-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WCagOXBAH8BU97WaQllYRzPBEVpKqIDAf6qlMPT6+CP7pv0FUYVDqyIcpPWgKalj CQRAHunREHsSnUeIjpoFSg== 0000912057-00-018303.txt : 20000418 0000912057-00-018303.hdr.sgml : 20000418 ACCESSION NUMBER: 0000912057-00-018303 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 20000417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARSIGHT CORP CENTRAL INDEX KEY: 0001040853 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770401273 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-34896 FILM NUMBER: 602703 BUSINESS ADDRESS: STREET 1: 800 WEST EL CAMINO REAL STREET 2: STE 200 CITY: PALO ALTO STATE: CA ZIP: 94040 BUSINESS PHONE: 6503143800 MAIL ADDRESS: STREET 1: 800 WEST EL CAMINO REAL STREET 2: STE 200 CITY: MOUNTAINVIEW STATE: CA ZIP: 94040 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PHARSIGHT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 7372 77-0401273 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification No.) organization)
800 WEST EL CAMINO REAL SUITE 200 MOUNTAIN VIEW, CALIFORNIA 94040 (650) 314-3800 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ ARTHUR H. REIDEL PRESIDENT AND CHIEF EXECUTIVE OFFICER PHARSIGHT CORPORATION 800 WEST EL CAMINO REAL SUITE 200 MOUNTAIN VIEW, CALIFORNIA 94040 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: COPIES TO: BRETT D. WHITE, ESQ. STEVEN B. STOKDYK, ESQ. THOMAS L. MACMITCHELL, ESQ. SULLIVAN & CROMWELL COOLEY GODWARD LLP 1888 CENTURY PARK EAST FIVE PALO ALTO SQUARE LOS ANGELES, CALIFORNIA 90067 3000 EL CAMINO REAL (310) 712-6600 PALO ALTO, CALIFORNIA 94306-2155 (650) 843-5000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE Common Stock, $0.001 par value.............................. $75,000,000 $19,800
(1) Estimated solely for the purposes of computing the registration fee in accordance with Rule 457(o). ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY UNITED STATES FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. SUBJECT TO COMPLETION--DATED APRIL 17, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS , 2000 [LOGO] SHARES OF COMMON STOCK - -------------------------------------------------------------------------------- PHARSIGHT CORPORATION: THE OFFERING: - We are offering shares. - - We develop and market integrated - The underwriters have an option to products and services that help purchase an additional shares pharmaceutical and biotechnology from us to cover over-allotments. companies improve the drug - This is our initial public offering development process. Our solution and no public market currently exists combines proprietary computer-based for our shares. simulation, statistical and data - Closing: , 2000 analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics. PROPOSED NASDAQ NATIONAL MARKET SYMBOL: PHST
- ------------------------------------------------------------------------------------- Per Share Total - ------------------------------------------------------------------------------------- Public offering price $ $ Underwriting fees Proceeds to us
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE CHASE H&Q WIT SOUNDVIEW DLJDIRECT INC. Inside Front Cover [The words "Accelerating Drug Development for Today's Competitive Environment" centered against a faded background collage including pictures of pharmaceutical drugs, computer equipment and people.] Gatefold [A box running vertically down the left side of the page with the heading "Pharsight Solution" divided into three labeled pieces. The first labeled piece contains the text "Model and Trial Workbench" and to its right an arrow pointing to a computer screen-shot depicting the components of a clinical trial plan. This screen-shot is labeled "Scenario" and to its right another arrow pointing at a second screen-shot of four dose vs. response graphs, labeled "Prediction." The second labeled piece of the vertical box contains the text "Decision and Scientific Services" and to its right an arrow pointing to a screen-shot upon which is depicted a decision tree. This screen-shot is labeled "Information" and is followed by another arrow pointing to the right at a second screen-shot depicting a graph with two circles showing when to go forward or skip a phase, labeled "Decision." The third labeled piece of the vertical box contains the text "Clinical Workbench and Information Products (Under Development)" and to its right an arrow pointing to a screen-shot depicting a query for information. This screen-shot is labeled "Query" and is followed by another arrow pointing to the right at a second screen shot with a graph depicting the outcome of the query, labeled "Answers."] TABLE OF CONTENTS
PAGE Prospectus Summary.................... 1 Risk Factors.......................... 5 Forward-Looking Statements............ 12 Use of Proceeds....................... 13 Dividend Policy....................... 13 Capitalization........................ 14 Dilution.............................. 15 Selected Financial Data............... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 17 Business.............................. 23
PAGE Management............................ 37 Certain Relationships and Related Transactions........................ 50 Principal Stockholders................ 53 Description of Capital Stock.......... 55 Shares Eligible for Future Sale....... 58 Underwriting.......................... 61 Legal Matters......................... 64 Experts............................... 64 Additional Information................ 64 Index to Financial Statements......... F-1
------------------------ PHARSIGHT AND WINNONLIN ARE REGISTERED TRADEMARKS, AND WINNONMIX IS A TRADEMARK, OF OUR COMPANY. THIS PROSPECTUS ALSO INCLUDES TRADEMARKS AND SERVICE MARKS OF OTHER COMPANIES. PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. WE URGE YOU TO READ THE ENTIRE PROSPECTUS CAREFULLY. PHARSIGHT CORPORATION We develop and market integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. Our solution combines proprietary computer-based simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics and consists of: - SCIENTIFIC AND DECISION SERVICES. Our multidisciplinary research teams collaborate with customers to design more efficient drug development programs by applying a more rigorous and integrated scientific approach than is currently used. - COMPUTER-BASED DEVELOPMENT APPLICATIONS AND SERVICES. Customers use our software applications, including drug and disease modeling and clinical trial simulation and related services, to improve their drug development process. - INFORMATION PRODUCTS. We are developing medical databases and software products for the analysis of these databases, to enable our customers to obtain objective and quantitative answers to important questions in trial and program decision-making. We have an integrated solution to address the critical steps in designing clinical trials and drug development programs. Our solution is designed to help our customers use a more rigorous scientific and statistical process to identify earlier those drug candidates that will not be successful and to enhance the likelihood that the remaining candidates will successfully complete clinical trials. We believe our solution helps reduce the time, cost and risk of drug development and may improve the marketing and use of pharmaceutical products. Pharmaceutical and biotechnology companies have invested substantial resources in new technologies, such as high throughput screening and combinatorial chemistry, to accelerate the drug discovery process. According to the Pharmaceutical Research and Manufacturers Association, as a result of advances in genetic research, the number of distinct targets for drug intervention is expected to increase from approximately 500 currently to more than 3,000 by 2005. While new technologies have been developed to expand the number of new drug candidates and accelerate the speed with which they can be evaluated, and to better and more rapidly capture and organize data for submission to regulatory agencies, the clinical development process continues to be lengthy and unpredictable. In fact, the FDA reports that clinical development prior to regulatory submission takes five years on average, and that 80% of drugs that enter human clinical trials ultimately fail to receive regulatory approval. 1 Twelve of the world's 20 largest pharmaceutical companies have begun to apply our computer-assisted drug development solution, and our computer-based development applications are currently used on more than 1,800 researcher desktops. Fourteen of our top sixteen customers by revenue to us in the fiscal year ended March 31, 2000 were, listed in alphabetical order: Anesta Corporation AstraZeneca PLC Chiron Corporation Durect Corporation F. Hoffmann-La Roche Ltd. Glaxo Wellcome Inc. Guilford Pharmaceuticals Inc. Johnson & Johnson Novartis Pharmaceuticals Corporation Pfizer Limited Proctor & Gamble Pharmaceuticals, Inc. Sankyo Company Ltd. SmithKline Beecham Pharmaceuticals Warner-Lambert Company Our strategy is to help pharmaceutical and biotechnology companies accelerate clinical development and to assist large healthcare organizations in the adoption and use of pharmaceutical products. Elements of our strategy include: - Expand our presence within the clinical development market; - Expand our activities in pharmaceutical marketing and phase IV study design; - Broaden our content and data-related product offerings; - Maintain and enhance our scientific and technology leadership; and - Pursue strategic alliances and acquisitions. We were incorporated in California in April 1995, and reincorporated in Delaware in 2000. Our executive offices are located at 800 West El Camino Real, Suite 200, Mountain View, CA 94040, and our telephone number is (650) 314-3800. Our website address is www.pharsight.com. We do not incorporate the information on our website into this prospectus, and you should not consider it part of this prospectus. 2 THE OFFERING Common stock offered............. shares Common stock to be outstanding after the offering............. shares Use of proceeds.................. Approximately $6.1 million to the holders of our series C preferred stock, research and development of new and existing products and services, and working capital and other general corporate purposes, including potential acquisition of products, technologies or businesses. See "Use of Proceeds." Proposed Nasdaq National Market symbol......................... PHST Risk Factors..................... See "Risk Factors," beginning on page 5, for a discussion of factors you should consider carefully before deciding to buy our common stock.
The number of shares outstanding after this offering is based on shares outstanding as of March 31, 2000, assuming the conversion of our preferred stock into 10,686,717 shares of common stock, and excludes an aggregate of: - 1,835,369 shares issuable upon exercise of outstanding stock options at a weighted average exercise price of $1.06 per share; and - 296,881 shares of common stock reserved for issuance under outstanding warrants at a weighted average exercise price of $1.45 per share. ASSUMPTIONS WHICH APPLY TO THIS PROSPECTUS Unless otherwise indicated, all share amounts and financial information presented in this prospectus assume the underwriters' over-allotment option is not exercised and give effect to: - conversion of our convertible preferred stock into our common stock, which will occur automatically upon completion of this offering; - our reincorporation from a California corporation to a Delaware corporation, which will occur at or prior to the completion of this offering; and - the filing of our restated certificate of incorporation, which will occur immediately following the completion of this offering. 3 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The tables below summarize our financial data set forth in more detail in the financial statements at the end of this prospectus. The financial data below are based on the following assumptions: - The pro forma basic and diluted net loss per share includes shares of common stock issued on the conversion of our outstanding preferred stock on a one-for-one basis into common stock. - The as adjusted balance sheet data reflect the conversion of all outstanding shares of preferred stock into common stock, the sale by us of shares of common stock offered by this prospectus at an assumed initial public offering price of $ per share after deducting the estimated underwriting discounts and commissions and offering expenses payable by us, and the payment of approximately $6.1 million to the holders of our series C preferred stock.
NINE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------------------------------ ------------------- 1997 1998 1999 1998 1999 (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Revenues..................................... $ -- $ 1,106 $ 4,085 $ 2,657 $ 6,252 Operating expenses........................... 1,974 5,402 13,858 10,250 13,061 Operating loss............................... (1,974) (4,296) (9,773) (7,593) (6,809) Net loss applicable to common shareholders... (1,934) (5,216) (10,696) (8,308) (7,755) Basic and diluted net loss per common share...................................... $ (2.57) $ (3.96) $ (4.41) $ (3.64) $ (2.50) Shares used in computing basic and diluted net loss per common share.................. 752 1,318 2,424 2,281 3,107 Pro forma basic and diluted net loss per common share............................... $ (1.23) $ (0.64) Shares used in computing pro forma basic and diluted net loss per common share.......... 8,670 12,194
DECEMBER 31, 1999 ---------------------- ACTUAL AS ADJUSTED (UNAUDITED) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments......... $18,339 $ Working capital........................................... 16,992 Total assets.............................................. 23,514 Long-term obligations, net of current portion............. 2,129 Redeemable convertible preferred stock.................... 18,272 Total stockholders' equity (deficit)...................... (1,426)
4 RISK FACTORS BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE THAT THERE ARE VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE YOU DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF LOSSES THAT WE EXPECT WILL CONTINUE, AND WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUES TO ACHIEVE PROFITABILITY. We commenced our operations in April 1995 and have incurred net losses since that time. As of December 31, 1999, we had an accumulated deficit of $25.8 million. We expect our net losses to continue as we increase our research and development costs and other costs to develop our business. We cannot assure you that we will generate sufficient revenues to achieve profitability. If our losses exceed the expectations of investors, the price of our common stock may decline. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND MAY FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE. We expect our quarterly operating results may fluctuate in the future, and may vary from securities analysts' and investors' expectations, depending on a number of factors described below and elsewhere in this "Risk Factors" section of the prospectus, including: - variances in demand for our products and services; - timing of the introduction of new products or services and enhancements of existing products or services; - changes in research and development expenses; - our ability to complete fixed-price service contracts without committing additional resources; and - changes in industry conditions affecting our customers. As a result, quarterly comparisons may not indicate reliable trends of future performance. We also expect to increase activities and spending in substantially all of our operational areas. We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short term. If we have lower revenue, we may not be able to reduce our spending in the short term in response. Any shortfall in revenue would have a direct impact on our results of operations. For these and other reasons, we may not meet the earnings estimates of securities analysts or investors, and the price of our common stock may decline. BECAUSE OUR SALES AND IMPLEMENTATION CYCLES ARE LONG AND UNPREDICTABLE, OUR REVENUES ARE DIFFICULT TO PREDICT AND MAY NOT MEET OUR EXPECTATIONS OR THOSE OF OUR INVESTORS. The lengths of our sales and implementation cycles are difficult to predict and depend on a number of factors, including the type of product or services being provided, the nature and size of the potential customer and the extent of the commitment being made by the potential customer. Our sales cycle is unpredictable and may take six months or more. Our implementation cycle is also difficult to predict and can be longer than one year. Each of these can result in delayed revenues, increased selling expenses and difficulty in matching revenues with expenses, which may contribute to fluctuations in our results of operations and cause our stock price to be volatile. A key element of our strategy is to market our product and service offerings to large organizations. These organizations can have elaborate decision-making processes and may require evaluation periods which could extend the sales and implementation cycle. Moreover, we often must provide a significant level of education to our 5 prospective customers regarding the use and benefit of our product and service offerings, which may cause additional delays during the evaluation and acceptance process. We therefore have difficulty forecasting the timing and recognition of revenues from sales of our product and service offerings. OUR REVENUE IS CONCENTRATED IN A FEW CUSTOMERS, AND IF WE LOSE ANY OF THESE CUSTOMERS OUR REVENUE MAY DECREASE SUBSTANTIALLY. We receive a substantial majority of our revenue from a limited number of customers. In fiscal year 2000, sales to our top customer, Johnson & Johnson, accounted for a substantial portion of our revenue and sales to our top five customers accounted for 40.8% of our revenue. We expect that a significant portion of our revenue will continue to depend on sales to a small number of customers. If we do not generate as much revenue from these major customers as we expect to, or if we lose any of them as customers, our total revenue may be significantly reduced. IF WE ARE UNABLE TO GENERATE ADDITIONAL SALES FROM EXISTING CUSTOMERS AND GENERATE SALES TO NEW CUSTOMERS, WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUES TO BECOME PROFITABLE. Our success depends on our ability to develop our existing customer relationships and establish relationships with additional pharmaceutical and biotechnology companies. If we lose any significant relationships with existing customers or fail to establish additional relationships, we may not be able to execute our business plan and our business will suffer. As of March 31, 2000, we have only performed a limited number of projects with twelve of the twenty largest pharmaceutical companies and a number of smaller companies. Developing customer relationships with pharmaceutical companies can be difficult for a number of reasons. These companies are often very large organizations with complex decision-making processes that are difficult to change. In addition, because our products and services relate to the core technologies of these companies, these organizations are generally cautious about working with outside companies. Some potential customers may also resist working with us until our products and services have achieved more widespread market acceptance. Our existing customers could also reassess their commitment to us, not renew existing agreements or choose not to expand the scope of their relationship with us. WE MAY LOSE EXISTING CUSTOMERS OR BE UNABLE TO ATTRACT NEW CUSTOMERS IF WE DO NOT DEVELOP NEW PRODUCTS AND SERVICES OR IF OUR OFFERINGS DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGES. The successful growth of our business depends on our ability to develop new products and services and incorporate new capabilities into our existing offerings on a timely basis. If we cannot adapt to changing technologies, emerging industry standards, new scientific developments and increasingly sophisticated customer needs, our products and services may become obsolete and our business could suffer. We have suffered product delays in the past, resulting in lost product revenues. In addition, early releases of software often contain errors or defects. We cannot assure you that, despite our extensive testing, errors will not be found in our products before or after commercial release, which could result in product redevelopment costs and loss of, or delay in, market acceptance. Furthermore, a failure by us to introduce new products or services on schedule could harm our business prospects. Any delay or problems in the installation or implementation of new products or services may cause customers to forego purchases from us. IF THE SECURITY OF OUR CUSTOMERS' DATA IS COMPROMISED, WE COULD BE LIABLE FOR DAMAGES AND OUR REPUTATION COULD BE HARMED. As part of implementing our products and services, we inherently gain access to certain highly confidential proprietary customer information. It is critical that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Despite our implementation of a number of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, 6 programming errors, attacks by third parties or similar disruptive problems. If we fail to meet our customers' security expectations, we could be liable for damages and our reputation could suffer. IF WE ARE REQUIRED TO COMMIT UNANTICIPATED RESOURCES TO COMPLETE FIXED-PRICE SERVICE CONTRACTS, WE MAY INCUR LOSSES ON THESE CONTRACTS WHICH COULD CAUSE OUR OPERATING RESULTS TO DECLINE. A significant portion of our revenue has been derived from service contracts that are billed on a fixed-price basis. These contracts specify certain obligations and deliverables to be met by us regardless of our actual costs incurred. Our failure to accurately estimate the resources required for a fixed-price service contract could cause us to commit additional resources to a project, which could cause our operating results to decline. We cannot assure you that we can successfully complete these contracts on budget, and our inability to do so could harm our business. IF WE ARE UNABLE TO COMPLETE A PROJECT DUE TO SCIENTIFIC LIMITATIONS OR OTHERWISE MEET OUR CUSTOMERS' EXPECTATIONS, OUR REPUTATION MAY BE ADVERSELY AFFECTED AND WE MAY NOT BE ABLE TO GENERATE NEW BUSINESS. Because our projects may contain scientific risks which are difficult to foresee, we cannot guarantee that we will always be able to complete them. Any failure to meet our customers' expectations could harm our reputation and ability to generate new business. On a few occasions, we have encountered scientific limitations and been unable to complete a project. In each of these cases, we have been able to successfully renegotiate the terms of the project with the particular customer. We cannot assure you that we will be able to renegotiate our customer agreements if such circumstances occur in the future. Moreover, even if we complete a project, we may not meet our customers' expectations regarding the quality of our products and services or the timeliness of our services. IF WE ARE UNABLE TO HIRE ADDITIONAL SPECIALIZED PERSONNEL, WE WILL NOT BE ABLE TO GROW OUR BUSINESS. Growth in the demand for our products and services will require additional personnel, particularly qualified scientific and technical personnel. We currently have limited personnel and other resources to staff and complete projects. In addition, as we grow our business, we expect an increase in the number of complex projects and large deployments of our products and services, which require a significant amount of personnel for extended periods of time. However, there is currently a shortage of these personnel worldwide, and competition for these personnel from numerous companies and academic institutions may limit our ability to hire these persons on commercially reasonable terms. Staffing projects and deploying our products and services will also become more difficult as our operations and customers become more geographically diverse. If we are not able to adequately staff and complete our projects, we may lose customers and our reputation may be harmed. Any difficulties we may have in completing customer projects may impair our ability to grow our business. IF WE LOSE KEY MEMBERS OF OUR MANAGEMENT, SCIENTIFIC OR DEVELOPMENT STAFF, OR OUR SCIENTIFIC ADVISORS, OUR REPUTATION MAY BE HARMED AND WE MAY LOSE BUSINESS. We are highly dependent on the principal members of our management, scientific and development staff. Our reputation is also in part based on our association with key scientific advisors. The loss of any of these personnel might adversely impact our reputation in the market and harm our business. Failure to attract and retain key management, scientific and technical personnel could prevent us from achieving our strategy and developing our products and services. WE HAVE ONLY RECENTLY UNDERTAKEN DEVELOPMENT OF OUR INFORMATION PRODUCTS, AND OUR FUTURE REVENUE AND OPERATING RESULTS COULD BE HARMED IF THESE PRODUCTS DO NOT ACHIEVE COMMERCIAL SUCCESS. An important component of our business strategy relates to our information products. We have only recently undertaken to develop these products and, as of March 31, 2000, we had generated no 7 revenues from them. We expect to release the initial versions of these products later this year, although we cannot guarantee you that we will be able to release these products on time. In addition, because the market for these products is new and emerging, it is difficult to predict the level of market acceptance. Our future business could be harmed if we do not release these products on time or if they do not achieve commercial success. IF WE ARE UNABLE TO OBTAIN SUFFICIENT DATA FROM THIRD-PARTY PROVIDERS, OUR INFORMATION PRODUCTS WILL NOT BE ATTRACTIVE TO CUSTOMERS. As of March 31, 2000, we have only established relationships with three organizations to provide data for inclusion in our information products. We may not be able to enter into additional agreements with content providers on commercially favorable terms, if at all. If we are unable to obtain adequate data, our information products will not be attractive to customers and, therefore, may not achieve commercial success. In addition, we cannot assure you that our existing or prospective data providers will not reassess their commitment to us in the future or develop competitive products internally. IF THERE IS A SYSTEM FAILURE OR NATURAL DISASTER AT OUR HOSTING FACILITY, WE MAY NOT BE ABLE TO PROVIDE ACCESS TO OUR INFORMATION PRODUCTS AND OUR BUSINESS COULD SUFFER. Our information products data are stored at a third party's computer data facility located in Santa Clara, California, an area prone to earthquakes. We currently have no backup systems at other sites. Accordingly, there is a significant risk to our ability to provide access to our information products from a natural disaster or system failure at such facility. OUR BUSINESS DEPENDS ON OUR INTELLECTUAL PROPERTY RIGHTS, AND IF WE ARE UNABLE TO ADEQUATELY PROTECT THEM, OUR COMPETITIVE POSITION WILL SUFFER. Our intellectual property is important to our competitive position. We protect our proprietary information and technology through a combination of trademark, trade secret and copyright law, confidentiality agreements and technical measures. We may also seek to protect our intellectual property through patents, but do not currently have any patents issued or filed. We cannot assure you that the steps we have taken will prevent misappropriation of our proprietary information and technology, nor can we guarantee that we will be successful in obtaining any patents or that the rights granted under such patents will provide a competitive advantage. Misappropriation of our intellectual property could harm our competitive position. In addition, we may need to engage in litigation in the future to enforce or protect our intellectual property rights or to defend against claims of invalidity, and we may incur substantial costs as a result. IF WE BECOME SUBJECT TO INFRINGEMENT CLAIMS BY THIRD PARTIES, WE COULD INCUR UNANTICIPATED EXPENSE AND BE PREVENTED FROM PROVIDING OUR PRODUCTS AND SERVICES. We cannot assure you that infringement claims by third parties will not be asserted against us or, if asserted, will be unsuccessful. These claims, whether or not meritorious, could be expensive and divert management resources from operating our company. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could block our ability to provide products or services, unless we obtain a license to such technology. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or at all. 8 FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND DILUTE STOCKHOLDER VALUE. In order to expand our product and service offerings and reach new customers, we may continue to acquire products, technologies or businesses that we believe are complementary. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, services, products and personnel of the acquired company, the diversion of management's attention from other business concerns, the potential loss of key employees of the acquired company and our inability to maintain the goodwill of the acquired businesses. We also cannot predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. Future acquisitions may result in: - potentially dilutive issuances of equity securities; - the incurrence of additional debt; - the assumption of known and unknown liabilities; and - the write-off of software development costs, and the amortization of expenses related to goodwill and other intangible assets and charges against earnings. Any of the above factors, if they occur, could harm our business. RISKS RELATED TO OUR INDUSTRY OUR MARKET MAY NOT DEVELOP AS QUICKLY AS EXPECTED, AND COMPANIES MAY ENTER OUR MARKET, THEREBY INCREASING THE AMOUNT OF COMPETITION AND IMPAIRING OUR BUSINESS PROSPECTS. Because our products and services are new and still evolving, there is significant uncertainty and risk as to the demand for, and market acceptance of, these products and services. As a result, we are not able to predict the size and growth rate of our market with any certainty. In addition, other companies, including potential strategic partners, may enter our market. Our existing customers may also elect to terminate our services and internally develop products and services similar to ours. If our market fails to develop, grow more slowly than expected or become saturated with competitors, our business prospects will be impaired. LAWS PROTECTING THE PRIVACY OF CONFIDENTIAL PATIENT INFORMATION MAY LIMIT THE RANGE OF SERVICES WE CAN PROVIDE AND, IF WE VIOLATE ANY OF THESE LAWS, COULD SUBJECT US TO CIVIL AND CRIMINAL PENALTIES. The healthcare industry is regulated by a number of federal, state, local and international governmental entities. These entities may enact laws that limit our operations or the operations of our customers. In particular, state laws aimed at protecting the privacy of confidential patient health information, including information regarding conditions like AIDS, substance abuse and mental illness, vary widely. The application of these laws in the context of research and internet health services is evolving. While these laws primarily are directed at healthcare providers, facilities and payors, and generally do not apply to the "anonymized" data we use, from which patient identifiable information has been removed, some of these laws could be applied to aspects of our business or to limit providers' ability to provide us with access to such data. We cannot predict which laws might be found applicable to our business, or assure you that our operations would be found to be in full compliance. Compliance with regulatory laws may be expensive and may limit our ability to provide a full range of services. In addition, a challenge under any of these laws could result in adverse publicity and, if successful, imposition of civil and criminal penalties, any of which could harm our business. 9 GOVERNMENT REGULATIONS MAY BE ENACTED THAT RESTRICT OUR OPERATIONS OR THE OPERATIONS OF OUR CUSTOMERS AND, THEREFORE, ADVERSELY AFFECT OUR BUSINESS. The pharmaceutical industry is regulated by a number of federal, state, local and international governmental entities. Although our products and services are not directly regulated by the United States Food and Drug Administration or comparable international agencies, the use of some of our analytical software products by our customers may be regulated. We currently provide assistance to our customers in achieving compliance with these regulations. The regulatory agencies could enact new regulations or amend existing regulations with regard to these or other products that could restrict the use of our products or the business of our customers, which could harm our business. CONSOLIDATION IN THE PHARMACEUTICAL INDUSTRY COULD CAUSE DISRUPTIONS OF OUR CUSTOMER RELATIONSHIPS AND INTERFERE WITH OUR ABILITY TO ENTER INTO NEW CUSTOMER RELATIONSHIPS. In recent years, the worldwide pharmaceutical industry has undergone substantial consolidation. If any of our customers consolidate with another business, they may delay or cancel projects, lay off personnel or reduce spending, any of which could cause our revenues to decrease. In addition, our ability to complete sales or implementation cycles may be impaired as these organizations undergo internal restructuring. REDUCTION IN THE RESEARCH AND DEVELOPMENT BUDGETS OF OUR CUSTOMERS MAY IMPACT OUR SALES. Our customers include researchers at pharmaceutical and biotechnology companies, academic institutions and government and private laboratories. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Research and development budgets fluctuate due to changes in available resources, spending priorities, internal budgetary policies and the availability of grants from government agencies. Our business could be harmed by any significant decrease in research and development expenditures by pharmaceutical and biotechnology companies, academic institutions or government and private laboratories. RISKS RELATED TO THIS OFFERING AND OUR STOCK THE PUBLIC MARKET FOR OUR COMMON STOCK MAY BE VOLATILE. We expect the market price of our common stock to be highly volatile and to fluctuate significantly in response to various factors, including: - actual or anticipated variations in our quarterly operating results; - announcements of technological innovations or new services or products by us or our competitors; - timeliness of our introductions of new products; - changes in financial estimates by securities analysts; and - changes in the conditions and trends in the pharmaceutical market. In addition, the stock markets, including the Nasdaq National Market, have experienced extreme price and volume fluctuations that have affected the market prices of equity securities of many technology companies. These fluctuations have often been unrelated or disproportionate to operating performance. These broad market factors may materially affect the trading price of our common stock. General economic, political and market conditions, such as recessions and interest rate fluctuations, may also have an adverse effect on the market price of our common stock. 10 OUR SECURITIES HAVE NO PRIOR MARKET AND WE CANNOT ASSURE YOU THAT OUR STOCK PRICE WILL NOT DECLINE AFTER THE OFFERING. Our common stock has never been sold in a public market. An active trading market for our common stock may not develop or be sustained after completion of this offering. The initial public offering price may not be indicative of the prices that will prevail in the public market after this offering, and the market price of the common stock could fall below the initial public offering price. WE MAY HAVE SUBSTANTIAL SALES OF OUR COMMON STOCK AFTER THIS OFFERING THAT COULD CAUSE OUR STOCK PRICE TO FALL. Sales of substantial amounts of our common stock in the public market after this offering, including shares issued upon the exercise of outstanding options, or the perception that such sales could occur, could reduce the market price of our common stock. These sales also might make it more difficult for us to raise funds through future offerings of common stock. Upon completion of this offering, there will be shares of our common stock outstanding. All of the shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, except for shares purchased by our "affiliates," as defined in Rule 144 under the Securities Act. The remaining shares of common stock that will be outstanding upon completion of this offering are "restricted securities" as defined in Rule 144. These restricted securities may be sold in the future without registration under the Securities Act to the extent permitted under Rule 144, Rule 701 or another exemption under the Securities Act. We and our officers, directors and stockholders holding approximately shares of common stock have agreed not to, without the prior written consent of Donaldson, Lufkin & Jenrette, directly or indirectly sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of common stock or any securities convertible into, or exchangeable, or exercisable for, or any other rights to purchase or acquire shares of common stock owned by them during the 180-day period commencing on the date of this prospectus. Some of the shares subject to the lockup agreements may be released from this restriction earlier depending on the trading price of our common stock. See "Shares Eligible for Future Sale" for a more detailed discussion. BECAUSE OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE SUBSTANTIAL CONTROL OF OUR VOTING STOCK, TAKEOVERS NOT SUPPORTED BY THEM WILL BE MORE DIFFICULT, POSSIBLY PREVENTING YOU FROM OBTAINING OPTIMAL SHARE PRICE. The control of a significant amount of our stock by insiders could adversely affect the market price of our common stock. After this offering, our executive officers and directors will beneficially own or control 7,447,144 shares or % of the outstanding common stock. If our executive officers and directors choose to act or vote together, they will have the power to significantly influence all matters requiring the approval of our stockholders, including the election of directors and the approval of significant corporate transactions. Without the consent of these stockholders, we could be prevented from entering into transactions that could result in our stockholders receiving a premium for their stock. OUR CHARTER DOCUMENTS CONTAIN ANTI-TAKEOVER PROVISIONS THAT MAY DISCOURAGE TAKE-OVER ATTEMPTS AND MAY REDUCE OUR STOCK PRICE. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of any preferred stock that may be issued in the future. Other provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of us without the consent of our board of directors, even if the changes were favored by a majority of the 11 stockholders. These include provisions that provide for a staggered board of directors, prohibit stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings. INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION. The initial price to the public in this offering will be substantially higher than the net tangible book value per share of common stock. If we sell shares in the offering at an assumed initial price to public of $ per share, our pro forma net tangible book value per share will be $ , which is $ below the per share initial price to public. If we issue additional common stock in the future or outstanding options or warrants to purchase our common stock are exercised, there will be further dilution. WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS, AND OUR INVESTMENT OF THESE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN. Our management will have considerable discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds of this offering, after payment of $6.1 million to the holders of series C preferred stock, may be used for corporate purposes that do not increase our results of operations or fail to yield a favorable return. Pending any uses, we plan to invest the net proceeds of the offering in investment-grade, interest-bearing securities. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements based on our current expectations, assumptions, estimates and projections about our business and our industry that involve risks and uncertainties. These forward-looking statements are usually accompanied by words like "believe," "anticipate," "plan," "seek," "expect," "intend" and similar expressions. Our actual results may differ materially from the results expressed or implied by these forward-looking statements because of the risk factors and other factors disclosed in this prospectus. We undertake no obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. 12 USE OF PROCEEDS Our net proceeds from the sale of the shares of our common stock in this offering are estimated to be approximately $ , or $ if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. We expect to use approximately $6.1 million of the net proceeds for payment to the holders of our series C preferred stock at the closing of the offering as required by the terms of the series C preferred stock. We intend to use the remainder of the net proceeds of this offering for research and development of new and existing products and services, working capital and other general corporate purposes, including potential acquisition of products, technologies or businesses. However, we are not party to any agreements, understandings or commitments regarding acquisitions at the present time. Pending these uses, the net proceeds will be invested in short-term, investment-grade, interest-bearing securities. Based on our current operating plan, we anticipate that the net proceeds of this offering, together with our available cash and expected interest income thereon and funds from operations, should be sufficient to finance our capital requirements through at least two years. This estimate is based on assumptions that could be negatively impacted by the matters discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock and do not anticipate paying such cash dividends in the foreseeable future. We currently anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operation, financial condition and other factors as our board of directors, in its discretion, deems relevant. In addition, under the terms of some of our debt agreements, we are prohibited from paying dividends without the consent of the lender. 13 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999 on an actual basis, and as adjusted to give effect to the receipt of net proceeds from the sale of the shares of our common stock at an assumed initial public offering price of $ per share, the payment of $6.1 million to the holders of our series C preferred stock and the conversion of all outstanding preferred stock into common stock. The table should be read in conjunction with "Use of Proceeds" and our financial statements and our related notes included elsewhere in this prospectus.
AS OF DECEMBER 31, 1999 --------------------------- ACTUAL AS ADJUSTED (IN THOUSANDS) Capital leases and notes payable............................ $ 3,792 $ 3,792 Redeemable convertible preferred stock: 5,511,640 shares authorized, 5,455,094 shares issued and outstanding actual; no shares authorized, no shares issued and outstanding as adjusted................................................... 18,272 -- Stockholders' equity: Convertible preferred stock: 5,253,052 shares authorized, 5,231,623 shares issued and outstanding actual; 5,000,000 shares authorized, no shares issued and outstanding as adjusted................................. 22,552 -- Common stock: 19,235,308 shares authorized, 3,915,172 shares issued and outstanding actual; 120,000,000 shares authorized, shares issued and outstanding as adjusted................................................ 4,754 Warrants.................................................. -- Notes receivable from stockholders........................ (133) (133) Deferred stock compensation............................... (2,743) (2,743) Accumulated other comprehensive income.................... (23) (23) Accumulated deficit....................................... (25,833) (25,833) -------- -------- Total stockholders' equity (deficit)........................ (1,426) -------- -------- Total capitalization........................................ $ 20,638 $ ======== ========
14 DILUTION Our pro forma net tangible book value as of December 31, 1999 was approximately $16.1 million, or $1.10 per share. Pro forma net tangible book value per share represents the amount of pro forma stockholders' equity, less intangible assets, divided by the pro forma number of shares of common stock outstanding as of December 31, 1999. Our as adjusted pro forma net tangible book value as of December 31, 1999 would have been $ million, or $ per share after giving effect to the sale of shares of common stock offered by us at the assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to investors purchasing our common stock in this offering, as illustrated in the following table:
Assumed initial public offering price per share. $ ------ Pro forma net tangible book value per share before this offering................................................ $ 1.10 Increase per share attributable to new investors.......... ------ As adjusted pro forma net tangible book value per share after this offering....................................... ------ Dilution per share to new investors......................... $ ======
The table below summarizes, on a pro forma basis, the differences between our existing stockholders and the new investors purchasing our common stock in this offering with respect to the total number of shares purchased from us, the total consideration paid and the average price per share paid. For this table, we have assumed an initial public offering price of $ per share.
TOTAL SHARES PURCHASED CONSIDERATION --------------------- ------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE Existing stockholders....................... 14,601,889 % $ % $ New investors............................... ---------- ---- ----- ---- Total..................................... 100% $ 100% ========== ==== ===== ====
These tables do not assume the exercise of stock options and warrants outstanding as of December 31, 1999. To the extent that outstanding options and warrants are exercised, there will be additional dilution to investors. As of December 31, 1999, there were 1,819,318 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $0.61 per share and 296,881 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.45 per share. The pro forma net tangible book value per share would be $ , the dilution per share to new investors would be $ after giving effect to the exercise of the options and warrants outstanding and exercisable as of December 31, 1999. 15 SELECTED FINANCIAL DATA You should read the following historical selected financial data in conjunction with the financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. We have derived our balance sheet data as of March 31, 1998 and 1999 and statements of operations data for each of the years ended March 31, 1997, 1998 and 1999 from our audited financial statements included in this prospectus. We have derived our balance sheet data as of March 31, 1996 and 1997 and statements of operations data for the period from April 4, 1995 to March 31, 1996 from our audited financial statements not included in this prospectus. We have derived our balance sheet data as of December 31, 1999 and statements of operations data for the nine months ended December 31, 1998 and 1999 from our unaudited condensed financial statements. We believe that the unaudited financial data fairly reflect our results of operations and financial condition for the respective periods.
NINE MONTHS ENDED APRIL 4, 1995 YEARS ENDED MARCH 31, DECEMBER 31, (INCEPTION) TO ------------------------------ ------------------- STATEMENTS OF OPERATIONS DATA MARCH 31, 1996 1997 1998 1999 1998 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.............................. $ -- $ -- $ 1,106 $ 4,085 $ 2,657 $ 6,252 Costs and expenses: Cost of revenues.................... -- -- 714 2,520 1,647 3,042 Research and development............ 126 720 2,134 4,327 3,004 3,759 Sales and marketing................. 67 816 1,366 2,292 1,592 2,773 General and administrative.......... 47 438 744 1,105 707 1,332 Amortization of deferred stock compensation...................... -- -- -- 57 -- 1,391 Amortization of intangible assets... -- -- 82 965 708 764 Acquired in-process research and development....................... -- -- 362 2,592 2,592 -- ------ ------- ------- -------- ------- ------- Total operating expenses.............. 240 1,974 5,402 13,858 10,250 13,061 ------ ------- ------- -------- ------- ------- Loss from operations.................. (240) (1,974) (4,296) (9,773) (7,593) (6,809) Other income (expense), net........... 8 40 172 (120) (223) (15) ------ ------- ------- -------- ------- ------- Net loss.............................. $ (232) $(1,934) $(4,124) $ (9,893) $(7,816) $(6,824) Accretion on convertible preferred stock............................... -- -- (448) (803) (492) (931) Series C redeemable convertible preferred stock dividend............ -- -- (644) -- -- -- ------ ------- ------- -------- ------- ------- Net loss applicable to common stockholders........................ $ (232) $(1,934) $(5,216) $(10,696) $(8,308) $(7,755) ====== ======= ======= ======== ======= ======= Basic and diluted net loss per share............................... $(1.30) $ (2.57) $ (3.96) $ (4.41) $ (3.64) $ (2.50) ====== ======= ======= ======== ======= ======= Shares used to compute basic and diluted net loss per share.......... 178 752 1,318 2,424 2,281 3,107 Pro forma basic and diluted net loss per share........................... $ (1.23) $ (0.64) ======== ======= Shares used to compute pro forma basic and diluted net loss per share........................... 8,670 12,194
AS OF AS OF MARCH 31, DECEMBER 31, ----------------------------------------- ------------ BALANCE SHEET DATA 1996 1997 1998 1999 1999 (IN THOUSANDS) Cash, cash equivalents and short-term investments.................................... $1,549 $ 662 $ 3,701 $ 6,147 $ 18,339 Working capital.................................. 1,552 459 2,922 2,604 16,992 Total assets..................................... 1,605 899 5,399 9,655 23,514 Long-term obligations, net of current portion.... 0 180 1,221 2,812 2,129 Redeemable convertible preferred stock........... -- -- 7,176 17,341 18,272 Deferred stock compensation...................... 0 0 0 (239) (2,743) Accumulated deficit.............................. (232) (2,166) (7,382) (18,078) (25,833) Total stockholders' equity (deficit)............. 1,582 472 (4,556) (15,086) (1,426)
16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN CONJUNCTION WITH "SELECTED FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO HISTORICAL INFORMATION, THE DISCUSSION IN THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THESE FORWARD-LOOKING STATEMENTS DUE TO FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW We develop and market integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. Our solution combines proprietary computer-based simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics. We have an integrated solution to address the critical steps in designing clinical trials and drug development programs. Our solution is designed to help our customers use a more rigorous scientific and statistical process to identify earlier those drug candidates that will not be successful and to enhance the likelihood that the remaining candidates will successfully complete clinical trials. During the period from our inception in April 1995 through March 1997, we were a development stage enterprise. Our operating activities during this period related primarily to developing products, building our corporate infrastructure and raising capital. In the second quarter of fiscal 1998 we released our first version of software for trial simulation and started offering our scientific and decision services. In December 1997 we acquired Scientific Consulting, Inc. and the model workbench family of products. The majority of our sales activities are conducted through a dedicated direct sales organization located in the United States and Europe. In addition, our technical support personnel and scientific consultants conduct sales and marketing activities. In fiscal 2000, we entered into licensing agreements with three organizations to gain access to their proprietary medical data on a royalty basis for use in our information products. In the future, we expect to enter into alliances and license arrangements to gain access to other medical data on a royalty basis. We expect this data to provide the foundation for our information products. We intend to provide these products to our customers on a subscription basis. REVENUE RECOGNITION We recognize revenue from our products and services when we determine that evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, we defer revenue recognition until all of the criteria are met. We consider all arrangements with payment terms extending beyond twelve months and other arrangements with payment terms longer than normal not to be fixed or determinable. If we do not consider collectibility probable, we recognize revenue when the fee is collected. No customer has the right of return. For contracts from which we receive solely license and maintenance fees, we recognize license revenue based upon the residual method after all elements other than maintenance have been delivered. We recognize maintenance revenues over the term of the maintenance contract as vendor-specific objective evidence of fair value for maintenance exists. We determine whether vendor-specific objective evidence of fair value of maintenance exists by reference to the price the customer will be required to pay when it is sold separately, i.e. the renewal rate. Each license agreement offers 17 additional maintenance renewal periods at a stated price. Maintenance contracts are typically one year in duration. We recognize revenue on software that is licensed on a per copy basis when each copy of the license requested by the customer is delivered. We recognize revenue through our Japanese distributor on shipment if the distributor has identified a valid end-user for the product, if other software revenue recognition criteria are met and since there is no right of return or price protection. We recognize revenues from scientific and training services as services are performed. For those contracts that include contract milestones or acceptance criteria, we recognize revenues as these milestones are achieved or as acceptance occurs. For contracts that are on a fixed price basis, we determine if losses should be recognized at the end of each accounting period. During the nine months ended December 31, 1999, we entered into arrangements that consist of licenses, maintenance and scientific and training services. For these arrangements, we assess whether the service element of the arrangement is essential to the functionality of the other elements of the arrangement. In those instances where we determine that the service elements are essential to the other elements of the arrangement, we will account for the entire arrangement using contract accounting. For those arrangements accounted for using contract accounting that do not include contractual milestones or other acceptance criteria, we will utilize the percentage of completion method based upon input measures of hours. For those contracts that include contract milestones or acceptance criteria, we will recognize revenue as such milestones are achieved or as such acceptance occurs. Our revenue recognition policy is in accordance with Statement of Position No. 97-2, "Software Revenue Recognition," as amended by Statement of Position No. 98-4, "Referral of the Effective Date of SOP 97-2, Software Revenue Recognition", and Statement of Position No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions." ACQUISITIONS In December 1997 we purchased all of the outstanding shares of Scientific Consulting, Inc., a developer of scientific software products for the pharmaceutical industry, for an aggregate purchase price of $1.3 million, consisting of cash, a note payable and shares of our common stock. The acquisition was accounted for using the purchase method, and the results of operations of Scientific Consulting, Inc. have been included in our operations since acquisition. We charged to expense $362,000 for in-process technology acquired from this acquisition. The valuation methodology used by an independent appraiser to establish this charge included an analysis and estimation of the fair market value and remaining economic life of both the core and the acquired in-process technologies on a going concern basis. In May 1998 we purchased biomedical modeling and simulation technology from Mitchell and Gauthier Associates, Inc., a provider of software and services principally to the aerospace and defense industries. We acquired the exclusive right to use the technology in the biopharmaceutical market. We purchased these assets for an aggregate purchase price of $4.7 million, consisting of cash, notes payable and shares of our common stock. The acquisition of the assets was accounted for using the purchase method. We charged to expense $2.6 million for the in-process technology acquired. The valuation methodology used by an independent appraiser to establish this charge included an analysis and estimation of the fair market value and remaining economic life of both the core and the acquired in-process technologies on a going concern basis. DEFERRED STOCK COMPENSATION For the year ended March 31, 1999 and the nine month period ended December 31, 1999, in connection with the grant of stock options to employees, we recorded deferred stock compensation totaling $296,000 and $3.9 million, respectively, representing the difference between the deemed fair value of our common stock for financial reporting purposes on the date these options were granted and 18 the exercise price. This amount is included as a reduction of stockholders' equity and is being amortized over the vesting period of the individual options, generally four years, using the graded vesting method. The graded vesting method provides for vesting of portions of the overall award at interim dates and results in higher vesting in earlier years than straight-line vesting. We recorded amortization of deferred stock compensation of $57,000 and $1.4 million for the year ended March 31, 1999 and the nine month period ended December 31, 1999, respectively. As of December 31, 1999, we had a total of $2.7 million remaining to be amortized over the vesting periods of the stock options. You should read Note 12 of notes to the financial statements. RESULTS OF OPERATIONS NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998 REVENUES. Revenues increased $3.6 million, or 135%, from $2.7 million for the nine months ended December 31, 1998 to $6.3 million for the nine months ended December 31, 1999. The majority of this increase was revenue recognized during fiscal 2000 under five new strategic agreements with major pharmaceutical companies. In addition, revenue also increased as the number of our customers increased significantly, and we enhanced our software and services and increased the prices we charged for them. COST OF REVENUES. Cost of revenues increased $1.4 million, or 85%, from $1.6 million for the nine months ended December 31, 1998 to $3.0 million for the nine months ended December 31, 1999. The increase was due primarily to increased service personnel in scientific and decision services. Cost of revenue as a percentage of total revenues decreased from 62% to 49%. Because of the direct relationship of personnel to projects undertaken, we anticipate that as we take on new projects, cost of revenues will reflect changes in total revenue. RESEARCH AND DEVELOPMENT. Research and development expenses increased $755,000, or 25%, from $3.0 million for the nine months ended December 31, 1998 to $3.8 million for the nine months ended December 31, 1999. The increase resulted primarily from an increase in the number of software developers and the use of outside contractors. In particular, we dedicated considerable resources to the development of the clinical workbench and information products. As a percentage of revenues, research and development expenses decreased from 113% to 60%. The decrease in research and development expenses as a percentage of total revenue primarily reflects the greater increase in revenue relative to the increase in research and development staff. We believe that our research and development expenses in absolute dollars will increase as we continue to expand our product offerings. SALES AND MARKETING. Sales and marketing expenses increased $1.2 million, or 74%, from $1.6 million for the nine months ended December 31, 1998 to $2.8 million for the nine months ended December 31, 1999. The increase in sales and marketing expenses is related primarily to an expansion in our sales force personnel. As a percentage of total revenues, sales and marketing expenses decreased from 60% to 44%. The decrease in marketing and sales expenses as a percentage of total revenue reflects the more rapid growth in our revenues compared to the growth of marketing and sales expenses. We expect our sales and marketing expenses to increase as we continue expansion of our field sales force in both the United States and Europe. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $625,000, or 88%, from $707,000 for the nine months ended December 31, 1998 to $1.3 million for the nine months ended December 31, 1999. The increase in general and administrative expenses is related to growth in management and administrative support staff. We expect to continue expansion of our management and administrative support staff as our management and corporate infrastructure grows. We also expect our general and administrative expenses to grow as we incur the costs of being a public company. As a percentage of total revenues, general and administrative expenses decreased from 27% to 21%. 19 OTHER INCOME (EXPENSE). Other expense decreased $208,000 from $223,000 for the nine months ended December 31, 1998 to $15,000 for the nine months ended December 31, 1999. This decrease occurred as a result of higher interest income on a larger average balance of cash and short-term investments during the period. PROVISION FOR INCOME TAXES. As a result of our net operating losses, no provision was recorded for income taxes during the nine months ended December 31, 1998 and 1999. YEARS ENDED MARCH 31, 1999 AND 1998 REVENUES. Revenues increased $3.0 million, or 269%, from $1.1 million in fiscal 1998 to $4.1 million in fiscal 1999. The overall increase in revenue was primarily attributable to the growth of our scientific and decision services and model and trial workbench applications. COST OF REVENUES. Cost of revenues increased $1.8 million, or 253%, from $714,000 in fiscal 1998 to $2.5 million in fiscal 1999. The increase was due to growth in scientific and decision services personnel. Cost of revenue as a percentage of total revenues decreased from 65% to 62%. RESEARCH AND DEVELOPMENT. Research and development expenses increased $2.2 million, or 103%, from $2.1 million in fiscal 1998 to $4.3 million in 1999. The increase resulted primarily from growth in the number of software developers as we continued development of new products, including updates and upgrades to our existing model and trial workbench families of products. As a percentage of revenues, research and development expenses decreased from 193% to 106%. SALES AND MARKETING. Sales and marketing expenses increased $926,000, or 68%, from $1.4 million in fiscal 1998 to $2.3 million in fiscal 1999. The increase in sales and marketing expenses was related primarily to the expansion of sales force personnel and marketing activities, including trade shows and public relations. As a percentage of total revenues, sales and marketing expenses decreased from 124% to 56%. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $361,000, or 49%, from $744,000 in fiscal 1998 to $1.1 million in fiscal 1999. The increase in general and administrative expenses was related primarily to growth in management and administrative support staff. As a percentage of total revenues, general and administrative expenses decreased from 67% to 27%. OTHER INCOME (EXPENSE). Other income decreased $292,000 from $172,000 in fiscal 1998 to an expense of $120,000 in fiscal 1999. This decrease occurred as a result of higher debt balance, which was due to interest expense paid on notes issued in connection with the acquisition of assets from Mitchell and Gauthier Associates, Inc. and increased capital leases. PROVISION FOR INCOME TAXES. As a result of our net operating losses, no provision was recorded for income taxes during the years ended March 31, 1998 and 1999. YEARS ENDED MARCH 31, 1998 AND 1997 REVENUES. We recognized no revenues for fiscal 1997. Revenues for fiscal 1998 were $1.1 million. The revenues in fiscal 1998 were primarily attributable to the introduction of our trial and model workbench applications and scientific services. COST OF REVENUES. We had no cost of revenues for fiscal 1997. Cost of revenues for fiscal 1998 was $714,000. Cost of revenues for fiscal 1998 was due to product royalties and hiring of service personnel. RESEARCH AND DEVELOPMENT. Research and development expenses increased $1.4 million, or 196%, from $720,000 in fiscal 1997 to $2.1 million in fiscal 1998. The increase resulted primarily from growth in the number of software developers as we continued development of new products. 20 SALES AND MARKETING. Sales and marketing expenses increased $550,000, or 67%, from $816,000 in fiscal 1997 to $1.4 million in fiscal 1998. The increase in sales and marketing expenses was related primarily to the expansion of sales force personnel. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $306,000, or 70%, from $438,000 in fiscal 1997 to $744,000 in fiscal 1998. The increase in general and administrative expenses was related primarily to growth in management and administrative support staff. OTHER INCOME (EXPENSE). Other income increased $132,000 from $40,000 in fiscal 1997 to $172,000 in fiscal 1998. This increase occurred as a result of higher interest income on a larger average balance of cash and short-term investments during the period. PROVISION FOR INCOME TAXES. As a result of our net operating losses, no provision was recorded for income taxes during the years ended March 31, 1997 and 1998. LIQUIDITY AND CAPITAL RESOURCES Since our inception we have funded operations through the private sale of preferred stock, with net proceeds of approximately $38 million, limited borrowings and equipment leases. All shares of our preferred stock will be converted automatically into common stock immediately prior to the closing of this offering. As of December 31, 1999, we had $18.3 million in cash and short-term investments, an increase of $12.2 million from cash and short-term investments held as of March 31, 1999, and a $1.5 million secured revolving line of credit against 80% of eligible accounts receivable, which bears a variable interest rate of prime plus 1% and expires in January 2001, if not extended. As of December 31, 1999, there were no borrowings under the line of credit. Our working capital, defined as current assets less current liabilities, at December 31, 1999 was $17.0 million, an increase of $14.4 million in working capital from March 31, 1999. The increase in the working capital is attributable to the increase in cash from the sales of our preferred stock and the increase in accounts receivable. Net cash used in operating activities was $1.8 million in fiscal 1997, $3.3 million in fiscal 1998, $5.6 million in fiscal 1999, and $5.4 million in the nine months ended December 31, 1999. The cash used in these periods was primarily attributable to net losses of $1.9 million in fiscal 1997, $4.1 million in fiscal 1998, $9.9 million in fiscal 1999, and $6.8 million in the nine months ended December 31, 1999. Of the loss in fiscal 1998 and 1999, $362,000 and $2.6 million, respectively, was attributable to a noncash in-process research and development charge incurred in connection with our acquisition of Scientific Consulting, Inc.'s business and certain assets from Mitchell and Gauthier Associates, Inc. Net cash used in investing activities was $178,000 in fiscal 1997, $1.9 million in fiscal 1998, $4.0 million in fiscal 1999, and $11.2 million in the nine months ended December 31, 1999. Net cash used in investing activities included purchase of short-term investments, capital expenditures and, in fiscal 1999, $2.4 million paid to acquire Scientific Consulting, Inc. and some of the assets of Mitchell and Gauthier Associates, Inc. Financing activities provided net cash of $1.1 million in fiscal 1997, $7.2 million in fiscal 1998, $11.0 million in fiscal 1999, and $18.1 million in the nine months ended December 31, 1999. These amounts were primarily proceeds from the sale of preferred stock and issuances of notes payable in connection with acquisitions. We currently anticipate that the net proceeds from this offering, together with our current cash, cash equivalents and available credit facilities, will be sufficient to meet our anticipated cash needs for operations, working capital and capital expenditures for at least the next two years. However, we may need to raise additional funds sooner through public or private financing or other sources to fund our operations and for potential acquisitions. We may not be able to obtain adequate or favorable financing 21 at that time. Failure to raise capital when needed could harm our business. If we raise additional funds through the issuance of equity securities, the percentage of ownership of our stockholders would be reduced. Furthermore, these equity securities might have rights, preferences or privileges senior to our common stock. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998 the FASB issued Statement of Financial Accounting Standards 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS 133 as deferred by SFAS 137, will be effective for our fiscal year ending March 31, 2001. We do not expect that the adoption of SFAS 133 will have a material impact on our results of operations, financial position or cash flows in the foreseeable future. In December 1999 the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." Although we are currently evaluating the potential impact of this bulletin, we do not believe its adoption will materially change our financial position, results of operation or cash flows. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS We have operated primarily in the United States and all funding activities and sales have been denominated in U.S. dollars. Accordingly, we have not had any exposure to foreign currency rate fluctuations. Our interest income is sensitive to changes in the general level of United States interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we believe that there is no material market risk exposure. As of March 31, 1999 and December 31, 1999, our cash, cash equivalents and short-term investments consisted primarily of demand deposits, money market funds, treasury instruments and commercial paper. 22 BUSINESS OVERVIEW We develop and market integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. Our solution combines proprietary computer-based simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics. Our solution consists of scientific and decision services, computer-based development applications and related services, and information products. We believe our solution helps pharmaceutical and biotechnology companies reduce the time, cost and risk of drug development activities, and may improve the marketing and use of pharmaceutical products. This is significant because the process of taking a drug through clinical development has remained lengthy and unpredictable while the productivity of discovery research has accelerated dramatically in recent years. Twelve of the world's largest 20 pharmaceutical companies have begun to apply our computer-assisted drug development solution, and our computer-based development applications are currently used on more than 1,800 researcher desktops. To date, we have been engaged in over 60 projects in more than nine therapeutic areas. BACKGROUND DRUG RESEARCH AND DEVELOPMENT PROCESS OVERVIEW The process of developing a new drug and bringing it to market is complex and lengthy. The process consists of four basic stages: - DISCOVERY STAGE. Researchers use various methods and techniques to discover new compounds as well as to identify targets they may affect. The recent emergence of technologies such as high throughput screening, combinatorial chemistry and genomics has substantially increased the number of drug candidates and potential targets. - PRECLINICAL STAGE. Once lead drug candidates have been identified, scientists test the chemical activity of the newly synthesized compounds in a variety of assays and animal models. - CLINICAL STAGE. Next, a drug candidate enters human testing to demonstrate safety and efficacy. Depending on the drug and the potential disease target, this process can consist of 50 to 100 separate studies. The process typically includes three pre-approval phases. In phase I, drug candidates are evaluated for safety at varying dose levels in healthy volunteers. In phase II, efficacy of the drug is tested in a small to moderate number of patients with the targeted disease indication. In phase III, trials are conducted to evaluate safety and efficacy in large groups of patients with the disease to be treated. - APPROVAL AND POST-APPROVAL STAGE. Next, data and analysis from prior stages of development are consolidated into a new drug application, which is submitted to the United States Food and Drug Administration or comparable international regulatory authorities. The regulatory authority reviews the application to manufacture, distribute and market the drug for specific indications and patient groups. After approval, pharmaceutical companies often conduct phase IV studies, which are sometimes a condition of approval, to study long-term safety or efficacy, or to expand the label of a drug. PHARMACEUTICAL AND BIOTECHNOLOGY RESEARCH AND DEVELOPMENT MARKET OVERVIEW According to industry sources, worldwide pharmaceutical market revenues totaled $302 billion in 1998 and are expected to grow to $406 billion in 2002. These growth expectations coincide with a 23 continuing number of patent expirations for high profile drugs. In addition, with increasing numbers of pharmaceutical companies developing competing compounds directed at the same disease targets, the amount of time during which a pharmaceutical company can expect to have exclusivity in a major market has declined substantially. As a result of these factors, to achieve targeted revenue growth, pharmaceutical companies have substantially increased the number of new drugs in their research and development pipelines. Many of these drugs target increasingly complex diseases that have clinical outcomes which are more difficult to measure. In their attempts to increase the number of new drugs ultimately introduced to the market, and in response to the increasingly complex nature of research and development activities, pharmaceutical companies have dramatically increased their research and development spending. According to the Pharmaceutical Research and Manufacturers Association, or PhRMA, as a percentage of sales, pharmaceutical research and development spending has increased from 12% in 1980 to 21% in 1999. Pharmaceutical and biotechnology companies have invested substantial resources in new technologies, such as high throughput screening and combinatorial chemistry, to accelerate the drug discovery process. According to PhRMA, as a result of advances in genetic research, the number of distinct targets for drug interventions is expected to increase from approximately 500 currently to more than 3,000 by 2005. Overall drug development success rates remain limited while the number of new drug candidates and targets have increased substantially. In fact, the FDA reports that 80% of compounds that enter human clinical trials ultimately fail to receive regulatory approval. The clinical development process continues to be time consuming and costly despite the development of new technologies to better and more rapidly capture and organize data for submission to regulatory agencies. According to the FDA, clinical development prior to regulatory submission takes an average of 5 years. The current decision process for drug development programs is imprecise and does not incorporate many of the new research information technologies utilized in drug discovery. We believe that communication across all key disciplines within an organization is crucial to rapid and efficient assessment of all the factors and data needed to design a successful trial or program. These organizations need solutions that systematically track and organize information from previous trials and that integrate external data to help design and statistically predict the outcome of future projects. PHARSIGHT CAPABILITIES We have an integrated offering of products and services to address the critical steps in designing clinical trials and drug development programs. Our offerings combine proprietary simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics. Our solution is designed to help drug development experts use a more rigorous scientific and statistical process to design trials and make program decisions. We believe our offerings help pharmaceutical and biotechnology companies reduce the time, cost and risk of drug development and may help improve the marketing and use of pharmaceutical products. We believe typical customer benefits of our capabilities include the following: - more rapid and objective decision-making with quantified assessment of value versus risk; - more effective trial designs with higher probability of success and greater information yield; - more efficient development programs requiring fewer clinical trials and patients, less time and lower cost to reach market; and - strengthened competitive position due to improved product labels. 24 The following examples illustrate typical customer applications of our solution: - In designing phase II clinical trials, companies often face significant uncertainty in selecting the appropriate doses to test. Our solution integrates information from phase I and pre-clinical activities, information concerning related drugs which have been developed by the customer, information in the scientific literature about other drugs in the same therapeutic area, and knowledge of the relevant physiological and disease processes. This information, along with carefully identified assumptions, is used to develop a mathematical model enabling a computer simulation of the proposed trial. Using this approach, customers are often able to identify proposed doses which have little chance of success and should be excluded or to identify additional doses which are more likely to yield important information. - In designing phase III clinical trials, companies often face significant uncertainty concerning the most appropriate treatment strategy, patient inclusion/exclusion criteria and/or clinical measurements. Our solution uses an information gathering and modeling approach similar to that described above, but incorporates phase II data and detailed mathematical models of the relevant patient populations. We are often able to identify patient groups with low chance of demonstrating efficacy, or an unacceptable chance of demonstrating side effects, prior to conducting the actual trial. In addition, we may be able to predict which clinical measurements will be most likely to provide conclusive results in the proposed trial. - In making drug portfolio decisions, companies need to integrate scientific and clinical results, such as those described above, with market and financial information for all of the drug candidates in the development pipeline. We believe that our solution helps companies make better decisions concerning "go/no-go" criteria, prioritization of potential label objectives to be pursued and optimal sequencing of clinical trials within a development program. Our solution can also help customers adopt a more quantitative and scientific approach to resource allocation among programs within their drug portfolios. We have developed significant expertise in key disciplines, including clinical pharmacology, drug and disease modeling, human genetics, biostatistics, decision science, clinical development and information technology. We believe our focus on communications and information sharing, together with the combined expertise of our personnel in these areas, increases our effectiveness and is only partially duplicated within any pharmaceutical or biotechnology company. STRATEGY Our strategy is to help pharmaceutical and biotechnology companies accelerate clinical development and to assist large healthcare organizations in the adoption and use of pharmaceutical products. Elements of our strategy include: - EXPAND OUR PRESENCE WITHIN THE CLINICAL DEVELOPMENT MARKET. Our customers include 12 of the world's largest 20 pharmaceutical companies as measured by total revenues. We intend to expand our relationships with these customers by extending our services to new therapeutic areas. In addition, we intend to expand our base of more than 1,800 software users through the launch of our information products and the expansion of our software offerings and to expand our customer base to include more of the world's largest 50 pharmaceutical and biotechnology companies. In order to achieve a broader customer presence, we plan to expand our service, marketing and sales activities and focus on establishing new relationships around therapeutic areas where we already have substantial experience and could provide the most near-term value to new customers. 25 - EXPAND OUR ACTIVITIES IN PHARMACEUTICAL MARKETING AND PHASE IV STUDY DESIGN. We believe our experience in the clinical development process, and the substantial data and analyses we help create during that process, position us to provide marketing program design services for our customers, including the design of post-approval studies. We believe this is a natural extension of the services we provide during other phases of the process. We plan to add personnel and develop new information products to focus on these business opportunities, with an initial focus on our existing customers and therapeutic areas where we have the most experience. - BROADEN OUR CONTENT AND DATA RELATED PRODUCT OFFERINGS. In addition to helping customers better evaluate and organize internally generated data, we review and incorporate external data sources when conducting our trial and program design services. We are organizing data libraries and information products that access multiple data sources and are updated on a consistent basis. We are applying our medical and statistical capabilities to develop these information products in our major therapeutic areas of expertise. We expect to introduce our first information products later this year, including products in the diabetes and cardiovascular areas, initially focusing on current customers. - MAINTAIN AND ENHANCE OUR SCIENTIFIC AND TECHNOLOGY LEADERSHIP. We believe the expertise of our staff and scientific advisors, and our relationships with major academic institutions, help us to identify and develop scientific, medical and technical advances important to our business. For example, advances in genomics may allow early identification of drug metabolism problems, reduce the number of patients required to statistically prove safety and efficacy, and stratify patient populations for improved competitive labeling and market success. We expect to continue investing a significant portion of our revenues in research and development in order to incorporate advances such as these into our products. - PURSUE STRATEGIC ALLIANCES AND ACQUISITIONS. We intend to evaluate and, where advantageous, pursue acquisitions, alliances and technology licensing opportunities that may extend the range of products and services we offer to our customers. We also intend to pursue strategic alliances to market our information products to managed care, hospital, physician and clinical laboratory organizations that are attempting to more effectively utilize drug therapies and target the appropriate patient populations for certain drugs. We may also license certain of our technologies to organizations in other fields of use. OUR PRODUCTS AND SERVICES We provide scientific and decision services and computer-based development applications and services. We first offered our workbench applications and scientific services in 1997, and have been providing our decision services since 1998. We are also developing our information products and we expect to launch our first group of information products, to be accessed over the internet, later this year. In a typical project, our products and services are used together to design clinical trials or development programs. In many cases our computer-based development applications and services continue to be utilized upon completion of a project as our customers seek to further redesign their 26 drug development processes. The following chart depicts typical issues that we are asked to address in projects. PHASE I PHASE II PHASE III PHASE IV - Balance efficacy with side effects. - - Bridge preclinical results to - Explore trial sensitivity to - Explore new indications and label clinical process. patient compliance and dropout. changes. - - Explore dose ranging and population - Investigate impact of - Plan life-cycle strategy, e.g. variability. population genetic variability. generic defense and "over-the- - - Determine surrogate endpoint - Evaluate alternate protocols. counter" switch. relevance, i.e. alternate - Assess time/cost versus - Evaluate special patient indicators of efficacy. populations. - - Support early "go/no-go" decisions. information trade-off. - Assess capital productivity and - - Assess strategic fit in franchise. - Develop licensing/acquisition franchise strategy. strategy.
