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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 0-27188

 

 

ACCELRYS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		33-0557266
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
10188 Telesis Court, Suite 100, San Diego, California		92121-4779
(Address of principal executive offices)		(Zip Code)

(858) 799-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨		Accelerated filer  x		Non-accelerated filer  ¨ (Do not check if smaller reporting company)		Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, as of October 29, 2010, was 55,686,430 net of treasury shares.

 

 

 

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ACCELRYS, INC.

FORM 10-Q — QUARTERLY REPORT

For The Quarterly Period Ended September 30, 2010

Table of Contents

 

PART I — FINANCIAL INFORMATION
Item 1.		Condensed Consolidated Financial Statements			3
		Condensed consolidated balance sheets as of September 30, 2010 (unaudited) and March 31, 2010			3
		Condensed consolidated statements of operations (unaudited) for the three-month and six-month periods ended September 30, 2010 and 2009			4
		Condensed consolidated statements of cash flows (unaudited) for the six-month periods ended September  30, 2010 and 2009			5
		Notes to condensed consolidated financial statements (unaudited)			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			26
Item 4.		Controls and Procedures			27
PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			27
Item 1A		Risk Factors			28
Item 6.		Exhibits			39
Signature					40

 

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PART I — FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements

Accelrys, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

 

		September 30, 2010				March 31, 2010
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	142,963			$	77,121
Marketable securities			—				10,461
Trade receivables, net of allowance for doubtful accounts of $163 as of September 30, 2010 and March 31, 2010			13,585				22,745
Prepaid expenses, deferred tax assets and other current assets			11,979				5,201
Total current assets			168,527				115,528
Restricted cash			5,552				5,500
Property and equipment, net			10,990				2,324
Goodwill			72,261				42,663
Purchased intangible assets, net			75,304				4,515
Long-term investments			18,510				—
Other assets			10,098				675
Total assets		$	361,242			$	171,205
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	3,116			$	1,823
Accrued liabilities			11,089				4,684
Accrued compensation and benefits			9,709				10,207
Current portion of accrued restructuring charges			3,533				109
Current portion of deferred revenue			52,137				58,403
Current portion of deferred tax liability			1,672				—
Total current liabilities			81,256				75,226
Deferred revenue, net of current portion			3,641				2,922
Deferred tax and other long term liabilities			9,963				2,309
Accrued restructuring charges, net of current portion			508				531
Lease-related liabilities, net of current portion			3,758				4,113
Stockholders’ equity:
Preferred stock, $.0001 par value; 2,000 shares authorized; no shares issued and outstanding			—				—
Common stock, $.0001 par value; 100,000 shares authorized; 55,586 and 28,409 shares issued at September 30, 2010 and March 31, 2010, respectively			6				3
Additional paid-in capital			453,922				272,726
Lease guarantee			(352	)			(383	)
Treasury stock; 644 shares at each of September 30, 2010 and March 31, 2010			(8,340	)			(8,340	)
Accumulated deficit			(184,325	)			(179,365	)
Accumulated other comprehensive income			1,205				1,463
Total stockholders’ equity			262,116				86,104
Total liabilities and stockholders’ equity		$	361,242			$	171,205

See accompanying notes to these condensed consolidated financial statements.

 

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Accelrys, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended September 30,								Six Months Ended September 30,
		2010				2009				2010				2009
Revenue		$	29,114			$	19,988			$	48,875			$	40,129
Cost of revenue:
Cost of revenue			9,117				3,112				13,072				6,331
Amortization of completed technology			2,373				381				2,414				762
Total cost of revenue			11,490				3,493				15,486				7,093
Gross margin			17,624				16,495				33,389				33,036
Operating expenses:
Product development			9,208				3,767				13,190				7,900
Sales and marketing			12,171				8,149				20,911				16,632
General and administrative			4,635				2,716				7,214				5,654
Business consolidation and restructuring costs (recoveries)			10,683				17				12,370				(74	)
Purchased intangible asset amortization			1,356				—				1,356				—
Total operating expenses			38,053				14,649				55,041				30,112
Operating income (loss)			(20,429	)			1,846				(21,652	)			2,924
Interest and other income, net			934				273				800				268
Income (loss) before taxes			(19,495	)			2,119				(20,852	)			3,192
Income tax expense (benefit)			(16,116	)			273				(15,891	)			602
Net income (loss)		$	(3,379	)		$	1,846			$	(4,961	)		$	2,590
Net income (loss) per share amounts:
Basic		($	0.06	)		$	0.07			($	0.12	)		$	0.09
Diluted		($	0.06	)		$	0.07			($	0.12	)		$	0.09
Weighted average shares used to compute net income (loss) per share:
Basic			55,479				27,503				41,726				27,403
Diluted			55,479				27,901				41,726				27,662

See accompanying notes to these condensed consolidated financial statements.

 

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Accelrys, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Six Months Ended September 30,
		2010				2009
Cash flows from operating activities:
Net (loss) income		$	(4,961	)		$	2,590
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization			5,876				1,766
Share-based compensation			3,511				1,809
Release of valuation allowance against deferred tax assets			(16,481	)			—
Other			(144	)			(378	)
Changes in operating assets and liabilities:
Trade receivables			23,834				14,374
Prepaid expense, deferred tax assets and other current assets			1,157				(142	)
Other assets			(363	)			(77	)
Accounts payable			241				(771	)
Accrued liabilities, compensation and benefits			(10,292	)			(4,516	)
Deferred revenue			(21,647	)			(17,876	)
Net cash used in operating activities			(19,269	)			(3,221	)
Cash flows from investing activities:
Purchases of property and equipment, net			(1,127	)			(252	)
Purchases of marketable securities			—				(19,192	)
Proceeds from maturities of marketable securities			11,500				31,014
Acquisition of business, net of cash acquired			74,467				—
Equity issuance costs in connection with Symyx merger			(783	)			—
Net cash provided by investing activities			84,057				11,570
Cash flows from financing activities:
Proceeds from issuance of common stock			894				414
Common stock tendered for payment of withholding taxes			(647	)			(474	)
Net cash provided by (used in) financing activities			247				(60	)
Effect of changes in exchange rates on cash and cash equivalents			807				1,212
Increase in cash and cash equivalents			65,842				9,501
Cash and cash equivalents at beginning of period			77,121				40,595
Cash and cash equivalents at end of period		$	142,963			$	50,096

See accompanying notes to these condensed consolidated financial statements.

 

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Accelrys, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

1.	Basis of Presentation and Significant Accounting Policies

Financial Statement Preparation

The condensed consolidated financial statements of Accelrys, Inc. (“Accelrys”, “we”, “our” or “us”) as of September 30, 2010, and for the three and six months ended September 30, 2010 and 2009 are unaudited. We have condensed or omitted certain information and disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States (“GAAP”). We believe the disclosures made are adequate to make the information presented not misleading. However, you should read these condensed consolidated financial statements in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, filed with the Securities and Exchange Commission (the “SEC”) on May 28, 2010 (the “Form 10-K”).

On July 1, 2010, Alto Merger Sub, Inc., our wholly-owned subsidiary (“Merger Sub”), merged with and into Symyx Technologies, Inc. (“Symyx”), with Symyx surviving as our wholly-owned subsidiary (the “Merger”). Symyx’s results of operations are included in the Company’s consolidated financial statements beginning July 1, 2010.

In the opinion of management, these condensed consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of results for the interim periods presented.

Our business is subject to seasonal variations. Historically, we have received approximately two-thirds of our annual customer orders in the fiscal quarters ended December 31 and March 31. In accordance with our revenue recognition policies, the revenue associated with these orders is generally recognized over the contractual license term. Therefore, because our policy is to accrue and expense sales commissions and royalties upon the invoicing of customer orders, we have historically experienced an increase in operating costs and expenses and a decrease in income during the fiscal quarters ended December 31 and March 31. Additionally, our cash flows from operations have historically been positive in the fiscal quarter ended March 31 as we collect the accounts receivable generated from customer orders received in the fiscal quarters ended December 31 and March 31, while we have historically experienced negative cash flows from operations in the other three fiscal quarters. As a result of these and other seasonal variations, we believe that sequential quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and that the interim financial results for the periods presented in this quarterly report are not necessarily indicative of results for a full year or for any subsequent interim period.

Principles of Consolidation

These consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Prior Period Reclassifications

We have reclassified a portion of our information technology overhead costs out of general and administrative expenses into cost of revenue, product development, and sales and marketing in our previously issued condensed consolidated statements of operations to conform with current period presentation. We believe that the allocation of these costs based on headcount as overhead costs provides a more accurate depiction of the costs associated with cost of revenue, research and development, sales and marketing and general and administrative costs.

 

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Information technology costs for the three months ended June 30, 2010 and the three and six months ended September 30, 2009 have been reclassified in our condensed consolidated statements of operations as follows:

 

		Three Months Ended June 30, 2010
		Original				As reclassified
Revenue		$	19,761			$	19,761
Cost of revenue			3,839				3,996
Gross margin			15,922				15,765
Operating expenses:
Product development			3,748				3,982
Sales and marketing			8,392				8,740
General and administrative			3,319				2,580
Business consolidation and restructuring costs			1,686				1,686
Total operating expenses			17,145				16,988
Operating loss		$	(1,223	)		$	(1,223	)

 

		Three Months Ended September 30, 2009								Six Months Ended September 30, 2009
		Original				As reclassified				Original				As reclassified
Revenue		$	19,988			$	19,988			$	40,129			$	40,129
Cost of revenue			3,350				3,493				6,800				7,093
Gross margin			16,638				16,495				33,329				33,036
Operating expenses:
Product development			3,551				3,767				7,454				7,900
Sales and marketing			7,812				8,149				15,955				16,632
General and administrative			3,412				2,716				7,070				5,654
Business consolidation and restructuring costs (recoveries)			17				17				(74	)			(74	)
Total operating expenses			14,792				14,649				30,405				30,112
Operating income		$	1,846			$	1,846			$	2,924			$	2,924

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to share-based compensation, income taxes and the valuation of goodwill, intangibles and other long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual future results could differ from those estimates.

 

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Revenue Recognition

We generate revenue from the following primary sources:

 

•

software licenses,

 

•

post-contract customer support and maintenance services on licensed software, collectively referred to as PCS

 

•

database content access, and

 

•

professional services.

Customer billings issued in connection with our revenue-generating activities are initially recorded as deferred revenue. We then recognize the revenue from these customer billings as set forth below and when all of the following criteria are met:

 

•

a fully executed written contract or purchase order has been obtained from the customer (i.e., persuasive evidence of an arrangement exists),

 

•

the contractual price of the product or services has been defined and agreed to in the contract or purchase order (i.e., price is fixed or determinable),

 

•

delivery of the product or service has occurred and no material uncertainties regarding customer acceptance of the delivered product or service exist, and

 

•

collection of the purchase price from the customer is considered probable.

Software Licenses. We license software on a term and perpetual basis. When sold perpetually, our standard perpetual software licensing arrangements generally include twelve months of bundled PCS, while our standard term-based software licensing arrangements typically include PCS for the full duration of the term license. Because we do not have vendor specific objective evidence of the fair value of these undelivered elements, we recognize as revenue the entire fee for such perpetual and term-based licenses ratably over the term of the bundled PCS.

Renewal of PCS under Perpetual Software Licenses. Our PCS includes the right to receive unspecified upgrades or enhancements and technical support. Fees from customer renewals of PCS related to previously purchased perpetual licenses are recognized ratably over the term of the PCS.

Database Content. Database content is licensed on a term basis and provides customers with access to the licensed content over the term of the agreement. Revenue from these licensing arrangements is recognized ratably over the term of the agreement, which is typically twelve months.

Professional Services. We provide certain services to our customers, including non-complex product training, installation, implementation and other professional services which are non-essential to the operation of the software. We also perform professional services for our customers designed to enhance the value of our software products by creating extensions to functionality to address a client’s specific business needs. When sold separately, revenue from these services is recorded as such services are delivered.

Multi-Element Arrangements. For multi-element arrangements which include software licenses, PCS and non-complex training, installation and implementation services which are non-essential to the operation of the software, the entire fee for such arrangements is recognized as revenue ratably over the term of the PCS or delivery of the services, whichever is longer. For multi-element arrangements which also include services that are essential to the operation of the software, the fee for such arrangements is generally deferred until the services essential to the operation of the software have been performed, at which point the entire fee for such arrangements is recognized as revenue ratably over the remaining term of the PCS or the delivery of the non-essential services, whichever is longer.

Deferred Costs

Occasionally we enter into professional service arrangements under which all the revenue is deferred until certain elements of the arrangements are delivered. Management considers the applicable revenue recognition guidance to determine the cost recognition of the deferred cost, as well as our ability to realize such deferred costs. Management believes recognizing deferred costs in the same period that revenue is recognized will provide investors a clearer view of the profitability of the contracts. As a result, we defer the direct variable expense, not exceeding the revenue deferred, in other current assets on the balance sheet until the period when revenue is recognized. Direct and incremental variable expenses include direct labor costs and direct services contracts with third parties working on the software service arrangements. As of September 30, 2010 and March 31, 2010, we deferred approximately $0.9 million and $0.8 million, respectively, of direct and incremental variable expenses related to software service arrangements where the revenue is deferred until future periods.

