Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-23649
ARTISAN COMPONENTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0278185
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1195 BORDEAUX DRIVE 94089
SUNNYVALE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 734-5600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant as of October 31, 1999 was $59,760,102. Shares of Common Stock
held by each executive officer, director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares of the registrant's Common Stock outstanding as of
October 31, 1999 was 13,932,863.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Annual
Report on Form 10-K portions of its Proxy Statement for the 2000 Annual Meeting
of Stockholders to be held February 17, 2000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I
CERTAIN FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K and the information incorporated by
reference herein contain "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and such forward looking statements involve risks and uncertainties. When
used in this Report, the words "expects," "anticipates" and "estimates" and
similar expressions are intended to identify forward looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those predicted. These risks and uncertainties
include those discussed below and those discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors
Affecting Future Operating Results". Artisan Components, Inc. undertakes no
obligation to publicly release any revisions to these forward looking statements
to reflect events or circumstances after the date this Report is filed with the
Securities and Exchange Commission or to reflect the occurrence of unanticipated
events.
ITEM 1. BUSINESS
GENERAL
Artisan Components, Inc. (the "Company" or "Artisan") is a leading
developer of high performance, 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 offers highly differentiated memory, standard cell and I/O components
that meet the acute needs of complex single chip system ("System-on-a-Chip") ICs
for performance, power and density. Together, memory, standard cell and I/O
components constitute approximately 80% of the silicon area on a typical
System-on-a-Chip IC. The Company's products are optimized for each customer's
manufacturing process and are delivered ready for use with industry standard and
proprietary IC design tools. The Company licenses its products to semiconductor
manufacturers and fabless semiconductor companies for the design of ICs used in
complex, high volume applications, such as portable computing devices, cellular
phones, consumer multimedia products, automotive electronics, personal computers
and workstations.
The Company primarily licenses its products on a nonexclusive, worldwide
basis to major semiconductor manufacturers and grants these manufacturers the
right to distribute its IP components to their internal design teams and to
fabless semiconductor companies that manufacture at the same facility. 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. The Company believes that this licensing approach encourages
proliferation of the Company's products and provides a highly efficient
distribution channel for its IP components. Artisan has licensed its products to
many leading semiconductor manufacturers including Chartered Semiconductor
Manufacturing Ltd. ("Chartered"), Conexant Systems, Inc. ("Conexant"), Fujitsu
Microelectronics, Inc. ("Fujitsu"), Hitachi, Ltd. ("Hitachi"), Infineon
Technologies AG ("Infineon"; formerly known as Siemens Semiconductors), NEC
Corporation ("NEC"), Newport Wafer-Fab, Ltd. ("Newport"), Oki Electric Industry
Co., Ltd. ("OKI"), ST-Microelectronics Group ("ST"; formerly known as
SGS-THOMSON Microelectronics, S.r.l.), Taiwan Semiconductor Manufacturing
Company Ltd. ("TSMC"), Toshiba Corporation ("Toshiba"), UMC Group ("UMC") and
VLSI Technology, Inc. ("VLSI Technology").
The Company was incorporated in California in April 1991 as VLSI Libraries
Incorporated and changed its name to Artisan Components, Inc. in March 1997. The
Company reincorporated in Delaware in January 1998. The Company's principal
executive offices are located at 1195 Bordeaux Drive, Sunnyvale, California
94089, and its telephone number is (408) 734-5600. Artisan, Process-Perfect,
SAGE, Integral and the Artisan logo are trademarks of the Company. This Annual
Report on Form 10-K also includes product names and other trade names and
trademarks of the Company and of other organizations.
2
3
INDUSTRY BACKGROUND
The development of the merchant IP component market has resulted from the
continuing trend toward horizontal specialization in the semiconductor industry,
a trend that has been driven by a growth in design complexity due to increases
in manufacturing capacity and an increasing focus on core competencies. In the
1970s, semiconductor companies were vertically integrated and responsible for
all aspects of IC production, including IC design, electronic design automation
("EDA") tool design, IP component design and IC manufacturing. In the 1980s,
application specific integrated circuit ("ASIC") companies developed a new
approach that allowed their customers to perform the logic design of an IC while
they performed the detailed physical implementation of the design and
manufactured the IC. In addition, standalone EDA tool vendors achieved success
by providing software design tools to complement those developed by internal
divisions of semiconductor companies. The early 1990s saw the emergence of a
number of fabless semiconductor companies that chose to focus on specific design
expertise, take advantage of the availability of excess semiconductor
manufacturing capacity and avoid the capital expenditures necessary to build
fabrication facilities. Throughout this period, semiconductor manufacturers
continued to focus on their core competencies: semiconductor design and
manufacturing processes. Today, with the emergence of System-on-a-Chip ICs,
semiconductor manufacturers are beginning to outsource the design of particular
IP components critical to the successful development of System-on-a-Chip ICs.
Over the past three decades, advances in semiconductor manufacturing
processes have enabled the transistor density on ICs to double every 18 months.
Today, it is possible to place nearly 100 million transistors on a single IC.
State of the art fabrication facilities of the 1980s produced ICs using process
geometries of 1.0um (one millionth of a meter). Current state-of-the-art
fabrication facilities use 0.25um process geometries, and many semiconductor
manufacturers have begun the transition to facilities using 0.18um and 0.15um
processes. These advances enable the manufacture of highly complex
System-on-a-Chip ICs, resulting in substantial performance, power, cost and
reliability improvements over conventional multi-chip systems on printed circuit
boards ("PCB Systems"). System-on-a-Chip ICs combine all of the functionality of
PCB Systems onto a single IC and are optimal for use in complex, high volume
applications such as portable computing devices, cellular phones, consumer
multimedia products, automotive electronics, personal computers and
workstations.
[Printed Circuit Board System Diagram]
As shown above, in both a PCB System and in a System-on-a-Chip, the primary
building blocks may include memory, standard cell (logic), I/O, microprocessor,
digital signal processor ("DSP"), mixed-signal and analog components. However,
integration of these components into System-on-a-Chip ICs at deep submicron
process geometries is far more complex than the design of a traditional PCB
System. With continuing advances in manufacturing processes, an increasing
number of individual transistors must be designed and tested and, consequently,
the gap is increasing between what can be manufactured and what can
3
4
be designed within the time to market requirements of the semiconductor
manufacturer. As a result, the full value of today's semiconductor manufacturing
processes is rarely realized, with designers settling for partial utilization of
the process in the interest of meeting cost and schedule requirements. Given
shorter product life cycles and the importance of reducing time to market, the
use of merchant IP components to leverage design and manufacturing capabilities
can be a significant competitive advantage to semiconductor manufacturers.
Semiconductor manufacturers require solutions that fully utilize their
manufacturing processes in order to maximize performance, speed and density
while reducing time to market. Although the merchant EDA industry has
successfully developed partial solutions to increase design productivity, EDA
tools have not completely overcome the time constraints posed by the need to
create IP components for each IC design in a compressed time to market window.
Merchant suppliers of portable generic IP libraries have also improved design
productivity by offering products designed to work with many manufacturing
processes. However, these generic libraries do not fully utilize the depth and
strengths of a particular manufacturing process. Semiconductor manufacturers
have also tried to expand their design resources, but establishing and
maintaining a large internal design group may divert finite resources from a
semiconductor manufacturer's core competencies. Despite the development and use
of EDA tools and generic libraries and the expansion of internal design
resources, the rapid pace of manufacturing process improvements has continued to
outstrip design capabilities. As a result, the Company believes many
semiconductor manufacturers are using merchant IP components in order to
maximize the performance of their product offerings and improve their time to
market.
THE ARTISAN SOLUTION
Artisan is a leading developer of high performance, high density and low
power memory, standard cell and I/O components for the design and manufacture of
complex ICs. The Company provides IP components that are optimized for each
customer's manufacturing process.
The Company's IP components are designed to offer customers the following
benefits:
Performance, Power and Reliability. Artisan delivers high performance, high
density and low power reliable IP components through a combination of design
expertise, proprietary technology and design tools. The Company's IP components,
which are customized, verified and tested for a particular manufacturing
process, require little or no integration by customers and have been proven by
use in over 50 different manufacturing processes. Many of the Company's products
are designed to achieve speeds in excess of 800 MHz.
Significant Time to Market Advantages. The Company enables semiconductor
manufacturers to reduce the time required to bring new ICs to market by (i)
eliminating the customer's need to design IP components, (ii) delivering
products designed for a specific manufacturing process and (iii) delivering
products ready for use with industry standard and proprietary IC design tools.
The Company's products can be reused in multiple customer designs, which reduces
design time and decreases time to market for new ICs.
Long Term Product Development Path. Artisan's IP component technology
provides semiconductor manufacturers with reliable building blocks for future
generations of their complex IC designs. Artisan's ability to adapt and
customize IP components used in one process and one design for use in additional
designs and processes provides each customer with a ready source of reliable IP
components for future designs and processes. This enables the Company's
customers to standardize on Artisan products, accelerate their product
development and focus internal engineering resources on core competencies,
including semiconductor design and manufacturing processes.
Cost Effective Solutions. As semiconductor dies shrink and the complexity
of IC designs increases, the cost to design System-on-a-Chip ICs increases
significantly. By providing reliable products with significant time to market
benefits, Artisan enables customers to reduce design costs, minimize integration
costs and increase manufacturing yield. Moreover, by using the Company's
products, semiconductor manufacturers avoid the cost of recruiting and training
a significant group of engineers dedicated to IP component design.
4
5
ARTISAN STRATEGY
The Company's objective is to be the leading provider of high performance
IP components to the semiconductor industry. The Company's strategy is based
upon the following key elements:
Focus on Key Components for High Volume System-on-a-Chip ICs. The Company
has targeted the rapidly growing System-on-a-Chip industry with high performance
memory, standard cell and I/O components. Together, these components constitute
approximately 80% of the silicon area on a typical System-on-a-Chip IC.
Improvements in the performance of these components, particularly memory, can
have a substantial impact on the overall performance of the IC.
Target Leading Semiconductor Manufacturers. The Company focuses on
licensing its products to the world's leading semiconductor manufacturers. These
manufacturers represent the largest revenue potential for the Company because
they utilize the most advanced manufacturing processes, manufacture the largest
number of ICs, have the most pressing need for high performance IP components
and face the greatest time to market pressures. To date, the Company has
licensed its products to many leading semiconductor manufacturers including
Chartered, Conexant, Fujitsu, Hitachi, Infineon, NEC, Newport, OKI, ST, TSMC,
Toshiba, UMC and VLSI Technology.
Generate Revenue through Innovative Business Model. The Company generates
revenue through a combination of license fees, maintenance and support contracts
and royalty payments. The Company charges manufacturers a license fee for the
right to manufacture semiconductors containing the Company's products. In
addition, manufacturers agree to pay the Company a royalty based on
manufacturing volumes. Once a manufacturer has licensed a product from the
Company and in order to maximize royalties, the manufacturer is encouraged to
distribute the product to teams designing integrated circuits for production at
the manufacturer's facility. In some cases, the manufacturer may not have the
infrastructure to distribute the Company's products to design teams. In these
cases, the Company performs the distribution function through its web site as
well as through an in-house telemarketing organization. As a result, the Company
believes its license agreements will facilitate the broad and rapid penetration
of the Company's products into multiple designs, and thereby increase potential
royalty revenue. Royalty payments are calculated based on per unit sales of ICs
or wafers containing the Company's IP components and generally vary in
proportion to the silicon area of an IC occupied by the Company's products. A
portion of these royalty payments is credited back to the customer's account 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. In the
third quarter of fiscal 1999, the Company received its first royalty revenue as
some of the Company's customers that had entered into royalty-based license
agreements with the Company began the manufacture and sale of products
incorporating the company's IP components.
Proliferate Artisan's IP Components throughout Customer Designs. The
Company intends to establish itself as the de facto supplier of key IP
components across multiple IC designs and new product generations for each
customer. By making its IP components easy to integrate into the customer's
design methodologies and supporting both industry standard and proprietary IC
design tools, Artisan facilitates the ready inclusion of its IP components in a
large number of designs.
Leverage Product Development Process. Artisan has developed a large
portfolio of IP building blocks and design tools that allows the Company to
develop new products rapidly. As its customer relationships mature, the Company
believes that the development time for additional products for a customer will
decrease due to the Company's growing base of knowledge and understanding of the
customer's manufacturing processes. The Company intends to continue to improve
the efficiency of its product development process in order to decrease product
delivery time.
Maintain Technological Leadership. The Company believes that its customers
evaluate IP components based on speed, density, power, quality, reliability and
price. Against these evaluation criteria, the Company believes that it currently
has a position of technological leadership. The Company intends to maintain its
technological leadership position by continuing to develop a significant
portfolio of IP building blocks upon which it can base new generations of
products and by making enhancements to existing products. The
5
6
Company also intends to maintain its expertise in state of the art manufacturing
processes by working with customers during their new process development
efforts.
PRODUCTS
Artisan's current family of IP components includes high performance, high
density and low power memory, standard cell and I/O components. Initial license
fees typically range from $250,000 to $700,000 per component, depending on the
amount of customization and the number of design views and models required.
Artisan's products are developed and delivered using a proprietary
methodology that includes a set of design tools, techniques and specific design
expertise that the Company calls "Process-Perfect." This methodology ensures
that the IP components produced by Artisan are designed to achieve the best
combination of performance, density, power and yield for a given manufacturing
process. In addition, the Company has created a flexible portfolio of IP
building blocks. This portfolio, combined with the Process-Perfect methodology,
allows the Company to satisfy its customers' schedule and quality requirements
in a cost effective manner. Artisan's IP components are easily integrated into a
variety of customer design methodologies and support industry standard IC design
tools, including those from EDA tool vendors such as Cadence Design Systems,
Inc. ("Cadence"), Synopsys, Inc. ("Synopsys") and Avant! Corporation ("Avant!"),
as well as customers' proprietary IC design tools. To support these various IC
design tool environments, each of the Company's products includes a
comprehensive set of verified tool models.
Memory Products. Artisan's embedded memory products include random access
memories ("RAMs"), read only memories ("ROMs") and register files. The Company's
high speed, high density and low power products include single- and dual-port
RAM and ROM products and single-, dual- and triple-port register files. The
Company's embedded memory products are configurable and vary in size to meet the
customer's specification. For example, the Company's RAM products will support
sizes from 2 to 128 bits wide and from 16 to 8,192 words. All of the Company's
memory products include features such as a power down mode, low voltage data
retention and fully static operation. In addition, the Company's memory products
may optionally include built-in test interfaces that support popular test
methodologies.
High Speed Memory Family. The high speed products are designed to
achieve speeds in excess of 800 MHz for 0.15mm manufacturing processes. The
Company achieves the high performance of its memory products through a
combination of proprietary design innovations that include latch based
sense amplifiers, high speed row select technology, precise core cell
balancing and rapid recovery bitlines.
High Density Memory Family. The high density products are designed for
applications where achieving the lowest possible manufacturing cost is
critical. These are typically consumer applications with high manufacturing
volumes. To achieve the lowest possible manufacturing cost for these
products, the Company utilizes proprietary circuit and layout techniques to
reduce the overall area of the memories. In addition, the Company uses
specific design and analysis techniques to enhance production yield.