Our solution provides an iterative method for enhancing the design of a clinical trial or development program, based on a series of steps. Each step utilizes available data to produce and validate a mathematical model that is in turn used to select a better strategy for moving to the next stage of clinical development. The following diagram and discussion describe this process. 27 - Step one focuses on collecting all available information on the new drug being tested, including data from the discovery and preclinical stages. Additionally, we often use proprietary resources and gather data from external sources, including public literature. In cases where adequate information is not initially available, assumptions based on prior experience with a similar type of compound or therapeutic area may be developed. These assumptions are often validated and refined via later analysis and activities as data from the actual clinical trials or other experiments become available. - Steps two and three involve the building and validation of a model that predicts how a new drug compound may behave in or be absorbed by the body. Our models are designed to take into account sources of variability due to demographics and experimental error. We also check and validate the model against other data for related or similar drugs, as well as for different treatment regimens and different drug dose levels. If necessary, the first three steps are iterated to incorporate new data and analysis results into the drug model. - In step four, a proposed protocol or design for the clinical trial is developed using the model and other information, such as the commercialization objectives for the new drug. The proposed trial design includes assumptions and recommendations around suitable patient population and number of patients necessary, a set of [Graphic with nine boxes arranged in a vertical treatment or dosing regimens, as well as a plan for column with the accompanying text contained in analysis of the data generated by the trial. a box next to each labeled step and a final - In steps five, six and seven, the trial is simulated unlabeled box containing the text "Conduct using our workbench applications. The results are then trial." Step 1-Gather, analyze available data analyzed to determine the range of possible outcomes for and assumptions; Step 2-Build drug model; the trial. The assumptions and models are then altered Step 3-Validate drug model; Step 4-Design and simulations are repeated to determine the relative proposed trial; Step 5-Simulate trial as impact of individual aspects of a trial design on the designed; Step 6-Analyze simulated trial range of possible outcomes. This process is iterated results; Step 7-Vary assumptions, modify trial until the relative merits of a set of trial design protocol; Step 8-Select optimal trial design; choices are quantified and an optimal trial design can be Conduct trial. Arrows point from one box to selected. another, showing the progression from Step 1 - In the eighth step, an optimal trial design is selected through Step 8. Arrows labeled "iterate" point and the trial is conducted. New experimental data from Step 3 to Step 1, from Step 7 to Step 5 generated by the trial are used as input in the design of and from the final box to Step 1.] subsequent trials.
28 The table below categorizes each of our products and services and describes the primary function and benefits of each offering. SCIENTIFIC AND DECISION SERVICES PRODUCT OR SERVICE PRIMARY FUNCTION PRIMARY BENEFITS Scientific Consulting We use our proprietary technology - Reduce repeated trials. and methodology to analyze and - Improve label quality and drug quantify scenarios related to competitive positioning. specific clinical development - Understand unexpected trial issues and to determine the range results. of plausible outcomes a trial could - Help to determine optimal patient produce prior to actually population and treatment conducting the trial. strategy. - Evaluate time/cost vs. information yield. Decision Services We focus on major decision points - Improve communication. in the drug development process, - Speed decision-making. including selection of disease - Quantify value and risk indications to be targeted by a tradeoffs. clinical trial or program, whether - Enhance overall economic to continue or terminate a clinical productivity of development trial or program and evaluation of investments. a licensing decision or structure. - Allow proactive risk management. - Identify information gaps. COMPUTER-BASED DEVELOPMENT APPLICATIONS AND SERVICES Model Workbench Our software allows researchers to - Optimize dose and treatment analyze data from clinical studies regimens based on early phase to build drug models and generate clinical data. standard reports. It provides the - Identify potential drug effects inputs required for our trial and interactions. workbench application. - Speed preparation of internal and regulatory reports. - Determine impact of population characteristics on drug response. - Build and validate drug models for use in trial simulation.
29 Trial Workbench Our software allows clinical - Identify more efficient designs. researchers to perform "virtual - Shorten time to market by clinical trials" on the computer reducing chances of failed or through an easy-to-use graphical inconclusive trials. interface. - Increase information yield of trials. - Quantify uncertainty to guide decision-making. Clinical Workbench Our software is designed to provide - Improve planning of enrollment, (UNDER DEVELOPMENT) a powerful and easy-to-use trial duration, and costs. interface to patient medical record - Help to identify the most databases. Its Web-based technology promising outcomes and surrogate allows clinical researchers to markers. access data and analysis anywhere, - Improve confidence in decisions anytime without special training. by providing objective support for "expert opinion." - Save time in clinical trial and program design. Applications and We conduct on-site training in the - Improve staff productivity and Methodology Training use of our workbench applications, efficiency. and Support data analysis techniques and - Accelerate adoption / overall methodology. implementation of new process. Process Design and We develop and standardize - Improve efficiency and reduce Automation reporting and analysis formats, and cost and errors. design and standardize work flow processes. INFORMATION PRODUCTS Information Products Our products are designed to - Address questions requiring (UNDER DEVELOPMENT) provide data, including medical, broad, population-level data and laboratory and genetic data in questions requiring highly specific therapeutic areas. They detailed patient data. are being designed to work in - Improve trial designs by allowing conjunction with our clinical access to highest-quality data on workbench applications, and will be outcomes, disease patterns and sold on a subscription basis. demographics. - Discover genetic predictors of disease course and response to therapy.
SCIENTIFIC AND DECISION SERVICES Our scientific and decision services consist of on-site consulting, training and process redesign projects conducted by our clinical and decision scientists. These projects span all phases of clinical 30 development, and range from single trial design to portfolio strategy optimization. These services consist of four specific categories: - SCIENTIFIC CONSULTING. In a typical project, our consultants, representing several technical disciplines, devote two to three months working with the customer team. The following steps comprise this effort: - creating alternative development strategies or trial designs to be evaluated; - constructing a drug-disease model, commercial model and/or a model of the trial or program being evaluated; - quantifying the clinical and/or economic risk involved in each strategy or trial design and conducting sensitivity analysis; - documenting the information and logic used in the evaluation; and - presenting results and recommendations to the client development team and senior management. - DECISION SERVICES. In a typical project, we devote one to three months working with a customer team. We often perform these services in conjunction with our scientific consulting services. We begin by defining the scope of the project, identifying the decisions and appropriate methods to be employed, and formulating appropriate alternatives to be considered. Next, we build comprehensive mathematical models, gather relevant data and information, and assess all team inputs to the decision. Finally, we perform detailed analysis, modify and re-analyze strategies and prepare and present recommendations. Our scientific and decision services group currently includes 21 full-time personnel. Our personnel are located throughout the United States and Europe. Most have M.D. or Ph.D. degrees with post-doctoral training in clinical pharmacology, biostatistics, human genetics, decision analysis or other relevant disciplines. We bring these skill sets to bear in an integrated fashion to address our customers' challenges. Senior consultants have more than a decade of experience in drug-disease modeling, trial design or strategic consulting. We also utilize an extensive network of part-time consultants with expertise in various specialized disciplines and therapeutic areas. We are continually refining our methodologies and introducing new technologies. We are also expanding our activities at the portfolio level and in newer therapeutic areas. In addition, we are beginning to address customer needs to improve their marketing and sales processes by applying the same quantitative methods that we apply to their development processes. COMPUTER-BASED DEVELOPMENT APPLICATIONS AND SERVICES Our software and services provide the analytical tools and conceptual framework to help clinical researchers optimize the decision-making required to perform clinical testing needed to bring drugs to market. By applying mathematical modeling and simulation to all available information on the compound being tested, researchers can clarify and quantify which trial and treatment design factors will influence the success of clinical trials. We currently provide our applications software for installation either on customer desktops or on customer intranets for shared access by their personnel. Our new clinical workbench application, currently under development, will be hosted by us and accessed by web browser over the internet. Our workbench applications are commonly deployed together with our scientific and decision services and include: - MODEL WORKBENCH. These products are used to build a drug model within a flexible framework, and validate the assumptions and information on which it is based. The models constructed and validated with these tools are used by our trial workbench in later steps of the computer-assisted trial design process. The output of these tools is also used in regulatory reporting as part of the 31 drug approval process. Our WinNonlin product is the most widely used product in the pharmaceutical industry for analysis of data from pharmacokinetic and pharmacodynamic studies. Our WinNonMix product is used to analyze the data from a wide range of studies when the user wishes to determine the influence of demographic and environmental factors as well as other sources of variability. Available enterprise editions provide additional data connectivity to data sources such as clinical data management systems and laboratory information management systems. Custom query builders for specific data management systems are included along with a software development kit to allow information technology staff to easily construct new interfaces for nonstandard data sources. We also provide validation kits that automate execution of standardized test scripts to reduce the manual time and effort required to operate and install these products in accordance with regulatory requirements. - TRIAL WORKBENCH. The trial workbench provides a structured framework for clinical trial simulation based on mathematical models that integrate existing knowledge and assumptions about a drug and the targeted patient population. The trial workbench supports the use of simulation scenarios, allowing a number of trial design parameters to be tested in a single step, thereby reducing the number of iterations needed to select an optimal trial design. It is designed for use by clinical and scientific personnel without extensive computer skills and supports a full range of trial designs, powerful drug and disease modeling and flexible definition of patient populations. The trial simulator includes integrated and extensive analysis tools, automatically generates protocol documents and supports data archiving. We are currently developing new trial workbench products, called therapeutic area editions, that bundle the trial simulator software with pre-built models, templates and usage guides relevant to a specific therapeutic area. - CLINICAL WORKBENCH. The clinical workbench, currently under development, is intended to enable testing of critical assumptions throughout clinical development by collecting data on target population, disease progression, current therapeutic approaches and characteristics of the potential market for relevant drugs. It is designed to access our information products currently under development and, in later versions, internal customer databases. Integrating internal sources of information helps leverage prior experience with specific disease mechanisms or a class of therapeutic compounds. Query results may be used in conjunction with future therapeutic area editions of the trial workbench and directly incorporated into the proposed trial design. This product is designed to enable clinicians to receive immediate answers to sophisticated questions that previously required at least several weeks to answer. The clinical workbench is designed to provide advanced statistical, temporal-logic (queries with a complex time dimension) and genetic analysis capabilities. Our workbench application related services are as follows: - APPLICATIONS AND METHODOLOGY TRAINING AND SUPPORT. Our services team works with customers to deploy our clinical drug development technology and methodologies. We work to improve our customers' overall clinical development productivity by using our cumulative experience and knowledge of our scientific and decision services' best practices. We tailor our training to specific functional and client needs. Our deployment programs typically focus on a specific therapeutic area within the customer's organization. In a typical training program, each individual is offered extensive class work, with support provided by us over the course of twenty-four months, before achieving full fluency in the relevant topics. During these programs we typically use the customer's own project data in the training activities. - PROCESS DESIGN AND AUTOMATION. Pharmaceutical scientists spend considerable time on non-scientific activities, such as formatting tables and graphs and cutting and pasting information from numerous software packages into reports. We provide scripts to automate the production of standard tables, figures and listings. This reduces the potential for mistakes, and enables scientific staff to work on other, higher return areas. We also assist in designing optimum 32 work-flow processes to accompany the process changes being implemented, and with integration of our tools into the customer's existing information technology infrastructure. With some customers, following the completion of pilot projects, we perform work at the portfolio level. We then develop a plan with our customer for ongoing analysis support, process design, capability development efforts and software infrastructure creation. Implementation may last up to one year once planning is completed. Our applications and methodology training group is currently staffed by four scientists with pharmaceutical industry experience. This group provides training in the efficient use of our products both at client sites and at our training center in Cary, North Carolina. Trainers also provide technical support for our products, so they are in an excellent position to understand client training needs. We also provide training in mathematical drug modeling and computer-assisted trial design methodology. Our training sessions involve lectures and hands-on problem solving using real case studies. INFORMATION PRODUCTS Our information products, which we expect to launch later this year, are intended to combine anonymized patient level medical, laboratory and genetic data with software to access, analyze and present informative results to sophisticated queries. These information products permit clinical and scientific personnel to obtain objective and quantitative answers to important questions in trial and program decision-making concerning, for example, the correlation of various disease markers with clinical outcomes, the frequency of adverse events under specific conditions, detailed patient demographics and response to placebo and standard therapies. We intend to obtain our data from world-class medical research centers, and expect that it will be regularly updated and extensively analyzed and processed by our statisticians and medical specialists. Our information products will be organized by therapeutic area beginning in the diabetes and cardiovascular areas. Over the course of the next several years we plan to extend our coverage to most major therapeutic areas, and to extend the application of these products from clinical development to the pharmaceutical selling and marketing processes. We currently have alliances, which include licenses to medical data, with Duke University, Lovelace Respiratory Research Institute and Protocare Sciences, Inc., and expect to enter into similar alliances with other third parties. We currently intend to sell our information products on an annual subscription basis for each therapeutic area. CUSTOMERS Our customers currently consist of large pharmaceutical companies and biotechnology companies. During our fiscal year ended March 31, 2000, we provided products and services for which we recognized revenue to more than 200 customers. Johnson & Johnson, our top customer, accounted for in excess of 10% of our revenue, in fiscal 2000. Fourteen of our top 16 customers by revenue to us in fiscal 2000 were, listed in alphabetical order: Anesta Corporation AstraZeneca PLC Chiron Corporation Durect Corporation F. Hoffmann-La Roche Ltd. Glaxo Wellcome Inc. Guilford Pharmaceuticals Inc. Johnson & Johnson Novartis Pharmaceuticals Corporation Pfizer Limited Proctor & Gamble Pharmaceuticals, Inc. Sankyo Company Ltd. SmithKline Beecham Pharmaceuticals Warner-Lambert Company 33 SALES AND MARKETING We currently employ nine professionals who sell our products and services to customers in the United States and throughout Europe and Japan. Some of our software products are also sold by a Japanese scientific software distribution company. Our direct sales and business development team is composed of individuals with a range of skills including scientific, medical and business disciplines. This blend of skills is necessary because of the complex nature of the clinical development process and the need to interact with a broad range of disciplines and levels of management, during the sales process. Our telesales group complements and supplements our direct sales staff selling primarily the model and trial workbench applications. The telesales group also supports our telemarketing activities for new product launches and workshop activities. We plan to significantly expand the direct and telesales staff in the future. Our sales and business development personnel work closely with our scientific and decision consultants to understand customer requirements and to educate customers about our solution. While our solution comprises an integrated suite of products and services, we typically employ a "services-led" sales strategy to quickly and efficiently prove the value of our offerings to new customers. After several initial projects with each customer, we seek to negotiate multi-year agreements for the broad deployment of our solution in one therapeutic area within their organization. In the future, we will seek to penetrate additional therapeutic areas at each customer. Our marketing department employs various media and methods to educate potential customers about our products and services and to inform customers of new developments and enhancements to existing offerings. We advertise in various journals and magazines, participate in scientific, medical and pharmaceutical business conferences, conduct educational seminars, provide comprehensive information about our offerings on our website, and conduct an ongoing public relations program. RESEARCH AND DEVELOPMENT We employ engineers with expertise in software development, web-based applications, database systems, and mathematical modeling, and scientists and medical doctors with expertise in clinical development, statistical modeling, human genetics, and clinical pharmacology and development. Our research and development personnel work closely with our service personnel in designing and testing products to meet customer requirements. We have a scientific advisory board and three scientific advisory groups which also help guide our product development efforts. - The modeling advisory group is chaired by Lewis B. Sheiner, M.D., Professor of Laboratory Medicine, Biopharmaceutical Sciences and Medicine at the University of California, San Francisco. Dr. Sheiner has also chaired our scientific advisory board since our inception. - The simulation advisory group is chaired by Nicholas H.G. Holford, M.B., Ch.B., M.R.C.P., Associate Professor, Department of Pharmacology and Clinical Pharmacology at the University of Auckland. - The information products advisory group is chaired by Donald B. Rubin, Ph.D., Professor and Chairman of Statistics at Harvard University. As of March 31, 2000, we had 30 employees engaged in research and development. Our research and development efforts are focused on improving and enhancing our existing products and services as well as developing new products and services. Our research and development efforts take place at our executive offices in Mountain View, California, and our development facilities in Lexington, Massachusetts and Cary, North Carolina. Our research and development expenses were $720,000, $2.1 million, $4.3 million and $3.8 million, in fiscal 1997, 1998, 1999 and the first nine months of fiscal 2000, respectively. We intend to increase our research and development budget and staffing levels during fiscal 2001. 34 INTELLECTUAL PROPERTY Our intellectual property consists primarily of our software, including software we license from third parties for inclusion in our products, our proprietary algorithms and methodologies, our documentation and training materials, and our trademarks. We rely on a combination of trademark, copyright and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality and proprietary rights agreements with our customers, employees and consultants and control access to software, documentation and other proprietary information. However, we cannot be certain that the steps we have taken to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate our proprietary rights. TECHNOLOGY LICENSING Although our products are based on our research and development, we license software from third parties when it is more efficient to incorporate pre-existing programs or routines, when there are novel technologies available by license that would improve our products, or when brand-recognition of established products provides a marketing advantage. For some of the third-party software we use, we have paid a one-time fee that allows unlimited use. We also incorporate third-party software that we have rights to use under the terms of license agreements that require us to pay royalties to the licensor based upon either a percentage of the sales of products containing the licensed software or a fixed fee for each product shipped. Although all of the software we license for use in our products is replaceable with software from other vendors or our own development efforts, the loss of a license could delay the sales of certain of our products. DATA LICENSING Our information products are designed to offer customers access, through the clinical workbench product or through our scientific and decision services, to databases of anonymized patient level information in various therapeutic areas that we have licensed from medical providers and other sources. Our ability to identify and license sources of high quality patient-level data is critical to our information products. We currently have database licenses from Duke University, Lovelace Respiratory Research Institute and Protocare Sciences, Inc. in the diabetes and cardiovascular areas. Including our renewal options, the Lovelace Respiratory Research Institute license and the Duke University license have terms of three and four years, respectively, running from database delivery, which is due at the end of May 2000, and the Protocare Sciences license has a term ending in October, 2002. Each of these licenses has a fixed or minimum royalty fee per customer as well as a minimum royalty payment each year. We plan to license additional data from multiple sources in diabetes, cardiovascular and additional therapeutic areas over the next several years. While we have been successful in negotiating license agreements so far, we may not be able to obtain all of the databases we seek to offer on favorable terms. GOVERNMENT REGULATION The pharmaceutical industry is regulated by a number of federal, state, local and international governmental entities. Although our products and services are not directly regulated by the United States Food and Drug Administration or comparable international agencies, the use of certain of our analytical software products by our customers may be regulated. We currently provide assistance to our customers in achieving compliance with these regulations. State laws aimed at protecting the privacy of confidential patient health information are many and varied, and states frequently adopt new laws in this area. Most state health information privacy laws apply only to specified providers of health care and/or healthcare payors, but some of these laws could 35 be found to apply to businesses such as ours that handle health information obtained from such providers for research purposes. Although our agreements with medical data providers require them to "anonymize" or remove patient-identifiable information before providing their data to us, and most health information privacy laws do not apply to anonymized data, definitions of whether data has been anonymized vary and we cannot provide assurance that the data we receive would be considered to be anonymous under all state laws. Violations of these laws may result in civil and/or criminal penalties. While we intend to comply with all applicable laws, and our medical data providers have asserted to us that they comply with such laws, we cannot predict how interpretations of existing law or changes in the law may affect our business, and compliance may be time consuming and expensive. The ways in which these laws could affect our operations include the following: - some state health privacy laws may directly regulate entities such as ours that obtain and use health information from third party providers; - some state laws directly regulating healthcare providers may extend their confidentiality protections to information transmitted by those entities to another entity, such as us; and - some state laws specifically restrict the disclosure of certain types of particularly sensitive health information, and if healthcare providers fail to obtain any necessary consents or otherwise comply with these restrictions, we could be liable for the improper use or disclosure of such information. While we cannot assure you that our position would prevail if challenged, we believe that in general our ways of doing business should not be the subject of enforcement proceedings or lead to liability under these laws. The confidentiality of health information is a high priority for us, and we have policies and procedures in place to protect against unauthorized access to the information and to ensure that such information is handled appropriately. Although the Secretary of the U.S. Department of Health and Human Services has promulgated proposed regulations dealing with privacy of electronically transmitted health information, as required by the Health Insurance Portability and Accountability Act of 1996, these regulations are not currently in effect, and may be changed substantially before they are finalized. Accordingly, at present, there is no federal law securing or regulating the privacy of confidential health information of a patient. We intend to monitor the development of federal laws and regulations and to adapt our business to comply with requirements that may become applicable in the future. COMPETITION We compete based on a number of factors, including cost, the quality and effectiveness of our services, and the functionality, reliability and ease of implementation and use of our products. Our model workbench product line competes with products produced by InnaPhase Corporation. Although we believe we currently do not have direct competitors for our trial workbench and clinical workbench product lines or our scientific and decision services, other companies may compete with us in the future. Potential competitors may have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the pharmaceutical industry than we have. In addition, competitors may merge or form strategic alliances and be able to offer, or bring to market earlier, services that are superior to our own. In addition, our customers are primarily large pharmaceutical companies that have substantial research and development budgets, and these customers may internally develop the expertise that we provide. EMPLOYEES As of March 31, 2000, we had 93 employees, consisting of 25 in services and support, 30 in research and development, 21 in sales and marketing and 17 in finance and operations. Thirty-five of our employees have either an M.D. or Ph.D. in relevant disciplines. None of our employees is a member of a union and we consider our relationship with our employees to be good. FACILITIES We lease approximately 32,000 square feet of space in Mountain View, California under a lease that expires in 2003. We also lease offices in Cary, North Carolina where we conduct development and training activities, and offices in Lexington, Massachusetts and San Diego, California where we conduct development activities. We believe our current facilities will be adequate for our needs for at least the next two years. 36 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table provides information concerning our directors, executive officers and key employees as of April 10, 2000:
NAME AGE POSITION Arthur H. Reidel(3)................. 49 Chairman of the Board, President and Chief Executive Officer Robin A. Kehoe...................... 42 Senior Vice President, Finance and Chief Financial Officer Michael A. Emley.................... 53 Senior Vice President, Sales and Professional Services Steven L. Shafer, M.D............... 45 Vice President, Product Development Daniel L. Weiner, Ph.D.............. 49 Senior Vice President, Technology Deployment Saeid Akhtari....................... 38 Vice President, Corporate Marketing and Strategic Development Ronald D. Beaver, Ph.D.............. 35 Managing Director, Decision Services Terrence F. Blaschke, M.D........... 57 Vice President, Collaborative Programs James D. Buzzard.................... 41 Vice President, Product Marketing Stuart M. Koretz, M.D., Ph.D........ 53 Vice President, Medical Affairs and Content Janice Kurth, M.D., Ph.D............ 37 Vice President, Genomics E. Gregory Lee, Ph.D................ 51 Vice President, Engineering Jacob W. Mandema, Ph.D.............. 36 Vice President and Chief Scientist Nancy Risch......................... 51 Vice President, Strategic Business Development Donald R. Stanski, M.D.............. 50 Vice President, Scientific and Medical Programs Steven D. Brooks(2)................. 48 Director Philippe O. Chambon, M.D., Ph.D.(1).......................... 41 Director Robert B. Chess(2).................. 44 Director Douglas E. Kelly, M.D.(2)........... 39 Director Dean O. Morton(3)................... 67 Director Gary L. Neil, Ph.D.(1)(3)........... 59 Director W. Ferrell Sanders(1)............... 63 Director
- ------------------------ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. (3) Member of the Nominating Committee. ARTHUR H. REIDEL served as our President from April 1995 to August 1995 and has served as our President and Chief Executive Officer since February 1996. He has also served as our Chairman of the Board since May 1995. He was a private investor/consultant from April 1995 to March 1996, during which he was involved in the formation of three start-up companies and performed consulting services for two other companies. From October 1994 to March 1995, he served as Vice President, Business Development of Viewlogic Systems, Inc., a publicly held software firm. From 1992 to 1994, Mr. Reidel served as President and Chief Executive Officer of Sunrise Test Systems, Inc., a privately held software firm acquired by Viewlogic Systems, Inc. in September 1994. Mr. Reidel received a B.S. in Mathematics from Massachusetts Institute of Technology. ROBIN A. KEHOE joined us as Vice President, Finance and Chief Financial Officer in August 1996 and is currently our Senior Vice President, Finance and Chief Financial Officer. From January 1995 to July 1996, Ms. Kehoe was Vice President of Finance for Digidesign, a subsidiary of Avid Technology, a provider of digital tools for film, video, audio, and broadcast. Prior to that, Ms. Kehoe was Controller of Digidesign and facilitated its initial public offering and subsequent merger into Avid Technology. 37 From 1988 to 1993, Ms. Kehoe held various positions with Coopers & Lybrand in both the financial consulting and emerging business groups. Ms. Kehoe received a B.A. from Wesleyan University and an M.B.A. from San Francisco State University. MICHAEL A. EMLEY joined us as Vice President of Sales and Marketing in February 1997 and became our Vice President of Sales and Services in January 1999 and is currently Senior Vice President, Sales and Professional Services. From 1985 through January 1997, he was at Viewlogic Systems, Inc., a publicly-held software company, where he began as an Area Sales Manager and finished as Vice President of Corporate Marketing and of Strategic Account Services. In 1995 and 1996, he led the Viewlogic corporate marketing and worldwide consulting services groups. Before joining Viewlogic, Mr. Emley held positions at Analog Design Tools, Inc., an electronic design automation software company, Cimlinc, Inc., a provider of software and hardware to aerospace and defense companies worldwide, Calcomp Inc., a division of Lockheed Martin, and Perkin Elmer Data Systems, Inc. Mr. Emley received a B.S. from California State University at Los Angeles and an M.B.A. from Pepperdine University. STEVEN L. SHAFER, M.D. joined us as Vice President of Information Products in September 1999 and became Vice President, Product Development in March 2000. Prior to joining us, he was Associate Professor, Department of Anesthesia, at Stanford University School of Medicine, which he joined in 1988. Prior to joining the Stanford faculty, Dr. Shafer was founder, President and Chief Executive Officer of two software development companies. Dr. Shafer received an A.B. from Princeton University and his M.D. from Stanford University. DANIEL L. WEINER, PH.D. joined us as Vice President and General Manager, Scientific Products in January of 1998 and became Senior Vice President, Technology Deployment in March 2000. From 1994 to 1997, he held the positions of Vice President, Senior Vice President and Worldwide Director, Data Management and Biostatistics, and Principal Scientist at Quintiles, Inc., a contract research organization providing clinical development services to the pharmaceutical industry. Prior to that, Dr. Weiner held management positions in biostatistics and data management with Syntex Development Research, a research company that discovers and develops new and cost-effective prescription medicines, Statistical Consulting, Inc, a contract research organization, and Merrell Dow Pharmaceuticals. Dr. Weiner received a B.S. and his Ph.D. in Statistics from the University of Kentucky. SAEID AKHTARI joined us as Vice President for Business Development in February 1999 and became Vice President, Corporate Marketing and Strategic Development in October 1999. Prior to joining us, Mr. Akhtari was an independent consultant working with various genomics companies from June 1998 to January 1999. Mr. Akhtari was the Vice President of Sales, Marketing and Strategic Planning at Pangea Systems, now called DoubleTwist, Inc., a bioinformatics company from August 1996 to June 1998. From May 1988 to July 1996, he held senior management positions at IntelliGenetics, which was acquired in 1994 by Oxford Molecular Group, a provider of information technology and drug discovery research services to the pharmaceutical industry. His last position at Oxford Molecular Group was Executive Vice President of Sales and Services. Mr. Akhtari received a B.S. and an M.B.A. from the University of Utah. RONALD D. BEAVER, PH.D. has been responsible for developing our Decision Services group since joining us in January 1998; he is now our Managing Director, Decision Services. Prior to joining us, Dr. Beaver was a director of the Pope Street Group, a strategic management consulting company focusing on the pharmaceutical and oil and gas industries, which he founded in July 1995. Previously, he was at Strategic Decisions Group, an international strategic management consulting firm, which he joined in 1992. Dr. Beaver received a B.A. from Simpson College and an M.S. and Ph.D. in Finance and Decision Analysis from Stanford University's Department of Engineering-Economic Systems. 38 TERRENCE F. BLASCHKE, M.D. joined us in January 2000 as Vice President, Collaborative Programs. He has been a member of the Scientific Advisory Board since our formation in April 1995. Prior to joining us, he was Professor of Medicine and Molecular Pharmacology and Chief of the Division of Clinical Pharmacology at Stanford University School of Medicine, where he joined the faculty in 1974. Dr. Blaschke's research focuses on applying pharmacokinetics to the study of drug-disease interactions and the study of mechanisms underlying drug-drug interactions, to find the sources of variation in response to drugs and to develop computer-based systems to help monitor therapeutic decisions. Dr. Blaschke is a past president of the American Society for Clinical Pharmacology and Therapeutics and a former Chairman of the Generic Drugs Advisory Committee and is a consultant to the FDA. Dr. Blaschke received a B.S. from University of Denver and an M.D. from Columbia University College of Physicians and Surgeons. JAMES D. BUZZARD joined us in September 1997 and is currently our Vice President, Product Marketing, responsible for product direction and strategic technology alliances. Immediately prior to joining us, he was the General Manager and Vice President for the Pharma Division within Domain Solutions Corporation, a scientific software company and formerly a wholly-owned subsidiary of BBN Corporation, which he joined in October 1995. Mr. Buzzard also served as Chief Technology Officer for Domain Solutions Corporation and was responsible for overall technical direction and company product strategy in the health research and manufacturing industries. Prior to joining Domain Solutions Corporation, he was Senior Director of Business Development at Oracle Corporation. Mr. Buzzard received a B.S. in Biology from the University of California at Santa Cruz. STUART M. KORETZ, M.D., PH.D. joined us as Vice President, Medical Affairs and Business Development in September 1997 and became Vice President for Medical Affairs and Content in September 1999. From 1994 until September 1997, he was Vice President, New Products Discovery at ALZA Corporation, a pharmaceutical company. Prior to joining ALZA Corporation, Dr. Koretz held a variety of positions at Syntex Corporation, including Vice President of the Licensing/Business Development Division. Dr. Koretz received a B.S. from Clarkson College of Technology and received an M.D. and Ph.D. in Biochemistry from the University of Rochester. JANICE KURTH, M.D., PH.D. joined us as Vice President, Genomics in January 2000. Prior to joining us, Dr. Kurth was Director of Clinical Genetics at Phenogenex LLC, a human genomics company, from January 1999 to January 2000. From January 1998 to January 1999, Dr. Kurth worked at Genset Corporation, a human genome research company, to establish their molecular genetics research facility in the United States. Dr. Kurth was Director of Pharmacogenetics at Sequana Therapeutics, a gene and drug discovery company, from January 1997 to January 1998, where she directed scientific aspects and served as the medical advisor for their pharmacogenetics program. Prior to that time, Dr. Kurth spent six years doing independent human molecular genetic research in academic settings. Dr. Kurth received a B.A. from Austin College, and a Ph.D. in Human Molecular and Population Genetics from Stanford University, and an M.D. from the University of Arizona. E. GREGORY LEE, PH.D. one of our founders, has been Vice President, Engineering since September 1995. Prior to joining us, Dr. Lee was Director of Engineering at Sunrise Test Systems, a developer of electronic design automation software, from May 1993 to November 1995. From 1984 until 1993, he held technical and management positions at Weitek Corporation, a maker of high performance integrated circuits, with his last position being Director of Advanced Development. Dr. Lee received a B.A. from Reed College and a Ph.D. in Mathematics from Massachusetts Institute of Technology. JACOB ("JAAP") W. MANDEMA, PH.D. joined us as Vice President, Scientific Affairs, in December 1996 and is currently our Vice President and Chief Scientist. From January 1996 to December 1996, Dr. Mandema was Director of New Products Discovery at ALZA Corporation, a pharmaceutical company. Prior to that, he was Assistant Professor of Pharmaceutical Sciences, 39 Department of Anesthesia, at Stanford University School of Medicine, which he joined in 1992. Prior to joining Stanford, he completed a post-doctoral fellowship at the University of California, San Francisco. Dr. Mandema's research interests are mathematical modeling of population pharmacokinetics and pharmacodynamics. He received an undergraduate degree from the University of Utrecht, the Netherlands and a Ph.D. in Pharmacology from the University of Leiden. NANCY RISCH joined us as Vice President, Sales in July 1996 and became Vice President, Strategic Business Development in March 2000. Prior to joining us, Ms. Risch was Eastern Region Director for BBN Corporation, a provider of software applications for manufacturing engineering which she joined in June 1995. From January 1982 to June 1995, she was Director of Worldwide Industry Sales at Interleaf, a manufacturer of document preparation systems. DONALD R. STANSKI, M.D. joined us as Vice President, Scientific and Medical Programs, in July 1998. He has been a member of our Scientific Advisory Board since our formation. Prior to joining us, he was Professor in the Department of Anesthesia, and chair of that department, from 1992 to 1997, at Stanford University School of Medicine, where he joined the faculty in 1979. Dr. Stanski pursues research in developing innovative pharmacokinetic and pharmacodynamic data, especially in using surrogate measures of drug effect. He served as a member of the Anesthesia and Life Support Advisory Panel at the FDA. Dr. Stanski studied Pharmacy at the University of Alberta and received an M.D. from the University of Calgary. STEVEN D. BROOKS has been a member of our board of directors since June 1997. Since February 1999, Mr. Brooks has been Managing Director of Broadview Capital Partners, a private equity firm. From September 1997 to February 1999, Mr. Brooks was a managing director of Donaldson, Lufkin & Jenrette Securities Corporation, an investment banking firm. From 1996 to 1997, Mr. Brooks was a private investor and a consultant to technology companies. From 1994 to 1996, Mr. Brooks served as Managing Director and Head of Global Technology Investment Banking at the Union Bank of Switzerland Securities, LLC. Mr. Brooks is a director of Paychex, Inc., QRS Corporation and Veritas Software Corporation. Mr. Brooks currently serves as chair of our Audit Committee. Mr. Brooks received a B.A. from Yale College and a J.D. from University of Virginia Law School. PHILIPPE O. CHAMBON, M.D., PH.D. has been a member of our board of directors since May 1997. Since January 1997, Dr. Chambon has been a General Partner of the Sprout Group, a private equity firm. He joined the Sprout Group in May 1995. From May 1993 to April 1995, Dr. Chambon served as Manager in the Healthcare Practice of The Boston Consulting Group, a leading management consulting firm. From September 1987 to April 1993, Dr. Chambon was an executive with Sandoz Pharmaceuticals Corporation (Novartis), a leading pharmaceutical company, where he had late stage product development and pre-marketing responsibilities. He is currently a director of Deltagen, Inc. and Variagenetics, Inc., as well as several other private companies. Dr. Chambon received an M.D. and Ph.D. from the University of Paris and an M.B.A. from Columbia University. ROBERT B. CHESS became a member of our board of directors in April 2000. Mr. Chess is Chairman and co-Chief Executive Officer of Inhale Therapeutic Systems, Inc., a provider of pulmonary delivery systems for biotechnology drugs. He has been at Inhale since 1991 and served as President and Chief Executive Officer until August 1998. From September 1990 until October 1991, he was an Associate Deputy Director in the White House Office of Policy Development. In March 1987, Mr. Chess co-founded Penederm Incorporated, a topical dermatological drug delivery company, and served as its President from February 1989 until October 1989. Prior to co-founding Penederm, Mr. Chess held management positions at Intel Corp., a semiconductor manufacturer, and Metaphor, a computer software company that was acquired by International Business Machines. Mr. Chess received a B.S. in Engineering from the California Institute of Technology and an M.B.A. from the Harvard Business School. 40 DOUGLAS E. KELLY, M.D. has been a member of our board of directors since February 1996. Dr. Kelly has been a partner at Alloy Ventures, formerly Asset Management Associates, a venture capital and investment management firm, since 1993. Dr. Kelly is a director of Fusion Medical Technologies, Inc. and several privately-held companies. Dr. Kelly received a B.A. in Biochemistry and Molecular Biology from the University of California, San Diego, an M.D. from the Albert Einstein College of Medicine and an M.B.A. from the Stanford University Graduate School of Business. DEAN O. MORTON became a member of our board of directors in April 2000. Mr. Morton was the Executive Vice President, Chief Operating Officer and a Director of Hewlett-Packard Company, a manufacturer of computer systems and test and measurement instruments, from 1984 until his retirement in 1992. Mr. Morton is a director of KLA-Tencor Inc., Centigram Communications Corporation, BEA Systems Inc., The Clorox Company and ALZA Corporation. He is a trustee of the State Street Research Group of Funds, the State Street Research Portfolios, Inc. and the Metropolitan Series Fund Inc. Mr. Morton received a B.S. from Kansas State University and an M.B.A. from Harvard Business School. GARY L. NEIL, PH.D. has been a member of our board of directors since April 1996. Dr. Neil is President, Chief Executive Officer and a director of Crescendo Pharmaceuticals Corporation, a pharmaceutical development and commercialization company, which he joined in 1997. Dr. Neil was a director and the President and Chief Executive Officer of Therapeutic Discovery Corporation, a pharmaceutical development and commercialization company, from 1993 until September 1997. From 1989 to 1993, Dr. Neil served as Executive Vice President for Wyeth-Ayerst Research division of Wyeth Laboratories, Inc., a subsidiary of American Home Products Corporation, a large pharmaceutical company. Dr. Neil is a director of Allergan Specialty Therapeutics, Inc. and Geron Corporation. He received a B.S. from Queens University, Canada and a Ph.D. in Organic Chemistry at the California Institute of Technology. W. FERRELL SANDERS has been a member of our board of directors since February 1996. Mr. Sanders has served as a partner of Alloy Ventures, Inc., formerly Asset Management Associates, a venture capital and investment management firm, since March 1987. Mr. Sanders is a director of Adaptec, Inc. Mr. Sanders holds a B.S. in Electrical Engineering from North Carolina State and an M.B.A. from the University of Santa Clara. BOARD COMPOSITION We currently have eight directors. Upon the closing of this offering, the terms of office of the board of directors will be divided into three classes. As a result, a portion of our board of directors will be elected each year. The division of the three classes, the initial directors and their respective election dates will be as follows: - the class I directors will be Arthur H. Reidel, Philippe O. Chambon, Ph.D. and Douglas E. Kelly, M.D., and their term will expire at the annual meeting of stockholders to be held in 2001; - the class II directors will be Robert B. Chess, Dean O. Morton and W. Ferrell Sanders, and their term will expire at the annual meeting of stockholders to be held in 2002; and - the class III directors will be Steven D. Brooks and Gary L. Neil, Ph.D., and their term will expire at the annual meeting of stockholders to be held in 2003. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire, will be elected to serve from the time of election and qualification until the third annual meeting following their election. In addition, our certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be 41 distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in our control or management. BOARD COMMITTEES AUDIT COMMITTEE. Our audit committee reviews our internal accounting procedures and consults with and reviews the services provided by our independent auditors. Current members of our audit committee are Messrs. Brooks and Chess and Dr. Kelly. COMPENSATION COMMITTEE. Our compensation committee reviews and recommends general policy relating to compensation and benefits of our officers and employees. The compensation committee also administers the issuance of stock options and other awards under our stock plans. Current members of the compensation committee are Mr. Sanders, Dr. Neil and Dr. Chambon. NOMINATING COMMITTEE. Our nominating committee identifies possible candidates to our board of directors. The nominating committee identifies candidates to replace members who may resign their position or candidates for election at our annual meeting of stockholders. Current members of the nominating committee are Dr. Neil and Messrs. Reidel and Morton. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of our executive officers serves as members of the board of directors or compensation committee of any entity that has one or more executive officers who serve on our board or compensation committee. COMPENSATION OF DIRECTORS Directors currently do not receive cash compensation from us for their services as members of the board or committees or for attendance at any such meetings. Our directors may be reimbursed for certain reasonable expenses in connection with attendance at board of director and committee meetings. In May 1999, Dr. Gary L. Neil received options to purchase 10,000 shares of our common stock at an exercise price of $0.35 per share, in connection with his attendance at our board of director and committee meetings. In April 2000, we adopted the 2000 Equity Incentive Plan which provides for the automatic grant of options to purchase shares of common stock to our directors who are not our employees or an employee of any our affiliates. Each non-employee director who has not previously received an option to purchase our common stock and who is serving as a director after the closing of this offering will receive an initial option to purchase 5,000 shares of common stock. After this offering, each person who is not our employee who is first elected or appointed to the board of directors less than six months from the prior annual meeting will be granted an initial grant on the date of this election or appointment to purchase 5,000 shares of our common stock, or if first elected after six months from the prior annual meeting of stockholders 2,500 shares. Starting at the annual meeting of stockholders in 2001, all non-employee directors will receive an annual option to purchase 5,000 shares of common stock. See "--Employee Benefit Plans--2000 Equity Incentive Plan" for a more detailed explanation of the terms of these stock options. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS Our bylaws provide that we will indemnify our directors and executive officers and may indemnify our other officers, employees and other agents to the fullest extent permitted by Delaware law. We are also empowered under our bylaws to enter into indemnification contracts with our directors and 42 officers and to purchase insurance on behalf of any person we are required or permitted to indemnify. Pursuant to this provision, we expect to enter into indemnification agreements with each of our directors and executive officers. We have obtained officer and director liability insurance to cover liabilities our officers and directors may incur in connection with their services to us, including matters arising under the Securities Act. In addition, our certificate of incorporation provides that, to the fullest extent permitted by Delaware law, our directors will not be liable for monetary damages for breach of the directors' fiduciary duty of care to us and our stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances, equitable remedies including an injunction or other forms of non-monetary relief would remain available under Delaware law. Under current Delaware law, a director's liability to us or our stockholders may not be limited: - with respect to any breach of the director's duty of loyalty to us or our stockholders; - for acts or omissions not in good faith or involving intentional misconduct; - for knowing violations of law; - for any transaction from which the director derived an improper personal benefit; - for improper transactions between the director and us; and - for improper distributions to stockholders and loans to directors and officers. This provision also does not affect a director's responsibilities under any other laws including the federal securities laws or state or federal environmental laws. There is no pending litigation or proceeding involving our directors or officers in which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. EXECUTIVE COMPENSATION The following table presents summary information for the fiscal year ended March 31, 2000, regarding the compensation of our Chief Executive Officer and each of our other executive officers whose salary and bonus for fiscal 2000 were in excess of $100,000. We refer to these officers as the "named executive officers." SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------ SHARES OF COMMON STOCK ISSUABLE UPON FISCAL EXERCISE OF NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS Arthur H. Reidel ..................................... 2000 $200,000 $ -- 107,250 President and Chief Executive Officer Robin A. Kehoe ....................................... 2000 $143,750 $ -- 72,500 Senior Vice President, Finance and Chief Financial Officer Michael A. Emley ..................................... 2000 $141,250 $56,148 60,000 Senior Vice President, Sales and Professional Services Daniel L. Weiner ..................................... 2000 $175,000 $ -- -- Senior Vice President, Technology Deployment