 

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Software Development Costs for Computer Software to be Sold

Costs incurred internally in the research and development of new software products and significant enhancements to existing software products for computer software to be sold are expensed as incurred until the technological feasibility of the product has been established. Technological feasibility occurs shortly before our internally developed software products are available for general release. We have determined that the internal costs eligible for capitalization are not material. Costs paid to third parties for products in which technological feasibility has been established are capitalized upon purchase of the software.

At September 30, 2010 and March 31, 2010, we had $2.0 million of capitalized software purchased from third parties. This amount is included in purchased intangible assets, net, in the accompanying condensed consolidated balance sheets. These costs are being amortized to cost of revenue on a straight-line basis over their estimated useful life of five years. Amortization expense was $0.1 million for each of the quarters ended September 30, 2010 and 2009 and $0.2 million for each of the six-month periods ended September 30, 2010 and 2009.

Share Based Compensation

We estimate the fair value of our share-based awards on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of certain input variables, as follows:

Expected Volatility. Volatility is a measure of the amount the stock price will fluctuate during the expected life of an award. We determine volatility based on our historical stock price volatility over the most recent period equivalent to the expected life of the award, giving consideration to company-specific events impacting historical volatility that are unlikely to occur in the future, as well as anticipated future events that may impact volatility. We also consider the historical stock price volatilities of comparable publicly traded companies.

Risk-Free Interest Rate. Our assumption of the risk-free interest rate is based on the interest rates on U.S. constant rate treasury securities with contractual terms approximately equal to the expected life of the award.

Expected Dividend Yield. Because we have not paid any cash dividends since our inception and do not anticipate paying dividends in the foreseeable future, we assume a dividend yield of zero.

Expected Award Life. We determine the expected life of an award by considering various relevant factors, including the vesting period and contractual term of the award, our employees’ historical exercise patterns and length of service, the expected future volatility of our stock price and employee characteristics. We also consider the expected terms of comparable publicly traded companies. For the 2005 Employee Stock Purchase Plan (the “ESPP”) purchase rights, the expected life is equal to the current offering period under the ESPP.

We also estimate at grant the likelihood that the award will ultimately vest (the “pre-vesting forfeiture rate”) and revise the estimate, if necessary, in future periods if the actual forfeiture rate differs. We determine the pre-vesting forfeiture rate of an award based on our historical pre-vesting award forfeiture experience, giving consideration to company-specific events impacting our historical pre-vesting award forfeiture experience that are unlikely to occur in the future as well as anticipated future events that may impact forfeiture rates.

Income Taxes

Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial carrying amounts and the tax basis of existing assets and liabilities by applying enacted statutory tax rates applicable to future years. The provision for income taxes is based on our estimates for taxable income of the various legal entities and jurisdictions in which we operate. As such, income tax expense may vary from the customary relationship between income tax expense and pre-tax income. We establish a valuation allowance against our net deferred tax assets to reduce them to the amount expected to be realized.

 

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We assess the recoverability of our deferred tax assets on an ongoing basis. In making this assessment we are required to consider all available positive and negative evidence to determine whether, based on such evidence, it is more likely than not that some portion or all of our net deferred assets will be realized in future periods. This assessment requires significant judgment. We do not recognize current and future tax benefits until it is more likely than not that our tax positions will be sustained. In general, any realization of our net deferred tax assets will reduce our effective rate in future periods. However, the realization of deferred tax assets that are related to net operating losses (“NOLs”) that were generated by tax deductions resulting from the exercise of non-qualified stock options will be a direct increase to stockholders’ equity.

We determine whether the benefits of our tax positions are more-likely-than-not to be sustained upon audit based on the technical merits of the tax position. We recognize the impact of an uncertain income tax position taken on our income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position is not recognized if it has less than a 50% likelihood of being sustained. We have an unrecognized tax benefit of $11.4 million related to pre-acquisition NOLs from acquisitions outside of the U.S. Upon realization of these pre-acquisition NOLs, we will recognize the benefit as a credit to income. As of September 30, 2010, we have not realized the benefit of any of these pre-acquisition NOLs.

Approximately $7.3 million in reserves against tax positions taken by Symyx prior to the Merger has been recorded in our preliminary purchase price allocation. As more fully described in Note 2, we are still evaluating these positions.

Interest and penalties related to income tax matters are recognized in income tax expense. During the three and six months ended September 30, 2010 we did not incur any expense related to interest or penalties for income tax matters. Included in the $7.3 million in reserves noted above was approximately $1.0 million in interest and penalties, which remained accrued as of September 30, 2010.

 

2.	Business Combinations

On July 1, 2010, we completed the Merger, whereby Symyx became our wholly-owned subsidiary. Pursuant to the terms of the Agreement and Plan of Merger and Reorganization, dated April 5, 2010, by and among Accelrys, Merger Sub and Symyx (the “Merger Agreement”), Symyx stockholders received 0.7802 shares of our common stock (the “Exchange Ratio”) for each share of Symyx common stock held on July 1, 2010. As a result, we issued an aggregate of approximately 27.4 million shares of our common stock to Symyx stockholders on July 1, 2010. In addition, 2,441,274 outstanding options to purchase Symyx common stock were assumed by us and converted into options to purchase our common stock, in each case appropriately adjusted based on the Exchange Ratio. Based on criteria under business combination accounting guidance, Accelrys was deemed to be the accounting acquirer.

As a result of the Merger, our U.S. federal and state deferred tax assets related to NOL carryforwards of $117.1 million and $30.6 million, respectively, as of March 31, 2010 may be subject to further limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”).

Fair Value of Consideration Transferred

 

(in thousands except exchange ratio, share and per share amounts )
Symyx common stock outstanding on June 30, 2010			34,986
Accelerated vesting of Symyx restricted stock units (“Symyx RSUs”) immediately prior to the Merger			132	(1)
Symyx common stock outstanding on June 30, 2010 (including Symyx RSUs)			35,118
Exchange ratio			0.7802
Number of shares of Accelrys stock issued in connection with the Merger			27,399
Per share closing price of Accelrys common stock on June 30, 2010		$	6.45
Fair value of estimated shares of Accelrys common stock to be issued in connection with the Merger		$	176,721
Fair value of exchanged equity awards		$	1,504	(2)
Preliminary estimated value of consideration transferred		$	178,225

 

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(1)	Represents unvested Symyx RSUs as of June 30, 2010. Pursuant to the Symyx 2007 Stock Incentive Plan, as amended (the “2007 Plan”) and associated grant agreements, unvested Symyx RSUs accelerated vesting upon a change of control (including the Merger).

(2)

Includes the fair value of Symyx stock options, granted to Symyx employees in connection with services provided prior to the Merger, exchanged for options to acquire 2,441,274 shares of Accelrys common stock in connection with the Merger. The fair value of the vested stock options exchanged is included in the calculation of purchase consideration and was determined using the Black-Scholes option pricing model using an Accelrys share price of $6.45. The assumptions used were as follows:

 

Expected volatility			32% – 65	%
Risk-free interest rate			0.22% – 1.4	%
Expected option life in years			0.5 – 4.0
Expected dividend yield			0	%

Recording of Assets Acquired and Liabilities Assumed

The Company has not yet finalized the determination of the fair values of the assets acquired and liabilities assumed in connection with the Merger. As a result, the fair values set forth below are considered preliminary and subject to potentially significant adjustments during the measurement period once the valuations are completed. We are reviewing the acquisition date fair value of the followings items:

 

•

We have engaged tax consultants to assist in our evaluation of uncertain tax positions, and we have not yet completed this evaluation.

 

•

We have a pre-acquisition legal contingency which we believe is probable but not estimable at this time. We believe we may obtain certain information that will allow us to measure the fair value of any potential obligation during the measurement period.

 

•

We have engaged a valuation firm to assist in valuing our intangible assets, real property, lease obligations, note receivable, deferred revenue and investments, and we have not yet completed these valuations.

The following table summarizes the preliminary acquisition-date fair value of the identifiable assets acquired and liabilities assumed, including an amount for recognized goodwill:

 

		(in thousands)
Fair Value of Consideration Transferred		$	178,225
Less: Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents			74,467
Accounts receivable			14,234
Other current assets			7,817
Property, plant and equipment			8,735
Intangible assets			75,390
Long-term investments			18,510
Other assets			9,831
Other current liabilities			(22,900	)
Deferred revenue			(14,559	)
Other long-term liabilities			(22,897	)
Goodwill		$	29,597

The goodwill resulting from the Merger consists largely of the synergies expected from combining the operations of Accelrys and Symyx. The anticipated synergies primarily relate to redundant staffing and related internal support costs, redundant locations, redundant systems and IT costs and purchasing economies of scale as well as an assembled workforce. Management has concluded that there is one reportable segment for the combined company and therefore all goodwill is allocated to the one reporting segment. There is no tax deductible goodwill as a result of the Merger.

 

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Below is a summary of the methodologies and significant assumptions used in estimating the preliminary fair value of purchased intangible assets.

Intangible assets – The preliminary fair value of the purchased intangible assets was determined using the below valuation approaches. In estimating the preliminary fair value of the purchased intangible assets, the Company utilized the valuation methodology determined to be most appropriate for the individual intangible asset being valued as described below. The purchased intangible assets include the following:

 

		Valuation Method		Estimated Fair Value				Remaining Useful Lives (1)
				(in thousands)				(years)
Completed Technology		Multi-Period Excess Earnings (2)		$	46,000				5-15
Backlog		Multi-Period Excess Earnings (2)			5,690				3.5
Customer Contracts / Relationships		With and Without (3)			18,100				7
Trademarks and trade names		Relief from Royalty (4)			5,600				5
Total purchased intangible assets				$	75,390

 

(1)

Determination of the estimated useful lives of the individual categories of purchased intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with definite lives is recognized over the shorter of the respective lives of the agreement or the period of time the assets are expected to contribute to future cash flows.

(2)

The multi-period excess earnings method estimates a purchased intangible asset’s value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The value attributed to these intangibles was based on projected net cash inflows from existing contracts or relationships.

(3)	The with and without method is a differential earnings method where the first scenario assumes the asset is being used by the entity to generate cash flows and second scenario assumes the asset is not available for use by the entity.

(4)	The relief from royalty method is an earnings approach which assesses the royalty savings an entity realizes since it owns the asset and doesn’t have to pay a third party a license fee for its use.

Some of the more significant estimates and assumptions inherent in the estimate of the fair value of the identifiable purchased intangible assets include all assumptions associated with forecasting cash flows and profitability. The primary assumptions used for the determination of the preliminary fair value of the purchased intangible assets were generally based upon the present value of anticipated cash flows discounted at rates ranging from 13% to 26%. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.

 

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Actual and Pro Forma Impact of the Merger

The amounts of revenue and net loss of Symyx included in the Company’s consolidated statement of operations from the acquisition date, through the period ending September 30, 2010, are as follows:

 

		(in thousands)
Revenue		$	8,559
Net loss		$	(18,596	)

The following unaudited pro forma information presents the consolidated results of Accelrys and Symyx for the three and six months ended September 30, 2010 and 2009, respectively, with adjustments to give effect to pro forma events that are directly attributable to the Merger and have a continuing impact, but exclude the impact of pro forma events that are directly attributable to the Merger and are one-time occurences. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods, the results of operations that actually would have been realized had the entities been a single company during the periods presented or the results of operations that the combined company will experience after the Merger. The unaudited pro forma information does not give effect to the potential impact of current financial conditions, regulatory matters or any anticipated synergies, operating efficiencies or cost savings that may be associated with the Merger. The unaudited pro forma information also does not include any integration costs, dis-synergies or remaining future transaction costs that the companies may incur as a result of the Merger and combining the operations of the companies.

The unaudited pro forma consolidated results of operations, assuming the Merger had occurred on April 1, 2009, are as follows:

 

		For the Three Months Ended September 30,
		2010				2009
		(In thousands)
Unaudited pro forma consolidated results:
Revenue		$	29,114			$	42,015
Net income (loss) from continuing operations		$	(3,379	)		$	2,978
		For the Six Months Ended September 30,
		2010				2009
		(In thousands)
Unaudited pro forma consolidated results:
Revenue		$	68,832			$	82,933
Net Income (loss) from continuing operations		$	(14,381	)		$	2,030

We have incurred a total of $5.6 million of transaction expenses to date relating to the Merger, of which $3.4 million and $5.0 million are included in the “Business consolidation and restructuring costs (recoveries)” line in our condensed consolidated statement of operations for the three and six months ended September 30, 2010, respectively. In addition, we recorded approximately $0.8 million of equity issuance costs which are recorded in additional paid-in capital in connection with the issuance of our common stock to Symyx stockholders in connection with the Merger.