Low Power Memory Family. The low power products are designed to
operate at low power levels to prolong battery life when used in
battery-powered electronic systems. The low power products achieve low
power through a combination of proprietary design innovations that include
latch based sense amplifiers, a power efficient banked memory architecture,
precise core cell balancing and unique address decoder and driver
circuitry.
Standard Cell Product. Artisan's standard cell product includes over 500
cells optimized for each customer's manufacturing process and IC design tool
environment to result in greater density as compared to competitive standard
cell products. The Company offers standard cell products that are optimized with
high performance, high density and low power to meet the needs of different
markets. The Company has recently introduced its SAGE-X architecture that
includes several design improvements to produce smaller silicon area and better
performance. The Company's standard cell product utilizes each customer's
proprietary manufacturing process rules, including stacked contact-via,
silicided diffusion and local interconnect layers.
6
7
All functions are available in at least four drive strengths, and the Company's
inverters, buffers and 3-state drivers are each available in nine drive
strengths.
I/O Products. The Company's Integral I/O library includes over 600 standard
I/O functions. The Company also offers a wide variety of specialized I/O
products that are compatible with industry standard PCI, GTL and PECL interfaces
and many others. Every I/O product utilizes each customer's proprietary
manufacturing process rules, pad pitch and ESD requirements, resulting in
superior performance, reliability and manufacturability.
PRODUCT DEVELOPMENT
The Company has targeted the rapidly growing System-on-a-Chip market with
high performance, high density and low power memory, standard cell and I/O
products. The ability of the Company to compete in the future will be
substantially dependent on its ability to continually create competitive
technologies to meet changing market needs. To this end, the Company's engineers
are involved in the development of more advanced versions of the Company's
products as well as in the development of new products. The Company has
assembled a team of highly skilled engineers whose activities are focused on the
development of IP components for current and anticipated manufacturing
processes. Because of the complexity of these activities, the design and
development process at Artisan is a multidisciplinary effort requiring expertise
in electronic circuit design, process technology, physical layout, design
software, model generation, data analysis and processing and general IC design.
As of September 30, 1999, Artisan had 64 employees and full-time
equivalents in the engineering department. In fiscal 1997, 1998 and 1999, total
engineering costs were approximately $4.8 million, $8.5 million and $10.6
million, respectively. Engineering costs are allocated between cost of revenue
and product development expenses. Engineering efforts devoted to developing
products for specific customer projects are recognized as cost of revenue while
the balance of engineering costs, incurred for general development of Artisan's
technology, is charged to product development. The Company expects that it will
continue to invest substantial funds for engineering activities. There can be no
assurance that the Company can develop and introduce new technology in a timely
fashion or that such new technology will be accepted by the market. The
Company's customers compete in the semiconductor industry, which is subject to
rapid technological change, frequent introductions of new products, short
product life cycles, changes in customer demands and requirements and evolving
industry standards. The development of new manufacturing processes, the
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable.
Accordingly, the Company's future success will depend on its ability to continue
to enhance its existing products and to develop and introduce new products that
satisfy increasingly sophisticated customer requirements and that keep pace with
new product introductions, emerging manufacturing process technologies and other
technological developments in the semiconductor industry. Any failure by the
Company to anticipate or respond adequately to changes in manufacturing
processes or customer requirements, or any significant delays in product
development or introduction, would have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and sale of new or enhanced
products or that such new or enhanced products will achieve market acceptance.
Any delay in release dates of new or enhanced products could materially
adversely affect the Company's business, operating results and financial
condition. The Company also could be exposed to litigation or claims from its
customers in the event that it does not satisfy its delivery commitments. There
can be no assurance that any such claim would not have a material adverse effect
on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results -- New Product
Development and Technological Change."
CUSTOMERS
The Company is focused on licensing its products to semiconductor
manufacturers and fabless semiconductor companies. Many of the world's leading
semiconductor manufacturers are among the
7
8
Company's customers including: Analog Devices, Inc., Chartered, Conexant,
Fujitsu, GEC Plessey Semiconductors (acquired by Mitel Semiconductor), Hitachi,
Infineon, ITT INTERMETALL Semiconductor (acquired by Micronas Semiconductor
Holding AG), LSI Logic Corporation, NEC, OKI, Philips Semiconductors, ST,
Toshiba, TSMC and UMC.
The Company's royalty-based business model enables aggressive product
distribution and licensing to semiconductor companies who are the customers of
the semiconductor manufacturers. To date, the Company has licensed its products
to hundreds of these semiconductor companies, many of whom are listed in the
table below.
ARTISAN'S END-USER LICENSEES*
Acer Laboratories Inc. Innovative Engineering Seattle Silicon Corp. (Acquired
Acute Communications Corporation Integrated Telecom Express, Inc. by ZiLOG, Inc.)
Adaptec, Inc. IP Semiconductors SiberCore Technologies
ADMtek Inc. Kawaski Steel Corporation Sierra Research and Technology,
Advanced Communication Devices Kendin Communications Inc. Inc.
Corp. Lara Technology Inc. Sigtron Technologies, Inc.
Advanced Hardware Architectures, Level One Communications, Inc. Silicon Image, Inc.
Inc. LinkUp Systems Corporation Silicon Magic Corporation
Alantro Communications Lucent Technologies Silicon Motion, Inc.
Alcatel Bell LuxSonor Semiconductors, Inc. Silicon Value, Ltd.
Allayer Technologies Corp. Luxxon Corp. STMicroelectronics Group
Alliance Semiconductor Macronix International, Co., Ltd. Stream Machine Company
Corporation Malleable Technologies Sundance Technology, Inc.
Advanced Micro Devices, Inc. Marvell Semiconductor, Inc. Switch On Networks
Analog Devices, Inc. Matrox Graphics Inc. S3, Incorporated
Ardent Technologies, Inc. Mitel Corporation TaraCom
ARM Ltd. MMC Networks, Inc. TeraLogic, Inc.
Array Microsystems, Inc. Motorola Inc. Theseus Logic, Inc.
Aspex Microsystems Ltd. National Semiconductor TOPIC Semiconductor Corp.
ATI Technologies Inc. Corporation Trident Microsystems, Inc.
Aureal Semiconductor NASA Goddard Space Flight Center Tripath Technology Inc.
Bitbltz Communications, Inc. NEC Corporation Trumpion Microelectronics
BroadLogic, Inc. NeoMagic Corporation Tundra Semiconductor Corporation
Centerpoint Broadband NeoParadigm Labs, Inc. T-Span Corporation
Technologies Newport Communications Inc. T-Square Design
Centillium Communications, Inc. NVIDIA(TM) Corporation UTMC Microelectronic Systems
Chameleon Systems, Inc. Nexware Corporation Inc.
Chip2Chip(TM), Inc. NTT Science and Core Technology Vertex Networks, Inc.
Cirrus Logic Inc. Laboratory Group VideoLogic Systems
Coast Logic, Inc. Oak Technology Inc. Virata Corporation
ControlNet, Inc. Packet Networks, Inc. Vision Group plc
Crest Microsystems Inc. Packetcom, Inc. (Acquired by STMicroelectronics)
Cypress Semiconductor Corporation Parallax, Inc. West Bay Semiconductors
Digital MediaCom, Inc. Philips Semiconductors XaQti Corporation (Acquired by
Digital Reflection, Inc. PixelFusion Ltd. Vitesse Semiconductor
DSP Group, Inc. Pixelworks, Inc. Corporation)
Dynamia Technology, Inc. Poseidon Technology ZiLOG, Inc.
Entridia Corp. Prominent Communications, Inc. 3Com Corporation
ESS Technology, Inc. Quantum Corporation 3dfx Interactive(R) Inc.
Genesis Computer Corporation QuickLogic Corporation 3DSP Corporation
Hitachi Semiconductor (America) Radiata Communications Pty Ltd 8x8, Inc.
Inc. Rise Technology Company
iCompression Inc. RocketChips, Inc.
iGS Technologies, Inc. SAGE, Inc.
Infineon Technologies
- ---------------
* Some of the Company's End-User Licensees are not listed in the table above as
they have not granted the Company publicity rights.
8
9
In addition, Artisan has several industry partner programs whereby members
provide a wide variety of soft IP and microprocessor solutions, design services
and tool support to streamline the design process for Artisan library users.
Many of the Company's current industry partners are listed in the table below.
ARTISAN'S PARTNERS
ALTIUS Solutions, Inc. IKOS Systems Inc. Simplex Solutions, Inc.
Arcadia Design Systems, Inc. Integrated Silicon Systems, Ltd. SIS Microelectronics, Inc.
Aristo Technology, Inc. Lexra Inc. SmartSand, Inc.
ATMOS Corporation LogicVision, Inc. SMT (SangHwa Micro Technology Inc.)
BOPS, Inc. MacroTech Research, Inc. Snaketech, Inc.
Cadence Design Systems, Inc. Magma Design Automation, Inc. Sonics, Inc.
CreOsys Inc. Micro Devices Technology, Inc. SSL -- Silicon Systems Ltd.
CynApps, Inc. Monterey Design Systems, Inc. Stellar Semiconductor Inc.
Dai Nippon Printing Co., Ltd. MOSAID Technologies Incorporated Sycon Design, Inc.
Denali Software, Inc. MOSIS Synopsys, Inc.
Electric Editor, Inc. Palmchip Corporation SynTest Technologies, Inc.
Enabling Technology, Inc. picoTurbo, Inc. Toppan Printing Co., Ltd.
Escalade Corporation QuArc, Inc. Transtechnic International, Inc.
FOCAM Technologies Inc. Quadic Systems, Inc. Ultima Interconnect Technology,
Frequency Technology, Inc. Quickturn Design Systems, Inc. Inc.
Gambit Automated Design, Inc. RealChip Inc. (formerly SiCore VeraTest, Inc.
Genesys Testware, Inc. Systems, Inc.) Verplex Systems, Inc.
Global UniChip Corporation Sapphire Design Automation, Inc. Voom, Inc.
Goya Technology Sente Inc. White Eagle Systems Technology,
Greenforest Consulting, Inc. Silicon Access Technology Inc. Inc.
HDAC, Inc. Silicon Perspective Corporation Xentec, Inc.
The Company has been dependent on a relatively small number of customers
for a substantial portion of its annual revenue, although the customers
comprising this group have changed from time to time. In fiscal 1997, ST,
Fujitsu, OKI and NEC accounted for 27%, 24%, 16% and 13% of revenue,
respectively. In fiscal 1998, TSMC, OKI and UMC accounted for 14%, 11% and 11%
of revenue, respectively. In fiscal 1999, NEC, TSMC, Conexant and UMC accounted
for 25%, 19%, 14% and 13% of revenue, respectively. The Company anticipates that
its revenue will continue to depend on a limited number of major customers for
the foreseeable future, although the companies considered to be major customers
and the percentage of revenue represented by each major customer may vary from
period to period depending on the addition of new contracts and the number of
designs utilizing the Company's products. None of the Company's customers has a
written agreement with the Company that obligates it to license future
generations of products or new products, and there can be no assurance that any
customer will license IP components from the Company in the future. In addition,
there can be no assurance that any of the Company's customers will ship products
incorporating the Company's technology or that, if such shipments occur, they
will generate significant revenue. The loss of one or more of the Company's
major customers, reduced orders by one or more of such customers, the failure of
one or more customers to pay license 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors Affecting Future Operating
Results -- Customer Concentration; Limited Customer Base."
There can be no assurance that the Company will be successful in continuing
to license its products to current customers or in entering into licenses with
additional semiconductor manufacturers. The Company faces numerous risks in
successfully obtaining orders from customers on terms consistent with the
Company's business model including, among others, the lengthy and expensive
process of building a relationship with a potential customer before reaching an
agreement with such party to license the Company's products; persuading large
semiconductor manufacturers to work with, disclose proprietary information to
and rely upon
9
10
a smaller company, such as the Company and persuading potential customers to
bear certain development costs associated with development of customized
components. In addition, there are a relatively limited number of semiconductor
manufacturers to which the Company can license its technology in a manner
consistent with its business model. The Company also faces significant
competition from internal design groups of semiconductor manufacturers as well
as other commercial suppliers of IP components. See "-- Competition" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results -- Competition."
SALES, MARKETING AND DISTRIBUTION
The Company primarily licenses its products on a nonexclusive, worldwide
basis to major semiconductor manufacturers and grants these manufacturers the
right to distribute its IP components to their internal design teams and to
fabless semiconductor companies that manufacture at the same facility. 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, using the Company's web site as well as its in-house telemarketing
organization. The Company believes its sales, marketing and distribution
approach gives it an advantage over its competitors since the Company is able to
leverage its customers' sales and marketing organizations and avoid the costs
associated with hiring, training and compensating the large sales force
necessary to negotiate with each end user customer. As of September 30, 1999,
the Company's sales and marketing organization comprised 13 sales and 9
marketing employees and full-time equivalents. Additionally, the Company relies
in part on a consulting company in Japan to assist its sales efforts in that
market.
Historically, a substantial portion of the Company's revenue has been
derived from customers outside the United States ("international revenue"). In
fiscal 1997, 1998 and 1999, international revenue, primarily in Asia and Europe,
represented 73%, 84% and 67%, 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
Future Operating Results -- Risks Associated with International Customers."
COMPETITION
The Company's strategy of targeting semiconductor manufacturers that
participate in, or may enter, the System-on-a-Chip market requires the Company
to compete in intensely competitive markets. Within the merchant segment of the
IP market, the Company competes primarily against Avant!, Mentor Graphics
Corporation ("Mentor Graphics"), the Silicon Architects division of Synopsys,
Virage Logic ("Virage") and Virtual Silicon Technologies ("Virtual Silicon"). 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
10
11
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
competitors; the emergence of new IP component interchangeability standards; the
widespread licensing of IP components by semiconductor manufacturers or their
design groups to third party manufacturers; the ability of the Company to
protect its intellectual property; market acceptance of the Company's IP
components; success of competitive products; market acceptance of products using
System-on-a-Chip ICs and industry and general economic conditions. There can be
no assurance that the Company will be able to compete successfully in the
emerging merchant IP component market. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Factors Affecting Future
Operating Results -- Competition."
PATENTS AND INTELLECTUAL PROPERTY PROTECTION
The Company relies primarily on a combination of nondisclosure agreements
and other contractual provisions and patent, trademark, trade secret, and
copyright law to protect its proprietary rights. The Company has an active
program to protect its proprietary technology through the filing of patents. As
of September 30, 1999, the Company had applications for 17 patents on file with
the United States Patent and Trademark Office (the "USPTO"), and, of these
applications, six patents had been granted. As of September 30, 1999, the
Company had no filings for foreign patents, but the Company intends to file such
foreign patent applications as appropriate in the future. The Company has filed
eight applications under the Patent Cooperation Treaty relating to eight patent
applications previously filed with the USPTO. There can be no assurance that the
Company's pending patent applications will be approved, that any issued patents
will protect the Company's intellectual property or will not be challenged by
third parties or that the patents of others will not have an adverse effect on
the Company's ability to do business. Furthermore, there can be no assurance
that others will not independently develop similar or competing technology or
design around any patents that may be issued to the Company.
