ARTISAN COMPONENTS INC
10-Q, 2000-08-14
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 June 30, 2000

                                       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)

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

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

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


     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes [X]    No [ ]

As of June 30, 2000 there were 14,558,790 shares of the Registrant's Common
Stock outstanding.

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


<PAGE>   2

                            ARTISAN COMPONENTS, INC.

                                    Form 10-Q

                                      INDEX

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

PART I - Financial Information

     ITEM 1 - Financial statements

     Condensed Balance Sheets as of June 30, 2000 and September 30, 1999....3
     Condensed Statements of Operations for the
          Three and Nine Months Ended June 30, 2000 and 1999................4
     Condensed Statements of Cash Flows for the
          Nine Months Ended June 30, 2000 and 1999..........................5
     Notes to Condensed Financial Statements................................6

     ITEM 2 - Management's Discussion and Analysis of Financial
          Condition and Results of Operations..............................10

PART II - Other Information

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

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


                                        2

<PAGE>   3
                            ARTISAN COMPONENTS, INC.
                            CONDENSED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                        JUNE 30,   SEPTEMBER 30,
                                                     ------------- -------------
                                                         2000          1999(1)
                                                     ------------- -------------
                                                      (UNAUDITED)
<S>                                                     <C>           <C>
                       ASSETS
Current assets:
  Cash and cash equivalents.........................    $34,990       $15,233
  Contract receivables, net.........................      7,910         7,721
  Marketable securities.............................     16,127        32,948
  Prepaid expenses and other current assets.........      1,415         1,760
                                                        -------       -------
    Total current assets............................     60,442        57,662
Property and equipment, net.........................      5,105         6,133
Deferred tax asset..................................        361           361
Other assets........................................        203           188
                                                        -------       -------
    Total assets....................................    $66,111       $64,344
                                                        =======       =======
        LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses.............    $ 1,830       $ 3,255
  Deferred revenue..................................      3,443         3,795
                                                        -------       -------
    Total current liabilities.......................      5,273         7,050
Long term liabilities...............................        151           174
                                                        -------       -------
    Total liabilities...............................      5,424         7,224
                                                        -------       -------

Stockholders' Equity:
 Common Stock, $0.001 par value:
  Authorized: 50,000 shares;
  Issued and outstanding: 14,559 and 13,909
   shares at June 30, 2000 and September 30,
   1999, respectively................................        15            14
 Additional paid in capital.........................     56,988        54,358
 Retained earnings..................................      3,684         2,748
                                                        -------       -------
    Total stockholders' equity......................     60,687        57,120
                                                        -------       -------
    Total liabilities and stockholders' equity......    $66,111       $64,344
                                                        =======       =======
</TABLE>
------------
(1)  Derived from the Registrant's audited balance sheet as of September 30,
     1999.

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


                                        3

<PAGE>   4

                            ARTISAN COMPONENTS, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                             THREE MONTHS          NINE MONTHS
                                            ENDED JUNE 30,        ENDED JUNE 30,
                                          ------------------    ------------------
                                            2000      1999        2000      1999
                                          --------  --------    --------  --------
<S>                                       <C>       <C>         <C>       <C>
Revenue:
   License..............................  $  3,950  $  4,097    $ 12,981  $ 10,037
   Net royalty..........................       952       206       2,351       206
                                          --------  --------    --------  --------
    Total revenue.......................     4,902     4,303      15,332    10,243
                                          --------  --------    --------  --------
Cost and expenses:
   Cost of license revenue..............     1,207     1,635       4,019     4,183
   Product development..................     1,811     1,192       5,044     3,580
   Sales and marketing..................     1,675     1,416       5,229     3,605
   General and administrative...........       663       567       1,810     1,933
                                          --------  --------    --------  --------
    Total cost and expenses.............     5,356     4,810      16,102    13,301
                                          --------  --------    --------  --------
Operating loss..........................      (454)     (507)       (770)   (3,058)
Other income............................       791       555       2,167     1,398
                                          --------  --------    --------  --------
Income (loss) before provision
   for income taxes.....................       337        48       1,397    (1,660)
Provision (benefit) for income
   taxes................................       111      (339)        461      (664)
                                          --------  --------    --------  --------
Net income (loss).......................  $    226  $    387    $    936  $   (996)
                                          ========  ========    ========  ========
Basic net income (loss) per share.......  $   0.02  $   0.03    $   0.07  $  (0.07)
                                          ========  ========    ========  ========
Diluted net income (loss) per share.....  $   0.01  $   0.03    $   0.06  $  (0.07)
                                          ========  ========    ========  ========
Shares used in computing:
  Basic net income (loss) per share.....    14,431    13,612      14,174    13,492
  Diluted net income (loss) per share...    15,223    14,375      15,413    13,492
</TABLE>

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


                                        4

<PAGE>   5

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

<TABLE>
<CAPTION>
                                                        NINE MONTHS ENDED
                                                             JUNE 30,
                                                      ---------------------
                                                        2000         1999
                                                      --------     --------
<S>                                                    <C>         <C>
Cash flows from operating activities:
  Net income (loss)................................    $   936     $   (996)
  Adjustments to reconcile net income (loss)
   to net cash provided by operating activities:
    Depreciation and amortization..................      2,095        1,767
    Gain on sale/disposal of fixed assets..........        (67)         (56)
    Provision for doubtful accounts................         --          294
    Compensation expense for options granted.......         45           65
    Changes in assets and liabilities:
      Contract receivables.........................       (189)        (396)
      Deferred revenue and
       long term liabilities.......................       (308)       1,758
      Prepaid expenses and other assets............        240         (468)
      Accounts payable and accrued liabilities.....     (1,425)       1,130
                                                      --------     --------
        Net cash provided by operating activities..      1,327        3,098
                                                      --------     --------
Cash flows from investing activities:
  Acquisition of property and equipment............     (1,067)      (2,868)
  Proceeds from sale of property and equipment.....         90           90
  Purchase of marketable securities................    (34,719)     (20,996)
  Proceeds from sale of marketable securities......     51,540       11,777
                                                      --------     --------
        Net cash provided by investing activities..     15,844      (11,997)
                                                      --------     --------
Cash flows from financing activities:
  Proceeds from issuance of Common Stock...........      2,586          477
                                                      --------     --------
        Net cash provided by financing activities..      2,586          477
                                                      --------     --------
Net increase in cash and cash equivalents..........     19,757       (8,422)
Cash and cash equivalents, beginning of period.....     15,233       36,516
                                                      --------     --------
Cash and cash equivalents, end of period...........   $ 34,990     $ 28,094
                                                      ========     ========
CASH PAID FOR:
  Income taxes.....................................   $    495     $     --
                                                      ========     ========
</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. ("Artisan" or 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 September
30, 1999 fiscal year end balance sheet data was derived from the audited
financial statements and does not include all disclosures required by GAAP.
Operating results for the three and nine month periods ended June 30, 2000 are
not necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 2000 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, 1999 included in the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission.