43 OPTION GRANTS The following table contains information about the stock option grants to the named executive officers in fiscal 2000: OPTION GRANTS IN FISCAL YEAR 2000
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE NUMBER OF PERCENTAGE OF APPRECIATION FOR SECURITIES TOTAL OPTIONS EXERCISE OPTION TERM(4) UNDERLYING OPTIONS GRANTED DURING PRICE PER EXPIRATION ------------------- GRANTED(1) FISCAL YEAR(2) SHARE($/SH)(3) DATE 5% 10% ------------------ -------------- -------------- ---------- -------- -------- Arthur H. Reidel(5)....... 107,250 8.16% 0.35 5/13/09 Robin A. Kehoe(5)......... 72,500 5.52% 0.35 5/13/09 Michael A. Emley(6)....... 60,000 4.56% 0.35 5/13/09 Daniel L. Weiner.......... -- -- -- -- -- --
- ------------------------ (1) Options are granted under our 1997 Stock Option Plan. These options expire 10 years from the date of grant, or earlier upon termination of employment. See "Management--Employee Benefit Plans." (2) Based on an aggregate of 1,314,575 options granted during fiscal 2000 to our employees and consultants, including the named executive officers. (3) The exercise price per share of each option was equal to the fair market value of our common stock on the date of grant as determined by our board of directors. (4) Amounts reported in this column represent hypothetical values that may be realized upon exercise of the options immediately prior to the expiration of their term, assuming that the stock price based upon an assumed initial public offering price of $ per share appreciates at the specified annual rates of appreciation, compounded annually over the term of the options. These numbers are calculated based on rules promulgated by the Securities and Exchange Commission. Actual gains, if any, on stock option exercises and common stock holdings are dependent on the time of such exercise and the future performance of our common stock. (5) Options to purchase 7,250 shares granted to Mr. Reidel and options to purchase 7,500 shares granted to Ms. Kehoe were fully vested on May 14, 1999. The remaining options held by Mr. Reidel and Ms. Kehoe vest in equal monthly installments over four years. (6) This option vests in equal monthly installments over 48 months. 44 YEAR-END VALUES The table below provides information about the number and value of options held by the named executive officers at March 31, 2000.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED AT MARCH 31, 2000 AT MARCH 31, 2000(1) ON EXERCISE VALUE REALIZED(1) --------------------------- ------------------------- ----------- ------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE NAME ----------- ------------- ------------------------- Arthur H. Reidel.............. 121,830 $ -- -- -- Robin A. Kehoe................ 82,220 -- -- -- Michael A. Emley.............. -- -- 13,750 46,250 $ Daniel L. Weiner.............. -- -- -- -- -- VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT MARCH 31, 2000(1) ------------------------- UNEXERCISABLE NAME ------------------------- Arthur H. Reidel.............. -- Robin A. Kehoe................ -- Michael A. Emley.............. $ Daniel L. Weiner.............. --
- ------------------------ (1) There was no public trading market for our common Stock as of March 31, 2000. Accordingly, these values have been calculated on the basis of an assumed initial public offering price of $ per share, less the applicable exercise price. EMPLOYEE BENEFIT PLANS 2000 EQUITY INCENTIVE PLAN Our board of directors adopted our 2000 Equity Incentive Plan on April 7, 2000, and our stockholders approved it on , 2000. We have reserved a total of 4,000,000 shares of our common stock for issuance under the incentive plan. On each January 1, starting with January 2001 and continuing through and including the calendar year 2010, the share reserve automatically will be increased by a number of shares equal to the LEAST of: - 5% of our then outstanding shares of common stock; - 2,000,000 shares; or - a lesser number determined by our board. If the recipient of a stock award does not purchase the shares subject to such stock award before the stock award expires or otherwise terminates, the shares that are not purchased will again become available for issuance under the incentive plan. ADMINISTRATION AND ELIGIBILITY. The board administers the incentive plan unless it delegates administration to a committee. The board may grant incentive stock options to our employees and to the employees of our affiliates. The board also may grant nonstatutory stock options, stock bonuses and restricted stock purchase awards to our employees, directors and consultants as well as to the employees, directors and consultants of our affiliates. OPTION TERMS. The board may grant incentive stock options with an exercise price of 100% or more of the fair market value of a share of our common stock on the grant date. It may grant nonstatutory stock options with an exercise price as low as 85% of the fair market value of a share on the grant date. In addition, the incentive plan provides for automatic stock option grants to non-employee directors on our board. After this offering, each person who is not our employee who is first elected or appointed to the board of directors less than six months from the prior annual meeting will be granted an initial grant on the date of this election or appointment to purchase 5,000 shares of our common stock, or if first elected after six months from the prior annual meeting of stockholders 2,500 shares, at fair market value of the common stock on the date of grant. On the date of this offering, 45 non-employee directors of our board of directors who have not previously been granted options to purchase common stock will receive an initial stock option to purchase 5,000 shares of our common stock. The non-employee directors become fully vested in the stock option grant at the next annual meeting of stockholders following the date of the grant, provided that the non-employee directors are providing services to us at that time. After this offering, each person who is a non-employee director on the day after each annual stockholder's meeting, shall, on that date, be granted an annual stock option grant to purchase 5,000 shares of our common stock at the fair market value of our common stock on that date of grant. The non-employee directors become fully vested in each stock option grant at the next annual meeting of stockholders following the date of the grant, provided that the non-employee directors are providing service to us at that time. STOCK BONUS AND RESTRICTED STOCK PURCHASE AWARDS. The board may also grant stock bonus awards and restricted stock purchase awards. Stock bonus awards are granted for services past rendered. Restricted stock purchase awards can be granted, but the purchase price cannot be less than 85% of the fair market value on the date of grant or at the time of purchase. EFFECT OF TRANSACTIONS ON OPTIONS. Transactions not involving our receipt of consideration, such as a merger, consolidation, reorganization, stock dividend, or stock split, may change the class and number of shares subject to the incentive plan and to outstanding awards. In that event, the board will appropriately adjust the incentive plan as to the class and the maximum number of shares subject to the incentive plan and to the limits on the number of shares that the board may grant under an option as provided in Section 162(m) of the Internal Revenue Code. It also will adjust outstanding awards as to the class, number of shares and price per share applicable to such awards. If we dissolve or liquidate, then outstanding stock awards will terminate immediately prior to such event. However, we treat outstanding stock awards differently in the following situations: - a sale, lease or other disposition of all or substantially all of our assets or stock; - a merger or other consolidation in which we are not the surviving corporation; - a reverse merger following which we are the surviving corporation but where our common stock outstanding immediately prior to the merger is converted into other property. In these situations, the surviving or acquiring corporation may either assume all outstanding awards under the incentive plan or substitute other awards for the outstanding awards. If the surviving or acquiring corporation does not assume or substitute outstanding options, then, for option holders who are then providing services to us or our affiliates, the vesting and exercisability, if applicable, of the options will accelerate and the options will terminate immediately prior to the occurrence of the event described above if not otherwise exercised. The vesting and exercisability of options held by option holders who are no longer providing services to us or one of our affiliates will not accelerate. However, those options will also terminate immediately prior to the occurrence of the event described above. In certain change in control circumstances, the vesting provisions of the outstanding stock options will be accelerated if a holder of a stock option is terminated due to a constructive termination or involuntarily terminated without cause within 13 months after a change in control. 2000 EMPLOYEE STOCK PURCHASE PLAN Our board adopted the 2000 Employee Stock Purchase Plan on April 7, 2000, and our stockholders approved it on , 2000. 46 SHARE RESERVE. We have authorized the issuance of 600,000 shares of our common stock pursuant to purchase rights granted to eligible employees under the purchase plan. On each January 1, starting with January 2001, the share reserve will automatically be increased by a number of shares equal to the LESSER of: - 1.5% of our then outstanding shares of common stock; - 600,000 shares; or - such fewer number of shares determined by the board. ELIGIBILITY. The purchase plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. The purchase plan provides a means by which eligible employees may purchase our common stock through payroll deductions. We implement the purchase plan by offerings of purchase rights to eligible employees. Generally, all of our full-time employees and the full-time employees of our affiliates incorporated in the United States may participate in offerings under the purchase plan. However, no employee may participate in the purchase plan if, immediately after we grant the employee a purchase right, the employee would have voting power over 5% or more of our outstanding capital stock. As of the date hereof, no shares of common stock have been purchased under the purchase plan. ADMINISTRATION. Under the purchase plan, the board may specify offerings of up to 27 months. Unless the board otherwise determines, common stock will be purchased for accounts of participating employees at a price per share equal to the lower of: - 85% of the fair market value of a share on the first day of the offering; or - 85% of the fair market value of a share on the purchase date. For the first offering, which will begin on the effective date of this initial public offering, and all additional offerings, we intend to register the shares being offered on a Form S-8 registration statement. The fair market value of the shares on the first date of the first offering will be the price per share at which our shares are first sold to the public as specified in the final prospectus with respect to our initial public offering. Otherwise, fair market value generally means the closing sales price (rounded up where necessary to the nearest whole cent) for such shares (or the closing bid, if no sales were reported) as quoted on the Nasdaq National Market on the trading day prior to the relevant determination date, as reported in THE WALL STREET JOURNAL. The board may provide that employees who become eligible to participate after the offering period begins nevertheless may enroll in the offering. These employees will purchase our stock at the lower of: - 85% of the fair market value of a share on the day they began participating in the purchase plan; or - 85% of the fair market value of a share on the purchase date. If authorized by the board, participating employees may authorize payroll deductions of up to 20% of their base compensation for the purchase of stock under the purchase plan. Generally employees may end their participation in the offering at any time up to 10 days before a purchase period ends. Their participation ends automatically on termination of their employment or loss of full-time status. OTHER PROVISIONS. The board may grant eligible employees purchase rights under the purchase plan only if the purchase rights, together with any other purchase rights granted under other employee stock purchase plans established by us or by our affiliates, if any, do not permit the employee's rights to purchase our stock to accrue at a rate which exceeds $25,000 of fair market value of our stock for each calendar year in which the purchase rights are outstanding. 47 Upon the happening of certain corporate transactions, a surviving corporation may assume outstanding purchase rights or substitute other purchase rights therefor. If the surviving corporation does not assume or substitute the purchase rights, the offering period may be shortened and our stock may be purchased for the participants immediately before the corporate transactions. 1997 STOCK OPTION PLAN Our board of directors initially adopted our 1997 stock option plan on February 17, 1997, and our stockholders initially approved it on March 17, 1997. It was last amended by the board of directors on April 7, 2000 and our stockholders approved the amendment on April , 2000. We have reserved a total of 3,800,000 shares of our common stock for issuance under the option plan. As of March 31, 2000, under the 1997 stock option plan (a) options to purchase 1,742,119 shares of common stock were outstanding and (b) options to purchase 470,179 shares had been exercised. On April 10, 2000, our Compensation Committee granted options to purchase an additional 812,625 shares of our common stock. If the recipient of a stock option does not purchase the shares subject to such stock option before the stock option expires or otherwise terminates, the shares that are not purchased will again become available for issuance under the option plan. The 1997 stock option plan provides that it will be administered by the board, or a committee appointed by the board, which determines recipients and types of options to be granted, including number of shares under the option and the exercisability of the shares. Transactions not involving our receipt of consideration, such as a merger, consolidation, reorganization, stock dividend, or stock split, may change the class and number of shares subject to the option plan and to outstanding options. In that event, the board will appropriately adjust the option plan as to the class and the maximum number of shares subject to the option plan and to the limits on the number of shares that the board may grant under an option as provided in Section 162(m) of the Internal Revenue Code. It also will adjust outstanding options as to the class, number of shares and price per share applicable to such options. In the event of a corporate transaction including a dissolution or liquidation, the sale, lease or disposition of all or substantially all of our assets or a merger or consolidation, then all outstanding options may be either assumed or substituted for by any surviving entity. If the surviving entity refuses to assume or substitute for such options, then the vesting and exercisability of the options held by person who are then providing services to us or our affiliates will be accelerated prior to such transaction and the options will terminate immediately prior to the occurrence of the corporate transaction. The vesting and exercisability of all other options will terminate immediately prior to the occurrence of the corporate transaction. 1995 STOCK OPTION PLAN Our board of directors initially adopted our 1995 stock option plan on May 12, 1995, and our stockholders initially approved it on May 2, 1996. It was last amended by the board of directors on April 19, 1996. The board authorized and reserved a total of 507,000 shares of our common stock for issuance under the 1995 stock option plan. The 1995 stock option plan provides for the grant of incentive stock options to our employees and to the employees of our affiliates. Under the 1995 stock option plan, the board also may grant nonstatutory stock options to our employees, directors and consultants as well as to the employees, directors and consultants of our affiliates. The 1995 stock option plan provides that it will be administered by the board, or a committee appointed by the board, which determines recipients and types of options to be granted, including number of shares under the option and the exercisability of the shares. As of March 31, 2000, under the 1995 stock option plan (a) options to purchase 94,750 shares of common stock were outstanding and (b) options to purchase 179,850 shares had been exercised. In 48 February 1997, the board voted that no additional grants would be made under the 1995 stock option plan and all shares that had been authorized and reserved but not granted under the plan were returned to our authorized common stock. Transactions not involving our receipt of consideration, such as a merger, consolidation, reorganization, stock dividend, or stock split, may change the class and number of shares subject to the option plan and to outstanding options. In that event, the board will appropriately adjust the option plan as to the class and the maximum number of shares subject to the option plan. It also will adjust outstanding options as to the class, number of shares and price per share applicable to such options. In the event of a corporate transaction including a dissolution or liquidation, the sale, lease or disposition of all or substantially all of our assets or a merger or consolidation, then all outstanding options may be either assumed or substituted for by any surviving entity. If the surviving entity refuses to assume or substitute for such options, the plan provides that the options will expire upon consummation of the transaction but the board has adopted a policy that in such a transaction, the vesting and exerciseability will be accelerated prior to the consummation of the transaction. SECTION 401(K) PLAN We maintain a retirement and deferred savings plan for our U.S. employees. The retirement and deferred savings plan is intended to qualify as a tax-qualified plan under Section 401 of the Internal Revenue Code. The retirement and deferred savings plan provides that each participant may contribute up to 20% of his or her pre-tax compensation, up to a statutory limit, which is $10,500 in calendar year 2000. Under the plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plan's trustee. The retirement and deferred savings plan also permits us to make discretionary contributions, subject to established limits and a vesting schedule. 49 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AGREEMENTS WITH EXECUTIVE OFFICERS In December 1997, we completed the acquisition of Scientific Consulting, Inc., of which Dr. Weiner was the majority shareholder. We purchased all of Dr. Weiner's interest in Scientific Consulting, Inc. in exchange for $760,000 and 400,000 shares of our common stock. In connection with the acquisition, Dr. Weiner entered into a two year non-competition agreement with us in consideration for which we issued him 300,000 shares of our common stock. Dr. Weiner became an executive officer in January 1998. In connection with becoming an officer and employee of the Company, Dr. Weiner purchased 300,000 shares of our common stock for $75,000 in the form of a promissory note. This stock is subject to a right of repurchase in favor of us in the event Dr. Weiner ceases to provide services to us or we terminate his employment for cause. This right of repurchase lapses over a four year period at the end of which all shares will become fully vested. If we should terminate Dr. Weiner's employment other than for cause prior to December 17, 2001, the vesting of these shares will accelerate and all of the shares will become fully vested as of the date of termination. Ms. Kehoe purchased 120,000 shares in July 1996, 40,000 shares in June 1998 and 65,000 shares in June 1999. These shares are subject to a right of repurchase in favor of us. This right of repurchase lapses over a four year period at the end of which all shares will become fully vested. If we should engage in a transaction resulting in change in control, and Ms. Kehoe is subsequently terminated within four years of such transaction, the vesting of these shares will accelerate and all of the shares will become fully vested at that time. INVESTOR RIGHTS AGREEMENT We have entered into an agreement with the holders of our preferred stock, including entities with which our directors are affiliated, that provides these stockholders certain rights relating to the registration of their stock. These rights have been waived as to this offering by the holders of preferred stock, but will survive this offering and will terminate no later than five years after the closing date of this offering. This agreement also entitles the holders of our preferred stock to rights to receive financial information regarding us and a right of first refusal to purchase shares of our stock we issue, both of which rights terminate at the close of this offering. SHAREHOLDER AGREEMENT We have entered into an agreement with institutional holders of our preferred stock and our three largest common stockholders, including entities with which our directors are affiliated, that provides for the voting of their shares in favor of the election of designated persons to our board of directors, including the current members of our board other than Messrs. Chess and Morton. In addition, some of our preferred stockholders have the right to designate, individually or mutually, up to four candidates to be elected by these stockholders as members of our board of directors. This agreement will terminate upon the closing of this offering. INDEMNIFICATION AGREEMENTS We have entered into indemnification agreements with our directors and officers for the indemnification of these persons to the full extent permitted by law. We also intend to execute these agreements with our future directors and officers. LOANS TO EXECUTIVE OFFICERS We loaned Ms. Kehoe $12,000 in July 1996 and $10,000 in June 1998 in connection with the purchase of our common stock. Each of these loans is a full recourse note and accrues interest at a 50 rate of 6.74% and 5.77% per year, respectively, compounded annually. The principal and accrued interest on each loan is due July 25, 2001 and may be prepaid without penalty. The promissory notes will accelerate and become due and payable 30 days after Ms. Kehoe's employment with us is terminated for any reason. In addition, we loaned Ms. Kehoe $22,750 in 1999 to purchase additional shares of our common stock. The interest on this loan is 6% per year, with the principal and accrued interest due May 1, 2003. This promissory note may be prepaid without penalty and will accelerate and become immediately due and payable should Ms. Kehoe's employment with us be terminated for any reason. In January 1998 we loaned Dr. Weiner $75,000 in connection with the purchase of our common stock. This loan is a full recourse note and accrues interest at a rate of 5.93% per year, compounded annually. The principal and accrued interest is due December 17, 2002 and may be prepaid without penalty. This promissory note will accelerate and become due and payable 90 days after Dr. Weiner's employment with us is terminated. STOCK SALES The following executive officers, directors or holders of more than 5% percent of our securities purchased shares of our stock in the amounts set forth below during the last three fiscal years.
SHARES OF PREFERRED STOCK COMMON --------------------------------- STOCK WARRANTS(1) SERIES C SERIES D SERIES E -------- ----------- --------- --------- --------- DIRECTORS AND EXECUTIVE OFFICERS Arthur H. Reidel........................ 121,830 -- -- -- -- Robin A. Kehoe.......................... 122,220 2,215 -- 11,108 -- Steven L. Shafer........................ 7,500 -- -- -- -- Daniel L. Weiner(2)..................... 907,000 -- -- -- -- Steven D. Brooks........................ 40,000 4,747 73,840 23,762 -- Gary L. Neil............................ -- 633 -- 3,174 -- 5% STOCKHOLDERS Asset Management Assoc. 1996, L.P.(3)... -- 91,646 970,465 611,121 -- The Sprout Entities(4).................. -- -- 1,265,823 538,527 -- McKesson HBOC, Inc...................... -- -- -- -- 2,777,778 Weiss, Peck & Greer Entities(5)......... -- -- -- 1,223,242 -- Per Share Price......................... $0.25 to $ 0.25 $ 2.37 $ 3.27 $ 7.20 $1.40 Date of Purchase........................ 9/97 to 5/98 5/97 10/98 9/99 3/00
- ------------------------ (1) These warrants represent warrants to purchase shares of our common stock. (2) Includes 3,000 shares held of record by Dr. Weiner's spouse. Also includes 604,000 shares issued to Dr. Weiner in conjunction with our acquisition of his interest in Scientific Consulting, Inc. in December 1997. (3) AMC Partners 96, L.P. is the general partner of Asset Management Associates 1996, L.P. Mr. Sanders and Dr. Kelly, two of our directors, are general partners of AMC Partners 96, L.P. (4) Consists of 1,569,595 shares held by Sprout Capital VII, L.P., 18,233 shares held by Sprout CEO Fund, L.P., 180,435 shares held by DLJ First ESC, L.P. and 36,087 shares held by DLJ Capital Corp. Dr. Chambon, one of our directors, is an employee of DLJ Capital Corp., which is the managing general partner of Sprout Capital VII, L.P. and a general partner of the Sprout CEO 51 Fund, and he is a Vice President of the Sprout Group, which is a division of DLJ Capital Corp. Dr. Chambon is a general partner of DLJ Associates VII, L.P. which is a general partner of Sprout VII, L.P. DLJ First ESC, L.P. is a fund that invests for the benefit of an employee deferred compensation plan for employees of DLJ Capital Corp. Dr. Chambon disclaims beneficial ownership of these shares except to the extent of his pecuniary or partnership interests. (5) Consists of 534,679 shares held by WPG Enterprise Fund III, L.L.C., 611,376 shares held by Weiss, Pech & Greer Venture Associates IV, L.L.C. and 77,187 shares held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P. All future transactions, including loans, between us and our officers, directors, principal stockholders and their affiliates will be approved by a majority of our board of directors, including a majority of the independent and disinterested directors in these transactions. 52 PRINCIPAL STOCKHOLDERS The following table sets forth information concerning the beneficial ownership of the shares of our common stock as of March 31, 2000, and as adjusted to give effect to the sale of shares of our common stock in this offering assuming conversion of all of the outstanding shares of preferred stock into common stock and no exercise of the underwriters' over-allotment option, by: - each person known by us to be the beneficial owner of 5% or more of the outstanding shares of common stock together with the affiliates of such person; - each named executive officer; - each of our directors; and - all executive officers and current directors as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock under options held by that person that are currently exercisable or exercisable within 60 days of March 31, 2000 are considered outstanding. Except pursuant to applicable community property laws or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power with respect to all shares of common stock shown as beneficially owned by such stockholder. Unless otherwise indicated in the footnotes, the address of the individuals listed below is: c/o Pharsight Corporation, 800 West El Camino Real, Mountain View, CA 94040.
BENEFICIAL OWNERSHIP PRIOR TO OFFERING -------------------------------------------- SHARES BENFICALLY OWNED PERCENTAGE THAT ARE ISSUABLE BENEFICIALLY NUMBER OF SHARES PURSUANT TO OPTIONS AND OWNED(1) BENEFICIALLY OWNED WARRANTS EXERCISABLE ------------------- NAME PRIOR TO THE WITHIN 60 DAYS OF BEFORE AFTER DIRECTORS AND EXECUTIVE OFFERING MARCH 31, 2000 OFFERING OFFERING OFFICERS ------------------ ----------------------- -------- -------- Arthur H. Reidel....................... 926,350 -- 6.3% Robin A. Kehoe......................... 253,328 2,215 1.7 Michael A. Emley....................... 100,000 16,250 * * Steven L. Shafer(2).................... 152,744 2,500 1.1 Daniel L. Weiner(3).................... 907,000 -- 6.2 Steven D. Brooks....................... 137,602 4,747 * * Gary L. Neil(4)........................ 41,174 32,708 * * Douglas E. Kelly(5).................... 3,124,596 91,646 21.7 Philippe O. Chambon(6)................. 1,804,350 -- 12.2 Robert B. Chess........................ -- -- * * W. Ferrell Sanders(5).................. 3,124,596 91,646 21.7 Dean O. Morton......................... -- -- * * All directors and officers as a group (12 persons)(7)...................... 7,447,144 147,631 51.0 5% STOCKHOLDERS Asset Management Associates 1996, L.P.(5).............................. 3,124,596 91,646 21.7 McKesson HBOC, Inc.(8)................. 2,777,778 -- 18.8 The Sprout Entities(6)................. 1,804,350 -- 12.2 The Weiss, Peck & Greer Entities(9).... 1,223,242 -- 8.3
- ------------------------ * Represents less than 1%. (1) Percentage of ownership is based on 14,741,939 shares of common stock outstanding before this offering and shares of common stock outstanding after this offering. (2) Includes 8,000 shares held by Mr. Shafer as custodian for his children under the California Uniform Gifts to Minors Act. 53 (3) Includes 3,000 shares held of record by Dr. Weiner's spouse. (4) Includes 21,174 shares and warrants to purchase 633 shares held by The Neil Family Trust dated 12/16/93, of which Dr. Neil is a trustee. (5) Consists solely of shares and warrants held by Asset Management Associates 1996, L.P. AMC Partners 96, L.P. is the general partner of Asset Management Associates 1996, L.P. W. Ferrell Sanders and Douglas E. Kelly, two of our directors, are general partners of AMC Partners 96, L.P. and disclaim beneficial ownership of these shares except to the extent of each of their proportionate partnership interest in these shares. The address for Asset Management Associates 1996, L.P. is c/o Alloy Ventures, 480 Cowper Street, Palo Alto, CA 94301. (6) Consists of 1,569,595 shares held by Sprout Capital VII, L.P., 18,233 shares held by Sprout CEO Fund, L.P., 180,435 shares held by DLJ First ESC, L.P. and 36,087 shares held by DLJ Capital Corp. Dr. Chambon is an employee of DLJ Capital Corp., which is the managing general partner of Sprout Capital VII, L.P. and a general partner of the Sprout CEO Fund, and he is a Vice President of the Sprout Group, which is a division of DLJ Capital Corp. Dr. Chambon is a general partner of DLJ Associates VII, L.P. which is a general partner of Sprout VII, L.P. DLJ First ESC, L.P. is a fund that invests for the benefit of an employee deferred compensation plan for employees of DLJ Capital Corp. Dr. Chambon disclaims beneficial ownership of these shares except to the extent of his pecuniary or partnership interests. The address for the Sprout Entities is 277 Park Avenue, New York, NY 10172. (7) Consists of 4,961,120 shares of common stock and warrants to purchase 92,279 shares of common stock held by entities affiliated with directors and executive officers. See footnotes 2 through 6 above. (8) McKesson HBOC, Inc. is located at One Post Street, Floor 33, San Francisco, CA 94104. (9) Consists of 534,679 shares held by WPG Enterprise Fund III, L.L.C., 611,376 shares held by Weiss, Peck & Greer Venture Associates IV, L.L.C. and 77,187 shares held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Weiss, Peck & Greer, L.L.C., is a Class A limited partner of WPG Venture Partners III, L.P., the Fund Investment Advisory Member for WPG Enterprise Fund III, L.L.C., Weiss, Peck & Greer Venture Associates IV, L.L.C. and Weiss, Peck & Greer Venture Associates IV Cayman, L.P. The Weiss, Peck & Greer Entities are located at 555 California Street, Suite 3130, San Francisco, CA 94104. 54 DESCRIPTION OF CAPITAL STOCK Upon completion of this offering, our authorized capital stock will consist of 120,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value. The following description of our capital stock does not purport to be complete and is subject to, and qualified in its entirety by, our certificate of incorporation and bylaws, which we have included as exhibits to the registration statement of which this prospectus forms a part. COMMON STOCK As of March 31, 2000, there were 14,741,939 shares of common stock outstanding, held of record by 94 stockholders. This amount assumes the conversion of all outstanding shares of preferred stock into common stock, which is to occur upon the closing of this offering. In addition, as of March 31, 2000, there were 1,835,369 shares of common stock subject to outstanding options. Upon completion of this offering, there will be shares of common stock outstanding, assuming no exercise of outstanding stock options or warrants or the underwriters' over-allotment option. Each share of common stock entitles its holder to one vote on all matters to be voted upon by stockholders. Subject to preferences that may apply to preferred stock that may be issued after this offering, holders of common stock may receive ratably any dividends that the board of directors may declare out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and any liquidation preference of preferred stock that may be issued after this offering. The common stock has no preemptive rights, conversion rights, subscription rights or redemption or sinking fund provisions. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and non-assessable. PREFERRED STOCK Our board of directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series. Our board may designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, sinking fund terms and number of shares constituting any series or the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock or delaying or preventing a change in control. We have no present plans to issue any shares of preferred stock after the completion of this offering. WARRANTS As of March 31, 2000, after giving effect to the conversion of all outstanding preferred stock into common stock, warrants to purchase 296,881 shares of common stock were outstanding at a weighted average exercise price of $1.45 per share. These warrants expire on various dates from the closing of this offering through the date that is five years after the closing of this offering. The warrants contain provisions for the adjustment of the exercise price and the aggregate number of shares that may be issued upon the exercise of the warrant if a stock dividend, stock split, reorganization, reclassification or consolidation occurs. REGISTRATION RIGHTS On the date 180 days after the completion of this offering, the holders of 10,686,717 shares of common stock or their permitted transferees, will be entitled to rights to register these shares under the Securities Act of 1933. If we propose to register any of our securities under the Securities Act, 55 either for our own account or for the account of other securities holders, the holders of these shares will be entitled to notice of the proposed registration and will be entitled to include, at our expense, their shares of common stock in the registration. In addition, the holders may require us, at our expense and on not more than two occasions, to file a registration statement under the Securities Act covering their shares of common stock, and we will be required to use our best efforts to have the registration statement declared effective. Further, the holders may require us at our expense, but not more than twice in any twelve month period, to register their shares on Form S-3 when use of this form becomes available to us. These rights shall terminate on the earlier of seven years after the effective date of this offering, or when a holder owns less than 1% of our outstanding common stock and is able to sell all its shares pursuant to Rule 144 under the Securities Act in any 90-day period. In addition, holders of warrants to purchase 296,881 shares of common stock will have similar registration rights upon exercise of these warrants. These registration rights are subject to conditions and limitations, including the right of the underwriters that may be engaged by us or the holders to limit the number of shares included in the registration statement. ANTI-TAKEOVER PROVISIONS DELAWARE LAW. We are subject to Section 203 of the Delaware General Corporation Law, which regulates acquisitions of some Delaware corporations. In general, Section 203 prohibits, with some exceptions, a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date the person becomes an interested stockholder, unless: - our board of directors approved the business combination or the transaction in which the person became an interested stockholder prior to the date the person attained this status; - upon consummation of the transaction that resulted in the person becoming an interested stockholder, the person owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - on or subsequent to the date the person became an interested stockholder, our board of directors approved the business combination and the stockholders other than the interested stockholder authorized the transaction at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding stock not owned by the interested stockholder. Section 203 defines a "business combination" to include: - any merger or consolidation involving us and the interested stockholder; - any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of our assets; - in general, any transaction that results in the issuance or transfer by us of any of our stock to the interested stockholder; - any transaction involving the corporation that has the effect of increasing the proportionate share of our stock owned by the interested stock holders; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through us. 56 In general, Section 203 defines an "interested stockholder" as any person who, together with the person's affiliates and associates, owns, or within three years prior to the determination of interested stockholder status did own, 15% or more of a corporation's voting stock. CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS. Our certificate of incorporation and bylaws include a number of provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of us. First, our certificate of incorporation provides that all stockholder actions upon completion of this offering must be effected at a duly called meeting of holders and not by a consent in writing. Second, our bylaws provide that special meetings of the stock holders may be called only by our chairman of the board of directors, our chief executive officer, our board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors or holders of 50% or more of our common stock. Third, our certificate of incorporation provides that our board of directors can issue up to 5,000,000 shares of preferred stock, as described under "--Preferred Stock" above. Fourth, our certificate of incorporation and the bylaws provide for a classified board of directors, in which approximately one-third of the directors would be elected each year. Consequently, any potential acquiror would need to successfully complete two proxy contests in order to take control of the board of directors. Finally, our bylaws establish procedures, including advance notice procedures with regard to the nomination of candidates for election as directors and stockholder proposals. These provisions of our certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control or management of us. TRANSFER AGENT AND REGISTRAR We are currently in the process of selecting a transfer agent and registrar. 57 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of common stock in the public market could reduce market prices prevailing from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after the restrictions lapse could reduce the market price of our stock and our ability to raise equity capital in the future. Upon completion of the offering, we will have shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options and warrants and based upon the number of shares outstanding as of March 31, 2000. Of these shares, the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless such shares are purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining 14,741,939 shares held by existing stockholders, and any shares purchased by affiliates in this offering, will be "restricted securities" as that term is defined in Rule 144 under the Securities Act. Our affiliates will hold 11,418,990 of the restricted shares. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 under the Securities Act, which are summarized below. Subject to the operation of lock-up agreements described below, upon completion of this offering, the holders of 10,686,717 shares of common stock, or their transferees, will be entitled to rights to require the registration of such shares under the Securities Act. Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by our affiliates, immediately upon the effectiveness of such registration. See "Description of Capital Stock--Registration Rights." LOCK-UP AGREEMENTS We, our officers, directors and stockholders holding approximately 12,733,622 shares of common stock have agreed that, for a period of 180 days from the date of the final prospectus, we and they will not, subject to some exceptions, transfer or otherwise dispose of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock. These restrictions shall cease to apply to: (a) 25% of our shares of common stock beneficially owned by each of these persons on the date of the final prospectus upon the later to occur of (i) the end of the 90-day period after the date of the final prospectus or (ii) the second trading day following the first public release of our quarterly results after the date of the final prospectus; and (b) an additional 25% of our shares of common stock beneficially owned by each of these persons on the date of the final prospectus, upon the end of the 135-day period after the date of the final prospectus; if, in the case of both clauses (a) and (b): (x) the reported last sale price of the common stock on the Nasdaq National Market is at least twice the price per share in the offering for 20 of the 30 trading days ending on (A) in the case of (a) above, the later of (1) the last trading day of the 90-day period after the date of the final prospectus or (2) the second trading day following the first public release of our quarterly results after the date of the final prospectus and (B) in the case of clause (b) above, the last trading day of the 135-day after the date of the final prospectus; and (y) such person is not, and has not been since the date of the final prospectus, our employee; 58 provided further, that such person agrees to give to us and Donaldson, Lufkin & Jenrette Securities Corporation written notice three business days prior to taking any of the actions described above and to execute any such action only through Donaldson, Lufkin & Jenrette Securities Corporation or any of its affiliates acting as broker, unless otherwise agreed in writing by Donaldson, Lufkin & Jenrette Securities Corporation. The underwriting agreement contains limited exceptions to these lock-up agreements. In addition, during this 180-day period, we have also agreed not to file any registration statement for, and each of our officers, directors and several stockholders has agreed not to make any demand for, or exercise any right for, the registration of any of our securities without Donaldson, Lufkin & Jenrette Securities Corporation's prior written consent. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144 and 701 of the Securities Act discussed below, shares subject to these lock-up agreements will not be salable until the shares are released from the agreements or the agreements expire or unless prior written consent is received from Donaldson, Lufkin & Jenrette Securities Corporation. Any early waiver of the lock-up agreements by the underwriters, which, if granted, could permit sales of a substantial number of shares and could adversely affect the trading price of our shares, may not be accompanied by an advance public announcement by us. Taking into account these lock-up agreements, 1,124,956 shares may be eligible for sale on the later of 90 days from the date of the final prospectus or the second trading day following the first public release of our quarterly results, and 1,124,956 shares may be eligible for sale 135 days from the date of the final prospectus. The remaining shares subject to the lockup requirements will become eligible for sale 180 days from the date of the final prospectus unless a portion of these shares have previously become eligible for sale as described above. RULE 144 In general, under Rule 144, beginning 90 days after the date of the final prospectus, a person, or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year, including a person who may be deemed our Rule 144 affiliate, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - one percent of the number of shares of our common stock then outstanding; or - the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the proposed sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. We are unable to estimate accurately the number of restricted shares that will be sold under Rule 144 because this will depend in part on the market price of our common stock, the personal circumstances of the seller and other factors. Under Rule 144(k), a person who is not deemed to have been our Rule 144 affiliate at any time during the 90 days preceding a sale, and who has beneficially owned for at least two years the shares proposed to be sold, would be entitled to sell those shares under Rule 144(k) without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, subject to the lock-up agreements, these shares may be sold upon completion of this offering. RULE 701 Beginning 90 days after the date of this prospectus, the shares of common stock issuable upon exercise of the options granted by us prior to the effective date of the registration statement will be eligible for sale in the public market pursuant to Rule 701 under the Securities Act, subject to the lock-up agreements. In general, Rule 701 permits resales of shares issued under specified compensatory 59 benefit plans and contracts commencing 90 days after the issuer becomes subject to the reporting requirements of the Securities Exchange Act in reliance upon Rule 144, but without compliance with restrictions, including the holding period requirements, contained in Rule 144. REGISTRATION STATEMENTS ON FORM S-8 Following this offering, we intend to file under the Securities Act one or more registration statements on Form S-8 to register all of the shares of our common stock eligible for this form of registration statement: - issuable upon exercise of outstanding options granted pursuant to our 1995 and 1997 stock option plans and 2000 equity incentive plan; - reserved for future option grants pursuant to individual option agreements or these plans; and - that we intend to offer for sale to our employees pursuant to our employee stock purchase plan. These registration statements are expected to become effective upon filing. Shares covered by these registration statements will be subject to vesting provisions and subject to expiration of the lock-up agreements. In the case of Rule 144 affiliates only, these shares will also remain subject to the restrictions of Rule 144 other than the holding period requirement. 60 UNDERWRITING Subject to the terms and conditions of an underwriting agreement, dated as of , 2000, the underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation, Chase Securities Inc., Wit SoundView Corporation and DLJDIRECT Inc. have severally agreed to purchase from us the respective number of shares of common stock shown opposite their names below.
NUMBER OF UNDERWRITERS SHARES Donaldson, Lufkin & Jenrette Securities Corporation......... Chase Securities Inc........................................ Wit SoundView Corporation................................... DLJDIRECT Inc............................................... --------- Total....................................................... =========
The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares of common stock offered by this prospectus require the approval by their counsel of legal matters and other conditions. The underwriters must purchase and accept delivery of all of the shares of common stock offered through this prospectus, other than those shares covered by the over-allotment option described below, if any are purchased. The underwriters propose to initially offer some of the shares of common stock directly to the public at the public offering price on the cover page of this prospectus and some of the shares of common stock to dealers, including the underwriters, at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and these dealers may re-allow, to other dealers a concession not in excess of $ per share. After the initial offering of the common stock, the representatives of the underwriters may change the public offering price and other selling terms at any time without notice. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The following table shows the underwriting fees to be paid to the underwriters by us in this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of common stock.
NO EXERCISE FULL EXERCISE ----------- ------------- Per Share............................................ Total................................................