The Company also relies on trademark and trade secret laws to protect its
intellectual property. The Company protects its trade secrets and other
proprietary information through confidentiality agreements with its employees
and customers in addition to other security measures. Despite these efforts,
there can be no assurance that others will not gain access to the Company's
trade secrets, that such trade secrets will not be independently discovered by
competitors or that the Company can meaningfully protect its intellectual
property. In addition, effective trade secret protection may be unavailable or
limited in certain foreign countries. Although the Company intends to protect
its rights vigorously, there can be no assurance that such measures will be
successful.
Failure of the Company to enforce its patents, trademarks or copyrights or
to protect its trade secrets could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that such intellectual property rights can be successfully asserted in
the future or will not be invalidated, circumvented or challenged. From time to
time, third parties, including competitors of the Company, may assert patent,
copyright and other intellectual property rights to technologies that are
important to the Company. There can be no assurance that third parties will not
assert infringement claims against the Company in the future, that assertions by
third parties will not result in costly litigation or that the Company would
prevail in any such litigation or be able to license any valid and infringed
patents from third
11
12
parties on commercially reasonable terms. Litigation, regardless of the outcome,
could result in substantial cost and would divert resources of the Company. Any
infringement claim or other litigation against or by the Company could
materially adversely affect the Company's business, operating results and
financial condition.
In addition, there can be no assurance that competitors of the Company,
many of which have substantial resources and have made 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 USPTO to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Any such suit or proceeding involving the
Company could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
Future Operating Results -- Risks Associated with Protection of Intellectual
Property."
EMPLOYEES
As of September 30, 1999, the Company had 97 employees and full-time
equivalents. Of this total, 64 were in engineering, 22 were in sales and
marketing and 11 were in finance and administration. None of the Company's
employees is represented by a labor union or is subject to a collective
bargaining agreement. The Company has never experienced a work stoppage and
believes that its relations with employees are good.
EXECUTIVE OFFICERS
The executive officers of the Company, their positions and their ages (as
of September 30, 1999) are as follows:
NAME AGE POSITION
---- --- --------
Mark R. Templeton............................... 40 President, Chief Executive Officer and
Director
Scott T. Becker................................. 39 Chief Technical Officer and Director
Dixie K. Lopes.................................. 32 Acting Chief Financial Officer
Larry J. Fagg................................... 53 Vice President, Worldwide Sales
Dhrumil Gandhi.................................. 42 Vice President, Engineering
Jeffrey A. Lewis................................ 39 Vice President, Market and Business
Development
Mark R. Templeton has served as President, Chief Executive Officer and a
director of the Company since April 1991 when he co-founded the Company. From
April 1990 to March 1991, Mr. Templeton was director of the Custom IC Design
Group at Mentor Graphics, an EDA company. From October 1984 to March 1990, he
held various positions with Silicon Compilers Systems Corporation ("Silicon
Compilers"), an EDA company, with the last position being Director of the Custom
IC Design Group. Mr. Templeton received a B.S.E.E. from Boston University.
Scott T. Becker has served as Chief Technical Officer and a director of the
Company since April 1991 when he co-founded the Company. From April 1990 to
April 1991, he was manager of the library development group at the IC Division
of Mentor Graphics. From May 1985 to April 1990, he was responsible for library
development at Silicon Compilers. Mr. Becker received a B.S.E.E. from the
University of Illinois and an M.S.E.E. from Santa Clara University.
Dixie K. Lopes has served as Acting Chief Financial Officer of the Company
since June 1999. Ms. Lopes, Director of Finance, has held previous positions
with the Company as Corporate Controller and Manager of Financial Planning and
Analysis from October 1997 to June 1999. From January 1994 to October 1997, she
was Manager of Financial Planning and Analysis for NetFRAME Systems, Inc, a
network computer systems company. Ms. Lopes received a B.A. in Liberal Studies
from California Polytechnic State University, San Luis Obispo and an M.B.A. with
finance concentration from Santa Clara University.
12
13
Larry J. Fagg has served as Vice President of Worldwide Sales of the
Company since August 1997. From May 1995 to August 1997, he served as Director,
North American Sales at the Silicon Architects Group of Synopsys, an EDA
company. From May 1994 to May 1995, he served as Vice President of North
American Sales at CrossCheck Technology, Inc., an EDA company. From December
1988 to May 1994, he served as Vice President, Strategic Alliances of Cadence,
an EDA company.
Dhrumil Gandhi has served as Vice President of Engineering of the Company
since May 1993. From July 1983 to May 1993, he served as Senior Manager for
Advanced ASIC Design Systems at Mentor Graphics. He received a B.S.E.E. from the
Indian Institute of Technology and an M.S.E.E. from the California Institute of
Technology.
Jeffrey A. Lewis has served as Vice President of Market and Business
Development of the Company since June 1999. From September 1996 to June 1999, he
served as Vice President of Marketing of the Company. From August 1994 to
September 1996, he served in several managerial positions at Compass Design
Automation, Inc, an EDA company, the most recent of which was Vice President of
Corporate Marketing. From April 1992 to August 1994, he served as Director of
Marketing at Redwood Design Automation, Inc., an EDA company. Mr. Lewis received
a B.S.E.E., a B.A. in Economics and an M.B.A., all from the University of
California, Berkeley.
ITEM 2. PROPERTIES
The Company's executive, administrative and technical offices currently
occupy 32,660 square feet in Sunnyvale, California, under a lease that expires
in 2004. The Company sublets to a third party the 16,797 square foot space it
formerly occupied in San Jose, California. The lease on the San Jose space
expires in 2001. In addition, as of December 1999, the Company also leases sales
and support offices in North Andover, Massachusetts and Tokyo, Japan. The
Company believes that its existing facilities are adequate to meet its current
needs but that it may need to seek additional space in the future. The Company
believes that suitable additional space will be available on commercially
reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "ARTI" since the Company's initial public offering on February
3, 1998. Prior to such time, there was no public market for the Common Stock of
the Company. The following table sets forth for the periods indicated the high
and low sale prices per share of the Common Stock as reported on the Nasdaq
National Market.
HIGH LOW
------- -------
Fiscal Year 1998
Second Quarter (from February 3, 1998)...................... $20.250 $15.250
Third Quarter............................................. 23.375 11.875
Fourth Quarter............................................ 15.500 6.500
Fiscal Year 1999
First Quarter............................................. 11.375 4.375
Second Quarter............................................ 7.688 5.000
Third Quarter............................................. 12.250 4.219
Fourth Quarter............................................ 14.375 8.125
On December 8, 1999, the reported last sale price of the Common Stock on
the Nasdaq National Market was $17.50 per share. As of October 31, 1999, there
were approximately 141 stockholders of record of the Common Stock.
DIVIDEND POLICY
Since March 1996, when the Company converted to a C corporation from a
subchapter S corporation, the Company has not declared or paid any cash
dividends on its Common Stock or other securities. The Company presently intends
to retain future earnings, if any, for use in the operation and expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Annual Report on Form 10-K. The balance sheet data as of September 30, 1998
and 1999 and the statement of operations data for the fiscal years ended
September 30, 1997, 1998 and 1999 are derived from the financial statements that
have been audited by PricewaterhouseCoopers LLP, independent accountants,
included elsewhere in this Annual Report on Form 10-K. The balance sheet data as
of September 30, 1995, 1996 and 1997 and the statement of operations data for
the fiscal years ended September 30, 1995 and 1996 are derived from the
financial statements that have been audited by
14
15
PricewaterhouseCoopers LLP, independent accountants, not included in this Annual
Report on Form 10-K. Historical results are not necessarily indicative of
results to be expected in the future.
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
License................................... $2,718 $4,147 $8,912 $16,568 $14,138
Net royalty............................... -- -- -- -- 729
------ ------ ------ ------- -------
Total revenue..................... 2,718 4,147 8,912 16,568 14,867
Costs and expenses:
Cost of revenue........................... 984 1,280 2,855 4,962 5,957
Product development....................... 1,044 1,080 1,955 3,580 4,631
Sales and marketing....................... 272 603 2,019 4,030 5,105
General and administrative................ 415 611 1,340 1,922 2,599
------ ------ ------ ------- -------
Total cost and expenses........... 2,715 3,574 8,169 14,494 18,292
------ ------ ------ ------- -------
Operating (loss) income..................... 3 573 743 2,074 (3,425)
Other income, net........................... -- 96 297 1,175 2,024
------ ------ ------ ------- -------
(Loss) income before provision for income
taxes..................................... 3 669 1,040 3,249 (1,401)
(Benefit) provision for income taxes........ 36 137 356 923 (858)
------ ------ ------ ------- -------
Net (loss) income........................... $ (33) $ 532 $ 684 $ 2,326 $ (543)
====== ====== ====== ======= =======
Basic net (loss) income per share
(historical)(2)........................... $(0.01) $ 0.11 $ 0.13 $ 0.22 $ (0.04)
====== ====== ====== ======= =======
Diluted net (loss) income per share
(historical)(2)........................... $(0.01) $ 0.08 $ 0.07 $ 0.18 $ (0.04)
====== ====== ====== ======= =======
Pro forma net income data (unaudited)(1):
Pro forma net income...................... $ 21 $ 409
====== ======
Diluted net income per share (pro
forma)(2).............................. $ 0.00 $ 0.06
====== ======
Shares used in computing:
Basic net (loss) income per share......... 5,018 5,040 5,456 10,457 13,569
====== ====== ====== ======= =======
Diluted net (loss) income per share....... 5,018 7,010 9,657 12,917 13,569
====== ====== ====== ======= =======
AT SEPTEMBER 30,
-------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities................................. $ 6 $2,958 $ 4,554 $47,204 $48,181
Working capital............................ 141 2,268 4,352 49,874 50,612
Total assets............................... 1,261 5,172 12,011 59,489 64,344
Long term liabilities, net of current
portion(3)............................... -- 15 49 218 174
Total stockholders' equity................. 410 4,292 9,348 55,539 57,120
- ---------------
(1) Prior to March 1996, the Company was a subchapter S corporation and,
therefore, was not subject to entity level taxation. Pro forma net income
includes pro forma tax expense as if the Company were taxed as a C
corporation in fiscal 1995 and 1996.
(2) For an explanation of net income (loss) per share and shares used in per
share calculations, see Note 13 of the Notes to Financial Statements
included elsewhere in this Annual Report on Form 10-K.
(3) Long term liabilities consist of deferred rent and deferred revenue. See
Note 8 of the Notes to Financial Statements.
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Annual Report on Form
10-K. Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward looking statements.
The forward looking statements contained herein are based on current
expectations and entail various risks and uncertainties that could cause actual
results to differ materially from those expressed in such forward looking
statements. For a more detailed discussion of these and other business risks,
see "-- Factors Affecting Future Operating Results."
OVERVIEW
Artisan is a leading developer of high performance, high density and low
power embedded memory, standard cell and I/O components for the design and
manufacture of complex ICs. The Company licenses its products to semiconductor
manufacturers and fabless semiconductor companies for the design of ICs used in
complex, high volume applications, such as portable computing devices, cellular
phones, consumer multimedia products, automotive electronics, personal computers
and workstations.
Beginning in late fiscal 1996, the Company implemented a royalty-based
business model that is intended to generate revenue from both license fees and
royalties. The Company generally licenses its products on a nonexclusive,
worldwide basis to major semiconductor manufacturers and grants these
manufacturers the right to distribute the Company's IP components to their
internal design teams and to distribute and sublicense to semiconductor design
companies that manufacture at the same facility. 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 and generally vary in proportion
to the silicon area of an IC occupied by the Company's products. 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.
To date, the substantial majority of the Company's license revenue has been
recognized on a percentage of completion method. Provisions for estimated losses
on uncompleted contracts are recognized in the period in which the likelihood of
such losses is determined. As the completion period for a project ranges from
three to six months, revenue in any quarter is dependent on the Company's
progress toward completion of the project. There can be no assurance that the
Company's estimates will be accurate, and, in the event they are not, the
Company's business, operating results and financial condition in subsequent
periods could be materially adversely affected.
In the third quarter of fiscal 1999, the Company received its first royalty
reports from customers. As expected, these royalties were from a small number of
IC designs that were early in their product life-cycles. According to contract
terms, a portion of these royalty payments is credited back to the customer's
account 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
16
17
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 fiscal 1997, ST, Fujitsu, OKI and NEC
accounted for 27%, 24%, 16% and 13% of revenue, respectively. In fiscal 1998,
TSMC, OKI, and UMC accounted for 14%, 11% and 11% of revenue, respectively. In
fiscal 1999, NEC, TSMC, Conexant and UMC accounted for 25%, 19%, 14% and 13% 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. See "-- Factors Affecting Future Operating Results --
Customer Concentration; Limited Customer Base."
Historically, a substantial portion of the Company's revenue has been
international revenue. In fiscal 1997, 1998 and 1999, international revenue,
primarily from Asia and Europe, represented 73%, 84%, and 67%, respectively, of
the Company's revenue. The Company anticipates that international revenue will
remain a substantial portion of its revenue in the future. To date, all of the
revenue from international customers has been denominated in U.S. dollars. See
"-- Factors Affecting Future Operating Results -- Risks Associated with
International Customers."
The Company derives substantially all of its revenue from sales of its
memory and standard cell products that together accounted for 94%, 94% and 80%
of revenue in fiscal 1997, 1998 and 1999, respectively. The Company expects that
memory products and standard cell products will continue to account for a
substantial portion of the Company's revenue for the foreseeable future. There
can be no assurance that the Company will continue to derive revenue from memory
or standard cell products and a decline in revenue from such products would have
a material adverse effect on the Company's business, operating results and
financial condition. The Company's future financial performance will depend in
significant part on the successful development, introduction and customer
acceptance of new products. See "-- 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 progressively increased as the Company has added
personnel and increased its activities in these areas. The Company intends to
continue making significant expenditures, particularly those associated with
engineering and sales and marketing, and expects that these costs and expenses
will continue to be a large percentage of revenue in future periods. Whether
such expenses increase or decrease as a percentage of revenue will be
substantially dependent upon the rate of change of the Company's revenue.
The Company in the past has experienced delays in the progress of certain
projects, and there can be no assurance that such delays will not occur in the
future. Any delay or failure to achieve progress could result in damage to
customer relationships and the Company's reputation, under-utilization of
engineering resources or a delay in the market acceptance of the Company's
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the Company's
contracts with customers generally may be canceled without cause, and if a
customer cancels or delays performance under any such contracts, the Company's
business, operating results and financial condition could be materially
adversely affected. The Company's costs and expenses will be based in part on
the Company's expectations of future revenue. Accordingly, if the Company does
not realize its expected revenue, its business, operating results and financial
condition could be materially adversely affected. The Company has recently
experienced periods of negative growth as well as declines in the rate of growth
of its revenue as compared with prior periods, primarily due to deterioration in
the demand for semiconductors generally. There can be no assurance that the
Company will experience positive revenue growth in the future. See "-- Factors
Affecting Future Operating Results -- Fluctuations in Operating Results."