Income tax impact of business combination

During the quarter ended September 30, 2010, as a result of the Merger, we released $16.5 million of our valuation allowance against our deferred tax assets, as we have concluded that our NOLs can be utilized against the assumed deferred tax liabilities of Symyx . We do not anticipate any further release of the valuation allowance against our deferred tax assets in the near future.

 

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3.	Net Income (Loss) Per Share

Basic net income (loss) per share and diluted net loss per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common stock and common stock equivalents outstanding during the period. Potentially dilutive common stock equivalents consist of common stock options and unvested restricted stock units (“RSUs”).

 

		Three Months Ended September 30,								Six Months Ended September 30,
		2010				2009				2010				2009
		(In thousands, except per share amounts)
Numerator:
Net income (loss)		$	(3,379	)		$	1,846			$	(4,961	)		$	2,590
Denominator:
Weighted average common shares outstanding			55,479				27,503				41,726				27,403
Dilutive potential common stock equivalents			—				398				—				259
Weighted average shares and dilutive potential common shares			55,479				27,901				41,726				27,662
Net income (loss) per share:
Basic		$	(0.06	)		$	0.07			$	(0.12	)		$	0.09
Diluted		$	(0.06	)		$	0.07			$	(0.12	)		$	0.09

Potentially dilutive common stock equivalents that were excluded from the diluted net income per share calculations since their effect would be anti-dilutive totaled approximately 5.1 million and 4.6 million shares for the three and six months ended September 30, 2010, respectively, and 2.0 million shares and 2.7 million shares for the three and six months ended September 30, 2009, respectively.

 

4.	Share-Based Payments

Share-Based Compensation Plans

On August 2, 2005, our stockholders approved the Amended and Restated 2004 Stock Incentive Plan (the “2004 Plan”). The 2004 Plan authorizes the grant of equity awards to purchase up to that number of shares of our common stock equal to the sum of (i) 1,900,000 shares and (ii) the number of shares of common stock underlying any stock awards granted under certain prior share-based compensation plans that expire or are cancelled or forfeited without having been exercised in full or that are repurchased by us. The types of equity awards that may be granted under the 2004 Plan to our officers, directors, employees and consultants include stock options, RSUs, restricted stock awards, common stock awards, stock appreciation rights, performance awards and deferred stock units. Pursuant to the 2004 Plan, any shares of common stock that are awarded under the 2004 Plan as RSUs, restricted stock awards, common stock awards, performance awards or deferred stock units (but not as stock options or stock appreciation rights) are counted against the maximum number of shares of common stock available for issuance under the 2004 Plan based on a 1.15-to-1 ratio. The terms and conditions of specific awards are set at the discretion of our board of directors although generally awards vest over not more than four years, expire no later than ten years from the date of grant and do not have exercise prices less than the fair market value of the underlying common stock on the date of grant. At September 30, 2010, approximately 670,000 shares of our common stock remained available for issuance pursuant to awards granted under the 2004 Plan.

On August 2, 2005, our stockholders also approved the ESPP, under which we have reserved 1,000,000 shares of our common stock for issuance. Under the ESPP, employees may defer up to 10% of their base salary to purchase shares of our common stock, up to a maximum of 1,000 shares per offering period. The purchase price of the common stock is equal to 85% of the lower of the fair market value per share of our common stock on the commencement date of the applicable offering period or the applicable purchase date. To date, we have issued approximately 580,000 shares under the ESPP and approximately 420,000 shares remained available for future issuance under the ESPP as of September 30, 2010.

 

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Upon completion of the Merger, all options to purchase Symyx common stock that were outstanding immediately prior to the Merger were assumed by us and converted into options to purchase our common stock (with the number of shares subject to each such option and the exercise price applicable to each such option adjusted based on the Exchange Ratio). We assumed each such stock option in accordance with the terms and conditions of the applicable Symyx stock option plan and stock option agreement, subject to the adjustments described in the preceding sentence. We also assumed the 2007 Plan, pursuant to which any shares of common stock that are awarded as RSUs, restricted stock awards, common stock awards, performance awards or deferred stock units (but not as stock options or stock appreciation rights) are counted against the maximum number of shares of common stock available for issuance under the 2007 Plan based on a 1.65-to-1 ratio. The terms and conditions of specific awards are set at the discretion of our board of directors although generally awards vest over not more than four years, expire no later than seven years from the date of grant and have exercise prices equal to or greater than the fair market value of the underlying common stock on the date of grant. As of September 30, 2010, there are approximately 4,464,000 shares of our common stock available for issuance under the 2007 Plan. These shares are available to grant to any employee, director or consultant who was not an employee, director or consultant of Accelrys prior to the Merger.

We also maintain certain other share-based compensation plans, pursuant to which we have not granted awards during calendar year 2010 and do not intend to grant any further awards in the future.

Share-Based Award Activity

A summary of stock option activity under our share-based compensation plans is as follows:

 

		Number of Shares				Weighted Average Exercise Price				Aggregate Intrinsic Value				Weighted Average Remaining Contractual Life
		(In thousands, except per share amounts)
Outstanding at April 1, 2010			3,544			$	6.39
Symyx stock options assumed			2,441				14.92
Granted			938				6.72
Exercised			(108	)			5.11
Expired/Forfeited			(388	)			9.90
Outstanding at September 30, 2010			6,427				9.49				4,869				5.67
Exercisable at September 30, 2010			3,638				11.90				2,277				4.14

RSUs granted under the 2004 Plan and 2007 Plan generally vest annually over three years and, once vested, do not expire. Upon vesting of an RSU, employees are generally issued an equivalent number of shares of our common stock. A summary of RSU activity under our share-based compensation plans is as follows:

 

		Number of Shares				Weighted Average Grant Date Fair Value Per Share
		(In thousands, except per share amounts)
Unvested at April 1, 2010			950			$	5.60
Granted			509				6.78
Vested			(333	)			5.65
Forfeited			(113	)			5.33
Unvested at September 30, 2010			1,013			$	6.15

 

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Included in the vested shares for the period are approximately 94,000 shares tendered to us by employees for payment of minimum income tax obligations upon vesting of RSUs.

Share-Based Compensation Expense

The estimated fair value of our share-based awards is generally recognized as a charge against income on a straight-line basis over the requisite service period, which is generally the vesting period of the award. Total share-based compensation expense recognized in our condensed consolidated statements of operations for the three and six months ended September 30, 2010 and 2009 was as follows:

 

		Three Months Ended September 30,								Six Months Ended September 30,
		2010				2009				2010				2009
		(In thousands)
Cost of revenue		$	51			$	49			$	103			$	112
Product development			306				229				543				451
Sales and marketing			334				292				680				458
General and administrative			480				451				981				788
Business consolidation and restructuring charges (recoveries)			1,204				—				1,204				—
Total stock-based compensation expense		$	2,375			$	1,021			$	3,511			$	1,809

No share-based compensation expense was capitalized in the periods presented. At September 30, 2010, the gross amount of unrecognized share-based compensation expense relating to unvested share-based awards was approximately $11.9 million, which we anticipate recognizing as a charge against income over a weighted average period of 2.5 years.

 

5.	Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period, except those changes resulting from investments by stockholders (changes in paid in capital) and distributions to stockholders (i.e., dividends). For the three and six months ended September 30, 2010 and 2009, comprehensive income (loss) consists of the following:

 

		Three Months Ended September 30,								Six Months Ended September 30,
		2010				2009				2010				2009
		(In thousands)
Net income (loss)		$	(3,379	)		$	1,846			$	(4,961	)		$	2,590
Foreign currency translation adjustment			(547	)			(116	)			(258	)			(774	)
Unrealized gain on marketable securities			—				14				—				18
Total comprehensive income (loss)		$	(3,926	)		$	1,744			$	(5,219	)		$	1,834

 

6.	Marketable Securities

Our marketable securities consisted of auction rate securities (“ARS”) with original maturities of greater than three months. On November 11, 2008 (the “Acceptance Date”), we entered into an agreement (the “ARS Agreement”) with one of our investment securities firms (the “Investment Firm”) pursuant to which the Investment Firm agreed to repurchase all of our ARS at par value. By accepting the ARS agreement, we (1) received the right to sell our ARS at par value to the Investment Firm between June 30, 2010 and July 2, 2010 (the “Put Option”) and (2) gave the Investment Firm the right to purchase the ARS from us any time after the Acceptance Date as long as we receive par value.

 

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During the quarter ended September 30, 2010, we exercised the Put Option with respect to $2.7 million of par value ARS. The remaining $2.9 million of ARS were called by the issuer at par value. Since the trade on the Put Option for one of our ARS with a par value of $0.3 million had not settled prior to the quarter end, and the ARS had not been converted into cash at that time, we recorded a $0.3 million receivable from our banker which was settled for cash in October 2010.

Our marketable securities as of March 31, 2010 consisted of the following:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
March 31, 2010:
Auction rate securities		$	10,461				—				—			$	10,461
		$	10,461			$	—			$	—			$	10,461

 

7.	Fair Value

We carry our cash equivalents and marketable securities at market value. The carrying amount of accounts receivable, accounts payable and accrued liabilities are considered to be representative of their respective fair values due to their short-term nature.

Fair value accounting provides a definition of fair value, establishes acceptable methods of measuring fair value and expands disclosures for fair value measurements. The principles apply under accounting pronouncements which require measurement of fair value and do not require any new fair value measurements in accounting pronouncements where fair value is the relevant measurement attribute. Fair value accounting also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.

In accordance with fair value accounting, fair value measurements are classified under the following hierarchy:

Level 1 — Quoted prices for identical instruments in active markets.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

Level 3 — Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

The following table summarizes the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

		Fair Value Measurements Using Significant Unobservable Level 3 Inputs Auction Rate Securities
		(In thousands)
Balance at April 1, 2010		$	11,750
Redemption of auction rate securities			(11,750	)
Balance at September 30, 2010		$	—

 

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8.	Guarantees

Guarantee of Lease Obligation of Others

On April 30, 2004, we spun-off our drug discovery subsidiary, Pharmacopeia Drug Discovery, Inc. (“PDD”), into an independent, separately traded, publicly held company through the distribution to our stockholders of a dividend of one share of PDD common stock for every two shares of our common stock. The landlords of our New Jersey facilities, which were used by our PDD operations, consented to the assignment of the leases to PDD. Despite the assignment, the landlords required us to guarantee the remaining lease obligations, which totaled approximately $13.7 million as of September 30, 2010. In the event that PDD defaults on their lease commitment, we are permitted under the guarantee to sublease the facility in order to mitigate our lease obligation. In fiscal year 2005, we recognized a liability and corresponding charge to stockholders’ equity for the probability-weighted fair market value of the guarantee. Changes to the fair market value of the liability are recognized in stockholders’ equity. The liability for our guarantee of the lease obligation was $0.4 million at September 30, 2010 and March 31, 2010.

Other Guarantees and Indemnifications

We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products. We have also entered into indemnification agreements with our officers and directors. Although the maximum potential amount of future payments we could be required to make under these indemnifications is unlimited, to date we have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. Additionally, we have insurance policies that, in most cases, would limit our exposure and enable us to recover a portion of any amounts paid. Therefore, we believe the estimated fair value of these agreements is minimal and likelihood of incurring an obligation is remote. Accordingly, we have not accrued any liabilities in connection with these indemnification obligations as of September 30, 2010.

 

9.	Restructuring Activities

The following summarizes the changes in our accrued restructuring charges liability:

 

		Severance and Related Costs				Lease Obligation Exit and Facility Closure Costs				Total
		(In thousands)
Balance at March 31, 2009		$	175			$	817			$	992
Additional severance and lease abandonment charges			(74	)			(12	)			(86	)
Adjustments to liability			(61	)			142				81
Cash payments			(43	)			(370	)			(413	)
Effect of foreign exchange			3				63				66
Balance at March 31, 2010			—				640				640
Symyx assumed restructuring liability			138				5,860				5,998
Additional severance and lease abandonment charges			3,543				—				3,543
Adjustments to liability			—				27				27
Cash payments			(832	)			(5,389	)			(6,221	)
Effect of foreign exchange			12				42				54
Balance at September 30, 2010		$	2,861			$	1,180			$	4,041

In July 2010, as a result of the Merger, we implemented a plan to terminate the employment of approximately 80 employees in the U.S., UK, France and Japan. In connection with the termination, we incurred approximately $3.5 million in severance charges in the quarter ended September 30, 2010. As of September 30, 2010, approximately 40 employees had left the Company, and the employment of approximately 40 additional employees will terminate during the quarter ending December 31, 2010. We expect to incur an additional $0.5 million in severance charges through December 31, 2010. As of September 30, 2010, $0.8 million in cash payments had been made, and the remaining $2.7 million will be paid during the quarter ending December 31, 2010 or the quarter ending March 31, 2011.