We will pay the offering expenses, estimated to be $ . A prospectus in electronic format will be made available on websites maintained by DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation and Wit SoundView Corporation's affiliate, Wit Capital Corporation. Other than the prospectus in electronic format, the information on these websites relating to the offering is not part of this prospectus and has not been approved and/or endorsed by us or the underwriters, and should not be relied on by prospective investors. We have granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of additional shares of common stock at the public offering price less underwriting discounts and commissions. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with the offering. To the extent that the underwriters exercise this option, each underwriter will become obligated, under conditions specified in the underwriting agreement, to purchase its pro rata portion of 61 the additional shares based on that underwriter's percentage underwriting commitment as indicated in the preceding table. We have agreed to indemnify the underwriters against liabilities specified in the underwriting agreement, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make because of these liabilities. We, our officers, directors and stockholders holding approximately shares of common stock have agreed that, for a period of 180 days from the date of the final prospectus, we and they will not, subject to some exceptions, transfer or otherwise dispose of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock. These restrictions shall cease to apply to: (a) 25% of our shares of common stock beneficially owned by each of these persons on the date of the final prospectus upon the later to occur of (i) the end of the 90-day period after the date of the final prospectus or (ii) the second trading day following the first public release of our quarterly results after the date of the final prospectus; and (b) an additional 25% of our shares of common stock beneficially owned by each of these persons on the date of the final prospectus, upon the end of the 135-day period after the date of the final prospectus; if, in the case of both clauses (a) and (b): (x) the reported last sale price of the common stock on the Nasdaq National Market is at least twice the price per share in the offering for 20 of the 30 trading days ending on (A) in the case of (a) above, the later of (1) the last trading day of the 90-day period after the date of the final prospectus or (2) the second trading day following the first public release of our quarterly results after the date of the final prospectus and (B) in the case of clause (b) above, the last trading day of the 135-day after the date of the final prospectus; and (y) such person is not, and has not been since the date of the final prospectus, our employee; provided further, that such person agrees to give to us and Donaldson, Lufkin & Jenrette Securities Corporation written notice three business days prior to taking any of the actions described above and to execute any such action only through Donaldson, Lufkin & Jenrette Securities Corporation or any of its affiliates acting as broker, unless otherwise agreed in writing by Donaldson, Lufkin & Jenrette Securities Corporation. The underwriting agreement contains limited exceptions to these lock-up agreements. In addition, during this 180-day period, we have also agreed not to file any registration statement for, and each of our officers, directors and several of our stockholders have agreed not to make any demand for, or exercise any right for, the registration of any of our shares of common stock without Donaldson, Lufkin & Jenrette Securities Corporation's prior written consent. Prior to the offering, there has been no established trading market for the common stock. We and the underwriters negotiated the public offering price for the shares of common stock offered by this prospectus. The factors they considered in determining the public offering price included: - the history of and the prospects for the industry in which we compete; - our past and present operations; - our historical results of operations; - our prospects for future earnings; - the recent market prices of securities of generally comparable companies; and 62 - the general condition of the securities markets at the time of the offering. Other than in the United States, neither we nor the underwriters have taken any action that would permit a public offering of the shares of common stock offered by this prospectus in any jurisdiction where action for that purpose is required. The shares of common stock offered through this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements associated with the offer and sale of any the shares of common stock offered through this prospectus be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. You should inform yourself and observe any restrictions relating to the offering of the common stock and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of common stock offered in this prospectus in any jurisdiction in which an offer or a solicitation is unlawful. The Sprout Entities are affiliated with Donaldson, Lufkin & Jenrette Securities Corporation. The Sprout Entities have placed a sufficient number of their shares in a voting trust so that upon the closing of this offering, the Sprout Entities will exercise voting control over less than five percent of our outstanding common stock. The shares subject to the voting trust are held and voted by an independent third party, as voting trustee. An associated person of Donaldson, Lufkin & Jenrette Securities Corporation is a member of our board of directors. As a result of the offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot the offering, creating a syndicate short position. The underwriters may bid for and purchase shares of common stock in the open market to cover a syndicate short position or to stabilize the price of the common stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members if the syndicate repurchases previously distributed common stock in syndicate covering transactions, in stabilization transactions or in some other way or if Donaldson, Lufkin & Jenrette Securities Corporation receives a report that indicates clients of such syndicate members have "flipped" the common stock. These activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. The underwriters, at our request, have reserved for sale at the initial public offering price up to shares of common stock to be sold in this offering for sale to our employees, directors and other persons designated by us. The number of shares available for sale to the general public will be reduced to the extent that any reserved shares are purchased. Any reserved shares not so purchased will be offered by the underwriters on the same basis as the other shares offered through this prospectus. 63 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Cooley Godward LLP, Palo Alto, California and for the underwriters by Sullivan & Cromwell, Los Angeles, California. As of the date of this prospectus, GC&H Investments, an investment partnership composed of current and former partners and associates of Cooley Godward LLP, owns 21,174 shares of our common stock. EXPERTS The financial statements of Pharsight Corporation and Scientific Consulting, Inc. appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, to the extent indicated in their reports thereon also appearing elsewhere herein and in the registration statement. The financial statements have been included herein in reliance upon these reports given on the authority of Ernst & Young LLP as experts in accounting and auditing. ADDITIONAL INFORMATION We have filed with the SEC a Registration Statement, which term shall include any amendments thereto, on Form S-1 under the Securities Act with respect to our common stock offered hereby. This prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement. As used herein, the term "Registration Statement" means the initial registration statement, including the exhibits, schedules, financial statements and notes filed as part thereof and any and all amendments thereto. This prospectus omits information contained in the Registration Statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock offered hereby, reference is made to the Registration Statement. Statements herein concerning the contents of any contract or other document are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed with the SEC as an exhibit to the Registration Statement, each such statement being qualified by and subject to such reference in all respects. With respect to each such document filed with the SEC as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved. As a result of the offering hereunder, we will become subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, will file reports and other information with the SEC. Reports, registration statements, proxy statements, and other information filed by us with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of the material can be obtained at prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. We intend to furnish holders of our common stock with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited condensed financial information for the first three quarters of each fiscal year. We intend to furnish such other reports as we may determine or as may be required by law. 64 INDEX TO FINANCIAL STATEMENTS
PAGE PHARSIGHT CORPORATION Report of Ernst & Young LLP, Independent Auditors........... F-2 Balance Sheets.............................................. F-3 Statements of Operations.................................... F-5 Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)............................ F-6 Statements of Cash Flows.................................... F-7 Notes to Financial Statements............................... F-8 SCIENTIFIC CONSULTING, INC. Report of Ernst & Young LLP, Independent Auditors........... F-28 Statement of Income......................................... F-29 Statement of Cash Flows..................................... F-30 Notes to Financial Statements............................... F-31
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Pharsight Corporation We have audited the accompanying balance sheets of Pharsight Corporation as of March 31, 1998 and 1999, and the related statements of operations, redeemable convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the three years in the period ended March 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pharsight Corporation at March 31, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1999 in conformity with accounting principles generally accepted in the United States. San Jose, California /s/ ERNST & YOUNG LLP May 14, 1999 F-2 PHARSIGHT CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PRO FORMA STOCKHOLDERS' MARCH 31, EQUITY (DEFICIT) ------------------- DECEMBER 31, DECEMBER 31, 1998 1999 1999 1999 -------- -------- ------------ ---------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 2,701 $ 4,148 $ 5,660 Short-term investments.................................... 1,000 1,999 12,679 Accounts receivable, net of allowance for bad debts of $27 for March 31 1998, 1999 and December 31, 1999........... 448 745 2,658 Prepaids and other current assets......................... 331 300 534 ------- -------- -------- Total current assets........................................ 4,480 7,192 21,531 Property and equipment, net................................. 381 845 1,057 Intangible assets, net Core technology........................................... 241 880 551 Other..................................................... 247 651 216 ------- -------- -------- 488 1,531 767 Other assets................................................ 50 87 159 ------- -------- -------- Total assets................................................ $ 5,399 $ 9,655 $ 23,514 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 289 $ 213 $ 23 Accrued interest.......................................... -- 157 145 Accrued expenses.......................................... 164 143 328 Accrued compensation...................................... 136 404 912 Deferred revenue.......................................... 352 753 1,468 Current portion of notes payable.......................... 503 2,660 1,307 Current obligations under capital leases.................. 114 258 356 ------- -------- -------- Total current liabilities................................... 1,558 4,588 4,539 Notes payable............................................... 953 2,293 1,316 Obligations under capital leases............................ 268 519 813 Commitments Series C redeemable convertible preferred stock: Authorized shares--2,581,640 for March 31, 1998, 1999 and December 31, 1999 $ 6,109 Issued and outstanding shares--2,577,840 for March 31, 1998, 1999 and December 31, 1999 (Liquidation preference at December 31, 1999 of $6,109) (no shares pro forma).................................................. 7,176 7,665 8,032 Series D redeemable convertible preferred stock: Authorized shares--2,930,000 for March 31, 1999 and December 31, 1999 Issued and outstanding shares--2,877,254 for March 31, 1999 and December 31, 1999 (Liquidation preference at December 31, 1999 of $9,408) (no shares pro forma)...... -- 9,676 10,240 --
F-3 PHARSIGHT CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PRO FORMA STOCKHOLDERS' MARCH 31, EQUITY (DEFICIT) ------------------- DECEMBER 31, DECEMBER 31, 1998 1999 1999 1999 -------- -------- ------------ ---------------- (UNAUDITED) (UNAUDITED) Stockholders' equity (deficit): Series A convertible preferred stock, no par value: Authorized shares--1,935,274 for March 31, 1998, 1999 and December 31, 1999 Issued and outstanding shares--1,913,845 for March 31, 1998, 1999 and December 31, 1999 (Liquidation preference at December 31, 1999 of $1,897) (no shares pro forma)............................................ 1,787 1,787 1,787 -- Series B convertible preferred stock, no par value: Authorized shares--540,000 for March 31, 1998, 1999 and December 31, 1999 Issued and outstanding shares--540,000 for March 31, 1998, 1999 and December 31, 1999 (Liquidation preference at December 31, 1999 of $810) (no shares pro forma)............................................ 798 798 798 -- Series E convertible preferred stock, no par value: Authorized shares--2,777,778 for December 31, 1999 Issued and outstanding shares--2,777,778 for December 31, 1999 (Liquidation preference at December 31, 1999 of $20,000) (no shares pro forma)... -- -- 19,967 -- Common stock, no par value: Authorized shares--9,943,086, 15,013,086 and 19,235,308, for March 31, 1998, 1999 and December 31, 1999, respectively Issued and outstanding shares--3,040,166, 3,570,607, and 3,915,172 for March 31, 1998, 1999 and December 31, 1999, respectively (14,601,889 shares pro forma)...... 330 751 4,754 45,578 Deferred stock compensation............................... -- (239) (2,743) (2,743) Accumulated deficit....................................... (7,382) (18,078) (25,833) (25,833) Accumulated other comprehensive loss...................... -- -- (23) (23) Notes receivable from stockholders........................ (89) (105) (133) (133) ------- -------- -------- -------- Total stockholders' equity (deficit)........................ (4,556) (15,086) (1,426) $ 16,846 ------- -------- -------- ======== Total liabilities and stockholders' equity (deficit)........ $ 5,399 $ 9,655 $ 23,514 ======= ======== ========
The accompanying notes are an integral part of these financial statements. F-4 PHARSIGHT CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------------------------------ ------------------------- 1997 1998 1999 1998 1999 -------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: License and support...................... -- $ 649 $ 1,800 $ 1,315 $ 2,157 Services................................. -- 457 2,285 1,342 4,095 ------- ------- -------- ------- ------- Total revenues............................. -- 1,106 4,085 2,657 6,252 Costs and expenses: License and support...................... -- 279 748 596 762 Services................................. -- 435 1,772 1,051 2,280 Research and development................. 720 2,134 4,327 3,004 3,759 Sales and marketing...................... 816 1,366 2,292 1,592 2,773 General and administrative............... 438 744 1,105 707 1,332 Amortization of deferred stock compensation........................... -- -- 57 -- 1,391 Amortization of intangible assets........ -- 82 965 708 764 Acquired in-process research and development............................ -- 362 2,592 2,592 -- ------- ------- -------- ------- ------- Total operating expenses................... 1,974 5,402 13,858 10,250 13,061 ------- ------- -------- ------- ------- Loss from operations....................... (1,974) (4,296) (9,773) (7,593) (6,809) Other income (expense): Interest expense......................... (17) (44) (602) (454) (392) Interest income and other, net........... 57 216 482 231 377 ------- ------- -------- ------- ------- 40 172 (120) (223) (15) ------- ------- -------- ------- ------- Net loss................................... (1,934) (4,124) (9,893) (7,816) (6,824) Accretion on Series C and D redeemable convertible preferred stock.............. -- (448) (803) (492) (931) Series C redeemable convertible preferred stock dividend........................... -- (644) -- -- -- ------- ------- -------- ------- ------- Net loss applicable to common stockholders............................. $(1,934) $(5,216) $(10,696) $(8,308) $(7,755) ======= ======= ======== ======= ======= Basic and diluted net loss per share....... $ (2.57) $ (3.96) $ (4.41) $ (3.64) $ (2.50) Shares used to compute basic and diluted net loss per share....................... 752 1,318 2,424 2,281 3,107 Pro forma basic and diluted net loss per share.................................... $ (1.23) $ (0.64) Shares used to compute pro forma basic and diluted net loss per share............... 8,670 12,194
The accompanying notes are an integral part of these financial statements. F-5 PHARSIGHT CORPORATION STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
REDEEMABLE CONVERTIBLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ------------------- ------------------- ------------------- DEFERRED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION -------- -------- -------- -------- -------- -------- --------------- Balance at April 1, 1996........... -- $ -- 1,914 $ 1,787 1,730 $ 27 $ -- Issuance of common stock........... -- -- -- -- 334 38 -- Issuance of Series B convertible preferred stock, net of issuance costs............................ -- -- 540 798 -- -- -- Net loss........................... -- -- -- -- -- -- -- ----- ------- ----- ------- ----- ------ ------- Balance at March 31, 1997.......... -- -- 2,454 2,585 2,064 65 -- Issuance of common stock under employee benefit plans, net of repurchases...................... -- -- -- -- 25 15 -- Issuance of common stock in connection with acquisition and other............................ -- -- -- -- 952 250 -- Issuance of Series C redeemable convertible preferred stock, net of issuance costs................ 2,578 6,084 -- -- -- -- -- Deemed dividend on Series C preferred stock.................. -- 644 -- -- -- -- -- Accretion of preferred stock....... -- 448 -- -- -- -- -- Net loss........................... -- -- -- -- -- -- -- ----- ------- ----- ------- ----- ------ ------- Balance at March 31, 1998.......... 2,578 7,176 2,454 2,585 3,041 330 -- Issuance of common stock under employee benefit plans, net of repurchases...................... -- -- -- -- 284 57 -- Issuance of common stock in connection with acquisition...... -- -- -- -- 246 68 -- Issuance of Series C redeemable convertible preferred stock, net of issuance costs................ -- -- -- -- -- -- -- Issuance of Series D redeemable convertible preferred stock, net of issuance costs................ 2,877 9,362 -- -- -- -- -- Accretion of Series C preferred stock............................ -- 489 -- -- -- -- -- Accretion of Series D preferred stock............................ -- 314 -- -- -- -- -- Deferred stock compensation related to stock option grants........... -- -- -- -- -- 296 (296) Amortization of deferred stock compensation..................... -- -- -- -- -- -- 57 Net loss........................... -- -- -- -- -- -- -- ----- ------- ----- ------- ----- ------ ------- Balance at March 31, 1999.......... 5,455 17,341 2,454 2,585 3,571 751 (239) Issuance of Series E convertible preferred stock, net of issuance costs (unaudited)................ -- -- 2,778 19,967 -- -- -- Issuance of common stock under employee benefit plans, net of repurchases (unaudited).......... -- -- -- -- 344 108 -- Deferred stock compensation related to stock option grants (unaudited)...................... -- -- -- -- -- 3,895 (3,895) Amortization of deferred stock compensation (unaudited)......... -- -- -- -- -- -- 1,391 Accretion of Series C preferred stock (unaudited)................ -- 367 -- -- -- -- -- Accretion of Series D preferred stock (unaudited)................ -- 564 -- -- -- -- -- Comprehensive loss Unrealized loss on short-term investments (unaudited)........ -- -- -- -- -- -- -- Net loss (unaudited)............. -- -- -- -- -- -- -- Total comprehensive loss (unaudited)...................... -- -- -- -- -- -- -- ----- ------- ----- ------- ----- ------ ------- Balance at December 31, 1999 (unaudited)...................... 5,455 $18,272 5,232 $22,552 3,915 $4,754 $(2,743) ===== ======= ===== ======= ===== ====== ======= ACCUMULATED NOTES OTHER RECEIVABLE ACCUMULATED COMPREHENSIVE FROM DEFICIT LOSS STOCKHOLDERS TOTAL ------------- ---------------- ------------- -------- Balance at April 1, 1996........... $ (232) $ -- $ -- $ 1,582 Issuance of common stock........... -- -- (13) 25 Issuance of Series B convertible preferred stock, net of issuance costs............................ -- -- -- 798 Net loss........................... (1,934) -- -- (1,934) -------- ---- ----- -------- Balance at March 31, 1997.......... (2,166) -- (13) 471 Issuance of common stock under employee benefit plans, net of repurchases...................... -- -- -- 15 Issuance of common stock in connection with acquisition and other............................ -- -- (76) 174 Issuance of Series C redeemable convertible preferred stock, net of issuance costs................ -- -- Deemed dividend on Series C preferred stock.................. (644) -- -- (644) Accretion of preferred stock....... (448) -- -- (448) Net loss........................... (4,124) -- -- (4,124) -------- ---- ----- -------- Balance at March 31, 1998.......... (7,382) -- (89) (4,556) Issuance of common stock under employee benefit plans, net of repurchases...................... -- -- (16) 41 Issuance of common stock in connection with acquisition...... -- -- -- 68 Issuance of Series C redeemable convertible preferred stock, net of issuance costs................ -- -- -- -- Issuance of Series D redeemable convertible preferred stock, net of issuance costs................ -- -- -- -- Accretion of Series C preferred stock............................ (489) -- -- (489) Accretion of Series D preferred stock............................ (314) -- -- (314) Deferred stock compensation related to stock option grants........... -- -- -- -- Amortization of deferred stock compensation..................... -- -- -- 57 Net loss........................... (9,893) -- -- (9,893) -------- ---- ----- -------- Balance at March 31, 1999.......... (18,078) -- (105) (15,086) Issuance of Series E convertible preferred stock, net of issuance costs (unaudited)................ -- -- -- 19,967 Issuance of common stock under employee benefit plans, net of repurchases (unaudited).......... -- -- (28) 80 Deferred stock compensation related to stock option grants (unaudited)...................... -- -- -- -- Amortization of deferred stock compensation (unaudited)......... -- -- -- 1,391 Accretion of Series C preferred stock (unaudited)................ (367) -- -- (367) Accretion of Series D preferred stock (unaudited)................ (564) -- -- (564) Comprehensive loss Unrealized loss on short-term investments (unaudited)........ -- (23) -- (23) Net loss (unaudited)............. (6,824) -- -- (6,824) Total comprehensive loss (unaudited)...................... -- -- -- (6,847) -------- ---- ----- -------- Balance at December 31, 1999 (unaudited)...................... $(25,833) $(23) $(133) $ (1,426) ======== ==== ===== ========
The accompanying notes are an integral part of these financial statements. F-6 PHARSIGHT CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------------------------------ ------------------- 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- (UNAUDITED) OPERATING ACTIVITIES Net loss.................................................... $(1,934) $(4,124) $(9,893) $(7,816) $(6,824) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred stock compensation............... -- -- 57 -- 1,391 Depreciation.............................................. 31 89 275 218 334 Amortization.............................................. -- 82 965 708 764 Write-off of acquired in-process research and development............................................. -- 362 2,592 2,592 -- Changes in operating assets and liabilities: Accounts receivable..................................... (19) (116) (297) (431) (1,914) Other current assets.................................... (14) (245) 31 (71) (234) Intangible and other assets............................. 16 40 (37) (57) (72) Accounts payable........................................ 88 274 (76) (121) (190) Accrued expenses........................................ -- 53 (21) 158 185 Accrued compensation.................................... 40 92 268 26 508 Deferred revenue........................................ 25 187 401 713 716 Interest payable........................................ -- -- 157 -- (19) ------- ------- ------- ------- ------- Net cash used in operating activities....................... (1,767) (3,306) (5,578) (4,081) (5,355) INVESTING ACTIVITIES Purchases of property and equipment......................... (178) (263) (738) (621) (546) Proceeds from sale of property and equipment................ -- -- 86 161 -- Purchases of short-term investments......................... (982) (1,246) (2,000) -- (11,679) Maturities of short-term investments........................ 982 245 1,000 -- 978 Acquisition of MGA and SCI.................................. -- (638) (2,368) (2,368) -- ------- ------- ------- ------- ------- Net cash used in investing activities....................... (178) (1,902) (4,020) (2,828) (11,247) FINANCING ACTIVITIES Proceeds from lease line.................................... 259 211 527 138 602 Proceeds from issuance of notes payable..................... -- 1,000 2,000 2,000 -- Principal payments on notes payable......................... -- -- (753) (431) (2,330) Principal payments on capital lease obligations............. (24) (63) (132) (138) (205) Proceeds from the issuance of common stock.................. 25 15 41 41 80 Proceeds from the issuance of convertible preferred stock, net....................................................... 798 6,084 9,362 9,391 19,967 ------- ------- ------- ------- ------- Net cash provided by financing activities................... 1,058 7,247 11,045 11,001 18,114 ------- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents........ (887) 2,039 1,447 4,092 1,512 Cash and cash equivalents at the beginning of the period.... 1,549 662 2,701 2,701 4,148 ------- ------- ------- ------- ------- Cash and cash equivalents at the end of the period.......... $ 662 $ 2,701 $ 4,148 $ 6,793 $ 5,660 ======= ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES Notes receivable from stockholders.......................... $ 13 $ 76 $ 16 $ 10 $ 28 Property and equipment acquired under capital leases........ 259 211 527 138 602 Common stock issued for acquisition......................... -- 100 68 68 -- Common stock issued for noncompetition agreement............ -- 74 -- -- -- Note payable issued for acquisition......................... -- 456 2,250 2,250 -- Accretion of preferred stock................................ -- 448 803 492 931 Dividend on preferred stock................................. -- 644 -- -- -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest...................................... $ 17 $ 34 $ 388 $ 146 $ 358 Cash paid for taxes......................................... -- -- 2 2 2
The accompanying notes are an integral part of these financial statements. F-7 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. DESCRIPTION OF BUSINESS Pharsight Corporation ("Pharsight") was incorporated in California on April 4, 1995. Pharsight develops and markets integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. In December 1997, Pharsight acquired Scientific Consulting, Inc. ("SCI"), based in Cary, North Carolina. SCI's operations were merged into Pharsight at acquisition. In May 1998, Pharsight acquired certain assets, mainly source code, from Mitchell and Gauthier Associates, Inc. ("MGA"). Pharsight operates in only one business segment comprised of products and services to pharmaceutical and biotechnology companies to improve the drug development process. Sales are primarily generated in the United States through a direct field sales organization. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTERIM FINANCIAL INFORMATION The financial information as of December 31, 1999 and for the nine months ended December 31, 1998 and 1999 is unaudited, but includes all adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of Pharsight's operating results and cash flows for such period. Results for the nine months ended December 31, 1999 are not necessarily indicative of results to be expected for the full fiscal year 2000 or for any future period. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Pharsight's revenues are derived from two sources: product licenses and scientific and training services. Pharsight enters into arrangements for sale of licenses of software products and related maintenance contracts usually for a period of one year. Pharsight's revenue recognition policy is in accordance with Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition", as amended by Statement of Position No. 98-4, "Referral of the Effective Date of SOP 97-2, 'Software Revenue Recognition' " ("SOP 98-4"), and Statement of Position No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions" ("SOP 98-9"). For each arrangement, Pharsight determines whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. Pharsight considers all arrangements with payment terms extending beyond twelve months and other arrangements with payment terms longer than normal not to be fixed or determinable. If collectibility is not considered probable, revenue is recognized when the fee is collected. No customer has the right of return. ARRANGEMENTS CONSISTING OF LICENSE AND MAINTENANCE FEES. For those contracts that consist solely of license and maintenance fees, Pharsight recognizes license revenue based upon the residual method after all elements other than maintenance have been delivered as prescribed by SOP 98-9. Pharsight recognizes maintenance revenues over the term of the maintenance contract as vendor-specific objective evidence of fair value for maintenance exists. In accordance with paragraph 10 of SOP 97-2, F-8 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) vendor-specific objective evidence of fair value of maintenance is determined by reference to the price the customer will be required to pay when it is sold separately (that is, the renewal rate). Each license agreement offers additional maintenance renewal periods typically one year in duration at a stated price. Maintenance contracts are typically one year in duration. Revenue is recognized on software that is licensed on a per copy basis when each copy of the license requested by the customer is delivered. Pharsight has one international distributor. There is no right of return or price protection for sales to the international distributor. In situations where the international distributor has a purchase order from the end user that is immediately deliverable, Pharsight recognizes revenue on shipment to the distributor, if other criteria in SOP 97-2 are met, since Pharsight has no risk of concessions. Pharsight defers the revenue on shipments to the international distributor if the international distributor does not have a purchase order from an end user that is immediately deliverable or other criteria in SOP 97-2 are not met. ARRANGEMENTS CONSISTING OF SERVICES. Revenues from services are recognized as services are performed. For those contracts that include contract milestones or acceptance criteria, Pharsight recognizes revenue as such milestones are achieved or as such acceptance occurs. For contracts that are on a fixed price basis, Pharsight determines if losses should be recognized at the end of each accounting period. During the nine months ended December 31, 1999 Pharsight entered into arrangements that consist of licenses, maintenance, and scientific and training services. For these arrangements Pharsight assesses whether the service element of the arrangement is essential to the functionality of the other elements of the arrangement. In those instances where Pharsight determines that the service elements are essential to the other elements of the arrangement, Pharsight accounts for the entire arrangement using contract accounting. For those arrangements accounted for using contract accounting that do not include contractual milestones or other acceptance criteria, Pharsight will utilize the percentage of completion method based upon input measures of hours. For those contracts that include contract milestones or acceptance criteria, Pharsight will recognize revenue as such milestones are achieved or as such acceptance occurs. CAPITALIZED SOFTWARE Pharsight capitalizes eligible computer software costs as products achieve technological feasibility, subject to net realizable value considerations. Pharsight has defined technological feasibility as completion of a working model. As of March 31, 1998 and 1999, and December 31, 1999, such internal capitalizable costs were insignificant. Accordingly, Pharsight has charged all such internal costs to research and development expenses in the accompanying statements of operations. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of Pharsight's cash and cash equivalents, short-term investments, accounts receivable and payable, and accrued liabilities approximate their fair values due to their short-term nature. The fair values of the capital lease obligations and notes payable are estimated based on current interest rates available to Pharsight for debt instruments with similar terms, degrees of risk, and remaining maturities. The carrying values of these obligations approximate their respective fair values. F-9 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT COSTS Since January 1, 1999, Pharsight has accounted for internal use software costs, including website development costs, in accordance with Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). In accordance with SOP 98-1, Pharsight capitalizes costs to develop software for its website and other internal uses when preliminary development efforts are successfully completed and management has authorized and committed project funding and it is probable that the project will be completed and the software will be used as intended. Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed. Costs incurred for upgrades and enhancements that are probable to result in additional functionality are capitalized. All capitalized costs are amortized to expense over their expected useful lives. Costs required to be capitalized under SOP 98-1 have been insignificant to date. Prior to the adoption of SOP 98-1, costs incurred by Pharsight to develop, enhance, manage, monitor and operate its website were expensed as incurred. ADVERTISING Pharsight expenses the cost of advertising as incurred. These costs were insignificant in all periods presented. CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of highly liquid financial instruments consisting primarily of investments in money market funds, commercial paper, and treasury instruments with insignificant interest rate risk and with original maturities of three months or less at the time of acquisition. SHORT-TERM INVESTMENTS All investments are designated as available-for-sale and are carried at fair value, with unrealized gains and losses, net of tax, reported in stockholders' equity. The cost of securities sold is based on the specific identification method. Realized gains or losses and declines in value, if any, judged to be other-than-temporary, are reported in interest income and other, net. Short-term investments consist of securities available-for-sale that mature within 12 months of purchase. F-10 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Short-term investments consisted of the following:
GROSS GROSS FAIR UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------- ---------- ---------- -------- MARCH 31, 1998 Market auction rate senior note....................... $ 1,000 $ -- $ -- $ 1,000 ======= ========= ==== ======= MARCH 31, 1999 United States government and federal agency obligations......................................... $ 1,999 $ -- $ -- $ 1,999 ======= ========= ==== ======= DECEMBER 31, 1999 United States government and federal agency obligations......................................... $ 8,988 $ -- $(12) $ 8,976 Corporate notes....................................... 3,714 -- (11) 3,703 ------- --------- ---- ------- $12,702 $ -- $(23) $12,679 ======= ========= ==== =======
Proceeds from sales and maturities of securities available-for-sale were $982, $245, $1,000, and $978 for the years ended March 31, 1997, 1998, and 1999, and the nine months ended December 31, 1999, respectively. Gross realized sales and losses were insignificant for all periods presented. PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of three to five years. Property under capital leases is amortized over the lesser of the useful lives of the assets or the lease term. Amortization expense related to these assets is included in depreciation expense. INTANGIBLE ASSETS Intangible assets related to the purchase of SCI's business and the acquisition of certain assets of MGA which included core technology, assembled workforce, developed technology, goodwill, and covenants not to compete. The intangible assets are being amortized on a straight-line basis over periods ranging from two to three years. Intangibles consist of:
MARCH 31, ------------------- DECEMBER 31, 1998 1999 1999 -------- -------- ------------ Developed technology........................................ $223 $ 387 $ 387 Core technology............................................. 241 1,316 1,316 Assembled workforce......................................... 82 258 258 Goodwill.................................................... 24 117 117 Covenants not to compete.................................... -- 500 500 ---- ------- ------- 570 2,578 2,578 Accumulated amortization.................................... (82) (1,047) (1,811) ---- ------- ------- $488 $ 1,531 $ 767 ==== ======= =======
F-11 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION Pharsight accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and has adopted the "disclosure only" alternative described in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). INCOME TAXES Pharsight accounts for income taxes under the liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE Basic net loss per share is computed using the weighted-average number of vested outstanding shares of common stock. Diluted net loss per share is computed using the weighted-average number of shares of vested common stock outstanding and, when dilutive, unvested common stock outstanding, potential common shares from options and warrants to purchase common stock using the treasury stock method and from convertible securities using the as-if-converted basis. All potential common shares have been excluded from the computation of diluted net loss per share for all periods presented because the effect would be antidilutive. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued for nominal consideration, prior to the anticipated effective date of Pharsight's proposed initial public offering ("IPO"), are included in the calculation of basic and diluted net loss per share as if they were outstanding for all periods presented. To date, Pharsight has not had any issuances or grants for nominal consideration. Basic and diluted pro forma net loss per share have been computed as described above and give effect to the automatic conversion of preferred stock into common stock effective upon the closing of Pharsight's IPO as if their conversion occurred at the original date of issuance. F-12 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per share:
NINE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------------------------------------- ------------------------- 1997 1998 1999 1998 1999 ----------- ---------- ---------- ----------- ----------- Net loss........................ $ (1,934) $ (4,124) $ (9,893) $ (7,816) $ (6,824) Accretion of preferred stock.... -- (448) (803) (492) (931) Series C redeemable convertible preferred stock dividend...... -- (644) -- -- -- ----------- ---------- ---------- ----------- ----------- Net loss attributable to common stockholders.................. $ (1,934) $ (5,216) $ (10,696) $ (8,308) $ (7,755) =========== ========== ========== =========== =========== Basic and diluted: Weighted average common shares outstanding................. 1,880 2,313 3,399 3,343 3,730 Less weighted average common shares subject to repurchase.................. (1,128) (995) (975) (1,062) (623) ----------- ---------- ---------- ----------- ----------- Shares used to compute basic and diluted net loss per share.... 752 1,318 2,424 2,281 3,107 =========== ========== ========== =========== =========== Basic and diluted net loss per common share.................. $ (2.57) $ (3.96) $ (4.41) $ (3.64) $ (2.50) =========== ========== ========== =========== =========== Pro forma basic and diluted: Shares used above............... 2,424 3,107 Weighted average convertible preferred stock outstanding, as if converted............. 6,246 9,087 ---------- ----------- Shares used to compute pro forma basic and diluted net loss per share.............. 8,670 12,194 ========== =========== Pro forma basic and diluted net loss per share................ $ (1.23) $ (0.64) ========== ===========
F-13 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The number of unvested and potential common shares excluded from the calculation of diluted net loss per share at March 31, 1997, 1998 and 1999 and December 31, 1999 is detailed in the following table:
MARCH 31, ---------------------------------- DECEMBER 31, 1997 1998 1999 1999 ---------- --------- --------- ------------ Preferred stock................................. 2,273 4,728 6,246 9,088 Shares subject to repurchase.................... (1,128) (994) (975) (623) Outstanding options............................. 349 815 1,125 1,819 Warrants........................................ 21 57 303 297 ---------- --------- --------- ---------- 1,515 4,606 6,593 10,603 ========== ========= ========= ==========
These instruments were excluded because their effect would be antidilutive. UNAUDITED PRO FORMA INFORMATION If Pharsight's IPO as described in Note 16 is consummated, all of the preferred stock outstanding will be automatically converted into common stock. In addition, the Series C stockholders will be entitled to receive the original issue price of $2.37 per share. The unaudited pro forma convertible preferred stock and stockholders' equity at December 31, 1999 has been adjusted for the assumed conversion of preferred stock and the repayment of the Series C original issue price based on the shares of preferred stock outstanding at December 31, 1999. OTHER COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), requires Pharsight to display comprehensive income and its components as part of the financial statements. Other comprehensive income includes certain changes in equity that are excluded from net income. Pharsight's only component of other comprehensive income, is unrealized loss on short-term investments for the nine month period ended December 31, 1999. Comprehensive loss for this period was $6,847. Pharsight's comprehensive loss was the same as the net loss for all other periods presented. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS No. 133 establishes methods for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. Because Pharsight does not currently hold any derivative instruments and does not engage in hedging activities, the adoption of SFAS 133 is not expected to have a significant impact on its financial position, results of operations or cash flows. Pharsight will be required to implement SFAS 133, as amended, for the year ending March 31, 2001. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). Although Pharsight is currently evaluating the impact of the SAB 101, Pharsight does not believe its adoption will materially change Pharsight's financial position, results of operations, or cash flows. F-14 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 3. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and consist of the following:
MARCH 31, ------------------- DECEMBER 31, 1998 1999 1999 -------- -------- ------------ Furniture and fixtures...................................... $ 158 $ 274 $ 343 Computers and equipment..................................... 344 863 1,336 Leasehold improvements...................................... -- 27 31 ----- ------ ------ 502 1,164 1,710 Accumulated depreciation and amortization................... (121) (319) (653) ----- ------ ------ $ 381 $ 845 $1,057 ===== ====== ======
Property and equipment include assets acquired under capital lease obligations with a cost of approximately $421, $948, and $1,559 and accumulated amortization of $108, $242, and $525 at March 31, 1998 and 1999, and December 31, 1999, respectively. 4. BUSINESS AND OTHER ACQUISITIONS In December 1997, Pharsight purchased all of the outstanding shares of SCI, a developer of scientific software products for the pharmaceutical industry, for an aggregate purchase price (including direct acquisition costs) of $1,300. Pharsight acquired SCI for cash, a note payable, and 400 shares of Pharsight's common stock valued at an aggregate of $100. Pharsight has accounted for the acquisition using the purchase method, and the results of operations of SCI have been included in Pharsight's operations since acquisition. Assets acquired and liabilities assumed in the acquisition were as follows: Current assets and other tangible assets.................... $ 511 Liabilities assumed......................................... (144) Core technology............................................. 242 Acquired in-process research and development................ 362 Developed technology........................................ 223 Assembled workforce......................................... 82 Goodwill.................................................... 24 ------ Total....................................................... $1,300 ======
A valuation was completed for SCI by an independent appraiser. Using this information Pharsight made a final purchase price allocation. To determine the value of the developed technology, the expected future cash flow attributed to all existing technology was discounted, taking into account risks related to the characteristics and applications of the technology, existing and future markets, and assessments of the life cycle state of the technology. The value of the assembled workforce was derived by estimating the costs to replace the existing employees, including recruiting and hiring costs and training costs for each category of employee. Management determined that approximately $362 of the purchase price represented acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use. To estimate the value of the in-process research and development ("IPR&D"), the expected cash flows attributed to the completed portion of F-15 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. BUSINESS AND OTHER ACQUISITIONS (CONTINUED) the IPR&D were calculated. These cash flows considered the contribution of the core technology, the risks related to the development of the IPR&D and the percent complete as of the valuation date as well as the expected life cycle of the technology. Finally, the cash flows attributed to the completed portion of the IPR&D, net of the core technology contribution, were discounted to the present value to estimate the value of the IPR&D. This amount was expensed during the year ended March 31, 1998 as a non-recurring charge upon consummation of the acquisition. Goodwill is determined based on the residual difference between the amount paid and the values assigned to identified tangible and intangible assets. In December 1997, Pharsight began amortizing goodwill, developed technology and assembled workforce over an estimated useful life of two to three years. The pro forma unaudited results of operations for the years ended March 31, 1997 and 1998, assuming the purchase of SCI had been consummated as of April 1, 1996, follows:
1997 1998 -------- -------- Revenues.................................................... $ 737 $2,259 Net loss applicable to common shareholders.................. 1,799 5,020 Net loss per Common Share Basic..................................................... 2.39 3.81 Diluted................................................... 2.39 3.81
In May 1998, Pharsight purchased certain assets, mainly modeling and simulation technology, from MGA, a consulting and software development firm based in Concord, Massachusetts. MGA's software allows scientists and engineers, principally in the aerospace and defense industries, to simulate product performance. Assets acquired were as follows: Fixed assets................................................ $ 86 Core technology............................................. 1,084 Acquired in-process research and development................ 2,592 Developed technology........................................ 164 Assembled workforce......................................... 177 Goodwill.................................................... 93 Covenants not to compete.................................... 500 ------ Total....................................................... $4,696 ======
Pharsight has only derived insignificant revenues ($82 since May 1998) related to the acquisition of certain assets from MGA. These revenues were related to maintenance renewals from existing customers of MGA. Pharsight developed a new product that was released in February 2000 that used part of the modeling and simulation technology acquired from MGA. The development of the new product took approximately 21 months and Pharsight's research and development costs related to the project were approximately $2,200. Pharsight purchased these assets for cash of $2,000, promissory notes totaling $1,750 due in equal annual installments over the next two years, and 246 shares of Pharsight's common stock valued at an aggregate of $62. Pharsight also incurred $250 of expenses, $500 relating to non-compete agreements, and approximately $134 of acquisition costs. F-16 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. BUSINESS AND OTHER ACQUISITIONS (CONTINUED) A valuation was completed for MGA by an independent appraiser. Using this information, Pharsight made a final purchase price allocation. To determine the value of the developed technology, the expected future cash flow attributed to all existing technology was discounted, taking into account risks related to the characteristics and applications of the technology, existing and future markets, and assessments of the life cycle stage of technology. The value of the assembled workforce was derived by estimating the costs to replace the existing employees, including recruiting and hiring costs and training costs for each category of employee. Management determined that approximately $2,600 of the purchase price represented acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use. This amount was expensed during the nine months ended December 31, 1999 as a non-recurring charge upon consummation of the acquisition. Goodwill is assigned to identifiable tangible and intangible assets. In June 1999, Pharsight began amortizing goodwill, developed technology and assembled workforce over an estimated useful life of two to three years. 5. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject Pharsight to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, and trade receivables. Pharsight generally invests its excess cash in money market funds, commercial paper, corporate notes and obligations issued by or fully collateralized by the U.S. government or federal agencies. Pharsight places its investments with high-credit quality counterparties and, by policy, limits the amount of credit exposure to any one counterparty. Pharsight sells primarily to major pharmaceutical and biotechnology companies. Pharsight evaluates its customers' financial condition when necessary and routinely receives a deposit for services contracts at the time of sale. Pharsight generally requires no collateral from its customers. Pharsight analyzes the need for reserves for potential credit losses and records reserves when necessary. It maintains an allowance for doubtful accounts based on the expected collectibility of accounts receivable. To date, Pharsight has not experienced any significant losses with respect to these balances. For the year ended March 31, 1998, Pharsight added $27 to its allowance for doubtful accounts through charges to bad debt expense. There were no bad debt write-offs for the years ended March 31, 1998 and 1999 and the nine months ended December 31, 1999. Three customers comprised 20%, 17%, and 12% of accounts receivable at March 31, 1998, four customers comprised 15%, 13%, 11% and 10% of accounts receivable at March 31, 1999, and two customers comprised 41% and 10% of accounts receivable at December 31, 1999, respectively. Three customers accounted for 19%, 17%, and 16%, and 15%, 13%, and 10% of revenues for the years ended March 31, 1998 and 1999, respectively. For the nine months ended December 31, 1998, no customer accounted for more than 10% of revenues. One customer accounted for 29% of revenues for the nine months ended December 31, 1999. F-17 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 6. COMMITMENTS Pharsight leases its office facilities and certain equipment under noncancelable operating leases expiring through 2004. Minimum annual rental commitments, net of subleases, at March 31, 1999, are as follows: 2000........................................................ $ 902 2001........................................................ 889 2002........................................................ 799 2003........................................................ 797 2004........................................................ 390 ------ Total minimum payments...................................... $3,777 ======
Sublease income and future sublease payments are insignificant. Rent expense was $75 for the year ended March 31, 1997, $221 for the year ended March 31, 1998 and $676 for the year ended March 31, 1999. Rent expense was $732 for the nine months ended December 31, 1999. Pharsight is required to pay royalties based on license revenue or license shipments for some products. As of March 31, 1999, required minimum payments under such royalty agreements are as follows: 2000........................................................ $174 2001........................................................ 67 ---- Total minimum payments...................................... $241 ====
Royalty expense totaled $144 for the year ended March 31, 1999. Royalty expense for the year ended March 31, 1998 was insignificant. This amount has been included in cost of revenues. 7. DEBT Pharsight has entered into various noncancelable capital lease agreements for equipment and software through a series of sale-leaseback transactions. Capital lease obligations represent the present F-18 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 7. DEBT (CONTINUED) value of future rental payments under these leases. Future minimum lease payments under the capital leases at March 31, 1999 are as follows: 2000........................................................ $338 2001........................................................ 269 2002........................................................ 215 2003........................................................ 115 ---- Total minimum payments...................................... 937 Less amounts representing interest.......................... 160 ---- Present value of minimum lease payments..................... 777 Less current portion........................................ 258 ---- $519 ====
In December 1997, in conjunction with the acquisition of SCI, Pharsight issued a note payable to a stockholder and subsequently an officer of Pharsight for $456. The payments were due in annual increments of $228, plus accrued interest at 8% per year. The initial amount due was paid in 1998 and the remaining payment was made in December 1999. There were no restrictive covenants or collateral associated with this note. In March 1998, Pharsight issued a note payable to a financier for $1,000. Principal and interest, at 7.68% per year, are due in monthly payments of $31 from April 1, 1998 through March 1, 2001. All assets of Pharsight have been pledged as collateral for this outstanding debt. Pharsight is required to maintain compliance with certain financial and non-financial covenants associated with the $1,000 note payable. The note limits the payment of dividends without the noteholder's consent. In May 1998, in conjunction with the acquisition of MGA, Pharsight issued a note payable to a stockholder and entered into two non-compete agreements for a total of $2,250 bearing interest at 8% per year. In May 1999, Pharsight and the noteholders modified the note and one of the non-compete agreements. Pharsight agreed to make a payment of $480 on the note and non-compete agreement and the noteholder agreed to issue two new notes for the remaining balance owed on the original note and non-compete agreement which totaled $600. The notes bear interest at 10%. The note balances, together with accrued interest, were due and paid in September 1999. The remaining non-compete balance is due in May 2000. Maturities of long-term debt obligations as of March 31, 1999 are as follows: 2000........................................................ $2,660 2001........................................................ 2,293 ------ Total....................................................... $4,953 ======
F-19 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK Each share of Series C and Series D redeemable convertible preferred stock (Series C stock and Series D stock, respectively) is convertible, at the holder's option, into one share of common stock subject to certain antidilution adjustments. At conversion, the holders are entitled to any and all declared and unpaid dividends. Each share of preferred stock automatically converts to common stock upon the closing of an underwritten public offering of Pharsight's common stock with aggregate proceeds to Pharsight of at least $20,000 and a per share offering price of at least $9.63. In addition, each share of Series C preferred stock shall be entitled to receive the original issue price of $2.37 upon conversion. The Series C stock and Series D stock are also convertible at the election of at least 51% of the outstanding shares of Series C stock and at least 66 2/3% of the outstanding shares of Series D stock, respectively. Each share of Series C stock and Series D stock may be voted as if converted to common stock. Each share of Series C stock and Series D stock entitles the holder to receive, in preference to holders of common shares, cash dividends at an annual rate of $0.213 per share and $0.327 per share, respectively. Such dividends shall be payable when and if declared by the Board of Directors and shall be noncumulative. As of March 31, 1999 and December 31, 1999, no dividends have been declared. The Series C stock can be redeemed at any time after May 2002 (five years from issuance) upon the affirmative vote of at least 51% of the Series C stockholders. The Series D stock can be redeemed at any time after October 2003 (five years from issuance) upon the affirmative vote of at least 66 2/3% of the Series D stockholders. The Series C stock can be redeemed at a price of $2.37 per share plus any and all dividends accrued, declared, and unpaid and a payment amount equal to 8% of the original issue price of the Series C stock multiplied by the number of full years elapsed between the original issue date and the redemption date. The Series D stock can be redeemed at a price of $3.27 per share, plus any and all dividends accrued and unpaid and a payment amount equal to 8% of the original issue price of the Series D stock multiplied by the number of full years elapsed between the original issue date and the redemption date. For the Series C stock and the Series D stock, Pharsight is recording accretion of the excess redemption value ratably against earnings over the term of the redemption feature. The accretion resulted in a $448, $489, and $367 increase to the carrying value of the Series C stock for the year ended March 31, 1998 and 1999 and the nine months ended December 31, 1999, respectively. The accretion resulted in a $314 and $564 increase in the carrying value of the Series D stock for the year ended March 31, 1999 and the nine months ended December 31, 1999. The $644 included in the statement of operations for the year ended March 31, 1998 represents the fair value on the date of grant, based upon the Black-Scholes fair value method, of the common stock into which the Series C stock may be converted. See Note 9 for the rights and preferences of the Series C and Series D stockholders in the event of liquidation. 9. CONVERTIBLE PREFERRED STOCK Each share of Series A and B convertible preferred stock (Series A stock and B stock, respectively) is convertible, at the stockholder's option, into one share of common stock, subject to certain adjustments. Each series of preferred stock automatically converts to common stock upon either F-20 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 9. CONVERTIBLE PREFERRED STOCK (CONTINUED) the closing of an underwritten public offering of Pharsight's common stock with aggregate proceeds to Pharsight of at least $20,000 and a per share price of at least $9.63 or the election of the holders of at least 51% of the outstanding preferred stock. Each share of Series A stock and B stock may be voted as if converted to common stock. Each share of Series A stock and B stock entitles the holder to receive, in preference to holders of common shares, cash dividends at an annual rate of $0.098 and $0.15 per share, respectively. Such dividends shall be payable when and if declared by the Board of Directors and shall be noncumulative. As of March 31, 1999 and December 31, 1999, no dividends have been declared. Upon any liquidation event, including a liquidation, dissolution, or winding up of Pharsight, as well as certain mergers and acquisitions, the holders of the Series A, B, C, and D stock shall be paid, in preference to the holders of common stock, an amount equal to $0.98, $1.50, $2.37, and $3.27 per share, respectively, plus any and all accrued and unpaid dividends. In addition, the holders of the Series C stock shall be paid, in preference to the holders of common stock, a payment amount equal to 8% of the original issue price of the Series C stock multiplied by the number of full years elapsed between the original issue date and the liquidation date. If the liquidation event occurs prior to May 1, 1999, the remaining assets would be distributed pro rata to holders of common and preferred shares on an as-if-converted basis until the Series A, B, and D stockholders receive an aggregate of $2.94, $4.50, and $9.81 per share, respectively, inclusive of the respective liquidation preference amounts referred to above. After such amounts have been paid, the remaining assets would be distributed ratably to common and Series C stockholders on an as-if-converted basis. If the liquidation event occurs on or after May 1, 1999, the assets remaining after the distributions noted above would be distributed ratably to the holders of the common stock and the Series C stock, on an as-if-converted basis, only. 10. COMMON STOCK Pharsight is authorized to issue up to 15,013 shares of common stock. At March 31, 1999, a total of 3,571 shares of common stock were issued and outstanding. At March 31, 1999, common stock was reserved for future issuance as follows: Conversion of Series A preferred stock...................... 1,935 Conversion of Series B preferred stock...................... 540 Conversion of Series C preferred stock...................... 2,582 Conversion of Series D preferred stock...................... 2,877 Warrants outstanding........................................ 278 Future issuance for acquisition of SCI...................... 24 Stock option plans.......................................... 1,237 --------- 9,473 =========
Sales of Pharsight's common stock have been made pursuant to restricted stock purchase agreements containing provisions established by the Board of Directors. Pharsight has a right to repurchase the shares at the original sale price, which generally expires at the rate of 25% after one year and 2.0833% per month thereafter. F-21 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. COMMON STOCK (CONTINUED) For the year ended March 31, 1998, Pharsight has sold 654 shares. For the year ended March 31, 1999, Pharsight has sold 2,169 shares. At March 31, 1999, 673 shares were subject to repurchase. Pharsight loaned an officer $12 in July 1996 and $10 in June 1998 in connection with the purchase of common stock. Interest on each of these loans is 6.74% and 5.77% per year, respectively, and compounds annually. The principal and accrued interest on each loan is due in July 2001 and may be prepaid without penalty. The promissory notes will accelerate and become due and payable 30 days after the officer's employment is terminated for any reason. In addition, Pharsight loaned the officer $23 in 1999 to purchase additional shares of common stock. The interest on this loan is 6% per year, with the principal and accrued due in May 2003. This promissory note may be prepaid without penalty and will accelerate and become immediately due and payable should the officer's employment with us be terminated for any reason. All notes are full recourse and the shares of common stock purchased have been pledged as repayment of the loans. In January 1998 Pharsight loaned an officer $75 in connection with the purchase of common stock. The interest on this loan is 5.93% per year and compounds annually. The principal and accrued interest is due in December 2002 and may be prepaid without penalty. This promissory note will accelerate and become due and payable 90 days after the officer's employment is terminated. The note is full recourse and the shares of common stock purchased have been pledged as repayment of the loans. 11. WARRANTS In connection with equipment leases entered into in April, 1996, Pharsight issued warrants to purchase 21 shares of Series A convertible preferred stock at an exercise price of $0.98 per share. The warrants expire April 30, 2006. The fair value assigned to these warrants was immaterial. In connection with equipment leases entered into in November, 1998, Pharsight issued a warrant that entitles the holder to purchase 4 shares of Series C convertible redeemable preferred stock at an exercise price of $2.37 per share. The warrants expire November 7, 2004 or, if earlier, 3 years after an IPO of Pharsight's stock. The fair value assigned to these warrants was immaterial. In connection with various convertible promissory notes and loan agreements entered into throughout fiscal 1999, Pharsight issued warrants to purchase 278 shares of common stock at an exercise price ranging from $0.25 - $3.27 per share. The warrants expire on dates ranging from March 31, 2008 to February 26, 2009 or, if earlier, 5 years after an IPO of Pharsight's stock. The fair value assigned to these warrants was immaterial. 12. STOCK-BASED BENEFIT PLANS In May 1995, Pharsight adopted the 1995 Stock Option Plan (the "1995 Plan"), which provides for the granting of incentive stock options and nonqualified stock options to employees, directors, and consultants. Under the 1995 Plan, the Board of Directors determines the term of each award and the award price. In the case of incentive stock options, the exercise price may be established at an amount not less than the fair market value at the date of grant, while nonstatutory options may have exercise prices not less than 85% of the market value as of the date of grant. Options generally vest ratably F-22 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. STOCK-BASED BENEFIT PLANS (CONTINUED) over a four-year period commencing with the grant date and expire no later than ten years from the date of grant. In February 1997, Pharsight adopted the 1997 Stock Option Plan (the "1997 Plan"), which provides for the granting of incentive stock options and nonqualified stock options to employees, directors, and consultants. When the 1997 Plan was adopted, the 1995 Plan was terminated. All shares that had been authorized but which had not been granted were returned to the pool of unreserved shares of common stock. Rights and obligations of options granted under the 1995 plan were not impaired by the termination of the plan. Under the 1997 Plan, the Board of Directors determines the term of each award and the award price. In the case of incentive stock options, the exercise price may be established at an amount not less than the fair market value at the date of grant, while nonstatutory options may have exercise prices not less than 85% of the market value as of the date of grant. Options generally vest ratably over a four-year period commencing with the grant date and expire no later than ten years from the date of grant. Pharsight applies APB Opinion No. 25 and related interpretations in accounting for its employee stock options. Under APB Opinion No. 25, because the exercise price of Pharsight's employee stock options is not less than the fair value of the underlying stock on the date of grant, no compensation expense is recognized. A summary of Pharsight's stock option activity and related information for the years ended March 31, 1997, 1998 and 1999 and for the nine months ended December 31, 1999 is as follows:
WEIGHTED NUMBER OF AVERAGE OPTIONS EXERCISE PRICE OUTSTANDING PER SHARE ----------- -------------- Balance at March 31, 1996........................... 25 $0.10 Options granted..................................... 340 0.14 Options exercised................................... (1) 0.10 Options canceled.................................... (15) 0.10 ------- Balance at March 31, 1997........................... 349 0.14 Options granted..................................... 519 0.25 Options exercised................................... (29) 0.12 Options canceled.................................... (24) 0.11 ------- Balance at March 31, 1998........................... 815 0.21 Options granted..................................... 575 0.27 Options exercised................................... (183) 0.20 Options canceled.................................... (82) 0.22 ------- Balance at March 31, 1999........................... 1,125 0.24 Options granted..................................... 1,268 0.81 Options exercised................................... (508) 0.37 Options canceled.................................... (66) 0.25 ------- Balance at December 31, 1999........................ 1,819 $0.61 =======
F-23 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. STOCK-BASED BENEFIT PLANS (CONTINUED) At March 31, 1999 and December 31, 1999, 1,237 and 2,510 shares were authorized under the plans, respectively, and 113 and 439 options to purchase common stock were available for future option grants. In May 1999, an additional 855 shares were authorized under the 1997 plan. In September 1999, an additional 500 shares were authorized under the 1997 plan. The following table summarizes information about stock options outstanding and exercisable at March 31, 1999:
OPTIONS OUTSTANDING ------------------------------------------ OPTIONS EXERCISABLE WEIGHTED ---------------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE PRICE NUMBER EXERCISE PRICE RANGE OF EXERCISE PRICES PER SHARE OUTSTANDING LIFE PER SHARE EXERCISABLE PER SHARE - ----------------------------------- ----------- ----------- -------------- ----------- -------------- $0.10 - $0.15...................... 179 7.50 years $0.13 77 $0.13 $0.25 - $0.35...................... 945 8.93 years 0.26 184 0.25 --------- ------- 1,124 8.71 years $0.24 261 $0.21 ========= =======
Pharsight recorded deferred compensation of $296 and $3,895 for the year ended March 31, 1999 and the nine month period ended December 31, 1999. This amount represented the difference between the exercise price and the deemed fair value of Pharsight's common stock on the date the stock options were granted. Pharsight recorded amortization of deferred stock compensation of $57 during the year ended March 31, 1999 based on a graded vesting method. During the nine months ended December 31, 1999, Pharsight recorded amortization of deferred stock compensation of $1,391. At March 31, 1999 and December 31, 1999, Pharsight had a total of approximately $239 and $2,743, respectively, remaining to be amortized on a graded vesting method over the corresponding vesting period of each respective option, generally four years. Pro forma information regarding net loss is required by SFAS 123, which also requires that the information be determined as if Pharsight had accounted for its employee stock options under the fair value method of SFAS 123. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period using an accelerated straight-line method. The weighted average grant date fair value of options and restricted stock granted was $.08 F-24 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. STOCK-BASED BENEFIT PLANS (CONTINUED) per share and $.05 per share during both 1998 and 1999, respectively. The fair value of these options was estimated at the date of grant using the Black-Scholes method and the following assumptions.