2.   EARNINGS PER SHARE (EPS) DISCLOSURES:

     Basic and diluted earnings per share are computed in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"). Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares consist of the
incremental common shares issuable upon the conversion of convertible preferred
stock (using the "if converted" method) and exercise of stock options and
warrants for all periods. Dilutive potential common shares are not included
during periods in which the Company experienced a net loss, as the impact would
be anti-dilutive.

<PAGE>   7

                            ARTISAN COMPONENTS, INC.

               NOTES TO CONDENSED FINANCIAL STATEMENTS--CONTINUED
                                   (Unaudited)


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

     In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                       THREE MONTHS ENDED      NINE MONTHS ENDED
                                            JUNE 30,                JUNE 30,
                                       ------------------     ------------------
                                         2000      1999         2000      1999
                                       --------  --------     --------  --------
<S>                                    <C>       <C>          <C>       <C>
Numerator--Basic and Diluted EPS
  Net income (loss)................... $    226  $    387     $    936  $   (996)
                                       ========  ========     ========  ========
Denominator--Basic EPS
  Common stock outstanding............   14,431    13,612       14,174    13,492
                                       --------  --------     --------  --------
Basic net income (loss) per share..... $   0.02  $   0.03     $   0.07  $  (0.07)
                                       ========  ========     ========  ========
Denominator--Diluted EPS
  Denominator--Basic EPS..............   14,431    13,612       14,174    13,492
  Effect of Dilutive Securities
    Common stock options..............      792       763        1,239        --
                                       --------  --------     --------  --------
                                         15,223    14,375       15,413    13,492
                                       --------  --------     --------  --------
Diluted net income (loss) per share... $   0.01  $   0.03     $   0.06  $  (0.07)
                                       ========  ========     ========  ========
</TABLE>

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

<PAGE>   8

                            ARTISAN COMPONENTS, INC.

               NOTES TO CONDENSED FINANCIAL STATEMENTS--CONTINUED
                                   (Unaudited)


3.   NEW ACCOUNTING STANDARDS:

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Investments and Hedging Activities." The
statement establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. The Company is currently evaluating
the impact SFAS No. 133 will have on its financial position and results of
operations. SFAS No. 133, as amended, is effective for fiscal years beginning
after June 15, 2000. The Company will adopt SFAS No. 133 for its fiscal year
beginning October 1, 2000.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will adopt SAB 101 as required in the first quarter of fiscal 2001 and is
evaluating the effect that such adoption may have on its financial position and
results of operations.

     In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
Opinion No. 25" ("FIN 44"). This Interpretation clarifies the definition of
employee for purposes of applying Accounting Practice Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. The Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998 or January 12, 2000. To the extent that FIN 44
covers events occurring during the period after December 15, 1998 or January 12,
2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000. The
Company does not expect the adoption of FIN 44 to have a material effect on its
financial position or results of operations.

4.   COMPREHENSIVE INCOME:

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes requirements for
disclosure of comprehensive income and became effective for the Company for its
fiscal year 1999, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments of contributions by
stockholders. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in other comprehensive income. The

<PAGE>   9

Company has adopted SFAS 130; however, the effect of the adoption was immaterial
to all periods presented.

5.   BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION:

     The Company currently operates in one industry segment, the semiconductor
intellectual property segment, for financial reporting purposes, and uses one
measure of profitability for its business. The Company markets its products to
customers in the North America, Europe and Asia. The substantial majority of the
Company's long-lived assets are maintained in the United States.

<PAGE>   10

                            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, 1999 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 is a leading developer of high performance, high density and low
power embedded memory, standard cell and input/output ("I/O") 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.

     Beginning in late fiscal 1996, the Company implemented a royalty-based
business model that is intended to generate revenue from royalties in addition
to license fees. 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 the Company's IP
components to semiconductor design companies that manufacture at the same
facility. In cases where the semiconductor manufacturer does not have the
infrastructure necessary to distribute and support the Company's IP components,
the Company performs the distribution function directly to the customers of the
semiconductor manufacturer. License fees and royalties are 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 $250,000 to $700,000 for each product delivered under
a contract. A contract typically calls for an initial payment of approximately
one-third of the license fee with the remainder due upon delivery, generally
three to six months later. Royalty payments are calculated based on per unit
sales of ICs or wafers containing the Company's IP components. Given that the
Company provides its products early in the customer's IC design process, there

<PAGE>   11

is a significant delay between the delivery of a product and the generation of
royalty revenue.

     To date, the substantial majority of the Company's license revenue has been
recognized using the percentage of completion method. As the completion period
for a project ranges from three to six months, revenue in any quarter is
dependent on the Company's progress toward completion of the project. Provisions
for estimated losses on uncompleted contracts are recognized in the period in
which the likelihood of such losses is determined. 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. See "--Factors Affecting Future
Operating Results--Lengthy Sales Cycle and Design Process."

     The Company began to receive royalty reports from certain of its customers
in the three months ended June 30, 1999. As expected, royalties to date have
come from a small number of IC designs that are early in their product life
cycles. According to contract terms, a portion of these royalty payments is
credited back to customers' accounts to use to pay license fees for future
orders to be placed with the Company. The remaining portion of the royalty is
reported as net royalty revenue. The Company's success will depend on its
ability to generate royalty revenue from a substantially larger number of
designs and on many of these designs achieving large manufacturing volumes.
There can be no assurance that the Company will be successful in expanding the
number of royalty-bearing contracts with customers, and there can be no
assurance that the Company will receive significant royalty revenue in the
future. See "--Factors Affecting Future Operating Results--Fluctuations in
Operating Results."