In connection with the grant of options for the purchase of 96,200 shares
of Common Stock to employees during the period from December 1996 through March
1997 and 15,000 shares of Common Stock to non-employees in January 1998, the
Company recorded aggregate deferred compensation of approximately
17
18
$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 have been amortized during
fiscal 1997, 1998 and 1999, respectively. In addition, the amortization will
result in charges in the first quarter of fiscal 2000 of approximately $21,000
and charges of $11,000 per quarter for the following five quarters.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data as a percentage of revenue:
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1998 1999
------ ------ ------
Total revenue............................................... 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue........................................... 32.0 30.0 40.1
Product development....................................... 22.0 21.6 31.1
Sales and marketing....................................... 22.7 24.3 34.3
General and administrative................................ 15.0 11.6 17.5
----- ----- -----
Total cost and expenses........................... 91.7 87.5 123.0
----- ----- -----
Operating (loss) income..................................... 8.3 12.5 (23.0)
Other income, net........................................... 3.3 7.1 13.6
----- ----- -----
(Loss) income before provision for income taxes............. 11.6 19.6 (9.4)
Provision for income taxes.................................. 4.0 5.6 (5.7)
----- ----- -----
Net (loss) income........................................... 7.6% 14.0% (3.7)%
===== ===== =====
YEARS ENDED SEPTEMBER 30, 1998 AND 1999
Revenue
Revenue decreased by 10.3% from $16.6 million in fiscal 1998 to $14.9
million in fiscal 1999. The decline in revenue in fiscal 1999 as compared with
fiscal 1998 was primarily attributable to decreased licensing of the Company's
memory products in fiscal 1999 of $3.9 million due to reduced customer orders
for these products, partially offset by the addition of net royalty revenue of
$729,000 and by increases in revenue from support contracts and licensing of I/O
and standard cell products in fiscal 1999 of $1.5 million. The net royalty
revenue of $729,000 reflects the Company's first royalty revenue arising from
the business model adopted in late fiscal 1996. Gross royalty payments are
calculated based on per unit sales of ICs or wafers containing the Company's IP
components and generally vary in proportion to the silicon area of an IC
occupied by the Company's products. Total gross royalties for fiscal 1999 were
$1.1 million. From this amount, a portion was credited back to the customer's
account to use to pay license fees for future orders to be placed with the
Company. The remaining portion of the royalty, or $729,000 in fiscal 1999, was
reported as net royalty revenue.
Cost and Expenses
Engineering Costs. Engineering costs are allocated between cost of license
revenue and product development expense. Engineering efforts devoted to
developing products for specific customer projects are recognized as cost of
revenue. The balance of engineering costs, incurred for general development of
Artisan's technology, is charged to product development. Engineering costs
generally are charged as incurred and do not necessarily correspond to the
recognition of revenue under related contracts. Engineering costs increased by
24.0% from $8.5 million in fiscal 1998 to $10.6 million in fiscal 1999.
Engineering costs as a percentage of revenue increased from 51.6% in fiscal 1998
to 71.2% for fiscal 1999. The absolute dollar increase in engineering costs in
fiscal 1999, as compared with fiscal 1998, was primarily due to an increase in
headcount
18
19
and personnel expenses of $1.3 million and increased computer and networking
equipment maintenance and depreciation of $628,000.
Cost of Revenue. Cost of license revenue increased by 20.1% from $5.0
million in 1998 to $6.0 million in fiscal 1999. Cost of license revenue as
a percentage of revenue was 30.0% and 40.1% for fiscal 1998 and fiscal
1999, respectively. The absolute dollar increase in cost of revenue in
fiscal 1999, as compared with fiscal 1998, was due to increases in
headcount and costs associated with delivering product to, and supporting,
a growing customer base.
Product Development Expenses. Product development expenses increased
by 29.4% from $3.6 million in fiscal 1998 to $4.6 million in fiscal 1999.
Product development expenses as a percentage of revenue increased from
21.6% to 31.1% for fiscal 1998 and fiscal 1999, respectively. The absolute
dollar increase in product development expenses in fiscal 1999, as compared
with fiscal 1998, was attributable to an increase in headcount and
personnel expenses and increased computer and networking equipment
maintenance and depreciation costs. The Company expects that product
development expenses will continue to increase in absolute dollars. Whether
such expenses increase or decrease as a percentage of revenue will be
substantially dependent upon the rate of change of the Company's revenue.
Sales and Marketing Expenses. Sales and marketing expenses include
salaries, commissions, travel expenses and costs associated with trade shows,
advertising and other marketing efforts. Costs of pre-sale customer support are
also charged to sales and marketing. Sales and marketing expenses increased by
26.7% from $4.0 million in fiscal 1998 to $5.1 million in fiscal 1999. Sales and
marketing expense as a percentage of revenue increased from 24.3% for fiscal
1998 to 34.3% for fiscal 1999. The increase in absolute dollars in sales and
marketing expenses in fiscal 1999, as compared with fiscal 1998, was
attributable to increased headcount and personnel-related expenses of
approximately $381,000, higher travel expenses of $350,000 and increased
advertising and trade show expenses plus investment in new marketing programs of
approximately $311,000. Advertising and trade show expenses increased because
the Company attended more small trade shows and allocated more resources to
enhance its profile with potential end-user customers at the Design Automation
Conference trade show in fiscal 1999. New marketing program expenditures
increased as a result of the Company's investment in telemarketing personnel and
collateral materials to support its growing end-user customer base. The Company
expects sales and marketing expenses to increase in absolute dollars in the
future as the Company increases headcount to expand account coverage and provide
increased customer support. The rate of increase of, and the percentage of
revenue represented by, sales and marketing expenses in the future will vary
from period to period based on the trade show, advertising, promotional and
other sales and marketing activities undertaken, the change in sales and
marketing headcount in any given period and the rate of change in the Company's
revenue.
General and Administrative Expenses. General and administrative expenses
increased by 35.2% from $1.9 million in fiscal 1998 to $2.6 million in fiscal
1999. As a percentage of revenue, general and administrative expenses increased
from 11.6% to 17.5% in fiscal 1998 and fiscal 1999, respectively. The absolute
dollar increase in general and administrative expenses in fiscal 1999, as
compared with fiscal 1998, was due to bad debt expense related to deterioration
in the financial and/or business condition of two of the Company's customers and
an increase the general reserve for doubtful accounts totaling $369,000,
headcount additions in late fiscal 1998 which increased 1999 expenses by
approximately $160,000 and increased costs of public reporting, additional
accounting and legal fees, increased insurance costs and professional recruiting
fees totaling $173,000, primarily due to the Company's status as a publicly-held
company for only part of fiscal 1998 but for all of fiscal 1999. The Company
expects general and administrative expenses to grow in absolute dollars in
future periods as the Company expands its operations. The percentage of revenue
represented by general and administrative expenses in the future will primarily
depend on the rate of change of the Company's revenue.
Other Income
Other income increased by 72.3% from $1.2 million in fiscal 1998 to $2.0
million in fiscal 1999. Other income as a percentage of revenue increased from
7.1% to 13.6% in fiscal 1998 and fiscal 1999, respectively.
19
20
The growth in other income in fiscal 1999, as compared with fiscal 1998,
reflects a full year of interest income in fiscal 1999 as compared to a partial
year in fiscal 1998, since the Company completed an initial public offering and
follow-on public offering in February 1998 and April 1998, respectively. The
increased other income also reflects higher interest income earned as a result
of the Company's decision to move from tax-exempt investments in fiscal 1998 to
taxable investments early in fiscal 1999.
Income Taxes
The provision for income taxes was $923,000 in fiscal 1998 and for fiscal
1999, the tax benefit was $858,000. The effective tax rate increased to 61.2% in
fiscal 1999, as compared with 28.4% in fiscal 1998. The increase in effective
tax rate for the respective periods was due primarily to the fully-taxable
operating losses recorded by the Company in fiscal 1999 and the Company's
tax-free interest income generated in the first two quarters of fiscal 1999. The
difference between the statutory and effective rates of income tax is due to the
impact of state taxes and tax-free interest income and tax credits.
YEARS ENDED SEPTEMBER 30, 1997 AND 1998
Revenue
Revenue increased by 85.9% from $8.9 million in fiscal 1997 to $16.6
million in fiscal 1998. The growth in revenue in fiscal 1998 as compared with
fiscal 1997 was primarily attributable to increased licensing of the Company's
memory, standard cell and I/O products.
Cost and Expenses
Engineering Costs. Engineering costs increased by 77.6% from $4.8 million
in fiscal 1997 to $8.5 million in fiscal 1998. Engineering costs as a percentage
of revenue declined from 54.0% in fiscal 1997 to 51.6% for fiscal 1998. The
absolute dollar increase in engineering costs in fiscal 1998, as compared with
fiscal 1997, was due primarily to an increase in engineering personnel and, to a
lesser extent, purchases of computer equipment, software tools and networking
infrastructure and equipment.
Cost of Revenue. Cost of license revenue increased by 73.8% from $2.9
million in 1997 to $5.0 million in fiscal 1998. Cost of license revenue as
a percentage of revenue was 32.0% and 30.0% for fiscal 1997 and fiscal
1998, respectively. The absolute dollar increase in cost of revenue in
fiscal 1998, as compared with fiscal 1997, was due to increases in
headcount and costs associated with delivering product to, and supporting,
a growing customer base.
Product Development Expenses. Product development expenses increased
by 83.1% from $2.0 million in fiscal 1997 to $3.6 million in fiscal 1998.
Product development expenses as a percentage of revenue declined from 22.0%
to 21.6% for fiscal 1997 and fiscal 1998, respectively. The absolute dollar
increase in product development expenses in fiscal 1998, as compared with
fiscal 1997, was attributable to an increase in engineering personnel and,
to a lesser extent, maintenance and depreciation related to purchases of
computer equipment, software tools and networking infrastructure and
equipment.
Sales and Marketing Expenses. Sales and marketing expenses increased by
99.6% from $2.0 million in fiscal 1997 to $4.0 million in fiscal 1998. Sales and
marketing expense as a percentage of revenue increased from 22.7% for fiscal
1997 to 24.3% for fiscal 1998. The increase in absolute dollars in sales and
marketing expenses in fiscal 1998, as compared with fiscal 1997, was primarily
attributable to increases in sales and marketing headcount and commissions
expense to support an expanded customer coverage model.
General and Administrative Expenses. General and administrative expenses
increased by 43.4% from $1.3 million in fiscal 1997 to $1.9 million in fiscal
1998. As a percentage of revenue, general and administrative expenses decreased
from 15.0% to 11.6% in fiscal 1997 and fiscal 1998, respectively. The absolute
dollar increases in general and administrative expenses in fiscal 1998, as
compared with fiscal 1997, were primarily due to increases in general and
administrative personnel and increases in fees for professional services.
20
21
Other Income
Other income increased by 295.6% from $297,000 in fiscal 1997 to $1.2
million in fiscal 1998. Other income as a percentage of revenue increased from
3.3% to 7.1% in fiscal 1997 and fiscal 1998, respectively. The growth in other
income in fiscal 1998, as compared with fiscal 1997, primarily reflects interest
income earned on the proceeds from the Company's initial public offering and
follow-on public offering which were completed in February 1998 and April 1998,
respectively.
Income Taxes
The provision for income taxes was $356,000 and $923,000 in fiscal 1997 and
fiscal 1998, respectively. The effective tax rate decreased to 28.4% in fiscal
1998, as compared with 34.2% in fiscal 1997. The change in effective tax rate
for the respective periods was primarily due to the Company investing the
proceeds from its initial public offering and follow-on public offering in
securities that were exempt from federal taxation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from license revenue
received from inception to September 30, 1999, the net proceeds of $27.1 million
from its February 1998 initial public offering of Common Stock, the net proceeds
of $15.8 million from its April 1998 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 $757,000, $2.1
million and $2.3 million in fiscal, 1997, 1998 and 1999, respectively. Net cash
provided by operating activities in fiscal 1997 and 1998 was due primarily to
net income plus depreciation and amortization offset by contract receivables and
prepaid expenses and other assets. Net cash provided by operating activities in
fiscal 1999 was due to deferred revenue, depreciation and amortization and
accounts payable and other liabilities offset by contract receivables, deferred
taxes and the Company's net loss.
Net cash used in investing activities was $4.6 million, $10.2 million and
$25.2 million in fiscal 1997, 1998 and 1999, respectively. Investing activities
have consisted primarily of net purchases of marketable securities and purchases
of property and equipment. See Notes 5 and 6 of the Notes to Financial
Statements.
Net cash provided by financing activities was $4.2 million, $43.6 million
and $1.6 million in fiscal 1997, 1998 and 1999, respectively. In fiscal 1997,
financing activities consisted primarily of sales of Preferred Stock. In fiscal
1998, financing activities consisted primarily of sales of the Company's Common
Stock in its initial public offering and follow-on public offering. In fiscal
1999, financing activities consisted of proceeds from issuance of Common Stock.
As of September 30, 1999, the Company had cash, cash equivalents and
current marketable securities of $48.2 million. As of September 30, 1999, the
Company had retained earnings of $2.7 million and working capital of $50.6
million that includes the current portion of deferred revenue of $3.8 million.
The Company anticipates spending at least $580,000 for office lease payments and
approximately $3.8 million for capital expenditures over the next 12 months.
The Company intends to continue to invest heavily in the development of new
products and enhancements to its existing products. The Company's future
liquidity and capital requirements will depend upon numerous factors, including
the costs and timing of expansion of product development efforts and the success
of these development efforts, the costs and timing of expansion of sales and
marketing activities, the extent to which the Company's existing and new
products gain market acceptance, competing technological and market
developments, the costs involved in maintaining and enforcing patent claims and
other intellectual property rights, the level and timing of license revenue,
available borrowings under line of credit arrangements and other factors. The
Company believes that 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
21
22
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 March 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after December 15,
1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The adoption of SOP 98-1 is not
expected to have a material impact on the Company.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard
requires companies to expense the costs of start-up activities and organization
costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning
after December 15, 1998. The Company does not expect SOP 98-5 to impact the
Company's results of operations.
In June 1998, the Financial Accounting Standards Board 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. To date, the Company has not entered into any
derivative financial instruments or hedging activities. SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and changes
in the market values of its investments.
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company has not used derivative financial instruments in its investment
portfolio. The Company invests its excess cash in high-quality corporate issuers
and in debt instruments of the U.S. Government and, 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 which have declined in market
value due to changes in interest rates.
22
23
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 September 30, 1999 and 1998. All investments mature
in one year or less.
CARRYING AVERAGE RATE CARRYING AVERAGE RATE
VALUE AT OF RETURN AT VALUE AT OF RETURN AT
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1998 1998
-------------- ------------- -------------- -------------
(IN THOUSANDS) (ANNUALIZED) (IN THOUSANDS) (ANNUALIZED)
INVESTMENT SECURITIES:
Cash equivalents -- variable rate........... $ 1,619 4.7% $ 2,205 3.1%
Money market funds -- variable rate......... 678 5.2% 145 1.7%
Cash equivalents -- fixed rate.............. 12,936 5.3% -- --
Short-term investments -- fixed rate........ 32,948 5.6% 44,854 3.8%
------- -------
Total investment securities............ $48,181 $47,204
======= =======
YEAR 2000 READINESS
Overview. The Year 2000 problem is best defined as a product or process
that, when executed on date data, produces an incorrect result. Further program
errors may occur as a result of incorrect usage of "9/9/99" or because the year
2000 was not properly recognized as a leap year.