 

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In August 2010, we bought out our remaining commitment under an operating lease in which we were contractually obligated through 2015 for approximately $4.7 million, net of our deposit of $0.1 million. A liability of approximately $5.3 million for this lease termination was recorded in our preliminary purchase price allocation upon completion of the Merger, which included the gross buyout obligation of $4.9 million and operating expense obligations through the date of the buyout of $0.4 million. As of September 30, 2010 we have no further obligations under such lease.

Prior to the Merger, Symyx had implemented various restructuring plans under which lease obligations of approximately $0.6 million and severance obligations of approximately $0.1 million remained as of the merger date. Additionally, prior to 2007, we had implemented a restructuring plan under which our lease obligation remains. Our obligations under the aforementioned lease agreements terminate in 2012, 2016 and 2022.

All amounts incurred in connection with the above activities are recorded in the “Business consolidation and restructuring costs (recoveries)” line in the accompanying condensed consolidated statements of operations, with the exception of the acquired balance of $6.0 million that was recorded in our preliminary purchase price allocation, as further described in Note 2.

 

10.	Legal Proceedings

Prior to the completion of the Merger, several lawsuits were filed against Symyx, the members of the Symyx board of directors and certain executive officers of Symyx, Accelrys and Merger Sub in purported class action lawsuits brought by individual Symyx stockholders challenging the Merger. The first of such lawsuits was a class action lawsuit filed in the Superior Court of the State of California, County of Santa Clara, purportedly on behalf of the stockholders of Symyx, against Symyx and its directors and chief financial officer, as well as Accelrys and Merger Sub, alleging, among other things, that Symyx’s directors breached their fiduciary duties to the stockholders of Symyx in connection with the proposed Merger. Subsequent to the filing of such lawsuit, several additional suits were filed, also in Santa Clara County, each of which was substantially similar to the first lawsuit. The lawsuits were ultimately consolidated into a single action and on May 20, 2010, the plaintiffs filed a single consolidated complaint (the “Complaint”). The Complaint serves as the only complaint in the combined litigation going forward (the “Consolidated Action”), which is pending in the Superior Court for the County of Santa Clara (the “Court”). The Complaint, like the previously filed complaints, alleges, among other things, that Symyx’s directors breached their fiduciary duties to the stockholders of Symyx in connection with the Merger, and was seeking, among other things, to enjoin the defendants from completing the Merger pursuant to the terms of the Merger Agreement.

On June 22, 2010, the defendants entered into a memorandum of understanding (the “MOU”) with the plaintiffs, pursuant to which the defendants and the plaintiffs agreed to settle the Consolidated Action. Subject to court approval and further definitive documentation the MOU resolves the allegations by the plaintiffs against the defendants made in connection with the Merger and the Merger Agreement, and provides a release and settlement by the purported class of Symyx stockholders with prejudice of all asserted claims against the defendants without costs to any defendant (other than as expressly provided in the MOU), in exchange for Symyx’s agreement to provide additional supplemental disclosures to the joint proxy statement/prospectus issued by Accelrys and Symyx in connection with the Merger. Accelrys and Symyx made the appropriate supplemental disclosures and the parties have agreed to present to the Court a stipulation of settlement and any other documentation as may be required in order to obtain approval by the Court of a settlement on behalf of the class of stockholders and the dismissal of the actions in the Complaint. We will be obligated to pay any attorneys fees and expenses awarded to the plaintiffs, if any. If the settlement is not approved or the conditions of the MOU are not satisfied, we intend to take all appropriate actions to defend against the allegations made in the Complaint.

 

11.	Recent Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our results of operations, financial position and cash flows.

 

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In September 2009, the FASB issued new accounting guidance related to certain revenue arrangements that include software elements. Previously, companies that sold tangible products with “more than incidental” software were required to apply software revenue recognition guidance. This guidance often delayed revenue recognition for the delivery of the tangible product. Under the new guidance, tangible products that have software components that are “essential to the functionality” of the tangible product will be excluded from the software revenue recognition guidance. The new guidance will include factors to help companies determine what is “essential to the functionality.” Software-enabled products will now be subject to other revenue guidance and will likely follow the guidance for multiple deliverable arrangements issued by the FASB in September 2009. The new guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our results of operations, financial position and cash flows.

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

When used anywhere in this Quarterly Report on Form 10-Q (this “Report”), the words “expect”, “believe”, “anticipate”, “estimate”, “intend”, “plan” and similar expressions are intended to identify forward-looking statements. These forward-looking statements may include statements addressing our future financial and operating results. We have based these forward-looking statements on our current expectations about future events. Such statements are subject to certain risks and uncertainties including those related to execution upon our strategic plans, the successful release and acceptance of new products, the demand for new and existing products, additional competition, changes in economic conditions and those described in documents we have filed with the SEC, including this Report in the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” and in our subsequent reports on Form 10-Q and Form 10-K. All forward-looking statements in this Report are qualified entirely by the cautionary statements included in this Report and such other filings. These risks and uncertainties could cause actual results to differ materially from results expressed or implied by forward-looking statements contained in this Report. These forward-looking statements speak only as of the date of this Report. We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this Report.

Overview

On July 1, 2010, pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub merged with and into Symyx, with Symyx surviving as our wholly-owned subsidiary. Symyx’s operating results are included in our results of operations beginning July 1, 2010.

Our Business

We develop and commercialize scientific informatics software and solutions that enable our customers to accelerate the discovery and development of new drugs and materials. Our customers include pharmaceutical, biotechnology and other life science companies, as well as companies that are in the energy, chemicals, aerospace and consumer packaged goods markets. Our software and service solutions are used by our customers’ scientists, biologists, chemists and information technology professionals in order to aggregate, mine, integrate, analyze, simulate, manage and interactively report scientific data. Our customers include leading commercial, government and academic organizations. Many of the largest pharmaceutical, biotechnology, chemicals, energy, aerospace and consumer packaged goods companies worldwide use our software. We market our products and services worldwide, principally through our direct sales force, augmented by the use of third-party distributors.

Following the completion of the Merger, we began providing a suite of scientific software, content and technology, as well as associated professional services, to support R&D information lifecycle management across the enterprise, improving scientists’ ability to search, develop, manage, manipulate and store research data and to manage intellectual property.

 

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Our Marketplace

A primary market for our solutions is the pharmaceutical and biotechnology industries. This market has been challenging due to industry consolidation, the maturity of the market, industry consolidation, reduction in the level of discovery research activity, and increased competition, including competition from open source software. We also sell our products to the energy, aerospace, chemicals, and consumer packaged goods industries. We believe these industries are in the early stages of adoption of these technologies. These industries to varying degrees are under pressure due to the broader economic environment of the past two years.

Following the completion of the Merger, we added to our software offering products from the Symyx product line, including their electronic lab notebook, content, chemistry and lab execution products. These Symyx product offerings, together with associated professional services are marketed and sold primarily to life science, chemicals and energy companies, as well as consumer and industrial products companies. The content business faces significant downward pressure due to competition, difficult market dynamics associated with the downsizing in the pharmaceutical industry and the increasing availability of this type of information for little to no fee.

Our Strategy

We believe the combination of our scientific informatics platform, our computer aided design modeling and simulation software and service solutions, and the Symyx products, enables our customers to better utilize their scientific data in order to solve critical business issues throughout their organizations. Through the merger with Symyx, our strategy is to offer an open, enterprise-scale informatics system for global scientific R&D, leveraging our deep domain expertise in chemistry, biology and materials science. We also are investing in a dedicated professional services organization to support these efforts and growing our partner ecosystem to increase the use of our scientific informatics system so that it remains the de facto standard in the industries we serve. In order to increase the use of our platform we will be bringing the Accelrys and Symyx solutions together, as well as continuing to develop advanced analysis and reporting component collections which operate with our scientific informatics platform in order to extend its capabilities and value to our customers. Our scientific informatics platform is also the basis of many of our service offerings, including offerings which integrate and enhance our customers’ software, thereby further increasing the use and value of our platform. Because our scientific informatics platform is the underlying informatics platform for many products in our broad portfolio of software and service solutions, we expect the usage of these products to increase as the usage of our platform increases, thus further increasing our sales and value to our customers.

Following the completion of the Merger, our strategy was further developed to include developing a combined marketing and selling approach that will enable us to take advantage of key strategic customer and partner relationships, which will allow us to gain further insight into the changing needs of our customers and deliver more agile, flexible and open scientific R&D environments through adaptive end-to-end workflow solutions.

We intend to continue to market and distribute our solutions to a broader group of users, including scientists, engineers and information technology professionals within our existing customer base, as well as to new customers in other industries. We also intend to continue to partner with other companies who provide scientific software and services in order to ensure that their software and service solutions operate with our scientific informatics platform, further proliferating its use and value to our customers.

Critical Accounting Policies

The critical accounting policies and estimates used in the preparation of our condensed consolidated financial statements are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of the Form 10-K. There have been no significant changes in our critical accounting policies and estimates since March 31, 2010.

 

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Results of Operations

Historically, we have received approximately two-thirds of our annual customer orders and bookings in the fiscal quarters ended December 31 and March 31. In accordance with our revenue recognition policies, the revenue associated with these orders is generally recognized over the contractual license term. Therefore, because our policy is to accrue and expense sales commissions and royalties upon the invoicing of customer orders, we have historically experienced an increase in operating costs and expenses and a decrease in income during the second half of our fiscal year. As a result of these and other seasonal variations, we believe that sequential quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and that the interim financial results for the periods presented in this Report are not necessarily indicative of results for a full year or for any subsequent interim period.

Comparison of the Three Months Ended September 30, 2010 and 2009

The following table summarizes our results of operations as a percentage of revenue for the respective periods:

 

		Three Months Ended September 30,
		2010				2009
Revenue			100	%			100	%
Cost of revenue:
Cost of revenue			31	%			16	%
Amortization of completed technology			8	%			2	%
Total cost of revenue			39	%			17	%
Gross profit			61	%			83	%
Operating expenses:
Product development			32	%			19	%
Sales and marketing			42	%			41	%
General and administrative			16	%			14	%
Business consolidation and restructuring costs (recoveries)			37	%			*	%
Purchased intangible asset amortization			5	%			*	%
Total operating expenses			131	%			73	%
Operating income (loss)			(70	)%			9	%
Interest and other income			3	%			1	%
Income (loss) before income taxes			(67	)%			11	%
Income tax expense (benefit)			(55	)%			1	%
Net income (loss)			(12	)%			9	%

 

*	Less than 1%.

Revenue

Revenue increased 46% to $29.1 million for the three months ended September 30, 2010, as compared to $20.0 million for the three months ended September 30, 2009. The increase in revenue during the quarter ended September 30, 2010 was primarily attributable to the Merger, and includes Symyx revenue of approximately $8.6 million.

Total Cost of Revenue

Cost of Revenue. Cost of revenue increased to $9.1 million for the three months ended September 30, 2010, as compared to $3.1 million for the three months ended September 30, 2009. As a percentage of revenue, cost of revenue increased to 31% for the three months ended September 30, 2010 as compared to 16% for the three months ended September 30, 2009. The increase in cost of revenue during the quarter ended September 30, 2010 was primarily attributable to an increase in software and content royalties of approximately $2.0 million, an increase in personnel and related expenses in our services department of approximately $2.5 million, an increase in professional fees of approximately $0.4 million and an increase in overhead allocated expense of approximately $0.8 million, each as a result of the Merger.

 

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Amortization of Completed Technology. Amortization of completed technology increased to $2.4 million for the three months ended September 30, 2010, as compared to $0.4 million for the three months ended September 30, 2009. As a percentage of revenue, amortization of completed technology increased to 8% for the three months ended September 30, 2010 as compared to 2% for the three months ended September 30, 2009. The increase in amortization of completed technology was due to amortization of completed technology intangible assets acquired in the Merger.

Operating Expenses

Product Development Expenses. Product development expenses increased to $9.2 million for the three months ended September 30, 2010, as compared to $3.8 million for the three months ended September 30, 2009. As a percentage of revenue, product development expenses increased to 32% for the three months ended September 30, 2010 as compared to 19% for the three months ended September 30, 2009. The increase in product development expenses during the quarter ended September 30, 2010 was primarily attributable to an increase in personnel and related expenses of approximately $3.1 million, an increase in professional fees of approximately $1.1 million and an increase in overhead allocated expense of approximately $1.3 million, each as a result of the Merger.

Sales and Marketing Expenses. Sales and marketing expenses increased to $12.2 million for the three months ended September 30, 2010, as compared to $8.1 million for the three months ended September 30, 2009. As a percentage of revenue, sales and marketing expenses increased to 42% for the three months ended September 30, 2010 as compared to 41% for the three months ended September 30, 2009. The increase in sales and marketing expenses during the quarter ended September 30, 2010 was primarily attributable to an increase in personnel and related expenses of approximately $3.2 million, an increase in professional fees of approximately $0.3 million and an increase in overhead allocated expense of approximately $0.6 million, each as a result of the Merger.