     The Company has been dependent on a relatively small number of customers
for a substantial portion of its revenue, although the customers comprising this
group have changed from time to time. In the three month period ended June 30,
2000, Taiwan Semiconductor Manufacturing Corporation ("TSMC"), Infineon
Technologies AG ("Infineon") and Sharp Corporation ("Sharp") accounted for 34%,
17% and 16% of revenue, respectively. In the nine month period ended June 30,
2000, TSMC, Sharp and NEC Corporation ("NEC") accounted for 35%, 13% and 12% of
revenue, respectively. In the three month period ended June 30, 1999, NEC,
Conexant Systems, Inc. ("Conexant") and Chartered Semiconductor Manufacturing
("Chartered") accounted for 36%, 13% and 12% of revenue, respectively. In the
nine month period ended June 30, 1999, NEC, TSMC, Conexant and United
Microelectronics Corporation ("UMC") accounted for 24%, 18%, 18% and 12% 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. For example, in the quarters ended March 31, 2000 and December 31, 1999,
fewer new orders were placed with the Company than in recent prior periods.
While new orders

<PAGE>   12

placed with the Company in the three months ended June 30, 2000 returned to
fiscal 1999 levels, the declines in new orders experienced in the quarters ended
March 31, 2000 and December 31, 1999 may adversely affect the Company's results
of operations in future quarters depending on its ability to obtain additional
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, primarily from Asia and Europe
("international revenue"). In the three and nine month periods ended June 30,
2000, international revenue represented approximately 87% and 88%, respectively,
of the Company's revenue. In the three and nine month periods ended June 30,
1999, international revenue represented approximately 65% and 64%, 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 the substantial majority of its revenue from sales of
its memory, standard cell and I/O products and process setup fees (collectively,
"product license revenue") that together accounted for 71% and 76% of revenue in
the three and nine month periods ended June 30, 2000, respectively. In the three
and nine month periods ended June 30, 1999, product license revenue accounted
for 90% and 94% of revenue, respectively. For the periods ended June 30, 2000 as
compared to the periods ended June 30, 1999, this shift in revenue mix was
primarily due to faster growth in revenue from net royalties and support and
maintenance contracts as compared to the growth of product license revenue.
However, the Company expects that product license revenue 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 product license revenue and a decline in revenue from such products
would have a material adverse effect on the Company's business, operating
results and financial condition. For example, in the three month period ended
June 30, 2000, the Company recorded lower product license revenue as compared to
the three month period ended March 31, 2000. The Company's future financial
performance will depend, in significant part, on the successful development,
introduction and customer acceptance of new products. See "--Factors Affecting
Future Operating Results--Product Concentration."

     Since the Company's inception in April 1991, each of the Company's cost and
expense categories has increased as the Company has added personnel and
increased its activities in most 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 has specifically
announced that it intends to continue its investment in research and development
as well as in product promotion, licensing and support programs in an effort to
maximize the growth of future royalties.

     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 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

<PAGE>   13

products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, some of the
Company's contracts with customers 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 experienced
periods of negative growth as well as declines in the rate of growth of its
revenue as compared with prior periods. For example, in the three month period
ended June 30, 2000, the Company reported lower product license revenue than in
the three month period ended March 31, 2000. There can be no assurance that the
Company will experience positive revenue growth in the future. See "--Factors
Affecting Future Operating Results--Fluctuations in Operating Results."

     In connection with the grant of options for the purchase of 96,200 shares
of Common Stock to employees during the period from December 1996 through March
1997 and 15,000 shares of Common Stock to non-employees in January 1998, the
Company recorded aggregate deferred compensation of approximately $281,000,
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, of which
approximately $41,000, $80,000, and $87,000 were amortized during fiscal 1997,
1998 and 1999, respectively. For the three and nine month periods ended June 30,
2000, $11,000 and $45,000 were amortized, respectively. In addition, the
amortization will result in charges of approximately $11,000 per quarter for the
following three quarters.

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenue:

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED     NINE MONTHS ENDED
                                           JUNE 30,               JUNE 30,
                                       ----------------      ----------------
                                        2000      1999        2000      1999
                                       ------    ------      ------    ------
<S>                                     <C>       <C>         <C>       <C>
Revenue:
  License...........................     80.6%     95.2%       84.7%     98.0%
  Net royalty.......................     19.4       4.8        15.3       2.0
                                       ------    ------      ------    ------
    Total revenue...................    100.0     100.0       100.0     100.0

Cost and expenses:
  Cost of license revenue...........     24.6      38.0        26.2      40.8
  Product development...............     37.0      27.7        32.9      35.0
  Sales and marketing...............     34.2      32.9        34.1      35.2
  General and
   administrative...................     13.5      13.2        11.8      18.9
                                       ------    ------      ------    ------
    Total cost and expenses.........    109.3     111.8       105.0     129.9
                                       ------    ------      ------    ------
Operating loss......................     (9.3)    (11.8)       (5.0)    (29.9)
Other income, net...................     16.2      12.9        14.1      13.7
                                       ------    ------      ------    ------
Income (loss) before provision
 for income taxes...................      6.9       1.1         9.1     (16.2)
Provision (benefit) for income
 taxes..............................      2.3      (7.9)        3.0      (6.5)
                                       ------    ------      ------    ------
Net income (loss)...................      4.6%      9.0%        6.1%     (9.7)%
                                       ======    ======      ======    ======
</TABLE>

<PAGE>   14

Revenue

     Revenue increased by 13.9% to $4.9 million for the three month period ended
June 30, 2000 from $4.3 million for the same period last fiscal year. Revenue
increased by 49.7% to $15.3 million for the nine month period ended June 30,
2000 from $10.2 million for the same period last fiscal year. For the three
month period ended June 30, 2000 as compared to the same period in fiscal 1999,
the increase in revenue was due to higher net royalty revenue and revenue from
support contracts, offset by lower product license revenue. For the nine month
period ended June 30, 2000, as compared to the same period in fiscal 1999, the
increase in revenue was due to increases in product license revenue, net royalty
revenue and support and maintenance contracts.

     License revenue (consisting of product license revenue and maintenance and
support revenue) as a percentage of total revenue decreased to 80.6% and 84.7%
in the three and nine month periods ended June 30, 2000, respectively, from
95.2% and 98.0% in the three and nine month periods ended June 30, 1999,
respectively. Royalty revenue as a percentage of total revenue increased to
19.4% and 15.3% in the three and nine month periods ended June 30, 2000,
respectively, from 4.8% and 2.0% in the three and nine month periods ended June
30, 1999. The time between the Company's implementation of a royalty-based model
in late fiscal 1996 and recognition of significant royalty revenue was due in
large part to the fact that the Company provides its products early in the
customer's IC design process resulting in a significant delay between the
delivery of a product and the generation of royalty revenue. The increase in
royalty revenue as a percentage of total revenue in the three and nine months
ended June 30, 2000 is due in part to the increase in units manufactured by
customers of the Company that incorporate components previously delivered by the
Company. However, there can be no assurance that the Company will be successful
in maintaining or expanding the number of royalty bearing contracts with
customers in the future.