RESTRICTED STOCK GRANTS OPTIONS YEARS ENDED MARCH 31, YEARS ENDED MARCH 31, ---------------------------------------- ---------------------------------------- 1997 1998 1999 1997 1998 1999 -------- -------- -------- -------- -------- -------- Expected life (years)...... 6.00 6.00 6.00 4.00 4.00 4.00 Expected stock price volatility............... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Risk-free interest rate.... 6.27% 6.11% 5.00% 5.89% 5.25% 5.00% Dividend yield............. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
YEARS ENDED MARCH 31, ------------------------------ 1997 1998 1999 -------- -------- -------- Net loss: As reported............................................... $(1,934) $(5,216) $(10,696) Pro forma................................................. (1,945) (5,230) (10,734) Basic and diluted net loss per share: As reported............................................... $ (2.57) $ (3.96) $ (4.41) Pro forma................................................. (2.59) (3.97) (4.43)
The option valuation models were developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because Pharsight's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 13. INCOME TAXES There was no provision for income taxes in any year presented due to the fact that Pharsight incurred net losses. As of March 31, 1999, Pharsight has federal net operating loss carryforwards of approximately $11,900 and federal research and development tax credit carryforwards of approximately $200. The net operating losses will expire at various dates beginning in 2011 through 2018, if not utilized. Utilization of the net operating losses may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. F-25 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 13. INCOME TAXES (CONTINUED) Significant components of deferred income taxes are as follows:
MARCH 31, ------------------------- 1998 1999 ----------- ----------- Deferred tax assets: Net operating loss carryforwards................. $ 2,100 $ 4,760 Research and development tax credits............. 200 200 Other............................................ 200 240 ----------- ----------- Total deferred tax assets........................ 2,500 5,200 Valuation allowance.............................. (2,500) (5,200) ----------- ----------- Net deferred tax assets........................ $ -- $ -- =========== ===========
The valuation allowance for deferred tax assets increased by approximately $800, $1,700 and $2,700 in the years ended March 31, 1997, 1998 and 1999. There were no offsets or other deductions to the valuation allowances in any year. 14. SEGMENT INFORMATION Effective April 1, 1998, Pharsight adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." Pharsight organizes and manages its products and services as a single product family, and accordingly, the required disclosures under SFAS No. 131 regarding their products and services are made to the face of the financial statements. The adoption of SFAS No. 131 had no effect on the financial position of Pharsight. Pharsight operates primarily within the United States. All of its assets are also located within the United States. 15. 401(K) PLAN Pharsight has a 401(k) plan which covers all employees. Pharsight's contributions to the plan are discretionary. Through December 31, 1999, Pharsight has made no contributions to the plan. 16. SUBSEQUENT EVENTS CONVERTIBLE PREFERRED STOCK In September 1999, Pharsight sold for cash a total of 2,778 shares of Series E convertible preferred stock for net proceeds of approximately $19,967. Shares of Series E convertible preferred stock are entitled to noncumulative dividends, when and if declared, of $0.72 per share and have a liquidation preference of $7.20 per share. The Series E convertible preferred shares have additional rights and privileges similar to those of the preferred stock discussed in Note 9. LINE OF CREDIT In January 2000, Pharsight obtained a $1,500 accounts receivable line of credit. Under the facility Pharsight may borrow up to 80% of its eligible accounts receivable. Interest at the bank's prime rate F-26 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 16. SUBSEQUENT EVENTS (CONTINUED) plus 1% is payable monthly with principal due January 2001 upon the line's expiration, if not extended. Pharsight has not yet borrowed under this line. REGISTRATION STATEMENT In April 2000, Pharsight's Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission to register shares of its common stock in connection with the proposed IPO. If the IPO is consummated under the terms presently anticipated, all of the currently outstanding shares of convertible preferred stock will be converted into shares of common stock upon the closing of the IPO. The effect of this conversion has been reflected in unaudited pro forma stockholders' equity in the accompanying balance sheet as of December 31, 1999. REINCORPORATION IN DELAWARE In April 2000, the Board of Directors approved the reincorporation of Pharsight in the State of Delaware. The reincorporation is expected to be approved by the stockholders prior to the closing date of Pharsight's IPO. AMENDED AND RESTATED CERTIFICATE OF INCORPORATION Immediately upon the completion of the IPO, Pharsight will amend and restate its Certificate of Incorporation to provide for authorized capital stock of 120,000 shares of common stock, $0.001 par value per share, and 5,000 shares, $0.001 par value per share, of undesignated preferred stock. STOCK-BASED BENEFIT PLANS In April 2000, Pharsight adopted the 2000 Equity Incentive Plan ("Incentive Plan") and the 2000 Employee Stock Purchase Plan ("Stock Purchase Plan"). Pharsight has reserved 4,000 and 600 shares of common stock for issuance under the Incentive and Stock Purchase Plans, respectively. F-27 REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS The Board of Directors Pharsight Corporation We have audited the accompanying statements of income and cash flows of Scientific Consulting, Inc. for the period from January 1, 1997 through December 17, 1997. These financial statements are the responsibility of Pharsight Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Scientific Consulting, Inc. for the period from January 1, 1997 through December 17, 1997, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP San Jose, California April 7, 2000 F-28 SCIENTIFIC CONSULTING, INC. STATEMENT OF INCOME FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 17, 1997 (IN THOUSANDS) Revenues: License and support....................................... $1,032 Services.................................................. 120 ------ 1,152 Costs and expenses: License and support....................................... 34 Services.................................................. 225 Research and development.................................. 449 Provision for bad debts................................... 54 General and administrative................................ 187 ------ 949 ------ Income from operations.................................... 203 Other income (expense): Interest expense.......................................... (9) Other, net................................................ 1 ------ (8) ------ Net income.................................................. $ 195 ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-29 SCIENTIFIC CONSULTING, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 17, 1997 (IN THOUSANDS) OPERATING ACTIVITIES Net income.................................................. $ 195 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 2 Provision for bad debts................................. 54 Changes in operating assets and liabilities: Receivables........................................... (301) Other assets.......................................... (4) Accounts payable...................................... 54 Accrued compensation.................................. 65 ------ Net cash provided by operating activities................... 65 INVESTING ACTIVITIES Capital expenditures........................................ (5) ------ Net cash used in investing activities....................... (5) FINANCING ACTIVITIES Distributions to shareholders............................... (60) Proceeds from notes payable................................. 49 ------ Net cash used in financing activities....................... (11) ------ Net increase in cash........................................ 49 Cash at beginning of period................................. 58 ------ Cash at end of period....................................... $ 107 ====== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest...................................... $ 8 ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-30 SCIENTIFIC CONSULTING, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 17, 1997 (IN THOUSANDS) 1. ORGANIZATION Scientific Consulting, Inc. ("the Company") designs, manufactures and markets a suite of specialty medical software products that are used by drug development companies operating in pharmaceutical, biotechnology and veterinarian medicine market segments. 2. SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from these estimates. REVENUE RECOGNITION The Company recognizes software revenue, primarily related to its software products, in accordance with American Institute of Certified Public Accountants Statement of Position 97-2 "Software Revenue Recognition." Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collectibility is probable. Service revenue is primarily consulting fees. Service revenue from consulting is recognized as the service is performed. Maintenance revenue is deferred and recognized on a straight-line basis over the life of the related contract, which is typically one year. CAPITALIZED SOFTWARE The Company capitalizes eligible computer software costs as products achieve technological feasiblity, subject to net realizable value considerations. The Company has defined technological feasibility as completion of a working model. As of December 17, 1997, such internal capitalizable costs were insignificant. Accordingly, the Company has charged all such internal costs to research and development expenses in the accompanying statements of operations. DEPRECIATION AND AMORTIZATION Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, which is between three and five years. INCOME TAXES The Company is an S Corporation for federal income tax purposes. Income and losses of the Company are passed through to its shareholders that bear the responsibility of paying federal income taxes on such amounts. Accordingly, the Company has not recognized any provision for federal income taxes. The Company is subject to state taxes. Such taxes were immaterial for the period presented. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. The Company performs ongoing credit evaluations of its customers and F-31 SCIENTIFIC CONSULTING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 17, 1997 (IN THOUSANDS) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) does not require collateral. Credit losses have not been significant and have been within management's expectations for all periods presented. 3. LEASE COMMITMENT The Company leases office space under a noncancelable operating lease. The lease agreement requires the Company to pay certain operating costs associated with the leased space in addition to the base rent. In addition, the lease contains an option for renewal. Future minimum lease payments under the lease at December 17, 1997, are as follows:
YEARS ENDING DECEMBER 31, - ------------------------- 1998........................................................ $36 1999........................................................ 36 --- $72 ===
Rent expense for the period from January 1, 1997 through December 17, 1997 totaled approximately $32. 4. SUBSEQUENT EVENT On December 17, 1997, Pharsight Corporation purchased all of the assets and assumed certain liabilities of the Company in exchange for cash and stock of Pharsight Corporation. The total purchase price was $1.3 million. The Company was subsequently dissolved. F-32 - --------------------------------------------------------- - --------------------------------------------------------- , 2000 [LOGO] SHARES OF COMMON STOCK ---------------------- P R O S P E C T U S ---------------------- DONALDSON, LUFKIN & JENRETTE CHASE H&Q WIT SOUNDVIEW DLJDIRECT INC. - --------------------------------------------------------- We have not authorized any dealer, salesperson or other person to give you written information other than this prospectus or to make representations as to matters not stated in the prospectus. You must not rely on unauthorized information. This prospectus is not an offer to sell these securities or our solicitation of your offer to buy the securities in any jurisdiction where that would not be permitted. The information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or any sale of these securities. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Until , 2000 (25 days after the date of this prospectus), all dealers that effect transactions in these shares of common stock may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions. - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by us in connection with the sale of our common stock being registered. All amounts shown are estimates except for the registration fee, the NASD filing fee and the Nasdaq National Market fee. Registration fee............................................ $ NASD filing fee............................................. Nasdaq National Market fee.................................. Blue sky qualification fees and expenses.................... Printing and engraving expenses............................. Legal fees and expenses..................................... Accounting fees and expenses................................ Transfer agent and registrar fees........................... Miscellaneous............................................... Total....................................................... $ =======
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the Delaware General Corporation Law, permits indemnification of officers, directors, and other corporate agents under certain circumstances and subject to certain limitations. The Registrant's Certificate and Bylaws provide that the Registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by the Delaware General Corporation Law, including circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, the Registrant has entered into separate indemnification agreements with its directors and executive officers which require the Registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service (other than liabilities arising from acts or omissions not in good faith or willful misconduct). These indemnification provisions and the indemnification agreements entered into between the Registrant and its executive officers and directors may be sufficiently broad to permit indemnification of the Registrant's executive officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The Underwriting Agreement to be filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act, or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. From March 31, 1997 through April 14, 2000 (or earlier if specifically noted), Pharsight has sold and issued the following unregistered securities: (1) From April 1996 through April 14, 2000, Pharsight has granted stock options to purchase 3,587,355 shares of common stock, at a weighted average exercise price of $2.00, to employees, consultants and directors pursuant to its 1995 stock option plan and 1997 stock option plan. Of these stock options, 289,332 shares have been cancelled or have lapsed without being exercised, 721,374 shares have been exercised, no shares have been repurchased and 2,576,649 shares remain outstanding. (2) In May 1997, Pharsight sold an aggregate of 2,577,840 shares of Series C preferred stock to 10 accredited investors at $2.37 per share, for an aggregate purchase price of $6,109,480. Shares of II-1 Series C preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series C preferred stock outstanding. (3) In October 1998, Pharsight sold an aggregate of 2,877,254 shares of Series D preferred stock to 20 accredited investors at $3.27 per share, for an aggregate purchase price of $9,408,620. Shares of Series D preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series D preferred stock outstanding. (4) In September 1999, Pharsight sold 2,777,778 shares of Series E preferred stock to McKesson HBOC, Inc. at $7.20 per share, for an aggregate purchase price of $20,000,000. Shares of Series E preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series E preferred stock outstanding. (5) In November 1997, Pharsight issued a warrant to purchase 3,800 shares of Series C preferred stock, at an exercise price of $2.37 per share to Comdusco, Inc., a lender, in connection with a lease financing arrangement. Shares of Series C preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series C preferred stock. (6) From September 1997 to August 1998, Pharsight issued an aggregate of 40,000 shares of common stock to Steven Brooks, a member of the board of directors, at a price of $0.25 per share. (7) From December 1997 to December 1999, Pharsight issued 700,000 shares of common stock to Daniel Weiner, an officer of Pharsight, and Glenn Stucker, Jr., the two shareholders of Scientific Consulting, Inc., as partial consideration for the outstanding capital stock of Scientific Consulting, Inc. (8) In January 1998, Pharsight issued 300,000 shares of common stock to Daniel Weiner, an officer, at a purchase price of $0.25 per share. (9) From March to June 1998, Pharsight issued warrants to purchase 137,131 shares of common stock, at an exercise price of $2.37 per share, to MMC/GATX Partnership No. 1, a lender, in connection with a loan agreement. (10) In May 1998, Pharsight issued an aggregate of 246,250 shares of common stock as partial consideration for the purchase of assets from Mitchell Gauthier and Associates, Inc. ("MGA"). These shares were issued, at the direction of MGA, to a total of eight individuals affiliated with MGA. (11) In May 1998, Pharsight issued warrants to purchase an aggregate of 127,089 shares of common stock to nine accredited investors in connection with a short term loan arrangement, at an exercise of $0.25 per share. (12) In June 1998, Pharsight issued 40,000 shares to Robin Kehoe, an officer, at a purchase price of $0.25 per share. (13) In November 1998, Pharsight issued an aggregate of 26,808 shares of common stock to two consultants, Steven Levene and Anthony Lautmann, at a purchase price of $0.35 per share. (14) In February 1999, Pharsight issued warrants to purchase an aggregate of 13,761 shares of common stock to two associated lenders, TransAmerica Business Credit Corporation and MM Ventures, at an exercise price of $3.27 per share. (15) From July 1999 through January 2000, Pharsight issued 22,478 shares to one employee as a commission for prior customer relationships transferred to Pharsight. The sales and issuances of securities described in paragraphs (1), (6), (8), (12) and (13) above were deemed to be exempt from registration under the Securities Act by virtue of Rule 701 promulgated thereunder in that they were offered and sold either pursuant to a written compensatory benefit plan or pursuant to a written contract relating to compensation, as provided by Rule 701. II-2 The sale and issuance of securities described in paragraphs (2), (3), (4), (5), (7), (9), (10), (11), (14) and (15) above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act or Regulation D promulgated thereunder. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 1.1(1) Form of Underwriting Agreement. 3.1 Amended and Restated Certificate of Incorporation of Pharsight, as currently in effect. 3.2 Amended and Restated Certificate of Incorporation of Pharsight, to be in effect immediately following the closing of the offering. 3.3 Bylaws of Pharsight, as currently in effect. 4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3. 4.2 Amended and Restated Investors' Rights Agreement, dated as of September 2, 1999, by and among Pharsight and the investors listed on Exhibit A attached thereto. 5.1(1) Opinion of Cooley Godward LLP. 10.1 Asset Purchase Agreement dated as of May 27, 1998, by and among Pharsight, Mitchell and Gauthier Associates, Inc., Edward E.L. Mitchell and Joseph S. Gauthier. 10.2 Lease on Suite 200 at 800 El Camino Real West, Mountain View, California, by and among the Company and Asset Growth Partners, dated as of June 11, 1998. 10.3 Co-Ownership Agreement, dated as of the May 27, 1998, by and between Pharsight and Mitchell and Gauthier Associates, Inc. 10.4 Noncompetition Agreement, dated as of May 27, 1998, by and between Pharsight and Joseph S. Gauthier. 10.5 Loan and Security Agreement, dated as of January 18, 2000, by and between Pharsight and Silicon Valley Bank. 10.6 Loan and Security Agreement, dated as of March 31, 1998, by and between Pharsight and MMC/GATX Partnership No. 1. 10.7 Loan and Security Agreement, dated as of June 8, 1998, by and between Pharsight and MMC/GATX Partnership No. l. 10.8 Master Loan and Security Agreement, dated as of February 26, 1999, by and between Pharsight and Transamerica Business Credit Corporation. 10.9(2) Information Product Distribution Agreement, dated as of June 25, 1999, by and between Pharsight and Protocare Sciences, Inc. 10.10(2) Database License Agreement, dated as of February 24, 2000 by and between Pharsight and Duke University. 10.11(2) Data Set License Agreement, dated as of March 1, 2000 by and between Pharsight and Lovelace Respiratory Research Institute. 10.12 Promissory note, dated as of July 25, 1996 from Robin Kehoe in favor of Pharsight. 10.13 Promissory note, dated as of June 2, 1998, from Robin Kehoe in favor of Pharsight. 10.14 Promissory note, dated as of June 15, 1999 from Robin Kehoe in favor of Pharsight. 10.15 Promissory note, dated as of January 25, 1998, from Daniel Weiner in favor of Pharsight. 10.16 Form of Indemnity Agreement to be entered into between Pharsight and each of its officers and directors. 10.17 Pharsight's 1997 Stock Option Plan. 10.18 Pharsight's 1995 Stock Option Plan. 10.19(1) Pharsight's 2000 Equity Incentive Plan and related documents. 10.20(1) Pharsight's 2000 Employee Stock Purchase Plan and related documents. 23.1 Consent of Ernst & Young, LLP. 23.2 Consent of Cooley Godward LLP. (See Exhibit 5.1.)
II-3
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 24.1 Power of Attorney. (See pages II-5 to II-6.) 27.1 Financial Data Schedule.
- ------------------------ (1) To be filed by amendment. (2) Confidential treatment has been requested for portions of this exhibit. (b) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they are not required, they are not applicable or the information is already included in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act, the information omitted from the form of this prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) That for purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. (3) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 15 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against these liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by a director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether the indemnification by it is against public policy as expressed in the Securities Act of 1933, and will be governed by the final adjudication of this issue. (4) To provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in the denomination and registered in the names required by the Underwriters to permit prompt delivery to each purchaser. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mountain View, State of California, on the 17th day of April, 2000. PHARSIGHT CORPORATION By: /s/ ARTHUR H. REIDEL ----------------------------------------- Arthur H. Reidel PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Arthur H. Reidel and Robin A. Kehoe, his or her true and lawful attorney-in-fact and agent, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments and registration statements filed pursuant to Rule 462) to the Registration Statement on Form S-1, and to any registration statement filed under Securities and Exchange Commission Rule 462, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE President, Chief Executive /s/ ARTHUR H. REIDEL Officer and Chairman of the -------------------------------------- Board (Principal Executive April 17, 2000 Arthur H. Reidel Officer) Vice President, Finance and /s/ ROBIN A. KEHOE Chief Financial Officer -------------------------------------- (Principal Financial and April 17, 2000 Robin A. Kehoe Accounting Officer) /s/ STEVEN D. BROOKS -------------------------------------- Director April 17, 2000 Steven D. Brooks /s/ PHILIPPE O. CHAMBON -------------------------------------- Director April 17, 2000 Philippe O. Chambon, M.D., Ph.D. /s/ ROBERT B. CHESS -------------------------------------- Director April 17, 2000 Robert B. Chess
II-5
SIGNATURE TITLE DATE /s/ DOUGLAS E. KELLY, M.D. -------------------------------------- Director April 17, 2000 Douglas E. Kelly, M.D. /s/ DEAN O. MORTON -------------------------------------- Director April 17, 2000 Dean O. Morton /s/ GARY L. NEIL, PH.D. -------------------------------------- Director April 17, 2000 Gary L. Neil, Ph.D. /s/ W. FERRELL SANDERS -------------------------------------- Director April 17, 2000 W. Ferrell Sanders
II-6 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 1.1(1) Form of Underwriting Agreement. 3.1 Amended and Restated Certificate of Incorporation of Pharsight, as currently in effect. 3.2 Amended and Restated Certificate of Incorporation of Pharsight, to be in effect immediately following the closing of the offering. 3.3 Bylaws of Pharsight, as currently in effect. 4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3. 4.2 Amended and Restated Investors' Rights Agreement, dated as of September 2, 1999, by and among Pharsight and the investors listed on Exhibit A attached thereto. 5.1(1) Opinion of Cooley Godward LLP. 10.1 Asset Purchase Agreement dated as of May 27, 1998, by and among Pharsight, Mitchell and Gauthier Associates, Inc., Edward E.L. Mitchell and Joseph S. Gauthier. 10.2 Lease on Suite 200 at 800 El Camino Real West, Mountain View, California, by and among the Company and Asset Growth Partners, dated as of June 11, 1998. 10.3 Co-Ownership Agreement, dated as of the May 27, 1998, by and between Pharsight and Mitchell and Gauthier Associates, Inc. 10.4 Noncompetition Agreement, dated as of May 27, 1998, by and between Pharsight and Joseph S. Gauthier. 10.5 Loan and Security Agreement, dated as of January 18, 2000, by and between Pharsight and Silicon Valley Bank. 10.6 Loan and Security Agreement, dated as of March 31, 1998, by and between Pharsight and MMC/GATX Partnership No. 1. 10.7 Loan and Security Agreement, dated as of June 8, 1998, by and between Pharsight and MMC/GATX Partnership No. l. 10.8 Master Loan and Security Agreement, dated as of February 26, 1999, by and between Pharsight and Transamerica Business Credit Corporation. 10.9(2) Information Product Distribution Agreement, dated as of June 25, 1999, by and between Pharsight and Protocare Sciences, Inc. 10.10(2) Database License Agreement, dated as of February 24, 2000 by and between Pharsight and Duke University. 10.11(2) Data Set License Agreement, dated as of March 1, 2000 by and between Pharsight and Lovelace Respiratory Research Institute. 10.12 Promissory note, dated as of July 25, 1996 from Robin Kehoe in favor of Pharsight. 10.13 Promissory note, dated as of June 2, 1998, from Robin Kehoe in favor of Pharsight. 10.14 Promissory note, dated as of June 15, 1999 from Robin Kehoe in favor of Pharsight. 10.15 Promissory note, dated as of January 25, 1998, from Daniel Weiner in favor of Pharsight. 10.16 Form of Indemnity Agreement to be entered into between Pharsight and each of its officers and directors. 10.17 Pharsight's 1997 Stock Option Plan. 10.18 Pharsight's 1995 Stock Option Plan. 10.19(1) Pharsight's 2000 Equity Incentive Plan and related documents. 10.20(1) Pharsight's 2000 Employee Stock Purchase Plan and related documents. 23.1 Consent of Ernst & Young, LLP. 23.2 Consent of Cooley Godward LLP. (See Exhibit 5.1.) 24.1 Power of Attorney. (See pages II-5 to II-6.) 27.1 Financial Data Schedule.
- ------------------------ (1) To be filed by amendment. (2) Confidential Treatment has been requested for portions of this exhibit. EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PHARSIGHT CORPORATION I. The name of this corporation is Pharsight Corporation. II. The address of the registered office of the corporation in the State of Delaware is 9 Lookerman Street, City of Dover, County of Kent, and the name of the registered agent of the corporation in the State of Delaware at such address is the National Registered Agents. III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. IV. A. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is one hundred thirty-two million (132,000,000) shares. one hundred and twenty million (120,000,000) shares shall be Common Stock, each having a par value of one-tenth of one cent ($.001). Twelve million (12,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($.001). B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law ("DGCL"), to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. C. One million nine hundred thirty-five thousand two hundred seventy-four (1,935,274) of the authorized shares of Preferred Stock are hereby designated "Series A Preferred Stock" (the "Series A Preferred"). Five hundred forty thousand (540,000) shares of the authorized shares of Preferred Stock are hereby designated "Series B Preferred Stock" (the 1. "Series B Preferred"). Two million five hundred eighty-one thousand six hundred forty (2,581,640) shares of the authorized shares of Preferred Stock are hereby designated "Series C Preferred Stock" (the "Series C Preferred"). Two million nine hundred thirty thousand (2,930,000) shares of the authorized shares of Preferred Stock are hereby designated "Series D Preferred Stock" (the "Series D Preferred"). Two million seven hundred seventy-seven thousand seven hundred seventy-eight (2,777,778) shares of the authorized Preferred Stock are hereby designated "Series E Preferred Stock" (the "Series E Preferred"). One million two hundred thirty-five thousand three hundred eight (1,235,308) shares of the authorized Preferred Stock remain undesignated (the "Undesignated Preferred"). The Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Undesignated Preferred are collectively referred to as the "Preferred Stock." D. The respective rights, preferences, privileges, restrictions and other matters relating to the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred are as follows: 1. DIVIDEND RIGHTS. a. Holders of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred, in preference to the holders of any other stock of the Company ("Junior Stock"), shall be entitled to receive, when and as declared by the Board of Directors, but only out of funds that are legally available therefor, cash dividends at the rate of ten percent (10%) of the "Original Issue Price" with respect to the Series A Preferred, the Series B Preferred, the Series C Preferred and Series E Preferred and at the rate of nine percent (9%) of the "Original Issue Price" per annum with respect to the Series C Preferred on each outstanding share of such series of Preferred Stock (as adjusted for any stock dividends, combinations, splits recapitalization and the like with respect to such shares). The Original Issue Price of the Series A Preferred shall be $0.98; the Original Issue Price of the Series B Preferred shall be $1.50; the Original Issue Price of the Series C Preferred shall be $2.37; the Original Issue Price of the Series D Preferred shall be $3.27; and the Original Issue Price of the Series E Preferred shall be $7.20. Such dividends shall be payable only when, as and if declared by the Board of Directors and shall be non-cumulative. b. So long as any shares of Preferred Stock shall be outstanding, no dividend, whether in cash or property, shall be paid or declared, nor shall any other distribution be made, on any Junior Stock, nor shall any shares of any Junior Stock of the Corporation be purchased, redeemed, or otherwise acquired for value by the Corporation (except for acquisitions of Common Stock by the Corporation pursuant to agreements which permit the Corporation to repurchase such shares upon termination of services to the Corporation or in exercise of the Corporation's right of first refusal upon a proposed transfer) until all dividends (set forth in Section 1(a) above) on the Preferred Stock shall have been paid or declared and set apart. In the event dividends are paid on any share of Common Stock, an additional dividend shall be paid with respect to all outstanding shares of Preferred Stock in an amount equal per share (on an as-if-converted to Common Stock basis) to the amount paid or set aside for each share of Common Stock. The provisions of this Section 1(b) shall not, however, apply to (i) a dividend payable in Common Stock, (ii) the acquisition of shares of any Junior Stock in exchange for shares of any other Junior Stock, or (iii) any repurchase of any outstanding securities of the Corporation that is 2. unanimously approved by the Corporation's Board of Directors. The holders of the Preferred Stock expressly waive their rights, if any, as described in California Corporations Code Sections 502, 503 and 506 as they relate to repurchase of shares pursuant to a written repurchase option upon termination of employment. 2. VOTING RIGHTS. a. GENERAL RIGHTS. Except as otherwise provided herein or as required by law, the Preferred Stock shall be voted equally with the shares of the Common Stock of the Company and not as a separate class, at any annual or special meeting of stockholders of the Company, and may act by written consent in the same manner as the Common Stock, in either case upon the following basis: each holder of shares of the Preferred Stock shall be entitled to such number of votes as shall be equal to the whole number of shares of Common Stock into which such holder's aggregate number of shares of the Preferred Stock are convertible (pursuant to Section 4 hereof) immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent. b. SEPARATE VOTE OF SERIES A PREFERRED. For so long as at least one hundred fifty thousand (150,000) shares of Series A Preferred remain outstanding, in addition to any other vote or consent required herein or by law, the vote or written consent of the holders of more than fifty percent (50%) of the outstanding Series A Preferred shall be necessary for effecting or validating the following actions: (i) Any amendment, alteration, or repeal of any provision of the Amended and Restated Certificate of Incorporation (the "Restated Certificate") or the Bylaws of the Corporation (including any filing of a Certificate of Determination), that materially alters or changes the rights, preferences, or privileges of the Series A Preferred; (ii) Any increase in the authorized number of shares of Series A Preferred; or (iii) Any authorization of any class of shares or series of equity securities of the Corporation ranking on a parity with or senior to the Series A Preferred in right of redemption, liquidation preference, voting or dividends. c. SEPARATE VOTE OF SERIES B PREFERRED. For so long as at least one hundred fifty thousand (150,000) shares of Series B Preferred remain outstanding, in addition to any other vote or consent required herein or by law, the vote or written consent of the holders of more than fifty percent (50%) of the outstanding Series B Preferred shall be necessary for effecting or validating the following actions: (i) Any amendment, alteration, or repeal of any provision of the Restated Certificate or the Bylaws of the Corporation (including any filing of a Certificate of Determination), that materially alters or changes the rights, preferences, or privileges of the Series B Preferred; (ii) Any increase in the authorized number of shares of Series B Preferred; or 3. (iii) Any authorization of any class of shares or series of equity securities of the Corporation ranking on a parity with or senior to the Series B Preferred in right of redemption, liquidation preference, voting or dividends. d. SEPARATE VOTE OF SERIES C PREFERRED. For so long as at least one hundred fifty thousand (150,000) shares of Series C Preferred remain outstanding, in addition to any other vote or consent required herein or by law, the vote or written consent of the holders of more than fifty percent (50%) of the outstanding Series C Preferred shall be necessary for effecting or validating the following actions: (i) Any amendment, alteration, or repeal of any provision of the Restated Certificate or the Bylaws of the Corporation (including any filing of a Certificate of Determination), that materially alters or changes the rights, preferences, or privileges of the Series C Preferred; (ii) Any increase in the authorized number of shares of Series C Preferred; or (iii) Any authorization of any class of shares or series of equity securities of the Corporation ranking on a parity with or senior to the Series C Preferred in right of redemption, liquidation preference, voting or dividends. e. SEPARATE VOTE OF SERIES D PREFERRED. For so long as at least one hundred fifty thousand (150,000) shares of Series D Preferred remain outstanding, in addition to any other vote or consent required herein or by law, the vote or written consent of the holders of more than fifty percent (50%) of the outstanding Series D Preferred shall be necessary for effecting or validating the following actions: (i) Any amendment, alteration, or repeal of any provision of the Restated Certificate or the Bylaws of the Corporation (including any filing of a Certificate of Determination), that materially alters or changes the rights, preferences, or privileges of the Series D Preferred; (ii) Any increase in the authorized number of shares of Series D Preferred; or (iii) Any authorization of any class of shares or series of equity securities of the Corporation ranking on a parity with or senior to the Series D Preferred in right of redemption, liquidation preference, voting or dividends. f. SEPARATE VOTE OF SERIES E PREFERRED. For so long as at least one hundred fifty thousand (150,000) shares of Series E Preferred remain outstanding, in addition to any other vote or consent required herein or by law, the vote or written consent of the holders of more than fifty percent (50%) of the outstanding Series E Preferred shall be necessary for effecting or validating the following actions: (i) Any amendment, alteration, or repeal of any provision of the Restated Certificate or the Bylaws of the Corporation (including any filing of a Certificate of 4. Determination), that materially alters or changes the rights, preferences, or privileges of the Series E Preferred; (ii) Any increase in the authorized number of shares of Series E Preferred; or (iii) Any authorization of any class of shares or series of equity securities of the Corporation ranking senior to the Series E Preferred as to redemption, liquidation preference, voting or dividend rights; provided, however, that greater liquidation preference or dividend rights that are merely proportional to the difference in original issue price of such equity securities from that of the Series E Preferred shall not cause such equity securities to be deemed senior to the Series E Preferred. g. SEPARATE VOTE OF PREFERRED STOCK. For so long as at least seven hundred fifty thousand (750,000) shares of Preferred Stock remain outstanding, in addition to any other vote or consent required herein or by law, the vote or written consent of the holders of more than sixty-six percent (66%) of the then outstanding shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred, voting together as one class, shall be necessary for effecting or validating the following actions: (i) Any approval by the Corporation or its stockholders of an Asset Transfer or Acquisition (each as defined in Section 3(c)) or any voluntary dissolution or liquidation of the Corporation; (ii) Any redemption, repurchase, or acquisition of any Common Stock of the Corporation (except for acquisitions of Common Stock by the Corporation pursuant to agreements which permit the Corporation to repurchase such shares upon termination of services to the Corporation or in exercise of the Corporation's right of first refusal upon a proposed transfer); or (iii) Any authorization of any debt securities of the Corporation other than (a) unsecured debt in an amount not to exceed five million dollars ($5,000,000), (b) equipment financing, or (c) any debt secured by accounts receivable, inventory, real property, fixtures, or equipment. 3. LIQUIDATION RIGHTS. a. Upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any Junior Stock, (i) the holders of Series A Preferred shall be entitled to be paid out of the assets of the Corporation an amount per share of Series A Preferred equal to the sum of (A) the Original Issue Price of the Series A Preferred, and (B) all declared and unpaid dividends on such shares of Series A Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for each share of Series A Preferred held by them; (ii) the holders of Series B Preferred shall be entitled to be paid out of the assets of the Corporation an amount per share of Series B Preferred equal to the sum of (A) the Original Issue Price of the Series B Preferred, and (B) all declared and unpaid dividends on such shares of Series B Preferred (as adjusted for any stock dividends, combinations, splits, 5. recapitalizations and the like with respect to such shares) for each share of Series B Preferred held by them; (iii) the holders of Series C Preferred shall be entitled to be paid out of the assets of the Corporation an amount per share of Series C Preferred equal to the sum of (A) the Original Issue Price of the Series C Preferred, (B) all declared and unpaid dividends on such shares of Series C Preferred and (C) an amount, if any, equal to eight percent (8%) of the Original Issue Price of the Series C Preferred times the number of full years elapsed between the original issue date of the Series C Preferred and the date of liquidation, dissolution or winding up of the Corporation (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for each share of Series C Preferred held by them; (iv) the holders of Series D Preferred shall be entitled to be paid out of the assets of the Corporation an amount per share of Series D Preferred equal to the sum of (A) the Original Issue Price of the Series D Preferred, and (B) all declared and unpaid dividends on such shares of Series D Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for each share of Series D Preferred held by them; and (v) the holders of Series E Preferred shall be entitled to be paid out of the assets of the Corporation an amount per share of Series E Preferred equal to the sum of (A) the Original Issue Price of the Series E Preferred, and (B) all declared and unpaid dividends on such shares of Series E Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for each share of Series E Preferred held by them. b. After the payment of the full liquidation preference of the Preferred Stock as set forth in Section 3(a) above, the remaining assets of the Corporation legally available for distribution, if any, shall be distributed ratably to the holders of the Common Stock and Series C Preferred. c. The following events shall be considered a liquidation under Section 3(a): (i) any consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Corporation immediately prior to such consolidation, merger or reorganization, own less than 50% of the resulting company's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions in which in excess of fifty percent (50%) of the Corporation's voting power is transferred (an "Acquisition"); or (ii) a sale, lease or other disposition of all or substantially all of the assets of the Corporation (an "Asset Transfer"). d. If, upon any liquidation, distribution, or winding up, the assets of the Corporation shall be insufficient to make payment in full to all holders of Preferred Stock of the liquidation preference set forth in Section 3(a), then such assets shall be distributed among the holders of Preferred Stock at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. e. In the event the Corporation proposes to distribute assets other than cash in connection with any liquidation, dissolution or winding up of the Corporation, the value 6. of the assets to be distributed to the holders of shares of the Preferred Stock shall be determined in good faith by the Board. Any securities not subject to investment letter or similar restrictions on free marketability shall be valued as follows: (i) If traded on a securities exchange, the value shall be deemed to be the average of the security's closing prices on such exchange over the thirty (30) day period ending three (3) days prior to the distribution; (ii) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the thirty (30) day period ending three (3) days prior to the distribution; and (iii) If there is no active public market, the value shall be the fair market value thereof as determined in good faith by the Board. The method of valuation of securities subject to investment letter or other restrictions on free marketability shall be adjusted to make an appropriate discount from the market value determined as above in clauses (i), (ii) or (iii) to reflect the fair market value thereof as determined in good faith by the Board. The holders of at least fifty-one percent (51%) of the outstanding Preferred Stock shall have the right to challenge any determination by the Board of fair market value pursuant to this Section 3(e), in which case the determination of fair market value shall be made by an independent appraiser selected jointly by the Board and the challenging parties, the cost of such appraisal to be borne equally by the Corporation and the challenging parties. 4. CONVERSION RIGHTS. The holders of the Preferred Stock shall have the following rights with respect to the conversion of the Preferred Stock into shares of Common Stock (the "Conversion Rights"): a. OPTIONAL CONVERSION. Subject to and in compliance with the provisions of this Section 4, and subject to the restriction set forth in Section 5(e) below, any shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred may, at the option of the holder, be converted at any time into fully-paid and nonassessable shares of Common Stock. The number of shares of Common Stock to which a holder of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred shall be entitled upon conversion shall be the product obtained by multiplying the "Series A Conversion Rate," "Series B Conversion Rate," "Series C Conversion Rate," "Series D Conversion Rate" or "Series E Conversion Rate" then in effect (determined as provided in Section 4(b)) by the respective number of shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred being converted. b. CONVERSION RATE. Subject to and in compliance with the provisions of this Section 4, and subject to the restriction set forth in Section 5(e) below, any shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred may, at the option of the holder, be converted at any time into fully-paid and nonassessable shares of Common Stock. The number of shares of Common Stock to which a 7. holder of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred shall be entitled upon conversion shall be the product obtained by multiplying the "Series A Conversion Rate," "Series B Conversion Rate," "Series C Conversion Rate," "Series D Conversion Rate" or "Series E Conversion Rate" then in effect (determined as provided in Section 4(b)) by the respective number of shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred being converted. c. CONVERSION PRICE. The conversion price for the Series A Preferred shall initially be the Original Issue Price of the Series A Preferred (the "Series A Conversion Price"), the conversion price for the Series B Preferred shall initially be the Original Issue Price of the Series B Preferred (the "Series B Conversion Price"), the conversion price for the Series C Preferred shall initially be the Original Issue Price of the Series C Preferred (the "Series C Conversion Price"), the conversion price for the Series D Preferred shall initially be the Original Issue Price of the Series D Preferred (the "Series D Conversion Price") and the conversion price for the Series E Preferred shall initially be the Original Issue Price of the Series E Preferred (the "Series E Conversion Price"). Such initial Series A Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price and Series E Conversion Price shall be adjusted from time to time in accordance with this Section 4. All references to the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price and Series E Conversion Price herein shall mean the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price and Series E Conversion Price as so adjusted. d. MECHANICS OF CONVERSION. Each holder of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred who desires to convert the same into shares of Common Stock pursuant to this Section 4 shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same. Such notice shall state the number of shares of such series of Preferred Stock being converted. Thereupon, the Corporation shall promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled (and, in the case of conversion of the Series C Preferred, cash receivable upon such conversion pursuant to Section 4(r), if any) and shall promptly pay in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Common Stock's fair market value determined by the Board of Directors as of the date of such conversion), any declared and unpaid dividends on the shares of such series of Preferred Stock being converted. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of such series of Preferred Stock to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. e. ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Corporation shall at any time or from time to time after the date that the first share of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred is issued (the "Original Issue Date" for such series) effect a subdivision of the outstanding Common Stock, the Series A Conversion Price, the Series B Conversion Price, the Series C 8. Conversion Price, the Series D Conversion Price and the Series E Conversion Price in effect immediately before that subdivision shall be proportionately decreased. Conversely, if the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock into a smaller number of shares, the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price, the Series D Conversion Price and the Series E Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 4(e) shall become effective at the close of business on the date the subdivision or combination becomes effective. f. ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS. If the Corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, in each such event the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price, the Series D Conversion Price and the Series E Conversion Price that are then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price, the Series D Conversion Price and the Series E Conversion Price then in effect by a fraction (1) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price, the Series D Conversion Price and the Series E Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price, the Series D Conversion Price and the Series E Conversion Price shall be adjusted pursuant to this Section 4(f) to reflect the actual payment of such dividend or distribution. g. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the Corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, in each such event provision shall be made so that the holders of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon (and, in the case of conversion of the Series C Preferred, cash receivable upon such conversion pursuant to Section 4(r), if any) the amount of other securities of the Corporation which they would have received had their shares of such series of Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 4 with respect to the rights of the holders of such series of Preferred Stock or with respect to such other securities by their terms. 9. h. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If at any time or from time to time after the Original Issue Date, the Common Stock issuable upon the conversion of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than an Acquisition or Asset Transfer as defined in Section 3(c) or a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 4), in any such event each holder of such series of Preferred Stock shall have the right thereafter to receive upon conversion of such series of Preferred Stock (in addition to any cash receivable upon such conversion of the Series C Preferred pursuant to Section 4(r)) the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Preferred Stock could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. i. REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If at any time or from time to time after the Original Issue Date, there is a capital reorganization of the Common Stock (other than an Acquisition or Asset Transfer as defined in Section 3(c) or a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section 4), as a part of such capital reorganization, provision shall be made so that the holders of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall thereafter be entitled to receive upon conversion of such series of Preferred Stock (in addition to any cash receivable upon such conversion of the Series C Preferred pursuant to Section 4(r)) the number of shares of stock or other securities or property of the Corporation to which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred after the capital reorganization to the end that the provisions of this Section 4 (including adjustment of the Series A Conversion Price, the Series B Conversion Price, Series C Conversion Price, the Series D Conversion Price and the Series E Conversion Price then in effect and the number of shares issuable upon conversion of such series of Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable. j. CERTIFICATE OF ADJUSTMENT. In each case of an adjustment or readjustment of the Series A Conversion Price, the Series B Conversion Price, Series C Conversion Price, the Series D Conversion Price or the Series E Conversion Price for the number of shares of Common Stock or other securities or property issuable upon conversion of such series of Preferred Stock, if the Preferred Stock is then convertible pursuant to this Section 4, the Corporation, at its expense, shall compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to each registered holder of such series of Preferred Stock at the holder's address as shown in the Corporation's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which 10. such adjustment or readjustment is based, including a statement of (1) the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price, the Series D Conversion Price and the Series E Conversion Price at the time in effect, and (2) the type and amount, if any, of other securities or property which at the time would be received upon conversion of such series of Preferred Stock. k. NOTICES OF RECORD DATE. Upon (i) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any Acquisition (as defined in Section 3(c)) or other capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation with or into any other corporation, or any Asset Transfer (as defined in Section 3(c)), or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the record date specified therein a notice specifying (1) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (2) the date on which any such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up is expected to become effective and a general description of the proposed transaction, and (3) the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up. l. AUTOMATIC CONVERSION. (1) Each share of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall automatically be converted into shares of Common Stock (a) (i) with respect to the Series A Preferred, at any time upon the affirmative vote of the holders of at least fifty-one percent (51%) of the outstanding shares of Series A Preferred, based on the then-effective Series A Conversion Price, (ii) with respect to the Series B Preferred, at any time upon the affirmative vote of the holders of at least fifty-one percent (51%) of the outstanding shares of Series B Preferred, based on the then-effective Series B Conversion Price, (iii) with respect to the Series C Preferred, at any time upon the affirmative vote of the holders of at least fifty-one percent (51%) of the outstanding shares of Series C Preferred, based on the then-effective Series C Conversion Price, (iv) with respect to the Series D Preferred, at any time upon the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of Series D Preferred, based on the then-effective Series D Conversion Price, or (v) with respect to the Series E Preferred, at any time upon the affirmative vote of the holders of at least fifty-one percent (51%) of the outstanding shares of Series E Preferred, based on the then-effective Series E Conversion Price, or (b) immediately upon the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation in which (i) the per share price is at least $10.88 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares), and (ii) the gross cash proceeds to the Corporation (before 11. underwriting discounts, commissions and fees) are at least $20,000,000 (a "Qualified Initial Public Offering"). (2) Upon the occurrence of the event specified in paragraph (1) above, the outstanding shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; PROVIDED, HOWEVER, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred are either delivered to the Corporation or its transfer agent as provided below, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Upon the occurrence of such automatic conversion of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred, the holders of such series of Preferred Stock shall surrender the certificates representing such shares at the office of the Corporation or any transfer agent for the Preferred Stock. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred surrendered were convertible on the date on which such automatic conversion occurred, and any declared and unpaid dividends shall be paid in accordance with the provisions of Section 4(d). m. FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Corporation shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Common Stock's fair market value (as determined by the Board) on the date of conversion. n. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of such series of Preferred Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of such series of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. 12. o. NOTICES. Any notice required by the provisions of this Section 4 shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Corporation. p. PAYMENT OF TAXES. The Corporation will pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Preferred Stock so converted were registered. q. NO DILUTION OR IMPAIRMENT. The Corporation shall not amend its Certificate of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but shall at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred against diminution or other impairment. r. PAYMENT UPON CONVERSION. Upon any of the following conversion events, each share of Series C Preferred shall be entitled to receive, in addition to the Common Stock receivable upon such conversion, an amount in cash equal to the Original Issue Price of the Series C Preferred: (i) automatic conversion of the Series C Preferred pursuant to clause (b) of Section 4(l)(1); (ii) provided that at least six (6) months have elapsed since the closing of the first public offering of Common Stock for the account of the Corporation pursuant to an effective registration statement under the Securities Act of 1933, as amended, automatic conversion of the Series C Preferred pursuant to clause (a)(iii) of Section 4(l)(1); or (iii) provided that at least six (6) months have elapsed since the closing of the first public offering of Common Stock for the account of the Corporation pursuant to an effective registration statement under the Securities Act of 1933, as amended, conversion of the Series C Preferred pursuant to Section 4(a). 5. REDEMPTION. a. The Corporation shall be obligated to redeem the Series C Preferred upon the vote of the holders of at least fifty-one percent (51%) of the then outstanding 13. shares of Series C Preferred to the extent it may lawfully do so, at any time after the fifth anniversary of the Original Issue Date for the Series C Preferred. The Corporation shall be obligated to redeem the Series D Preferred upon the vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then outstanding shares of Series D Preferred to the extent it may lawfully do so, at any time after the fifth anniversary of the Original Issue Date for the Series D Preferred. Such redemptions of the Series C Preferred or Series D Preferred shall be made in three (3) annual installments beginning sixty (60) days after the Corporation receives notice of such vote or on the date specified in such vote, whichever is later, and ending on the date two (2) years from such first redemption date (each a "Redemption Date"). The Corporation shall effect such redemptions on the applicable Redemption Date by paying in cash in exchange for each such share of Series C Preferred or Series D Preferred to be redeemed a sum equal to (A) the respective Original Issue Price per share of such Series C Preferred or Series D Preferred, plus (B) all accrued but unpaid dividends with respect to such share of Series C Preferred or Series D Preferred, plus (C) an amount, if any, equal to eight percent (8%) of the respective Original Issue Price of each such share of the Series C Preferred or Series D Preferred, times the number of full years elapsed between the respective Original Issue Date of the Series C Preferred or Series D Preferred and such Redemption Date (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares). The total amount to be paid for the Series C Preferred or Series D Preferred is hereinafter referred to as the "Redemption Price." The number of shares of Series C Preferred or Series D Preferred that the Corporation shall be required to redeem on any one Redemption Date shall be equal to the amount determined by dividing (i) the aggregate number of such shares of Series C Preferred or Series D Preferred outstanding immediately prior to such Redemption Date by (ii) the number of remaining Redemption Dates (including the Redemption Date to which such calculation applies). Shares subject to redemption pursuant to this Section 5(a) shall be redeemed from each such holder of Series C Preferred or Series D Preferred on a pro rata basis. b. At least thirty (30) days but no more than sixty (60) days prior to the first Redemption Date, the Corporation shall send by mail, first class postage prepaid, to all holders of Series C Preferred or Series D Preferred to be redeemed, as the case may be, a written notice (a "Redemption Notice") notifying such holders of the redemption to be effected on the Redemption Date and setting forth (i) the Redemption Price for the shares to be redeemed, and (ii) the place at which such holders may obtain payment of the Redemption Price upon surrender of their share certificates. If the Corporation does not have sufficient funds legally available to redeem all of the shares to be redeemed at the Redemption Date then it shall redeem such shares pro rata (based on the portion of the aggregate Redemption Price payable to them) to the extent possible and shall redeem the remaining shares to be redeemed as soon as sufficient funds are legally available. c. On or prior to the Redemption Date, the Corporation shall deposit the Redemption Price of all shares to be redeemed with a bank or trust company having aggregate capital and surplus in excess of $100,000,000, as a trust fund, with irrevocable instructions and authority to the bank or trust company to pay, on and after such Redemption Date, the Redemption Price of the shares to their respective holders upon the surrender of their share certificates. Any moneys deposited by the Corporation pursuant to this paragraph 5(c) for the redemption of shares thereafter converted into shares of Common Stock pursuant to Section 4 hereof no later than the fifth (5th) day preceding the Redemption Date shall be returned to the 14. Corporation forthwith upon such conversion. The balance of any funds deposited by the Corporation pursuant to this Section 5(c) remaining unclaimed at the expiration of one (1) year following such Redemption Date shall be returned to the Corporation promptly upon its written request. d. On or after such Redemption Date, each such holder of shares of Series C Preferred or Series D Preferred to be redeemed shall surrender such holder's certificates representing such shares to the Corporation in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by such certificates are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after such Redemption Date, unless there shall have been a default in payment of the Redemption Price or the Corporation is unable to pay the Redemption Price due to not having sufficient legally available funds, all rights of the holders of such shares as holders of Series C Preferred or Series D Preferred, as the case may be (except the right to receive the Redemption Price without interest upon surrender of their certificates), shall cease and terminate with respect to such shares, provided that in the event that such shares of Series C Preferred or Series D Preferred are not redeemed due to a default in payment by the Corporation or because the Corporation does not have sufficient legally available funds, such shares of Series C Preferred or Series D Preferred shall remain outstanding and shall be entitled to all of the rights and preferences provided herein. e. In the event of a call for redemption of any shares of Series C Preferred or Series D Preferred, the Conversion Rights (as defined in Section 4) for such Series C Preferred or Series D Preferred shall terminate as to the shares designated for redemption at the close of business on the fifth (5th) day preceding the Redemption Date, unless default is made in payment of the Redemption Price. 6. NO REISSUANCE OF PREFERRED STOCK. No share or shares of Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued. 7. NO PREEMPTIVE RIGHTS. Stockholders shall have no preemptive rights except as granted by the Company pursuant to written agreements. V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: 15. A. 1. MANAGEMENT OF BUSINESS The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors that shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. BOARD OF DIRECTORS a. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Act"), covering the offer and sale of Common Stock to the public (the "Initial Public Offering"), the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. During such time or times that the corporation is subject to Section 2115(b) of the California General Corporation Law ("CGCL"), this Section a.2.a of this Article V shall become effective and be applicable only when the corporation is a "listed" corporation within the meaning of Section 301.5 of the CGCL. b. In the event that the corporation is subject to Section 2115(b) of the CGCL AND is not a "listed" corporation or ceases to be a "listed" corporation under Section 301.5 of the CGCL, Section a. 2. a. of this Article V shall not apply and all directors shall be shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. c. No person entitled to vote at an election for directors may cumulate votes to which such person is entitled, unless, at the time of such election, the corporation is subject to Section 2115(b) of the CGCL AND is not a "listed" corporation or ceases to be a "listed" corporation under Section 301.5 of the CGCL. During this time, every stockholder entitled to vote at an election for directors may cumulate such stockholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which such stockholder's shares are otherwise entitled, or distribute the stockholder's votes on the same principle among as many candidates as such 16. stockholder thinks fit. No stockholder, however, shall be entitled to so cumulate such stockholder's votes unless (i) the names of such candidate or candidates have been placed in nomination prior to the voting and (ii) the stockholder has given notice at the meeting, prior to the voting, of such stockholder's intention to cumulate such stockholder's votes. If any stockholder has given proper notice to cumulate votes, all stockholders may cumulate their votes for any candidates who have been properly placed in nomination. Under cumulative voting, the candidates receiving the highest number of votes, up to the number of directors to be elected, are elected. Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3. REMOVAL OF DIRECTORS Removal of directors shall be governed as provided in the Bylaws of the corporation. 4. VACANCIES a. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. b. If at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Delaware Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in offices as aforesaid, which election shall be governed by Section 211 of the DGCL. c. At any time or times that the corporation is subject to Section 2115(b) of the CGCL, if, after the filling of any vacancy by the directors then in office who have been elected by stockholders shall constitute less than a majority of the directors then in office, then: 17. (i) Any holder or holders of an aggregate of five percent (5%) or more of the total number of shares at the time outstanding having the right to vote for those directors may call a special meeting of stockholders; or (ii) The Superior Court of the proper county shall, upon application of such stockholder or stockholders, summarily order a special meeting of stockholders, to be held to elect the entire board, all in accordance with Section 305(c) of the CGCL. The term of office of any director shall terminate upon that election of a successor. B. 1. BYLAW AMENDMENTS Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the voting stock of the corporation entitled to vote. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. 2. BALLOTS The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. ACTION BY STOCKHOLDERS No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws or by written consent of stockholders in accordance with the Bylaws prior to the closing of the Initial Public Offering and following the closing of the Initial Public Offering no action shall be taken by the stockholders by written consent. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. 4. ADVANCE NOTICE Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VI. A. The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or 18. C. omission to act giving rise to liability or indemnification. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph b. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the voting stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI, and VII. 19. EX-3.2 3 EXHIBIT 3.2 Exhibit 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PHARSIGHT CORPORATION I. The name of this corporation is Pharsight Corporation. II. The address of the registered office of the corporation in the State of Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the name of the registered agent of the corporation in the State of Delaware at such address is National Registered Agents, Inc. III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. IV. A. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is One Hundred Twenty Five Million (125,000,000) shares. One Hundred Twenty Million (120,000,000) shares shall be Common Stock, each having a par value of one tenth of one cent ($.001). Five Million (5,000,000) shares shall be Preferred Stock, each having a par value of one tenth of one cent ($.001). B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights (voting or otherwise) granted upon, and the qualifications, limitations or restrictions of, any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. V. 1. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. 1. Management of Business. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. Board of Directors. a. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Act"), covering the offer and sale of Common Stock to the public (the "Initial Public Offering"), the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. During such time or times that the corporation is subject to Section 2115(b) of the California General Corporation Law ("CGCL"), this Section A.2.a of this Article V shall become effective and be applicable only when the corporation is a "listed" corporation within the meaning of Section 301.5 of the CGCL. b. In the event that the corporation is subject to Section 2115(b) of the CGCL and is not a "listed" corporation or ceases to be a "listed" corporation under Section 301.5 of the CGCL, Section A. 2. a. of this Article V shall not apply and all directors shall be shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. c. No person entitled to vote at an election for directors may cumulate votes to which such person is entitled, unless, at the time of such election, the corporation is subject to Section 2115(b) of the CGCL and is not a "listed" corporation or ceases to be a "listed" corporation under Section 301.5 of the CGCL. During this time, every stockholder entitled to vote at an election for directors may cumulate such stockholder's votes 2. and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which such stockholder's shares are otherwise entitled, or distribute the stockholder's votes on the same principle among as many candidates as such stockholder thinks fit. No stockholder, however, shall be entitled to so cumulate such stockholder's votes unless (i) the names of such candidate or candidates have been placed in nomination prior to the voting and (ii) the stockholder has given notice at the meeting, prior to the voting, of such stockholder's intention to cumulate such stockholder's votes. If any stockholder has given proper notice to cumulate votes, all stockholders may cumulate their votes for any candidates who have been properly placed in nomination. Under cumulative voting, the candidates receiving the highest number of votes, up to the number of directors to be elected, are elected. Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3. Removal of Directors. Removal of directors shall be governed as provided in the Bylaws of the corporation. 4. Vacancies a. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. b. If at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Delaware Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in offices as aforesaid, which election shall be governed by Section 211 of the DGCL. c. At any time or times that the corporation is subject to Section 2115(b) of the CGCL, if, after the filling of any vacancy by the directors then in office who have been elected by stockholders shall constitute less than a majority of the directors then in office, then: 3. (i) Any holder or holders of an aggregate of five percent (5%) or more of the total number of shares at the time outstanding having the right to vote for those directors may call a special meeting of stockholders; or (ii) The Superior Court of the proper county shall, upon application of such stockholder or stockholders, summarily order a special meeting of stockholders, to be held to elect the entire board, all in accordance with Section 305(c) of the CGCL. The term of office of any director shall terminate upon that election of a successor. B. 1. Bylaw Amendments Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the voting stock of the corporation entitled to vote. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. 2. Ballots. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. Action by Stockholders. No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws or by written consent of stockholders in accordance with the Bylaws prior to the closing of the Initial Public Offering and following the closing of the Initial Public Offering no action shall be taken by the stockholders by written consent. 4. Advance Notice. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VI. A. The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. 4. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI and VII. 5. EX-3.3 4 EXHIBIT 3.3 Exhibit 3.3 BYLAWS OF PHARSIGHT CORPORATION __________________________________________________ (A DELAWARE CORPORATION) TABLE OF CONTENTS