The Year 2000 issue does create risk for the Company, the extent of which
cannot be fully known. To address these risks, the Company has created a program
for dealing with its internal products and processes, internal information
technology systems and non-information technology systems. The Company has also
requested information regarding Year 2000 readiness from its major suppliers and
customers. The Company has received responses from 88% of its suppliers,
including all of its significant suppliers, and 40% of its customers. Responses
received to date indicate the majority of the Company's customers, suppliers,
service providers and contractors are or intend to be Year 2000 compliant. Where
any supplier's response is deemed unsatisfactory, the Company intends to change
suppliers, service providers or contractors to those that have demonstrated Year
2000 compliance. The Company cannot be assured of finding alternative suppliers,
service providers or contractors.
In the event any of the Company's significant customers, suppliers, service
providers or contractors does not achieve Year 2000 compliance and the Company
is unable to replace those customers, suppliers, service providers or
contractors, business operations could be adversely affected. The effect of a
loss of customers, suppliers, services providers or contractors could include,
but is not limited to, losses in revenue, a loss of customers, suppliers,
service providers or contractors and the inability of the Company to deliver its
products and services.
The cost of the Company's Year 2000 readiness program is not incremental to
the Company and it represents a re-allocation of existing resources. During the
normal course of business, the Company has made capital investments in certain
third party software and hardware to address its operational needs. These
systems, which were intended to improve efficiency and productivity, have been
certified as "Year 2000 Compliant" by the respective vendors and were installed
by October 31, 1999. To date these projects have been a part of the Company's
capital plan and were not accelerated as a result of the Year 2000 issue. Total
Year 2000 project expenditures are expected to total approximately $4.4 million,
of which $3.0 million were expended in the year ended September 30, 1999.
The Company believes it has made significant progress in the remediation of
its Year 2000 issues. Additional testing is planned for the remainder of the
calendar year to reasonably ensure Year 2000 readiness. Regardless of the
outcome of this testing, the Company believes it will be able to conduct its
business, possibly at reduced volume, using its existing Year 2000 compliant
systems and software until remaining issues can be resolved. Although there can
be no assurance that all required modifications will be complete prior to the
year 2000, it is management's belief that the Company is taking adequate action
to ensure its Year 2000 readiness.
23
24
Management does not expect the financial impact of Year 2000 readiness to be
material to the Company's financial position, results of operations or cash
flows.
Year 2000 Readiness Plan. Phases of the Company's readiness program
include: Inventory, Review and Assessment, Prioritization and Resolution.
Inventory. The goal of this phase of the project is to identify products
and processes that may be impacted by the year 2000 date rollover. An accurate
inventory consists of product or process identification, specific version
information, importance and risk to the business, compliance status, action
required to make compliant, cost of the action, targeted fix dates and
verification information. Products and processes, regardless of their compliance
status, are listed on the inventory. The Company has completed an inventory of
all telephone and voice mail systems and associated software, computer systems
hardware, operating systems and applications software and security systems.
Review and Assessment. The goal of the Review and Assessment phase is to
identify those items needing remediation and to determine the extent of impact
of any item on the Company's ability to conduct business. The Company has
conducted a review of its processes, products and items from the Year 2000
Inventory, including operating systems, application software, internally
developed software and non-information technology systems including, but not
limited to, environmental control systems, fire suppression systems, postage
meters, copy machines and other embedded microprocessor controlled systems. The
Company has also contacted its major suppliers and customers to determine their
Year 2000 readiness as it relates to the Company's business.
Prioritization. The goal of the Prioritization phase is to produce an
ordered list of items needing remediation based upon their importance to the
Company's business. A general list of prioritized items includes, but is not
limited to, operating systems and software used to support the finance
organization, software used in the development of the Company's products and
services, networking equipment, telephone systems, data circuits associated with
the Company's Internet Service Provider, and hardware and software used to
secure the Company's facility.
Resolution. The goal of the Resolution phase is to identify and apply
"fixes" to items needing remediation. The Company has developed plans to address
those items deemed to be non-compliant. No hardware systems need to be replaced
or upgraded as a result of non-compliance. However, the operating systems
software for almost all information technology systems will have "patches"
applied to achieve Year 2000 compliance. These upgrades are carried out as a
routine part of the Company's operations and are not expected to have a material
impact on the Company's expenses. As of November 30, 1999, the Company was 80%
through the upgrade process. Operating system and application upgrades were
completed by August 31, 1999 for systems used for administration and will be
complete by December 15, 1999 for those used in product development. The Company
is currently developing plans for final testing of compliance.
Risks and Contingencies. The Company believes the most significant risks to
its business lie in two areas: the re-design or re-engineering of products and
services the Company has delivered using older versions of its EDA software and
the non-compliance of its suppliers and customers.
During the product development process, specific versions of EDA tools and
processes are used to create products. If the Company were required to correct a
defect or re-design parts of a product produced with EDA tools that are not Year
2000 compliant, the Company would have to create a development environment in
which the date were rolled back to the original design dates. It is not known
how much effort would be required to re-create the design environment for a
given product. The Company relies heavily on the Internet for distribution of
its products. Failure of the Company's Internet Service Provider or its ISP's
Local Exchange Carrier due to Year 2000 non-compliance could have a material
impact on the Company's business, operating results and financial condition. The
Company has based its Year 2000 readiness program actions upon standard
operating environments and processes used in the conduct of its business.
However, if a product or process outside the standard is used and that product
or process is not Year 2000 compliant, the Company may experience an impact on
its ability to conduct business until the product or process in question can be
made compliant. Statements made by third parties regarding Year 2000 compliance
are used by the Company
24
25
to determine that party's Year 2000 readiness. The Company relies on a limited
number of customers for a significant portion of its revenue. Should any
customer experience difficulties as a result of Year 2000 non-compliance, the
Company's revenues could be significantly impacted. Many of the Company's
customers are headquartered outside of the United States. As a result, many of
the Company's customers may be subject to different Year 2000 disclosure
requirements, making it difficult to ascertain the true nature of Year 2000
compliance status. The Company's products work in combination with semiconductor
designs and planning tools in environments developed by other vendors and
interact with other operating environments. Commencing in the year 2000, the
functionality of certain operating environments will be adversely affected if
one or more component products of the environment is not Year 2000 compliant.
The Company cannot provide assurance that its products will function properly
with respect to Year 2000 compliance when integrated with other vendors' or
customers' non-compliant component products. The Year 2000 readiness project is
currently staffed with the Company's employees. Should key members of the Year
2000 readiness program leave the Company prior to completion of the project, the
project could suffer a significant setback. The Company plans to maintain
adequate documentation regarding all phases of the project and to hold regular
meetings to discuss the status of the project. Each of these risks, if realized
either independently or in combination, could have a material adverse affect on
the Company's business, operating results and financial condition.
Worst-Case Scenarios. Worst-case scenarios of the Company's failure to
solve Year 2000 compliance issues could include substantial purchasing costs to
develop alternative methods of managing the business and to replace noncompliant
equipment, temporary slowdowns or cessation of certain revenue-producing
operations, delays in delivery or distribution of products, delays in the
receipt of supplies and invoice and collection errors or delays. The Company is
in the process of developing its contingency plans to address each of these
business risks.
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.
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.
25
26
The Company's sales cycle can be lengthy and is subject to a number of
risks over which the Company has little or no control. As a result of the
significant dollar amounts represented by a single customer order, the timing of
the receipt of an order can have a significant impact on the Company's revenue
for a particular period. In addition, because the Company's revenue is
concentrated among a small number of customers, a decline or a delay in the
recognition of revenue from one customer in a period may cause the Company's
business, operating results and financial condition in such period to be
materially adversely affected and may lead to significant fluctuations from
quarter to quarter. Any significant or ongoing failure to obtain new orders from
customers or to collect outstanding accounts receivable would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company has recently experienced periods of negative growth as
well as declines in the rate of growth of its revenue as compared with prior
periods, primarily due to deterioration in the demand for semiconductors
generally. There can be no assurance that the Company will experience positive
revenue growth in the future.
To date, a substantial majority of the Company's revenue has been
recognized on a percentage of completion method. Provisions for estimated losses
on the uncompleted contracts are recognized in the period in which the
likelihood of such losses is determined. As the completion period ranges from
three to six months, revenue in any quarter is dependent on the Company's
progress toward completion of the project. There can be no assurance that the
Company's estimates will be accurate, and, in the event they are not, the
Company's business, operating results and financial condition in subsequent
periods could be materially adversely affected. From time to time, the Company
experiences delays in the progress of certain projects, and there can be no
assurance that such delays will not occur in the future. Any delay or failure to
achieve progress could result in damage to customer relationships and the
Company's reputation, under-utilization of engineering resources or a delay in
the market acceptance of the Company's products, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company's contracts with customers
generally may be canceled without cause, and, if a customer cancels or delays
performance under any such contracts, the Company's business, operating results
and financial condition could be materially adversely affected. See "-- Results
of Operations."
The Company has historically generated revenue from license fees only.
Beginning in late fiscal 1996, the Company implemented a royalty-based business
model that is intended to generate revenue from both license fees and royalties.
The Company generally licenses its products on a nonexclusive, worldwide basis
to major semiconductor manufacturers and grants these manufacturers the right to
distribute the Company's IP components to their internal design teams and to
distribute and sublicense to semiconductor design companies that manufacture at
the same facility. 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 and generally vary in proportion to the silicon area of
an IC occupied by the Company's products. A portion of these payments is
credited back to the customer's account 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. In the third quarter of fiscal 1999, the
Company received its first royalty revenue. As expected, these royalties were
from a small number of IC designs that were 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
26
27
from its customers and will be dependent upon fluctuating sales volumes. In
addition, under the royalty-based business model, the Company's revenue will be
dependent upon the sales by its customers of products that incorporate the
Company's technology. Even if the Company's technology is adopted, there can be
no assurance that it will be used in a product that is ultimately brought to
market, achieves commercial acceptance or results in significant royalties to
the Company. The Company will also face risks relating to the accuracy and
completeness of the royalty collection process. See "-- Results of Operations."
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. There can
be no assurance that the merchant IP component and System-on-a-Chip markets will
continue to develop or grow at a rate sufficient to support the Company's
business. If either of these markets fails to grow or develops slower than
expected, the Company's business, operating results and financial condition
would be materially adversely affected. To date, the Company's IP products have
been licensed only by a limited number of customers. The vast majority of the
Company's existing and potential customers currently rely on components
developed internally and/or by other vendors. The Company's future growth, if
any, is dependent on the adoption of, and increased reliance on, merchant IP
components by both existing and potential customers. Moreover, if the Company's
products do not achieve broad market acceptance, the Company's business,
operating results and financial condition would be materially adversely
affected.
Competition. The Company's strategy of targeting semiconductor
manufacturers that participate in, or may enter, the System-on-a-Chip market
requires the Company to compete in intensely competitive markets. Within the
merchant segment of the IP component market, the Company competes primarily
against Avant!, Mentor Graphics, the Silicon Architects division of Synopsys,
Virage and Virtual Silicon. 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
27
28
the Company's current or potential competitors); the price, quality and timing
of new product introductions by the Company and its competitors; the emergence
of new IP component interchangeability standards; the widespread licensing of IP
components by semiconductor manufacturers or their design groups to third party
manufacturers; the ability of the Company to protect its intellectual property;
market acceptance of the Company's IP components; success of competitive
products; market acceptance of products using System-on-a-Chip ICs and industry
and general economic conditions. There can be no assurance that the Company will
be able to compete successfully in the emerging merchant IP component market.
See "Business -- Competition."
Dependence on Semiconductor Manufacturers; Dependence on Semiconductor and
Electronics Industries. The Company's success is substantially dependent both on
the adoption of the Company's technology by semiconductor manufacturers and on
an increasing demand for products requiring complex System-on-a-Chip ICs, such
as portable computing devices, cellular phones, consumer multimedia products,
automotive electronics, personal computers and workstations. The Company is
subject to many risks beyond its control that influence the success of its
customers, including, among others, competition faced by each customer in its
particular industry, market acceptance of the customer's products that
incorporate the Company's technology, the engineering, sales and marketing
capabilities of the customer, and the financial and other resources of the
customer.
The semiconductor and electronics products industries are characterized by
rapid technological change, frequent introductions of new products, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. Each of these industries is highly cyclical and has
periodically experienced significant downturns, often in connection with or in
anticipation of declines in general economic conditions during which the number
of new IC design projects often decreases. Revenue from licenses of the
Company's products is influenced by the level of design efforts by its
customers, and factors negatively affecting these industries could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's business, operating results and financial
condition may fluctuate in the future from period to period as a consequence of
general economic conditions in the semiconductor and electronics industries.
Customer Concentration; Limited Customer Base. The Company has been
dependent on a relatively small number of customers for a substantial portion of
its annual revenue, although the customers comprising this group have changed
from time to time. In fiscal 1997, ST, Fujitsu, OKI and NEC accounted for 27%,
24%, 16% and 13% of revenue, respectively. In fiscal 1998, TSMC, OKI and UMC
accounted for 14%, 11% and 11% of revenue, respectively. In fiscal 1999, NEC,
TSMC, Conexant and UMC accounted for 25%, 19%, 14% and 13% of revenue,
respectively. The Company anticipates that its revenue will continue to depend
on a limited number of major customers for the foreseeable future, although the
companies considered to be major customers and the percentage of revenue
represented by each major customer may vary from period to period depending on
the addition of new contracts and the number of designs utilizing the Company's
products. None of the Company's customers has a written agreement with the
Company that obligates it to license future generations of products or new
products, and there can be no assurance that any customer will license IP
components from the Company in the future. In addition, there can be no
assurance that any of the Company's customers will ship products incorporating
the Company's technology or that, if such shipments occur, they will generate
significant revenue. The loss of one or more of the Company's major customers,
reduced orders by one or more of such customers, the failure of one or more
customers to pay license 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. 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
28
29
and persuading potential customers to bear certain development costs associated
with development of customized components. There are a relatively limited number
of semiconductor manufacturers to which the Company can license its technology
in a manner consistent with its business model and there can be no assurance
that such manufacturers will rely on merchant IP components or adopt the
Company's products. See "-- Competition" and "Business -- Customers."
Product Concentration. The Company derives substantially all of its revenue
from sales of its memory and standard cell products that, together, accounted
for 94%, 94% and 80% of revenue in fiscal 1997, 1998 and 1999, respectively. The
Company expects that memory products and standard cell products will continue to
account for a substantial portion of the Company's revenue for the foreseeable
future. There can be no assurance that the Company will continue to derive
revenue from memory or standard cell products and a decline in revenue from such
products would have a material adverse effect on the Company's business,
operating results and financial condition. The Company's future financial
performance will depend in significant part on the successful development,
introduction and customer acceptance of new products. See "-- New Product
Development and Technological Change."
Lengthy Sales Cycle and Design Process. The license of the Company's
products typically involves a significant commitment of capital by the customer
and a purchase will often be timed to coincide with a customer's migration to a
new manufacturing process. Potential customers generally commit significant
resources to an evaluation of available IP solutions and require the Company to
expend substantial time, effort and resources to educate them about the value of
the Company's products. A variety of factors, including factors over which the
Company has little or no control, may cause potential customers to favor an
alternate solution or to delay or forego a license of the Company's products. As
a result of these and other factors, the sales cycle for the Company's products
is long, typically ranging from six to 12 months. The Company's ability to
forecast the timing and scope of specific sales is limited, and delay of or
failure to complete one or more large contracts could have a material adverse
effect on the Company's business, operating results and financial condition and
could cause the Company's operating results to fluctuate significantly from
quarter to quarter.