Cost and Expenses

     Engineering Costs. Engineering costs are allocated between cost of license
revenue and product development expenses. Engineering efforts devoted to
developing products for specific customer projects are recognized as cost of
revenue. The balance of engineering costs, incurred for general development of
Artisan's technology, is charged to product development. Engineering costs
generally are charged as incurred. Engineering costs increased by 6.8% to $3.0
million in the three month period ended June 30, 2000 from $2.8 million in the
three month period ended June 30, 1999. Engineering costs increased by 16.7% to
$9.1 million in the nine month period ended June 30, 2000 from $7.8 million in
the nine month period ended June 30, 1999. Engineering costs as a percentage of
revenue decreased to 61.6% and 59.1% in the three and nine month periods ended
June 30, 2000, respectively, from 65.7% and 75.8% in the three and nine month
periods ended June 30, 1999, respectively. The absolute dollar increase in
engineering costs of $191,000 in the three month period ended June 30, 2000, as
compared with the same period in fiscal 1999, was primarily due to increases in
headcount and personnel expenses of approximately $210,000 and increased other
outside services of $27,000, offset by decreased usage of external contractors
and lower computer and networking equipment maintenance and depreciation of
approximately $27,000 and by decreased warranty expense of $19,000. The absolute
dollar increase in engineering costs of $1.3 million in the nine month period
ended June 30, 2000, as compared with the same period in fiscal 1999, was
primarily due to increases in headcount and personnel expenses of $745,000,
additional computer and networking equipment maintenance and depreciation of

<PAGE>   15

approximately $442,000 and increased usage of external contractors and other
outside services of $226,000, offset by decreased warranty expense of $110,000.

     Cost of License Revenue. Cost of license revenue decreased by 26.2% to $1.2
   million in the three month period ended June 30, 2000 from $1.6 million in
   the three month period ended June 30, 1999. Cost of license revenue decreased
   by 3.9% to $4.0 million in the nine month period ended June 30, 2000 from
   $4.2 million in the nine month period ended June 30, 1999. Cost of license
   revenue as a percentage of revenue decreased to 24.6% from 38.0% for the
   three month periods ended June 30, 2000 and 1999, respectively. For the nine
   month periods ended June 30, 2000 and 1999, cost of license revenue as a
   percentage of revenue decreased to 26.2% from 40.8%, respectively. The
   absolute dollar decreases in cost of license revenue of $428,000 and $163,000
   in the three and nine month periods ended June 30, 2000, respectively, as
   compared with the same periods of fiscal 1999, were due to fewer engineering
   hours allocated to revenue-generating projects in the three month period
   ending June 30, 2000. The decrease in cost of license revenue as a percentage
   of revenue for the three and nine month periods ended June 30, 2000, as
   compared to the three and nine month periods ended June 30, 1999, was due to
   the increase in royalty revenue in the periods ended June 30, 2000 as well as
   to higher revenue efficiency per project hour in the periods ended June 30,
   2000.

     Product Development Expenses. Product development expenses increased by
   51.9% to $1.8 million in the three month period ended June 30, 2000 from $1.2
   million in the three month period ended June 30, 1999. Product development
   expenses increased by 40.9% to $5.0 million in the nine month period ended
   June 30, 2000 from $3.6 million in the nine month period ended June 30, 1999.
   Product development expenses as a percentage of revenue increased to 37.0%
   from 27.7% in the three month periods ended June 30, 2000 and 1999,
   respectively. Product development expenses as a percentage of revenue
   decreased to 32.9% from 35.0% in the nine month periods ended June 30, 2000
   and 1999, respectively. The absolute dollar increases in product development
   expenses of $619,000 and $1.5 million in the three and nine month periods
   ended June 30, 2000, respectively, as compared with the same periods in
   fiscal 1999, were attributable to an increase in headcount and
   personnel-related expenses and to depreciation and maintenance expenses
   related to purchases of computer equipment, software tools and networking
   infrastructure and equipment. The increase in product development expenses as
   a percentage of revenue for the three month period ended June 30, 2000, as
   compared to the three month period ended June 30, 1999, was primarily due to
   the Company's allocation of engineering resources to product development
   efforts. The decrease in product development expenses as a percentage of
   revenue for the nine month period ended June 30, 2000, as compared to the
   nine month period ended June 30, 1999, was primarily due to the growth of the
   Company's revenue.

     Sales and Marketing Expenses. Sales and marketing expenses include
salaries, commissions, travel expenses and costs associated with trade shows,
advertising and other marketing efforts. Costs of pre-sale customer support are
also charged to sales and marketing. Sales and marketing expenses increased by
18.3% to $1.7 million in the three month period ended June 30, 2000 from $1.4
million in the three month period ended June 30, 1999. Sales and marketing
expenses increased by 45.0% to $5.2 million in the nine month period ended June
30, 2000 from $3.6 million in the nine month period ended June 30, 1999. Sales
and marketing expense as a percentage of revenue increased to 34.2% from 32.9%
in the three month periods ended June 30, 2000 and 1999, respectively. For the

<PAGE>   16

nine month periods ended June 30, 2000 and 1999, sales and marketing expense as
a percentage of revenue decreased to 34.1% from 35.2%, respectively. The
increase in absolute dollars in sales and marketing expenses of $259,000 in the
three month period ended June 30, 2000, as compared with the same period in
fiscal 1999, was primarily attributable to increased headcount and
personnel-related expenses of approximately $176,000, increased travel and
transportation expenses of $49,000 and increased direct and allocated facilities
and equipment costs and depreciation and other miscellaneous expenses of
approximately $34,000. The increase in absolute dollars in sales and marketing
expenses of $1.6 million in the nine month period ended June 30, 2000, as
compared with the same period in fiscal 1999, was primarily due to increased
headcount and personnel-related expenses of approximately $1.1 million,
increased travel and transportation costs of $305,000, increased direct and
allocated facilities and equipment costs and depreciation of $185,000 and
increased trade show and other promotional activity and other miscellaneous
expenses of approximately $44,000. The increase in sales and marketing expenses
as a percentage of revenue for the three month period ended June 30, 2000, as
compared to the three month period ended June 30, 1999, was due to the Company's
ongoing investment in people and programs to support its end user distribution
model. The decrease in percentage of revenue for the nine month period ended
June 30, 2000, as compared to the same period last year, was primarily due to
growth in the Company's revenue.