PAGE ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . . . . .1 Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . . . . . .1 ARTICLE II CORPORATE SEAL. . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Section 3. Corporate Seal . . . . . . . . . . . . . . . . . . . . . . . . .1 ARTICLE III STOCKHOLDERS' MEETINGS. . . . . . . . . . . . . . . . . . . . . . . .1 Section 4. Place Of Meetings. . . . . . . . . . . . . . . . . . . . . . . .1 Section 5. Annual Meetings. . . . . . . . . . . . . . . . . . . . . . . . .1 Section 6. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . .3 Section 7. Notice Of Meetings . . . . . . . . . . . . . . . . . . . . . . .4 Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Section 9. Adjournment And Notice Of Adjourned Meetings . . . . . . . . . .5 Section 10. Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . .5 Section 11. Joint Owners Of Stock. . . . . . . . . . . . . . . . . . . . . .6 Section 12. List Of Stockholders . . . . . . . . . . . . . . . . . . . . . .6 Section 13. Action Without Meeting . . . . . . . . . . . . . . . . . . . . .6 Section 14. Organization . . . . . . . . . . . . . . . . . . . . . . . . . .7 ARTICLE IV DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Section 15. Number And Term Of Office. . . . . . . . . . . . . . . . . . . .7 Section 16. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Section 17. Classes of Directors . . . . . . . . . . . . . . . . . . . . . .8 Section 18. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Section 19. Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 20. Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 21. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 22. Quorum And Voting. . . . . . . . . . . . . . . . . . . . . . . 11 Section 23. Action Without Meeting . . . . . . . . . . . . . . . . . . . . 11 Section 24. Fees And Compensation. . . . . . . . . . . . . . . . . . . . . 12 Section 25. Committees . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 26. Organization . . . . . . . . . . . . . . . . . . . . . . . . . 13 i. TABLE OF CONTENTS (CONTINUED) PAGE ARTICLE V OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 27. Officers Designated. . . . . . . . . . . . . . . . . . . . . . 13 Section 28. Tenure And Duties Of Officers. . . . . . . . . . . . . . . . . 13 Section 29. Delegation Of Authority. . . . . . . . . . . . . . . . . . . . 15 Section 30. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 31. Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION. . . . . . . . . . . . . . . . . . . . . . 15 Section 32. Execution Of Corporate Instruments . . . . . . . . . . . . . . 15 Section 33. Voting Of Securities Owned By The Corporation. . . . . . . . . 15 ARTICLE VII SHARES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 34. Form And Execution Of Certificates . . . . . . . . . . . . . . 16 Section 35. Lost Certificates. . . . . . . . . . . . . . . . . . . . . . . 16 Section 36. Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 37. Fixing Record Dates. . . . . . . . . . . . . . . . . . . . . . 17 Section 38. Registered Stockholders. . . . . . . . . . . . . . . . . . . . 18 ARTICLE VIII OTHER SECURITIES OF THE CORPORATION . . . . . . . . . . . . . . . . 18 Section 39. Execution Of Other Securities. . . . . . . . . . . . . . . . . 18 ARTICLE IX DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 40. Declaration Of Dividends . . . . . . . . . . . . . . . . . . . 18 Section 41. Dividend Reserve . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE X FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 42. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE XI INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 43. Indemnification Of Directors, Executive Officers, Other Officers, Employees And Other Agents . . . . . . . . . . . . . 19 ARTICLE XII NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 44. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE XIII AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 45. Amendments.. . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE XIV LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . 24 ii. TABLE OF CONTENTS (CONTINUED) PAGE Section 46. Loans To Officers. . . . . . . . . . . . . . . . . . . . . . . 24
iii. BYLAWS OF PHARSIGHT CORPORATION (A DELAWARE CORPORATION) ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be in the City of Dover, County of Kent. SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II CORPORATE SEAL SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE III STOCKHOLDERS' MEETINGS SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. SECTION 5. ANNUAL MEETINGS. (a) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders: (i) pursuant to the corporation's notice of meeting of stockholders; (ii) by or at the direction of the Board of Directors; or (iii) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in the following paragraph, 1. who is entitled to vote at the meeting and who complied with the notice procedures set forth in Section 5. (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of Section 5(a) of these Bylaws, (i) the stockholder must have given timely notice thereof in writing to the Secretary of the corporation, (ii) such other business must be a proper matter for stockholder action under the Delaware General Corporation Law ("DGCL"), (iii) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the corporation with a Solicitation Notice (as defined in this Section 5(b)), such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the corporation's voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the corporation's voting shares reasonably believed by such stockholder or beneficial owner to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice, and (iv) if no Solicitation Notice relating thereto has been timely provided pursuant to this section, the stockholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section 5. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced more than thirty (30) days prior to or delayed by more than thirty (30) days after the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth: (A) as to each person whom the stockholder proposed to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner, (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, and (iii) 2. whether either such stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of the proposal, at least the percentage of the corporation's voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the corporation's voting shares to elect such nominee or nominees (an affirmative statement of such intent, a "Solicitation Notice"). (c) Notwithstanding anything in the second sentence of Section 5(b) of these Bylaws to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least one hundred (100) days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 5 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the corporation. (d) Only such persons who are nominated in accordance with the procedures set forth in this Section 5 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 5. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposal or nomination shall not be presented for stockholder action at the meeting and shall be disregarded. (e) Notwithstanding the foregoing provisions of this Section 5, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholders' meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Nothing in these Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation proxy statement pursuant to Rule 14a-8 under the 1934 Act. (f) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act. SECTION 6. SPECIAL MEETINGS. (a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). 3. At any time or times that the corporation is subject to Section 2115(b) of the California General Corporation Law ("CGCL"), stockholders holding fifty percent (50%) or more of the outstanding shares shall have the right to call a special meeting of stockholders only as set forth in Section 18(c) herein. (b) If a special meeting is properly called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the Chief Executive Officer, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. If the notice is not given within one hundred (100) days after the receipt of the request, the person or persons properly requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. (c) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation's notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the corporation who is a stockholder of record at the time of giving notice provided for in these Bylaws who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 6(c). In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporation's notice of meeting, if the stockholder's notice required by Section 5(b) of these Bylaws shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the one hundred twentieth (120th) day prior to such special meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of 4. objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. SECTION 8. QUORUM. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, in all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of the votes cast by the holders of shares of such class or classes or series shall be the act of such class or classes or series. SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 10. VOTING RIGHTS. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. 5. SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the DGCL, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest. SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present. SECTION 13. ACTION WITHOUT MEETING. (a) Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. (b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the corporation in the manner herein required, written consents signed by a sufficient number of stockholders to take action are delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. (c) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented 6. in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of stockholders to take action were delivered to the corporation as provided in Section 228 (c) of the DGCL. If the action which is consented to is such as would have required the filing of a certificate under any section of the DGCL if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written consent has been given in accordance with Section 228 of the DGCL. (d) Notwithstanding the foregoing, no such action by written consent may be taken following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock of the corporation (the "Initial Public Offering"). SECTION 14. ORGANIZATION. (a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. ARTICLE IV DIRECTORS SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter 7. as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. SECTION 16. POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. SECTION 17. CLASSES OF DIRECTORS. (a) Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the Initial Public Offering, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. During such time or times that the corporation is subject to Section 2115(b) of the CGCL, this Section 17(a) shall become effective and apply only when the corporation is a "listed" corporation within the meaning of Section 301.5 of the CGCL. (b) In the event that the corporation is unable to have a classified Board of Directors under applicable law(1), Section 17(a) of these Bylaws shall not apply and all directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. (c) No stockholder entitled to vote at an election for directors may cumulate votes to which such stockholder is entitled, unless, at the time of the election, the corporation (i) is subject to Section 2115(b) of the CGCL and (ii) is not or ceases to be a "listed" corporation under Section 301.5 of the CGCL. During this time, every stockholder entitled to vote at an election for directors may cumulate such stockholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which such stockholder's shares are otherwise entitled, or distribute the stockholder's votes on the same principle among as many candidates as such stockholder thinks fit. No stockholder, however, shall be entitled to so cumulate such stockholder's votes unless (i) the names of such candidate or candidates have been placed in nomination prior to the voting and (ii) the stockholder has given notice at the meeting, prior to the voting, of such stockholder's intention to cumulate such stockholder's votes. If any stockholder has given proper notice to cumulate votes, all - ---------------------- (1) [NOTE THAT WHILE A FOREIGN CORPORATION SUBJECT TO CGCL SECTION 2115 MAY HAVE A CLASSIFIED BOARD UNDER CGCL SECTION 301.5 IF IT IS A "LISTED" CORPORATION, THERE IS AN ADDITIONAL REQUIREMENT REGARDING THE NUMBER OF DIRECTORS NECESSARY TO HAVE A CLASSIFIED BOARD. SECTION 301.5(b) STATES THAT TO HAVE A TWO-CLASS BOARD, THE COMPANY MUST HAVE AT LEAST SIX AUTHORIZED DIRECTORS AND TO HAVE A THREE-CLASS BOARD, THE COMPANY MUST HAVE AT LEAST NINE AUTHORIZED DIRECTORS. MANY OF OUR COMPANIES WILL NOT MEET THE NINE DIRECTOR REQUIREMENT AND WILL NO BE ABLE TO HAVE A THREE-CLASS BOARD.] 8. stockholders may cumulate their votes for any candidates who have been properly placed in nomination. Under cumulative voting, the candidates receiving the highest number of votes, up to the number of directors to be elected, are elected. Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. SECTION 18. VACANCIES. (a) Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Section 18 in the case of the death, removal or resignation of any director. (b) If at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Delaware Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in offices as aforesaid, which election shall be governed by Section 211 of the DGCL. (c) At any time or times that the corporation is subject to Section 2115(b) of the CGCL, if, after the filling of any vacancy, the directors then in office who have been elected by stockholders shall constitute less than a majority of the directors then in office, then (1) Any holder or holders of an aggregate of five percent (5%) or more of the total number of shares at the time outstanding having the right to vote for those directors may call a special meeting of stockholders; or (2) The Superior Court of the proper county shall, upon application of such stockholder or stockholders, summarily order a special meeting of stockholders, to be held to elect the entire board, all in accordance with Section 305(c) of the CGCL. The term of office of any director shall terminate upon that election of a successor. 9. SECTION 19. RESIGNATION. Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. SECTION 20. REMOVAL. (a) During such time or times that the corporation is subject to Section 2115(b) of the CGCL, the Board of Directors or any individual director may be removed from office at any time without cause by the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote on such removal; provided, however, that unless the entire Board is removed, no individual director may be removed when the votes cast against such director's removal, or not consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively at an election which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of such director's most recent election were then being elected. (b) Following any date on which the corporation is no longer subject to Section 2115(b) of the CGCL and subject to any limitations imposed by law, the Board of Directors or any individual director may be removed from office at any time without cause by the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote on such removal. SECTION 21. MEETINGS. (a) ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be held immediately before or after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) REGULAR MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may be held at any time or date and at any place within or without the State of Delaware which has been designated by the Board of Directors and publicized among all directors. No formal notice shall be required for regular meetings of the Board of Directors. (c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place 10. within or without the State of Delaware whenever called by the Chairman of the Board, the President or any two of the directors (d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (e) NOTICE OF MEETINGS. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting, or sent in writing to each director by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (f) WAIVER OF NOTICE. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 22. QUORUM AND VOTING. (a) Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 43 hereof, for which a quorum shall be one-third of the exact number of directors fixed from time to time in accordance with the Certificate of Incorporation, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; PROVIDED, HOWEVER, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all 11. members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. SECTION 25. COMMITTEES. (a) EXECUTIVE COMMITTEE. The Board of Directors may appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any bylaw of the corporation. (b) OTHER COMMITTEES. The Board of Directors may, from time to time, appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws. (c) TERM. Each member of a committee of the Board of Directors shall serve a term on the committee coexistent with such member's term on the Board of Directors. The Board of Directors, subject to any requirements of any outstanding series of preferred Stock and the provisions of subsections (a) or (b) of this Bylaw, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. 12. (d) MEETINGS. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. SECTION 26. ORGANIZATION. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President (if a director), or if the President is absent, the most senior Vice President (if a director), or, in the absence of any such person, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, any Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. ARTICLE V OFFICERS SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the Controller, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. SECTION 28. TENURE AND DUTIES OF OFFICERS. (a) GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any 13. time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. If there is no President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 28. (c) DUTIES OF PRESIDENT. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. Unless some other officer has been elected Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. (d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (e) DUTIES OF SECRETARY. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and 14. perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. SECTION 31. REMOVAL. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person 15. authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President. ARTICLE VII SHARES OF STOCK SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or othe special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to agree to indemnify the corporation in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. 16. SECTION 36. TRANSFERS. (a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL. SECTION 37. FIXING RECORD DATES. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall, subject to applicable law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the adjourned meeting. (b) Prior to the Initial Public Offering, in order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to 17. corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII OTHER SECURITIES OF THE CORPORATION SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; PROVIDED, HOWEVER, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. 18. ARTICLE IX DIVIDENDS SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation and applicable law. SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X FISCAL YEAR SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. ARTICLE XI INDEMNIFICATION SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. (a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify its directors and executive officers (for the purposes of this Article XI, "executive officers" shall have the meaning defined in Rule 3b-7 promulgated under the 1934 Act) to the fullest extent not prohibited by the DGCL or any other applicable law; PROVIDED, HOWEVER, that the corporation may modify the extent of such indemnification by individual contracts with its directors and executive officers; and, PROVIDED, FURTHER, that the corporation shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the DGCL or any other applicable law or (iv) such indemnification is required to be made under subsection (d). (b) EMPLOYEES AND OTHER AGENTS. The corporation shall have power to indemnify its other officers, employees and other agents as set forth in the DGCL or any other applicable law. The Board of Directors shall have the power to delegate the determination of 19. whether indemnification shall be given to any such person except executive officers to such officers or other persons as the Board of Directors shall determine. (c) EXPENSES. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or executive officer, of the corporation, or is or was serving at the request of the corporation as a director or executive officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Section 43 or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Section 43, no advance shall be made by the corporation to an executive officer of the corporation (except by reason of the fact that such executive officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. (d) ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and executive officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or executive officer. Any right to indemnification or advances granted by this Section 43 to a director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the DGCL or any other applicable law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an executive officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such executive officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to 20. have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the DGCL or any other applicable law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or executive officer to enforce a right to indemnification or to an advancement of expenses hereunder, the buden of proving that the director or executive officer is not entitled to be indemnified, or to such advancement of expenses, under this Section 43 or otherwise shall be on the corporation. (e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any applicable statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law, or by any other applicable law. (f) SURVIVAL OF RIGHTS. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) INSURANCE. To the fullest extent permitted by the DGCL or any other applicable law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Section 43. (h) AMENDMENTS. Any repeal or modification of this Section 43 shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and executive officer to the full extent not prohibited by any applicable portion of this Section 43 that shall not have been invalidated, or by any other applicable law. If this Section 43 shall be invalid due to the application of the indemnification provisions of another jurisdiction, then the corporation shall indemnify each director and executive officer to the full extent under any other applicable law. (j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following definitions shall apply: (1) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, 21. arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (2) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (3) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section 43 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (4) References to a "director," "executive officer," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (5) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Section 43. ARTICLE XII NOTICES SECTION 44. NOTICES. (a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. (b) NOTICE TO DIRECTORS. Any notice required to be given to any director may be given by the method stated in subsection (a), or by overnight delivery service, facsimile, telex 22. or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director. (c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained. (d) TIME NOTICES DEEMED GIVEN. All notices given by mail or by overnight delivery service, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission. (e) METHODS OF NOTICE. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (f) FAILURE TO RECEIVE NOTICE. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such director to receive such notice. (g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. (h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person 23. shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. ARTICLE XIII AMENDMENTS SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the voting stock of the corporation entitled to vote. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. ARTICLE XIV LOANS TO OFFICERS SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 24. EX-4.2 5 EXHIBIT 4.2 Exhibit 4.2 PHARSIGHT CORPORATION AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT September 2, 1999 TABLE OF CONTENTS PAGE I. GENERAL............................................................2 1.1 Amendment of Prior Agreement..............................2 1.2 Definitions...............................................2 II. REGISTRATION; RESTRICTIONS ON TRANSFER.............................3 2.1 Restrictions on Transfer..................................3 2.2 Demand Registration.......................................5 2.3 Piggyback Registrations...................................6 2.4 Form S-3 Registration.....................................7 2.5 Expenses of Registration..................................8 2.6 Obligations of the Company................................9 2.7 Termination of Registration Rights.......................10 2.8 Delay of Registration; Furnishing Information............10 2.9 Indemnification..........................................10 2.10 Assignment of Registration Rights........................13 2.11 Amendment of Registration Rights.........................13 2.12 Limitation on Subsequent Registration Rights.............13 2.13 "Market Stand-Off" Agreement.............................13 2.14 Rule 144 Reporting.......................................14 III. COVENANTS OF THE COMPANY..........................................14 3.1 Basic Financial Information and Reporting................14 3.2 Inspection Rights........................................15 3.3 Confidentiality of Records...............................15 3.4 Reservation of Common Stock..............................16 3.5 Stock Vesting............................................17 3.6 Proprietary Information and Inventions Agreement.........17 3.7 Directors' Expenses......................................17 3.8 Real Property Holding Corporation........................17 3.9 Stock Issuances and Option Grants........................18 3.10 Initial Offering.........................................18 3.11 Strategic Transactions...................................18 i. TABLE OF CONTENTS (CONTINUED) PAGE 3.13 Termination of Covenants.................................19 IV. RIGHTS OF FIRST OFFER.............................................19 4.1 Subsequent Offerings.....................................19 4.2 Exercise of Rights.......................................19 4.3 Issuance of Equity Securities to Other Persons...........19 4.4 Termination of Rights of First Offer.....................20 4.5 Transfer of Rights of First Offer........................20 4.6 Excluded Securities......................................20 V. ASSIGNED RIGHT OF FIRST REFUSAL...................................21 5.1 Bylaw Right of First Refusal.............................21 5.2 Purchase of Additional Shares............................21 5.3 Purchase of All Offered Shares...........................21 5.4 Compliance with Bylaws...................................21 5.5 Termination of Right to Assignment of Right of First Refusal............................................22 VI. MISCELLANEOUS.....................................................22 6.1 Governing Law............................................22 6.2 Survival.................................................22 6.3 Successors and Assigns...................................22 6.4 Severability.............................................22 6.5 Amendment and Waiver.....................................22 6.6 Delays or Omissions......................................23 6.7 Notices..................................................23 6.8 Attorneys' Fees..........................................23 6.9 Titles and Subtitles.....................................23 6.10 Counterparts.............................................23 ii. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT This AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (the "Agreement") is entered into as of September 2, 1999, by and among PHARSIGHT CORPORATION, a California corporation (the "Company"), the holders of the Company's Series A Preferred Stock (the "Series A Stock"), the holders of the Company's Series B Preferred Stock (the "Series B Stock"), the holders of the Company's Series C Preferred Stock (the "Series C Stock"), the holders of the Company's Series D Preferred Stock (the "Series D Stock"), and the purchasers of the Company's Series E Preferred Stock (the "Series E Stock") set forth on Exhibit A attached hereto. The holders of the Series A Stock, the holders of the Series B Stock, the holders of the Series C Stock, the holders of the Series D Stock, and the purchaser of the Series E Stock shall be referred to hereinafter as the "Investors," and each individually as an "Investor." RECITALS WHEREAS, the Company, the holders of the Series A Stock, the holders of the Series B Stock, the holders of the Series C Stock and the holders of the Series D Stock are parties to that certain Amended and Restated Investors' Rights Agreement dated as of May 13, 1997, as amended on September 15, 1997, December 6, 1997, March 23, 1998, May 11, 1998 and October 28, 1998 (the "Original Agreement"); WHEREAS, the Company proposes to sell and issue up to two million seven hundred seventy-seven thousand seven hundred seventy-eight (2,777,778) shares of its Series E Stock pursuant to that certain Series E Preferred Stock Purchase Agreement of even date herewith (the "Purchase Agreement"); WHEREAS, as a condition of entering into the Purchase Agreement, the purchaser of the Series E Stock has requested that the Company extend to it certain registration rights, information rights and other rights; and WHEREAS, the Company and a majority in interest of the holders of the Series A Stock, Series B Stock, Series C Stock and Series D Stock desire to amend the Original Agreement to extend to the purchaser of the Series E Stock the registration rights, information rights, and other rights granted to the holders of the Series A Stock, Series B Stock, Series C Stock and Series D Stock under the Original Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, in the Original Agreement, and in the Purchase Agreement, the parties hereby amend and restate the Original Agreement and mutually agree as follows: 1. I. GENERAL 1.1 Amendment of Prior Agreement. Effective upon the execution of this Agreement by the Company and the Holders of a majority of the Registrable Securities covered by the Original Agreement, the Original Agreement shall be null and void and shall be superseded in its entirety by the provisions of this Agreement. Any rights granted in the Original Agreement and not granted in this Agreement are hereby waived, released and terminated and are null and void as of the date of this Agreement. 1.2 Definitions. As used in this Agreement the following terms shall have the following respective meanings: "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Holder" means any person owning of record Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities in accordance with Section 2.10 hereof. "Initial Offering" means the Company's first firm commitment underwritten public offering of its Common Stock registered under the Securities Act. "Major Investor" shall mean each Investor (together with its affiliates) who owns not less than one hundred fifty thousand (150,000) shares of Registrable Securities (as adjusted for stock splits and combinations). "Register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. "Registrable Securities" means (i) Common Stock of the Company issued or issuable upon conversion or exercise of the Shares; and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right, or other security which is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, such above-described securities. Notwithstanding the foregoing, Registrable Securities shall not include any securities sold by a person to the public either pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferor's rights under Article II of this Agreement are not assigned. For purposes of Article II (except Section 2.2), the term "Registrable Securities" shall also include any Common Stock of the Company issued upon the exercise of any warrant issued by the Company in connection with a commercial financing or equipment leasing arrangement, provided the issuance of such warrant, including any registration rights associated therewith, is approved by a majority of the Board of Directors, including the affirmative vote of at least two of the directors nominated by the holders of the Preferred Stock under the Amended and Restated Shareholders' Agreement of even date herewith, as such agreement may be amended from time to time. 2. "Registrable Securities then outstanding" shall be the number of shares determined by calculating the total number of shares of the Company's Common Stock that are Registrable Securities and either (1) are then issued and outstanding or (2) are issuable pursuant to then exercisable or convertible securities. "Registration Expenses" shall mean all expenses incurred by the Company in complying with Sections 2.2, 2.3 and 2.4 hereof, including, without limitation, all registration and filing fees, printing expenses, fees, and disbursements of counsel for the Company, reasonable fees and disbursements not to exceed fifteen thousand dollars ($15,000) of a single special counsel for the Holders, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "Securities Act" shall mean the Securities Act of 1933, as amended. "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale. "Shares" shall mean the Company's Series A Stock issued pursuant to the Series A Preferred Stock Purchase Agreement dated February 6, 1996; the Company's Series B Stock issued pursuant to the Series B Preferred Stock Purchase Agreement dated July 31, 1996; the Company's Series C Stock issued pursuant to the Series C Preferred Stock Purchase Agreement dated May 13, 1997; the Company's Series D Stock issued pursuant to the Series D Preferred Stock Purchase Agreement dated October 28, 1998, the Company's Series E Stock issued pursuant to the Purchase Agreement; and the shares issued upon exercise of warrants to purchase Series A Stock and Series C Stock dated April 30, 1996, and November 7, 1997, respectively. "Form S-3" means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "SEC" or "Commission" means the Securities and Exchange Commission. II. REGISTRATION; RESTRICTIONS ON TRANSFER. 2.1 Restrictions on Transfer. 2.1.1 Each Holder agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) The transferee has agreed in writing to be bound by this Section 2.1, (B) Such Holder shall have notified the Company of the proposed disposition and 3. shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interest in the corporation, (C) a limited liability company to its members or former members in accordance with their interest in the limited liability company, or (D) to the Holder's family members or trust for the benefit of an individual Holder or his family members, provided the transferee will be subject to the terms of this Section 2.1 to the same extent as if he were an original Holder hereunder. (iv) The Holder shall have complied with the provisions of the Company's bylaws regarding the Company's right of first refusal, if applicable. 2.1.2 Each certificate representing Shares or Registrable Securities shall (unless otherwise permitted by the provisions of the Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws, the Company's bylaws, or as provided elsewhere in this Agreement): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 2.1.3 The Company shall be obligated to reissue promptly unlegended certificates at the request of any holder thereof if the holder shall have obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. 2.1.4 Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate state securities authority authorizing such removal. 4. 2.2 Demand Registration. 2.2.1 Subject to the conditions of this Section 2.2, if the Company shall receive a written request from the Holders of more than fifty percent (50%) of the Registrable Securities then outstanding (the "Initiating Holders") that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities having an aggregate offering price to the public in excess of $5,000,000 (or, if such request is made after the Company's Initial Offering, $2,000,000) (a "Qualified Public Offering"), then the Company shall, within thirty (30) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 2.2, effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. 2.2.2 Unless the request under this Section 2.2 is made after the Company's Initial Offering, the Registrable Securities shall be distributed only by means of a firm commitment underwriting. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2.2 and the Company shall include such information in the written notice referred to in Section 2.2.1. In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 2.2, if the underwriter advises the Company that marketing factors require a limitation of the number of securities to be underwritten (including Registrable Securities) then the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders). Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. 2.2.3 The Company shall not be required to effect a registration pursuant to this Section 2.2: (i) prior to (A) February 6, 2000, or (B) six (6) months after the date of the Company's Initial Offering, whichever is earlier; or (ii) after the Company has effected two (2) registrations pursuant to this Section 2.2, and such registrations have been declared or ordered effective; or (iii) during the period starting with the date of filing of, and ending on the date one hundred eighty (180) days following the effective date of the registration 5. statement pertaining to the Initial Offering, provided that the Company is making reasonable and good faith efforts to cause such registration statement to become effective; or (iv) if within thirty (30) days of receipt of a written request from Initiating Holders pursuant to Section 2.2.1, the Company gives notice to the Holders of the Company's intention to file a registration statement pertaining to the Initial Offering within ninety (90) days; or (v) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2.2, a certificate signed by the Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders; provided that such right to delay a request shall be exercised by the Company no more than twice in any one-year period. 2.2.4 The rights granted under this Section 2.2 shall not apply to any person who is a "Holder" by virtue of owning securities that are included in the term "Registrable Securities" solely by the application of the final sentence of the definition of that term in Section 1.2 above. 2.3 Piggyback Registrations. The Company shall notify all Holders of Registrable Securities in writing at least thirty (30) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to employee benefit plans or with respect to corporate reorganizations or other transactions under Rule 145 of the Securities Act) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after the above-described notice from the Company, so notify the Company in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent such registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. 2.3.1 Underwriting. If the registration statement under which the Company gives notice under this Section 2.3 is for an underwritten offering, the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to be included in a registration pursuant to this Section 2.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the 6. Company. Notwithstanding any other provision of the Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Company; second, to the Holders on a pro rata basis based on the total number of Registrable Securities held by the Holders; and third, to any shareholder of the Company (other than a Holder) on a pro rata basis. No such reduction shall reduce the securities being offered by the Company for its own account to be included in the registration and underwriting, and in no event shall the amount of securities of the selling Holders included in the registration be reduced below twenty-five percent (25%) of the total amount of securities included in such registration, unless such offering is the Initial Offering and such registration does not include shares of any other selling shareholders, in which event any or all of the Registrable Securities of the Holders may be excluded in accordance with the immediately preceding sentence. In no event will shares of any other selling shareholder be included in such registration which would reduce the number of shares which may be included by Holders without the written consent of Holders of more than fifty percent (50%) of the Registrable Securities proposed to be sold in the offering. 2.3.2 Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The Registration Expenses of such withdrawn registration shall be borne by the Company in accordance with Section 2.5 hereof. 2.4 Form S-3 Registration. In case the Company shall receive from any Holder or Holders of Registrable Securities a written request or requests that the Company effect a registration on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: 2.4.1 promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities; and 2.4.2 as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 2.4: (i) if Form S-3 (or any successor or similar form) is not available for such offering by the Holders; or (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $2,000,000; or 7. (iii) if the Company shall furnish to the Holders a certificate signed by the Chairman of the Board of Directors of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than ninety (90) days after receipt of the request of the Holder or Holders under this Section 2.4: provided, that such right to delay a request shall be exercised by the Company nor more than twice in any one-year period; or (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two (2) registrations on Form S-3 for the Holders pursuant to this Section 2.4; or (v) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. 2.4.3 Subject to the foregoing, the Company shall file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. All Registration Expenses incurred in connection with registrations requested pursuant to this Section 2.4 shall be paid by the selling Holders pro rata in proportion to the number of shares sold by each. 2.5 Expenses of Registration. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 2.2 or any registration under Section 2.3 herein shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 2.2, the request of which has been subsequently withdrawn by the Initiating Holders unless (a) the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were not aware at the time of such request or (b) the Holders of a majority of the Registrable Securities agree to forfeit their right to one requested registration pursuant to Section 2.2 in which event such right shall be forfeited by all Holders. If the Holders are required to pay the Registration Expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (a) above, then the Holders shall not forfeit their rights pursuant to Section 2.2 to a demand registration. 2.6 Obligations of the Company. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: 8. 2.6.1 Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to ninety (90) days or, if earlier, until the Holder or Holders have completed the distribution related thereto. 2.6.2 Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. 2.6.3 Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. 2.6.4 Use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. 2.6.5 In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. 2.6.6 Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 2.6.7 Furnish, at the request of a majority of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting 9. registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities. 2.6.8 Cause all such Registrable Securities covered by such registration statement to be listed on each securities exchange on which similar securities issued by the Company are then listed. 2.6.9 Provide a transfer agent and registrar and a CUSIP number for all Registrable Securities covered by such registration statement not later than the effective date of such registration statement. 2.7 Termination of Registration Rights. All registration rights granted under this Article II shall terminate and be of no further force and effect seven (7) years after the date of the Company's Initial Offering. In addition, a Holder's registration rights shall expire if (i) the Company has completed its Initial Offering and is subject to the provisions of the Exchange Act, (ii) such Holder (together with its affiliates, partners and former partners) holds less than 1% of the Company's outstanding Common Stock (treating all shares of convertible Preferred Stock on an as converted basis) and (iii) all Registrable Securities held by such Holder may be sold under Rule 144 during any ninety (90) day period. 2.8 Delay of Registration; Furnishing Information. 2.8.1 No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Article II. 2.8.2 It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 2.2, 2.3 or 2.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. 2.9 Indemnification. In the event any Registrable Securities are included in a registration statement under Sections 2.2, 2.3 or 2.4: 2.9.1 To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers, directors and legal counsel of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, 10. the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided however, that the indemnity agreement contained in this Section 2.9.1 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. 2.9.2 To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors, its officers, and legal counsel and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, severally, but not jointly against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 2.9.2 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 2.9 exceed the proceeds from the offering received by such Holder. 2.9.3 Promptly after receipt by an indemnified party under this Section 2.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with 11. the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.9. 2.9.4 If the indemnification provided for in this Section 2.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Holder hereunder exceed the proceeds from the offering received by such Holder. 2.9.5 The obligations of the Company and Holders under this Section 2.9 shall survive completion of any offering of Registrable Securities in a registration statement. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. In the event any offering of Registrable Securities is underwritten, and the underwriting agreement provides for indemnification and/or contribution by the Company and the Holders offering securities thereunder, the indemnification and/or contribution obligations of the Company and the Holders hereunder shall in no event exceed the obligations of the parties set forth in such underwriting agreement. 2.10 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Article II may be assigned by a Holder to a transferee or assignee of Registrable Securities that (i) is a subsidiary, parent, general partner, limited partner or retired partner of a Holder, (ii) is an individual Holder's family member or trust for the benefit of an individual Holder or his or her family members, or (iii) acquires at least fifty thousand (50,000) shares of Registrable Securities (as adjusted for stock splits and combinations); provided, however, (A) the transferor shall, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and 12. (B) such transferee shall agree to be subject to all restrictions set forth in this Agreement. With respect to any person who is a "Holder" by virtue of owning securities that are included in the term "Registrable Securities" solely by the application of the final sentence of the definition of that term in Section 1.2 above, such Holder may assign its rights to cause the Company to register Registrable Securities pursuant to Article II without regard to the limitation in clause (iii) of this Section 2.10, provided the transferee or assignee acquires at least one (1) share of Registrable Securities. 2.11 Amendment of Registration Rights. Any provision of this Article II may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of more than fifty percent (50%) of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 2.11 shall be binding upon each Holder and the Company. By acceptance of any benefits under this Article II, Holders of Registrable Securities hereby agree to be bound by the provisions hereunder. 2.12 Limitation on Subsequent Registration Rights. After the date of this Agreement, the Company shall not, without the prior written consent of the Holders of more than fifty percent (50%) of the Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company that would grant such holder registration rights senior to or pari passu with those granted to the Holders hereunder. 2.13 "Market Stand-Off" Agreement. If requested by the Company and the representative of the underwriters of Common Stock (or other securities) of the Company, and provided that all officers and directors of the Company and holders of at least one percent (1%) of the Company's voting securities enter into similar agreements, each Holder shall not sell or otherwise transfer or dispose of any shares of Common Stock (or other securities) of the Company held by such Holder (other than those included in the registration) until the earlier of (i) the conclusion of the one hundred eighty (180) day period (or such shorter period as the Company may specify) following the effective date of a registration statement of the Company filed under the Securities Act; or (ii) the date upon which the five-day trailing average of the market price of the Common Stock of the Company, as quoted on the Nasdaq National Market or any exchange or over-the-counter market upon which such Common Stock is listed or traded is two (2) times the price to the public for the Common Stock as set forth in the final prospectus included with such Registration Statement. The obligations described in this Section 2.13 shall apply only to the Company's Initial Offering and shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of the restricted sale period as set forth in clause (i) or (ii) above. 13. 2.14 Rule 144 Reporting. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) Take such action, including the voluntary registration of its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; and (d) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act, and of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. III. COVENANTS OF THE COMPANY. 3.1 Basic Financial Information and Reporting. 3.1.1 The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions pursuant to a system of accounting established and administered in accordance with generally accepted accounting principles consistently applied, and will set aside on its books all such proper accruals and reserves as shall be required under generally accepted accounting principles consistently applied. 3.1.2 As soon as practicable after the end of each fiscal year of the Company, the Company will furnish each Investor a consolidated balance sheet of the Company, as of the end of such fiscal year, and a consolidated statement of income and a consolidated statement of cash flows of the Company, for such year, all prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail. Such financial statements shall be accompanied by a report and opinion thereon by independent public accountants of national standing selected by the Company's Board of Directors. 3.1.3 The Company will furnish each Major Investor, as soon as practicable after the end of the first, second, and third quarterly accounting periods in each fiscal year of the Company, a consolidated balance sheet of the Company as of the end of each such 14. quarterly period, and a consolidated statement of income and a consolidated statement of cash flows of the Company for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. 3.1.4 The Company will furnish each such Major Investor (i) within thirty (30) days after the beginning of each fiscal year a capitalization summary, annual budget and operating plans for such fiscal year (and as soon as available, any subsequent revisions thereto); and (ii) as soon as practicable after the end of the first and second month of each quarterly accounting period, a consolidated balance sheet of the Company as of the end of each such month, and a consolidated statement of income and a consolidated statement of cash flows of the Company for such month and for the current fiscal year to date, including a comparison to plan figures for such period, in the form such statements are provided to the Company's Board of Directors. 3.2 Inspection Rights. Each Major Investor shall have the right to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested all at such reasonable times and as often as may be reasonably requested; provided, however, that the Company shall not be obligated under this Section 3.2 with respect to a competitor of the Company or with respect to information which the Board of Directors determines in good faith is confidential and should not, therefore, be disclosed. 3.3 Confidentiality of Records. 3.3.1 Each Investor agrees not to use Confidential Information (as hereinafter defined) of the Company for its own use or for any purpose except to evaluate and enforce its equity investment in the Company. Each Investor shall undertake to treat such Confidential Information in a manner consistent with the treatment of its own information of such proprietary nature and agrees that it shall protect the confidentiality of and use reasonable best efforts to prevent disclosure of the Confidential Information to prevent it from falling into the public domain or the possession of unauthorized persons. Each transferee of any Investor who receives Confidential Information shall agree to be bound by such provisions. For purposes of this Section, "Confidential Information": means any information, technical data, or know-how, including, but not limited to, information, technical data or know-how related to the Company's research, products, software, services, development, inventions, processes, designs, drawings, engineering, marketing, or finances, disclosed by the Company either directly or indirectly in writing, orally or by drawings or inspection of parts or equipment, which written material is stamped "Confidential" or "Proprietary" or if disclosed orally, is promptly confirmed in writing to be Confidential Information. 3.3.2 Confidential Information does not include information, technical data or know-how which (i) is in the Investor's possession or known to the Investor at the time of disclosure as shown by Investor's files and records immediately prior to the time of disclosure; (ii) before or after it has been disclosed to the Investor, is part of the public knowledge or literature, not as a result of any action or inaction of the Investor; (iii) is disclosed to an Investor 15. on a non-confidential basis by a third party having a legal right to such information, (iv) is independently developed by Investor without use of or reference to any Confidential Information of the Company, as properly documented by the Investor, or (v) is approved for release by written authorization of Company. The provisions of this Section shall not apply (i) to the extent that an Investor is required to disclose Confidential Information pursuant to any law, statue, rule or regulation or any order of any court or pursuant to any direction, request or requirement (whether or not having the force of law but if not having the force of law being of a type with which institutional investors in the relevant jurisdiction are accustomed to comply) of any self-regulating organization or any governmental, fiscal, monetary or other authority; (ii) to the disclosure of Confidential Information to an Investor's employees, counsel, accountants or other professional advisors; (iii) to the extent that an Investor needs to disclose Confidential Information for the protection of any of such Investor's rights or interest against the Company, whether under this Agreement or otherwise; or (iv) to the disclosure of Confidential Information to a prospective transferee of securities which agrees to be bound by the provisions of this Section in connection with the receipt of such Confidential Information. 3.3.3 The Company and each Investor agree that, except with the prior written permission of the Investor disclosing such confidential information (the "Disclosing Investor"), the Company and each Investor shall at all times keep confidential and not divulge, furnish or make accessible to anyone any confidential information, knowledge or data concerning or relating to the business or financial affairs of the Disclosing Investor to which the Company or Investors have been or shall become privy by reason of this Agreement, discussions or negotiations relating to this Agreement, the performance of its obligations hereunder or the ownership of Shares hereunder, that have been labeled as "Confidential." If the confidential information is disclosed orally or visually, it shall be identified as confidential at the time of disclosure and be confirmed in writing to the receiving party(ies) within thirty days of such disclosure. The provisions of this Section 3 shall be in addition to, and not in substitution for, the provisions of any separate non-disclosure agreement executed by the parties thereto with respect to the transactions contemplated hereby. 3.4 Reservation of Common Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Series A Stock, the Series B Stock, the Series C Stock, Series D Stock and the Series E Stock all Common Stock issuable from time to time upon such conversion. 3.5 Stock Vesting. Unless otherwise approved by the Board of Directors, all stock options, restricted stock and other stock equivalents issued after the date of this Agreement to employees, directors, consultants and other service providers shall be subject to vesting as follows: (i) twenty-five percent (25%) of such stock shall vest at the end of the first year following the earlier of the date of issuance or such person's services commencement date with the company, and (ii) one-forty-eighth (1/48) of such stock shall vest each month thereafter over the remaining three (3) years. With respect to any shares of stock purchased by any such person, the Company's repurchase option shall provide that upon such person's termination of employment or service with the Company, with or without cause, the Company or its assignee (to the extent permissible under applicable securities laws and other laws) shall have the option to purchase at cost any unvested shares of stock held by such person. 16. 3.6 Proprietary Information and Inventions Agreement. The Company shall require all employees or officers now or hereafter employed by it to execute and deliver a Proprietary Information and Inventions Agreement substantially in the form attached to the Purchase Agreement. In addition, the Company will require that all consultants now or hereafter engaged by the Company agree to execute a written agreement assigning his or her rights to the Company on all inventions, pending patent applications, all patents issued, and all other intellectual property rights developed by such consultant while working for or on behalf of the Company, and that all consultants who have access to the confidential information of the Company agree to protect the confidentiality of such information. 3.7 Directors' Expenses. The Company shall not be obligated to pay any compensation to any member of the Company's Board of Directors in connection with the performance of his or her duties as a director. The Company may, however, provide compensation in the form of stock options or otherwise to directors not affiliated with any Major Investors or the Company when the Board of Directors determines that it is in the best interests of the Company to do so. The Company shall pay (i) each director for out-of-pocket expenses incurred in connection with the performance of his or her duties as a director when such expenses are reasonable and, with respect to expenses exceeding $100, authorized in advance, and (ii) each director for reasonable travel expenses incurred in connection with his or her attendance at or participation in any meeting of the Board of Directors held outside the geographical area of the Company's executive offices, but shall not otherwise pay travel expenses for attendance at meetings of the Board. 3.8 Real Property Holding Corporation. The Company covenants that it will operate in a manner such that it will not become a "United States real property holding corporation" ("USRPHC") as that term is defined in Section 897(c)(2) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder. The Company agrees to make determinations as to its status as a USRPHC, and will file statements concerning those determinations with the Internal Revenue Service, in the manner and at the times required under Reg. ss. 1.897-2(h), or any supplementary or successor provision thereto. Within 30 days of a request from an Investor or any of its partners, the Company will inform the requesting party, in the manner set forth in Reg. ss. 1.897- 2(h)(1)(iv) or any supplementary or successor provision thereto, whether that party's interest in the Company constitutes a United States real property interest (within the meaning of Internal Revenue Code Section 897(c)(1) and the regulations thereunder) and whether the Company has provided to the Internal Revenue Service all required notices as to its USRPHC status. 3.9 Stock Issuances and Option Grants. The Company will not, without the approval of a majority of the Board of Directors (including the affirmative vote of at least two of the directors nominated by the holders of the Preferred Stock under the Amended and Restated Shareholders' Agreement of even date herewith, as such agreement may be amended from time to time (the "Shareholders' Agreement"), issue shares of Common Stock or grant options for the purchase of shares of Common Stock to any employees, officers, directors, or consultants if such issuance or grant would cause the total number of shares held and shares issuable upon options held by such persons in the aggregate to exceed 4,715,000 shares. Shares held by any employee, officer, director, or consultant shall not be counted toward this limit if such shares were, at the time they were acquired by such person, excluded from the rights of first 17. offer established by Article IV of this Agreement pursuant to sections 4.6.2 through 4.6.8 thereof or if such shares are issued upon conversion of any shares of Preferred Stock. 3.10 Initial Offering. The Company will not, without the approval of two-thirds of the Board of Directors (including the affirmative vote of at least two of the directors nominated by the holders of Preferred Stock under the Shareholders' Agreement) make an Initial Offering of its Common Stock unless such offering would be a "Qualified Initial Public Offering" under Article III, Section C.4(l)(1) of the Company's Amended and Restated Articles of Incorporation. 3.11 Strategic Transactions. The Company will not, without the approval of a majority of the Board of Directors (including the affirmative vote of at least two of the directors nominated by the holders of Preferred Stock under the Shareholders' Agreement) issue any shares of Common Stock or Preferred Stock in connection with strategic transactions involving the Company and other entities, including (i) joint ventures, manufacturing, marketing, or distribution arrangements, (ii) technology transfer or development arrangements and (iii) acquisitions involving the issuance of the Company's shares (other than stock options granted to employees of the company acquired). 