Simplex Solutions Form 10-K 9/30/01

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the 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. þ

The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the Registrant, as of December 13, 2001, was approximately $266,000,000 based upon the last sale price reported for such date on The Nasdaq National Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily conclusive.

As of December 13, 2001, 15,234,470 shares of the registrant’s Common Stock, $0.001 par value, were outstanding.

The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on February 14, 2002 is incorporated by reference in Part III of this Form 10-K to the extent stated herein.

Unless the context indicates otherwise, the terms “we,” “us,” “our,” “the Company,” or “Simplex” refer to Simplex Solutions, Inc. a Delaware corporation.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of federal securities laws. These statements relate to our, and in some cases our customers’ or partners’, future plans, objectives, expectations, intentions and financial performance, and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to, statements regarding the benefits obtainable by use of our products and services, our intentions to introduce newer software products, our intentions to expand our design capacity, the design and performance improvements obtainable by the X Architecture, our intentions to expand our industry-partner and integration relationships, our intentions to acquire strategic technology, the ability of our software and services to enable our customers to achieve first-time production success, our expectations relating to seasonal variations in our revenue, our expectations for revenue outside of North America to continue to be significant, our expectations for demand for our existing products to increase from technological advances, our expectations relating to adequacy of cash resources, our expectations to invest in research and development, our expectations for growth in personnel to continue, our expectations regarding employee compensation, our expectations to invest in new areas of our business, our expectations to make investments in complementary companies, products and technologies, our continued dependency on a small number of customers, our continued effort to promote and support the X Initiative, our expectations regarding infringement claims including the Sequence lawsuit, and our anticipated increase in sales denominated in the Japanese yen and the euro. These forward-looking statements involve risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties, see the “Factors That May Affect Future Results of Operations” section of this Form 10-K. We undertake no obligation to update these forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.

The stockholder communication document accompanying this Annual Report on Form 10-K contains forward-looking statements within the meaning of federal securities laws. These statements relate to our, and in some cases our customers’ or partners’, future plans, objectives, expectations, intentions and financial performance, and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to, statements regarding the ability of our software and services to achieve first-silicon success, the benefits and advantages obtainable by use of our products and services, the design and performance improvements resulting from the X Architecture, the future production of chips using X Architecture, our plans to make X Architecture chips available and our continued effort to promote and support the X Initiative. These forward-looking statements involve risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties, see the “Factors That May Affect Future Results of Operations” section of this Form 10-K. We undertake no obligation to update these forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.

Fire & Ice are registered trademarks and Simplex Solutions, the Simplex logo, VoltageStorm, ElectronStorm, ClockStorm, SI Report, First-Silicon Success, SoC Design Foundry, 3D Adaptive Analytical Extraction, SubstrateStorm and COSMIC are trademarks of Simplex Solutions, Inc. or its subsidiaries.

We provide software and services for the design and verification of integrated circuits to enable our communications, computer and consumer products customers to achieve first-time production success and rapid delivery of complex system-on-chip semiconductors. A system-on-chip is an integrated circuit that includes the computing, memory and communications components that previously had been available only on separate chips. Our customers use our products and services prior to manufacture to design and verify the integrated circuits to help ensure that the integrated circuits will perform as intended, taking into account the complex effects of deep submicron semiconductor physics.

Simplex Solutions, Inc. was incorporated in Delaware in April 1995. Our principal executive offices are located at 521 Almanor Avenue, Sunnyvale, California 94085. Our telephone number is (408) 617-6100. Our website can be found at www.simplex.com.

Advances in the communications and electronics industries have stimulated consumer and business demand for communications and networking equipment, desktop computers, handheld computing wireless devices and other semiconductor-powered products. Demand for system-on-chip semiconductors is increasing dramatically as manufacturers seek to remain competitive by rapidly introducing products with higher performance, lower cost and smaller size.

Successful development and commercialization of system-on-chip designs require the design and manufacture of integrated circuits with extremely small features, or geometries. Feature size, which is measured in millionths of a meter, or microns, refers to the size of physical structures that underlie a semiconductor device’s transistors and the wires, or interconnect, that connect these transistors. The configuration of the transistors and interconnect together make up the chip’s geometry.

Advances in chip manufacturing technology have reduced feature sizes from 3.0 micron in 1980 to 0.18 micron and below in today’s advanced semiconductors. Integrated circuit geometries at or below 0.18 micron are commonly referred to as deep submicron geometries. Reductions in feature size make it possible to increase the number of transistors on each chip dramatically, producing corresponding increases in integrated circuit computing power and functionality.

Designing system-on-chip with geometries at 0.18 micron and below presents major challenges both to designers and to traditional design software, making it extremely difficult to build chips that function as intended. As geometries shrink, chip devices and interconnect become so densely packed that the different components of a chip interact in unintended ways and impact the proper functioning of the whole chip. These unintended interactions, which are negligible at larger geometries and thus have traditionally been ignored in chip design, are particularly acute at geometries of 0.18 micron and below. As designs become more dense, accurate analysis, or modeling, of interconnect signal transmission becomes fundamental to first-time production success of complex integrated circuits.

The laws of semiconductor physics ultimately dictate an integrated circuit’s behavior. Yet, properly accounting for the effects of semiconductor physics at 0.18 micron and below represents a significant barrier to the successful manufacture of today’s deep submicron designs. Historically, chip design focused on modeling the electrical properties of transistors alone in order to predict chip performance and functionality, primarily because the effects of other components at larger geometries were negligible. However, due to the interrelated nature of electrical current flow across an integrated circuit’s transistors, interconnect and underlying silicon

Discontinuity Between Manufacturing Capability and Effective Design. The chip industry’s ability to manufacture integrated circuits at deep submicron geometries has surpassed designers’ ability to reliably deliver designs that function as intended once manufactured in such densely configured geometries. The continued move to deep submicron has had an inordinate impact on design and manufacturing process efficiency including, but not limited to:


	•	increasing the likelihood of prototype failure;

	•	diminishing the ability to predict chip performance;

	•	lowering manufacturing yield;

	•	decreasing the reliability of end-products used by customers over time; and

	•	increasing run-time for analysis and completion of complex designs.

To avoid these adverse effects, chip designers have increasingly recognized a need for improved design methodologies and enabling technologies that can analyze deep submicron effects on all of the chip’s components without sacrificing speed or accuracy. As a result, full-chip analysis has become critical due to the interrelated nature of electrical current flow across an integrated circuit’s transistors, interconnect and underlying silicon structure. Segmented analyses of separate system-on-chip components and regions are frequently too inaccurate to ensure that new integrated circuits will be fully operational when manufactured.

Trend of Market Disaggregation. The semiconductor industry is comprised of three major segments: system design, silicon engineering and semiconductor manufacturing. Over the last ten years, the semiconductor industry has been disaggregating these activities. In the early stages of this disaggregation, many companies began to outsource semiconductor manufacturing, focusing instead on system design and silicon engineering, also referred to as design implementation, in an effort to reduce the costs and risks associated with increasingly complex semiconductor fabrication. This outsourcing of semiconductor manufacturing led to the rise of silicon foundries, which concentrate exclusively on the manufacture of semiconductor chips. As the complexities of designing a system-on-chip increase, many semiconductor companies have chosen to outsource silicon engineering as well. This trend towards outsourcing design implementation is reflected in the emergence of design foundries, which aim to reduce the risk of designing complex chips under aggressive time-to-market constraints. As a result, today’s integrated circuits are created in concept by semiconductor and systems companies, implemented by design foundries and manufactured by silicon foundries.

Time-to-Market Delays. In today’s increasingly competitive high-technology economy, the inability to launch products successfully and cost-effectively into narrow market windows can mean the success or failure of products, divisions and even companies. First-mover advantage in introducing new products can be vital to capturing dominant market share for a given product segment, making the efficiency of design and manufacturing processes critical to competitive positioning. Delays introduced by unanticipated design flaws can force product launch postponement or cancellation. Design decisions that cause chips to fail are frequently not identified until significant manufacturing resources have been committed. As deep submicron design becomes more prevalent, design companies are increasingly experiencing time-to-market delays along with an increased incidence of design flaws.

Increased Incidence of Design Flaws Identified after Manufacturing. The lack of accurate verification software used throughout the design and final testing, or sign-off verification, processes has increased the incidence of manufactured design flaws. Whether design flaws are evident upon initial manufacture or become evident over time with a product’s use, the costs associated with integrated circuit redesign and remanufacture are significant.

Managing the complexity of deep submicron effects has emerged as a critical barrier to the design and first-time production success of system-on-chip with the desired levels of performance. Advances in manufacturing technologies alone can no longer mitigate the increased risk of delayed system-on-chip product introduction or failure without corresponding advances in design technologies. As a result, the chip design industry must integrate advanced methodologies and software products that manage design complexity and that incorporate full-chip deep submicron effects into all aspects of their design process.

Our system-on-chip verification software and services are designed to provide comprehensive, high-speed verification that an integrated circuit will perform as designed, taking into account the complex effects of deep submicron semiconductor physics. Our design foundry services provide design implementation to help our customers achieve first-to-market delivery of system-on-chip designs. We believe our customers can gain a competitive advantage by using our products in advance of manufacture to verify that the chip design will perform as intended. The advantages of our platform, which stem from our expertise in chip design, computer science algorithms and software engineering, include the following key benefits:

Enabling Deep Submicron Chip Design and Manufacture. Our design technology is engineered to analyze deep submicron effects throughout an integrated circuit without sacrificing speed or accuracy. In the environment of increasingly complex chip designs and correspondingly increased system-on-chip design requirements, we believe that we enable electrical correctness throughout the full chip during the design process. Our modeling and analysis capabilities are designed to enable our customers to verify the integrity of their designs prior to completing the design process and manufacturing the chip. A number of chips designed with current technology fail without designers locating the cause of such fatal failures. We believe our products provide our customers with a competitive advantage in the design and delivery of high-performance chips.

Accelerating Time-to-Market. Using our products, we believe our customers can accelerate their time-to-market by incorporating deep submicron effects during the design cycle, not simply after the designs are released to manufacture, thus preventing unanticipated design and manufacture iterations. Our software and services help to provide customers with designs ready for production volume, thus avoiding a significant delay and the corresponding loss of revenue for the design supplier.

Lowering Cost per Chip. Designers using our products test their chip designs during the design cycle. Our software is designed to limit the number of iterations required to design a reliable chip, thereby decreasing both the production cost per chip and the opportunity cost of time spent redesigning instead of innovating.


	•	Comprehensive Platform for System-on-Chip Verification. We provide software products that model the entire semiconductor and help enable the delivery of designs with increased power integrity, timing integrity, signal integrity, and reliability. These products analyze complete system-on-chip designs without compromising speed or accuracy, enabling our customers to design and to test complex integrated circuits.

	•	High-Performance and High-Accuracy Verification. Our products have the capacity and speed to verify the full chip without partitioning it into smaller blocks. Without full-chip analysis, it is difficult to predict whether electricity will flow throughout a chip as intended. Our products also capture the higher accuracy of transistor-level models in the simpler gate-level analysis where transistors are grouped into blocks. Gate-level refers to the simplified representation of frequently used groups of transistors. As a result, we provide our customers with transistor-level accuracy at gate-level speeds.

	•	Advanced Design Services for System-on-Chip Implementation. We offer services designed to help our customers be first-to-market by delivering electrically correct integrated circuits. A combination of our verification and design software and proprietary design methodology enables our design team to complete complex system-on-chip designs, which have been verified for electrical correctness in advance of manufacture.


	•	Integrated Total Solution with Semiconductor Manufacturing Foundries. Anticipating the essential role physics would play in the chip design process, we were one of the first in the industry to create and to market an integration program with silicon foundries. Our program enables our research and development staff to work on site at silicon foundries to develop and to certify models of the foundries’ semiconductor processes. These models are then integrated with our existing software products for use by our customers who outsource their manufacturing to these foundries. Our program provides us with validation that our software is accurate and scalable. It also gives us a first-hand look at the manufacturers’ present and future technologies enabling us to focus our innovation in areas that will serve our customers’ needs. The resulting models are made available to our customers for use during system-on-chip design verification. To date, Chartered Semiconductor Manufacturing, IBM, NEC, Toshiba, Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and United MicroElectronics Corp. (UMC) are among the members of our integration program.

Our objective is to make our customers more successful by enabling them to design system-on-chip designs with ever decreasing geometries. In order to achieve this objective, we employ a number of strategies:

Broaden Customer Service Offering. Because we view the continuing disaggregation of the semiconductor industry as an opportunity for silicon engineering, we have begun complementing our verification software and services with design services. To implement this strategy, we acquired Altius Solutions, a system-on-chip design services company, in October 2000. We intend to provide our customers with a more complete solution for their design needs by combining design services, physical design, intellectual property and system-on-chip verification software.

Extend Market Leadership into Newer Products. We intend to use our leadership in system-on-chip verification markets to introduce newer software products to our customers. In our experience, once customers have adopted one of our verification products, they are more likely to adopt our other products.

Broaden Addressable Markets. We intend to expand our design capacity to develop broader market acceptance of our system-on-chip products and design services. As system-on-chip designs become more prevalent, both system-on-chip design and deep submicron physics expertise will become increasingly vital to the successful design of integrated circuits. We intend to leverage our expertise to help customers not only verify but also create new chip designs and design techniques. In addition, we anticipate that many companies will find it valuable to outsource design capability due to the high cost of keeping up with changing technology. In June 2001, we announced, along with our development partner, Toshiba Corporation, a new semiconductor architecture that we believe has the potential to deliver simultaneous improvements of 10+ percent greater chip performance, 20+ percent less power consumption, and 30+ percent more working chips per wafer. This new architecture, called the X Architecture, is the first to make possible the pervasive use of diagonal interconnects, or wiring, for advanced integrated circuits. We also announced our invention of the interconnect design technology, including our “liquid routing” technology, that enables the development of chips based on the new X Architecture.

Continue our Commitment to Quality and Customer Satisfaction. We focus on the development of high-quality software, and we have a strong emphasis on customer service. We believe our customer support services are highly regarded in the industry not only for our ability to integrate products from a variety of vendors, but also for our proactive working relationships with chip manufacturers and designers. We focus on the development of quality software without the need for additional development time. This Quality-on-Time^TM approach to software development is a key component to customer satisfaction with our software and services. Through our intensive focus on company-wide quality, our engineering and support resources have the freedom to devote more time and energy to innovation.

Advance and Develop Strategic Relationships. We intend to expand our industry-partner relationships with technology leaders to deliver to our customers further integration of the technologies and design capabilities critical to successful system-on-chip design and production. We intend to continue to develop relationships with leading semiconductor manufacturers for the next generation of our integration program. In

addition, we intend to expand our integration relationships with leading design tool vendors to provide customers with integrated software solutions using our products as well as the products of other vendors. To build an industry infrastructure for the X Architecture, Simplex and Toshiba co-founded the X Initiative consortium. Currently, there are 23 member companies, spanning the design-to-silicon supply chain from semiconductor intellectual property to integrated circuit manufacturing.

Pursue Strategic Acquisitions; Invest in Next-Generation Technology. We intend to acquire strategic technology that will broaden our product offerings into related markets or will expand or improve our customer solutions.

The adoption of geometries at 0.18 micron and below has widened the gap between the performance potential of chip manufacturing technology and the designers’ ability to create high-performance designs. Because preparing an integrated circuit design for manufacture is increasingly expensive and time-consuming, it has become even more critical to design with electrically correct methodology and to verify in advance that each chip, once manufactured, will work as specified. Further, the rapid emergence of system-on-chip design styles has introduced new requirements for design tools and methodologies that overcome the limitations of previously available solutions.

To satisfy these requirements, we create software models that capture the intricate details of semiconductor physics that are relevant to real-world integrated circuit designs. Our analysis tools then apply these models to a full chip, providing the designer with an accurate assessment of the expected performance and reliability of an integrated circuit before manufacturing. It is only by bridging the disparate disciplines of semiconductor physics, computer science and chip design that we have been able to develop our innovative technologies, and our strong emphasis on advanced software engineering methodologies has resulted in the rapid development of high-quality software products.

