for issuance
thereunder beginning on October 1, 1999 in an amount equal to the lesser of (x)
1,000,000 shares, (y) 5% of Common Stock outstanding as of the last day of the
prior fiscal year or (z) such amount as determined by the Board of Directors of
the Registrant and (ii) establish share limitations for purposes of Section
162(m) of the Internal Revenue Code of 1986, as amended.

                  FOR:                    5,558,127
                  AGAINST:                3,786,321
                  ABSTAIN:                    3,344
                  BROKER NON-VOTES:       2,004,677

3.    To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Registrant for the fiscal year ending September 30, 1999.

                  FOR:                   11,351,075
                  AGAINST:                      850
                  ABSTAIN:                      544

ITEM 6: Exhibits

     (a)  Exhibits

          27.1 Financial Data Schedule


                                       27
<PAGE>   28
                                   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:  May 13, 1999

                                       ARTISAN COMPONENTS, INC.
                                       (Registrant)

                                       /s/ Mark R. Templeton
                                       -----------------------------------------
                                       Mark R. Templeton
                                       Chief Executive Officer

                                       /s/ Robert D. Selvi
                                       -----------------------------------------
                                       Robert D. Selvi
                                       Vice President, Finance and 
                                       Chief Financial Officer


                                       28
<PAGE>   29
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBITS
- --------
<S>        <C>
  27.1                      Financial Data Schedule
</TABLE>


                                       29

<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          SEP-30-1999
<PERIOD-START>                             OCT-01-1998
<PERIOD-END>                               MAR-31-1999
<CASH>                                          42,905
<SECURITIES>                                     3,495
<RECEIVABLES>                                    6,085
<ALLOWANCES>                                     (724)
<INVENTORY>                                          0
<CURRENT-ASSETS>                                53,463
<PP&E>                                          10,444
<DEPRECIATION>                                 (3,895)
<TOTAL-ASSETS>                                  60,573
<CURRENT-LIABILITIES>                            5,745
<BONDS>                                              0
                                0
                                          0
<COMMON>                                            14
<OTHER-SE>                                      52,707
<TOTAL-LIABILITY-AND-EQUITY>                    60,573
<SALES>                                          5,940
<TOTAL-REVENUES>                                 5,940
<CGS>                                            2,549
<TOTAL-COSTS>                                    8,491
<OTHER-EXPENSES>                                    42
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                               (885)
<INCOME-PRETAX>                                (1,708)
<INCOME-TAX>                                     (325)
<INCOME-CONTINUING>                            (1,383)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   (1,383)
<EPS-PRIMARY>                                    (.10)
<EPS-DILUTED>                                    (.10)
        

</TABLE>



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