General and Administrative Expenses. General and administrative expenses increased to $4.6 million for the three months ended September 30, 2010, as compared to $2.7 million for the three months ended September 30, 2009. As a percentage of revenue, general and administrative expenses increased to 16% for the three months ended September 30, 2010 as compared to 14% for the three months ended September 30, 2009. The increase in general and administrative expenses during the quarter ended September 30, 2010 was primarily attributable to an increase in personnel and related expenses of approximately $1.9 million and an increase in professional fees of approximately $0.9 million, partially offset by an increase in overhead expense allocated to other departments of approximately $0.9 million, each as a result of the Merger.

Business Consolidation and Restructuring Costs (Recoveries). Business consolidation and restructuring costs (recoveries) of $10.7 million for the three months ended September 30, 2010, consisted of $7.1 million in business consolidation costs and $3.5 million in restructuring costs. As a percentage of revenue, business consolidation and restructuring costs (recoveries) were 37% for the three months ended September 30, 2010. We have classified all transaction and integration related costs to business consolidation costs, which include personnel costs of $3.7 million related to employees who have been notified they are being terminated from the Company, and professional service and other costs of $3.4 million directly related to the Merger and integrating our companies.

Purchased Intangible Asset Amortization. Purchased intangibles assets amortization was $1.4 million for the three months ended September 30, 2010. As a percentage of revenue, amortization of purchased intangible assets was 5% for the three months ended September 30, 2010, and was related solely to the amortization of backlog, customer relationship and trademark intangible assets acquired in the Merger.

Net Interest and Other Income

Net interest and other income increased to $0.9 million for the three months ended September 30, 2010, as compared to $0.3 million for the three months ended September 30, 2009. Significant components of net interest and other income for the three months ended September 30, 2010 included interest income of $0.3 million, royalty revenue of $0.8 million, and a foreign currency exchange gain of $0.5 million, partially offset by royalty expense of $0.2 million and amortization of purchased intangible assets of $0.6 million. Significant components of net interest and other income for the three months ended September 30, 2009 included interest income of $0.1 million and a foreign currency exchange gain of $0.2 million.

 

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Income Tax Expense (Benefit)

Income tax benefit was $16.1 million for the three months ended September 30, 2010 as compared to income tax expense of $0.3 million for the three months ended September 30, 2009. In connection with the Merger, we released $16.5 million of our valuation allowance against our deferred tax assets, as we have concluded that our NOLs can be utilized against the deferred tax liabilities assumed in connection with the Merger.

Comparison of the Six Months Ended September 30, 2010 and 2009

The following table summarizes our results of operations as a percentage of revenue for the respective periods:

 

		Six Months Ended September 30,
		2010				2009
Revenue			100	%			100	%
Cost of revenue:
Cost of revenue			27	%			16	%
Amortization of completed technology			5	%			2	%
Total cost of revenue			32	%			18	%
Gross profit			68	%			82	%
Operating expenses:
Product development			27	%			20	%
Sales and marketing			43	%			41	%
General and administrative			15	%			14	%
Business consolidation and restructuring costs (recoveries)			25	%			*	%
Purchased intangible asset amortization			3	%			*	%
Total operating expenses			113	%			75	%
Operating income (loss)			(44	)%			7	%
Interest and other income , net			2	%			1	%
Income (loss) before income taxes			(43	)%			8	%
Income tax expense (benefit)			(33	)%			2	%
Net income (loss)			(10	)%			6	%

Revenue

Revenue increased 22% to $48.9 million for the six months ended September 30, 2010, as compared to $40.1 million for the six months ended September 30, 2009. The increase in revenue during the quarter ended September 30, 2010 was primarily attributable to the Merger, and includes Symyx revenue of approximately $8.6 million.

Total Cost of Revenue

Cost of Revenue. Cost of revenue increased to $13.1 million for the six months ended September 30, 2010, as compared to $6.3 million for the six months ended September 30, 2009. As a percentage of revenue, cost of revenue increased to 27% for the six months ended September 30, 2010 as compared to 16% for the six months ended September 30, 2009. The increase in cost of revenue during the quarter ended September 30, 2010 was primarily attributable to an increase in software and content royalties of approximately $2.3 million, an increase in personnel and related expenses in our services department of approximately $2.8 million, an increase in professional fees of approximately $0.6 million and an increase in overhead allocated expense of approximately $0.8 million, each as a result of the Merger.

 

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Amortization of Completed Technology. Amortization of completed technology increased to $2.4 million for the six months ended September 30, 2010, as compared to $0.8 million for the six months ended September 30, 2009. As a percentage of revenue, amortization of completed technology increased to 5% for the six months ended September 30, 2010 as compared to 2% for the six months ended September 30, 2009. The increase in amortization of completed technology was due to amortization of completed technology intangible assets acquired in the Merger .

Operating Expenses

Product Development Expenses. Product development expenses increased to $13.2 million for the six months ended September 30, 2010, as compared to $7.9 million for the six months ended September 30, 2009. As a percentage of revenue, product development expenses increased to 27% for the six months ended September 30, 2010, as compared to 20% for the six months ended September 30, 2009. The increase in product development expenses during the quarter ended September 30, 2010 was primarily attributable to an increase in personnel and related expenses of approximately $2.9 million, an increase in professional fees of approximately $1.1 million and an increase in overhead allocated expense of approximately $1.2 million, each as a result of the Merger.

Sales and Marketing Expenses. Sales and marketing expenses increased to $20.9 million for the six months ended September 30, 2010, as compared to $16.6 million for the six months ended September 30, 2009. As a percentage of revenue, sales and marketing expenses increased to 43% for the six months ended September 30, 2010 as compared to 41% for the six months ended September 30, 2009. The increase in sales and marketing expenses during the quarter ended September 30, 2010 was primarily attributable to an increase in personnel and related expenses of approximately $3.0 million, an increase in professional fees of approximately $0.4 million and an increase in overhead allocated expense of approximately $0.9 million, each as a result of the Merger.

General and Administrative Expenses. General and administrative expenses increased to $7.2 million for the six months ended September 30, 2010, as compared to $5.7 million for the six months ended September 30, 2009. As a percentage of revenue, general and administrative expenses increased to 15% for the six months ended September 30, 2010, as compared to 14% for the six months ended September 30, 2009. The increase in general and administrative expenses during the quarter ended September 30, 2010 was primarily attributable to an increase in personnel and related expenses of approximately $1.6 million and an increase in professional fees of approximately $0.9 million, partially offset by an increase in overhead expense allocated to other departments of approximately $0.9 million, each as a result of the Merger.

Business Consolidation and Restructuring Costs (Recoveries). Business consolidation and restructuring costs (recoveries) of $12.4 million for the six months ended September 30, 2010, were comprised of $8.8 million in business consolidation costs and $3.5 million in restructuring costs. As a percentage of revenue, business consolidation and restructuring costs (recoveries) were 25% for the six months ended September 30, 2010. We have classified all transaction and integration related costs to business consolidation costs, which includes personnel costs of $3.8 million related to current employees have been notified they will be terminated from the Company and professional service and other costs of $5.0 million directly related to the Merger and integrating our companies.

Purchased Intangible Asset Amortization. Purchased intangible asset amortization was $1.4 million for the six months ended September 30, 2010. As a percentage of revenue, purchased intangible asset amortization was 3% for the six months ended September 30, 2010, and was related solely to the amortization of backlog, customer relationship and trademark intangible assets acquired in the Merger.

Net Interest and Other Income

Net interest and other income was $0.8 million for the six months ended September 30, 2010, as compared to $0.3 million for the six months ended September 30, 2009. Significant components of net interest and other income for the six months ended September 30, 2010 included interest income of $0.4 million, royalty revenue of $0.8 million, and a foreign currency exchange gain of $0.3 million, partially offset by royalty expense of $0.2 million and amortization of purchased intangible assets of $0.6 million. Significant components of net interest and other income for the six months ended September 30, 2009 included interest income of $0.2 million and a gain on our auction rate securities of $0.2 million, partially offset by a foreign currency exchange loss of $0.2 million.

Income Tax Expense (Benefit)

Income tax benefit was $15.9 million for the six months ended September 30, 2010, as compared to income tax expense of $0.6 million for the six months ended September 30, 2009. In connection with the Merger, we released $16.5 million of our valuation allowance against our deferred tax assets, as we have concluded that our NOLs can be utilized against the deferred tax liabilities assumed in connection with the Merger.

 

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Liquidity and Capital Resources

We had cash, cash equivalents, marketable securities, and restricted cash of $148.5 million as of September 30, 2010, as compared to $93.1 million as of March 31, 2010, an increase of $55.4 million. The increase cash, cash equivalents, marketable securities and restricted cash during the six months ended September 30, 2010 was primarily attributable to a $74.5 million increase in cash acquired in the Merger, an increase in the fair value of our marketable securities balance of $1.3 million and proceeds from the sale of common stock of $0.2 million, net of shares tendered for payment of withholding tax, partially offset by cash used in operations of $19.3 million, as well as purchases of capital equipment of $1.1 million and equity issuance costs of $0.8 million. Our quarterly operating cash flows are significantly impacted by changes in accounts receivable balances. Due to the seasonality of our business, accounts receivable balances have historically increased significantly in the quarter ended December 31 as a result of higher order intake and bookings. The collection of these accounts receivable balances has generally resulted in positive cash flows from operations in the quarter ended March 31, while we have historically experienced negative cash flows from operations in the other three fiscal quarters.

Net cash used in operating activities was $19.3 million for the six months ended September 30, 2010, as compared to $3.2 million for the six months ended September 30, 2009. The increase in cash used in operating activities was primarily attributable to our net loss, as well as changes in working capital for the six months ended September 30, 2010.

Net cash provided by investing activities was $84.1 million for the six months ended September 30, 2010, as compared to $11.6 million for the six months ended September 30, 2009. Significant components of cash flows from investing activities for the six months ended September 30, 2010 included cash of $74.5 million acquired in the Merger and redemptions of marketable securities of $11.5 million, partially offset by net purchases of property and equipment of $1.1 million and equity issuance costs of $0.8 million. Significant components of cash flows from investing activities for the six months ended September 30, 2009 included a net decrease in our marketable securities portfolio of $11.8 million, partially offset by net purchases of property and equipment of $0.3 million.

Net cash provided by financing activities was $0.2 million for the six months ended September 30, 2010 as compared to net cash used in financing activities of $0.1 million for the six months ended September 30, 2009. Cash flows from financing activities for both periods consisted solely of proceeds from the issuance of our common stock under employee stock plans, reduced by payments made to taxing authorities on behalf of our employees when tendering stock to us for settlement of minimum income tax liability upon vesting of RSUs.

We have funded our activities to date primarily through the sales of software licenses and related services and the issuance of equity securities.

We anticipate that our capital requirements may increase in future periods as a result of seasonal sales trends, additional product development activities and the acquisition of additional equipment. Our capital requirements may also increase in future periods as we seek to expand our technology platform through investments, licensing arrangements, technology alliances or acquisitions.

On November 2, 2010, our board of directors authorized the Company to commit up to $6.0 million during the next two fiscal quarters for the repurchase of the Company’s common stock pursuant to a program to be executed in accordance with a Rule 10b5-1 trading plan.

We anticipate that our existing capital resources will be adequate to fund our operations for at least the next twelve months. However, there can be no assurance that changes will not occur that would consume available capital resources before then. Our capital requirements depend on numerous factors, including our ability to continue to generate software sales, the purchase of additional capital equipment and acquisitions of other businesses or technologies. There can be no assurance that additional funding, if necessary, will be available to us on favorable terms, if at all. Our forecast for the period of time through which our financial resources will be adequate to support our operations is forward-looking information, and actual results could vary.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The information called for by this item is provided in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Form 10-K. Our exposures to market risk have not changed materially since March 31, 2010.

 

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Item 4.

Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures. As of the end of the period covered by this Report, we conducted an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principle financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2010.

Changes in Internal Control Over Financial Reporting

Except as disclosed below, there were no changes in our internal control over financial reporting during the three months ended September 30, 2010 that materially affected, or are reasonably likely to materially affect, those controls.

Scope of Management’s Report on Internal Control over Financial Reporting

As described throughout this Report, on July 1, 2010, Symyx merged with and into Merger Sub and became our wholly-owned subsidiary. While our financial statements for the quarter ended September 30, 2010 include the results of Symyx from the July 1, 2010 acquisition date through September 30, 2010, as permitted by the rules and regulations of the SEC, our management’s assessment of our internal control over financial reporting did not include an evaluation of Symyx’s internal control over financial reporting. Further, our management’s conclusion regarding the effectiveness of our internal control over financial reporting as of September 30, 2010 does not extend to Symyx’s internal control over financial reporting.