Semiconductor Physics. An integrated circuit’s behavior is ultimately dictated by the laws of semiconductor physics. The complexity of the interaction between different components of an integrated circuit increases with higher design speeds and increasingly dense geometries, and phenomena such as crosstalk, voltage drops, and noise become severe. The continuing, dramatic increase in the number of devices on a chip concomitantly increases the likelihood of deep submicron-related design failures.

Our technical staff has a significant breadth and depth of experience, both in industry and academia, at modeling semiconductor physics. Our expertise manifests itself in the correlation of our models to silicon. To keep our products and the designs we create at the forefront of semiconductor technology, we maintain close relationships with semiconductor manufacturers worldwide, providing us with ongoing access to the leading experts in the field and to the most advanced fabrication technologies.

Computer Science and Software Engineering. The rapidly rising complexity of today’s deep submicron integrated circuits can pose an overwhelming challenge to both the designer and traditional design software, making it extremely difficult to prevent chip failure. For example, the power grid on a typical chip today is more than ten times as complex as the power grids of just five or six years ago, and transistors now switch more than one billion times per second on the highest-performance chips. Even with today’s fast computers, accurately analyzing tens of millions of wires overnight can be very difficult. We address this problem through continual innovation in computer science. For example, our unique technologies for computational geometry, including the QIC Engine and our adaptive substrate grid, and our matrix solver provide high speed and capacity, while our adaptive analytical modeling technology provides high accuracy. Our extensive computer science expertise draws from disciplines as diverse as cartography, aeronautics, computational chemistry, statistics and electronics.

Chip Design and Manufacturing. The design and manufacture of today’s integrated circuits involves dozens of complex steps, each of which contains potential sources of error. A thorough understanding of each step and its consequence is necessary to design and verify deep submicron chips that work upon first manufacture. Our organization includes design engineers, software developers, salespeople, applications

The intersection of these three key disciplines, physics, software and design, is the foundation on which we have built and continue to build our diverse technologies. Our principal technologies and algorithms are listed below.

In today’s system-on-chip design methodology, the chip design flow involves the following steps:

System Design. In the system-level design phase, the designer specifies the architecture and overall design of an integrated circuit, partitioning the proposed system into hardware and software components and defining which hardware is appropriate.

Design Implementation. Design implementation is an implementation phase that maps the system design into a physical representation that can be manufactured. Once design implementation is complete, physical verification is necessary to ensure that the manufactured chip will function correctly.

SoC Verification. The system-on-chip verification, or SoC verification, step certifies that the results of design implementation are electrically correct for manufacturing.

Our verification software and services can be used to perform system-on-chip verification both concurrently during the design implementation and as part of the final verification procedures prior to semiconductor manufacturing. When used concurrently, system-on-chip verification software provides early feedback to the designers in order for them to reach deep submicron, or DSM, closure. DSM closure is the point in the deep submicron chip design cycle where deep submicron-related problems are corrected, and power integrity, timing integrity, signal integrity and reliability goals are met. Used in final verification procedures prior to semiconductor manufacturing, our system-on-chip verification software and services provide the last opportunity to ensure the integrity of the design before the expensive manufacturing process begins.

SoC verification consists of three major steps: technology characterization; interconnect, device, and silicon structure modeling; and the combination of power integrity, timing integrity, signal integrity and reliability analysis.

Technology Characterization. Our technology characterization constructs models by simulating the semiconductor process using highly accurate field solvers, which are high-resolution simulators of the physics of electromagnetic fields. This characterization step is an essential part of the process because it provides correlation between silicon and the software models used by the SoC verification software. This task is performed in close cooperation with the semiconductor manufacturers to benefit from the expertise of their process engineers.

Interconnect, Device and Silicon Structure Modeling. The electrical properties of the chip’s interconnect, devices and underlying silicon structure, or substrate, must be modeled in order to perform power integrity, timing integrity, signal integrity and reliability verifications. This modeling must be accurate for meaningful verification. Our modeling software is designed to simultaneously deliver the accuracy, speed and capacity required to create the models that describe the electrical behavior of integrated circuits.

Power Integrity. To verify whether electricity will flow as intended throughout the entire chip, it is essential to perform full-chip analysis with transistor-level accuracy. Our products are designed to model integrated circuits at the transistor level with the efficiency and performance of modeling them at the gate level. Gate level refers to a simplified representation of frequently used groups of transistors for faster analysis.

Timing Integrity. The timing integrity of complex integrated circuits with geometries at or below 0.18 micron is dictated by the performance of the interconnect. Timing analysis products, such as those provided by our interoperability partners, require the combination of accurate models of an integrated circuit’s interconnect with accurate delay calculation in order to predict chip timing behavior. By providing both transistor-level and gate-level interconnect modeling, we address the timing integrity needs of each segment of the semiconductor community.

Signal Integrity. Frequently, noise problems, or interference between signals, are incorrectly diagnosed as manufacturing problems as they can be intermittent, appearing only on certain chips when tested at certain operating speeds. Identifying and modeling noise propagation through complex integrated circuits is essential to ensure the performance and functionality of both mixed-signal and high-performance digital designs. Our signal integrity verification product is designed to perform a detailed, transistor-level analysis of the noise propagation through the interconnect and the underlying silicon structure, providing an accurate measure of circuit noise behavior. This technology is critical for radio-frequency, mixed-signal and high-end digital chip designs.

Reliability. The increasing operating frequencies of today’s integrated circuits, when combined with the reduction of power supply levels, introduce significant electromigration risks. Electromigration is an excessive wear of the interconnect, potentially resulting in breakage due to the high density of current flow. Identifying portions of the design where the current density is excessive and can cause reliability problems is an extremely complex task. The technologies in our reliability product are designed to analyze the complete current flows through both signal and supply wires, providing feedback to designers so they can improve design reliability.

We currently provide several products that address our customers’ system-on-chip design and verification needs. Since different customers encounter different combinations of challenges in their designs, we often provide integrated bundles of our various products and their options in an attempt to address their needs. These bundles are sold to customers in different configurations and at different price points, depending on a customer’s needs. Although customers frequently purchase these bundles, we have organized the component products in the table below by their estimated impact on fiscal 2001 revenue, ranging from largest to smallest.

Our products address the needs of system-on-chip design and verification as described in this table:

We provide services in addition to our software products to enable our customers to produce working chips while focusing primarily on system-level design. Reflecting our emphasis on customer satisfaction and proficiency in the use of our software products, we offer design and verification services to help our customers realize the full potential of our software, thereby increasing the adoption of our technology. We also offer design foundry services that aim to enable our customers to create their most complex, system-on-chip designs. We have organized the services in the table below in decreasing order of their strategic importance to the business.


	•	design and engineering services;

	•	microprocessor suppliers;

	•	embedded-memory manufacturers and designers;

	•	digital signal processor, or DSP, suppliers;

	•	application-specific integrated circuit, or ASIC, vendors;

	•	application-specific standard products, or ASSP;

	•	high-end graphics; and

	•	networking, wireless and communications systems.

Sony is both a customer of our software technology and design foundry services. As our largest customer, Sony accounted for approximately 22% of our total revenue in fiscal 2001.

Through our wide network of industry partners, we seek to ensure complete interoperability of our software products with those of our partners to facilitate faster adoption and increased ease of use.

Interoperability. We have interoperability alliances with Mentor Graphics Corp., Magma Design Automation, Monterey Design Systems, Silicon Perspective Corp., Cadence Design Systems and Synopsys. These alliance companies have entered into licensing arrangements with us for the sole purpose of development and testing interfaces to ensure compatibility. We work closely with the leading providers of complementary technologies to provide seamless integration with our products. These alliances range from interoperability programs, for validation of our products’ interoperability, to relationships through which customer-specific applications are jointly developed.

Foundry. We have developed relationships with Toshiba, IBM, NEC, TSMC, Chartered Semiconductor Manufacturing, and UMC. Our alliances with these leading foundries and semiconductor companies worldwide allows us to demonstrate the accuracy of our chip verification products by gaining access to silicon measurements of process parameters. By jointly developing and supporting accurate models of the most commonly-used semiconductor processes, we provide our mutual customers with validated verification products. Part of our close relationship with foundries revolves around our COSMIC test chip program.

COSMIC Program. Our COSMIC test chip program with semiconductor industry leaders creates standards for measurement and characterization of interconnect on silicon. Leading semiconductor vendors have successfully used our COSMIC standard to manufacture test chips and to validate the accuracy of our chip verification tools. To date, we have completed test chips with Chartered Semiconductor Manufacturing, IBM, NEC, TSMC and UMC.

Intellectual Property (IP) Partners. We have launched an IP Partners Program with ARM and Virtual Silicon Technology to provide power grid libraries for users of VoltageStorm SoC. Our partnerships with these leading IP companies allow customers to obtain transistor-accurate libraries of frequently used semiconductor IP such as processor cores and standard cell libraries. Our partners use our tools and support to create, validate and distribute these libraries to their customers who use VoltageStorm SoC.

X Initiative. In June 2001, at the same time as the announcement of the X Architecture, a revolutionary interconnect architecture based on the pervasive use of diagonal routing, we co-sponsored the formation of the X Initiative, a group of 23 leading companies from throughout the semiconductor industry, including:

The X Initiative supports a five-year program aimed at accelerating the availability and fabrication of the X Architecture. This consortium of leaders in semiconductor intellectual property, electronic design automation, integrated circuit design services, photomask production, and semiconductor equipment and manufacturing will pursue a three-pronged mission: provide an independent source of education about the X Architecture; facilitate support and fabrication of the X Architecture through the semiconductor industry supply chain; and survey usage of the X Architecture to track its adoption.

We sell and market our services primarily through a direct sales force. Our sales force consists of salespeople, pre-sales application engineers and post-sales application engineers. As of September 30, 2001, we had 69 sales and marketing employees of which 45 were located in the United States, 15 were located in Europe and 9 were located elsewhere. We intend to expand our direct sales organization to all major global markets; specifically, we intend to focus expansion in Europe and Asia.

We focus our marketing efforts on achieving brand recognition, market awareness and sales campaign support. We currently market our services through direct advertising and targeted events, including trade shows, conferences, technical publications and live and web-based seminars. Our current customers provide references, and we feature customer recommendations in our promotional activities.

From our inception through the first quarter of fiscal 1997, our operations were primarily focused on research and development related to the development of our early analysis and extraction products. In fiscal 2001, our research and development expenses were $12.6 million or 26% of revenue, excluding stock-based compensation and amortization of intangibles. In fiscal 2000, our research and development expenses were $5.0 million or 22% of revenue, excluding stock-based compensation and amortization of intangibles, and in 1999, our research and development expenses were $6.4 million or 59% of revenue. Including stock-based compensation and amortization of intangibles, our research and development expenses were $14.8 million or 31% of revenue in fiscal 2001, $5.3 million or 23% of revenue in fiscal 2000, and $6.4 million or 59% of revenue

in fiscal 1999. As of September 30, 2001, we had 81 employees in our research and development team of which 61 were located in the United States, 15 were located in Europe and 5 were located elsewhere. We have made use of modern networking and communications technologies to maintain close working relationships with our geographically remote developers, and we intend to continue recruiting developers worldwide. Research and development capabilities are essential to our strategy to enhance and expand our products and services. We have invested, and expect to continue to invest, significant resources in creating a structured process for undertaking all of our research and development and have recruited personnel with the appropriate computer science and software engineering experience. The complexity of system-on-chip design and verification at deep submicron levels requires expertise in semiconductor physics, computer science and software engineering, as well as chip design and manufacturing. We believe that the multidisciplinary expertise of our team of scientists and engineers will continue to advance our market and technological leadership.

We compete with suppliers of software for the design of integrated circuits. We believe that the key competitive factors in this market are product capabilities and performance, quality, price, interoperability and a reputation for technical excellence and integrity. We believe that we compete favorably with respect to each of these factors.

We compete with domestic and international suppliers of software for chip design. Our principal competitors include Avant!, Cadence Design Systems, Mentor Graphics and Synopsys.

Many of our competitors have longer operating histories and presence in key markets, greater name recognition, access to larger customer bases and significantly greater financial, sales and marketing, technical and other resources. As a result, our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products. Current and potential competitors have established or might establish financial or strategic relationships among themselves or with existing or potential customers or third parties. Accordingly, new competitors or alliances among existing competitors might emerge and rapidly acquire significant market share. For example, Synopsys recently announced its pending acquisition of Avant!. If successfully completed, this acquisition will strengthen Synopsys’ product offerings in the area of SoC verification software. In addition, our competitors might develop technologies in the future that more effectively address the design of integrated circuits at deep submicron levels at a lower cost.

We regard the protection of our copyrights, service marks, trademarks and trade secrets and other intellectual property rights as critical to our future success. We rely on various intellectual property laws and contractual restrictions, such as confidentiality and nondisclosure agreements and licensing arrangements, to protect our proprietary rights in products and services. The license agreements with our customers limit their rights to the technologies that we offer and develop for our customers. In addition, we seek to avoid disclosure of our trade secrets through a number of means, including requiring those persons with access to our proprietary information to execute nondisclosure agreements and restricting access to such information.

We also rely on technologies that we license from third parties. For instance, in 1998, we entered into a license agreement with Computational Applications and System Integration to incorporate certain of their technologies into some of our products. In 1995, we also entered into license agreements with Digital Semiconductor (a business unit of Digital Equipment Corporation) and Chris Terman (an independent contractor who was formerly engaged by us). These licenses are perpetual but may be terminated upon a material breach, including a failure to protect the underlying intellectual property. Each of these license agreements provides us with complementary technologies from parties with specific expertise that we believe is an effective means of expanding the features and functionality of our products. These licenses might not continue to be available to us on commercially reasonable terms in the future, if at all. As a result, we might be required to develop or obtain substitute technology at additional cost.

We have applied for registration of the following trademarks: ClockStorm, COSMIC, ElectronStorm, SignalStorm, Simplex Solutions and VoltageStorm. Fire & Ice QX is our registered trademark. We currently have three patents issued and a number of patent applications filed in connection with our existing products and technologies and our technologies and intellectual property in development.

As of September 30, 2001, we had 220 employees, including 69 in sales and marketing, 81 in research and development, 38 in design service and post sales support and 32 in general and administrative. None of our employees is represented by a labor union. We have never experienced a work stoppage and believe our relationship with our employees is good.

Our headquarters includes approximately 30,000 square feet in Sunnyvale, California pursuant to a lease that expires May 31, 2002. Although we believe our facilities are adequate for our needs in the near term, due to the rapid growth of our employee base we might need either to lease or to find alternative facilities in order to accommodate future expansion. In addition, we have sales offices in Texas and North Carolina, and we lease space in the United Kingdom, Germany, France and Japan.

From time to time, we receive claims that arise in the ordinary course of our business. We are currently subject to some such claims related to intellectual property and employee relations matters.

On August 10, 2001, Sequence Design, Inc. filed a suit against us in the United States District Court for the Northern District of California, alleging that we infringed Sequence’s United States Patent No. 5,901,063. We have filed an answer to Sequence’s complaint denying infringement and asserting that the Sequence patent is not valid. No trial date has been set.

No matters were submitted to a vote of stockholders of Simplex during the fourth quarter of fiscal 2001.

Set forth below is information concerning our executive officers, and their ages as of September 30, 2001.

Penelope A. Herscher has served as our Chief Executive Officer since April 1996. From May 1996 to July 2000, Ms. Herscher served as our President. In July 2000, Ms. Herscher was appointed Chairman of our Board of Directors. From June 1988 to April 1996, Ms. Herscher held several management positions at Synopsys, Inc., an electronic design automation company, including business development, Vice President of Marketing and general management positions. Ms. Herscher serves on the board of directors of the EDA Consortium. Ms. Herscher holds a B.A. in mathematics from Cambridge University in England.

Aki Fujimura has served as our Chief Operating Officer and as a member of our Board of Directors since August 1997. In July 2000, Mr. Fujimura was appointed our President. From April 1993 to October 1996,

Mr. Fujimura served on the Board of Directors and as Vice President for Pure Software, a developer of automated software quality products and services. Mr. Fujimura serves on the Board of Directors of Bristol Technology Inc. Mr. Fujimura holds a B.S. and an M.S. in electronic engineering and computer science from the Massachusetts Institute of Technology.