Once the Company receives and accepts an order from a customer, the Company
must commit significant resources to customizing its products for the customer's
manufacturing process. This customization is complex and time consuming and is
subject to a number of risks over which the Company has little or no control,
including the customer's adjustments and alterations of its manufacturing
process or the timing of migration to a new process. Typically, this
customization takes from three to six months to complete. Delays in product
customization could have a material adverse effect on the Company's business,
operating results and financial condition and could cause the Company's
operating results to vary significantly from quarter to quarter.
Risks Associated with International Customers. Historically, a substantial
portion of the Company's revenue has been international revenue. In fiscal 1997,
1998 and 1999, revenue derived from customers outside the United States,
primarily in Asia and Europe, represented 73%, 84% and 67%, 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
29
30
Company's business, operating results and financial condition. See "-- Results
of Operations" and "Business -- Sales, Marketing and Distribution."
New Product Development and Technological Change. The Company's customers
compete in the semiconductor industry, which is subject to rapid technological
change, frequent introductions of new products, short product life cycles,
changes in customer demands and requirements and evolving industry standards.
The development of new manufacturing processes, the introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. Accordingly, the Company's
future success will depend on its ability to continue to enhance its existing
products and to develop and introduce new products that satisfy increasingly
sophisticated customer requirements and that keep pace with new product
introductions, emerging manufacturing process technologies and other
technological developments in the semiconductor industry. Any failure by the
Company to anticipate or respond adequately to changes in manufacturing
processes or customer requirements, or any significant delays in product
development or introduction, would have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and sale of new or enhanced
products or that such new or enhanced products will achieve market acceptance.
Any delay in release dates of new or enhanced products could materially
adversely affect the Company's business, operating results and financial
condition. The Company could also be exposed to litigation or claims from its
customers in the event that it does not satisfy its delivery commitments. There
can be no assurance that any such claim would not have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business -- Product Development."
Dependence on Key Personnel. The Company's success depends in large part on
the continued contributions of its key management, engineering, sales and
marketing personnel, many of whom are highly skilled and would be difficult to
replace. None of the Company's senior management or key technical personnel is
bound by an employment contract. In addition, the Company does not currently
maintain key man life insurance covering its key personnel. The Company believes
that its success depends to a significant 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. See
"Business -- Employees."
Management of Growth. The ability of the Company to license its products
and manage its business successfully in a rapidly evolving market requires an
effective planning and management process. The Company's rapid growth has
placed, and is expected to continue to place, a significant strain on the
Company's managerial, operational and financial resources. From September 30,
1996 to September 30, 1999, the Company grew from 28 to 97 employees or
full-time equivalents. The Company's customers rely heavily on the Company's
technological expertise in designing, testing and manufacturing products
incorporating the Company's IP components. Relationships with new customers
generally require significant engineering support. As a result, any increase in
the demand for the Company's products will increase the strain on the Company's
personnel, particularly its engineers. The Company's financial and management
controls, reporting systems and procedures are also limited. Although some new
controls, systems and procedures have been implemented, the Company's future
growth, if any, will depend on its ability to continue to implement and improve
operational, financial and management information and control systems on a
timely basis, together with maintaining effective cost controls, and any failure
to do so would have a material adverse effect on the Company's business,
operating results and financial condition. Further, the Company will be required
to manage multiple relationships with various customers and other third parties
and must successfully implement its new business model. There can be no
assurance that the Company's systems, procedures or controls will be adequate to
support the Company's operations or that the Company's management will be able
to achieve the rapid execution necessary to offer its services and products
successfully and to implement its business plan.
30
31
The Company's inability to manage any future growth effectively would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Employees."
Risks Associated with Protection of Intellectual Property. The Company
relies primarily on a combination of nondisclosure agreements and other
contractual provisions and patent, trademark, trade secret and copyright law to
protect its proprietary rights. Failure of the Company to enforce its patents,
trademarks or copyrights or to protect its trade secrets could have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that such intellectual property rights can
be successfully asserted in the future or will not be invalidated, circumvented
or challenged. From time to time, third parties, including competitors of the
Company, may assert patent, copyright and other intellectual property rights to
technologies that are important to the Company. There can be no assurance that
third parties will not assert infringement claims against the Company in the
future, that assertions by third parties will not result in costly litigation or
that the Company would prevail in any such litigation or be able to license any
valid and infringed patents from third parties on commercially reasonable terms.
Litigation, regardless of the outcome, could result in substantial cost and
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.
In addition, there can be no assurance that competitors of the Company,
many of which have substantial resources and have made substantial investments
in competing technologies, do not have, or will not seek to apply for and
obtain, patents that will prevent, limit or interfere with the Company's ability
to make, use or sell its products either in the United States or in
international markets. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference proceedings declared by the USPTO to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Any such suit or proceeding involving the
Company could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Patents and
Intellectual Property Protection."
Future Capital Needs; Uncertainty of Additional Funding. The Company
intends to continue to invest heavily in the development of new products and
enhancements to its existing products. The Company's future liquidity and
capital requirements will depend upon numerous factors, including the costs and
timing of expansion of product development efforts and the success of these
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which the Company's existing and new products gain
market acceptance, competing technological and market developments, the costs
involved in maintaining and enforcing patent claims and other intellectual
property rights, the level and timing of license revenue, available borrowings
under line of credit arrangements and other factors. The Company believes that
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."
31
32
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. See "Market for Registrant's Common Equity and Related
Stockholder Matters -- Price Range of Common Stock."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the independent accountants' report
appear on pages F-1 through F-18 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
32
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item concerning the Company's directors is
incorporated by reference to the sections captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's proxy statement relating to the Annual Meeting of Stockholders to be
held February 17, 2000 to be filed by the Company with the Securities and
Exchange Commission within 120 days of the end of the Company's fiscal year
pursuant to General Instruction G(3) of Form 10-K (the "Proxy Materials").
Certain information required by this item concerning executive officers is set
forth in Part I of this Report under the caption "Business -- Executive
Officers" and certain other information required by this item is incorporated by
reference from the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in the Proxy Materials.
ITEM 11. EXECUTIVE COMPENSATION
The Information required by this item is incorporated by reference to the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Materials.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
sections captioned "Record Date and Principal Share Ownership" contained in the
Proxy Materials.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
sections captioned "Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions" contained in the Proxy Materials.
33
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are incorporated by reference in Item 8
of this Report:
DESCRIPTION PAGE
----------- ----
Index to Financial Statements............................... F-1
Report of Independent Accountants........................... F-2
Balance Sheets at September 30, 1999 and 1998............... F-3
Statements of Operations for the years ended September 30,
1999, 1998 and 1997....................................... F-4
Statements of Stockholders' Equity for the years ended
September 30, 1999, 1998 and 1997......................... F-5
Statements of Cash Flows for the years ended September 30,
1999, 1998 and 1997....................................... F-6
Notes to Financial Statements............................... F-7
(a)(2) Financial Statement Schedules
DESCRIPTION PAGE
----------- ----
Schedule II -- Valuation and Qualifying Accounts and
Reserves.................................................... S-1
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the financial statements or notes thereto.
(a)(3) Exhibits
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.3* Bylaws of the Registrant.
4.2* First Amended and Restated Registration Rights Agreement
dated December 17, 1996 by and among the Registrant and the
Shareholders named therein.
10.1* Form of Indemnification Agreement for directors and
executive officers.
10.2* 1993 Stock Option Plan and form of agreement thereunder.
10.3* 1997 Employee Stock Purchase Plan.
10.4* 1997 Director Stock Option Plan.
10.5* Lease Agreement dated December 13, 1995 between Registrant
and Spieker Properties, L.P. for 2077 Gateway Place, San
Jose, California office.
10.5.1* Sublease dated October 10, 1997 between the Registrant and
Unison Software, Inc.
10.5.2* First Addendum to Sublease dated October 14, 1997 between
the Registrant and Unison Software, Inc.
10.5.3* Fixed Asset Purchase Agreement dated October 10, 1997
between the Registrant and Unison Software, Inc.
10.6* Series A Preferred Stock Purchase Agreement dated March 21,
1996 by and among the Registrant and the Purchasers named
therein.
10.7*+ Purchase and License Agreement dated April 9, 1996 between
the Registrant and OKI Electric Industry Co., Ltd. And
amendments thereto.
10.8* Business Loan Agreement dated May 8, 1996 between the
Registrant and Union Bank of California, N.A. and
attachments thereto.
10.9* Offer Letter dated August 29, 1996 between the Registrant
and Jeffrey A. Lewis and letter amendment dated September 5,
1996 thereto.
34
35
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.10+* Collaboration Agreement dated December 4, 1996 between the
Registrant and SGS-THOMSON MICROELECTRONICS S.r.l.
10.11* Series B Preferred Stock Purchase Agreement dated December
17, 1996 by and among the Registrant and the Purchasers
named therein.
10.12+* OEM Agreement dated December 6, 1996 between the Registrant
and Synopsys, Inc.
10.13+* License Agreement dated June 16, 1997 between the Registrant
and Fujitsu Microelectronics, Inc.
10.14* Lease Agreement dated June 16, 1997 between Registrant,
Richard Bowling and Katherine Bowling for 1195 Bordeaux
Drive, Sunnyvale, California office.
10.15* Severance Agreement dated June 20, 1997 between the
Registrant and Robert D. Selvi.
10.16* Offer Letter dated July 31, 1997 between the Registrant and
Larry J. Fagg.
10.17** Confidential Mutual Release and Settlement Agreement
effective as of April 15, 1998 between the Registrant and
Daniel I. Rubin.
10.18** Form of License Agreement.
10.19+** License Agreement dated as of November 30, 1997 between the
Registrant and Taiwan Semiconductor Manufacturing
Corporation, as amended.
10.20 Commercial Lease Agreement dated December 1, 1999 by and
between the Registrant and The Dai-Tokyo Fire and Marine
Insurance Co., Ltd.
10.21 Commercial Lease Agreement dated December 1, 1999 by and
between the Registrant and Kenrick Investment Group.
21.1** Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
24.1 Power of Attorney (see page 36).
27.1 Financial Data Schedule.
- ---------------
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-41219) which was declared
effective on February 2, 1998.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.
** Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-50243) which was declared
effective on April 29, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the quarter
ended September 30, 1999.
35
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
ARTISAN COMPONENTS, INC.
By: /s/ MARK R. TEMPLETON
------------------------------------
Mark R. Templeton
President and Chief Executive
Officer
Dated: December 10, 1999
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature appears
below constitutes and appoints Mark R. Templeton and Scott T. Becker, jointly
and severally, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MARK R. TEMPLETON President and Chief December 10, 1999
- -------------------------------------------------------- Executive Officer
(Mark R. Templeton) (Principal Executive and
Financial and Accounting
Officer
/s/ DIXIE K. LOPES Acting Chief Financial December 10, 1999
- -------------------------------------------------------- Officer
(Dixie K. Lopes)
/s/ SCOTT T. BECKER Chief Technology Officer December 10, 1999
- -------------------------------------------------------- and Director
(Scott T. Becker)
/s/ LUCIO L. LANZA Chairman of the Board of December 10, 1999
- -------------------------------------------------------- Directors
(Lucio L. Lanza)
/s/ DR. ELI HARARI Director December 10, 1999
- --------------------------------------------------------
(Dr. Eli Harari)
36
37
ARTISAN COMPONENTS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
F-1
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Artisan Components, Inc.
In our opinion, the financial statements listed in the index appearing
under Item 14(a)(1) on page 34 present fairly, in all material respects, the
financial position of Artisan Components, Inc. at September 30, 1999 and 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended September 30, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
on page 34 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related financial statements. These
financial statements and financial statement schedule are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
October 25, 1999
F-2
39
ARTISAN COMPONENTS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
SEPTEMBER 30,
------------------
1999 1998
------- -------
Current assets:
Cash and cash equivalents................................. $15,233 $36,516
Contract receivables (net of allowance of $746 and $430 at
September 30, 1999 and 1998, respectively)............. 7,721 5,052
Marketable securities..................................... 32,948 10,688
Prepaid expenses and other current assets................. 1,514 1,350
Deferred tax asset........................................ 246 --
------- -------
Total current assets.............................. 57,662 53,606
Property and equipment, net................................. 6,133 5,387
Deferred tax asset.......................................... 361 82
Other assets................................................ 188 414
------- -------
Total assets...................................... $64,344 $59,489
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 3,255 $ 1,704
Deferred tax liability.................................... -- 976
Deferred revenue.......................................... 3,795 1,052
------- -------
Total current liabilities......................... 7,050 3,732
Deferred rent............................................... 98 53
Deferred revenue............................................ 76 165
------- -------
Total liabilities................................. 7,224 3,950
------- -------
Commitments (Note 8)
Stockholders' Equity:
Preferred Stock, $0.001 par value:
Authorized: 5,000 shares;
Issued and outstanding: None at September 30, 1999
and 1998.............................................. -- --
Common Stock, $0.001 par value:
Authorized: 50,000 shares;
Issued and outstanding: 13,909 and 13,368 shares at
September 30, 1999 and 1998, respectively............. 14 13
Additional paid in capital................................ 54,358 52,235
Retained earnings......................................... 2,748 3,291
------- -------
Total stockholders' equity........................ 57,120 55,539
------- -------
Total liabilities and stockholders' equity........ $64,344 $59,489
======= =======
The accompanying notes are an integral part of these financial statements.
F-3
40
ARTISAN COMPONENTS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30,
----------------------------
1999 1998 1997
------- ------- ------
Revenue:
License..................................................... $14,138 $16,568 $8,912
Net royalty............................................... 729 -- --
------- ------- ------
Total revenue..................................... 14,867 16,568 8,912
Cost and expenses:
Cost of revenue........................................... 5,957 4,962 2,855
Product development....................................... 4,631 3,580 1,955
Sales and marketing....................................... 5,105 4,030 2,019
General and administrative................................ 2,599 1,922 1,340
------- ------- ------
Total cost and expenses........................... 18,292 14,494 8,169
------- ------- ------
Operating (loss) income..................................... (3,425) 2,074 743
Other income, net........................................... 2,024 1,175 297
------- ------- ------
(Loss) income before provision for income taxes............. (1,401) 3,249 1,040
(Benefit) provision for income taxes........................ (858) 923 356
------- ------- ------
Net (loss) income........................................... $ (543) $ 2,326 $ 684
======= ======= ======
Basic net (loss) income per share........................... $ (0.04) $ 0.22 $ 0.13
======= ======= ======
Diluted net (loss) income per share......................... $ (0.04) $ 0.18 $ 0.07
======= ======= ======
Shares used in computing:
Basic net (loss) income per share......................... 13,569 10,457 5,456
======= ======= ======
Diluted net (loss) income per share....................... 13,569 12,917 9,657
======= ======= ======
The accompanying notes are an integral part of these financial statements.