We are currently integrating policies, processes, technology and operations for the combined company and will continue to evaluate our internal control over financial reporting as we develop and execute our integration plans. Until the companies are fully integrated, we will maintain the operational integrity of each company’s legacy internal control over financial reporting. Symyx represented approximately 43%, or $156 million, of our total assets at September 30, 2010 and approximately 29%, or $8.6 million, of total revenue for the three months ended September 30, 2010

PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings

Prior to the completion of the Merger, several lawsuits were filed against Symyx, the members of the Symyx board of directors and certain executive officers of Symyx, Accelrys and Merger Sub in purported class action lawsuits brought by individual Symyx stockholders challenging the Merger. The first of such lawsuits was a class action lawsuit filed in the Superior Court of the State of California, County of Santa Clara, purportedly on behalf of the stockholders of Symyx, against Symyx and its directors and chief financial officer, as well as Accelrys and Merger Sub, alleging, among other things, that Symyx’s directors breached their fiduciary duties to the stockholders of Symyx in connection with the proposed Merger. Subsequent to the filing of such lawsuit, several additional suits were filed, also in Santa Clara County, each of which was substantially similar to the first lawsuit. The lawsuits were ultimately consolidated into a single action and on May 20, 2010, the plaintiffs filed a single consolidated complaint. The Complaint serves as the only complaint in the combined litigation going forward, which is pending in the Superior Court for the County of Santa Clara. The Complaint, like the previously filed complaints, alleges, among other things, that Symyx’s directors breached their fiduciary duties to the stockholders of Symyx in connection with the Merger, and was seeking, among other things, to enjoin the defendants from completing the Merger pursuant to the terms of the Merger Agreement.

 

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On June 22, 2010, the defendants entered into the MOU with the plaintiffs, pursuant to which the defendants and the plaintiffs agreed to settle the Consolidated Action. Subject to court approval and further definitive documentation the MOU resolves the allegations by the plaintiffs against the defendants made in connection with the Merger and the Merger Agreement, and provides a release and settlement by the purported class of Symyx stockholders with prejudice of all asserted claims against the defendants without costs to any defendant (other than as expressly provided in the MOU), in exchange for Symyx’s agreement to provide additional supplemental disclosures to the joint proxy statement/prospectus issued by Accelrys and Symyx in connection with the Merger. Accelrys and Symyx made the appropriate supplemental disclosures and the parties have agreed to present to the Court a stipulation of settlement and any other documentation as may be required in order to obtain approval by the Court of a settlement on behalf of the class of stockholders and the dismissal of the actions in the Complaint. We will be obligated to pay any attorneys fees and expenses awarded to the plaintiffs, if any. If the settlement is not approved or the conditions of the MOU are not satisfied, we intend to take all appropriate actions to defend against the allegations made in the Complaint.

 

Item 1A.

Risk Factors

You should carefully consider the risks described below before investing in our publicly-traded securities. The risks described below are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as competition, technological obsolescence, labor relations, general economic conditions, geopolitical changes and international operations. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations and our liquidity. The risks described below could cause our actual results to differ materially from those contained in the forward-looking statements we have made in this Report, the information incorporated herein by reference and those forward-looking statements we may make from time to time.

Certain Risks Related to Our Marketplace and Environment

Our revenue from the sale of computer aided design modeling and simulation software to the life science discovery research marketplace, which has historically constituted a significant portion of our overall revenue, has been declining over the past several years and may continue to decline in future years . Historically we have derived a significant portion of our revenue from the sale of computer aided design modeling and simulation software to the discovery research departments in pharmaceutical and biotechnology companies. Based on recurring analyses of incoming orders typically conducted by our sales and marketing departments, we estimate that orders for our computer aided design modeling and simulation software for the life science industry declined approximately 11% between fiscal year 2007 and fiscal year 2008, approximately 18% between fiscal year 2008 and 2009, and approximately 16% between fiscal year 2009 and 2010. While there is not a linear correlation between product orders and resulting revenue, we believe that our estimates of decreased product orders ultimately reflect a decline in revenue attributable to sales of our computer aided design modeling and simulation software products. We believe this decline is due to several factors, including industry consolidation, a general reduction in the level of discovery research activity by our customers, increased competition, including competition from open source software, and reductions in profit and related information technology spending by our customers. If such declines continue and we do not increase the revenue we derive from our other product and service offerings, our business could be adversely impacted.

Our ability to sustain or increase revenues will depend upon our success in entering new markets and in deriving additional revenues from our existing customers. Our products are currently used primarily by molecular modeling and simulation specialists in discovery research organizations. One component of our overall business strategy is to derive more revenues from our existing customers by expanding their usage of our products and services. Such strategy would have our customers utilize our scientific informatics platform and our tools and components to leverage vast amounts of information stored in both corporate databases and public data sources in order to make informed scientific and business decisions during the research and development process. In addition, we seek to expand into new markets and new areas within our existing markets by attracting and retaining personnel knowledgeable in these markets, identifying the needs of these markets and developing marketing programs to address these needs. If successfully implemented, these strategies would increase the usage of our software and services by biologists, chemists, engineers and informaticians operating within our existing pharmaceutical and biotechnology customers, as well as by new customers in other industries. However, if our strategies are not successfully implemented, our products and services may not achieve market acceptance or penetration in targeted new departments within our existing customers or in new industries. As a result, we may incur additional costs and expend additional resources without being able to sustain or increase revenue.

 

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Our focus on offering scientific business intelligence solutions to both existing and new customers and markets may make it more difficult for us to sustain our revenue from the sale of computer aided design modeling and simulation products to the life science discovery research marketplace. Our strategy involves transforming our product and service offerings by utilizing our scientific informatics platform and our tools and components in order to enable our customers to more effectively utilize the vast amounts of information stored in both their databases and public data sources in order to make informed scientific and business decisions during the research and development process. This strategy is intended to lead us to new and different markets and customers, as well as increase the usage of our offerings by existing customers. Executing this strategy will require significant management focus and utilization of resources. Though we intend to continue to dedicate sufficient resources and management focus to our life science computer aided design modeling and simulation products, it is possible that the strategy will result in loss of management focus and resources relating to these existing products and markets, thereby resulting in decreasing revenues from these markets. If these revenues are not offset by increasing revenues from new markets and/or customers, our overall revenues will suffer.

We may be unable to develop strategic relationships with our customers. Our overall business strategy is to expand usage of our products and services by expanding our current customers’ usage of our products and by marketing and distributing our solutions to a broader, more diversified group of biologists, chemists, engineers and informaticians operating throughout our customers’ research and development organizations. A key component of this strategy is to become a preferred provider of scientific software and solutions. Becoming a preferred vendor will require substantial re-training and new skills development within our sales and service personnel and deployment of a successful account-management sales model. We believe that developing strategic relationships with our customers may lead to additional revenue opportunities. However, executing this strategy may require significant expense, and there can be no assurance that any such relationships will develop or that such relationships will produce additional revenue or profit opportunities.

Consolidation within the pharmaceutical and biotechnology industries may continue to lead to fewer potential customers for our products and services. A significant portion of our customer base consists of pharmaceutical and biotechnology companies. Continued consolidation within the pharmaceutical and biotechnology industries may result in fewer customers for our products and services. If one of the parties to a consolidation uses the products or services of our competitors, we may lose existing customers as a result of such consolidation.

Increasing competition and increasing costs within the pharmaceutical and biotechnology industries may affect the demand for our products and services, which may affect our results of operations and financial condition. Our pharmaceutical and biotechnology customers’ demand for our products is impacted by continued demand for their products and by our customers’ research and development costs. Demand for our customers’ products could decline, and prices charged by our customers for their products may decline, as a result of increasing competition, including competition from companies manufacturing generic drugs. In addition, our customers’ expenses could continue to increase as a result of increasing costs of complying with government regulations and other factors. A decrease in demand for our customers’ products, pricing pressures associated with the sales of these products, and additional costs associated with product development could cause our customers to reduce research and development expenditures. Because our products and services depend on such research and development expenditures, our revenues may be significantly reduced.

Health care reform and restrictions on reimbursement may affect the pharmaceutical, biotechnology and industrial chemical companies that purchase or license our products or services, which may affect our results of operations and financial condition. The continuing efforts of government and third-party payers in the markets we serve to contain or reduce the cost of health care may reduce the profitability of pharmaceutical, biotechnology and industrial chemical companies causing them to reduce research and development expenditures. Because our products and services depend on such research and development expenditures, our revenues may be significantly reduced. We cannot predict what actions federal, state or private payers for health care goods and services may take in response to any health care reform proposals or legislation.

 

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We face strong competition in the life science market for computer aided design modeling and simulation software and for cheminformatics products. The market for our computer aided design modeling and simulation software products for the life science market is intensely competitive. We currently face competition from other scientific software providers, larger technology and solutions companies, in-house development by our customers, as well as academic and government institutions and the open source community.

Some of our competitors and potential competitors in this sector have longer operating histories than we do and could have greater financial, technical, marketing, research and development and other resources. Many of our competitors offer products and services directed at more specific markets than those we target, enabling these competitors to focus a greater proportion of their efforts and resources on these markets. Some offerings that compete with our products are developed and made available at lower cost by government organizations and academic institutions, and these entities may be able to devote substantial resources to product development and also offer their products to users for little or no charge. We also face competition from open source software initiatives, in which developers provide software and intellectual property free over the Internet. In addition, many of our customers spend significant internal resources in order to develop their own software. Moreover, we intend to leverage our scientific informatics platform in order to enable our customers to more effectively utilize the vast amounts of information stored in both their databases and public data sources in order to make informed scientific and business decisions during the research and development process. This strategy could lead to competition from much larger companies which provide general data storage and management software.

There can be no assurance that our current or potential competitors will not develop products, services or technologies that are comparable to, superior to, or render obsolete, the products, services and technologies we offer. There can be no assurance that our competitors will not adapt more quickly than us to technological advances and customer demands, thereby increasing such competitors’ market share relative to ours. Any material decrease in demand for our technologies or services may have a material adverse effect on our business, financial condition and results of operations.

We are subject to pricing pressures in some of the markets we serve. The market for computer aided design modeling and simulation products for the life science industry is intensely competitive, which has led to significant pricing pressure and declines in average selling price over the past several years. Based on recurring analyses of incoming orders typically conducted by our sales and marketing departments, we estimate that the average sales price of our computer aided design modeling and simulation products for the life science industry declined approximately 6% between fiscal year 2007 and fiscal year 2008, approximately 10% between fiscal year 2008 and fiscal year 2009, and approximately 14% between fiscal year 2009 and fiscal year 2010. While there is not a linear correlation between our product pricing and competition in the marketplace, we believe that our estimates of decreased prices ultimately reflect increased competition that has led and may continue to lead to pricing pressure with respect to sales of these products. In response to such increased competition and general adverse economic conditions in this market, we may be required to further modify our pricing practices. Changes in our pricing model could adversely affect our revenue and earnings.

Revenue from our Database Content Business Has Been Declining and May Continue to Decline. Through the Symyx acquisition, we have acquired a database content business. This business faces intense competition from both third parties and the increasing availability of freely-available content databases. As a result, revenue from this database content business has been declining. If we are unable to reverse the decline in this business or to increase revenues from our other businesses in order to offset the decline, our revenues and results of operations may suffer.

Our operations may be interrupted by the occurrence of a natural disaster or other catastrophic event at our primary facilities. Our research and development operations and administrative functions are primarily conducted at our facilities in San Diego, California, San Ramon, California, Bend, Oregon and Cambridge, United Kingdom. We also conduct sales and customer support activities at our facilities in Bedminster, New Jersey, Burlington, Massachusetts, Paris, France, Basel, Switzerland, and Tokyo, Japan. Although we have contingency plans in effect for natural disasters or other catastrophic events, the occurrence of such events could still disrupt our operations. For example, our San Diego and Tokyo facilities are located in areas that are particularly susceptible to earthquakes. Any natural disaster or catastrophic event in our facilities or the areas in which they are located could have a significant negative impact on our operations.

 

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Our insurance coverage may not be sufficient to avoid material impact on our financial position or results of operations resulting from claims or liabilities against us, and we may not be able to obtain insurance coverage in the future. We maintain insurance coverage for protection against many risks of liability. The extent of our insurance coverage is under continuous review and is modified as we deem it necessary. Despite this insurance, it is possible that claims or liabilities against us may have a material adverse impact on our financial position or results of operations. In addition, we may not be able to obtain any insurance coverage, or adequate insurance coverage, when our existing insurance coverage expires. For example, we do not carry earthquake insurance for our facilities in Tokyo, Japan or San Diego, California, because we do not believe the costs of such insurance are reasonable in relation to the potential risk.

Certain Risks Related to Our Operations

Defects or malfunctions in our products could hurt our reputation among our customers, result in delayed or lost revenue and expose us to liability. Our business and the level of customer acceptance of our products depend upon the continuous, effective and reliable operation of our software and related tools and functions. To the extent that defects cause our software to malfunction and our customers’ use of our products is interrupted, our reputation could suffer and our revenue could decline or be delayed while such defects are remedied. We may also be subject to liability for the defects and malfunctions of third-party technology partners and others with whom our products and services are integrated.