Aurangzeb Khan has served as our Executive Vice President and General Manager since October 2000. Mr. Khan co-founded Altius and has served as its President and Chief Executive Officer since March 1999. From February 1996 to March 1999, Mr. Khan was Vice President, Silicon Engineering at Cirrus Logic, Inc. From October 1983 to February 1996, Mr. Khan held various positions at Tandem Computers, Inc., including Director of Engineering, Technology & CAD Development. Prior to October 1983, Mr. Khan served as Senior Design Engineer, SRAM Development, for Fairchild Semiconductor Corp. Mr. Khan holds an M.S. in Engineering Management and an M.S. in Electrical Engineering from Stanford University, a B.S. in Electrical Engineering and Computer Sciences and a B.S. in Nuclear Engineering from University of California, Berkeley, and a B.Sc. in Physics and Mathematics (with highest honors) from University of Punjab.

James D. Behrens has served as our Vice President of Worldwide Field Operations since April 2000. From August 1999 to April 2000, Mr. Behrens served as President and Chief Executive Officer of Snaketech, S.A., which we acquired in March 2000. From January 1999 to August 1999, Mr. Behrens served as a partner at Quanah Consulting. From February 1998 to January 1999, Mr. Behrens served as Vice President of Business Development for Aspec Technology, Inc. (now Ingenuus Corporation), a provider of electronic design automation software tools. From August 1997 to February 1998 Mr. Behrens served as President of SIS Microelectronics, which was acquired by Aspec Technology in February 1998. From November 1989 to March 1997, Mr. Behrens held various management roles at Cadence Design Systems, Inc. Mr. Behrens holds a B.S. in chemistry from Colorado State University.

Luis P. Buhler has served as our Chief Financial Officer since January 1999. From February 1998 to January 1999, Mr. Buhler served as a consultant and as a principal at Rockledge Associates, a finance and public affairs consulting firm. From January 1997 to February 1998, Mr. Buhler served as Deputy Secretary for Economic Development at the California Trade and Commerce Agency, which included acting as Executive Director for California Infrastructure and Economic Development Bank. From August 1988 to September 1996, Mr. Buhler held several positions at Trans Ocean Ltd., an international equipment leasing company, including Vice President of International Marketing and Vice President Treasurer. Mr. Buhler holds a B.A. in economics and an M.B.A. from Stanford University and an M.A. in Urban Studies from Occidental College.

Steven L. Teig has served as our Chief Technical Officer since August 1998. From April 1995 to August 1998, Mr. Teig served as Vice-President, Advanced Technology at CombiChem, Inc., a drug discovery company, where he developed their core Discovery Engine technology. In June 1989, Mr. Teig co-founded BioCAD Corporation, the commercial developer of the Catalyst drug discovery software, and served as its Chief Technical Officer until its merger with Molecular Simulations Inc. in August 1994. Thereafter, Mr. Teig served as President and Chief Technical Officer of Entropix Corp., a subsidiary of Molecular Simulations, from August 1994 through April 1995. Mr. Teig holds a B.S.E. in Electrical Engineering and Computer Science from Princeton University.

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock has traded on The Nasdaq National Market under the symbol “SPLX” since our initial public offering on May 2, 2001. As of December 13, 2001 we had approximately 292 stockholders of record and the closing price of our common stock was $20.60 per share as reported by The Nasdaq National Market.

The following table sets forth for the periods indicated the high and low closing sale prices for our common stock as reported by The Nasdaq National Market:

No cash dividends were declared or paid in fiscal 2001. We anticipate retaining all available funds to finance future internal growth and product development.

The following selected consolidated financial data for the periods ended September 30 for each of the five years indicated have been derived from our audited financial statements. You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes related thereto included in Items 7 and 8 of Part II of this Form 10-K.

(1)

In the Other Financial Data table above, we present gross profit, total operating expenses, operating income (loss) and net income (loss) as adjusted to exclude the following non-cash charges: stock-based compensation expense, in-process research and development charges, and amortization of goodwill and other intangibles. We consider these measures to be useful as they provide an additional basis upon which to evaluate our ability to fund our operations, growth and other capital expenditures. However, these measures are not indicators of performance under generally accepted accounting principles and may not be comparable to information reported by other companies. Further, these measures do not replace gross profit, total operating expenses, operating income (loss) and net income (loss) as indicators of our operating performance or cash flow as a measure of liquidity. For example, as indicated above, our operating income excluding non-cash charges for the year ended September 30, 2001 was $2,364,000, as compared to our net cash used in operating activities for the same period which was $220,000. The difference is primarily due to our assumption of Altius’ existing current liabilities which we paid down after the acquisition, as well as our use of cash to finance current assets net of current liabilities of our business. In addition, we believe that these measures are typically used by financial analysts when comparing and evaluating companies in our industry. With respect to stock-based compensation expense,

we believe that offering equity as a portion of compensation helps to align the interests of our employees with the interests of our stockholders. As a result, we expect equity will continue to be a part of the compensation we offer our employees. However, we do not currently intend to grant options with exercise prices below fair market value. Further, we do not have a policy with respect to the repricing of stock options or the grant of cash bonuses if the market price of our stock falls below the exercise prices of our granted options. For a reconciliation of these Other Financial Data items to those reported under generally accepted accounting principles, see “Reconciliation between reported Statement of Operations Data and the amounts shown as Other Financial Data” below.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 8 of Part II of this Form 10-K. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ significantly from those projected in the forward-looking statements. Actual results may differ materially due to a number of factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Factors That May Affect Future Results of Operations.” See “Cautionary Note Regarding Forward-Looking Statements.”

We provide software and services for integrated circuit design and verification to enable our communications, computer and consumer products customers to achieve first-time production success and rapid delivery of complex system-on-chip semiconductors. Our products and services are designed to enable our customers to rapidly deliver high quality system-on-chip semiconductors with geometries at and below 0.18 micron.

From our incorporation in April 1995 until we shipped our first product in November 1996, we primarily focused our activities on conducting research and development for our software products. In November 1996, we shipped our first product suite, which included Fire & Ice (a SoC verification product) and the predecessor to VoltageStorm SoC (a SoC verification product). In March 1999, we shipped VoltageStorm along with the ElectronStorm, ClockStorm and SI Report options (each analysis products). During the last two years, we have substantially extended and improved our products. In September 1999, we shipped our next-generation proprietary modeling product, Fire & Ice QX, which resulted in a 100x increase in performance over the prior version. In May 2000, we introduced our next-generation power integrity product, VoltageStorm SoC, which addresses the unique challenges of system-on-chip design earlier in our customers’ design flow.

In March 2000, we acquired all the outstanding capital stock of Snaketech S.A., or Snaketech, in exchange for a total of approximately 929,000 shares of our common stock and options to purchase approximately 104,000 additional shares of our common stock. The acquisition of Snaketech added SubstrateStorm to our SoC verification product family. We have accounted for this transaction using the purchase method of accounting.

In October 2000, we acquired Altius Solutions, Inc., or Altius, which is now our wholly owned subsidiary, in exchange for a total of approximately 2.6 million shares of our common stock and options to purchase approximately 384,000 additional shares of our common stock. As a result of our Altius acquisition, we now provide design foundry services that enable accelerated chip development. Altius was incorporated in March 1998, and received its first revenue for system-on-chip design services in March 1999. We have accounted for this transaction using the purchase method of accounting.

In May 2001, we completed our initial public offering of 4,600,000 shares of common stock at $12 per share. The offering was managed by Credit Suisse First Boston Corporation and co-managed by Robertson Stephens, Inc. and SG Cowen Securities Corporation.

In June 2001, we announced, along with our development partner, Toshiba Corporation, a new semiconductor architecture that we believe has the potential to deliver simultaneous improvements of 10+ percent greater chip performance, 20+ percent less power consumption, and 30+ percent more working chips per wafer. This new architecture, called the X Architecture, is the first to make possible the pervasive use of diagonal interconnects, or wiring, for advanced integrated circuits. We also announced our invention of the interconnect design technology, including our “liquid routing” technology, that enables the development of chips based on the new X Architecture.

In June 2001, at the same time as the announcement of the X Architecture, we co-sponsored the formation of the X Initiative, a group of leading companies from throughout the semiconductor industry which has grown to 23 members. The X Initiative supports a five-year program aimed at accelerating the availability and fabrication of the X Architecture.

In October 2001, the X Initiative announced the successful effort of member Numerical Technologies to process the first X Architecture photomask data with optical proximity correction, based on design data provided by us. Numerical Technologies was able to use its current mask data preparation tool CATS^TM, which is used in virtually every photomask manufacturing facility worldwide to prepare design information for mask manufacturing, to assess mask data preparation for X Architecture designs. In a separate announcement, the X Initiative announced the successful production of the world’s first X Architecture mask by X Initiative member Dupont Photomasks, Inc. Dupont Photomasks was able to produce this first-of-its-kind photomask using existing photomask manufacturing software and equipment, including Numerical’s CATS, for current-generation 0.18 micron process technologies.

In the fourth quarter of fiscal 2001, general economic conditions and conditions in the semiconductor industry, impacted the ability of our customers to purchase our products and services as uncertainty in their businesses has increased. These conditions have caused our sales cycle to lengthen, customer budgets for research and development to decrease and customer purchases to be delayed or decreased. In response to these events, we have tightened expense controls and adjusted our sales compensation to focus sales efforts on the first half of fiscal 2002.

Historically, our revenues have been flat or slightly down in our first fiscal quarter, as compared to the immediately preceding quarter, due in large part to the structure of our sales incentives. In the current business and customer environment, we expect this seasonal pattern to be accentuated.

We derive our revenue from software licenses, maintenance, consulting, design foundry services, training and the development of technologies under research and development contracts. Our end customers include microprocessor companies, embedded memory or digital signal processor suppliers, design and engineering service companies, application-specific integrated circuit vendors and application-specific standard products companies building high-end graphics, networking, wireless and communications systems.

Our total revenue in the fiscal years ended September 30, 2001 and 2000, and 1999 were comprised of the following:

We generate our revenue under time-based licenses where revenue is recognized ratably and term licenses where revenue is recognized at time of shipment. Our time-based licenses are typically 1 year or less and can be renewed or remixed periodically. Our term licenses exceed one year in length and typically do not exceed 20 years. We intend to increase the percentage of revenue derived from our time-based licenses and our 3-year term licenses. License revenue was 51% of total revenue for fiscal year 2001 reflecting the Altius acquisition and related increases in design foundry services. License revenue was 64% of our total revenue in fiscal 2000 and 71% of total revenue in fiscal 1999.


	•	design foundry services;

	•	maintenance services;

	•	short-term consulting and training; and

	•	research and development contracts.

Maintenance is sold to customers with term licenses and is renewed by customers on an annual basis. We perform short-term consulting for and provide training to end customers. We also have a research and development project with one customer. Services revenue accounted for 49% of our total revenue for fiscal year 2001 reflecting the Altius acquisition and related increases in design foundry services. Services revenue accounted for 36% of our total revenue in fiscal 2000 and 29% of our total revenue in fiscal 1999.

We have international sales offices located in the United Kingdom, Germany, France, and Japan. North American sales offices are located in North Carolina, Texas and California. We also use distributors and sales agents in Taiwan. Our sales outside of North America accounted for 47% of our total revenue for fiscal year 2001, 34% of our total revenue in fiscal 2000 and 23% of our total revenue in fiscal 1999.

We report revenue in two categories: license revenue and services revenue. License revenue is derived from product sales to end users and distributors. Services revenue is derived from providing design foundry, consulting, training and maintenance services to end-users as well as services under research and development contracts.

We recognize revenue in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, Software Revenue Recognition, as amended by Statement of Position 98-4, Deferral of the Effective Date of Certain Provisions of SOP 97-2, (SOP 97-2) and Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions. License revenue is derived from term and time-based licenses. License revenue from term licenses is recognized upon shipment of the product, if an executed agreement or purchase order has been received, the fee is fixed and determinable and collection is deemed probable. We do not generally include acceptance criteria or rights of return in our arrangements.

For contracts with multiple obligations (e.g., product licenses, maintenance and other services), we allocate revenue to each component of the contract based on vendor specific objective evidence of its fair value, which is based on either the price when each component is sold separately, or the renewal rates for maintenance in future years as specified in the arrangement. We recognize revenue allocated to undelivered products and services when the criteria for revenue set forth herein are met.

License and maintenance revenue from time-based licenses for a term of one year or less is recognized ratably over the period of the license, as maintenance for these licenses is never sold separately from the license.

Services revenue from consulting, installation and training is recognized as the related services are performed, when collectibility is probable and the fee is fixed and determinable. Revenue from maintenance and support agreements are deferred and recognized on a straight-line basis over the term of the related agreement. Payments of maintenance fees are generally made in advance and are nonrefundable.

We recognize revenues derived from research and development contracts in accordance with American Institute of Certified Public Accountants Statement of Position No. 68, Research and Development Arrangements and Statement of Position No. 81-1, Contract Accounting under the percentage-of-completion method of accounting based on the estimated stage of completion of individual contracts. We recognize revenues from design foundry engineering contracts in accordance with Statement of Position No. 81-1, Contract Accounting under the percentage-of-completion method.

Simplex also recognizes service and license revenue for contracts which require significant customization or modification of its software and service revenue for contracts which do not include licenses, under SOP 81-1, using the percentage-of-completion method based on the estimated stage of completion of the individual contracts.

Deferred revenue primarily consists of maintenance and support services under maintenance contracts and unearned revenue on time-based licenses. For design foundry engineering and research and development contracts, deferred revenue represents the excess of amounts invoiced over the revenue recognized. Deferred revenue fluctuates at each period end in accordance with the mix of contracts entered into.

Cost of license revenue consists primarily of the expenses related to royalties, amortization and maintenance related to acquired or licensed technologies. We deliver our product and associated documentation electronically. Cost of services revenue consists primarily of personnel expenses, including stock-based compensation expense, costs related to outside consultants, travel and overhead expenses related to program management, software installation, customer and technical support and fees for sub-contractors and training.

Operating expenses consist of research and development expenses, selling and marketing expenses, general and administrative expenses, stock-based compensation expenses, amortization of acquired intangibles and in-process research and development expenses. We allocate the total costs for overhead and facilities based on headcount to each of the functional areas that use the relevant services. These allocated charges include general overhead items such as building rent, equipment-leasing costs, telecommunications charges and depreciation expense.

Research and development costs consist primarily of expenses related to the development of new functionality and upgrades of our software and to the amortization of acquired intangibles. These expenses include compensation and benefits, including stock-based compensation expense, for software developers, quality assurance personnel and for third-party contract development costs.

Sales and marketing expenses consist primarily of compensation and benefits, including stock-based compensation expense, for direct sales and marketing personnel, travel cost, public relations, sales and other promotional materials, trade shows, advertising and other sales and marketing programs.

General and administrative expenses consist primarily of compensation and benefits, including stock-based compensation expense, for general and administrative employees and fees for professional advisors.

Amortization of goodwill and other intangibles arises through our acquisitions of Snaketech and Altius. These acquisitions were each accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition dates. Goodwill and other intangible assets are amortized on a straight-line basis over their respective estimated useful lives from three to seven years.

For the year ended September 30, 2001 we recorded an unearned stock-based compensation charge of $11.8 million, $10.3 million of which related to the stock options assumed in connection with the acquisition of Altius in October 2000. During the year ended September 30, 2000 we granted stock options and issued restricted stock to our officers, employees and consultants where, with respect to officers and employees, the fair value was subsequently determined to be greater than on the date of grant. As a result, we recorded an unearned stock-based compensation charge of $4.0 million for the year ended September 30, 2000. For employees, such amount represents the difference at the grant date between the exercise price of each stock option granted or the purchase price for each share of restricted stock and the fair market value of the underlying common stock. This amount is being amortized, using the accelerated vesting method, over the vesting period of the options or restricted stock, generally four years. Stock-based compensation related to consultants is measured on a fair-value basis using the Black-Scholes option pricing methodology.