     General and Administrative Expenses. General and administrative expenses
increased by 16.9% to $663,000 in the three month period ended June 30, 2000
from $567,000 in the three month period ended June 30, 1999. General and
administrative expenses decreased by 6.4% to $1.8 million in the nine month
period ended June 30, 2000 from $1.9 million in the nine month period ended June
30, 1999. As a percentage of revenue, general and administrative expenses
increased to 13.5% from 13.2% in the three month periods ended June 30, 2000 and
1999, respectively. For the nine month periods ended June 30, 2000 and 1999,
general and administrative expenses as a percentage of revenue decreased to
11.8% from 18.9%, respectively. The absolute dollar increase of $96,000 in
general and administrative expenses in the three month period ended June 30,
2000, as compared to the three month period ended June 30, 1999, was due to
increased recruiting expenses of $50,000, increased external legal costs of
$25,000 and increased miscellaneous expenses of $21,000. The absolute dollar
decrease of $123,000 in general and administrative expenses in the nine month
period ended June 30, 2000, as compared to the nine month period ended June 30,
1999, was due to a decrease in bad debt expense of $294,000 and a decrease in
personnel related expense of $95,000 offset by increased external legal costs of
$156,000, increased recruiting costs of $95,000 and increased other
miscellaneous expenses of $15,000. The increase in general and administrative
expense as a percentage of revenue for the three month period ended June 30,
2000, as compared to the three month period ended June 30, 1999, was due to
higher than usual recruiting and professional services incurred in the three
month period ending June 30, 2000. The decrease in general and administrative
expense as a percentage of revenue for the nine month period ended June 30,
2000, as compared to same period in fiscal 1999, was due to the provision for
bad debt recorded in the nine month period ended June 30, 1999 as well as to the
increase in revenue for the nine month period ended June 30, 2000.

Other Income

     Other income increased by 42.5% to $791,000 in the three month period ended
June 30, 2000 from $555,000 in the three month period ended June 30, 1999. Other
income increased by 55.0% to $2.2 million in the nine month period ended June
30, 2000 from $1.4 million in the nine month period ended June 30, 1999.

<PAGE>   17

Other income as a percentage of revenue increased to 16.2% from 12.9% for the
three month periods ended June 30, 2000 and 1999, respectively. For the nine
month periods ended June 30, 2000 and 1999, other income as a percentage of
revenue increased to 14.1% from 13.7%, respectively. The absolute dollar growth
in other income and the increase in other income as a percentage of revenue in
the three and nine month periods ended June 30, 2000, as compared with the same
periods in fiscal 1999, was primarily due to higher rates of return on the
Company's investments in the periods ended June 30, 2000.

Income Taxes

     The income tax provision for the three month period ended June 30, 2000 was
$111,000 and the income tax benefit for the three month period ended June 30,
1999 was $339,000. The income tax provision for the nine month period ended June
30, 2000 was $461,000 and the income tax benefit for the nine month period ended
June 30, 1999 was $664,000. For the nine month periods ended June 30, 2000, the
effective tax rate was a provision of 33.0%. For the nine month period ended
June 30, 1999 the effective tax rate was a benefit of 40%. The change in the
effective tax rate was due to the combination of taxable losses and non-taxable
investment income in fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has funded its operations primarily from license revenue
received from inception to June 30, 2000, the net proceeds of $27.1 million from
its February 1998 initial public offering of Common Stock, the net proceeds of
$15.8 million from its April 1998 secondary offering of Common Stock and, to a
lesser extent, the proceeds of approximately $7.7 million from the sale of
Preferred Stock and a warrant.

     The Company's operating activities provided net cash of $1.3 million and
$3.1 million in the nine month periods ended June 30, 2000 and 1999,
respectively. Net cash provided by operating activities in the nine month period
ended June 30, 2000 was primarily due to depreciation and amortization and the
Company's net income, partially offset by a decrease in accounts payable and
other liabilities. Net cash provided by operating activities in the nine month
period ended June 30, 1999 was primarily due to depreciation and amortization,
an increase in deferred revenue and an increase in accounts payable and other
liabilities, partially offset by the Company's net loss.

     Net cash provided by investing activities was $15.8 million in the nine
month period ended June 30, 2000. Net cash used by investing activities was
$12.0 million in the nine month period ended June 30, 1999. In the nine months
ended June 30, 2000, investing activities consisted primarily of net sales of
marketable securities partially offset by purchases of property and equipment.
In the nine months ended June 30, 1999, investing activities consisted primarily
of net purchases of marketable securities and purchases of property and
equipment.

     Net cash provided by financing activities was $2.6 million and $477,000 in
the nine month periods ended June 30, 2000 and 1999, respectively. Net cash
provided by financing activities in both periods consisted of proceeds from the
issuance of Common Stock.

     At June 30, 2000, the Company had cash, cash equivalents and current
marketable securities of $35.0 million. As of June 30, 2000, the Company had

<PAGE>   18

retained earnings of $3.7 million and working capital of $55.2 million that
includes the current portion of deferred revenue of $3.4 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. However, from time to time, the Company may be required to
raise additional funds through public or private financing, strategic
relationships or other arrangements. There can be no assurance that such
funding, if needed, will be available on terms attractive to the Company, or at
all. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional funds, may
require the Company to relinquish its rights to certain of its technologies or
products. The failure of the Company to raise capital when needed could have a
material adverse effect on the Company's business, operating results and
financial condition. See "--Factors Affecting Future Operating Results--Future
Capital Needs; Uncertainty of Additional Funding."

NEW ACCOUNTING STANDARDS

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Investments and Hedging Activities." The statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The Company is currently evaluating the impact SFAS No. 133 will have on
its financial position and results of operations. SFAS No. 133, as amended, is
effective for fiscal years beginning after June 15, 2000. The Company will adopt
SFAS No. 133 effective October 1, 2000.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will adopt SAB 101 as required in the first quarter of fiscal 2001 and is
evaluating the effect that such adoption may have on its consolidated results of
operations and financial position.