Delays in the release of new or enhanced products or services or undetected errors in our products or services may result in increased cost to us, delayed market acceptance of our products and delayed or lost revenue. To achieve market acceptance, new or enhanced products or services can require long development and testing periods, which may result in delays in scheduled introduction. Any delays in the release schedule for new or enhanced products or services may delay market acceptance of these products or services and may result in delays in new customer orders for these new or enhanced products or services or the loss of customer orders. In addition, new or enhanced products or services may contain a number of undetected errors or “bugs” when they are first released. Although we test each new or enhanced software product or service before it is released to the market, there can be no assurance that significant errors will not be found in existing or future releases. As a result, in the months following the introduction of certain releases, we may need to devote significant resources to correct these errors. There can be no assurance, however, that all of these errors can be corrected.

We are subject to risks associated with the operation of a global business. We derive a significant portion of our total revenue from our operations in international markets. In 2010, 2009 and 2008, 54%, 52% and 51%, respectively, of our total revenue was derived from our international operations. Our global business may be affected by local economic conditions, including inflation, recession and currency exchange rate fluctuations. In addition, political and economic changes throughout the world may interfere with our or our customers’ activities in particular locations and result in a material adverse effect on our business, financial condition and operating results. We anticipate that revenue from operations in international markets will continue to account for a significant percentage of future revenue. The following table depicts our region-specific revenue as a percent of total revenue for each of the last three fiscal years:

 

		Years Ended
Region		March 31, 2010				March 31, 2009				March 31, 2008
U.S.			46	%			48	%			49	%
Europe			30	%			28	%			29	%
Asia-Pacific			24	%			24	%			22	%

Other potential risks inherent in our international business include:

 

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unexpected changes in regulatory requirements;

 

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longer payment cycles;

 

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currency exchange rate fluctuations;

 

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import and export license requirements;

 

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tariffs and other barriers;

 

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political unrest, terrorism and economic instability;

 

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disruption of our operations due to local labor conditions;

 

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limited intellectual property protection;

 

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difficulties in collecting trade receivables;

 

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difficulties in managing distributors or representatives;

 

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difficulties in managing an organization spread over various countries;

 

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difficulties in staffing foreign subsidiary or joint venture operations; and

 

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potentially adverse tax consequences.

Our success depends, in part, on our ability to anticipate and address these risks. There can be no assurance that we will do so effectively, or that these or other factors relating to our international operations will not adversely affect our business or operating results.

In order to improve our financial position, we have reduced our headcount, which could negatively impact our business. We have undergone several reductions-in-force over the past several years, and our workforce has declined approximately 25% since March 31, 2006, without giving effect to the Merger. We do not believe that these reductions have had a material adverse effect on our operations or our ability to generate revenue to date. However, while we believe we have sufficient staff to operate our business, we do not have duplicative or redundant resources in many of our functions or operations. As a result, there can be no assurance that further attrition will not impact our ability to operate our business, or adversely impact our revenues.

Failure to attract and retain skilled personnel could have a material adverse effect on us. Our success depends in part on the continued service of key scientific, sales, business development, marketing, engineering, management and accounting personnel and our ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel. Immigration laws may further restrict our ability to attract or hire qualified personnel. We may not be able to continue to attract and retain the personnel necessary for the development of our business. Failure to attract and retain key personnel could have a material adverse effect on our business, financial condition and results of operations. Further, we are highly dependent on the principal members of our technical, scientific and management staff and certain groups of consultants. One or more of these key employees or consultants could retire or otherwise leave our employ within the foreseeable future, and the loss of any of these people could have a material adverse effect on our business, financial condition or results of operations. We do not intend to maintain key person life insurance on the life of any employee.

Continued turmoil in the worldwide financial markets may negatively impact our business, results of operations, and financial condition. As widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent months, including, among other things, extreme volatility in security prices, declining valuations of certain investments, severely diminished liquidity and credit availability, the failure or sale of various financial institutions and an unprecedented level of government intervention. Many economists believe that the United States economy, and possibly the global economy, is in the midst of a prolonged recession. This protracted downturn may hurt our business in a number of ways, including through general decreases in spending and the adverse impact on our customers’ ability to obtain financing, which may lead to delays or failures in our signing customer agreements or signing customer agreements at reduced purchase levels. While we are unable to predict the likely duration and severity of the current disruption in the financial markets and the adverse economic conditions in the U.S. and other countries, any of the circumstances mentioned above could have a material adverse effect on our revenues, financial condition and results of operations.

If we choose to acquire businesses, products or technologies instead of developing them ourselves, we may be unable to complete these acquisitions or to successfully integrate an acquired business or technology in a cost-effective and non-disruptive manner. From time to time, we may choose to acquire businesses, products or technologies instead of developing them ourselves. We do not know if we will be able to complete any acquisitions, or whether we will be able to successfully integrate any acquired businesses, operate them profitably or retain their key employees. Integrating any business, product or technology we acquire could be expensive and time-consuming, disrupt our ongoing business and distract company management. In addition, in order to finance any acquisition, we may utilize our existing funds, thereby lowering the amount of funds we currently have, or might need to raise additional funds through public or private equity or debt financings. Prolonged tightening of the financial markets may impact our ability to obtain financing to fund future acquisitions and we could be forced to obtain financing on less than favorable terms. Additionally, equity financings may result in dilution to our stockholders. If we are unable to integrate any acquired entities, products or technologies effectively, our business could suffer. In addition, under certain circumstances, amortization of assets or charges resulting from the costs of acquisitions could harm our business, financial condition, or operating results.

 

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Certain Risks Related To Our Financial Performance

We have a history of losses and our future profitability is uncertain. We generated net losses for the three and six months ended September 30, 2010 and the years ended March 31, 2007 and 2006. Although we generated net income for the years ended March 31, 2010, 2009 and 2008, we may experience future net losses which may limit our ability to fund our operations and we may not generate income from operations in the future. Our future profitability depends upon many factors, including several that are beyond our control. These factors include without limitation:

 

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changes in the demand for our products and services;

 

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the introduction of competitive software;

 

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our ability to license desirable technologies;

 

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changes in the research and development budgets of our customers and potential customers;

 

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our ability to successfully, cost effectively and timely develop, introduce and market new products, services and product enhancements; and

 

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the acquisition of any new entities or businesses which may have a dilutive effect upon our earnings.

Our sales forecast and/or revenue projections may not be accurate. We use a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of proposals, including the date when they estimate a customer will make a purchase decision and the potential size of the order. We aggregate these estimates on a quarterly basis in order to generate a sales pipeline. While the pipeline process provides us with some guidance in business planning and forecasting, it is based on estimates only and is therefore subject to risks and uncertainties. Any variation in the conversion of the pipeline into revenue or the pipeline itself could cause us to improperly plan or budget and thereby adversely affect our business, results of operations and financial condition.

If we are unable to license software to, or collect receivables from, our customers our operating results may be adversely affected. While the majority of our current customers are well-established, large pharmaceutical customers and universities, we also provide products and services to smaller biotechnology companies. We have not experienced significant customer defaults during the past three fiscal years. Our financial success depends upon the creditworthiness and ultimate collection of amounts due from our customers, including our smaller customers with fewer financial resources. If we are not able to collect from our customers, we may be required to write-off significant accounts receivable and recognize bad debt expenses which could materially and adversely affect our operating results.

Our quarterly operating results, particularly our quarterly cash flows, may fluctuate. Quarterly operating results may fluctuate as a result of a number of factors, including lengthy sales cycles, market acceptance of new products and upgrades, timing of new product introductions, changes in pricing policies, changes in general economic and competitive conditions, and the timing and integration of acquisitions. We may also experience fluctuations in quarterly operating results due to general and industry specific economic conditions that may affect the research and development expenditures of pharmaceutical and biotechnology companies. In particular, historically we have received approximately two-thirds of our annual customer orders in the second half of our fiscal year. In accordance with our revenue recognition policies, the revenue associated with these orders is generally recognized over the contractual license term. Therefore, because we accrue sales commissions and royalties upon the receipt of customer orders, we generally experience an increase in operating costs and expenses during the second half of our fiscal year with only a minimal corresponding incremental increase in revenue. Additionally, our cash flows from operations have historically been positive in the fiscal quarter ended March 31 as we collect the accounts receivable generated from these customer orders, while we have historically experienced negative cash flows from operations in the other three fiscal quarters. As a result of these seasonal variations, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and that our interim financial results are not necessarily indicative of results for a full year or for any subsequent interim period.

 

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We may be required to indemnify PDD, or may not be able to collect on indemnification rights from PDD. On April 30, 2004, we spun-off our drug discovery subsidiary, PDD, into an independent, separately traded, publicly held company through the distribution to our stockholders of a dividend of one share of PDD common stock for every two shares of our common stock. As part of the spin-off, we agreed to indemnify the indebtedness, liabilities and obligations of PDD. One such obligation includes a guarantee by us to the landlord of PDD’s obligations under certain facility leases, with respect to which PDD will indemnify us should we be required to make any payment under the guarantee. These indemnification obligations could be as significant as the remaining future minimum lease payments, which totaled approximately $13.7 million as of September 30, 2010. PDD’s ability to satisfy any such indemnification obligations (including, without limitation, PDD’s commitment to indemnify us in the event of our payment under our guarantee of its leases) will depend upon PDD’s future financial strength. We cannot assure you that, if PDD becomes obligated to indemnify us for any substantial obligations, PDD will have the ability to do so. There also can be no assurance that we will be able to satisfy any indemnification obligations to PDD. Any failure by PDD to satisfy its obligations and any required payment by us could have a material adverse effect on our business.

Enacted and proposed changes in securities laws and regulations have increased our costs and may continue to increase our costs in the future. In recent years, there have been several changes in laws, rules, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and various other new regulations promulgated by the SEC and rules promulgated by the national securities exchanges.

The Dodd-Frank Act, enacted in July 2010, expands federal regulation of corporate governance matters and imposes requirements on publicly-held companies to, among other things, provide stockholders with a periodic advisory vote on executive compensation and also adds compensation committee reforms and enhanced pay-for-performance disclosures. While some provisions of the Dodd-Frank Act are effective upon enactment, others will be implemented upon the SEC’s adoption of related rules and regulations. The scope and timing of the adoption of such rules and regulations is uncertain and accordingly, the cost of compliance with the Dodd-Frank Act is also uncertain.

Sarbanes-Oxley required changes in some of our corporate governance and securities disclosure and compliance practices. Under Sarbanes-Oxley, publicly-held companies, including us, are required to, among other things, furnish independent annual audit reports regarding the existence and reliability of their internal control over financial reporting and have their chief executive officer and chief financial officer certify as to the accuracy and completeness of their financial reports.

These and other new or changed laws, rules, regulations and standards are, or will be, subject to varying interpretations in many cases due to their lack of specificity. As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Further, compliance with new and existing laws, rules, regulations and standards may make it more difficult and expensive for us to maintain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Members of our board of directors and our principal executive officer and principal financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified directors and executive officers, which could harm our business. We continually evaluate and monitor regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result.

 

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Our business, financial condition and results of operations may be adversely impacted by fluctuations in foreign currency exchange rates. Our international sales generally are denominated in local currencies. Fluctuations in the value of currencies in which we conduct business relative to the United States dollar result in currency transaction gains and losses, and the impact of future exchange rate fluctuations cannot be accurately predicted. Future fluctuations in currency exchange rates may have a material adverse impact on revenue from international sales, and thus on our business, financial condition and results of operations. When deemed appropriate, we may engage in currency exchange rate hedging transactions in an attempt to mitigate the impact of adverse exchange rate fluctuations. However, currency hedging policies may not be successful, and they may increase the negative impact of exchange rate fluctuations.

If we consume cash more quickly than expected, we may be unable to raise additional capital and we may be forced to curtail operations. We anticipate that our existing capital resources will be adequate to fund our operations for at least the next twelve months. However, our capital requirements will depend on many factors, including the potential acquisition of other businesses or technologies. If we determine that we must raise additional capital, we may attempt to do so through public or private financings involving debt or equity. However, additional capital may not be available on favorable terms, or at all. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds by entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, products or potential markets that we would not otherwise relinquish.

Certain Risks Related to Owning Our Stock

We expect that our stock price will fluctuate significantly, and as a result, our stockholders may not be able to resell their shares at or above their original investment price. The stock market, historically and in recent years, has experienced significant volatility particularly with technology company stocks. The volatility of technology company stock prices often does not relate to the operating performance of the companies represented by the stock. Factors that could cause volatility in the price of our common stock include without limitation:

 

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actual and anticipated fluctuations in our quarterly financial and operating results;

 

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market conditions in the technology and software sectors;

 

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issuance of new or changed securities analysts’ reports or recommendations;

 

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developments or disputes concerning our intellectual property or other proprietary rights or other legal claims;

 

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introduction of technological innovations or new commercial products by us or our competitors;

 

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market acceptance of our products and services;

 

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additions or departures of key personnel; and

 

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the acquisition of new businesses or technologies

These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock.