The following table presents certain financial data as a percentage of total revenue for the periods indicated:

Total Revenue. Total revenue increased 111% from $22.8 million for the year ended September 30, 2000 to $48.2 million for the year ended September 30, 2001. Our contracts with Sony accounted for 22% of total revenue for the year ended September 30, 2001. As a percentage of total revenue, license revenue accounted for 51% for the year ended September 30, 2001 and 64% for the year ended September 30, 2000. Total revenue from sales to customers outside North America accounted for 47% of total revenue for the year ended September 30, 2001 and 34% of total revenue for the year ended September 30, 2000. We expect that revenue derived from customers outside of North America will continue to account for a significant portion of our future revenue. We see the demand for our products and services driven by our customer’s design starts at 0.18 micron and below.

License Revenue. License revenue increased 68% from $14.7 million for the year ended September 30, 2000 to $24.7 million for the year ended September 30, 2001 due to the introduction of next generation models of our primary products as well as an increase in the demand for our existing products primarily due to technological advances in our industry which we expect to continue.

Services Revenue. Services revenue increased 188% from $8.1 million for the year ended September 30, 2000 to $23.5 million for the year ended September 30, 2001. This increase was due primarily to approximately $12.8 million in revenue from our design foundry services which resulted from our acquisition of Altius on October 4, 2000 and approximately $2.5 million increase in maintenance and other support of our customers.

Excluding amortization of acquired technology, cost of license revenue decreased 24% from $92,000 for the year ended September 30, 2000 to $70,000 for the year ended September 30, 2001, due to lower royalties incurred. As a percentage of license revenue, cost of license revenue, excluding amortization of acquired technology were 0.3% for the year ended September 30, 2001, and 0.6% for the year ended September 30, 2000. Including amortization of acquired technology of $453,000 for the year ended September 30, 2001, cost of license was $523,000, or 2.1% of license revenue. Including amortization of acquired technology of $166,000 for the year ended September 30, 2000, cost of license increased to $258,000, or 1.8% of license revenue.

Excluding stock-based compensation expense, cost of services increased 191% from $3.4 million in the year ended September 30, 2000 to $9.9 million in the year ended September 30, 2001, due to additional costs incurred for the new design foundry service resulting from the Altius acquisition. As a percentage of services revenue, cost of services, excluding stock-based compensation expense, was 42% for each of the years ended September 30, 2001 and 2000. Including stock-based compensation expense of $3.1 million for the year ended September 30, 2001, cost of service increased to $13.0 million, or 55% of service revenue. Including stock-based compensation expense of $254,000 for the year ended September 30, 2000, cost of service was $3.6 million, or 45% of service revenue.

Excluding stock-based compensation expense and amortization of intangibles, research and development expenses increased 154% from $5.0 million for the year ended September 30, 2000 to $12.6 million for the year ended September 30, 2001. This increase resulted from the hiring of new employees and the headcount increase related to the acquisition of Snaketech in March 2000 and the acquisition of Altius in October 2000. As a percentage of total revenue, research and development expenses, excluding stock-based compensation expense and amortization of intangibles, were 26% for the year ended September 30, 2001 and 22% for the year ended September 30, 2000. Including stock-based compensation expense of $2.2 million for the year ended September 30, 2001, research and development expense increased to $14.8 million, or 31% of total revenue. Including stock-based compensation expense of $375,000 for the year ended September 30, 2000, research and development expense was $5.3 million, or 23% of total revenue.

Excluding stock-based compensation expense, sales and marketing expenses increased 72% from $10.4 million for the year ended September 30, 2000 to $17.8 million for the year ended September 30, 2001. This increase resulted from increased compensation expense due to the expansion of our sales and marketing organization, including the effect of the Snaketech and Altius acquisitions. As a percentage of total revenue, sales and marketing expenses, excluding stock-based compensation expense, were 37% for the year ended September 30, 2001 and 45% for the year ended September 30, 2000, due to the growth of revenue outpacing the increase of sales and marketing expenses. Including stock-based compensation expense of $1.3 million for the year ended September 30, 2001, sales and marketing expense increased to $19.1 million, or 40% of total revenue. Including stock-based compensation expense of $262,000 for the year ended September 30, 2000, sales and marketing expense was $10.6 million, or 47% of total revenue.

Excluding stock-based compensation expense, general and administrative expenses increased 93% from $2.8 million for the year ended September 30, 2000 to $5.5 million for the year ended September 30, 2001 due to increased recruiting expenses and increased headcount from the Altius acquisition. We also incurred increased expenses associated with being a public company starting May 2, 2001, including annual and other reporting costs, increased director and officer liability insurance, investor relations programs and accounting and legal fees. As a percentage of total revenue, general and administrative expenses, excluding stock-based compensation expense, were 11% for the year ended September 30, 2001 and 12% for the year ended September 30, 2000. Including stock-based compensation expense of $775,000 for the year ended September 30, 2001, general and administrative expense increased to $6.2 million, or 13% of total revenue. Including stock-based compensation expense of $904,000 for the year ended September 30, 2000, general and administrative expense was $3.7 million, or 16% of total revenue.

Amortization of Goodwill and Other Intangibles. Amortization of acquired intangibles was $6.6 million for the year ended September 30, 2001, of which $453,000 was allocated to cost of license. Amortization of acquired intangibles was $575,000 for the year ended September 30, 2000, of which $166,000 was allocated to cost of license. Amortization of goodwill and other intangibles relates to the Snaketech and Altius acquisitions. Snaketech was acquired in March 2000 which resulted in $5.5 million of goodwill and intangibles. Altius was acquired in October 2000 which resulted in $25.8 million of goodwill and intangibles.

Stock-based Compensation. We recorded an unearned stock-based compensation charge of $11.7 million for the year ended September 30, 2001 and $4.0 million for the year ended September 30, 2000. Stock-based compensation expense was $7.3 million for the year ended September 30, 2001 and $1.8 million for the year ended September 30, 2000. This stock-based compensation expense has been allocated to its respective category under cost of revenue, research and development, sales and marketing and general and administrative. This increased expense resulted from the increased level of stock option grants and restricted stock issuances and increases in the deemed fair market value of the underlying common stock.

Net Interest and Other Income (Expense). Net interest and other expense was $509,000 for the year ended September 30, 2001 and a net income of $284,000 for the year ended September 30, 2000. Net interest and other expense for the year ended September 30, 2001 includes interest expense incurred on our line of credit and capital leases, amortization of debt discount and foreign currency translation loss, offset by interest income earned on our cash, cash equivalent and short-term investment balances.

The income tax provision for the year ended September 30, 2001 was $1.1 million which is the result of alternative minimum taxes, foreign withholding taxes on revenue, and tax on earnings generated from operations in certain foreign jurisdictions. No provision for federal and state income taxes has been recorded since inception because we have experienced significant net losses, which have resulted in federal and state operating loss carryforwards of approximately $27.2 million as of September 30, 2001. In light of our cumulative operating losses, we have provided a full valuation allowance for all deferred tax assets since at present we are uncertain whether such deferred tax assets will be realized.

Total Revenue. Total revenue increased 110% from $10.9 million for the year ended September 30, 1999 to $22.8 million for the year ended September 30, 2000. Our contracts with Toshiba accounted for 18% of total revenue for the year ended September 30, 2000. As a percentage of total revenue, license revenue accounted for 64% for the year ended September 30, 2000 and 71% for the year ended September 30, 1999. Total revenue from sales to customers outside North America accounted for 34% of total revenue for the year ended September 30, 2000 and 23% of total revenue for the year ended September 30, 1999. We expect that revenue derived from customers outside North America will continue to account for a significant portion of our future revenue.

License Revenue. License revenue increased 91% from $7.7 million for the year ended September 30, 1999 to $14.7 million for the year ended September 30, 2000 due to the introduction of next generation models of our primary products as well as an increase in the demand for our existing products primarily due to technological advances in our industry which we expect to continue.

Services Revenue. Services revenue increased 156% from $3.2 million for the year ended September 30, 1999 to $8.1 million for the year ended September 30, 2000. This increase was due to an approximately $3.6 million increase in maintenance and other support of our customers and approximately $1.3 million increase in revenue related to our research contract.

Excluding amortization of acquired technology, cost of licenses decreased 4% from $96,000 for the year ended September 30, 1999 to $92,000 for the year ended September 30, 2000, due to lower royalties incurred. As a percentage of licenses revenue, cost of licenses, excluding amortization of acquired technology were 0.6% for the year ended September 30, 2000, and 1.2% for the year ended September 30, 1999. Including amortization of acquired technology of $166,000 for the year ended September 30, 2000, cost of license increased to $258,000, or 1.8% of license revenue. We incurred no amortization of acquired technology for the year ended September 30, 1999.

Excluding stock-based compensation expense, cost of services increased 72% from $2.0 million in the year ended September 30, 1999 to $3.4 million in the year ended September 30, 2000, due to cost of services related to our research contract offset by a cost-saving program that included a decrease in the use of outside consultants utilized for application engineering in early fiscal 1999. As a percentage of services revenue, cost of services, excluding stock-based compensation expense, was 42% for the year ended September 30, 2000, and 62% for the year ended September 30, 1999. Including stock-based compensation expense of $254,000 for the year ended September 30, 2000, cost of service increased to $3.6 million, or 45% of service revenue. We incurred no stock-based compensation expense pertaining to services for the year ended September 30, 1999.

Excluding stock-based compensation expense and amortization of intangibles, research and development expenses decreased 22% from $6.4 million for the year ended September 30, 1999 to $5.0 million for the year ended September 30, 2000. During the second quarter of fiscal 1999, we limited the use of higher-priced outside consultants resulting in lower expenses. We started increasing the level of staffing for research and development after the acquisition of Snaketech in the quarter ended March 31, 2000. As a percentage of total

revenue, research and development expenses, excluding stock-based compensation expense and amortization of intangibles, were 22% for the year ended September 30, 2000 and 59% for the year ended September 30, 1999, attributable to increases in total revenue and lower expenses. Including stock-based compensation expense of $375,000 for the year ended September 30, 2000, research and development expense increased to $5.3 million, or 23% of total revenue. We incurred $9,000 stock-based compensation expense for the year ended September 30, 1999.

Excluding stock-based compensation expense, sales and marketing expenses increased 42% from $7.3 million for the year ended September 30, 1999 to $10.4 million for the year ended September 30, 2000. Approximately $2.1 million of this increase was due to the addition of sales personnel and increased commissions paid. As a percentage of total revenue, sales and marketing expenses, excluding stock-based compensation expense, were 45% for the year ended September 30, 2000 and 67% for the year ended September 30, 1999, due to the growth of revenue outpacing the increase of sales and marketing expenses. Including stock-based compensation expense of $262,000 for the year ended September 30, 2000, sales and marketing expense increased to $10.6 million, or 47% of total revenue. We incurred no stock-based compensation expense pertaining to sales and marketing for the year ended September 30, 1999.

Excluding stock-based compensation expense, general and administrative expenses increased 27% from $2.2 million for the year ended September 30, 1999 to $2.8 million for the year ended September 30, 2000 due to the addition of personnel and increased use of consultants and third party advisors. As a percentage of total revenue, general and administrative expenses, excluding stock-based compensation expense, were 12% for the year ended September 30, 2000 and 20% for the year ended September 30, 1999. Including stock-based compensation expense of $904,000 for the year ended September 30, 2000, general and administrative expense increased to $3.7 million, or 16% of total revenue. We incurred $4,000 of stock-based compensation expense for the year ended September 30, 1999.

Amortization of Goodwill and Other Intangibles. Amortization of acquired intangibles was $0.6 million for the year ended September 30, 2000, of which $166,000 was allocated to cost of license revenue. The total amortization related to the acquisition of Snaketech in March 2000. No amortization expense was recorded in the year ended September 30, 1999.

Stock-based Compensation. We recorded an unearned stock-based compensation charge of $4.0 million for the year ended September 30, 2000 and $20,000 for the year ended September 30, 1999. Stock-based compensation expense was $1.8 million for the year ended September 30, 2000 and $13,000 for the year ended September 30, 1999. This stock-based compensation expense has been allocated to its respective category

under cost of revenue, research and development, sales and marketing and general and administrative. This increased expense resulted from the increased level of stock option grants and restricted stock issuances and increases in the deemed fair market value of the underlying common stock.

In-process and Acquired Research and Development. On March 31, 2000, we acquired Snaketech. In connection with this acquisition, $1.1 million of in-process research and development has been allocated based on established valuation techniques using the incremental expected cash flows. At the date of the acquisition, this amount was expensed as a non-recurring charge as the in-process technology had not yet reached technological feasibility and had no alternative future use. Snaketech had one major in-process research and development project relating to the development of chip design software in progress at the time of the acquisition. We have completed the Snaketech in-process project and continue to use it to assist in developing our own next generation chip design technology.

In addition, Simplex also acquired a place and route development tool in the Snaketech acquisition which will be used exclusively in the development of one of Simplex’ products. The development tool was valued based upon Simplex’ estimate of fair value. In assigning fair value, Simplex considered its market value if the product were separately sold, its value if the product were sold or licensed by Snaketech, as well as Simplex’ planned usage. As the development tool had no probable alternative future use, Simplex expensed the full fair market value of $3.9 million upon purchase.

Net Interest and Other Income (Expense). Net interest and other expense was $284,000 for the year ended September 30, 2000 and $78,000 for the year ended September 30, 2000. Net interest and other expense for the year ended September 30, 2000 includes interest expense incurred on our line of credit and capital leases, foreign withholding taxes, amortization of debt discount and foreign currency translation loss, offset by interest income earned on our cash, cash equivalent and short-term investment balances. We utilized the line of credit starting June 1999.

Income Taxes. During the year ended September 30, 2000, Simplex incurred foreign taxes of $242,000. We have never paid significant U.S. federal or state income taxes and, at September 30, 2000, had net federal operating loss carryforwards of approximately $18.7 million. We have a full valuation allowance to the extent of all deferred tax assets since it is more likely than not that we will not realize any benefit from these assets.

Prior to our initial public offering, we financed our operations primarily through private sales of preferred stock, funds generated from operations, and the use of our line of credit with Transamerica Business Credit Corporation which was repaid in May 2001.

On May 2, 2001, we completed our initial public offering and realized net proceeds from the offering of approximately $47.5 million in cash. As of September 30, 2001, we had $50.7 million of cash, cash equivalents and short-term investments.

Net cash used in operating activities was $220,000 in fiscal 2001, compared to net cash provided of $1.6 million in fiscal 2000 and net cash used of $5.4 million in fiscal 1999. Cash used in fiscal 2001 resulted primarily from payment of liabilities assumed in the Altius acquisition. This was partially offset by the acquisition of $2.3 million of cash from Altius reported in cash flows from investing activities.

Net cash used in investing activities was $34.2 million in fiscal 2001, compared to net cash provided of $807,000 in fiscal 2000 and net cash used of $696,000 in fiscal 1999. Cash used in fiscal 2001 consists primarily of purchases of property, equipment and available-for-sale securities, offset by cash received in the acquisition of Snaketech and Altius and the proceeds from sales of available-for-sale securities.

Net cash provided by financing activities was $45.4 million, $871,000 and $3.2 million in fiscal 2001, 2000 and 1999 respectively. Cash generated in fiscal 2001 resulted primarily from the proceeds of $2.5 million from a line of credit and from the net proceeds received from our initial public offering and offset by the repayment of our $5.0 million line of credit.

We currently anticipate that our available cash resources combined with the cash generated from operations will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12 months. In addition, although there are no present understandings, commitments or agreements with respect to any acquisition of other businesses, services, products and technologies, we may from time to time evaluate potential acquisitions, which could increase our capital requirements.

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), “Business Combinations.” SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. We believe that the adoption of SFAS 141 will not have a significant impact on our financial statements.

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS 142), “Goodwill and Other Intangible Assets,” which is effective for fiscal years beginning after March 15, 2001. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. We intend to adopt SFAS 142 early. Based upon our initial assessment, we expect goodwill, including acquired workforce of $2.7 million, would cease to amortize at the beginning of fiscal 2002, which would reduce amortization by $6.1 million on an annual basis.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS 144) “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 supercedes SFAS 121 and applies to all long-lived assets including discontinued operations and consequently amends Accounting Principals Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business.” SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001.