     In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
Opinion No. 25" ("FIN 44"). This Interpretation clarifies the definition of
employee for purposes of applying APB 25, the criteria for determining whether a
plan qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business

<PAGE>   19

combination. The Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. To the extent that FIN 44 covers events
occurring during the period after December 15, 1998 or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
Interpretation are recognized on a prospective basis from July 1, 2000. The
Company does not expect the adoption of FIN 44 to have a material effect on its
financial position or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

     The table below presents the carrying value and related weighted average
interest rates for the Company's investment portfolio. The carrying values
approximate fair values at June 30, 2000 and 1999. All investments mature in one
year or less.

<PAGE>   20

<TABLE>
<CAPTION>
                                      CARRYING     AVERAGE RATE     CARRYING     AVERAGE RATE
                                      VALUE AT     OF RETURN AT     VALUE AT     OF RETURN AT
                                      JUNE 30,       JUNE 30,       JUNE 30,       JUNE 30,
                                        2000           2000           1999           1999
                                    ------------   ------------   ------------   ------------
                                   (IN THOUSANDS)  (ANNUALIZED)  (IN THOUSANDS)  (ANNUALIZED)
<S>                                    <C>             <C>          <C>              <C>
INVESTMENT SECURITIES:
Cash Equivalents -
         variable rate                 $ 2,553         4.8%         $ 2,254          4.5%
Money market funds -
         variable rate                 $   215         6.6%         $   451          4.8%
Cash Equivalents -
         fixed rate                    $32,222         6.6%         $    --           --
Short-term investments -
         fixed rate                    $16,127         6.6%         $45,296          4.9%
                                       -------                      -------
Total                                  $51,117                      $48,001
                                       =======                      =======
</TABLE>


FACTORS AFFECTING FUTURE OPERATING RESULTS

     FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results have
fluctuated in the past as a result of a number of factors including the
relatively large size and small number of customer orders during a given period;
the timing of customer orders; delays in the design process due to changes by a
customer to its order after it is placed; the Company's ability to achieve
progress on percentage of completion contracts; the length of the Company's
sales cycle; the Company's ability to develop, introduce and market new products
and product enhancements; the timing of new product announcements and
introductions by the Company and its competitors; market acceptance of the
Company's products; the demand for semiconductors and end-user products that
incorporate semiconductors and general economic conditions. The Company's future
operating results may fluctuate from quarter to quarter and on an annual basis
as a result of these and other factors, in particular the relatively large size
and small number of customer orders during a given period and the amount of
royalties recognized in a given period. Accordingly, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In that event, the price of the Company's
Common Stock would likely decline, perhaps substantially.

     The limited number of semiconductor manufacturers to which the Company can
license its products may also have a material adverse effect on the Company's
business, operating results and financial condition if any of the Company's
customers suffers a deterioration in financial condition or there is a decline
in the demand for the semiconductors produced by such manufacturers. The
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.
While new orders placed with the Company in the three months ended June 30, 2000
returned to fiscal 1999 levels, the declines in new orders experienced in the
quarters ended March 31, 2000 and December 31, 1999 may adversely affect the
Company's results of operations in future quarters depending on its ability to
obtain additional orders.

<PAGE>   21

     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. Accordingly, if the Company does not realize its expected
revenue, its business, operating results and financial condition could be
materially adversely affected. The Company intends to increase its investment in
research and development as well as in product promotion, licensing and support
programs in an effort to maximize the growth of future royalties.

     The Company's sales cycle can be lengthy and is subject to a number of
risks over which the Company has little or no control. As a result of the
significant dollar amounts represented by a single customer order, the timing of
the receipt of an order can have a significant impact on the Company's revenue
for a particular period. In addition, because the Company's revenue is
concentrated among a small number of customers, a decline or a delay in the
recognition of revenue from one customer in a period may cause the Company's
business, operating results and financial condition in such period to be
materially adversely affected and may lead to significant fluctuations from
quarter to quarter. Any significant or ongoing failure to obtain new orders from
customers or to collect outstanding accounts receivable would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company has experienced periods of negative growth as well as
declines in the rate of growth of its revenue as compared with prior periods.
For example, in the three month period ended June 30, 2000, the Company recorded
lower product license revenue as compared to the three month period ended March
30, 2000. There can be no assurance that the Company will experience positive
revenue growth in the future.

     To date, a substantial majority of the Company's revenue has been
recognized using the percentage of completion method. As the completion period
for a project ranges from three to six months, revenue in any quarter is
dependent on the Company's progress toward completion of the project. Provisions
for estimated losses on uncompleted contracts are recognized in the period in
which the likelihood of such losses is determined. 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 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, some of the Company's contracts with customers
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 LICENSE AND ROYALTY BASED BUSINESS MODEL. Beginning in late
fiscal 1996, the Company implemented a royalty-based business model that is
intended to generate revenue from royalties in addition to license fees. 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

<PAGE>   22

the same facility. In cases where the semiconductor manufacturer does not have
the infrastructure necessary to distribute and support the Company's IP
components, the Company performs the distribution function directly to the
customers of the semiconductor manufacturer. Given that the Company provides its
products early in the customer's IC design process, there is a significant delay
between the delivery of a product and the generation of royalty revenue. Royalty
payments are calculated based on per unit sales of ICs or wafers containing the
Company's IP components. A portion of these payments is credited back to
customers' accounts to use to pay license fees for future orders to be placed
with the Company. The remaining portion of the royalty is reported as net
royalty revenue. The Company began to receive royalty reports from certain
customers in the three months ended June 30, 1999. As expected, royalties to
date have come from a small number of IC designs that are early in their product
life cycles. The Company's success will depend on its ability to generate
royalty revenue from a substantially larger number of designs and on many of
these designs achieving large manufacturing volumes. There can be no assurance
that the Company will be successful in expanding the number of royalty-bearing
contracts with customers, and there can be no assurance that the Company will
receive significant royalty revenue in the future. 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. In addition, the Company will face risks inherent
in a royalty-based business 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 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 also faces risks relating to the accuracy and completeness of
the royalty collection process. The Company has no experience or systems in
place to conduct reviews of the accuracy of the royalty reports it receives from
its licensees. The Company has the right to audit its licensee's records to
ensure the integrity of their royalty reporting systems; however, such audits
may only be conducted periodically and are at the Company's cost. The Company
does not have internal systems or staff dedicated to monitoring the royalty
obligations of its customers, and if it were to implement such systems and hire
such staff in the short term, the costs of those systems and staff could largely
offset the revenue the Company receives in the form of royalties.