As institutions hold the majority of our common stock in large blocks, substantial sales by these stockholders could depress the market price for our shares. As of October 29, 2010, the top ten institutional holders of our common stock held approximately 43% of our outstanding common stock. As a result, if one or more of these major stockholders were to sell all or a portion of their holdings, or if the market were to perceive that such sale or sales may occur, the market price of our common stock may fall significantly.

Because we do not intend to pay dividends, our stockholders will benefit from an investment in our common stock only if our stock price appreciates in value. We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend entirely upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which it was purchased.

 

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Anti-takeover provisions under the Delaware General Corporation Law, provisions in our certificate of incorporation and bylaws, and our adoption of a stockholder rights plan may make the accomplishment of mergers or the assumption of control by a principal stockholder more difficult, thereby making the removal of management more difficult. Certain provisions of the Delaware General Corporation Law may delay or deter attempts to secure control of our company without the consent of our management. Also, our governing documents provide for a staggered board of directors, which will make it more difficult for a potential acquirer to gain control of our board of directors. In 2002, we adopted a stockholder rights plan, which is triggered upon commencement or announcement of a hostile tender offer or when any one person or group acquires 15% or more of our common stock. The rights plan, once triggered, enables our stockholders (other than the stockholder responsible for triggering the rights plan) to purchase our common stock at reduced prices. These provisions of our governing documents and stockholder rights plan, and of Delaware law, could have the effect of delaying, deferring or preventing a change of control, including without limitation a proxy contest, making the acquisition of a substantial block of our common stock more difficult. The provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. Further, the existence of these anti-takeover measures may cause potential bidders to look elsewhere, rather than initiating acquisition discussions with us.

Certain Risks Related to Intellectual Property

We may not be able to protect adequately the trade secrets and confidential information that we disclose to our employees. We rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. Competitors through their independent discovery (or improper means, such as unauthorized disclosure or industrial espionage) may come to know our proprietary information. We generally require employees and consultants to execute confidentiality and assignment-of-inventions agreements. These agreements typically provide that all materials and confidential information developed by or made known to the employee or consultant during his, her or its relationship with us are to be kept confidential, and that all inventions arising out of the employee’s or consultant’s relationship with us are our exclusive property. Our employees and consultants may breach these agreements, and in some instances we may not have an adequate remedy. Additionally, in some instances, we may have failed to require that employees and consultants execute confidentiality and assignment-of-inventions agreements.

Foreign laws may not afford us sufficient protections for our intellectual property, and we may not seek patent protection outside the United States. We believe that our success depends, in part, upon our ability to obtain international protection for our intellectual property. However, the laws of some foreign countries may not be as comprehensive as those of the United States and may not be sufficient to protect our proprietary rights abroad. In addition, we generally do not pursue patent protection outside the United States because of cost and confidentiality concerns. Accordingly, our international competitors could obtain foreign patent protection for, and market overseas, products and technologies for which we are seeking patent protection in the United States.

A patent issued to us may not be sufficiently broad to protect adequately our rights in intellectual property to which the patent relates. Due to cost and other considerations, we generally do not rely on patent protection to enforce our intellectual property rights, and have filed only a limited number of patent applications. Even if patents are issued to us, these patents may not sufficiently protect our interest in our software or other technologies because the scope of protection provided by any patents issued to or licensed by us are subject to the uncertainty inherent in patent law. Third parties may be able to design around these patents or develop unique products providing effects similar to our products. In addition, others may discover uses for our software or technologies other than those uses covered in our patents, and these other uses may be separately patentable. A number of pharmaceutical and biotechnology companies, software organizations and research and academic institutions, have developed technologies, filed patent applications or received patents on various technologies that may be related to our business. Some of these technologies, patent applications or patents may conflict with our technologies, patent applications or patents. These conflicts could also limit the scope of patents, if any, that we may be able to obtain, or result in the denial of our patent applications.

We may be subject to claims of infringement by third parties. A number of patents may have been issued or may be issued in the future that could cover certain aspects of our technology or functionality of our products and could prevent us from using technology that we use or expect to use, or making or selling certain of our products. In addition, to the extent our employees are involved in research areas similar to those areas in which they were involved at their former employers, we may inadvertently use or disclose alleged trade secrets or other proprietary information of their former employer. Thus, our products may infringe patent or other intellectual property rights of third parties, and we may be subject to infringement claims by third parties. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management’s attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Such licenses may not be available on terms acceptable to us, if at all. In the event of a successful claim of product infringement against us, our failure or inability to license or design around the infringed technology could have a material adverse effect on our business, financial condition and results of operations.

 

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Third-party software codes incorporated into our products could subject us to liability or limit our ability to sell such products. Some of our products include software codes licensed from third parties, including the open source community. Some of these licenses impose certain obligations upon us, including royalty and indemnification obligations. In the case of codes licensed from the open source community, the licenses may also limit our ability to sell products containing such code. Though we generally review the applicable licenses prior to incorporating third party code into our software products, there can be no assurance that such third party codes incorporated into our products would not subject us to liability or limit our ability to sell the products containing such code, thereby having a material adverse affect upon our business.

Certain Risks Related to the Combined Company Resulting from the Merger

Any failure to integrate successfully the businesses of Accelrys and Symyx in the expected timeframe will adversely affect the combined company’s future results. The success of the Merger will depend, in large part, on the ability of the combined company to realize the anticipated benefits, including annual net operating synergies, from combining the businesses of Accelrys and Symyx. To realize these anticipated benefits, the combined company must successfully integrate the businesses of Accelrys and Symyx. This integration will be complex and time-consuming.

The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in the combined company’s failure to achieve some or all of the anticipated benefits of the Merger.

Potential difficulties that may be encountered in the integration process include the following:

 

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lost sales and customers as a result of customers of either of the two companies deciding not to do business with the combined company;

 

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complexities associated with managing the larger, more complex, combined business;

 

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integrating personnel from the two companies while maintaining focus on providing consistent, high quality products;

 

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potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the Merger; and

 

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performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the Merger and integrating the companies’ operations.

The combined company’s future results will suffer if the combined company does not effectively manage its expanded operations following the Merger. The size of the combined company’s business is significantly larger than the current businesses of Accelrys and Symyx as stand-alone entities. The combined company’s future success depends, in part, upon its ability to manage this expanded business, which will pose substantial challenges for the combined company’s management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. Accelrys cannot assure you that the combined company will be successful or that the combined company will realize the expected operating efficiencies, annual net operating synergies, revenue enhancements and other benefits currently anticipated to result from the Merger.

The Merger may not be accretive and may cause dilution to the combined company’s earnings per share, which may negatively impact the price of the common stock of the combined company following the completion of the Merger. Accelrys currently anticipates that the Merger will be accretive to the earnings per share of the combined company for the first full calendar year following the completion of the Merger. This expectation is based on preliminary estimates and assumes certain synergies expected to be realized by the combined company during such time. Such estimates and assumptions could materially change due to additional transaction-related costs, the failure to realize any or all of the benefits expected in the Merger or other factors beyond the control of Accelrys. All of these factors could delay, decrease or eliminate the expected accretive effect of the Merger and cause resulting dilution to the combined company’s earnings per share or to the price of the common stock of the combined company.

 

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The Merger has resulted in changes to our board of directors that may affect the combined company’s operations. Upon completion of the Merger, the composition of our board of directors changed in accordance with the Merger Agreement. The combined company’s board of directors now consists of 10 members, including the six directors of Accelrys prior to the Merger and four of the individuals who served as directors of Symyx prior to the Merger. This new composition of our board of directors may affect the business strategy and operating decisions of the combined company.

The loss of key personnel could have a material adverse effect on the combined company’s business, financial condition or results of operations. The success of the Merger will depend in part on the combined company’s ability to retain key Accelrys and Symyx employees who continue employment with the combined company. It is possible that these employees might decide not to remain with the combined company now that the Merger has been completed. If these key employees terminate their employment, the combined company’s sales, marketing or development activities might be adversely affected, management’s attention might be diverted from successfully integrating Symyx’s operations to recruiting suitable replacements and the combined company’s business, financial condition or results of operations could be adversely affected. In addition, the combined company might not be able to locate suitable replacements for any such key employees who leave the combined company or offer employment to potential replacements on reasonable terms.

The success of the combined company will also depend on relationships with third parties and pre-existing customers of Accelrys and Symyx, which relationships may be affected by customer preferences or public attitudes about the Merger. Any adverse changes in these relationships could adversely affect the combined company’s business, financial condition or results of operations. The combined company’s success will be dependent on the ability to maintain and renew relationships with pre-existing customers and other clients of both Accelrys and Symyx and to establish new client relationships. There can be no assurance that the business of the combined company will be able to maintain pre-existing customer contracts and other business relationships, or enter into or maintain new customer contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important customer relationships could have a material adverse effect on the business, financial condition or results of operations of the combined company.

The combined company’s ability to utilize its NOL and tax credit carryforwards in the future may be substantially limited by Sections 382 and 383 of the Code. In general, under Section 382 and 383 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss and credit carryforwards to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (which is generally three years). The amount of the annual limitation is generally equal to the value of the stock of the corporation immediately prior to the ownership change, multiplied by the adjusted federal tax-exempt rate set by the Internal Revenue Service.

As a result of the Merger, it is possible that either or both of Accelrys and Symyx will be deemed to have undergone an “ownership change” for purposes of Section 382 of the Code. Accordingly, the combined company’s ability to utilize Accelrys’s and Symyx’s NOL and tax credit carryforwards may be substantially limited as described in the preceding paragraph. These limitations could in turn result in increased future tax payments for the combined company, which could have a material adverse effect on the business, financial condition or results of operations of the combined company.

The price of our common stock following the Merger may be affected by factors different from those that affected the price of shares of Accelrys or Symyx prior to the Merger. The business of Accelrys differs from the business of Symyx in important respects and, accordingly, the results of operations of the combined company and the price of our common stock following the completion of the Merger may be affected by factors different from those factors that affected the independent results of operations of Accelrys and Symyx. As a result, the price of our common stock could fluctuate in a manner or based on factors not in keeping with the historical results of fluctuations in the stock prices of Accelrys or Symyx prior to the Merger.

 

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Item 6.

Exhibits

 

Exhibit Number		Description
2.1		Agreement and Plan of Merger and Reorganization, dated April 5, 2010, by and among Accelrys, Inc., Alto Merger Sub, Inc. and Symyx Technologies, Inc. (incorporated by reference to Exhibit 2.1 of Accelrys, Inc.’s Current Report on Form 8-K filed on April 6, 2010).
3.1		Restated Certificate of Incorporation of Pharmacopeia, Inc., as amended (including a Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock) (incorporated by reference to Exhibit 3.2 to Accelrys, Inc.’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005).
3.2		Certificate of Amendment of Amended and Restated Certificate of Accelrys, Inc. (incorporated by reference to Exhibit 3.4 to Accelrys, Inc.’s Quarterly Report Form 10-Q for the quarter ended September 30, 2007).
3.3		Certificate of Amendment to the Restated Certificate of Incorporation of Accelrys, Inc. (incorporated by reference to Exhibit 3.1 to Accelrys, Inc.’s Current Report on Form 8-K filed on July 2, 2010).
3.4		Amended and Restated Bylaws of Accelrys, Inc. as amended on June 9, 2005 (incorporated by reference to Exhibit 3.3 to Accelrys, Inc.’s Annual Report on Form 10-K for the fiscal year ended March 31, 2005).
4.1		Rights Agreement, dated as of September 6, 2002, between Pharmacopeia, Inc. and American Stock Transfer & Trust Company, as Rights Agent, which includes as Exhibit A thereto the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and Exhibit B thereto the Form of Right Certificate (incorporated by reference to Exhibit 4.1 to Accelrys, Inc.’s Current Report on Form 8-K filed on September 4, 2002).
4.2		First Amendment to Rights Agreement, dated as of April 5, 2010 (incorporated by reference to Exhibit 4.1 to Accelrys, Inc.’s Current Report on Form 8-K filed on April 6, 2010).
10.1		Symyx Technologies, Inc. 2007 Stock Incentive Plan, as amended, and the forms of agreement related thereto (incorporated by reference to Exhibit 4.3 to Accelrys, Inc.’s Registration Statement on Form S-8 (Registration No. 333-168656) filed on August 9, 2010).
10.2		2010 Management Incentive Plan for the Period of July 1, 2010 through December 31, 2010 (incorporated by reference to Exhibit 10.7 to Accelrys, Inc.’s Quarterly Report on Form 10-Q filed on August 9, 2010).
31.1*		Section 302 Certification of the Principal Executive Officer
31.2*		Section 302 Certification of the Principal Financial Officer
32.1*		Section 906 Certification of the Chief Executive Officer and Chief Financial Officer

 

*	Filed herewith

 

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SIGNATURE

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

 

 

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