We have spent significant funds to date to develop and to refine our current technologies and services and to develop our sales and marketing resources. If we are unable to execute on our strategy to become profitable, our stock price could be negatively affected. We have incurred significant operating losses in the past and have not yet achieved profitability. As of September 30, 2001, we had an accumulated deficit of $40.6 million. In addition, we expect to continue to invest significantly in our next-generation research and development projects and to continue to hire additional people in all areas of our company to support our growing business. As a result of these factors, to achieve profitability we will need, among other matters, to increase our customer base and to increase the number of and amounts of products and services purchased by our customers. We cannot assure you that we will be able to increase our revenue or operating efficiencies in this manner or otherwise and achieve and maintain profitability. Because we expect to continue to increase our investment in new areas of our business, our investment could outpace growth in our revenue, thus preventing our ability to achieve and maintain profitability. If we are unable to achieve and maintain profitability, our stock price could be materially adversely affected.

We acquired Snaketech in March 2000 and Altius in October 2000. If we fail to successfully integrate Snaketech, Altius, or any future acquisition into our company, the revenue and operating results of the combined company would decline. To realize the benefits of these recent acquisitions, we must successfully integrate both companies’ research and development facilities into our existing operations despite differences in culture, language and legal environments, such as the mandated 35 hour work week in France, specific work rules covering the Altius Japan office, and different tax treatments related to the issuance of equity to employees. Such integration has required and will continue to require significant time and resources to manage and we may not be able to manage such integration successfully. If our customers are uncertain about our ability to operate on a combined basis, they could delay or cancel orders for our products. We intend to continue to make investments in complementary companies, products or technologies. If we buy a company or a division of a company, we could have difficulty in assimilating that company or division’s personnel and operations which could negatively affect our operating results. In addition, the key personnel of the acquired company may decide not to work for us. Furthermore, we may have to incur debt or issue equity securities as we have in past acquisitions to pay for any future acquisition, the issuance of which would be dilutive to our existing stockholders.

The semiconductor and design software industries are characterized by rapid technological change, frequent new product introductions and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. We devote a substantial amount of our resources to research and development to enable us to enhance current products and develop new technologies. If we fail to enhance our current products and develop and introduce new generations of technology and products on a timely basis, we will not be able to address the increasingly sophisticated needs of our customers and our results of operations will be harmed. In addition, if we develop new products that do not achieve market acceptance, we may not be able to recoup development and marketing expenses, which could lead to a loss of market share which could harm our results of operations. For example, in the second half of 2001 we announced the development of a new physical design intellectual property called the X Architecture. We cannot assure you that we will be successful in fully developing and marketing this new technology, future product enhancements or new products that respond to technological change, that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products, or that our new products and product enhancements will achieve market acceptance. If we are unable to develop, introduce and successfully market products and services in a timely manner in response to changing market conditions or customer requirements, our business, operating results and financial condition might be materially and adversely affected.

To successfully implement our business strategy, we must provide products that can be integrated with the software of other design software companies. Execution of our business strategy is dependent upon our ability to develop superior products and cooperative relationships with competitors so that they work with us to integrate our software into a customers’ design flow. Most of these bigger design software companies offer software intended to address a larger part of the market, including software which offers similar functionality as our software at highly discounted prices. Therefore, to market our products, we must both convince our customers of the technological superiority of our products and convince our competitors to cooperate in integrating our software with their products that provide different functionality. Currently, we have integrated our software with the existing software of Cadence, Mentor Graphics, Synopsys and other interoperability partners. If we are unable to convince customers to adopt our software solutions over those of competitors

If the software that we provide to our customers in the future performs poorly, contains errors or defects or is otherwise unreliable, our customers would likely be dissatisfied. Any failure or poor performance of our products could result in:


	•	delayed or lost revenue;

	•	hindered market acceptance of our products due to adverse customer reaction;

	•	negative publicity or loss of reputation regarding us and our products and services;

	•	diversion of research and development and management resources; and

	•	claims for substantial damages against us.

The period between our initial contact with a potential customer and their purchase of our products and services is relatively long, making it difficult to predict the quarter in which a particular sale will occur and to plan our expenditures accordingly. If we do not correctly predict the timing of our sales, the amount of revenue we recognize in that quarter could be negatively impacted, which could negatively affect our operating results. Our sales cycle is long due to several factors, including:


	•	limited access to key decision-makers of potential customers to authorize the adoption of our products;

	•	long periods of time for potential customers to perform technical evaluations of our products and validation of the integration flow of our products with their existing products;

	•	the significant investment of resources required by a customer to purchase and integrate our products;

	•	budget cycles of our customers which affect the timing of purchases; and

	•	delay of purchases due to announcements or planned introductions of new products by us or our competitors.

The delay or failure to complete large orders and sales in a particular quarter could significantly reduce revenue in that quarter, as well as subsequent quarters over which revenue for the sale would likely be recognized. If our sales cycle unexpectedly lengthens in general or for one or more large orders, it would adversely affect the timing of our revenue, could cause us not to meet research analysts’ expectations and cause our stock price to suffer. If we were to experience a delay on a large order, it could harm our ability to meet our forecasts for a given quarter.

We currently operate Simplex Solutions, S.A.S. in France, Simplex Solutions K.K. in Japan, Simplex Solutions U.K. Limited in the United Kingdom and Simplex Solutions GmbH in Germany. Maintenance of


	•	proper maintenance of corporate formalities for our international entities;

	•	the uncertainty of Japanese sales due to the typically lengthy Japanese sales cycle;

	•	potential adverse tax consequences, including restrictions on repatriation of earnings and taxation of equity compensation for employees and consultants;

	•	foreign currency exchange rate fluctuations;

	•	greater difficulty in collecting accounts receivable; and

	•	burdens of complying with foreign laws, particularly with respect to intellectual property.

On a fiscal year basis, we generated 47% of our consolidated revenue from sales outside North America in fiscal 2001, 34% of our consolidated revenue from sales outside North America in fiscal 2000 and 23% of our consolidated revenue from sales outside of North America in fiscal 1999. A significant proportion of our international sales to date have been denominated in U.S. dollars. As a result, a decrease in the value of the U.S. dollar relative to foreign currencies could increase the relative costs of our overseas operations which could substantially reduce our operating margins. Any of the above could negatively affect our results of operations.

We have grown rapidly since our inception and to be successful we need to grow quickly in the future. Any failure to manage this growth could strain our resources, which would impede our ability to increase revenue and achieve profitability. For example, the number of our employees increased from 69 at September 1999 to 220 at September 2001. This increase in personnel was accompanied by increased resources and management time focused on infrastructure, training and integration. We expect this growth in personnel to continue and require us to relocate to larger and more expensive corporate offices within a year. Further, future expansion could be expensive and strain our infrastructure, management and other resources. To manage growth effectively, we must:


	•	maintain a high level of customer service and support;

	•	improve our management, financial and information systems and controls;

	•	manage and expand our sales operations, which are in several locations; and

	•	hire, train, manage and integrate new personnel.

There will be additional demands on our customer service support, research and development, sales and marketing and administrative resources as we try to increase our product and service offerings and expand our target markets. The strains imposed by these demands are magnified by our relatively limited operating history. If we cannot manage our growth effectively, our business and results of operations could be adversely affected.

We currently derive, and we expect to continue to derive, a large percentage of our total revenue from a relatively small number of customers. If any of these customers terminates or substantially diminishes its


	•	our 10 largest customers accounted for approximately 57% of our revenue for fiscal year 2001 and approximately 53% of our revenue for fiscal year 2000; and

	•	revenue from Sony Semiconductor accounted for approximately 22% of our revenue in fiscal 2001.

The loss of significant revenue from any of our major customers could negatively impact our results of operations, or limit our ability to execute our strategy. We expect that we will continue to be dependent upon a limited number of customers for a significant portion of our revenue in future periods.

Many of our competitors have substantially greater financial, customer support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. We cannot be sure that we will have the resources or expertise to compete successfully in the future. If we are unable to gain additional market share due to their pre-existing relationships with our potential customers, our operating results could be harmed. The design software industry is comprised of companies that offer software products that are used to facilitate the chip design process. Our products are used to facilitate complex deep submicron chip designs. Our competitors who offer products that are used for other segments of the chip design process often bundle their products together to offer discounts on products competitive with those we offer, making it extremely attractive for our customers or potential customers to use alternative products to ours. In addition, these competitors may not support our effort to integrate our products into their existing software. These competitors include such companies as Avant!, Cadence, Mentor Graphics and Synopsys. Since these competitors offer a more comprehensive range of products than we do, they are often able to respond more quickly or price more effectively to take advantage of new or changing opportunities and respond to new technologies and customer requirements. If we lose such opportunities to our competitors, our results of operations could be harmed. These risks to our business could be accentuated by consolidations by our competitors. For example, Synopsys recently announced its pending acquisition of Avant!. If successful, this consolidation will create a larger single competitor with greater resources. Consolidation and the creation of larger competitors offering increasingly comprehensive product offerings could limit our ability to penetrate our market and gain additional market share which could cause serious harm to our business.

We currently encounter direct competition from competitors such as Avant!, Cadence, Mentor Graphics and Synopsys for design software at deep submicron geometries. If the market for design software at 0.18 micron geometries and below continues to grow, some of our competitors may increase their focus on offering design software directly competitive with ours, whether by internal development, external development or acquisition. If competition for software competitive with ours increases, our competitors may attempt to keep us from integrating our software with theirs, making it more difficult for our customers to adopt our software in their design flows. If such increased competition were to result in resistance to integration of our software with those of our competitors, our business would be harmed.

We have made a serious effort to promote the development and proliferation of our recently publicized X Architecture by assembling a group of leading companies from the semiconductor industry to form the X Initiative. Members of the X Initiative include leaders in intellectual property, electronic design automation, integrated circuit design services, photomask production, and semiconductor equipment and manufacturing. These companies advocate the merits of the X Architecture and their mandate is to validate, support and survey the usage of the X Architecture through the semiconductor industry supply chain.

Any actual or perceived failure by us or the X Initiative consortium to deliver the technological improvements claimed to be achievable through use of the X Architecture in a reasonable period of time may impact negatively on our image and reputation as inventor of the X Architecture and founder and leader of the X Initiative and materially impact our future business or operating results. To the extent we continue to promote the X Architecture and associate ourselves with the X Initiative, we will be subject to the increased risk that this technology encounters unforeseen technological or implementation difficulties that make its anticipated benefits unattainable. In addition, failure of the members of the X Initiative to continue their support for the X Architecture could limit the industry support for this technology which is essential for its future success.

Our future success depends on our continuing ability to attract and retain highly qualified technical personnel, particularly engineers, and qualified sales and marketing personnel. If we cannot attract and retain the necessary individuals we may not be able to continue our innovation and sell our products, which could negatively affect our operating results. For instance, during fiscal 2000 and fiscal 1999, we experienced significant difficulty in hiring and retaining engineers qualified to support our current products and develop next generation technologies. We partially addressed our hiring needs through the acquisitions of Altius and Snaketech. Appropriate acquisition targets may not be available in the future and we might not otherwise be able to find adequate personnel. In addition, we have previously experienced significant turnover in our sales force. Any future turnover might adversely impact our revenue. If we are unable to hire and retain qualified personnel in the future, which is particularly difficult in Silicon Valley, our business could be seriously harmed and our operating results could suffer.

Our future success depends upon the continued service of our executive officers and other key personnel, and their ability to work together. Of particular importance to our continued operation are:


	•	Penelope A. Herscher, Chairman and Chief Executive Officer;

	•	Aki Fujimura, President and Chief Operating Officer;

	•	Aurangzeb Khan, Executive Vice President and General Manager;

	•	Luis P. Buhler, Chief Financial Officer;

	•	Steven L. Teig, Chief Technical Officer; and

	•	James D. Behrens, Executive Vice President of Worldwide Field Operations.

Searching for replacements for our key management could divert management’s time and result in increased operating expenses. Most of our executive officers or key employees are not bound by an employment agreement for any specific term and we do not maintain any key person life insurance policies. If

Because our products are based on the technology in our software, our success depends on our ability to protect our intellectual property. If we are not able to successfully protect our technology domestically and abroad, our results of operations could suffer. We rely on a combination of patent, copyright, trademark and trade secrets to establish and protect our intellectual property rights. In addition, we seek to avoid disclosure of our trade secrets through a number of means, including requiring those with access to our intellectual property to execute nondisclosure agreements with us and restricting access to our technology. We currently have three issued U.S. patents and we have several patent applications pending relating to our technology. We cannot provide any assurance that these applications will be granted. In addition, we cannot assure that, even if granted, third parties have not or will not develop competitive technologies or products without infringing our current patent or any future patents, or that such patents would be held valid and enforceable by a court having jurisdiction over a dispute involving such patents. If such patents are not held valid our use of technology under such patents could result in a claim of infringement and we may be unable to license the patented technology on commercially reasonable terms, or at all. If we are unable to obtain licenses to technology embedded in our software our business would be materially harmed. Despite our efforts to protect our intellectual property, unauthorized parties, including employees may attempt to copy our software or obtain and use information we regard as proprietary. Policing unauthorized use of software is difficult, especially internationally. The laws of some foreign countries in which we do business do not protect our intellectual property to as great an extent as do the laws of the United States. Patent infringement and trade secret misappropriation litigation is highly visible and increasing in our industry. As a result of all these factors, our means of protecting our intellectual property may not be adequate and our competitors may independently develop similar technology, duplicate our products or design around our intellectual property.

We currently license certain third-party technologies that are critical to our software products. For instance, we currently have license agreements with Computational Applications and System Integration, Inc., Random Logic, Digital Semiconductor (a business unit of Digital Equipment Corporation which has been acquired by Compaq Computer Corporation) and Chris Terman (an independent contractor who was formerly engaged by us) that are important to our current software products. These and other third-party licenses are generally perpetual but may be terminated upon a material breach, including failure to protect the underlying intellectual property. Some of these technologies would be difficult or impossible to replace in the short term. The loss of the use of these technologies would prevent us from selling a significant portion of our software products, which would materially reduce our revenue and significantly harm our business.

We expect that, like other software developers, we may increasingly be subject to infringement claims for our verification software and proprietary technologies. These claims could injure our reputation and decrease or inhibit our ability to license or sell our products. On August 10, 2001 a complaint was filed in the United States District Court for the Northern District of California by Sequence Design, Inc. alleging patent infringement, Sequence Design Inc. v. Simplex Solutions Inc. C01-20-760. We have filed an answer to the complaint denying its allegations and asserting that the patent is invalid or not infringed. This lawsuit follows written notices from Sequence on November 1, 2000 of alleged infringement and on March 15, 2001 that legal action is imminent. Based on a review of the relevant intellectual property, we believe any infringement

allegation by Sequence to be without merit. We intend to defend ourselves vigorously in this lawsuit. However, because of the uncertainties of litigation, we cannot assure you that we will ultimately prevail. A final judgment rendered against us in litigation on this matter will have a significant negative impact on our revenue and will have a material adverse effect on our business. Further, claims of infringement relating to our intellectual property, or technology we license from third parties, regardless of merit, might be costly and time-consuming to defend against, could divert management’s attention from the day-to-day operations of our company and could seriously harm our ability to develop and market our products and manage our daily operations. Our customer contracts generally require us to indemnify customers for losses resulting from third party infringement claims resulting from the use of our products. Thus, in addition to any claims brought directly against us, we could be responsible to indemnify customers for claims brought against them. The competitive nature of the semiconductor industry and the importance of our software products to our customers’ design flows and competitors’ businesses may contribute to a higher likelihood of being subject to third party claims of infringement.

We anticipate that our cash resources will be sufficient to meet our currently predicted working capital and capital expenditure requirements for at least the next 12 months. We might, however, need to raise additional funds through public or private financings, strategic relationships or other arrangements to do any of the following:


	•	develop next-generation technologies or enhance current products;

	•	fund additional sales and marketing programs;

	•	acquire complementary businesses or technologies;

	•	hire additional personnel;

	•	expand our operations faster than currently anticipated; or

	•	respond to competitive pressures in our industry.

If we are unable to fund such potential business requirements, our results of operations could be harmed.

Future changes in accounting policies including those affecting revenue recognition, could require the company to change its methods of revenue recognition. Such changes could cause deferment of revenue recognized in current periods to subsequent periods or accelerated recognition of deferred revenue to current periods, each of which could cause shortfalls in meeting securities analysts and investors’ expectations. Any such shortfalls could have an adverse impact on our stock price.