     DEPENDENCE ON EMERGENCE OF MERCHANT IP COMPONENT MARKET AND BROAD MARKET
ACCEPTANCE OF THE COMPANY'S PRODUCTS. The market for merchant IP components has
only recently emerged. The Company's ability to achieve sustained revenue growth
and profitability in the future will depend on the continued development of this
market and, to a large extent, on the demand for System-on-a-Chip ICs.
System-on-a-Chip ICs are characterized by rapid technological change and
competition from an increasing number of alternate design strategies such as
multi-chip system-on-package and chip size packaging designs. 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

<PAGE>   23

Company's business, operating results and financial condition would be
materially adversely affected. To date, the Company's IP products have been
licensed only by a limited number of customers. The vast majority of the
Company's existing and potential customers currently rely on components
developed internally and/or by other vendors. The Company's future growth, if
any, is dependent on the adoption of, and increased reliance on, merchant IP
components by both existing and potential customers. Moreover, if the Company's
products do not achieve broad market acceptance, the Company's business,
operating results and financial condition would be materially adversely
affected.

     COMPETITION. The Company's strategy of targeting semiconductor
manufacturers that participate in, or may enter, the System-on-a-Chip market
requires the Company to compete in intensely competitive markets. Within the
merchant segment of the IP component market, the Company primarily competes
against Avant! Corporation, Mentor Graphics Corporation, the Silicon Architects
division of Synopsys, Inc., Virage Logic Corporation and Virtual Silicon
Technology. 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 semiconductor manufacturers that are expanding their
manufacturing capabilities and portfolio of IP components to participate in the
System-on-a-Chip market. These internal design groups compete with the Company
for access to the parent's IP component requisitions and may eventually compete
with the Company to supply IP components to third parties on a merchant basis.
There can be no assurance that internal design groups will not expand their
product offerings to compete directly with those of the Company or will not
actively seek to participate as merchant vendors in the IP component market by
selling to third party semiconductor manufacturers or, if they do, that the
Company will be able to compete against them successfully. In addition to
competition from companies in the merchant IP component market, the Company
faces competition from vendors that supply EDA software tools, including certain
of those mentioned above, and there can be no assurance that the Company will be
able to compete successfully against them.

     The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less
expensive than the Company's IP components or that may provide better
performance or additional features not currently provided by the Company. Many
of the Company's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, certain of the Company's
principal competitors offer a single vendor solution, since, in the case of EDA
tool companies, they maintain their own EDA design tools and IP libraries or, in
the case of internal design groups, they provide IP components developed to
utilize the qualities of a given manufacturing process, and may therefore
benefit from certain capacity, cost and technical advantages. The Company's
ability to compete successfully in the emerging market for IP components will
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

<PAGE>   24

competitors; the emergence of new IP component interchangeability standards; the
widespread licensing of IP components by semiconductor manufacturers or their
design groups to third party manufacturers; the ability of the Company to
protect its intellectual property; market acceptance of the Company's IP
components; success of competitive products; market acceptance of products using
System-on-a-Chip ICs and industry and general economic conditions. There can be
no assurance that the Company will be able to compete successfully in the
emerging merchant IP component market.

     DEPENDENCE ON SEMICONDUCTOR MANUFACTURERS; DEPENDENCE ON SEMICONDUCTOR AND
ELECTRONICS INDUSTRIES. The Company's success is substantially dependent both on
the adoption of the Company's technology by semiconductor manufacturers and on
an increasing demand for products requiring complex System-on-a-Chip ICs, such
as portable computing devices, cellular phones, consumer multimedia products,
automotive electronics, personal computers and workstations. The Company is
subject to many risks beyond its control that influence the success of its
customers including, among others, competition faced by each customer in its
particular industry, market acceptance of the customer's products that
incorporate the Company's technology, the engineering, sales and marketing
capabilities of the customer and the financial and other resources of the
customer. Demand for the Company's products may also be affected by mergers in
the semiconductor and systems industries, which may reduce the aggregate level
of purchases of the Company's products and services by the combined companies.
Faltering growth in the semiconductor and systems industries, a reduced number
of designs starts, shifts in the types of integrated circuits manufactured,
tightening of customers' operating budgets or consolidation among the Company's
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.

     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.

     CUSTOMER CONCENTRATION; LIMITED CUSTOMER BASE. The Company has been
dependent on a relatively small number of customers for a substantial portion of
its revenue, although the customers comprising this group have changed from time
to time. In the three month period ended June 30, 2000, TSMC, Infineon and Sharp
accounted for 34%, 17% and 16% of revenue, respectively. In the nine month
period ended June 30, 2000, TSMC, Sharp and NEC accounted for 35%, 13% and 12%
of revenue, respectively. In the three month period ended June 30, 1999, NEC,
Conexant and Chartered accounted for 36%, 13% and 12% of revenue, respectively.
In the nine month period ended June 30, 1999, NEC, TSMC, Conexant and UMC
accounted for 24%, 18%, 18% and 12% 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

<PAGE>   25

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 or royalty 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. While new orders placed
with the Company in the three months ended June 30, 2000 returned to fiscal 1999
levels, the declines in new orders experienced in the quarters ended March 31,
2000 and December 31, 1999 may adversely affect the Company's results of
operations in future quarters depending on its ability to obtain additional
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 the substantial majority of
its revenue from product license revenue that accounted for 71% and 76% of
revenue in the three and nine month periods ended June 30, 2000, respectively.
In the three and nine month periods ended June 30, 1999, product license revenue
accounted for 90% and 94% of revenue, respectively. For the periods ended June
30, 2000, as compared to the periods ended June 30, 1999, this shift in revenue
mix was due to faster growth in revenue from net royalties and support and
maintenance contracts as compared to the growth of product license revenue.
However, the Company expects that product license revenue 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 product license revenue and a decline in revenue from such products
would have a material adverse effect on the Company's business, operating
results and financial condition. For example, in the three month period ended
June 30, 2000, the Company recorded lower product license revenue as compared to
the three month period ended March 30, 2000. The Company's future financial
performance will depend in significant part on the successful development,
introduction and customer acceptance of new products. See "--New Product
Development and Technological Change."