F-4
41
ARTISAN COMPONENTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- --------------- PAID IN RETAINED
SHARES AMOUNT SHARES AMOUNT WARRANT CAPITAL EARNINGS TOTAL
------ ------- ------ ------ ------- ---------- -------- -------
Balance at September 30, 1996...... 2,264 $ 3,478 5,114 $ 5 -- $ 528 $ 281 $ 4,292
Options exercised.................. -- -- 510 1 -- 16 -- 17
Issuance of Series B Preferred
Stock, net of issuance costs of
$19............................ 1,122 4,086 -- -- -- -- -- 4,086
Issuance of Common Stock to
employees as a stock bonus..... -- -- 20 -- -- 103 -- 103
Compensation expense for options
granted........................ -- -- -- -- -- 41 -- 41
Issuance of Warrant.............. -- -- -- -- $ 125 -- -- 125
Net income....................... -- -- -- -- -- -- 684 684
------ ------- ------ --- ----- ------- ------ -------
Balance at September 30, 1997...... 3,386 $ 7,564 5,644 $ 6 $ 125 $ 688 $ 965 $ 9,348
Common Stock issued upon
conversion of Series A and
Series B Preferred Stock....... (3,386) (7,564) 3,386 3 -- 7,561 -- --
Common Stock issued upon exercise
of warrant..................... -- -- 50 -- (125) 313 -- 188
Common Stock issued upon initial
public offering................ -- -- 3,015 3 -- 27,083 -- 27,086
Common Stock issued upon
secondary offering............. -- -- 956 1 -- 15,846 -- 15,846
Options exercised................ -- -- 271 -- -- 78 -- 78
Common Stock issued pursuant to
employee stock purchase plan... -- -- 46 -- -- 391 -- 391
Compensation expense for options
granted........................ -- -- -- -- -- 80 -- 80
Tax benefit for disqualifying
dispositions................... -- -- -- -- -- 196 -- 196
Net income....................... -- -- -- -- -- -- 2,326 2,326
------ ------- ------ --- ----- ------- ------ -------
Balance at September 30, 1998...... -- $ -- 13,368 $13 $ -- $52,235 $3,291 $55,539
Options exercised................ -- -- 372 1 -- 798 -- 799
Common Stock issued pursuant to
employee stock purchase plan... -- -- 169 -- -- 806 -- 806
Compensation expense for options
granted........................ -- -- -- -- -- 87 -- 87
Tax benefit for disqualifying
dispositions................... -- -- -- -- -- 432 -- 432
Net loss......................... -- -- -- -- -- -- (543) (543)
------ ------- ------ --- ----- ------- ------ -------
Balance at September 30, 1999...... -- $ -- 13,909 $14 $ -- $54,358 $2,748 $57,120
====== ======= ====== === ===== ======= ====== =======
The accompanying notes are an integral part of these financial statements.
F-5
42
ARTISAN COMPONENTS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
-------------------------------
1999 1998 1997
-------- -------- -------
Cash flows from operating activities:
Net (loss) income........................................... $ (543) $ 2,326 $ 684
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization.......................... 2,359 1,845 777
Gain on sale/disposal of fixed assets.................. (78) (82) --
Provision for doubtful accounts........................ 316 155 275
Issuance of Common Stock to employees as a stock
bonus................................................ -- -- 103
Compensation expense for options granted............... 87 80 41
Changes in assets and liabilities:
Contract receivables................................. (2,985) (2,373) (2,277)
Deferred revenue..................................... 2,743 (217) 1,107
Prepaid expenses and other assets.................... (58) (1,116) (267)
Deferred rent........................................ 45 4 34
Deferred taxes....................................... (1,183) 516 243
Accounts payable and other liabilities............... 1,641 941 37
-------- -------- -------
Net cash provided by operating activities......... 2,344 2,079 757
-------- -------- -------
Cash flows from investing activities:
Acquisition of property and equipment.................. (3,092) (3,128) (3,389)
Proceeds from sale of property and equipment........... 120 110 --
Purchase of marketable securities...................... (49,443) (11,498) (5,692)
Proceeds from sales of marketable securities........... 27,183 4,295 4,456
-------- -------- -------
Net cash used in investing activities............. (25,232) (10,221) (4,625)
-------- -------- -------
Cash flows from financing activities:
Net proceeds from issuance of Series B Preferred Stock and
Warrant................................................ -- -- 4,211
Proceeds from issuance of Common Stock.................... 1,605 43,589 17
-------- -------- -------
Net cash provided by financing activities......... 1,605 43,589 4,228
-------- -------- -------
Net (decrease)increase in cash and cash equivalents......... (21,283) 35,447 360
Cash and cash equivalents, beginning of period.............. 36,516 1,069 709
-------- -------- -------
Cash and cash equivalents, end of period.................... $ 15,233 $ 36,516 $ 1,069
======== ======== =======
CASH PAID FOR:
Income taxes.............................................. $ 2 $ 370 $ 2
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Fixed asset acquisitions in exchange for accounts
payable.............................................. $ 24 $ 163 $ 384
======== ======== =======
Issuance of Common Stock to employees as a stock
bonus................................................ $ -- $ -- $ 103
======== ======== =======
Compensation expense for options granted............... $ 87 $ 80 $ 41
======== ======== =======
Tax benefits from disqualifying dispositions of Common
Stock................................................ $ 432 $ 196 $ --
======== ======== =======
The accompanying notes are an integral part of these financial statements.
F-6
43
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Artisan Components, Inc. ("Artisan" or the "Company") 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and to
disclose contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
REVENUE AND COST OF REVENUE
Revenue consists of license fees and net royalties. License fees are
received under the terms of license agreements with customers to provide the
Company's IP component products which are customized to each customer's
manufacturing process. IP component products consist of data and/or software and
related documentation which enables a customer to design and manufacture complex
ICs. The software, if any, included in the Company's IP component products is
incidental. The purpose of the license is to permit the customer to use the
Company's IP in connection with the design and manufacture of the customers'
products. The customization of the IP component products generally takes up to
six months to complete and the customer obtains ownership rights to the
in-process customization as well as the completed customization. The license
period is typically twenty years. Under the terms of a typical license
agreement, a portion of the fees are paid on signing of the agreement with the
final payment due within 30 days of completion of customization. The Company
warrants that the licensed products shall be free from defects and conform to
customer's specifications. In addition, the Company generally provides
telephonic and e-mail support to its customers through the warranty period,
which is typically 90 days. In some instances, the Company has agreed to provide
limited support beyond the warranty period, although the Company believes its
products are not support intensive and the experience to date would indicate
such support requires a relatively minor resource commitment. Customers are also
able to purchase support contracts that provide for a continuation of the
telephonic and e-mail support mentioned above. No upgrades or modifications to
the licensed product are provided under these contracts. Other than warranty and
ongoing product support, the Company has no further obligations subsequent to
completion of the customization. Revenue from license fees is recognized based
on the percentage of completion method over the period that the Company
completes customization for the majority of the Company's contracts. Under
certain contracts where the costs cannot be estimated, the completed contract
method is utilized whereby revenue and costs are recognized when the Company
completes customization. Under the percentage of completion and completed
contract methods, provisions for estimated losses on uncompleted contracts are
recognized in the period in which the likelihood of such losses is determined.
Royalties are calculated based on production volumes of silicon which
contain the Company's IP. License agreements dictate royalty reporting by each
customer on either a per-chip or per-wafer basis. Of the royalties reported, a
portion is recognized by the Company as net royalty revenue and a portion is
reserved for the customer to use toward future license purchases from the
Company.
F-7
44
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Cost of license revenue is primarily comprised of salaries and benefits of
employees assigned to customization contracts, is allocated based on the amount
of time devoted to each contract by the employees and includes an accrual for
warranty and product support costs.
PRODUCT DEVELOPMENT
Product development expenses are charged to operations as incurred.
EARNINGS PER SHARE ("EPS")
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at date of acquisition to be cash equivalents.
The Company maintains its cash and cash equivalents in accounts with three major
financial institutions.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale securities and
are carried at fair value, based on quoted market prices, with the unrealized
gains or losses, net of tax, reported in stockholders' equity. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity, both of which are included in interest income.
Realized gains and losses are recorded using the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Property and equipment are depreciated on a straight line basis over their
respective estimated useful lives of three to five years. Leasehold improvements
are amortized on a straight line basis over the shorter of their respective
estimated useful lives or the terms of their respective leases. Upon disposal,
assets and related accumulated depreciation are removed from the accounts and
the related gain or loss is included in results from operations.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
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
F-8
45
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
Company has adopted SFAS 130; however, the effect of the adoption was immaterial
to all periods presented.
RECENT PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after December 15,
1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The adoption of SOP 98-1 is not
expected to have a material impact on the Company.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard
requires companies to expense the costs of start-up activities and organization
costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning
after December 15, 1998. The Company does not expect SOP 98-5 to impact the
Company's results of operations.
In June 1998, the Financial Accounting Standards Board 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. To date, the Company has not entered into any
derivative financial instruments or hedging activities. SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000.
3. BUSINESS RISKS AND CREDIT CONCENTRATION
The Company operates in an intensely competitive industry that has been
characterized by rapid technological change, short product life cycles, cyclical
market patterns and heightened foreign and domestic competition. Significant
technological changes in the industry could affect operating results adversely.
The Company markets and sells its technology to a narrow base of customers
and generally does not require collateral. At September 30, 1999, two customers
accounted for 36% and 24% of gross contract receivables. At September 30, 1998,
three customers accounted for 36%, 18% and 12%, respectively, of gross contract
receivables. As of September 30, 1999, the Company's cash and cash equivalents
were deposited with three major financial institutions in the form of demand
deposits, money market accounts, corporate bonds, certificates of deposit and
commercial paper. Financial instruments that potentially subject the Company to
concentrations of credit risk comprise principally cash and cash equivalents,
marketable securities and contract receivables. The Company invests its excess
cash primarily in high-quality corporate debt instruments that mature within one
year.
F-9
46
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CONTRACT RECEIVABLES
Contract receivables were comprised of the following (in thousands):
SEPTEMBER 30,
----------------
1999 1998
------ ------
Accounts receivable........................................ $5,391 $3,379
Unbilled contract receivables.............................. 3,076 2,103
------ ------
8,467 5,482
Allowance for doubtful accounts............................ (746) (430)
------ ------
$7,721 $5,052
====== ======
5. PROPERTY AND EQUIPMENT
Property and equipment were comprised of the following (in thousands):
SEPTEMBER 30,
------------------
1999 1998
------- -------
Computer equipment and software.......................... $ 8,036 $ 5,100
Office furniture......................................... 765 744
Leasehold improvements................................... 2,431 2,367
------- -------
11,232 8,211
Accumulated depreciation and amortization................ (5,099) (2,824)
------- -------
$ 6,133 $ 5,387
======= =======
6. MARKETABLE SECURITIES
Marketable securities, classified as available-for-sale securities,
included the following (in thousands):
SEPTEMBER 30,
------------------
1999 1998
------- -------
Short term investments:
Municipal government obligations......................... -- $10,686
======= =======
Corporate bonds, certificates of deposit and
commercial paper.................................... $32,948 --
======= =======
All short term investments have maturities of less than one year from the
respective balance sheet date. The cost of marketable securities approximates
fair value of the securities and there are no unrealized holding gains or
losses.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses were comprised of the following (in
thousands):
SEPTEMBER 30,
----------------
1999 1998
------ ------
Accounts payable........................................... $1,227 $ 368
Accrued expenses........................................... 1,015 689
Accrued compensation....................................... 831 596
Accrued warranty........................................... 182 51
------ ------
$3,255 $1,704
====== ======
F-10
47
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS
The Company rents its office facility in Sunnyvale under a noncancelable
operating lease that expires in 2004. Under the terms of the lease, the Company
is responsible for its share of taxes, insurance and common area maintenance
costs.
At September 30, 1999, future minimum annual lease payments under this
lease were as follows (in thousands):
Fiscal 2000......................................... $ 470
Fiscal 2001......................................... 490
Fiscal 2002......................................... 509
Fiscal 2003......................................... 529
and thereafter...................................... 549
------
$2,547
======
The Company continues to lease its previous office facility in San Jose
under a non-cancelable lease that expires in 2001. In October 1997, the Company
entered into a sublease arrangement with respect to the San Jose office
facility. This sublease expires in 2001 and provides that the subtenant assumes
the lease obligation of the Company.
Future minimum annual lease payments and future minimum annual rental
income with respect to the San Jose property are as follows (in thousands):
LEASE RENTAL
PAYMENT INCOME
------- ------
Fiscal 2000................................ $347 $347
Fiscal 2001................................ 148 148
---- ----
$495 $495
==== ====
Net rent expense was $524,000 and $511,000 and $442,000 for the fiscal
years ended September 30, 1999, 1998 and 1997, respectively.
On December 1, 1999, the Company entered into a non-cancelable operating
lease to lease a facility for its sales office in Tokyo, Japan. The lease term
is 24 months and future minimum lease payments (unaudited) under this agreement
are $94,160, $112,992 and $18,832 in fiscal years 2000, 2001 and 2002,
respectively.
On December 1, 1999, the Company entered into a non-cancelable operating
lease to lease a facility for its sales office in North Andover, Massachusetts.
The lease term is 12 months and future minimum lease payments (unaudited) under
this agreement are $15,400 and $3,080 in fiscal years 2000 and 2001,
respectively.
9. STOCKHOLDERS' EQUITY
AUTHORIZED PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of undesignated
preferred stock, $0.001 par value per share, of which no shares were issued and
outstanding as of September 30, 1999 and 1998. Preferred stock may be issued
from time to time in one or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges and restrictions granted to and
imposed upon any wholly unissued series of preferred stock and to fix the number
of shares of any series of preferred stock and the designation of any such
series without any vote or action by the Company's stockholders.
F-11
48
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
STOCK OPTION PLANS
The Company had reserved 4,291,396 shares of its Common Stock under its
1993 Stock Option Plan, as amended (the "1993 Plan") for issuance upon the
exercise of incentive and nonstatutory stock options to employees, directors and
consultants as of September 30, 1999. The 1993 Plan expires in 2003. The 1993
Plan provides for an automatic annual increase in the number of shares reserved
for issuance thereunder commencing on October 1, 1999 in an amount equal to the
lesser of (i) 1,000,000 shares, (ii) 5% of the outstanding shares on such date
or (iii) such amount as determined by the Board of Directors. Pursuant to such
mechanism, on October 1, 1999, the number of shares reserved for issuance under
the 1993 Plan was increased by 1,000,000 shares to a total of 5,291,396.
Incentive stock options may be granted with exercise prices of no less than fair
market value, and non-statutory stock options may be granted with exercise
prices of no less than 85% of the fair market value of the common stock on the
grant date, as determined by the Board of Directors. Options become exercisable
as determined by the Board of Directors but generally at a rate of 25% after the
first year and 6.25% each quarter thereafter. Options expire as determined by
the Board of Directors but not more than ten years after the date of grant. In
November 1997, the Company adopted the 1997 Director Option Plan (the "Director
Plan"). The Director Plan provides for the granting of options of up to 200,000
shares of Common Stock of the Company. The option grants under the Director Plan
are automatic and nondiscretionary, and the exercise price of the options is
100% of the fair market value of the Company's Common Stock on the date of
grant. The Director Plan provides for an initial grant of options to purchase
25,000 shares of Common Stock to each new nonemployee director. In addition,
each nonemployee director will automatically be granted an option to purchase
5,000 shares of Common Stock annually. Options granted under the Director Plan
become exercisable over a four year period with the 25,000 share grants vesting
one-fourth on the first anniversary of the date of grant and then monthly
thereafter and the 5,000 share grants vesting monthly. At September 30, 1999,
options to purchase a total of 60,000 shares of Common Stock were outstanding
under the Director Plan. The Director Plan expires in November 2008.