The primary customers for our products are semiconductor design and manufacturing companies. Any significant downturn in our customers’ markets, in particular, or in general economic conditions which result in the cut back of research and development budgets or the delay of software purchases would likely result in a reduction in demand for our products and services and could harm our business. In addition, the markets for semiconductor products are cyclical. For example, in recent years certain Asian countries have experienced significant economic difficulties, including currency devaluation and instability, business failures and a depressed business environment. These difficulties triggered a significant downturn in the semiconductor

market, resulting in reduced budgets for chip design tools which, in turn, negatively impacted us. Our business is harmed when research and development budgets of our customers are curtailed or when software purchases by our customers are delayed. In addition, the electronics industry has historically been subject to seasonal and cyclical fluctuations in demand for its products, and this trend may continue in the future. Such industry downturns have been, and may continue to be, characterized by diminished product demand, excess manufacturing capacity and subsequent erosion of average selling prices.

We expect to experience significant seasonal variations in our revenue due to sales incentives that result in increased sales efforts at the end of the fiscal year. These seasonal trends materially affect our quarter-to-quarter operating results, which, if not effectively managed, could negatively impact our stock price. Based on our limited operating history, we expect that our revenue in the first quarter each year will typically be lower than revenue in other quarters. If we are unable to effectively manage our resources in anticipation of the seasonality of our revenue and the costs we expect to incur during periods of lower revenue, our operating results might be lower than anticipated by investors. This would likely cause the trading price of our stock to fall.

In today’s competitive technology industry, employment decisions of highly skilled personnel are influenced by stock option packages, which offer incentives above traditional compensation only where there is a consistent, long-term upward trend over time of a company’s stock price. If our stock price declines due to market conditions, investors’ perceptions of the technology industry or managerial or performance problems we have, our stock option incentives may lose value to key employees and we may lose such employees or be forced to grant additional options to retain such employees, which could result in the following material adverse consequences to us:


	•	loss of employees due to negative impact on our option packages;

	•	immediate and substantial dilution to investors resulting from the grant of additional options necessary to retain employees; and

	•	potential compensation charges against the company which could negatively impact our operating results.

We may be subject to claims by competitors for infringement of their intellectual property or prior employees for human resources-related claims. Our insurance is limited to specific amounts per claim depending on the type of claim involved. A successful liability claim brought against us in excess of corresponding insurance coverage could be costly, which would harm our business, financial condition and results of operations.

Our common stock has been publicly traded only since May 2, 2001. The market price of our common stock has been subject to significant fluctuations since the date of our initial public offering. These fluctuations could continue. Among the factors that could affect our stock price are:


	•	quarterly variations in our operating results;

	•	changes in revenue or earnings estimates or publication of research reports by analysts;

	•	speculation in the press or investment community;

	•	strategic actions by us or our competitors, such as new product announcements, acquisitions or restructuring;

	•	actions by institutional stockholders;

	•	general market conditions; and

	•	domestic and international economic factors unrelated to our performance.

The stock markets in general, and the markets for high technology stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. These fluctuations could also lead to costly class action litigation that could significantly harm our business and operating results.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. These provisions include a classified board of directors and limitations on actions by our stockholders by written consent. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Although we believe these provisions provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders.

We develop products in the United States, France, Asia and Japan and sell our products globally, through our direct sales force and independent distributors. Our products are sold primarily in North America, Europe, Asia and Japan. Most of our sales are currently denominated in U.S. dollars; however, we anticipate an increasing amount of sales to be denominated in the Japanese yen and possibly the euro. As a result, our financial results may be directly affected by changes in foreign currency exchange rates and weak economic conditions in foreign markets.

As of September 30, 2001, we had $50.7 million of cash, cash equivalents and short-term investments. Our interest income is sensitive to changes in the general level of United States interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we concluded that we do not have material market risk exposure.

Our investment policy requires us to invest funds in excess of current operating requirements in:


	•	obligations of the U.S. government and its agencies;

	•	investment grade state and local government obligations;

	•	securities of U.S. corporations rated A1 or P1 by Standard & Poors, or the Moody’s equivalents; and/or

	•	money market funds, deposits or notes issued or guaranteed by U.S. and non-U.S. commercial banks meeting certain credit rating and net worth requirements with maturities of less than two years.

As of September 30, 2001, our cash equivalents consisted primarily of money market funds and U.S. government agency notes, and our short-term investments consisted primarily of U.S. government agency notes.

The following table sets forth selected unaudited quarterly information for Simplex’s last eight fiscal quarters. Simplex believes that all necessary adjustments (which consisted only of normal recurring adjustments) have been included in the amounts stated below to present fairly the results of such periods when read in conjunction with the consolidated financial statements and related notes included elsewhere herein.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of convertible preferred stock and stockholders’ equity (deficit), and of cash flows present fairly, in all material respects, the financial position of Simplex Solutions, Inc. and its subsidiaries at September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Simplex Solutions, Inc.’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion.

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

[Continued from above table, first column(s) repeated]


	Notes						Accumulated								Total
	Receivable			Unearned			Other								Stockholders’
	from			Stock-Based			Comprehensive		Accumulated			Comprehensive			Equity
	Stockholders			Compensation			Income		Deficit			Loss			(Deficit)


	(In thousands, except share amounts)
Balances, September 30, 1998	$	(608	)	$	(9	)	$	—	$	(14,777	)				$	(14,854	)
Repayment of stockholder note receivable		—			—			—		—						—
Issuance of restricted common stock in exchange for note receivable		(725	)		—			—		—						—
Interest accrued from stockholder notes receivable		(68	)		—			—		—						(68	)
Amortization of stockholder note forgiven		94			—			—		—						94
Repurchase of restricted common stock		—			—			—		—						(13	)
Issuance of common stock pursuant to exercise of stock options		—			—			—		—						166
Warrants granted in consideration for capital lease financing		—			—			—		—						—
Issuance of restricted common stock in exchange for cash		—			—			—		—						50
Issuance of stock options to non-employees in exchange for services		—			(20	)		—		—						—
Stock-based compensation expense		—			13			—		—						13
Comprehensive loss net loss		—			—			—		(7,041	)	$	(7,041	)		(7,041	)
Unrealized gain on investments		—			—			2		—			2			2

Comprehensive loss												$	(7,039	)

Balances, September 30, 1999		(1,307	)		(16	)		2		(21,818	)					(21,651	)
Repayment of stockholder note receivable		16			—			—		—						16
Interest accrued from stockholder notes receivable		(95	)		—			—		—						(95	)
Amortization of stockholder note forgiven		93			—			—		—						93
Issuance of common stock pursuant to exercise of stock options		—			—			—		—						854
Issuance of common stock in connection with acquisition of Snaketech		—			—			—		—						10,730
Issuance of fully vested common stock options in connection with acquisition of Snaketech		—			—			—		—						609
Issuance of restricted common stock in exchange for cash		—			—			—		—						40
Issuance of preferred stock pursuant to exercise of warrants		—			—			—		—						—
Repurchase of restricted common stock		—			—			—		—						—
Issuance of restricted common stock in exchange for services		—			(31	)		—		—						—
Unearned stock-based compensation		—			(3,996	)		—		—						—
Stock-based compensation expense		—			1,796			—		—						1,796

[Continued from above table, first column(s) repeated]


	Notes						Accumulated									Total
	Receivable			Unearned			Other									Stockholders’
	from			Stock-Based			Comprehensive			Accumulated			Comprehensive			Equity
	Stockholders			Compensation			Income			Deficit			Loss			(Deficit)


	(In thousands, except share amounts)
Net loss											(6,722	)					(6,722	)
Realized loss on investments		—			—			(2	)		—						(2	)
													$	(6,722	)
														(2	)

Comprehensive loss													$	(6,724	)

Balances, September 30, 2000	$	(1,293	)	$	(2,247	)	$	—		$	(28,540	)				$	(14,332	)

Balances, September 30, 2000	$	(1,293	)	$	(2,247	)	$	—		$	(28,540	)	$	—		$	(14,332	)
Interest accrued from stockholder notes receivable		(76	)		—			—			—			—			(76	)
Amortization of stockholder note forgiven		86			—			—			—			—			86
Issuance of common stock pursuant to exercise of stock options		—			—			—			—			—			408
Issuance of common stock in connection with acquisition of Altius Solutions, Inc.		—			—			—			—			—			25,462
Assumption of common stock warrant in connection with acquisition of Altius Solutions, Inc.		—			—			—			—			—			27
Issuance of common stock options in connection with acquisition of Altius Solutions, Inc.		—			—			—			—			—			3,108
Issuance of common stock in conjunction with initial public offering, net of cost incurred of $3,786		—			—			—			—			—			47,550
Conversion of preferred stock to common stock upon initial public offering		—			—			—			—			—			24,251
Repurchases and cancellations of common stock, net of exercise of warrants to purchase common stock		—			—			—			—			—			—
Issuance of restricted common stock in exchange for services		—			(31	)		—			—			—			—
Unearned stock-based compensation		—			(11,747	)		—			—			—			—
Stock-based compensation expense		—			7,300			—			—			—			7,300
Net loss		—			—			—			(12,087	)		(12,087	)		(12,087	)
Unrealized gain on investments		—			—			46			—			46			46

Comprehensive loss													$	(12,041	)

Balances, September 30, 2001	$	(1,283	)	$	(6,725	)	$	46		$	(40,627	)				$	81,743

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

Simplex Solutions, Inc. (“Simplex”) was incorporated in the State of Delaware in April 1995. Simplex provides software and services that enable the design and first-time production success of complex integrated circuits for computer, communications, and consumer products. Simplex’ products are designed to enable its customers to deliver timely, competitive systems-on-chips implemented in deep submicron technologies. Simplex also provides design foundry services that enable accelerated chip development. Simplex’ customers use its products and services prior to manufacture to design and verify the integrated circuits to help ensure that the integrated circuits will perform as intended, taking into account the complex effects of deep submicron semiconductor physics.

On May 2, 2001, Simplex completed its initial public offering of 4.6 million shares of common stock for net cash proceeds of approximately $47.5 million.

The accompanying consolidated financial statements include the accounts of Simplex and its wholly owned subsidiaries, Simplex Solutions UK Ltd., Simplex Solutions S.A.R.L., Simplex Solutions GmbH, Simplex Solutions KK, Simplex Solutions, S.A.S. (together “Simplex”). All material intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The functional currency of Simplex’ foreign subsidiaries is the U.S. dollar. Accordingly, the financial statements of those subsidiaries, which are maintained in the local currency, are remeasured into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation.” Exchange gains or losses from remeasurement of monetary assets and liabilities that are not denominated in U.S. dollars were not material for any period presented and are included in the consolidated statements of operations.

Simplex considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents, except those held as collateral for Simplex’ lease arrangement (see Note 12).

Investments with original maturities, or maturities at the date of purchase greater than three months and remaining maturities of less than one year are classified as short-term investments. Short-term investments, which are classified as available-for-sale, consist of corporate notes and U.S. government agency notes and are reported at fair value. The cost of securities sold is determined using the specific identification method when computing realized gains and losses. Fair value is determined using available market information. At September 30, 2001 and 2000, there were no investments with maturities greater than one year.

Simplex’ licenses and services are concentrated in the area of enabling companies to design complex integrated circuits. This industry is characterized by rapid technological advances, changes in customer requirements and evolving industry standards.

Any failure by Simplex to anticipate or respond adequately to technological changes in its industry, changes in customer requirements or changes in industry standards could have a material adverse effect on Simplex’ business and operating results.

Financial instruments which potentially subject Simplex to concentrations of credit risk consist primarily of cash, cash equivalents, short term investments and accounts receivable. Simplex places the majority of its cash and cash equivalents with two high credit-quality financial institutions. Deposits at any time may exceed federally insured limits. For short term investments, Simplex invests in a variety of financial instruments issued by high credit-quality institutions or U.S. government. Markets for these securities generally are highly liquid, and therefore bear minimal risk. Simplex has established guidelines relative to credit rating, diversification and maturities that seek to maintain safety and liquidity. For accounts receivable, Simplex performs ongoing credit evaluations of its customers’ financial condition and does not require collateral. Simplex maintains allowances for potential credit losses and such losses have been within management’s expectations.

At September 30, 2001, two customers each accounted for 19% and 11% respectively, of aggregate accounts receivable. At September 30, 2000, three customers each accounted for 10%, 11%, and 15%, respectively, of aggregate accounts receivable. One customer accounted for 22% of total revenue for the year ended September 30, 2001. Revenue from one customer accounted for 15% of total revenue for the year ended September 30, 2000, exclusive of revenue of 3% sold to this customer through a distributor. No customers accounted for greater than 10% of total revenue for the year ended September 30, 1999.

The carrying amounts of certain of Simplex’ financial instruments including cash and cash equivalents, accounts receivable, accounts payable, notes payable, and line of credit approximate fair value.

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets, generally three to five years. Leased assets are amortized on a straight-line basis over the lesser of the estimated useful life or the lease term.

Maintenance and repairs are charged to expense as incurred. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operations.

Intangible assets include goodwill, assembled workforce and acquired technology from the acquisition of Snaketech, S.A. (“Snaketech”) and Altius Solutions, Inc. (“Altius”) (see Note 3). Goodwill and other intangible assets are amortized on a straight-line basis over the estimated periods of benefit, which are as follow:

Simplex evaluates the recoverability of long-lived assets, goodwill related to those assets and enterprise goodwill in accordance with Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (“SFAS No. 121”). SFAS No. 121 requires recognition of impairment of long-lived assets upon the occurrence of certain events and in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets.

Simplex reports revenue in two categories; license and services revenue. License revenue is derived from product sales to end users and distributors. Services revenue is derived from providing consulting, training, maintenance and support services to end users, research and development services and customization services related to software and design services.

Simplex recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position 97-2, Software Revenue Recognition, as amended by Statement of Position 98-4, “Deferral of the Effective Date of Certain Provisions of SOP 97-2,” (“SOP 97-2”) and Statement of Position 98-9, “Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions.” License revenue is derived from term and time-based licenses. Time-based licenses are for a period of 1 year or less. Term licenses are typically for a period of 3 to 20 years. License revenue of term licenses is recognized upon shipment of the license, if an executed agreement or purchase order has been received, a signed license agreement exists, the fee is fixed and determinable and collection is deemed probable. All licenses commence upon execution of a Simplex license agreement. Simplex’ standard payment terms are net 30. Simplex does not generally include acceptance criteria or rights of return in its arrangements. When acceptance criteria or rights of return are included in these license arrangements, revenue is deferred until acceptance is received or the rights of return expire.

For contracts with multiple obligations (e.g., product licenses, maintenance and other services), and which do not involve significant customization or modification of software, Simplex allocates revenue to each component of the contract based on vendor specific objective evidence of its fair value, which is based on either the price when each component is sold separately, or the renewal rates for maintenance in future years. Vendor specific objective evidence exists for maintenance, consulting and training based upon a history of separate sales of these services. As Simplex has not generally sold its licenses separately, it uses the residual method to determine the allocation of revenue to the license portion of multiple-element arrangements and, as such, no revenue is recognized until delivery. Simplex recognizes revenue allocated to undelivered products when the criteria for product revenue set forth above are met.

License and maintenance revenue from time-based licenses are recognized ratably over the period of the license as vendor specific objective evidence of the fair value of the maintenance is not established, as maintenance for these licenses is never sold separately from the license.

Services revenue from consulting and training are recognized as the related services are performed, when collectibility is probable and the fee is fixed and determinable. Revenue from maintenance and support agreements is deferred and recognized on a straight-line basis over the period of the related agreement. Payments of maintenance fees are generally made in advance and are nonrefundable.

Simplex recognizes service revenue derived from long-term research and development contracts in accordance with Statement of Financial Accounting Standard No. 68, Research and Development Arrangements and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, SOP 81-1 under the percentage-of-completion method of accounting based on the estimated stage of completion of individual contracts. Simplex currently has only one long-term research and development

contract. Revenue recorded related to this contract amounted to $1.0 million for the year ended September 30, 2001 and $1.7 million for the year ended September 30, 2000.