     LENGTHY SALES CYCLE AND DESIGN PROCESS. The license of the Company's
products typically involves a significant commitment of capital by the customer
and a purchase will often be timed to coincide with a customer's migration to a

<PAGE>   26

new manufacturing process. Potential customers generally commit significant
resources to an evaluation of available IP solutions and require the Company to
expend substantial time, effort and resources to educate them about the value of
the Company's products. A variety of factors, including factors over which the
Company has little or no control, may cause potential customers to favor an
alternate solution or to delay or forego a license of the Company's products. As
a result of these and other factors, the sales cycle for the Company's products
is long, typically ranging from six to 12 months. The Company's ability to
forecast the timing and scope of specific sales is limited, and delay of or
failure to complete one or more large contracts could have a material adverse
effect on the Company's business, operating results and financial condition and
could cause the Company's operating results to fluctuate significantly from
quarter to quarter.

     Once the Company receives and accepts an order from a customer, the Company
must commit significant resources to customizing its products for the customer's
manufacturing process. This customization is complex and time consuming and is
subject to a number of risks over which the Company has little or no control,
including the customer's adjustments and alterations of its manufacturing
process or the timing of migration to a new process. Typically, this
customization takes from three to six months to complete. Delays in product
customization could have a material adverse effect on the Company's business,
operating results and financial condition and could cause the Company's
operating results to vary significantly from quarter to quarter.

     RISKS ASSOCIATED WITH INTERNATIONAL CUSTOMERS. Historically, a substantial
portion of the Company's revenue has been international revenue. In the three
and nine month periods ended June 30, 2000, international revenue represented
approximately 87% and 88%, respectively, of the Company's revenue. In the three
and nine month periods ended June 30, 1999, international revenue represented
approximately 65% and 64%, respectively, of the Company's revenue. The Company
anticipates that international revenue will remain a substantial portion of its
revenue in the future. To date, all of the revenue from international customers
has been denominated in U.S. dollars. In the event that the Company's
competitors denominate their sales in a currency that becomes relatively
inexpensive in comparison to the U.S. dollar, the Company may experience fewer
orders from international customers whose business is based primarily on the
less expensive currency. 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 and greater difficulty in accounts receivable
collection; unexpected changes in regulatory requirements; reduced or limited
protection for intellectual property rights; export license requirements;
tariffs and other trade barriers and potentially adverse tax consequences. There
can be no assurance that the Company will be able to sustain or increase revenue
derived from international customers or that the foregoing factors will not have
a material adverse effect on the Company's business, operating results and
financial condition.

         NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The Company's
customers compete in the semiconductor industry, which is subject to rapid
technological change, frequent introductions of new products, short product life
cycles,

<PAGE>   27

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. The Company
must also attract and retain highly skilled managerial, engineering, sales,
marketing and finance personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. The loss of the services of any 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 growth has placed, and
is expected to continue to place, a significant strain on the Company's
managerial, operational and financial resources. From September 30, 1998 to June
30, 2000, the Company grew from 86 to 108 employees or full-time equivalents.
The Company's customers rely heavily on the Company's technological expertise in
designing, testing and manufacturing products incorporating the Company's IP
components. Relationships with new customers generally require significant
engineering support. As a result, any increase in the demand for the Company's
products will increase the strain on the Company's personnel, particularly its
engineers. The Company's financial and management controls, reporting systems
and procedures are also limited. Although some new controls, systems and
procedures have been implemented, the Company's future growth, if any, will
depend on its ability to continue to implement and improve operational,
financial and management information and control systems on a timely basis,
together with maintaining effective cost controls, and any failure to do so
would have a material adverse effect on the Company's business, operating

<PAGE>   28

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 royalty 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
would divert resources of the Company. Any infringement claim or other
litigation against or by the Company could materially adversely affect the
Company's business, operating results and financial condition.

     In 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 protects its proprietary
technology and processes, in part, through 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.

     There can be no assurance that competitors of the Company, many of which
have substantial resources and have made substantial investments in competing
technologies, do not have, or will not seek to apply for and obtain, patents
that will prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the United States or in international markets. There
can be no assurance that the Company will not in the future become subject to
patent infringement claims and litigation or interference proceedings declared
by the United States Patent and Trademark Office ("USPTO") to determine the
priority of inventions. The defense and prosecution of intellectual property
suits, USPTO interference proceedings and related legal and administrative
proceedings are both costly and time consuming. Any such suit or proceeding
involving the Company could have a material adverse effect on the Company's
business, operating results and financial condition.

     FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
intends to continue to invest heavily in the development of new products and
enhancements to its existing products. The Company's future liquidity and

<PAGE>   29

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.
However, from time to time, the Company may be required to raise additional
funds through public or private financing, strategic relationships or other
arrangements. There can be no assurance that such funding, if needed, will be
available on terms attractive to the Company, or at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. Strategic arrangements, if
necessary to raise additional funds, may require the Company to relinquish its
rights to certain of its technologies or products. The failure of the Company to
raise capital when needed could have a material adverse effect on the Company's
business, operating results and financial condition. See "--Liquidity and
Capital Resources."

     POTENTIAL VOLATILITY OF STOCK PRICE. The trading price of the Company's
Common Stock has in the past been and could in the future be subject to
significant fluctuations in response to quarterly variations in the Company's
results of operations; announcements regarding the Company's product
developments; announcements of technological innovations or new products by the
Company, its customers or competitors; release of reports by securities
analysts; changes in security analysts' recommendations; developments or
disputes concerning patents or proprietary rights or other events. Also, at some
future time, the Company's revenues and results of operations may be below the
expectations of public market securities analysts or investors, resulting in
significant fluctuations in the market price of the Company's Common Stock. 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. These
broad market fluctuations, as well as general economic, political and market
conditions, may adversely affect the market price of the Company's Common Stock.
In the past, following periods of volatility in the market price of a company's
stock, securities class action litigation has occurred against that company.
Such litigation could result in substantial costs and would at a minimum divert
management's attention and resources, which could have a material adverse effect
on the Company's business, financial condition and results of operations. Any
adverse determination in such litigation could also subject the Company to
significant liabilities.

ITEM 6: Exhibits

     (a)  Exhibits

          27.1 Financial Data Schedule

<PAGE>   30

                                   SIGNATURES

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

Dated: August 14, 2000

                                    ARTISAN COMPONENTS, INC.
                                         (Registrant)

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

<PAGE>   31

                                INDEX TO EXHIBITS

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




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