3.12 Qualified Small Business Stock. For so long as the Shares or the Conversion Shares are held by an Investor (or a transferee) in whose hands such Shares or Conversion Shares are eligible to qualify as "qualified small business stock" as defined in Section 1202(c) of the Code, the Company will use reasonable efforts to comply with the reporting and recordkeeping requirements of Section 1202 of the Code, any regulations promulgated thereunder and any similar state laws and regulations, and agrees not to repurchase any stock of the Company if such repurchase would constitute a "significant redemption" within the meaning of Section 1202(c)(3)(B) of the Code with respect to the Shares. Within ten (10) days after any Investor has delivered to the Company a written request for any reports required under Section 1202(d)(1)(C) of the Code or any related Treasury Regulations, the Company shall deliver to such Investor a written statement informing the Investor whether, in the Company's good faith judgment after a reasonable investigation, such Investor's interest in the Company constitutes "qualified small business stock" as defined in Section 1202(c) of the Code. The Company's obligation to furnish a written statement pursuant to this Section 3.12 shall continue notwithstanding the fact that a class of the Company's stock may be traded on an established market. 3.13 Termination of Covenants. All covenants of the Company contained in Article III of this Agreement (except for Sections 3.1 and 3.2) shall expire and terminate as to each Investor on the effective date of the registration statement pertaining to the Company's Qualified Initial Public Offering (as defined under Article III, Section C.4(l)(1) of the Company's Amended and Restated Articles of Incorporation). The covenants of the Company contained in Sections 3.1 and 3.2 of this Agreement shall expire and terminate as to each Investor on the date the Company becomes subject to the public company reporting requirements under the Exchange Act. 18. IV. RIGHTS OF FIRST OFFER. 4.1 Subsequent Offerings. Each Investor shall have a right of first offer to purchase its pro rata share of all Equity Securities, as defined below, that the Company may, from time to time, propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Section 4.6 hereof. Each Investor's pro rata share is equal to the ratio of (A) the sum of the number of shares of the Series A Stock, the Series B Stock, the Series C Stock, the Series D Stock and the Series E Stock which such Investor holds immediately prior to the issuance of such Equity Securities to (B) the total number of shares of the Company's outstanding Series A Stock, Series B Stock, Series C Stock, the Series D Stock and Series E Stock immediately prior to the issuance of the Equity Securities. The term "Equity Securities" shall mean (i) any Common Stock, Preferred Stock or other security of the Company, (ii) any security convertible, with or without consideration, into any Common Stock, Preferred Stock or other security (including any option to purchase such a convertible security), (iii) any security carrying any warrant or right to subscribe to or purchase any Common Stock, Preferred Stock or other security, or (iv) any such warrant or right. 4.2 Exercise of Rights. If the Company proposes to issue any Equity Securities other than those excluded under Section 4.6, it shall give each Investor written notice of its intention, describing the Equity Securities, the price, and the terms and conditions upon which the Company proposes to issue the same. Each Investor shall have ten (10) days from the giving of such notice to agree to purchase its pro rata share of the Equity Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased. Notwithstanding the foregoing, the Company shall not be required to offer or sell such Equity Securities to any Investor who would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale. 4.3 Issuance of Equity Securities to Other Persons. If not all of the Investors elect to purchase their pro rata share of the Equity Securities, then the Company shall promptly notify in writing the Investors who do so elect and shall offer such Investors the right to acquire such unsubscribed shares. The Investors shall have five (5) days after receipt of such notice to notify the Company of its election to purchase all or a portion thereof of the unsubscribed shares. If the Investors fail to exercise in full the rights of first refusal, the Company shall have one hundred twenty (120) days thereafter to sell the Equity Securities in respect of which the Investor's rights were not exercised, at a price and upon general terms and conditions materially no more favorable to the purchasers thereof than specified in the Company's notice to the Investors pursuant to Section 4.2 hereof. If the Company has not sold such Equity Securities within one hundred twenty (120) days of the notice provided pursuant to Section 4.2, the Company shall not thereafter issue or sell any Equity Securities, other than those set forth in Section 4.6, without first offering such securities to the Investors in the manner provided above. 4.4 Termination of Rights of First Offer. The rights of first offer established by this Article IV shall terminate upon the effective date of the registration statement pertaining to the Company's Qualified Initial Public Offering (as defined under Article III, Section C.4(l)(1) of the Company's Amended and Restated Articles of Incorporation). 19. 4.5 Transfer of Rights of First Offer. The rights of first offer of each Investor under this Article IV may be transferred to the same parties, subject to the same restrictions, as any transfer of registration rights pursuant to Section 2.10. 4.6 Excluded Securities. The rights of first offer established by this Article IV shall have no application to any of the following Equity Securities: 4.6.1 shares of Common Stock (and/or options, warrants or other rights to purchase Common Stock ) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors; 4.6.2 stock issued pursuant to any rights or agreements outstanding as of the date of this Agreement, stock issued pursuant to any options and warrants outstanding as of the date of this Agreement, and stock issued pursuant to any rights or agreements granted after the date of this Agreement; provided that the rights of first refusal established by this Article IV applied with respect to the initial sale or grant by the Company of such rights or agreements; 4.6.3 any Equity Securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination; 4.6.4 shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization by the Company; 4.6.5 shares of Common Stock issued upon conversion of the Shares; 4.6.6 any Equity Securities issued pursuant to any equipment leasing arrangement, or commercial financing; 4.6.7 any Equity Securities that are issued by the Company pursuant to a registration statement filed under the Securities Act; and 4.6.8 shares of the Company's Common Stock or Preferred Stock issued in connection with strategic transactions involving the Company and other entities, including (A) joint ventures, manufacturing, marketing or distribution arrangements or (B) technology transfer or development arrangements; provided that such strategic transaction and the issuance of shares therein, have been approved by the Company's Board of Directors. V. ASSIGNED RIGHT OF FIRST REFUSAL. 5.1 Bylaw Right of First Refusal. If the Company receives from any holder of shares of its Common Stock a notice pursuant to Article XI of its Bylaws stating such holders' intention to sell or otherwise transfer any of his shares (a "Transfer Notice"), the Company shall have ten (10) days to exercise its option to purchase all or some portion of the shares at the price and upon the terms set forth in such notice. If the Company elects not to exercise such option, it shall within fifteen (15) days after receipt of such notice notify the Investors that it is assigning to them, on a pro rata basis (as defined in Section 4.1 above) its right to purchase such shares (the "Transfer Shares"). Each Investor shall have ten (10) days from the receipt of the 20. Company's notice, to notify the Company that it will purchase its pro rata share of the Transfer Shares at the price and upon the terms set forth in the Transfer Notice. 5.2 Purchase of Additional Shares. Each Investor electing to purchase its pro rata share of the Transfer Shares shall also notify the Company whether it wishes to purchase shares in addition to its pro rata share and the largest number of shares that it would purchase if offered the opportunity. If not all of the Investors elect to exercise the option to purchase their pro rata share of the Transfer Shares, the Company shall assign its right as to the remaining Transfer Shares to those Investors who do so elect and who have indicated that they wish to purchase additional shares. To the extent that two or more Investors wish to purchase the remaining Transfer Shares and there are not sufficient Transfer Shares remaining to fully accommodate such Investors' request to purchase the additional Transfer Shares, the remaining Transfer Shares shall be distributed proportionately to each such Investor based on the number of shares of Preferred Stock held by such Investor divided by the total number of shares of Preferred Stock held by all such Investors. 5.3 Purchase of All Offered Shares. Under Section 64 of the Company's Bylaws, the Company and its assignees have the option to purchase all (but not less than all) of the shares specified in the Transfer Notice. Therefore, if the Company and those Investors electing to purchase the shares do not together agree to purchase the full number of shares, or obtain the consent of the transferring shareholder to the purchase of less than the full number of shares, the Company and the Investors shall have no further rights with respect to the offered shares except as set forth in Section 64 of the Company's Bylaws requiring the transferring shareholder to consummate the proposed transfer within sixty (60) days. 5.4 Compliance with Bylaws. If an Investor exercises the option assigned by the Company as to any part of the Transfer Shares, it shall comply fully with the notice requirements and other conditions set forth in Section 64 of the Bylaws. Failure by an Investor to so comply shall terminate such Investor's rights under this Article V and the Company shall have no further obligations with respect to the Transfer Shares. 5.5 Termination of Right to Assignment of Right of First Refusal. The rights of the Investors set forth in this Article V shall terminate upon the termination of the Company's rights under Section 64 of the Company's Bylaws. VI. MISCELLANEOUS. 6.1 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 6.2 Survival. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 21. 6.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price. 6.4 Severability. In case any provision of the Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 6.5 Amendment and Waiver. 6.5.1 Except as otherwise expressly provided, this Agreement may be amended or modified only upon the written consent of the Company and the holders of more than fifty percent (50%) of the Registrable Securities. 6.5.2 Except as otherwise expressly provided, the obligations of the Company and the rights of the Holders under this Agreement may be waived only with the written consent of the holders of more than fifty percent (50%) of the Registrable Securities. 6.6 Delays or Omissions. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any Holder, upon any breach, default, or noncompliance of the Company under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default, or noncompliance, or any acquiescence therein, or of any similar breach, default, or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on any Holder's part of any breach, default, or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not alternative. 6.7 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at the address set forth on the signature page hereof and to an Investor at the address as set forth on Exhibit A hereto or at such other address as the Company or Investor may designate by ten (10) days advance written notice to the other parties hereto. 6.8 Attorneys' Fees. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to 22. recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 6.9 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 23. IN WITNESS WHEREOF, the parties hereto have executed this AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: INVESTORS: PHARSIGHT CORPORATION __________________________________________ (Name of Entity, if applicable) By: /s/ Arthur H. Reidel By: -------------------------- --------------------------------------- Arthur H. Reidel President Name: ------------------------------------- Title: ------------------------------------ [Amended and Restated Investor's Rights Agreement] EXHIBIT A SCHEDULE OF INVESTORS
Series A Series B Series C Series D Series E Name and Address Stock Stock Stock Stock Stock - ---------------- --------- --------- --------- --------- --------- Asset Management Associates 1996, L.P. 1,275,510 267,000 970,465 611,621 - 2275 East Bayshore Road, Suite 150 Palo Alto, CA 94303 Solstice Capital Limited Partnership 102,041 200,000 210,970 93,846 - 33 Broad Street, 3rd Floor Boston, MA 02109 Stanford University 76,531 21,000 21,097 - - Attn: Carol Gilmer 2770 Sand Hill Road Menlo Park,CA 94025 Arthur H. Reidel 191,520 - - - - P. O. Box 61030 Palo Alto, CA 94306 Camilla Marie Olson, as Trustee 76,724 - - - - of the Olson Living Trust dated 10/20/93 805 Melville Avenue Palo Alto, CA 94301 Steven L. Shafer 65,244 - - - - 531 Sullivan Drive Mountain View, CA 94041 Thomas M. Niermann 57,398 16,000 - - - 116 El Nido Road Portola Valley, CA 94028 Alex Brown & Sons Inc. 34,438 - - - - Cust FBO Donald R. Stanski IRA Account # 247-83199 1432 Brookmill Road Los Altos, CA 94024-5804 E. Gregory Lee, as Trustee of 22,959 - - - - the Lee-Chambers Living Trust dated 5/13/91 811 Guinda Street Palo Alto, CA 94301
A-1
Series A Series B Series C Series D Series E Name and Address Stock Stock Stock Stock Stock - ---------------- --------- --------- --------- --------- --------- Terrence F. Blaschke, as Trustee 11,480 - 4,000 9,857 - of the Terrence F. Blaschke and Jeannette Blaschke Revocable Trust dated 11/11/93 855 Allardice Stanford, CA 94035 Gary L. Neil, as Trustee of the - 18,000 - 3,174 - Neil Family Trust dated 12/16/93 526 Sand Hill Circle Menlo Park, CA 94025 GC&H Investments - 18,000 - 3,174 - c/o Cooley Godward LLP 5 Palo Alto Square Palo Alto, CA 94306 Sprout Capital VII, L.P. - - 1,101,133 468,462 - 3000 Sand Hill Road Building 4, Suite 270 Menlo Park, CA 94025 DLJ First ESC, L.P. - - 126,582 53,853 - 3000 Sand Hill Road Building 4, Suite 270 Menlo Park, CA 94025 DLJ Capital Corp. - - 25,317 10,770 - 3000 Sand Hill Road Building 4, Suite 270 Menlo Park, CA 94025 The Sprout CEO Fund, L.P. - - 12,791 5,442 - 3000 Sand Hill Road Building 4, Suite 270 Menlo Park, CA 94025 Bruns H. Grayson - - 31,645 13,463 - One State Street, Suite 2150 Baltimore, MD 21202 Steven D. Brooks - - 73,840 23,762 - 45 Scenic Way San Francisco, CA 94121 WPG Enterprise Fund III, L.L.C. - - - 534,679 - 555 California Street, Suite 3130 San Francisco, CA 94104
A-2
Series A Series B Series C Series D Series E Name and Address Stock Stock Stock Stock Stock - ---------------- --------- --------- --------- --------- --------- Weiss, Peck & Greer Venture Associates IV, L.L.C. - - - 611,376 - 555 California Street, Suite 3130 San Francisco, CA 94104 Weiss, Peck & Greer Venture Associates IV - - - 77,187 - Cayman, L.P. 555 California Street, Suite 3130 San Francisco, CA 94104 Needham Capital SBIC II, L.P. - - - 267,898 - 445 Park Avenue New York, NY 10022 Needham Capital Partners II (Bermuda), L.P. - - - 37,913 - 445 Park Avenue New York, NY 10022 Robin Kehoe - - - 11,108 - 4136 21st Street San Francisco, CA 94114 David Pidwell, as Trustee for the Pidwell Family - - - 31,735 - Trust dated 6/25/87 20628 Vickery Lane Saratoga, CA 95070 Mark Platshon - - - 7,934 - 3125 Barney Ave. Menlo Park, CA 94025 McKesson HBOC, Inc. - - - - 2,777,778 1 Post Street San Francisco, CA 94104 Total 1,913,845 540,000 2,577,840 2,877,254 2,777,778
A-3 EX-10.1 6 EXHIBIT 10.1 Exhibit 10.1 ASSET PURCHASE AGREEMENT among PHARSIGHT CORPORATION MITCHELL AND GAUTHIER ASSOCIATES, INC. EDWARD E. L. MITCHELL and JOSEPH S. GAUTHIER Dated May 27, 1998 TABLE OF CONTENTS PAGE ---- 1. CERTAIN DEFINITIONS.....................................................1 1.1 "Acquired Assets".................................................1 1.2 "Ancillary Agreements"............................................3 1.3 "Assumed Agreements"..............................................3 1.4 "Assumed Liabilities".............................................3 1.5 "Co-Ownership Agreement"..........................................3 1.6 "Derivative Work".................................................3 1.7 "Disclosure Schedule".............................................3 1.8 "Excluded Assets".................................................3 1.9 "Golden Master"...................................................4 1.10 "Intellectual Property"...........................................4 1.12 "Legal Requirement"...............................................5 1.13 "Lien"............................................................5 1.14 "MGA Facility"....................................................5 1.15 "MGA Fields"......................................................5 1.16 "MGA Intellectual Property".......................................5 1.17 "MGA Products"....................................................5 1.18 "MGA Restricted Software".........................................5 1.19 "MGA Unrestricted Software".......................................5 1.21 "Pharsight Fields"................................................5 1.22 "Person"..........................................................5 1.24 "Used In Connection With".........................................6 2. SALE AND PURCHASE; ASSUMPTION OF LIABILITIES; PURCHASE PRICE; CLOSING...6 2.1 Sale and Purchase of the Acquired Assets..........................6 2.2 Assumed Agreements; Specified Contractual Liabilities.............6 2.3 Assumption of Liabilities.........................................6 2.4 Closing; Closing Deliverables.....................................7 2.5 Assignment of Contracts and Rights................................8 2.6 Complete Transfer.................................................8 2.7 Allocation........................................................8 i TABLE OF CONTENTS (CONTINUED) PAGE ---- 3. REPRESENTATIONS AND WARRANTIES OF SELLERS...............................8 3.1 Organization of MGA...............................................8 3.2 Authorization of Transaction......................................9 3.3 Non-Contravention.................................................9 3.4 Consents..........................................................9 3.5 Title to the Acquired Assets.....................................10 3.6 Assumed Agreements...............................................10 3.7 Intellectual Property............................................10 3.8 Ownership Transfer...............................................12 3.9 Litigation.......................................................12 3.10 Environmental Matters............................................12 3.11 Employment Matters...............................................13 3.12 Use Of Office Facilities.........................................13 3.13 Brokers' Fees....................................................13 3.14 Compliance with Bulk Sales Laws..................................13 3.15 Underlying Documents.............................................14 3.16 Investment Representation........................................14 3.17 Full Disclosure..................................................14 4. REPRESENTATIONS AND WARRANTIES OF PHARSIGHT............................14 4.1 Organization of Pharsight........................................14 4.2 Authorization of Transaction.....................................15 4.3 Non-Contravention................................................15 4.4 Brokers' Fees....................................................15 4.5 Acknowledgement..................................................15 5. POST-CLOSING COVENANTS AND AGREEMENTS..................................16 5.1 Cooperation; Further Assurances..................................16 5.2 Delivery; Removal of Excluded Assets.............................16 5.3 Notice of Developments...........................................16 5.4 Enforcement of Rights............................................16 5.5 Delivery of Notices..............................................16 ii TABLE OF CONTENTS (CONTINUED) PAGE ---- 5.6 Payment by Pharsight of Certain of Sellers' Costs................16 5.7 Reimbursement of Remaining Amounts...............................17 6. INDEMNIFICATION........................................................17 6.1 Indemnification and Reimbursement of Pharsight's Losses..........17 6.2 Indemnification and Reimbursement of Sellers's Losses............18 6.3 Payment..........................................................18 6.4 Notice of Claims.................................................18 6.5 Third Party Claims...............................................18 6.6 Disputed Claims..................................................19 6.7 Survival.........................................................19 6.8 Right of Setoff..................................................20 6.9 Sole Remedy; Co-Ownership Agreement Separate.....................20 7. MISCELLANEOUS..........................................................20 7.1 Further Assurances...............................................20 7.2 No Third Party Beneficiaries.....................................20 7.3 Entire Agreement.................................................21 7.4 Succession and Assignment........................................21 7.5 Counterparts.....................................................21 7.6 Headings.........................................................21 7.7 Notices..........................................................21 7.8 Governing Law....................................................22 7.9 Waiver...........................................................23 7.10 Amendments.......................................................23 7.11 Severability.....................................................23 7.12 Expenses.........................................................23 7.13 Transfer Taxes...................................................23 7.14 Confidentiality of Information...................................23 7.15 Construction.....................................................24 iii ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT (this "Agreement") is entered into on May 27, 1998, by and among PHARSIGHT CORPORATION, a California corporation ("Pharsight"), MITCHELL AND GAUTHIER ASSOCIATES, INC., a Delaware corporation ("MGA"), Edward E. L. Mitchell ("Mitchell"), and Joseph S. Gauthier ("Gauthier," and together with MGA and Mitchell, "Sellers"). RECITALS This Agreement contemplates a transaction in which Pharsight shall purchase certain assets (and assume certain future obligations) of MGA in return for the consideration described herein. AGREEMENT The parties, intending to be legally bound, hereby agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms have the meaning given to them below: 1.1 "Acquired Assets" means the following assets of MGA: (a) all right, title and interest in and to the MGA Unrestricted Software, including all software, Intellectual Property Rights and proprietary assets owned by MGA and exclusively Used In Connection With the MGA Unrestricted Software; (b) an exclusive (other than to MGA), unrestricted, perpetual, irrevocable, royalty-free, world-wide license to use, reproduce, create Derivative Works of, distribute, sublicense (through multiple tiers of sublicensees), perform, publicly display, make, manufacture, import and export any Intellectual Property and other proprietary assets owned by MGA, Used In Connection With the MGA Unrestricted Software and not included in (a) above; (c) all of MGA's rights under all Assumed Agreements, including the lease of the MGA Facility and all rights thereunder (including all security and other deposits and pre-paid rent); (d) an undivided one-half ownership interest in and to the MGA Restricted Software, both in Source Code and Object Code, with no right of accounting and with exclusive use in the Pharsight Fields (except as set forth in Section 4.2(b) of the Co-Ownership Agreement), with exclusive use in the MGA Fields (except as set forth in Section 4.2(a) of the Co-Ownership Agreement) to remain with MGA, as further set forth in the Co-Ownership Agreement; (e) an exclusive (even as to MGA), perpetual, irrevocable, royalty-free, world-wide license to use, reproduce, create Derivative Works of, distribute, sublicense (through multiple tiers of sublicensees), perform, publicly display, make, manufacture, import and export any Intellectual Property and other proprietary assets and all other assets not included in (d) 1 above owned by MGA and Used In Connection With the MGA Restricted Software in the Pharsight Fields, as further set forth in the Co-Ownership Agreement; (f) a non-exclusive, perpetual, irrevocable, royalty-free, world-wide license to use, reproduce, create Derivative Works of, distribute, sublicense (through multiple tiers of sublicensees), perform, publicly display, make, manufacture, import and export any Intellectual Property and other proprietary assets and all other assets not included in (d) above owned by MGA and Used In Connection With the MGA Restricted Software, in the MGA Fields, provided that such Intellectual Property, other proprietary assets or Derivative Works thereof, are incorporated or bundled with an additional Pharsight product (including, without limitation, ACSL BioMed or ACSL Tox) such that the resultant product is designed for use in the Pharsight Fields and represents an enhancement and/or transformation of such Intellectual Property or proprietary assets (with regard to both value and function), as further set forth in the Co-Ownership Agreement; (g) all machinery, equipment, furniture, leasehold improvements and other fixed assets owned by MGA located at the MGA Facility, together with all other assets located at the MGA Facility other than the Excluded Assets set forth in Section 1.8(a); (h) all business and financial records, books, files, plans, documents, correspondence, lists, drawings, notebooks, specifications, creative materials, advertising and promotional materials, marketing materials, studies and reports of MGA, whether written or electronically stored or otherwise recorded if, and only to the extent, that such foregoing items are exclusively Used in Connection With the Acquired Assets (not including the items of this subsection (h) for these purposes) or the Assumed Liabilities; provided, however, if such foregoing items are Used in Connection With the Acquired Assets (not including the items of this subsection (h) for these purposes) or the Assumed Liabilities other than on an exclusive basis, copies thereof shall be proved to Pharsight by MGA and Pharsight shall have the right to use such items in connection with the exercise of its rights pursuant to this Agreement and the Co-Ownership Agreement; (i) all indemnity and contribution rights granted to MGA or owed by third parties to MGA with respect to the Assumed Liabilities, and any and all rights or assets arising from and related to the defense, release, compromise, discharge, administration, management or satisfaction by MGA of the Assumed Liabilities; and (j) all of MGA's rights, claims, actions, causes of action, vendor, supplier and similar claims, judgments and demands of whatever nature arising out of or related to the Acquired Assets (for purposes hereof not including this subsection (j)) including, without limitation, MGA's rights, claims, actions, and causes of action arising out of or related to any employee confidentiality, proprietary information, invention assignment or other such agreements; provided, however, that if any of the foregoing items are not related exclusively to the Acquired Assets (not including the items of this subsection (j) for these purposes), Pharsight shall use its best efforts to afford MGA the benefits of the foregoing items in proportion to the extent to which such items do not relate exclusively to the Acquired Assets (not including the items of this subsection (j) for these purposes), and MGA and Pharsight will use their good faith best efforts to agree on such division of benefits. 2 Notwithstanding the foregoing, the Acquired Assets shall not include the Excluded Assets. 1.2 "Ancillary Agreements" means each of the agreements referred to in Section 2.4. 1.3 "Assumed Agreements" means each of the agreements set forth on Exhibit A. 1.4 "Assumed Liabilities" means only those liabilities and obligations arising after the Closing under each Assumed Agreement actually assigned to Pharsight pursuant to this Agreement. 1.5 "Co-Ownership Agreement" means the Co-Ownership Agreement, dated as of even date herewith, between MGA and Pharsight, pursuant to which, among other things, MGA assigns to Pharsight a one-half ownership interest in and to the MGA Restricted Software. 1.6 "Derivative Work" shall mean a work which is based on one or more pre-existing works, such as a revision, enhancement, modification, translation, abridgement, condensation, expansion, or any other form in which such software may be recast, transformed, or adapted, and which, if prepared without authorization of the owner of the copyright in the software, would constitute a copyright infringement. For purposes hereof, Derivative Work shall also include any compilation that incorporates any pre-existing work. 1.7 "Disclosure Schedule" shall mean the disclosure schedule separately delivered by Sellers to Pharsight concurrently with this Agreement, which schedule is initialed for identification by the parties. 1.8 "Excluded Assets" means the following assets: (a) MGA's Unix hardware, disk duplicators, and web site hardware and all manuals, articles, libraries and licenses Used In Connection With MGA's Unix system, in each case as listed in Exhibit B hereto; (b) an undivided one-half ownership interest in and to the MGA Restricted Software, both in Source Code and Object Code, with no right of accounting and with exclusive use in the MGA Fields (except as set forth in Section 4.2(a) of the Co-Ownership Agreement), with exclusive use in the Pharsight Fields (except as set forth in Section 4.2(b) of the Co-Ownership Agreement) to remain with Pharsight, as further set forth in the Co-Ownership Agreement; (c) except for the Assumed Agreements, all of MGA's rights with respect to any contracts, bids, subcontracts or other agreements for the provision of MGA services that do not relate to the Pharsight Fields, together with all related subcontracts, purchase orders and similar agreements (with such contracts, bids, subcontracts and agreements and the purchase orders and similar agreements relating thereto, together with all related change orders, extra work orders and other amendments and modifications thereto being referred to herein as the "Retained MGA Contracts"); (d) any capital stock or equity interest of MGA; 3 (e) all foreign federal, state or local tax refunds, tax refund claims and tax credits, deductions or other tax benefits of MGA; (f) all indemnity and contribution rights granted to MGA or owed by third parties to MGA with respect to any liability or obligations of any nature, fixed or contingent or known or unknown, of MGA whatsoever other than as set forth in Section 1.1(i) (herein "Retained Contribution Claims") and any and all rights or assets arising from and related to the defense, release, compromise, discharge, administration, management or satisfaction by MGA of the liabilities in respect of the Retained Contribution Claims; (g) all of MGA's rights, claims, actions, causes of action, vendor, supplier and similar claims, judgments and demands of whatever nature arising out of the Excluded Assets (for purposes hereof not including this subsection (g)); (h) all of MGA's deferred charges, advance payments, prepaid items, security and other deposits, claims for refunds, rights of offset, and credits of all kinds, relating specifically to the Excluded Assets (for purposes hereof not including this subsection (h)); (i) cash and other liquid assets and accounts receivable (other than accounts receivable related to the Assumed Agreements for services rendered or amounts accruing after the closing); and (j) the rights of MGA under this Agreement. 1.9 "Golden Master" shall mean, with respect to a given software program, program module, or documentation, a copy of such item that (i) is under source code control, (ii) is complete and accurate, (iii) represents the producer's best efforts to meet the applicable specifications, (iv) has passed all applicable test procedures, and (v) complies with normal industry practices for verification and duplication. 1.10 "Intellectual Property" means any or all of the following and all statutory and/or common law rights throughout the world in, arising out of, or associated therewith: (i) all patents and applications therefor and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (ii) all inventions (whether patentable or not), invention disclosures and improvements, all trade secrets, proprietary information, know-how and technology; (iii) all works of authorship, "moral rights", copyrights (including Derivative Works thereof), mask works, copyright and mask work registrations and applications; (iv) all industrial designs and any registrations and applications therefor; (v) all trade names, logos, trademarks and service marks, trademark and service mark registrations and applications together with the good will of the business symbolized by the names and the marks; (vi) all computer software and related documentation including all Source Code, Object Code, firmware, installation programs, source code control archives, development tools, test plans, test files, test data, build scripts, file specifications, design and implementation documents, interface specifications, requirements specifications, data bases, utilities, bug databases, and all media on which any of the foregoing is recorded; (vii) any similar, corresponding or equivalent rights to any of the foregoing; and (viii) all goodwill associated with any of the foregoing. 4 1.11 "Intellectual Property Rights" shall mean any interest or right protectable under the law of any country as to any form of Intellectual Property. 1.12 "Legal Requirement" means any federal, state, local, municipal, foreign, international, multinational, or other administrative order, constitution, law, ordinance, principle of common law, regulation, rule, restriction, statute, or treaty. 1.13 "Lien" means any mortgage, pledge, lien, security interest, charge, claim, equity, encumbrance, restriction on transfer, conditional sale or other title retention device or arrangement (including a capital lease), transfer for the purpose of subjection to the payment of any indebtedness, or restriction on the creation of any of the foregoing, whether relating to any property or right or the income or profits therefrom. 1.14 "MGA Facility" means MGA's facility located at 200 Baker Avenue, Concord, Massachusetts. 1.15 "MGA Fields" shall mean all fields other than the Pharsight Fields. 1.16 "MGA Intellectual Property" means Intellectual Property owned by MGA that constitutes an Acquired Asset. 1.17 "MGA Products" means the MGA Restricted Software and the MGA Unrestricted Software. 1.18 "MGA Restricted Software" means the "Software" as defined in the Co-Ownership Agreement. 1.19 "MGA Unrestricted Software" means the following products of MGA and any Derivative Work thereof, both in Source Code and Object Code: ACSL Biomed, and ACSL Tox, including any upgrades, updates, works in progress, and all associated documentation (existing as of the Effective Date) developed by or for MGA and other components, programs or utilities required for the operation or execution thereof, except as set forth in Exhibit D of the Co-Ownership Agreement, but not including the MGA Restricted Software included therein. 1.20 "Object Code" shall mean a machine-executable object code form of the software. 1.21 "Pharsight Fields" shall mean the biotechnology, pharmaceutical (including over-the-counter), veterinary, medical devices, environmental and healthcare fields. 1.22 "Person" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). 1.23 "Source Code" shall mean a human-readable source code version of the software and all related program documentation such that a programmer reasonably skilled in the programming language could read, understand and modify the software. 5 1.24 "Used In Connection With" means with respect to any asset, tangible or intangible, currently used in connection with, has ever been used in connection with, is or was intended for use in connection with, is necessary for use in connection with, or is reasonably desirable for use in connection with, such assets. 2. SALE AND PURCHASE; ASSUMPTION OF LIABILITIES; PURCHASE PRICE; CLOSING. 2.1 Sale and Purchase of the Acquired Assets. At the Closing (as defined below), on the terms and subject to the conditions of this Agreement and the Co-Ownership Agreement, MGA shall sell and Pharsight shall purchase all of the Acquired Assets for the following consideration: (a) $2,000,000, to be paid at the Closing by check; (b) $1,750,000, to be paid at the Closing in the form of a promissory note (the "Promissory Note") in such principal amount, bearing simple interest at a rate of 8.0% per annum and which shall be payable (i) one year from the date of issuance in the principal amount of $875,000 together with interest accrued on such principal amount paid, and (ii) two years from the date of issuance in the principal amount of $875,000 together with interest accrued on such principal amount paid; (c) 246,250 shares of Pharsight Common Stock, to be issued, at the direction of the Sellers, to the following persons as follows: (i) 140,000 shares to Mitchell; (ii) 60,000 shares to Gauthier; (iii) 25,000 shares to Mike Gauthier; (iv) 10,000 shares to Andy Levine; (v) 5,000 shares to Mark Sale; (vi) 2,500 shares to Sining Fang; (vii) 2,500 shares to Michael Dunlavy; and (viii) 1,250 shares to Sharon Kumnick; (d) The obligations of Pharsight under Sections 5.6 and 5.7 hereof; and (e) The assumption of the Assumed Liabilities. 2.2 Assumed Agreements; Specified Contractual Liabilities. From and after the Closing, Pharsight shall be entitled to the benefit of all of the Assumed Agreements. Sellers shall give such assistance to Pharsight as Pharsight shall reasonably request to enable Pharsight to enjoy the benefit of the Assumed Agreements. 2.3 Assumption of Liabilities. At the Closing, on the terms and subject to the conditions of this Agreement, Pharsight agrees to assume and become responsible for all of the Assumed Liabilities. Pharsight shall not assume or have any responsibility, however, with respect to any other obligation or liability of MGA that is not an Assumed Liability. Without limiting the foregoing, Pharsight shall not assume or be responsible for (i) any liabilities relating to events arising or occurring prior to the Closing, regardless of when payable, or (ii) any and all 6 sales taxes, use taxes, transfer taxes, filing fees and similar taxes, fees, charges and expenses required to be paid in connection with the transactions contemplated by this Agreement, and all such liabilities shall be for the account of MGA. 2.4 Closing; Closing Deliverables. The closing shall occur in the offices of Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, CA 94306-2155, upon the execution and delivery of this Agreement by the parties hereto ("Closing"). At the Closing the parties will deliver the following documents, and such additional documents as the parties may agree to transfer ownership of the Acquired Assets to Pharsight (which shall be in form satisfactory to both parties) : (a) Sellers shall deliver to Pharsight: (i) A bill of sale and assignment, executed by MGA, for the Acquired Assets; (ii) An assignment and assumption agreement (the "Assignment and Assumption Agreement"), executed by MGA, assigning the Assumed Agreements; (iii) The Co-Ownership Agreement, executed by Sellers; (iv) Copyright assignments as set forth in Exhibit C and the Co-Ownership Agreement; (v) Noncompetition Agreements, executed by each of Mitchell and Gauthier; (vi) An Estoppel Certificate, executed by the lessor under the lease of the MGA Facility; (vii) A Quitclaim by Mark Sale as to any right, title and interest he may have in and to the MGA Products; (viii) Evidence that notice of termination of each of the distribution agreements listed on Exhibit D has been given with respect to (A) the MGA Unrestricted Software covered thereby and (B) the MGA Restricted Software covered thereby in the Pharsight Fields; and (ix) The Disclosure Schedule (as defined below). (b) Pharsight shall deliver the following documents: (i) The cash portion of the purchase price as set forth in Section 2.1(a); (ii) The Promissory Note, as set forth in Section 2.1(b); (iii) The Noncompetition Agreements, executed by Pharsight; and (iv) The Assignment and Assumption Agreement, executed by Pharsight, pursuant to which Pharsight is assuming the Assumed Liabilities. 7 2.5 Assignment of Contracts and Rights. Anything in this Agreement to the contrary notwithstanding, neither this Agreement nor the consummation of the transactions contemplated hereby shall constitute an assignment, or an agreement to assign, any Acquired Asset or any claim or right or any benefit arising thereunder or resulting therefrom (a "Consent-Required Asset") if an attempted assignment of such Consent-Required Asset, without consent of one or more third parties, would constitute a breach or other contravention thereof or would in any way adversely affect the rights of Pharsight or MGA thereunder; provided, however, that once all such consents are obtained, this Agreement shall automatically effect an immediate assignment of such Consent-Required Asset without further action by either party hereto. Pharsight and MGA will use their commercially reasonable efforts (which shall not be deemed to require any payment of money or other value by Pharsight or MGA) to obtain the consent of the other parties to any such Consent-Required Asset for the assignment thereof to Pharsight as Pharsight may reasonably request. If such consent is not obtained, or if an attempted assignment thereof would be ineffective or would adversely affect the rights of MGA thereunder so that Pharsight would not in fact receive all such rights, Sellers and Pharsight will cooperate in a mutually agreeable arrangement under which Pharsight would obtain the benefits and assume the obligations thereunder in accordance with this Agreement, including sub-contracting or sub-licensing to Pharsight, or under which Sellers would enforce for the benefit of Pharsight, with Pharsight assuming MGA's obligations, any and all rights of MGA against a third party thereto. Sellers will promptly pay or assign to Pharsight when received all monies received by Sellers with respect to any Consent-Required Asset and any claim or right or any benefit arising thereunder, except to the extent the same represents an Excluded Asset. Nothing in this Section 2.5 shall be construed to diminish the representations, warranties and covenants of Sellers respecting such consents. 2.6 Complete Transfer. Sellers expressly agree that the sale of the Acquired Assets constitutes a transfer of all of MGA's rights with respect to the Acquired Assets and that Sellers reserve no rights to market or otherwise transfer the Acquired Assets (other than the MGA Restricted Software in fields other than the Pharsight Fields). 2.7 Allocation. Pharsight and MGA shall use their best efforts to mutually agree, within forty-five (45) days after the Closing, upon the manner in which the consideration referred to in Section 2.1 is to be allocated among the Acquired Assets. If Pharsight and MGA shall not agree upon such allocation, at the end of such 45 day period the parties shall proceed as required by the Internal Revenue Code. Pharsight and Sellers shall not file any tax return or other document with, or make any statement or declaration to, any governmental body that is inconsistent with the allocation determined in accordance with this Section 2.7. 3. REPRESENTATIONS AND WARRANTIES OF SELLERS. Sellers, jointly and severally, represent and warrant to Pharsight that the statements contained in this Section 3 are correct and complete as of the Closing, except as set forth in the Disclosure Schedule: 3.1 Organization of MGA. MGA is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. MGA has all requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as 8 presently conducted and as presently proposed to be conducted. MGA is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on the Acquired Assets or Assumed Liabilities. 3.2 Authorization of Transaction. Each Seller has full power and authority to execute and deliver this Agreement, and the Ancillary Agreements to which it is a party, and to perform its obligations hereunder and thereunder. Without limiting the generality of the foregoing, MGA has taken all corporate and other action required for the execution, delivery and performance of this Agreement, and the Ancillary Agreements to which it is a party, including the sale of the Acquired Assets as provided herein. This Agreement constitutes the valid and legally binding obligation of each of the Sellers, and each of the Ancillary Agreements constitutes the valid and legally binding obligation of each of the Sellers a party thereto, in each case enforceable in accordance with its terms. The persons who have executed this Agreement, and the Ancillary Agreements to which MGA is a party, on behalf of MGA have been duly authorized to do so. 3.3 Non-Contravention. Neither the execution and the delivery of this Agreement or the Ancillary Agreements, nor the consummation of the transactions contemplated hereby or thereby, shall (i) violate any (A) statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which any Seller is subject or (B) any provision of the charter or bylaws of MGA or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require a notice under any contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, security interest, or other arrangement to which any Seller is a party or by which it is bound or to which any of its assets is subject, except where the violations, conflicts, breaches, defaults, accelerations, terminations, modifications, cancellations or failures to give notice, individually or in the aggregate, would not have a material adverse effect on the Acquired Assets, the Assumed Liabilities or the ability of the parties to consummate the transactions contemplated by this Agreement and the Ancillary Agreements (a "Material Adverse Effect"). Sellers need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order for the parties to consummate the transactions contemplated by this Agreement and the Ancillary Agreements, except where the failure to do so, individually or in the aggregate, would not have a Material Adverse Effect. 3.4 Consents. No approvals, waivers or consents of or assignments by any Person (including any federal, state or local governmental or administrative authorities) are necessary in connection with the execution, delivery or performance of this Agreement or the Ancillary Agreements. All notices, consents or waivers to the transfer or assignment of the Acquired Assets, including but not limited to the Assumed Agreements, required from third Persons have been given or obtained prior to the date hereof. 9 3.5 Title to the Acquired Assets. MGA has good and marketable title, free and clear of all Liens, to the Acquired Assets. When transferred to Pharsight at the Closing, Pharsight will acquire the Acquired Assets free and clear of all Liens. 3.6 Assumed Agreements. (a) True, correct and complete copies of the Assumed Agreements have been delivered to Pharsight. MGA has performed in all material respects all obligations required to be performed by MGA under the Assumed Agreements. To Sellers' knowledge, each of the other parties to the Assumed Agreements has performed in all material respects all the obligations required to be performed by them thereunder to date. Each Assumed Agreement (i) is valid, binding and enforceable against the parties thereto in accordance with its terms, (ii) is in full force and effect with no default or dispute existing or, to Sellers' knowledge, threatened with respect thereto, and no notice of termination has been provided to MGA, or to Sellers' knowledge threatened, thereunder, and (iii) shall not be terminated or otherwise affected by the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. No consent of any third party is required for the assignment of any Assumed Agreement to Pharsight, other than such consents as have been obtained prior to the date hereof. Sellers have provided Pharsight with a complete and accurate list of payments paid to MGA by each licensee under the Assumed Agreements, indicating the licensee and the month paid, from January 31, 1996 to present. MGA has not received any advanced payments (including prepayments of royalties, or other payments by reason of which a licensee is entitled to reduce its current or future royalty or payment obligations) under the Assumed Agreements which have not been earned by MGA. (b) The Assumed Agreements include (i) all supply agreements, customer agreements, license agreements, maintenance agreements, service agreements and other contracts to which MGA is a party relating to the MGA Unrestricted Software, and (ii) all supply agreements, customer agreements, license agreements, maintenance agreements, service agreements and other contracts to which MGA is a party relating to the MGA Restricted Software and that relate to the Pharsight Fields. 3.7 Intellectual Property. (a) The MGA Intellectual Property constitutes all the Intellectual Property Used in Connection With the conduct of MGA's business in the Pharsight Fields as currently being or proposed to be conducted by MGA. (b) MGA owns no Intellectual Property Rights not included in the Acquired Assets that are competitive with or are otherwise applicable to the Intellectual Property Used in Connection With the conduct of MGA's business in the Pharsight Fields as currently being or proposed to be conducted by MGA. (c) None of the MGA Intellectual Property is subject to any proceeding or outstanding decree, order, judgment, agreement or stipulation that restricts in any manner the use, transfer or licensing thereof by MGA or may affect the validity, use or enforceability of such MGA Intellectual Property. 10 (d) With respect to the transfer of MGA Unrestricted Software under this Agreement, Pharsight will be subject to no limitations, obligations or restrictions with regard to the sale, license, distribution or other transfer or exploitation of the MGA Unrestricted Software, whether in the form transferred to Pharsight or after modification, including, but not limited to, any of the foregoing arising out of any distribution, license or other agreements previously entered into by MGA or any of its affiliates. (e) With respect to the transfer of rights in the MGA Restricted Software under this Agreement and the Co-Ownership Agreement, Pharsight will be subject, except as otherwise provided herein or therein, to no limitations, obligations or restrictions with regard to the sale, license, distribution or other transfer or exploitation of the MGA Restricted Software in the Pharsight Fields, whether in the form transferred to Pharsight or after modification, including, but not limited to, any limitations, obligations or restrictions arising out of any distribution, license or other agreements previously entered into by MGA or any of its affiliates. (f) The Acquired Assets contain all components, programs or utilities required for the operation or execution of the MGA Products. (g) MGA has not transferred ownership of or granted any license of or right to use or authorized the retention of any rights to use any MGA Intellectual Property to any other Person other than pursuant to the terms of the Assumed Agreements set forth on Exhibit A hereto. (h) MGA is not, and following the Closing Pharsight will not be, required to make or accrue any royalty payment to any third party in connection with the sale, distribution, license, transfer or other disposition or exploitation of any of the Acquired Assets. (i) There are no contracts, licenses or agreements between MGA and any other Person with respect to MGA Intellectual Property under which there is, to Sellers' knowledge, any dispute or any threatened dispute regarding the scope of such agreement, or performance under such agreement including with respect to any payments to be made or received by MGA thereunder. (j) Neither the MGA Products nor the use of the MGA Intellectual Property (A) infringes upon or misappropriates the Intellectual Property of any Person, (B) violates the rights of any Person (including rights to privacy or publicity), or (C) constitutes unfair competition or trade practices under the laws of any jurisdiction. There are no pending or, to Sellers' knowledge, threatened claims against Sellers alleging any of the foregoing nor are Sellers aware of any reasonable basis upon which any party might allege any of the foregoing. (k) Each software developer or other Person who has performed services for MGA or otherwise assisted in the development of the MGA Products has assigned to MGA any right, title and interest he or she may have in and to the MGA Products and the use thereof. (l) MGA and, to Sellers' knowledge, each prior owner of the MGA Intellectual Property have taken and will take all reasonable security measures to protect the secrecy, confidentiality and value of all Intellectual Property Rights transferred in accordance with this Agreement and with the Co-Ownership Assignment Agreement. 11 (m) The Acquired Assets include all assets, properties and rights necessary for compliance by Pharsight with all obligations relating to the Assumed Liabilities. (n) Except as set forth on Part 3.7(n) of the Disclosure Schedule, (i) the MGA Restricted Software is an original work of MGA, and any third parties with rights thereto have executed binding assignments of rights in favor or MGA in or to the MGA Restricted Software; (ii) neither the MGA Restricted Software nor, to Sellers' knowledge, the Trademarks (as defined in Section 4.3 of the Co-Ownership Agreement), nor any element thereof infringes the Intellectual Property Rights of any third party; (iii) neither the MGA Restricted Software nor any element thereof is subject to any restrictions or to any mortgages, liens, pledges, security interests, encumbrances or encroachments; (iv) the MGA Restricted Software and related documentation delivered pursuant to Section 3 of the Co-Ownership Agreement is complete, accurate and current as of the date hereof; (v) to the knowledge of Sellers, the Trademarks (as defined in Section 4.3 of the Co-Ownership Agreement) licensed pursuant to Section 4.3 of the Co-Ownership Agreement do not infringe the Intellectual Property Rights of any third party; and (vi) MGA has not granted, directly or indirectly, any rights or interest in the MGA Restricted Software to third parties that are inconsistent with the rights assigned to Pharsight herein and under the Co-Ownership Agreement. 3.8 Ownership Transfer. Ownership of and all rights to all versions of the Acquired Assets (other than the one-half ownership interest of MGA in and to the MGA Restricted Software) will be transferred from MGA to Pharsight at the Closing; all copies of the MGA Unrestricted Software in the possession of Sellers or under their control will be transferred to Pharsight at the Closing; and neither Sellers nor any third party under any Seller's control will have retained any copies of the MGA Unrestricted Software. Co-ownership of and certain rights to the MGA Restricted Software all as more fully set forth in the Co-Ownership Agreement, will be transferred from MGA to Pharsight at the Closing. 3.9 Litigation. There is no claim, dispute, action, proceeding (including arbitration), suit or appeal, or investigation, at law or in equity, pending (other than those, if any, with respect to which service of process or similar notice has not yet been made and which are not within Sellers' knowledge) or, to Sellers' knowledge, threatened against any Seller or involving any of the Acquired Assets before any court, agency, authority, arbitration panel or other tribunal that would have a Material Adverse Effect. There is no outstanding order, writ, injunction or decree of any court, agency, authority, arbitration panel or other tribunal, and MGA is not in default with respect to any notice, order, writ, injunction, or decree, in each case relating to, or affecting the Acquired Assets or the Assumed Liabilities. 3.10 Environmental Matters. To Sellers' knowledge, MGA has at all times been in compliance with, and is not currently in violation of, any Legal Requirement relating to the environment or occupational health and safety, and to Sellers' knowledge, no material expenditures are or will be required in order to comply with any such existing Legal Requirement. Sellers have no basis to expect, nor has any of them or any other Person for whose conduct they are or may be held to be responsible received, any actual or threatened order, notice, or other communication from (i) any governmental body, private citizen acting in the public interest or any other Person, or (ii) the current or prior owner or operator of MGA's properties, of any actual or potential violation or failure to comply with any Legal Requirement 12 relating to the environment or occupational health and safety, or of any actual or threatened obligation to undertake or bear the cost of any environmental, health, and safety liabilities with respect to any of the properties of MGA (whether real, personal, or mixed) in which any of Sellers has had an interest, or with respect to any property at or to which hazardous materials were generated, manufactured, refined, transferred, imported, used, or processed by Sellers or any other Person for whose conduct they are or may be held responsible, or from which hazardous materials have been transported, treated, stored, handled, transferred, disposed, recycled or received. Sellers have made all filings with governmental bodies or agencies, voluntary or involuntary, relating to the environment which may be necessary or appropriate to mitigate any exposure to liabilities arising from activities related to the environment or under Legal Requirements related to the environment. Sellers have delivered to Pharsight true and complete copies and results of any reports, studies, analyses, tests, or monitoring possessed or initiated by Sellers pertaining to hazardous materials or hazardous activities in, on, or under the properties of MGA, or concerning compliance by Sellers or any other Person for whose conduct they are or may be held responsible, with any Legal Requirement relating to the environment. 3.11 Employment Matters. Pharsight will not become liable to any employee of MGA, as a result of the transactions contemplated by this Agreement, for any obligations under any employment contracts, any pension, bonus, profit-sharing, stock option or other arrangement providing for employee remuneration or benefits of MGA, or, to the knowledge of Sellers, under the Employee Retirement Income Security Act of 1974, other than pursuant to contracts entered into separately and directly between Pharsight and any such employees, if any. Sellers and, to the knowledge of Sellers, MGA's officers and directors have (i) used their best efforts to support Pharsight's offers of employment to MGA employees who Pharsight desires to employ and to secure for Pharsight the employment of such MGA employees, and (ii) have taken no actions which would discourage such MGA employees from accepting such employment or otherwise have the effect of impeding the efforts of Pharsight to secure employment of such MGA employees. 3.12 Use Of Office Facilities. MGA has maintained the MGA Facility in material compliance with MGA's lease of the MGA Facility. The MGA Facility is in good condition and fit for the purposes for which MGA uses the MGA Facility, ordinary wear and tear excepted. MGA has obtained all necessary permits and approvals required for the use of the MGA Facility as is currently being used, and the transactions contemplated by this Agreement will not cause any such permit to be canceled or otherwise affected so that Pharsight will not have the full benefit of such permits or approvals. Since March 12, 1998, MGA has not removed or allowed the removal of any of the items or materials identified in Section 1.1(f) from the MGA Facility, other than in the normal course of business operations. 3.13 Brokers' Fees. No Seller has agreed or become obligated to pay, or has taken any action that might result in any party claiming to be entitled to receive, any brokerage commission, finder's fee or similar commission or fee in connection with any of the transactions contemplated by this Agreement. 3.14 Compliance with Bulk Sales Laws. Sellers have taken all actions necessary for the sale, transfer and assignment of the Acquired Assets by MGA to Pharsight hereunder and for 13 the consummation of the other transactions contemplated hereby to comply with the bulk sales laws of all applicable jurisdictions. 3.15 Underlying Documents. Copies of all documents listed or described in the Disclosure Schedule and the Exhibits hereto have been furnished to Pharsight. All such documents are true, correct and complete copies, and there are no amendments or modifications thereto. 3.16 Investment Representation. MGA with respect to the Promissory Note referenced in Section 2.1(b), and each of Mitchell and Gauthier with respect to the shares of Pharsight Common Stock referenced in Section 2.1(c) (collectively, the "Securities"): (a) taking into account the personnel and resources such Seller can practically bring to bear on the acquisition of such Securities, either alone or together with the advice of such Seller's purchaser representative, is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments in shares presenting an investment decision like that involved in the acquisition of such Securities, and has requested, received, reviewed and considered, either alone or with such Seller's purchaser representative, all information such Seller deems relevant in making an informed decision to acquire such Securities; (b) is acquiring such Securities for such Seller's own account for investment only and with no present intention of distributing any of such Securities or any arrangement or understanding with any other persons regarding the distribution of such Securities except in compliance with Section 3.16(c). (c) will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of such Securities acquired hereunder except in compliance with the Securities Act of 1933, as amended (the "Securities Act"), applicable blue sky laws, and the rules and regulations promulgated thereunder. 3.17 Full Disclosure. Neither this Agreement, the Ancillary Agreements, the Disclosure Schedule or the Exhibits hereto, nor, to Sellers' knowledge, any other documents delivered by Sellers in connection with this Agreement contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading, and, to Sellers' knowledge, there is no fact that has not been disclosed to Pharsight that materially and adversely affects or could reasonably be anticipated to materially and adversely affect the Acquired Assets, or the operation of the Acquired Assets by Pharsight as currently conducted by MGA. 4. REPRESENTATIONS AND WARRANTIES OF PHARSIGHT. Pharsight represents and warrants to Sellers that the statements contained in this Section 4 are correct and complete as of the Closing. 4.1 Organization of Pharsight. Pharsight is a corporation duly organized, validly existing, and in good standing under the laws of the State of California. Pharsight has all requisite corporate power and authority to own and operate its properties and assets, and to carry 14 on its business as presently conducted and as presently proposed to be conducted. Pharsight is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on the business of Pharsight. 4.2 Authorization of Transaction. Pharsight has full power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party and to perform its obligations hereunder and thereunder. Without limiting the generality of the foregoing, Pharsight has taken all corporate and other action required for the execution, delivery and performance of this Agreement and the Ancillary Agreements to which it is a party. This Agreement and each of the Ancillary Agreements to which it is a party constitutes the valid and legally binding obligation of Pharsight, in each case enforceable in accordance with its terms. The persons who have executed this Agreement and the Ancillary Agreements to which Pharsight is a party on behalf of Pharsight have been duly authorized to do so. 4.3 Non-Contravention. Neither the execution and the delivery of this Agreement or the Ancillary Agreements, nor the consummation of the transactions contemplated hereby or thereby, shall (i) violate any (A) statute, regulation, rule, judgment, order, decree, stipulation, injunction, charge, or other restriction of any government, governmental agency, or court to which Pharsight is subject or (B) any provision of the articles of incorporation or bylaws of Pharsight or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require a notice under any contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, security interest, or other arrangement to which Pharsight is a party or by which it is bound or to which any of its assets is subject, except where the violations, conflicts, breaches, defaults, accelerations, terminations, modifications, cancellations or failures to give notice, individually or in the aggregate, would not have a material adverse effect on the business of Pharsight. Pharsight need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order for the parties to consummate the transactions contemplated by this Agreement, except where the failure to do so, individually or in the aggregate, would not have a material adverse effect on the business of Pharsight. 4.4 Brokers' Fees. Pharsight has not agreed or become obligated to pay, or has taken any action that might result in any party claiming to be entitled to receive, any brokerage commission, finder's fee or similar commission or fee in connection with any of the transactions contemplated by this Agreement. 4.5 Acknowledgement. Pharsight understands that MGA may in the future desire to sell, transfer, assign or license any and all rights, including Intellectual Property Rights, to the MGA Restricted Software to a third party for use in the MGA Fields. This acknowledgement does not constitute a consent by Pharsight to any such action or act in any way restrict or diminish Pharsight's rights under this Agreement, the Co-Ownership Agreement or any other agreement contemplated hereby. 15 5. POST-CLOSING COVENANTS AND AGREEMENTS. 5.1 Cooperation; Further Assurances. Each party hereto shall, at all times following the Closing, not take any action inconsistent with the satisfaction of its obligations hereunder, and shall promptly take any further action necessary or desirable to carry out the purposes of this Agreement and the Ancillary Agreements (including the execution and delivery of such further instruments and documents) as the other party may reasonably request. 5.2 Delivery; Removal of Excluded Assets. (a) Upon execution of this Agreement, MGA shall provide to Pharsight five (5) Golden Masters of the Object Code of the MGA Products, two (2) electronic copies of the Source Code corresponding to the Golden Master Object Code of the MGA Products, and five (5) Golden Masters and two (2) printed copies of any end-user documentation for the MGA Products. Without limiting the foregoing, MGA's delivery shall include everything Pharsight needs to recreate the most current released version, and every supported prior version, of each of the MGA Products for all currently supported platforms, including copies of all firmware, installation programs, source code control archives, development tools, test plans, test files, test data, build scripts, file specifications, design and implementation documents, interface specifications, requirements specifications, data bases, utilities, and bug databases. (b) Sellers shall promptly put all of the Excluded Assets in the subleased portion of the MGA Facility. 5.3 Notice of Developments. Each party shall give prompt written notice to the other parties of any material development that could have a Material Adverse Effect. Each party shall give prompt written notice to the other parties of any material development affecting the ability of the parties to perform their post-Closing obligations under this Agreement. 5.4 Enforcement of Rights. In connection with the enforcement of its rights of ownership of the Acquired Assets and the enjoyment thereof, Pharsight may bring actions in the name of Sellers, or cause Sellers to join any such action as a party, as reasonably necessary, provided that Pharsight shall indemnify Sellers with respect thereto unless and to the extent such actions are based upon facts constituting a material breach of a representation, warranty or covenant of any of Sellers hereunder or under any of the Ancillary Agreements. 5.5 Delivery of Notices. After the Closing, each of Sellers shall promptly forward to Pharsight any and all notices and correspondence which it may receive pertaining to the Acquired Assets, and MGA shall remain responsible for the maintenance of all Consent-Required Assets retained by MGA pursuant to Section 2.5 as a consequence of the failure to obtain a required consent of a third party until such time as the applicable consent is obtained. 5.6 Payment by Pharsight of Certain of Sellers' Costs. Pharsight shall pay directly or reimburse Sellers for, up to an aggregate of $250,000, reasonable, documented out-of-pocket legal, accounting and severance costs incurred by Sellers and tendered to Pharsight for payment prior to or in the twelve months following the Closing, in connection with the sale of the Acquired Assets hereunder and the termination of employment of employees of MGA to whom Pharsight determines not to offer employment; provided, however, that Pharsight shall not be 16 obligated to pay any amount in connection with the termination of any MGA employee hereunder unless (i) Sellers shall have obtained from such employee and delivered to Pharsight a general release of liability, in form and substance reasonably satisfactory to Pharsight, executed by and enforceable against such terminated employee releasing Pharsight from any liabilities Pharsight may have to such employee, and (ii) Sellers shall have complied with all Legal Requirements in connection with the termination of such MGA employee, including with respect to obtaining such general release. Following such twelve-month period Pharsight shall have no further obligations under this Section 5.6. 