Deferred revenue primarily consists of maintenance and support services under maintenance contracts and unearned revenue on time-based licenses.

Simplex expenses advertising costs as they are incurred. For the years ended September 2001, 2000 and 1999, advertising expense was $370,000, $0 and $141,000 respectively. Sales commissions related to both term and time-based licenses are expensed when earned.

Simplex accounts for income taxes using the liability method whereby deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and measured at tax rates that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets where it is more likely than not the deferred tax assets will not be realized.

Simplex has elected to adopt the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”). Simplex accounts for stock-based compensation using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and, accordingly, pro forma disclosures required under SFAS No. 123 have been presented. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant, between the deemed fair value of Simplex common stock and the exercise price of the option. Additionally, pursuant to Emerging Issues Task Force Issue 96-18, (“EITF 96-18”) “Accounting for Equity Instruments that are issued to other than Employees for Acquiring, or in conjunction with Selling, Goods or Services,” equity instruments issued to non-employees are measured at fair value over the period of performance using the Black-Scholes option pricing model.

Costs related to research, design and development of products are charged to research and development expense as incurred. Software development costs are capitalized beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. To date, attaining technological feasibility and general release have substantially coincided. As a result, Simplex has not capitalized any software development costs.

Simplex computes net loss per share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share,” (“SFAS No. 128”). Under the provisions of SFAS No. 128, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net loss for the period by the weighted average number of common and dilutive

common equivalent shares outstanding during the period. For all periods presented, options, warrants and convertible preferred stock were not included in the computation of diluted net loss per share because the effect would be antidilutive.

A reconciliation of shares used in the calculation of basic and diluted net loss per share follows (in thousands, except per share amounts):

Comprehensive income (loss) includes unrealized gains and losses on available for sale securities that are excluded from net loss and reflected instead in stockholders’ equity (deficit).

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141 (“SFAS No. 141”), “Business Combinations.” SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. Simplex believes that the adoption of SFAS No. 141 will not have a significant impact on its financial statements.

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets,” which is effective for fiscal years beginning after March 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. Simplex is currently assessing, but has not yet determined, the impact of SFAS No. 142 on its financial position and results of operations. Simplex intends to adopt SFAS No. 142 early.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, (“SFAS No. 144”) “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supercedes SFAS No. 121 and applies to all long-lived assets including discontinued operations and consequently amends Accounting Principals Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business.” SFAS No. 144 is effective for financial statements issued for fiscal

years beginning after December 15, 2001. Simplex has not yet determined the impact of the adoption of SFAS No. 144 on the consolidated financial statements.

In March 2000, Simplex acquired all of the common stock and outstanding options to purchase common stock of Snaketech for a purchase price of approximately $11.8 million, which consisted of 928,983 shares of Simplex’ common stock, options to purchase approximately 104,000 shares of Simplex common stock, and related acquisition expenses totaling approximately $442,000. Simplex valued its stock issued based upon the then deemed fair market value of $11.55 from a contemporaneous appraisal which aggregated $10,729,935. Options to purchase Simplex stock issued to replace outstanding options were reflected at fair-value, using the Black-Scholes option pricing model method. The fair market value of options issued amounted to $608,707 and was calculated using the following assumptions: option term, 3 years; volatility 70%; risk-free rate of return 6.47% and fair-market value of Simplex stock of $11.55. Snaketech was incorporated in 1996 in France as a developer and marketer of high performance physical design solutions for integrated circuits. The acquisition was accounted for as a purchase and accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. The allocation of the purchase price is summarized below (in thousands):

The excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired has been recorded as goodwill. Simplex has included the results of operations of Snaketech since April 1, 2000, the date of acquisition.

In October 2000, Simplex acquired Altius Solutions, Inc., which provides system-on-chip design foundry services. Simplex issued 2,551,434 shares of common stock and options to purchase approximately 384,000 shares of Simplex common stock to Altius stockholders in exchange for their shares and options of Altius common and preferred stock. Related acquisition expenses totaled approximately $549,000.

The acquisition was accounted for as a purchase and accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. The allocation of the purchase price is summarized below (in thousands):

Simplex has included the results of operations of Altius since October 4, 2000, the date of acquisition.

The following unaudited pro forma financial information reflects the results of operations for the year ended September 30, 2000 as if the acquisitions of Snaketech and Altius had occurred on October 1, 1999,

respectively, and after giving effect to purchase accounting adjustments. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place on October 1, 1999, and may not be indicative of future operating results (in thousands, except per share amounts):

Pro forma disclosures have not been presented for the year ended September 30, 2001 as the results of both acquisitions had been included in the results of Simplex for the entire period.

Note 4 — In-Process Research and Development and Purchased Research and Development:

In connection with the acquisition of Snaketech in March 2000 (see Note 3), Simplex incurred purchased in-process research and development costs of $1.1 million. The fair values of Snaketech’s existing products, as well as the technology currently under development were determined using the income approach, which discounts expected future cash flows from the acquired in-process technology to present value. The discount rates used in the present value calculations were derived from a weighted average cost of capital of 21%, adjusted upward by a premium of 5% for the in-process project from the Snaketech acquisition to reflect additional risks inherent in the development lifecycle. Although Simplex expects to achieve certain expense reductions as a result of integrating the acquired in-process technology, the valuation assumptions do not include any expense reductions in the amounts allocated to in-process research and development. The in-process software product acquired is of reasonable complexity and its final integration into Simplex products is uncertain. Should the product not be successfully integrated into Simplex products, or if such development efforts go beyond the timeframe estimated by management, Simplex will not receive the full benefits anticipated from the acquisition. The percent complete, the estimated cost to complete and the value assigned for the Snaketech project included in-process research and development was as follows:

In addition, Simplex also acquired a place and route development tool which is used exclusively in the development of one of Simplex’ products. The development tool was valued based upon Simplex’ estimate of fair value. In assigning fair value, Simplex considered its market value if the product were separately sold, its value if the product were sold or licensed by Snaketech, as well as Simplex’ planned usage. As the development tool had no probable alternative future use, Simplex expensed the full fair market value of $3.9 million upon purchase, in the year ended September 30, 2000.

At September 30, 2001, Simplex had a note payable of $207,000 which had been assumed from Snaketech. Snaketech had been granted two interest free advances from the French government for software development projects, repayable in three non-equal installments commencing March 31, 2001. If the development project is unsuccessful as determined by the Agence Nationale de Valorisation de la Recherche (“ANVAR”), repayment of all or a portion of the advances will not be required. Conversely, if the development project is successful, Simplex is obligated to repay the loan. Simplex believes these projects were successful and therefore reported these advances as repayable loans at September 30, 2001.

At September 30, 2001, Simplex also had $89,000 outstanding for a $107,000 note entered into in September 1999 by Snaketech. This note is repayable in monthly installments over 15 years at a fixed interest rate of 4.25% per annum. This loan is guaranteed by Snaketech and collateralized by a building owned by a subsidiary of Snaketech.

Future maturities for the notes payable as of September 30, 2001 are as follows (in thousands):

Prior to May 2001, Simplex had $5,000,000 outstanding under a $5,000,000 revolving line of credit. The line of credit was fully paid and cancelled in May 2001.

In connection with the initial public offering in May 2001, all convertible preferred stock was converted into common stock. As of September 30, 2001, all warrants were exercised and none were outstanding.

On February 12, 1998, Simplex entered into a promissory note agreement with an employee in the amount of $509,250 which bears interest at the rate of 6% per annum with principal and interest due on February 12, 2002, unless forgiven by Simplex. Under the terms of the note, Simplex shall forgive up to a total of $375,000 of the outstanding principal of this note at the rate of $93,750 one year from the vesting date (August 1997) and $7,813 each month thereafter until a total of $375,000 has been forgiven. This note is a full recourse note collateralized by certain shares of Simplex’ common stock. The note becomes due and payable immediately upon termination of the employment relationship.

On May 26, 1998, Simplex entered into a settlement agreement with a former employee, under which Simplex loaned $556,191 to the former employee. The loan bears interest at the rate of 5.69% per annum, is a non-recourse obligation and is due on the earlier of May 15, 2002 or one year after the closing of Simplex’ initial public offering in one lump sum of cash or shares of Simplex common stock. The loan is collateralized by 56,666 shares of Simplex common stock owned by the former employee. In addition, Simplex paid the former employee approximately $106,000 in consideration for an option granted by the former employee to Simplex to purchase up to 33,333 shares of common stock of the 56,666 owned by him at $6.75 per share. The option terminates on the earlier of May 15, 2002 or the closing of Simplex’ initial public offering. As the loan agreement is non-recourse, the excess of this price over the deemed fair market value of $449,500 has been reflected as compensation expense. During the year ended September 30, 2001, Simplex exercised its option to purchase 33,333 shares of common stock from the former employee.

In January 1999, Simplex accepted a full recourse promissory note from an executive of Simplex in the amount of $241,406 collateralized by 64,375 shares of restricted common stock. Such note is due no later than January 19, 2004 and bears interest at 4.63% per annum.

In March 1999, Simplex accepted full recourse promissory notes from two executives of Simplex in the amounts of $283,334 and $200,000 collateralized by 47,222 and 33,333 shares of restricted common stock. Such notes are due no later than March 30, 2004 and bear interest at 4.84% per annum.

Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding.

On April 18, 2001, the Delaware Secretary of State approved a reverse-split of Simplex’ common stock on a ratio of one for three. All references in the financial statements to shares and per share amounts have been restated to give effect to this reverse-split.

In connection with the acquisition of Altius, Simplex assumed a warrant to purchase a total of 2,091 shares of common stock at an exercise price of $1.91 per share which expires on November 1, 2004. The fair value of the warrant was calculated using the Black-Scholes option pricing model and regarded as part of the purchase price. This warrant was exercised as of September 30, 2001.

Simplex, from inception to September 30, 2001 has issued approximately 1,706,000 shares of common stock to the founders and others that were subject to repurchase by Simplex. Simplex has the right to repurchase unvested shares at book value, or the value paid per share by the original purchaser, which is intended to approximate fair value at the time of issuance. Vesting is generally over four years on a monthly basis. All common stock subject to repurchase has been issued out of the 1995 Stock Option Plan (the “Plan”) except the founder’s shares. Stock purchase rights of 10,200 were granted under the Plan during the year ended September 30, 2000. As of September 30, 2001, 366,018 shares were subject to repurchase by Simplex.

At September 30, 2001, Simplex had reserved 2,123,703 shares of common stock for future stock option plan issuance.

In 1995, Simplex adopted the 1995 Stock Option Plan, which was subsequently amended and restated as of March 2000 by the Board of Directors to include a sub-division called the 2000 Stock Plan (together “the Plans”).

Options granted under the Plans have a term of ten years measured from the grant date and are initially unvested. Participants either vest in the option shares granted over a four-year period with (i) twenty-five percent of the option shares vesting upon the completion of one year of service and (ii) the balance of the option shares in thirty-six successive equal monthly installments upon the completion of each additional month of service, over a four year period with forty-eight successive equal monthly installments upon the completion of additional month of service, or over a five-year period with (i) twenty percent of the option shares vesting upon the completion of one year of service and (ii) the balance of the option shares in forty-eight successive equal monthly installments upon the completion of each additional month of service.

Under the Plan, incentive stock options may be granted with a per share exercise price not lower than fair market value at the date of grant or 110% of the fair market value if the optionee, immediately prior to the grant, owns stock representing 10% or more of the voting power or value of all securities. Nonstatutory options may be granted with a per share exercise price not lower than 85% of fair market value at the date of grant or 110% of the fair market value if the optionee, immediately prior to the grant, owns stock representing 10% or more of the voting power or value of all securities. Stock options granted under the Plan are exercisable and vest at such times and under such conditions as determined by the Board of Directors. Stock options generally expire from five to ten years from date of grant. Stock purchase rights are subject to repurchase by Simplex at such times as determined by the Board of Directors, typically four years.

In connection with the Altius acquisition, Simplex assumed all outstanding options issued under the 1999 Altius Stock Plan. These assumed options became options to purchase an aggregate of 383,955 shares of Simplex’ common stock. All material terms of the Altius options are the same as the terms of Simplex’ 1995 Stock Option Plan.

In May 2001, Simplex adopted the 2001 Incentive Stock Plan (the “2001 Plan”). Under the 2001 Plan, Simplex initially reserved 2,389,807 shares of common stock for the grant of stock purchase rights and stock options to employees, directors or consultants under the terms and provisions established by the Board of Directors. The 2001 Plan also provides for an annual increase to be added on the first day of Simplex’s fiscal year beginning in 2002, equal to the lesser of (i) 2,000,000 shares, (ii) 5% of the outstanding shares on such date or (iii) an amount determined by the Board of Directors.

The term of each option shall be stated in the option agreement. In the case of an incentive stock option, the term shall be ten years from the date of grant or such shorter term as may be provided in the option agreement. In the case of an incentive stock option granted to an optionee who, at the time the option is granted, owns stock representing more than 10% of the total combined voting power of all securities, the term of the incentive stock option shall be five years or shorter, as provided in the option agreement.

Under the 2001 Plan, incentive stock options may be granted with a per share exercise price not lower than fair market value at the date of grant or 110% of the fair market value if the optionee, immediately prior to the grant, owns stock representing 10% or more of the voting power or value of all securities. Nonstatutory options may be granted with a per share exercise price not lower than 100% of fair market value at the date of grant. Stock options granted under the 2001 Plan are exercisable and vest at such times and under such conditions as determined by the Board of Directors. Stock purchase rights are subject to repurchase by Simplex at such times as determined by the Board of Directors.

A summary of the status of Simplex’ stock option plans as of September 30, 1999, 2000 and 2001, and changes during the years ended on these dates is presented below:

The options outstanding and currently exercisable by exercise price at September 30, 2001 are as follows:

Options exercisable at September 30, 2000 and 1999 were 531,758 and 325,989, respectively.

In connection with certain stock option grants to employees during the year ended September 30, 2001, Simplex recorded stock-based compensation approximating $11,747,000, which is being amortized in accordance with FASB Interpretation No. 28 over the vesting periods of the related options, which is generally four years. Of this amount, $10,289,000 was in relation to restricted common stock and unvested options assumed in connection with the acquisition of Altius. Stock-based compensation amortization recognized during the years ended September 30, 2001 and 2000 totaled $7,300,000 and $1,796,000, respectively.

The following information concerning Simplex stock option plans is provided in accordance with SFAS No. 123. Simplex accounts for such plans in accordance with APB No. 25.

The fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants:

For purposes of pro forma disclosures, the estimated fair value of the options are amortized over the option’s vesting period. Pro forma information follows (in thousands, except per share amounts):

The effects of applying SFAS No. 123 in this pro forma disclosure may not be indicative of future amounts. Additional awards in future periods are anticipated.

In May 2001, the Board of Directors approved the adoption of Simplex’s 2001 Employee Stock Purchase Plan (“2001 Purchase Plan”). A total of 500,000 shares of common stock were initially reserved for issuance under the 2001 Purchase Plan. The Purchase Plan also provides for an annual share increase to be added on the first day of Simplex’s fiscal year beginning in 2002, equal to the lesser of (i) 1,200,000 shares, (ii) 3% of the outstanding shares on such date or (iii) an amount determined by the Administrator. The Purchase Plan permits eligible employees to acquire shares of Simplex’s common stock through periodic payroll deductions of up to 15% of total compensation. No more than 1,250 shares may be purchased on any purchase date per employee. Each offering period will have a maximum duration of 24 months. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of Simplex’s common stock on the first day of the applicable offering period or on the last day of the respective purchase period. The initial offering period commenced on the effectiveness of the initial public offering and will end on October 31, 2001 and the current offering period will end on the last business day of October 31, 2003.

Simplex leases administrative, engineering and sales facilities in the United States, United Kingdom, France and Japan under noncancelable operating leases that expire at various dates through 2005. Simplex is generally responsible for insurance and property taxes. Simplex’ primary lease in Sunnyvale, California is subject to annual payment increases based on the consumer price index. Simplex also leases computer equipment under leases classified as capital leases. Under the terms of a facility lease agreement, Simplex is obligated to provide the lessor with a letter of credit of approximately $300,000. The letter of credit is collateralized by a certificate of deposit, which is included in other long-term assets. In addition, Simplex has provided the lessor, under the terms of another facility lease agreement, a letter of credit of $200,000. The letter of credit is collateralized by a certificate of deposit which is included in other long-term assets.