Activity under the 1993 Plan and the Director Plan was as follows (in
thousands except per share data):
WEIGHTED
OPTIONS OUTSTANDING AVERAGE
SHARES ------------------------------------ EXERCISE
AVAILABLE NUMBER PRICE PER PRICE
FOR GRANT OF SHARES SHARE TOTAL PER SHARE
--------- --------- -------------- ------- ---------
Balance at September 30, 1996.......... 592 1,086 $0.01 - $ 0.15 52 $0.0477
Additional shares reserved for
issuance............................... 400 -- -- -- --
Granted.............................. (831) 831 $0.15 - $ 5.00 2,165 $2.6052
Exercised............................ -- (510) $0.01 - $ 0.15 (17) $ 0.034
------ ----- -------
Balance at September 30, 1997.......... 161 1,407 $0.01 - $ 5.00 2,200 $1.5635
Additional shares reserved for
issuance.......................... 2,200 -- -- -- --
Granted.............................. (1,166) 1,166 $5.00 - $17.63 9,293 $7.9723
Exercised............................ -- (271) $0.01 - $ 7.00 (78) $0.2892
Canceled............................. 101 (101) $0.15 - $17.63 (547) $5.4375
------ ----- -------
Balance at September 30, 1998.......... 1,296 2,201 $10,868 $4.9371
Additional shares reserved for
issuance.......................... -- -- -- -- --
Granted.............................. (771) 771 $5.00 - $12.50 5,096 $6.6162
Exercised............................ -- (372) $0.01 - $ 7.00 (799) $2.1492
Canceled............................. 216 (216) $0.25 - $ 7.00 (1,120) $5.1828
------ ----- -------
Balance at September 30, 1999.......... 741 2,384 $14,045 $5.8925
====== ===== ======= =======
At September 30, 1999, 1998 and 1997, options to purchase 801,309, 450,692,
and 291,011 shares of Common Stock, respectively, were exercisable pursuant to
the 1993 Plan and the Director Plan. The weighted
F-12
49
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
average remaining contract life was 7.9, 8.2, and 8.9 years as of September 30,
1999, 1998 and 1997, respectively.
The options outstanding and currently exercisable by exercise price at
September 30, 1999 are as follows (in thousands, except per share data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- --------- -------- ----------- --------
$0.01 - $0.25........ 426 6.67 $ 0.13 302 $ 0.13
$2.00 - $5.00........ 264 7.85 $ 4.59 141 $ 4.59
$5.06 - $7.00........ 1,158 8.82 $ 6.25 224 $ 6.95
$7.70 - $8.44........ 259 4.27 $ 7.81 82 $ 7.70
$9.06 - $17.13....... 277 9.13 $12.74 52 $13.94
----- ---
2,384 7.87 $ 5.89 801 $ 4.49
===== ===
The fair value of option grants related to the above plans is estimated on
the date of grant using the Black-Scholes pricing model with the following
assumptions for the years ended September 30, 1999, 1998 and 1997:
1999 1998 1997
------- ------- -------
Risk-free interest rate......................... 5.03% 5.37% 6.25%
Expected average life........................... 5 years 5 years 5 years
Expected dividends.............................. -- -- --
Expected volatility............................. 93% 79% 0%
The expected average life is based upon the assumption that the stock
options, on average, are exercised one year after they are fully vested. The
weighted average per share value of common stock options granted during fiscal
1999, 1998 and 1997 was $4.88, $5.20 and $0.92, respectively.
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 have been amortized during fiscal
1997, 1998 and 1999, respectively. In addition, the amortization will result in
charges in the first quarter of fiscal 2000 of approximately $21,000 and charges
of $11,000 per quarter for the following five quarters.
EMPLOYEE STOCK PURCHASE PLAN
In November 1997, the Company adopted the 1997 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 600,000 shares of common stock for issuance
under the Purchase Plan. In November 1998, 133,810 incremental shares were
reserved for issuance under the Purchase Plan. The Purchase Plan authorizes the
granting of stock purchase rights to eligible employees during two-year offering
periods with exercise dates approximately every six months. The first offering
period commenced in February 1998 and ended on July 31, 1998. Shares are
purchased through employee payroll deductions at purchase prices equal to 85% of
the lesser of the fair market value of the Company's Common Stock at either the
first day of each offering period or the date of purchase. As of September 30,
1999, 215,447 shares had been issued under the Purchase Plan at an average price
of $5.55 per share.
F-13
50
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The estimated fair value of purchase rights under the Company's Purchase
Plan is determined using the Black-Scholes pricing model with the following
assumptions for the year ended September 30, 1998:
1999 1998
---------- ----------
Risk-free interest rate.............................. 4.94% 5.25%
Expected average life................................ 0.62 years 0.74 years
Expected dividends................................... -- --
Expected volatility.................................. 89% 79%
The weighted average per share fair value of purchase rights under the
Purchase Plan during fiscal 1999 and 1998 was $3.37 and $4.23, respectively.
STOCK COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for the 1993 Plan or the Purchase Plan. Had compensation expense been determined
at the fair value on the grant dates for awards under the plans consistent with
the method of SFAS No. 123, the Company's net (loss) income in fiscal 1999, 1998
and 1997 would have been reduced to the pro forma amounts indicated below (in
thousands):
YEAR ENDED SEPTEMBER 30,
--------------------------
1999 1998 1997
------- ------ -----
Net (loss) income
As reported...................................... $ (543) $2,326 $ 684
Pro forma...................................... $(2,903) $ 831 $ 658
Net (loss) income per share
As reported
Basic (loss) income per share............... $ (0.04) $ 0.22 $0.13
Diluted (loss) income per share............. $ (0.04) $ 0.18 $0.07
Pro forma
Basic (loss) income per share............... $ (0.21) $ 0.08 $0.12
Diluted (loss) income per share............. $ (0.21) $ 0.06 $0.07
The effects of SFAS No. 123 on pro forma disclosures of net (loss) income
and net (loss) income per share for fiscal 1999, 1998 and 1997 are not likely to
be representative of the pro forma effects on net income and earnings per share
in future years.
F-14
51
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The (benefit) provision for income taxes comprised (in thousands):
1999 1998 1997
----- ---- ----
Federal:
Current.............................................. $ 180 $126 $ --
Deferred........................................... (983) 403 181
----- ---- ----
(803) 529 181
State:
Current............................................ 1 42 --
Deferred........................................... (200) 113 49
----- ---- ----
(199) 155 49
Foreign:
Current............................................ 144 239 126
----- ---- ----
Total...................................... $(858) $923 $356
===== ==== ====
The Company's effective tax rate on pretax (loss) income differed from the
U.S. federal statutory regular tax rate as follows:
1999 1998 1997
----- ---- ----
Provision at U.S. federal statutory rate.......... (34.0)% 34.0% 34.0%
State tax net of federal benefit.................. (9.3) 4.3 4.2
Research and experimentation credits.............. (6.0) (4.0) (4.0)
Tax exempt interest............................... (16.8) (9.9) --
Other............................................. 4.9 4.0 --
----- ---- ----
Effective tax rate................................ (61.2)% 28.4% 34.2%
===== ==== ====
F-15
52
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities as of September 30 were as
follows (in thousands):
1999 1998
------- -------
DEFERRED TAX ASSETS:
Current:
Net operating losses................................... $ 374 $ 67
Research and experimentation credits................... -- 213
Foreign tax credits.................................... -- 239
Other credits.......................................... 275 --
------- -------
649 519
Non current:
Research and experimentation credits................... 473 --
Accruals and Reserves.................................. 40 --
Foreign tax credits.................................... 383 --
Depreciation and amortization.......................... 270 82
------- -------
1,166 82
DEFERRED TAX LIABILITIES:
Current:
Accrual to cash conversion............................. (403) (1,495)
Non current:
Accrual to cash conversion............................. (805) --
------- -------
(1,208) (1,495)
------- -------
Net deferred tax asset (liability)....................... $ 607 $ (894)
======= =======
As of September 30, 1999, the Company had federal and state net operating
loss carryforwards ("NOLs") of approximately $1,090,000 and $55,000,
respectively, available to offset future taxable income. The Company had federal
and state credits of $762,000 and $94,000, respectively. The net operating loss
and credit carryforwards expire between 2004 and 2019 if not utilized.
11. SEGMENT REPORTING
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS 131") "Disclosure about Segments of an Enterprise and Related
Information" effective for fiscal years beginning after December 31, 1997. The
Company operates in one industry segment. Management uses one measurement of
profitability for its business.
F-16
53
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The distribution of revenues by geographic area was as follows (in
thousands):
YEAR ENDED SEPTEMBER 30,
----------------------------
1999 1998 1997
------- ------- ------
REVENUE FROM UNAFFILIATED CUSTOMERS:
United States.................................. $ 4,940 $ 2,726 $2,376
Other North America............................ 593 1,250 547
Europe......................................... 1,389 2,567 511
Italy.......................................... 82 1,281 2,362
Japan.......................................... 2,039 4,588 2,666
Taiwan......................................... 4,718 4,156 450
Asia........................................... 1,106 -- --
------- ------- ------
$14,867 $16,568 $8,912
======= ======= ======
Revenue from individual customers equal to 10% or more of revenue was as
follows (in thousands, except percent data):
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
------- ------ ------- ------ ------- ------
A. ............................. -- -- -- -- 27% $2,362
B. ............................. 25% $3,715 -- -- 13 1,145
C. ............................. -- -- 11% $1,889 16 1,388
D. ............................. -- -- -- -- 24 2,167
E. ............................. 19 2,820 14 2,284 -- --
F. ............................. 13 1,875 11 1,845 -- --
G. ............................. 14 2,083 -- -- -- --
12. BENEFIT PLAN
The Company sponsors a 401(k) profit sharing plan (the "401(k) Plan") for
substantially all employees. The 401(k) Plan provides for profit sharing
contributions to be made at the discretion of the Company's Board of Directors.
The Company did not elect to make a profit sharing contribution for fiscal 1999,
1998 or 1997.
The 401(k) Plan also provides for elective employee salary reduction
contributions and Company matching of employees' contributions. Employees may
contribute up to 20% of elective compensation. The Company's matching
contribution is at the discretion of the Company's Board of Directors. The
Company's matching contributions were $138,857, $136,664 and $74,017 for fiscal
1999, 1998 and 1997, respectively.
F-17
54
ARTISAN COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. EARNINGS PER SHARE
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts).
YEAR ENDED SEPTEMBER 30,
----------------------------
1999 1998 1997
------- ------- ------
Numerator -- Basic and Diluted EPS
Net (loss) income.............................. $ (543) $ 2,326 $ 684
======= ======= ======
Denominator -- Basic EPS
Common stock outstanding..................... 13,569 10,457 5,456
------- ------- ------
Basic (loss) income per share.................. $ (0.04) $ 0.22 $ 0.13
======= ======= ======
Denominator -- Diluted EPS
Denominator -- Basic EPS..................... 13,569 10,457 5,456
Effect of Dilutive Securities:
Common stock options...................... -- 1,279 1,052
Warrant................................... -- 12 --
Convertible preferred stock............... -- 1,169 3,149
------- ------- ------
13,569 12,917 9,657
------- ------- ------
Diluted (loss) income per share................ $ (0.04) $ 0.18 $ 0.07
======= ======= ======
F-18
55
ARTISAN COMPONENTS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
Allowance for Doubtful Accounts:
September 30, 1997............................ $ -- $275 $ -- $275
September 30, 1998.......................... 275 155 -- 430
September 30, 1999.......................... 430 394 (78) 746
S-1
56
EXHIBIT INDEX
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.3* Bylaws of the Registrant.
4.2* First Amended and Restated Registration Rights Agreement
dated December 17, 1996 by and among the Registrant and the
Shareholders named therein.
10.1* Form of Indemnification Agreement for directors and
executive officers.
10.2* 1993 Stock Option Plan and form of agreement thereunder.
10.3* 1997 Employee Stock Purchase Plan.
10.4* 1997 Director Stock Option Plan.
10.5* Lease Agreement dated December 13, 1995 between Registrant
and Spieker Properties, L.P. for 2077 Gateway Place, San
Jose, California office.
10.5.1* Sublease dated October 10, 1997 between the Registrant and
Unison Software, Inc.
10.5.2* First Addendum to Sublease dated October 14, 1997 between
the Registrant and Unison Software, Inc.
10.5.3* Fixed Asset Purchase Agreement dated October 10, 1997
between the Registrant and Unison Software, Inc.
10.6* Series A Preferred Stock Purchase Agreement dated March 21,
1996 by and among the Registrant and the Purchasers named
therein.
10.7*+ Purchase and License Agreement dated April 9, 1996 between
the Registrant and OKI Electric Industry Co., Ltd. And
amendments thereto.
10.8* Business Loan Agreement dated May 8, 1996 between the
Registrant and Union Bank of California, N.A. and
attachments thereto.
10.9* Offer Letter dated August 29, 1996 between the Registrant
and Jeffrey A. Lewis and letter amendment dated September 5,
1996 thereto.
10.10+* Collaboration Agreement dated December 4, 1996 between the
Registrant and SGS-THOMSON MICROELECTRONICS S.r.l.
10.11* Series B Preferred Stock Purchase Agreement dated December
17, 1996 by and among the Registrant and the Purchasers
named therein.
10.12+* OEM Agreement dated December 6, 1996 between the Registrant
and Synopsys, Inc.
10.13+* License Agreement dated June 16, 1997 between the Registrant
and Fujitsu Microelectronics, Inc.
10.14* Lease Agreement dated June 16, 1997 between Registrant,
Richard Bowling and Katherine Bowling for 1195 Bordeaux
Drive, Sunnyvale, California office.
10.15* Severance Agreement dated June 20, 1997 between the
Registrant and Robert D. Selvi.
10.16* Offer Letter dated July 31, 1997 between the Registrant and
Larry J. Fagg.
10.17** Confidential Mutual Release and Settlement Agreement
effective as of April 15, 1998 between the Registrant and
Daniel I. Rubin.
10.18** Form of License Agreement.
10.19+** License Agreement dated as of November 30, 1997 between the
Registrant and Taiwan Semiconductor Manufacturing
Corporation, as amended.
10.20 Commercial Lease Agreement dated December 1, 1999 by and
between the Registrant and The Dai-Tokyo Fire and Marine
Insurance Co., Ltd.
10.21 Commercial Lease Agreement dated December 1, 1999 by and
between the Registrant and Kenrick Investment Group.
21.1** Subsidiaries of the Registrant
57
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
24.1 Power of Attorney (see page 36).
27.1 Financial Data Schedule.
- ---------------
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-41219) which was declared
effective on February 2, 1998.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.
** Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-50243) which was declared
effective on April 29, 1998.