At September 30, 2001, the aggregate future minimum lease payments under all noncancelable leases are as follows (in thousands):

Rent expense in the years ended September 30, 2001, 2000 and 1999 was $1,397,564 and $789,621 and $744,167, respectively.

From time to time, Simplex may be involved in litigation arising out of claims in the normal course of business. Simplex is currently subject to some such claims related to intellectual property and employee relations matters, none of which management believes will materially impact the Company.

On August 10, 2001, Sequence Design, Inc. filed a suit against us in the United States District Court for the Northern District of California, alleging that Simplex infringed one of Sequence’s patents. Simplex has filed an answer to Sequence’s complaint denying infringement and asserting that the Sequence patent is not valid. As such, Simplex has not accrued any amounts in relation to this suit. No trial date has been set. Because of the uncertainties of the legal process, if this matter leads to litigation there can be no assurance that this matter will not materially impact the Company.

Net income (loss) allocable to United States and foreign sources are as follows (in thousands):

The components of deferred tax assets and liabilities as of September 30, 2001, 2000 and 1999 are as follows (in thousands):

In accordance with generally accepted accounting principles, a valuation allowance must be established for a deferred tax asset if it is uncertain that a tax benefit may be realized from the asset in the future. Simplex has established a valuation allowance to the full extent of its deferred tax assets since it is not certain that a benefit can be realized in the future due to Simplex’s recurring operating losses.

The increase (decrease) in the valuation allowance was $(340,000), $426,000 and $4,514,000 for the years ended September 30, 2001, 2000 and 1999, respectively.

Simplex had federal and state net operating loss carryforwards of approximately $16.0 million and $11.2 million, respectively at September 30, 2001. Simplex’s federal and state net operating loss carryforwards will expire beginning in the year 2011 and 2003, respectively, if not utilized. Simplex also has federal and state research and development credits of approximately $1.8 million and $1.5 million respectively, which expire in years commencing 2011 through 2021 if not used. During the year ended September 30, 2001, Simplex utilized federal net operating loss of approximately $1.7 million.

The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event Simplex has a change in ownership, utilization of the carryforwards could be restricted.

The expected U.S. Federal statutory income tax rate (34%) differs from the effective tax rate as follows:

Tax expense for the year ended September 30, 2001 was limited to alternative minimum and foreign taxes of $78,000 and $1,012,000, respectively, all of which were currently payable.

Simplex maintains a 401(k) plan for its employees. The plan allows eligible employees to defer up to 15% of their earnings, not to exceed the statutory amount per year on a pretax basis through contributions to the plan. The plan provides for employer contributions at the discretion of the Board of Directors; however, no such contributions were made during the years ended September 30, 2001, 2000 and 1999.

Simplex operates in a single business segment, the development and licensing of software products and the provision of services to companies which are used to verify the design of integrated circuits. Simplex uses only one measure of profitability. Operations of Simplex’ overseas subsidiaries consist of license revenue and services.

Information regarding geographic areas at September 30, 2001, 2000, and 1999 and for each of the years then ended is as follows (in thousands):

Revenue from external customers are attributed based upon the geographic location of the customer. European revenue is principally from the France, and revenue in Asia is principally from Japan.

A partner in a law firm which operates as Simplex’ general counsel is a member of the Board of Directors. This firm provided legal services amounting to approximately $1,885,000 and $704,000 to Simplex for the years ended September 30, 2001 and 2000, respectively.

Simplex sold certain licenses and maintenance to a subsidiary of a corporation which also was a shareholder. Such sales amounted to $1,219,725, $349,175 and $217,500 for the years ended September 30, 2001, 2000 and 1999, respectively.

During the year ended September 30, 2000, Simplex sold software amounting to $269,000 to Altius Solutions, Inc., a company with which it had entered into a definitive merger agreement and subsequently purchased in October 2000.

Information regarding our directors is incorporated by reference from the information contained under the heading “Proposal One: Election of Directors — Nominee and Other Directors of Simplex” in our 2002 Proxy Statement for the 2002 Annual Meeting of Stockholders. Information regarding current executive officers found under the heading “Executive Officers” in Item 4 of Part I hereof is also incorporated by reference into this Item 10. Information regarding Section 16 reporting compliance is incorporated by reference from information contained under the heading “Compensation of Executive Officers and Other Matters — Section 16(a) Beneficial Ownership Compliance” in our 2002 Proxy Statement.

The information required by this item is incorporated by reference from information contained under the heading “Compensation of Executive Officers and Other Matters — Executive Compensation” in our 2002 Proxy Statement.

The information required by this item is incorporated by reference from information contained under the heading “General Information” in our 2002 Proxy Statement.

The information required by this item is incorporated by reference from information contained under the heading “Compensation of Executive Officers and Other Matters — Certain Business Relationships” in our 2002 Proxy Statement.


	1. Financial Statements: See Index to Consolidated Financial Statements under Item 8 on page 42 hereof.

	2. Financial Statement Schedules: See Report of Independent Accountants on Financial Statement Schedule on page 70 hereof and Valuation and Qualifying Accounts on page 71 hereof.

	3. Exhibits: See Exhibit Index on page 72 hereof.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/ PENELOPE A. HERSCHER



	Penelope A. Herscher
	Chief Executive Officer and Chairman of the Board of Directors

KNOW ALL BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Penelope A. Herscher and Luis P. Buhler, jointly and severally, as his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connections therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Our audits of the consolidated financial statements referred to in our report dated October 19, 2001 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.


*	Incorporated by reference from the registrant’s Registration Statement on Form S-1 (No. 333-45504), as amended, declared effective by the Securities and Exchange Commission on May 1, 2001.


Delaware		77-0492528
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)


PART I
	Item 1.Business
	Item 2.Properties
	Item 3.Legal Proceedings
	Item 4.Submission of Matters to a Vote of Security Holders
PART II
	Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6.Selected Consolidated Financial Data
	Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A.Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Consolidated Financial Statements and Supplementary Data
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
SIMPLEX SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
PART IV
	Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
	SIGNATURES
	EXHIBIT INDEX
EXHIBIT 3.3
EXHIBIT 10.12
EXHIBIT 23.1


		Page

PART I
Item 1.	Business		3
Item 2.	Properties		15
Item 3.	Legal Proceedings		15
Item 4.	Submission of Matters to a Vote of Security Holders		15
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		16
Item 6.	Selected Financial Data		17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		40
Item 8.	Financial Statements and Supplementary Data		42
PART III
Item 10.	Directors and Officers of the Registrant		68
Item 11.	Executive Compensation		68
Item 12.	Security Ownership of Certain Beneficial Owners and Management		68
Item 13.	Certain Relationships and Related Transactions		68
PART IV
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		68
	SIGNATURES		69
	EXHIBIT INDEX		72


Technology	Description	Benefits

QIC Engine	Novel geometry data processing	Faster interconnect modeling and power integrity analysis modeling of more than 10 million gates overnight on one processor From approximately 200,000 to over 400,000 nets per hour on a single processor

Lightning	High-capacity matrix solver	Automatic computation of current distribution Solving networks with more than 200 million resistors overnight Capacity to handle designs of more than 120 million transistors

Thunder	Dynamic circuit simulation	High-capacity for full chip simulation 100x faster than the industry standard SPICE

Accura	Static power estimation	Vector-independent solution Statistical power estimation technology Combined speed and accuracy

Adaptive Analytical 3D Extraction	Wire modeling	Accuracy to a standard deviation of 4% versus silicon From approximately 200,000 to over 400,000 nets per hour on a single processor

Self-Adjusting Grid	Self-adjusting grid generation for substrate modeling	High-accuracy substrate modeling 100x improved performance over fixed-grid solution

COSMIC	Semiconductor process characterization	Capacitance measurement on silicon to femtofarad (10^-15F) precision Certified models to foundry customers A standard for evaluating and tuning software models

DFT	Design for testability (software engineering technology)	Improves software quality and reliability Increases software development productivity

APIGen^TM	Automatic code generation	Accelerates software development cycles Reduces common software errors

QoT^TM	Quality-on-Time	High quality of software on schedule Enhances internal efficiency Software product management with quality on time

ECSM^TM	Effective current source model	Improves performance of characterization Accuracy within 2% of SPICE


Technology	Description	Benefits

X Placement	Placement of standard cells into X designs

Liquid Routing	Gridless octilinear routing	Potential for 20% less interconnect and 30% fewer vias which result in 10% performance gain, 20% power reduction and 10% die cost savings
X Extraction	Parasitic modeling of X wires


	*Business Challenges Facing System-on-Chip Design Companies*


Product	Features	Segments	Benefits

SoC Verification Products
VoltageStorm SoC	Power grid voltage and electromigration for IC designs	Power Integrity and Reliability	Large design capacity (over 100 million transistors) Production-proven technology Static and dynamic analysis

Fire & Ice QX	Modeling interconnect in integrated circuits for timing integrity	Interconnect and Device Modeling	Designed for high throughput and unlimited capacity 4% standard deviation to silicon

SubstrateStorm	Integrated circuit modeling and noise analysis for radio- frequency, analog and mixed-signal designs	Substrate Modeling Signal Integrity	Estimate of interference between sensitive analog and noisy digital circuitry Support of most advanced semiconductor processes Graphical user interface for identifying noise-critical path


Services	Description	Benefits

Contract Silicon Engineering	Contract chip design	Targeted use of our expertise on critical designs Electrically correct designs Fast turnaround from design to successful manufacture

SoC Verification Services	Single or multiple full-chip verification	Targeted use of our expertise on critical designs Fast adoption/ rollout of our products and solutions Additional support to meet customer’s project schedules


Artisan Components, Inc. Dai Nippon Printing Co., Ltd. DuPont Photomasks, Inc. Etec Systems, Inc., an Applied Materials, Inc. company KLA-Tencor Corporation Matsushita Electric Industrial Co., Ltd. MicroArk Co., Ltd. Monterey Design Systems, Inc. Numerical Technologies, Inc. NurLogic Design, Inc. PDF Solutions, Inc.		Photronics, Inc. Prolific, Inc. Silicon Perspective Corporation Silicon Map, LLC Silicon Logic Engineering, Inc. Simplex Solutions, Inc. STMicroelecronics N.V. Tensilica, Inc. Toshiba Machine Co., Ltd. Toshiba Corporation Virage Logic Corp. Virtual Silicon Technology, Inc.


Name	Age		Position

Penelope A. Herscher		41	Chief Executive Officer and Chairman of the Board of Directors
Aki Fujimura		43	President, Chief Operating Officer and Director
Aurangzeb Khan		45	Executive Vice President and General Manager
James D. Behrens		50	Executive Vice President, Worldwide Field Operations
Luis P. Buhler		48	Chief Financial Officer
Steven L. Teig		40	Chief Technical Officer


Fiscal 2001	High		Low

Third Quarter	$	38.20	$	19.83
Fourth Quarter	$	28.51	$	11.15



		Years Ended September 30,

		2001			2000			1999			1998			1997


		(In thousands, except per share data)
Consolidated Statement of Operations Data:
	Revenue	$	48,184		$	22,817		$	10,881		$	6,537		$	3,001
	Gross profit		34,681			18,914			8,811			5,640			2,291
	Operating loss		(11,506	)		(6,196	)		(7,119	)		(7,527	)		(5,278	)
	Net loss		(12,087	)		(6,722	)		(7,041	)		(7,215	)		(5,178	)
	Basic and diluted net loss per share	$	(1.30	)	$	(2.40	)	$	(3.62	)	$	(4.64	)	$	(4.16	)
	Number of shares used in calculation of basic and diluted net loss per share		9,311			2,801			1,944			1,557			1,245
Other Financial Data (unaudited)(1):
	Gross profit excluding non-cash charges	$	38,243		$	19,334		$	8,811		$	5,640		$	2,291
	Total operating expenses excluding non-cash charges		35,879			18,160			15,917			12,669			7,562
	Operating income (loss) excluding non-cash charges		2,364			1,174			(7,106	)		(7,029	)		(5,271	)
	Net income (loss) excluding non-cash charges	$	1,783		$	648		$	(7,028	)	$	(6,717	)	$	(5,171	)



		September 30,

		2001		2000			1999			1998			1997

Consolidated Balance Sheet Data:
	Cash, cash equivalents and short-term investments		50,672		7,447			4,466			7,041			3,277
	Working capital		52,065		2,669			3,382			6,631			2,360
	Total assets		99,447		22,516			11,803			10,727			6,261
	Convertible preferred stock and warrants		—		24,251			24,184			23,333			11,044
	Total common stock and other stockholder’s equity (deficit)		81,743		(14,332	)		(21,651	)		(14,854	)		(7,414	)



	Year Ended September 30,

	2001			2000		1999

Consolidated Cash Flow Data:
Net cash (used in) provided by operating activities	$	(220	)	$	1,565	$	(5,384	)
Net cash (used in) provided by investing activities		(34,151	)		807		(696	)
Net cash provided by financing activities		45,369			871		3,243



		Year Ended
		September 30,

		2001		2000


		(In thousands)
Other cost of license revenue		$	70	$	92
Amortization of acquired technology			453		166

	Cost of license revenue	$	523	$	258


þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)


	*Breakthrough Chip Design Technology*


	*The New Era of Physics-Dominated Chip Design*


	We have a history of losses and we have accumulated a deficit of $40.6 million as of September 30, 2001. If we fail to achieve and to maintain profitability in the future, investors could lose confidence in the value of our stock which could cause it to decline.


	Our recent acquisitions have, and future acquisitions could, require significant management attention and might further distract our management and disrupt our business.


	Our industries are characterized by rapid technological change. If we fail to design new products that gain market acceptance, it will result in reduced gross margins and loss of market share.


	If chip designers and manufacturers do not integrate our software into existing software and design flows or if other software companies do not cooperate in integrating our products with their products, demand for our products may decrease.


	If our products do not perform as expected, our reputation could be negatively affected, we could lose market share and our growth rate could be negatively impacted.


	Our maintenance of operations in several different countries exposes us to risks inherent in doing business on an international level that could negatively impact our results of operations.


	If we fail to manage our rapid growth successfully, our infrastructure, management and resources could be strained and our ability to effectively manage our business could be diminished and our results of operations could suffer.


	Because 10 customers represented 57% of our total revenue for the year ended September 30, 2001, the loss of any of these customers could substantially adversely impact our revenue.


	Because many of our current competitors have more market share than we do and pre-existing relationships with our potential customers and industry consolidation will create stronger competitors, we might not be able to achieve sufficient market penetration to achieve or sustain profitability or be able to gain additional market share.


	As the deep submicron market continues to grow, competitors will likely increase their focus on this market and apply substantially greater resources to the development and distribution of design software directly competitive with our software.


	Failure to meet the industry’s and our customer’s expectations for the technological improvements obtainable by use of the X Architecture or failure of the results of the X Initiative to successfully optimize the supply chain could disrupt our operations or delay execution of our business plan and consequently harm our business.


	If we cannot continually attract and retain sufficient sales, marketing and technical personnel, our results of operations will be harmed.


	If we lose any of our key personnel, our ability to manage our business and continue our growth would be negatively impacted.


	Any inability to protect our intellectual property adequately could impair our competitive advantage, divert management attention, require additional intellectual property to be developed and/or cause us to incur expenses to enforce our rights.


	If we are unable to continue to license key third-party technology, our business would be significantly harmed.


	If third parties assert, regardless of merit, that our technologies infringe their intellectual property rights, our reputation and ability to license or sell our products could be harmed.


	If we need to raise additional funds in the foreseeable future to fund our operations or future acquisitions, they might not be available to us, on favorable terms or at all, and if unavailable, could impair our ability to run our business.


	Future changes in accounting policies or standards, specifically changes affecting methods of revenue recognition, could cause adverse unexpected revenue fluctuations.


	If the industries into which we sell our products experience recession or other cyclical effects impacting our customers’ research and development budgets, our operating results could be negatively impacted.


	If we are unable to effectively manage our resources in anticipation of the expected seasonality of our revenue, our quarterly operating results may suffer and our stock price may decline.