5.7 Reimbursement of Remaining Amounts. Pharsight will pay to MGA, on the date twelve months following the Closing, the sum of $250,000 less all amounts paid by Pharsight under Section 5.6 (the "Remaining Amount); provided, however, that Pharsight shall have no obligation to pay the Remaining Amount if, on such date, (i) Pharsight shall not have received a general release from Michael Gauthier, if terminated on or prior to such date, in form and substance as referred to in the proviso of Section 5.6, and (ii) Pharsight shall not have received a general release from Mark Sale, if terminated on or prior to such date, in form and substance as referred to in the proviso of Section 5.6; provided further, that if the provisions of the previous proviso have been complied with, Pharsight shall only be obligated to pay the proportion of the Remaining Amount as equals the Remaining Amount multiplied by the Release Termination Ratio. The "Release Termination Ratio" shall be (i) the total number of MGA employees on the date hereof that are terminated by MGA on or prior to one year from the date hereof and from which Pharsight has received a general release in form and substance as referred to in the proviso of Section 5.6, divided by(ii) the total number of MGA employees on the date hereof that are terminated by MGA on or prior to one year from the date hereof. 6. INDEMNIFICATION. 6.1 Indemnification and Reimbursement of Pharsight's Losses. Sellers, jointly and severally, shall indemnify Pharsight and its affiliates, together with their respective officers, directors and employees (each a "Sellers' Indemnitee") against Losses (as defined below) as set forth in this Section 6. If a Sellers's Indemnitee shall have suffered a Loss by reason of (i) the breach of any of the representations or warranties made by Sellers herein, (ii) any liabilities under the Assumed Agreements arising prior to the Closing, whether or not disclosed to Pharsight prior to the Closing, (iii) any liability of Sellers that is not an Assumed Liability, including any successor liability to MGA employees or former MGA employees not hired by Pharsight to which Pharsight may become subject as a result of the purchase of the Acquired Assets, or (iv) any breach of a covenant of Sellers hereunder, Sellers's Indemnitee shall be reimbursed for such Loss by Sellers as set forth in this Section 6. For purposes hereof, "Loss" shall mean any losses, liabilities, claims, damages and expenses incurred or reasonably expected to be incurred, including penalties, fines, interest, amounts paid in settlement and reasonable fees and disbursements of counsel, and expenses incurred in connection with any investigation, action, suit or proceeding instituted against an indemnified party, including in connection with any action taken to enforce such indemnified party's rights under this Agreement or the Ancillary Agreements. Notwithstanding the foregoing, Sellers shall have no obligation to indemnify Sellers's Indemnitees for Losses which, cumulatively, total less than $50,000; 17 provided, however, that if cumulative Losses equal or exceed said $50,000, then Sellers shall indemnify Sellers's Indemnitees for all of such Losses, including such $50,000. The total of all Liquidated Claims (as defined below) actually paid by Mitchell and/or Gauthier (but not MGA) under this Section 6, other than Claims or Third Party Claims based upon fraud or willful misconduct by Mitchell or Gauthier, shall be limited to an aggregate of $4.5 million, including any payments contemplated under Section 6.8 of this Agreement withheld or set off by Pharsight. 6.2 Indemnification and Reimbursement of Sellers's Losses. Pharsight shall indemnify Sellers, together with MGA's affiliates, directors and employees (each a "Pharsight's Indemnitee") against Losses as set forth in this Section 6. If a Pharsight's Indemnitee shall have suffered a Loss by reason of (i) the breach of any of the representations or warranties made by Pharsight herein, (ii) any Assumed Liability, provided such Assumed Liability is not related to or arising from any breach of a covenant, representation or warranty of Sellers or any act or omission by Sellers involving willful misconduct, fraud or bad faith, or (iii) any breach of a covenant of Pharsight hereunder, Pharsight's Indemnitee shall be reimbursed for such Loss by Pharsight as set forth in this Section 6. Notwithstanding the foregoing, Pharsight shall have no obligation to indemnify Pharsight's Indemnitees for Losses which, cumulatively, total less than $50,000, provided however that if cumulative Losses equal or exceed said $50,000, then Pharsight shall indemnify Pharsight's Indemnitees for all of such Losses, including such $50,000. 6.3 Payment. At such time as the reimbursable amount of a Claim (as defined below) or a Third Party Claim (as defined below) has been determined in accordance with this Section 6 (a "Liquidated Claim"), the indemnifying party shall immediately pay the Person to be indemnified hereunder (an "Indemnitee") the amount of the Liquidated Claim. No forbearance of an Indemnitee in demanding payment from the indemnifying party shall act as a waiver of any right of an Indemnitee to receive payment from the indemnifying party, nor shall it relieve the indemnifying party of any obligation to an Indemnitee under this Agreement. 6.4 Notice of Claims. In the event an Indemnitee has any claim for indemnification under Section 6.1 or Section 6.2 (a "Claim"), it shall give prompt written notice thereof to the indemnifying party, including in such notice a brief description of the facts upon which such claim is based and the amount thereof. 6.5 Third Party Claims. (a) If any third party shall notify an Indemnitee with respect to any matter (a "Third Party Claim") that may give rise to a claim for indemnification against a party hereto (the "Indemnifying Party") under this Section 6, then the Indemnitee shall promptly notify the Indemnifying Party thereof in writing; provided, however, that no delay on the part of the Indemnitee in notifying the Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder, unless (and then solely to the extent that) the Indemnifying Party is prejudiced. (b) The Indemnifying Party shall have the right to defend the Indemnitee against the Third Party Claim with counsel of the Indemnifying Party's choice reasonably 18 satisfactory to the Indemnitee so long as: (A) the Indemnifying Party notifies the Indemnitee within 15 days after the Indemnitee has given notice of the Third Party Claim that the Indemnifying Party will indemnify the Indemnitee as required by (and subject to the limitations of) this Section 6 for Losses arising out of, relating to, in the nature of, or caused by the Third Party Claim; (B) the Indemnifying Party provides the Indemnitee with evidence reasonably acceptable to the Indemnitee that the Indemnifying Party will have the financial resources to defend against the Third Party Claim and fulfill its indemnification obligations hereunder; (C) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief; and (D) the Indemnifying Party conducts the defense of the Third Party Claim actively and diligently. (c) So long as the Indemnifying Party is conducting the defense of the Third Party Claim in accordance with Section 6.5(b) above: (A) the Indemnitee may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim; (B) the Indemnitee shall not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (not to be withheld unreasonably); and (C) the Indemnifying Party shall not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnitee (not to be withheld unreasonably). (d) In the event any of the conditions in Section 6.5(b) above is or becomes unsatisfied; (A) the Indemnitee may defend against, and consent to the entry of any judgment or enter into any settlement with respect to, the Third Party Claim in any manner it reasonably may deem appropriate (and the Indemnitee need not consult with or obtain any consent from, any Indemnifying Party in connection therewith); (B) the Indemnifying Party shall reimburse the Indemnitee promptly and periodically for the reasonable costs of defending against the Third Party Claim (including attorneys' fees and expenses), and (C) the Indemnifying Party shall remain responsible for any Losses the Indemnitee may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third Party Claim to the fullest extent provided in this Section 6. 6.6 Disputed Claims. If the Indemnifying Party objects to any Claim, it shall give written notice of such objection and brief statement of the grounds of such objection to Indemnitee within 20 business days after notice is received. If no such objection is given, such Claim, as the case may be, shall be a Liquidated Claim. If such objection is made, Indemnitee and the Indemnifying Party shall meet and use their best efforts to settle the dispute in writing that when resolved shall be a Liquidated Claim. 6.7 Survival. The provisions of this Section 6 shall survive the Closing. Notwithstanding anything to the contrary in this Agreement, no Claim or Third Party Claim may be asserted by a Sellers's Indemnitee under this Section 6: (i) with respect to Losses arising in connection with the obligation to pay taxes, following the date of the expiration of the applicable statute of limitations for such obligation; (ii) with respect to a Loss arising out of or in connection with an Assumed Agreement, following the termination of such Assumed Agreement in accordance with its terms; (iii) with respect to a Loss arising out of or in connection with a breach of a representation or warranty (A) set forth in Section 3.7(n) hereof or (B) relating specifically to a claim that distribution of the MGA Unrestricted Software relating to ACSL 19 Biomed infringes upon the Intellectual Property Rights held or formerly held by Georgetown University, following five years from the date of this Agreement; and (iv) with respect to all other Losses, following two years from the date of this Agreement. No Claim or Third Party Claim may be asserted by a Pharsight's Indemnitee under this Section 6, other than Losses arising with respect to the Assumed Liabilities, following two years from the date of this Agreement. Any Claim or Third Party Claim asserted within the appropriate time periods specified above shall be indemnifiable hereunder regardless of whether such claims or Third Party Claims are reduced to Liquidated Claims within such time periods. Notwithstanding the foregoing provisions of this Section 6.7, an Indemnitee may assert a Claim or Third Party Claim under this Section 6 with respect to Losses that are the result of fraud or willful misconduct by the Indemnifying Party at any time within the applicable statute of limitations for such Claim or Third Party Claim. 6.8 Right of Setoff. Pharsight shall be entitled to set off any amount payable by Pharsight under the Promissory Note or the Noncompetition Agreements referred to in Section 2.4(b), or the amounts payable under Sections 5.6 and 5.7 hereof, in satisfaction, partially or fully as the case may be, of Liquidated Claims hereunder, and to withhold any such amounts with respect to Claims or Third Party Claims not reduced to Liquidated Claims; provided, however, that any and all such amounts so retained by Pharsight as a set off pursuant to this Section 6.8 shall reduce the indemnification obligation of the Sellers hereunder by such amount. 6.9 Sole Remedy; Co-Ownership Agreement Separate. The right of each party hereto to assert Claims and receive indemnification payments pursuant to this Section 6 shall be the sole and exclusive right and remedy exercisable by such party with respect to any breach by the other party hereto of any representation or warranty under this Agreement or failure to perform any covenant required to be performed by such other party under this Agreement; provided, however, that the above shall not prevent a party hereto from seeking specific performance of a covenant which another party hereto has failed to perform under this Agreement. The rights and remedies of the parties to the Co-Ownership Agreement are as set forth in the Co-Ownership Agreement and are not governed by, and are separate from, this Section 6; provided, however, that no party shall be entitled to indemnification for the same Loss under both this Agreement and the Co-Ownership Agreement except and only to the extent that such entitlement would provide coverage for the full amount of the Loss suffered. 7. MISCELLANEOUS. 7.1 Further Assurances. Each party hereto shall execute and cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (at or after the Closing) for the purpose of carrying out or evidencing any of the transactions contemplated by this Agreement. 7.2 No Third Party Beneficiaries. Except as otherwise specified herein, this Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 20 7.3 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations by or between the parties, written or oral, that may have related in any way to the subject matter hereof. 7.4 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. Sellers shall not assign any of their rights, interests or obligations hereunder without the prior written consent of Pharsight, which consent shall not be unreasonably withheld. Pharsight shall not assign any of its rights, interests or obligations hereunder without the prior written consent of MGA, which consent shall not be unreasonably withheld. 7.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 7.6 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 7.7 Notices. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received (i) when delivered by hand, (ii) five days after deposit in the United States mail if by certified mail, (iii) on the next business day if sent by courier or express delivery service that guarantees next business day delivery, or (iv) upon confirmation if sent by facsimile, to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto): If to Sellers: MITCHELL AND GAUTHIER ASSOCIATES, INC. 919 B Willowbrook Drive Huntsville, Alabama 35802 Attention: President Facsimile: (205) 883-5516 Copy to: Richard Stein Hutchins, Wheeler & Dittmar 101 Federal Street Boston, MA 02110 Facsimile: (617) 951-1295 If to Pharsight: PHARSIGHT CORPORATION 299 California Ave. 21 Suite 300 Palo Alto, CA 94306 Attention: Arthur H. Reidel, President Facsimile: (650) 462-5610 Copy to: Cooley Godward LLP 5 Palo Alto Square Palo Alto, California 94306 Attention: Andrei M. Manoliu, Esq. Facsimile: (650) 857-0663 7.8 Governing Law. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the State of California (without giving effect to principles of conflicts of laws). (b) Any dispute, claim or controversy of any nature arising out of or relating to this Agreement, including without limitation any action or claim based on tort, contract, statute, or for any other cause of action, and which relates in any way to the interpretation, effect, termination, validity, enforcement, performance and/or breach of this Agreement, shall be resolved by final binding arbitration administered by the American Arbitration Association ("AAA"). The arbitration shall be conducted before a panel of three arbitrators under the commercial arbitration rules of the AAA and shall be held at an AAA facility (i) in Boston, Massachusetts, if brought by Pharsight, and (ii) in Santa Clara County, California, if brought by Sellers. The parties hereto agree that all arbitrators serving on such panel must be available to serve on the panel in accordance with the timetable of the arbitration. (c) Not for the adjudication of any matters (other than judicial review for fraud or undisclosed bias), but for the enforcement of an arbitration award (which shall be brought in California if Pharsight is enforcing the arbitration award or in Massachusetts if one or more Sellers are enforcing the arbitration award) or the granting of injunctive relief (which shall be brought in Massachusetts if Pharsight is seeking injunctive relief or in California if one or more Sellers are seeking injunctive relief), the parties hereto irrevocably elect as the sole two judicial forums for the adjudication of any matters arising under or in connection with this Agreement, and consent to the jurisdiction of, the courts of the State of California and the Commonwealth of Massachusetts. 22 7.9 Waiver. (a) No failure on the part of any Person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. (b) No Person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given. 7.10 Amendments. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of all of the parties hereto. 7.11 Severability. In the event that any provision of this Agreement, or the application of any such provision to any Person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to Persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law. 7.12 Expenses. Subject only to Sections 5.6 and 5.7, each party to this Agreement shall bear and pay all fees, costs and expenses (including legal fees and accounting fees) that have been incurred or that are incurred by such party in connection with the transactions contemplated by this Agreement, including all fees, costs and expenses incurred by such party in connection with or by virtue of (a) the investigation and review conducted by Pharsight and its representatives with respect to the Acquired Assets, (b) the negotiation, preparation and review of this Agreement (including the Disclosure Schedule) and all agreements, certificates, opinions and other instruments and documents delivered or to be delivered in connection with the transactions contemplated by this Agreement, and (c) the preparation and submission of any filing or notice required to be made or given in connection with any of the transactions contemplated by this Agreement, and the obtaining of any consent required to be obtained in connection with any of such transactions. 7.13 Transfer Taxes. Any and all sales taxes, use taxes, transfer taxes, filing fees and similar taxes, fees, charges and expenses required to be paid in connection with the transactions contemplated by this Agreement shall be paid by Sellers. 7.14 Confidentiality of Information. All information given to a party by the other party in connection with this Agreement ("Confidential Information") shall be used only for purposes related to the consummation of the transactions contemplated herein, and shall be disclosed to the receiving party's employees and representatives only on a "need to know" basis 23 in connection with such purposes. If the Closing does not occur for any reason, each party shall maintain in confidence all Confidential Information of the other party, shall return to the disclosing party or destroy all tangible embodiments (and all copies) of such Confidential Information and shall not use such Confidential Information for any purpose; provided, however, that the forgoing restrictions shall not apply to: (i) information that is or becomes a matter of public knowledge through no act or failure to act of the receiving party, its representatives or employees, (ii) information that becomes available to the receiving party from a source not under an obligation of confidentiality to the disclosing party, or (iii) information that was known to receiving party prior to its disclosure to the receiving party by the disclosing party. 7.15 Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. Except as otherwise specified, references in this Agreement to Sections are to Sections of this Agreement. Except where the context clearly requires to the contrary, "including" shall mean "including, without limitation." 24 IN WITNESS WHEREOF, the parties have executed this Asset Purchase Agreement on the date first written above. PHARSIGHT CORPORATION By: /s/ Arthur H. Reidel ----------------------------------- Name: Arthur H. Reidel --------------------------------- Title: President -------------------------------- MITCHELL AND GAUTHIER ASSOCIATES, INC. By: /s/ Michael Gauthier ----------------------------------- Name: Michael Gauthier --------------------------------- Title: illegible -------------------------------- /s/ Edward E. L. Mitchell -------------------------------------- Edward E. L. Mitchell /s/ Joseph S. Gauthier -------------------------------------- Joseph S. Gauthier 25 EXHIBIT A ASSUMED AGREEMENTS 1. Lease, dated November 9, 1990, between Concord Office Realty Trust and MGA, relating to the MGA Facility. 2. The following Customer Agreements, which are all shrink-wrap licenses, a form of which has been provided to Pharsight: Customer Product Units Sold By Date Pharmacia & Upjohn Biomed 3 MGA Nov-96 US/FDA Biomed 1 MGA Nov-96 U Degli St. Udine Biomed 1 MGA Dec-96 Hoffman LaRoche Biomed 1 MGA Jun-97 Pfizer Biomed 1 MGA Aug-97 Glaxo-Wellome Biomed 1 RDL Sep-97 GloboMax Biomed 3 MGA Dec-97 Sanofi Biomed 2 MGA Jan-98 Rohm & Haas Tox 1 MGA Jan-98 Rhone Poulenc Biomed 1 RDL Jan-98 Bayer, Germany Model 7 RDL CIIT ACSL 3 MGA CIIT Optimize 3 MGA Eli Lilly ACSL 1 MGA Glaxo ACSL 1 MGA Globomax Optimize 3 MGA ICF Kaiser Model 9 MGA Mantech Env Tech ACSL 6 MGA Mantech Env Tech Model 5 MGA Monsanto Model 9 MGA Monsanto Optimize 9 MGA Rhone Poulenc ACSL 5 RDL Rhone Poulenc Optimize 1 MGA EPA ACSL 4 MGA FDA ACSL 4 MGA 26 EXHIBIT B EXCLUDED ASSETS 1 Silicon Graphics O2 (boole.mga.com) 32Mb of memory internal 2 GB disk CDROM player 17" color monitor running Irix 6.3 2. DEC Alphastation 200 4/166 (alpha.mga.com) 64Mb of memory 2 internal 1GB disks CDROM Player 17" color monitor running Digital Unix 4.0c & Open VMS 6.2 3. Sun IPX (eileen.mga.com) 64MB of memory internal 1 GB disk 17" color monitor running SunOS 4.1.3 4. HP 710 (9000 Series) (aeneas.mga.com) 32 MB of memory internal 2 GB disk external CDROM Player 19" BW monitor running HPUX 10.20 5. VaxStation 4000 (vax.mga.com) 16MB memory 1 GB internal disk vt100 monitor running VMS 6.2 6. PC running Linux used as Web Server P-120 (www.mga.com) 32MB of memory 2 GB internal disk CDROM player 14" color monitor running Linux (kernel 2.30) 27 CD Writer and the PC it is attached to. Floppy Disk Duplicator the PC it is attached to. Sharp P-120 laptop Filing cabinets holding MGA customer files and simulation library articles (16 file cabinets) Shelving holding documentation in shipping department. 28 EXHIBIT C ASSIGNMENT OF COPYRIGHT For good and valuable consideration which has been received, the undersigned sells, assigns and transfers to Pharsight, a California corporation, and its successors and assigns, all right, title and interest in the copyright in and to the following work, which was created by the following indicated author(s): Title:____________________________________ Author(s):________________________________ ________________________________ Copyright Office Identification No. (if any):_______________________________ and all of the right, title and interest of the undersigned, vested and contingent, therein and thereto. Executed this ________________ day of _______________ , 1998. Signature:_______________________________________ Printed Name:____________________________________ 1 EXHIBIT D TERMINATED DISTRIBUTION AGREEMENTS 1. Distribution Agreement with Jason International Supply, dated July 2, 1991. 2. Distribution Agreement with JTT Corporation, dated June 10, 1993 3. Distribution Agreement with Vanguard Information Company, dated November 1, 1992. 4. Distribution Agreement with Inpol Company Ltd., dated April 17, 1992. 5. Distribution Agreement with Industrial and Offshore Computer Services Pte Ltd., dated July 13, 1992. 6. Distribution Agreement with Hearne Scientific Software Pty Ltd., dated January 10, 1995. 7. Distribution Agreement with Jason Advanced Technology, Inc., dated November 11, 1990. 8. Distribution Agreement with Baruch D. Pekelman and/or Omikron Delta, dated November 5, 1985. 2 EX-10.2 7 EXHIBIT 10.2 Exhibit 10.2 STANDARD OFFICE LEASE-GROSS 1. BASIC LEASE PROVISIONS ("Basic Lease Provisions") 1.1 Parties: This Lease, dated, for reference purposes only JUNE 11, 1998, is made by and between ASSET GROWTH PARTNERS, LTD. (herein called "Lessor") and PHARSIGHT CORPORATION, INC., (herein called "Lessee"). 1.2 Premises: Suite Number(s) 200 ON THE SECOND floor(s), consisting of approximately 16,000 rentable square feet, more or less, as defined in paragraph 2 and as shown on Exhibit "A" hereto (the "Premises"). 1.3 Building: Commonly described as being located at 800 W. EL CAMINO REAL in the City of MOUNTAIN VIEW County of SANTA CLARA State of CALIFORNIA as more particularly described in Exhibit A hereto, and as defined in paragraph 2. 1.4: Use: GENERAL OFFICE, RESEARCH & DEVELOPMENT, LABORATORY AND OTHER RELATED LEGAL USES subject to paragraph 6. 1.5 Term: FIVE YEARS commencing ON THE LATER TO OCCUR OF TENDER OF POSSESSION, OR SEPTEMBER 1, 1998 ("Commencement Date") and ending as defined in paragraph 3. 1.6 Base Rent: $3.40 PER RENTABLE SQUARE FOOT per month. payable on the FIRST day of each month, per paragraph 4.1. 1.7 Base Rent Increase: Base Rent payable under paragraph 1.6 above shall be adjusted as provided in paragraph 51 below. 1.8 Rent Paid Upon Execution: FIFTY FOUR THOUSAND FOUR HUNDRED & NO/100 DOLLARS ($54,400.00). 1.9 Security Deposit: FIFTY FOUR THOUSAND FOUR HUNDRED & NO/100 DOLLARS ($54,400.00). ADDITIONALLY, LESSEE TO PROVIDE LESSOR UPON MUTUAL LEASE EXECUTION A STAND-BY LETTER OF CREDIT OR OTHER INSTRUMENT REASONABLY ACCEPTABLE TO LESSOR IN THE AMOUNT OF ONE HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($150,000.00). THE BALANCE OF THE LETTER OF CREDIT WOULD BE REDUCED ANNUALLY IN ACCORDANCE WITH A STRAIGHT-LINE AMORTIZATION OVER THE LEASE TERM. 1.10 Lessee's Share of Operating Expense Increase: 13.64% as defined in paragraph 4.2. 2. PREMISES, PARKING AND COMMON AREAS. 2.1 Premises: The Premises are a portion of a building, herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provisions. "Building" shall include adjacent parking structures used in connection therewith. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project". Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2 as the "Premises," including rights to the Common Areas as hereinafter specified. 2.2 Vehicle Parking: , and subject to the rules and regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to rent and use UNDERGROUND RESERVED SPACES AND ADDITIONAL SURFACE SPACES NOT TO EXCEED A TOTAL OF 3.4 TOTAL SPACES PER 1,000 SQUARE FEET OF PREMISES in the Office Building Project. THROUGHOUT THE TERM, AND ANY EXTENSIONS THEREOF, LESSEE SHALL HAVE THE RIGHT TO THE NONEXCLUSIVE AND UNRESERVED USE OF NO LESS THAN 54 PARKING SPACES FREE OF CHARGE. HOWEVER, LESSOR RESERVES THE RIGHT TO CHARGE FOR PARKING IN THE EVENT OF A GOVERNMENT IMPOSED PARKING/TRANSIT TAX OR FEE. 2.2.1 If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.2.2 The monthly parking rate per parking space will be $ --0-- per month at the commencement of the term of this Lease, and is subject to change ONLY PURSUANT TO THE TERMS OF PARAGRAPH 2.2 ABOVE upon five (5) days prior written notice to Lessee. Monthly parking fees shall be payable one month in advance prior to the first day of each calendar month. 2.3 Common Areas-Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, escalators, Initials ____ Initials ____ Page 1 parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 Common Areas-Rules and Regulations. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect to the Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to modify, amend and enforce said rules and regulations IN A REASONABLE AND NON-DISCRIMINATORY MANNER. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees, their agents, employees and invitees of the Office Building Project. FOLLOWING A WRITTEN REQUEST FROM LESSEE, LESSOR SHALL USE COMMERCIALLY REASONABLE EFFORTS TO ENFORCE THE RULES AND REGULATIONS AGAINST OTHER LESSEES OF THE BUILDING. 2.5 Common Areas-Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape. number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all times provide the parking facilities required by applicable law; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land and improvements outside the boundaries of the Office Building Project to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Office Building Project, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. LESSOR'S RIGHT PURSUANT TO THIS SECTION 2.5 SHALL BE SUBJECT TO THE CONDITION THAT EXERCISE OF ANY OF SUCH RIGHTS SHALL NOT UNREASONABLY INTERFERE WITH LESSEE'S USE OF THE PREMISES. 3. TERM. 3.1 Term. The term and Commencement Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 Delay in Possession. Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 3.2.2, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof; but, in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee, as hereinafter defined; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days following said Commencement Date, as the same may be extended under the terms of a Work Letter executed by Lessor and Lessee, Lessee may, at Lessee's option, by notice In writing to Lessor cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided, however, that, as to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for Non-Standard Improvement). 3.2.1 Possession Tendered-Defined. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed, (2) the Building utilities are ready for use in the Premises, (3) Lessee has reasonable access to the Premises, (4) A CERTIFICATE OF OCCUPANCY HAS BEEN ISSUED BY THE APPROPRIATE GOVERNMENTAL AUTHORITY, and (5) ten (10) days shall have expired following advance written notice to Lessee of the occurrence of the matters described in (1), (2), (3), AND (4) above of this paragraph 3.2.1. 3.2.2 Delays Caused by Lessee. There shall be no abatement of rent, and the sixty (60) day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omissions of Lessee, Lessee's agents, employees and contractors. 3.3 Early Possession. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date, and Lessee shall pay rent for such occupancy. 3.4 Uncertain Commencement. In the event commencement of the Lease term is defined as the completion of the improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of Page 2 Possession (as defined in paragraph 3.2.1) or the actual taking of possession by Lessee, whichever first occurs, as the Commencement Date. 3.5 NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 3.2, IF LESSOR HAS NOT DELIVERED POSSESSION BY SEPTEMBER 1, 1998, THEN LESSEE SHALL RECEIVE CREDIT FOR ONE (1) DAY OF FREE RENT FOR EACH SUBSEQUENT DAY, UNTIL SUCH DELIVERY OF POSSESSION. 4. RENT. 4.1 Base Rent. Subject to adjustment as hereinafter provided in paragraph 4.3, and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of the Basic Lease Provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address slated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 Operating Expense Increase. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of the amount by which all Operating Expenses, as hereinafter defined, for each Comparison Year exceeds the amount of all Operating Expenses for the Base Year, such excess being hereinafter referred to as the "Operating Expense Increase," in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as the percentage set forth in paragraph 1.10 of the Basic Lease Provisions, which percentage has been determined by dividing the approximate square footage of the Premises by the total approximate square footage of the rentable space contained in the Office Building Project. It is understood and agreed that the square footage figures set forth in the Basic Lease Provisions are approximations which Lessor and Lessee agree are reasonable and shall not be subject to revision except in connection with an actual change in the size of the Premises or a change in the space available for lease in the Office Building Project. (b) "Base Year" is defined as 1999. (c) "Comparison Year" is defined as each calendar year during the term of this Lease subsequent to the Base Year; provided, however, Lessee shall have no obligation to pay a share of the Operating Expense Increase applicable to the first twelve (12) months of the Lease Term (other than such as are mandated by a governmental authority, as to which government mandated expenses Lessee shall pay Lessee's Share, notwithstanding they occur during the first twelve (12) months). Lessee's Share of the Operating Expense Increase for the first and last Comparison Years of the Lease Term shall be prorated according to that portion of such Comparison Year as to which Lessee is responsible for a share of such increase. (d) "Operating Expenses" is defined, for purposes of this Lease, to include all costs, if any, incurred by Lessor in the exercise of its reasonable discretion, for: (i) The operation, repair, maintenance, and replacement, in neat, clean, safe, good order and condition, of the Office Building Project, including but not limited to, the following: (aa) The Common Areas, including their surfaces, coverings, decorative items, carpets, drapes and window coverings, and including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, building exteriors and roofs, fences and gates; (bb) All heating, air conditioning, plumbing, electrical systems, life safety equipment, telecommunication and other equipment used in common by, or for the benefit of, lessees or occupants of the Office Building Project, including elevators and escalators, tenant directories, fire detection systems including sprinkler system maintenance and repair. (ii) Trash disposal, janitorial and security services; (iii) Any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense"; (iv) The cost of the premiums for the liability and property insurance policies to be maintained by Lessor under paragraph 8 hereof; (v) The amount of the real property taxes to be paid by Lessor under paragraph 10 1 hereof; (vi) The cost of water, sewer, gas, electricity, and other publicly mandated services to the Office Building Project; (vii) Labor, salaries and applicable fringe benefits and costs, materials, supplies and tools, used in maintaining and/or cleaning the Office Building Project and accounting and a management fee attributable to the operation of the Office Building Project; (viii) Replacing and/or adding improvements mandated by any governmental agency and any repairs or removals necessitated thereby amortized over its useful life according to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then reasonable in the judgment of Lessor's accountants); (ix) Replacements of equipment or improvements that have a useful life for depreciation purposes according to Federal income tax guidelines of five (5) years or less, as amortized over such life. (e) Operating Expenses shall not include the costs of replacements of equipment or improvements Page 3 that have a useful life for Federal income tax purposes in excess of five (5) years unless it is of the type described in paragraph 4.2(d)(viii}, in which case their cost shall be included as above provided. (f) Operating Expenses shall not include any expenses paid by any lessee directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or by insurance proceeds. (g) Lessee's Share of Operating Expense Increase shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time in advance of Lessee's Share of the Operating Expense Increase for any Comparison Year, and the same shall be payable monthly or quarterly, as Lessor shall designate, during each Comparison Year of the Lease term, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expense Increase as aforesaid, Lessor shall deliver to Lessee within sixty (60) days after the expiration of each Comparison Year a reasonably detailed statement showing Lessee's Share of the actual Operating Expense Increase incurred during such year. If Lessee's payments under this paragraph 4.2(g) during said Comparison Year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expense Increase next falling due. If Lessee's payments under this paragraph during said Comparison Year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. Lessor and Lessee shall forthwith adjust between them by cash payment any balance determined to exist with respect to that portion of the last Comparison Year for which Lessee is responsible as to Operating Expense Increases, notwithstanding that the Lease term may have terminated before the end of such Comparison Year. (h) NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE FOLLOWING SHALL NOT BE INCLUDED WITHIN OPERATING EXPENSES: LEASING COMMISSIONS, ATTORNEYS' FEES, COSTS, DISBURSEMENTS AND OTHER EXPENSES INCURRED IN CONNECTION WITH NEGOTIATIONS OR DISPUTES WITH LESSEES, OR IN CONNECTION WITH LEASING, RENOVATING, OR IMPROVING SPACE FOR LESSEES OR OTHER OCCUPANTS OR PROSPECTIVE LESSEES OR OTHER OCCUPANTS OF THE BUILDING. THE COST OF ANY SERVICE SOLD TO ANY LESSEE (INCLUDING LESSEE) OR OTHER OCCUPANT FOR WHICH LESSOR IS ENTITLED TO BE REIMBURSED AS AN ADDITIONAL CHARGE OR RENTAL OVER AND ABOVE THE BASIC RENT AND ESCALATIONS PAYABLE UNDER THE LEASE WITH THAT LESSEE. ANY DEPRECIATION ON THE BUILDING OR PROPERTY. COSTS OF A CAPITAL NATURE, INCLUDING BUT NOT LIMITED TO CAPITAL IMPROVEMENTS AND ALTERATIONS, CAPITAL REPAIRS, CAPITAL EQUIPMENT, AND CAPITAL TOOLS AS DETERMINED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. EXPENSES IN CONNECTION WITH SERVICES OR OTHER BENEFITS OF A TYPE THAT ARE NOT PROVIDED TO LESSEE BUT WHICH ARE PROVIDED ANOTHER LESSEE OR OCCUPANT OF THE BUILDING OR PROPERTY. COSTS INCURRED DUE TO LESSOR'S VIOLATION OF ANY TERMS OR CONDITIONS OF THIS LEASE OR ANY OTHER LEASE RELATING TO THE BUILDING OR PROPERTY. OVERHEAD PROFIT INCREMENTS PAID TO LESSOR'S SUBSIDIARIES OR AFFILIATES FOR MANAGEMENT OR OTHER SERVICES ON OR TO THE BUILDING OR FOR SUPPLIES OR OTHER MATERIALS TO THE EXTENT THAT THE COST OF THE SERVICES, SUPPLIES, OR MATERIALS EXCEEDS THE COST THAT WOULD HAVE BEEN PAID HAD THE SERVICES, SUPPLIES OR MATERIALS BEEN PROVIDED BY UNAFFILIATED PARTIES ON A COMPETITIVE BASIS. ALL INTEREST, LOAN FEES, AN OTHER CARRYING COSTS RELATED TO ANY MORTGAGE OR DEED OF TRUST OR RELATED TO ANY CAPITAL ITEM, AND ALL RENTAL AND OTHER PAYABLE DUE UNDER ANY GROUND OR UNDERLYING LEASE, OR ANY LEASE FOR ANY EQUIPMENT ORDINARILY CONSIDERED TO BE OF A CAPITAL NATURE (EXCEPT JANITORIAL EQUIPMENT WHICH IS NO AFFIXED TO THE BUILDING). ANY COMPENSATION PAID TO CLERKS, ATTENDANTS, OR OTHER PERSONS IN COMMERCIAL CONCESSIONS OPERATED BY LESSOR. ADVERTISING AND PROMOTIONAL EXPENDITURES. COSTS OF REPAIRS AND OTHER WORK OCCASIONED BY FIRE, WINDSTORM, OR OTHER CASUALTY OF AN INSURABLE NATURE. ANY COSTS, FINES, OR PENALTIES INCURRED DUE TO VIOLATIONS BY LESSOR OF ANY GOVERNMENTAL RULE OR AUTHORITY, THIS LEASE OR ANY OTHER LEASE IN THE PROPERTY, OR DUE TO LESSOR'S NEGLIGENCE OR WILLFUL MISCONDUCT. MANAGEMENT COSTS TO THE EXTEND THEY EXCEED MANAGEMENT COSTS CHARGED FOR SIMILAR FACILITIES IN THE AREA AND IN ANY EVENT, TO THE EXTEND THEY EXCEED 3% OF GROSS RENTAL INCOME. COSTS FOR SCULPTURE, PAINTINGS OR OTHER OBJECTS OF ART (NOR INSURANCE THEREON OR EXTRAORDINARY SECURITY IN CONNECTION THEREWITH). WAGES, SALARIES OR OTHER COMPENSATION PAID TO ANY EXECUTIVE EMPLOYEES ABOVE THE GRADE OF BUILDING MANAGER. THE COST OF CORRECTING ANY BUILDING CODE OR OTHER VIOLATIONS WHICH WERE VIOLATIONS PRIOR TO THE COMMENCEMENT DATE. THE COST OF CONTAINING, REMOVING, OR OTHERWISE REMEDIATING ANY CONTAMINATION OF THE PROPERTY (INCLUDING THE UNDERLYING LAND AND GROUND WATER) BY ANY TOXIC OR HAZARDOUS MATERIALS (INCLUDING, WITHOUT Page 4 LIMITATION, ASBESTOS AND "PCB'S") WHERE SUCH CONTAMINATION WAS NOT CAUSED BY LESSEE. ANY OTHER EXPENSE THAT UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND PRACTICE CONSISTENTLY APPLIED WOULD NOT BE CONSIDERED A NORMAL MAINTENANCE OR OPERATING EXPENSE. (i) WITHIN 90 DAYS AFTER RECEIPT OF LESSOR'S STATEMENT SETTING FORTH ACTUAL OPERATING EXPENSES (THE "STATEMENT"). LESSEE SHALL HAVE THE RIGHT TO AUDIT AT LESSOR'S LOCAL OFFICES, AT LESSEE'S EXPENSE, LESSOR'S ACCOUNTS AND RECORDS RELATING TO OPERATING EXPENSES. SUCH AUDIT SHALL BE CONDUCTED BY A CERTIFIED PUBLIC ACCOUNTANT APPROVED BY LESSOR, WHICH APPROVAL SHALL NOT BE UNREASONABLE WITHHELD. IF SUCH AUDIT REVEALS THAT LESSOR HAS OVERCHARGED LESSEE, THE AMOUNT OVERCHARGED SHALL BE PAID TO LESSEE WITHIN 30 DAYS AFTER THE AUDIT IS CONCLUDED, TOGETHER WITH INTEREST THEREON AT THE RATE OF 10% PER ANNUM, FROM THE DATE THE OVERCHARGE WAS PAID BY LESSEE. UNTIL REFUND OF THE OVERCHARGES IS MADE TO LESSEE. IN ADDITION, IF THE STATEMENT EXCEEDS THE ACTUAL OPERATING EXPENSES AND REAL PROPERTY TAXES WHICH SHOULD HAVE BEEN CHARGED TO LESSEE BY MORE THAN 15%, THE COST OF THE AUDIT SHALL BE PAID BY LESSOR. 4.3 Rent Increase. SEE PARAGRAPH 51. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, it any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. USE. 6.1 Use. The Premises shall be used and occupied only for the purpose set forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is reasonably comparable to that use and for no other purpose. 6.2 Compliance with Law. Page 5 (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Office Building Project. NOTWITHSTANDING THE FOREGOING OR ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, LESSEE SHALL NOT BE RESPONSIBLE FOR COMPLIANCE WITH ANY LAWS, CODES, ORDINANCES OR OTHER GOVERNMENTAL DIRECTIVES WHERE SUCH COMPLIANCE IS NOT RELATED SPECIFICALLY TO LESSEE'S USE AND OCCUPANCY OF THE PREMISES. FOR EXAMPLE, IF ANY GOVERNMENTAL AUTHORITY SHOULD REQUIRE THE BUILDING OR THE PREMISES TO BE STRUCTURALLY STRENGTHENED AGAINST EARTHQUAKE, OR SHOULD REQUIRE THE REMOVAL OF ASBESTOS FROM THE PREMISES AND SUCH MEASURES ARE IMPOSED AS A GENERAL REQUIREMENT APPLICABLE TO ALL LESSEES RATHER THAN AS A CONDITION TO LESSEE'S SPECIFIC USE OR OCCUPANCY OF THE PREMISES, SUCH WORK SHALL BE PERFORMED BY AND AT THE SOLE COST OF LESSOR. 6.3 Condition of Premises. (a) Lessor shall deliver the Premises to Lessee in a clean condition on the Lease Commencement Date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, and heating systems in the Premises shall be in good operating condition. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 6.4 LESSEE'S ACCESS. LESSEE SHALL HAVE ACCESS TO THE PREMISES 24 HOURS PER DAY, SEVEN DAYS PER WEEK. 7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES. 7.1 Lessors Obligations. Lessor shall keep the Office Building Project, including the Premises interior and exterior walls, roof, and common areas, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings. or to repair or replace any improvements that are not ordinarily a part of the Building or are above the Building standards. Except as provided in paragraph 9.5, there shall be no abatement of rent or liability of Lessee on account of any injury or interference with Lessee's business with respect to any improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense because of Lessor's failure to keep the Premises in good order, condition and repair. NOTWITHSTANDING THE PROVISIONS OF PARAGRAPH 7.1, IF LESSOR FAILS TO TIMELY PERFORM ITS MAINTENANCE AND REPAIR OBLIGATIONS HEREUNDER, AND, AS A CONSEQUENCE, LESSEE'S USE OF THE PREMISES IS SUBSTANTIALLY IMPAIRED, LESSEE SHALL HAVE THE RIGHT TO CAUSE SUCH REPAIR OR MAINTENANCE TO BE PERFORMED AT LESSOR'S EXPENSE AND TO DEDUCT THE COSTS THEREOF, TOGETHER WITH INTEREST THEREON AT THE HIGHEST RATE PERMITTED BY LAW, FROM THE RENT PAYABLE TO LESSOR. 7.2 Lessee's Obligations. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above the Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the Page 6 cost of which is otherwise Lessee's responsibility hereunder. (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, carpets, wall paneling, ceilings and plumbing on the Premises and in THE SAME CONDITION RECEIVED IN. 7.3 Alterations and Additions. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, Utility Installations or repairs in, on, or about the Premises or the Office Building Project. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing, and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additions or Utility Installations, and the restoration of the Premises and the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, WHICH APPROVAL SHALL NOT BE UNREASONABLY WITHHELD, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Office Building Project that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, addition or Utility Installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, the Building or the Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest so to do. (e) All alterations, improvements, additions and Utility Installations which may be made to the Premises by Lessee, including but not limited to, floor coverings, paneling, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Building, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations. improvements, additions or Utility Installations. 7.4 Utility Additions. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 7.5 NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 7: Page 7 (a) LESSEE SHALL BE ENTITLED TO MAKE ALTERATIONS, ADDITIONS, IMPROVEMENTS AND UTILITY INSTALLATIONS IN OR TO THE PREMISES, WITHOUT THE PRIOR CONSENT OF LESSOR, SO LONG AS EACH OF THE SAME (i) DO NOT EXCEED THE SUM OF $20,000 IN COST AND (ii) DO NOT AFFECT ANY STRUCTURAL OR EXTERIOR PORTIONS OF THE BUILDING OR ADVERSELY AFFECT THE BUILDING ELECTRICAL, PLUMBING OR HVAC SYSTEMS. HOWEVER, LESSEE MUST NOTIFY LESSOR AT LEAST 5 BUSINESS DAYS IN ADVANCE OF COMMENCEMENT OF ANY SUCH WORK. (b) LESSEE SHALL NOT BE REQUIRED TO REMOVE AN ALTERATIONS, ADDITIONS, IMPROVEMENTS OR UTILITY INSTALLATIONS FOR WHICH LESSEE HAS OBTAINED LESSOR'S CONSENT, UNLESS LESSOR HAS INDICATED AT THE TIME GRANTING SUCH CONSENT, THAT SUCH REMOVAL WILL BE REQUIRED AT THE END OF THE LEASE TERM. (c) LESSEE'S SURRENDER OBLIGATIONS SHALL NOT INCLUDE THE REMOVAL OF ANY OF THE INITIAL TENANT IMPROVEMENTS OR ANY REPAIRS MADE PURSUANT TO LESSEE'S REPAIR OBLIGATIONS HEREUNDER. 8. INSURANCE; INDEMNITY. 8.1 Liability Insurance-Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Commercial General Liability insurance utilizing an Insurance Services Office standard form, or equivalent, issued by an insurer with a Best's rating of "A- VII" or better, in an amount of not less than $2,000,000 per occurrence of bodily injury and property damage combined or in a greater amount as reasonably determined by Lessor and shall insure Lessee with Lessor and and Lender of Lessor as an additional insured against liability arising out of the use, occupancy or maintenance of the Premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 Liability Insurance-Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Office Building Project in an amount not less than $5,000,000.00 per occurrence. 8.3 Property Insurance-Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant improvements. 8.4 Property Insurance-Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Office Building Project improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services Office standard form, or equivalent, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance policies OTHER THAN DEDUCTIBLES ON ANY EARTHQUAKE INSURANCE CARRIED BY LESSOR shall be deemed an Operating Expense. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall pay the entirety of any increase in the property insurance premium for the Office Building Project over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 Insurance Policies. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days prior to the Commencement Date of this Lease. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals thereof. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of Lessor or Lessee or their agents, employees. contractors and/or invitees If necessary all property insurance policies required under this Lease shall be endorsed to so provide. 8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its agents, Lessor's master or ground lessor, partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from Lessee's use of the Office Building Project. or from the conduct of Lessee's business or from any activity. work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall Page 8 further indemnify and hold harmless Lessor from and against any and all claims, costs and expenses arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees, or invitees, and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding involved therein; and in case any action or proceeding be brought against Lessor by reason of any such matter, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTION 8.7: (a) LESSEE SHALL NOT BE REQUIRED TO INDEMNIFY, DEFEND, OR HOLD LESSOR HARMLESS FROM OR AGAINST ANY CLAIMS, LIABILITY, LOSS, COST OR EXPENSE ARISING OUT OF (i) THE BREACH BY LESSOR, OR LESSOR'S AGENTS, EMPLOYEES, LICENSEES, INVITEES, OR INDEPENDENT CONTRACTORS (COLLECTIVELY "LESSOR'S AGENTS"), OF ANY COVENANT, REPRESENTATION OR WARRANTY UNDER THIS LEASE, OR (ii) ANY GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LESSOR OR LESSOR'S AGENTS. (b) LESSOR SHALL PROTECT, DEFEND AND HOLD HARMLESS LESSEE AND LESSEE'S EMPLOYEES, OFFICERS, AGENTS, DIRECTORS AND SHAREHOLDER, AND THE SUCCESSORS AND ASSIGNS OF EACH OF THE FOREGOING, AGAINST AND FROM ANY AND ALL CLAIMS, DEMANDS, LOSSES, LIABILITIES, DAMAGES, COSTS AND EXPENSES, (INCLUDING, WITHOUT LIMITATIONS, ATTORNEYS' AND CONSULTANTS' FEES AND THE COSTS AND EXPENSES OF DEFENSE) ARISING OR RESULTING FROM (i) LESSOR OR LESSOR'S AGENTS' BREACH OF ANY COVENANT, REPRESENTATION OR WARRANTY UNDER THIS LEASE, AND (ii) LESSOR OR LESSOR'S AGENTS' GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. THE MUTUAL INDEMNITY OBLIGATIONS OF LESSOR AND LESSEE UNDER THIS LEASE SHALL NOT, HOWEVER, RELEASE THE RESPECTIVE INSURERS OF LESSOR AND LESSEE FROM SUCH INSURERS' OBLIGATIONS UNDER ANY POLICIES COVERING THEIR RESPECTIVE INSUREDS. 8.8 Exemption of Lessor from Liability. EXCEPT IN THE CASE OF LESSOR'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Office Building Project, or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. 8.9 No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified in this paragraph 8 are adequate to cover Lessee's property or obligations under this Lease. 9. DAMAGE OR DESTRUCTION. 9.1 Definitions. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement Cost of the building. (c) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all Page 9 improvements made by lessees. other than those installed by Lessor at Lessee's expense. 9.2 Premises Damage; Premises Building Partial Damage. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Damage or Premises Building Partial Damage, then Lessor shall, as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 Premises Building Total Destruction; Office Building Project Total Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classifications of either (i) Premises Building Total Destruction or (ii) Office Building Project Total Destruction then Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.4 Damage Near End of Term, (a) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Damage during the last twelve (12) months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense. repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 Abatement of Rent; Lessee's Remedies. (a) In the event any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expense Increase) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of the negligence of Lessee, and (2) such abatement shall only be to the extent the operation of Lessee's business as operated from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this Paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence, or if Lessor shall not complete the restoration and repair within six (6) months after such occurrence, OR IF IN THE EVENT THAT ONLY THE PREMISES ARE DAMAGED SUCH THAT LESSEE CANNOT CONTINUE OPERATION OF ITS BUSINESS IN THE PREMISES AND LESSOR IS UNABLE TO SUBSTANTIALLY RESTORE THE PREMISES WITHIN FOUR (4) MONTHS AFTER SUCH OCCURRENCE, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (c) Lessee agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications required. 9.6 Termination-Advance Payments. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor Page 10 shall, in addition, return to Lessee so much of Lessee's security deposit as has not therefore been applied by Lessor. 9.7 Waiver. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. REAL PROPERTY TAXES, 10.1 Payment of Taxes. Lessor shall pay the real property tax, as defined in paragraph 10.3, applicable to the Office Building Project subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 Additional Improvements. Lessee shall not be responsible for paying any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other lessees or by Lessor for the exclusive enjoyment of any other lessee. Lessee shall, however. pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 Definition of "Real Property Tax." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax {other than inheritance, personal income or estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire. street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Office Building Project or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Office Building Project. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1,1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Office Building Project or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 Joint Assessment. If the improvements or property, the taxes for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately assessed, Lessee's portion of that tax shall be equitably determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Personal Property Taxes. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. 11.1 Services Provided by Lessor. Lessor shall provide heating, ventilation, air conditioning, and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. 11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 11.3 Hours of Service. Said services and utilities shall be provided during generally accepted business days and hours or such other days or hours as may hereafter be set forth. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the ACTUAL cost thereof. 11.4 Excess Usage by Lessee. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services over standard office usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. Page 11 11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions, provided Lessor uses reasonable and diligent efforts to reinstate. 12. ASSIGNMENT AND SUBLETTING. 12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner, and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease without the need for notice to Lessee under paragraph 13.1. Prior to any assignment or sublet of the premises or any portion thereof, Lessee shall notify Lessor in writing of the name and address of the proposed assignee or sublessee, and deliver to Lessor financial statements of the proposed assignee or sublessee, a true and complete copy of the proposed assignment agreement(s) or sublease with said notice, and shall promptly provide any other information reasonably requested by Lessor to enable Lessor to evaluate the proposed assignment or sublet. Lessor shall within five (5) business days of the receipt of complete information as required above, elect to do one of the following: (1) consent to such proposed assignment or sublease; (2) refuse such consent which refusal shall be on reasonable grounds; or (3) IN THE EVENT LESSEE DESIRES TO ASSIGN OR SUBLEASE MORE THAN 50% OF THE PREMISES, terminate this lease with respect to the portion of the premises which Lessee desires to assign or sublease, in which case rental paid by Lessee to Lessor hereunder shall be reduced in the proportion that the square feet of the premises that Lessee desires to so assign or sublet bears to the total square feet of the premises leased by Lessee hereunder, and thereafter neither party shall have any further obligation or liability to the other with regard to said portion of the premises except for matters which arose prior to termination and except for obligations that exist upon termination. NOTWITHSTANDING THE FOREGOING, LESSEE SHALL HAVE THE RIGHT TO WITHDRAW ITS PROPOSAL TO ASSIGN OR SUBLET THE PREMISES, IN THE EVENT LESSOR NOTIFIES IT THAT IT WILL ELECT TO TERMINATE THIS LEASE UNDER THIS SUBPARAGRAPH (3). "Transfer" within the meaning of this paragraph 12 shall NOT INCLUDE A TRANSFER TO ANY ENTITY WHICH ACQUIRES SUBSTANTIALLY ALL OF THE ASSETS OF LESSEE, AS A GOING CONCERN, WITH RESPECT TO THE BUSINESS THAT IS BEING CONDUCTED IN THE PREMISES; NOR SHALL "TRANSFER" INCLUDE THE SALE OF STOCK, OR THE TRANSFER OF THE BENEFICIAL OWNERSHIP OR EFFECTIVE VOTING CONTROL OF LESSEE FROM THE PERSON(s) HAVING EFFECTIVE VOTING CONTROL AS OF THE DATE OF LESSEE'S EXECUTION OF THIS LEASE, WHERE SUCH TRANSFER OCCURS IN CONNECTION WITH ANY BONA FIDE FINANCING OR CAPITALIZATION FOR THE BENEFIT OF LESSEE. 12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, no assignment or subletting shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's Share of Operating Expense Increase, and to perform all other obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 or this Lease. (d) If Lessee's obligations under this Lease have been guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (e) The consent by Lessor to any assignment or subletting shall not constitute a consent to any subsequent Page 12 assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or said sublease; however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Lessee or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgment that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by Lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's said consent null and void. 12.4 Additional Terms and Conditions Applicable to Subletting. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor, WHICH APPROVAL SHALL NOT BE UNREASONABLY DENIED. Such sublease shall not be changed or modified without Lessor's prior written consent. Any sublease shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within three (3) days after service of said notice of default upon such sub-lessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expenses incurred in connection therewith, including attorneys', architects', engineers' or other consultants' fees. 12.6 Conditions to Consent. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or sublessee shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of the Office Building Project and not in violation of any exclusives or rights then held by other tenants, and (b) the proposed assignee or sublessee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. Page 13 12.7 Surplus Rent. To the extent that the aggregate amount of any rental or other payments to be made by the proposed assignee, transferee or sublessee to Tenant exceeds the sum of (i) the aggregate amount of the monthly Base Rent payable by Tenant to Landlord during the term of such sublease, transfer or assignment or the remaining Term of the Lease, whichever expires earlier, (ii) the amount of any commissions payable in connection with such sublease, transfer or assignment, (iii) the cost of any alterations or improvements reasonably requested to be installed in connection with such sublease, transfer or assignment, AND (iv) LESSEE'S REASONABLE ATTORNEY'S FEES, such excess amount shall be amortized ratably over the term of such sublease, transfer or assignment or the remaining Term of the Lease, whichever expires earlier, and one hundred percent (100%) of such amortized portion of such excess amount shall be paid by Tenant to Landlord on the first day of each month during the applicable term. 13. DEFAULT; REMEDIES. 13.1 Default. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The abandonment of the Premises by Lessee. (b) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder. as and when due, where such failure shall continue for a period of FIVE (5) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (c) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and (c). above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (d) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined in 11 US.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within NINETY (90) days; (iii) the appointment of a trustee or receiver to lake possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease. where possession is not restored to Lessee within NINETY (90) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within NINETY (90) days. In the event that any provision of this paragraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (e) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder, was materially false. 13.2 Remedies. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by Page 14 law. 13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently pursues the same to completion. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense Increase or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any installment of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within FIVE (5) days notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount. nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 14. CONDEMNATION. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised only in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expense Increase shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made ascompensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures. removable personal property and unamortized tenant improvements that have been paid for by Lessee. For that purpose the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. BROKER'S FEE. (a) The brokers involved in this transaction are ____________________________as "listing broker" and STEVE LEVERE OF TORY CORPORATE REAL ESTATE ADVISORS as "cooperating broker," licensed real estate broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s), or in the event there is no separate agreement between Lessor and said broker(s), the sum of $ PER SCHEDULE for brokerage services rendered by said broker(s) to Lessor in this transaction. The commission shall be paid 50% upon execution of this Lease and 50% upon the commencement of this Lease. HOWEVER, IN NO EVENT SHALL ANY COMMISSION BE DUE IN THE EVENT LESSEE EXERCISES ITS RIGHT TO TERMINATE UNDER PARAGRAPH 52 OF THIS LEASE. (b) Lessor shall have no obligation to pay any additional fee or commission under any of the following circumstances: (i) if Lessee exercises any Option, as defined in paragraph 3.9.1 of this Lease, which is granted to Page 15 Lessee under this Lease, or any subsequently granted option which is substantially similar to an Option granted to Lessee under this Lease, or (ii) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or (iii) if Lessee remains in possession of the Premises after the expiration of the term of this Lease after having failed to exercise an Option, or (iv) if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest. (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15. Each listing and cooperating broker shall be a third party beneficiary of the provisions of this paragraph 15 to the extent of their interest in any commission arising under this Lease and may enforce that right directly against Lessor; provided, however, that all brokers having a right to any part of such total commission shall be a necessary party to any suit with respect thereto. (d) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person. firm, broker or finder (other than the person(s), if any, whose names are set forth in paragraph 15(a), above) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and no other broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction and Lessee and Lessor do each hereby indemnify and hold the other harmless from and against any costs, expenses, attorneys' fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying party. 16. ESTOPPEL CERTIFICATE. (a) Each party (as "responding party") shall at any time upon not less than ten (10) BUSINESS days' prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Office Building Project or of the business of Lessee. (b) At the requesting party's option. the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party. (it) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Office Building Project. or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Office Building Project, and except as expressly provided in paragraph 15, in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. Page 16 20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense Increase and any other expenses payable by Lessee hereunder shall be deemed to be rent. 22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. NOTICES. All notices, demands, requests and other communications required hereunder (a) shall be in writing, (b) shall be deemed to be properly addressed and transmitted if mailed by United States registered or certified mail, with return receipt request, postage prepaid, or by United States Express Mail, or if sent by a national courier service or if personally served, and the same if sent to a party at its address set forth on the signature page hereto. Any notice, demand, request or other communication required hereunder will be deemed delivered (a) upon personal delivery, if personally served, or (b) if mailed or if sent by courier, upon receipt (as reflected in the records of the delivering entity) or upon the addressee's refusal to accept delivery (as reflected in the records of the delivering entity). Any party may designate a change of address by written notice to the other, given at least ten (10) days before such change of address is to be come effective. Absent delivery to a party of the change of address of another party, no party shall be required to inquire as to the continuing correctness of the last address delivered to it for the other party. 24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be two hundred percent (200%) of the rent payable immediately preceding the termination date of this Lease, and all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee AND LESSOR shall be deemed both a covenant and a condition. 29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Office Building Project is located. 30. SUBORDINATION. (a) This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to all renewals, Page 17 modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, PURSUANT TO PARAGRAPH 55 HEREUNDER, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so Iong as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) BUSINESS days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. LESSEE'S OBLIGATIONS PURSUANT TO THIS PARAGRAPH 30(b) SHALL BE SUBJECT TO THE CONDITION THAT ANY SUCH DOCUMENTS SHALL NOT MATERIALLY INCREASE ANY OBLIGATIONS OR DECREASE ANY RIGHTS OF LESSEE. 31. ATTORNEYS' FEES. 31.1 If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgment. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 31.2 The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the REASONABLE preparation and service of notice of default TO LESSEE and consultations in connection therewith, whether or not a legal transaction is subsequently commenced in connection with such default. 32. LESSOR'S ACCESS. 32.1 Lessor and Lessor's agents shall have the right to enter the Premises UPON REASONABLE PRIOR NOTICE for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and sales, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forceable or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's properly or business in connection therewith. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 34. SIGNS. Lessee shall not place any sign upon the Premises or the Office Building Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. 35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall. at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof, wherever in this Lease the consent of one Page 18 party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee, under this Lease. 38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 39. OPTIONS. 39.1 Definition. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option of right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Office Building Project or other properly of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right of first refusal to purchase the Premises or the Office Building Project or the right of first offer to purchase the Premises or the Office Building Project, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 Options Personal. Each Option granted to Lessee in this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity 1or notice thereof to Lessee) and continuing until the obligation is paid, or (iii) In the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, during the 12 month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach, or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(d) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessor gives to Lessee three or more notices of default under paragraph 13.1(c) or paragraph 13.1 (d), whether or not the defaults are cured, or (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1 (b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 39.5 Exercise Notice. No exercise of any Option right hereunder shall be effective unless the required notice is received by the party to whom it is sent strictly in accordance with the provisions of Paragraph 23 herein. The risk of non-delivery shall be on the sender of the Option notice. 40. SECURITY MEASURES-LESSOR'S RESERVATIONS. 40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's Page 19 agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address or title of the Office Building Project or building in which the Premises are located upon not less than 90 days prior written notice; (b) To, at Lessee's expense, provide and install Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office Building Project or on pole signs in the Common Areas; 40.3 Lessee shall not: (a) Use a representation (photographic or otherwise) of the Building or the Office Building Project or their name(s) in connection with Lessee's business; (b) Suffer or permit anyone, except in emergency, to go upon the roof of the Building. 41. EASEMENTS. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 41.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. AUTHORITY. If Lessee is a corporation, trust, or general or limited partnership, Lessee, and each individual executing this Lease on behalf of such entity represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. CONFLICT. Any conflict between the printed provisions, Exhibits or Addenda of this Lease and the typewritten or handwritten provisions, if any. shall be controlled by the typewritten or handwritten provisions. 45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender in connection with the obtaining of normal financing or refinancing of the Office Building Project. 47. MULTIPLE PARTIES. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 48. WORK LETTER. This Lease is supplemented by that certain Work Letter of even date executed by Lessor and Lessee, attached hereto as Exhibit C, and incorporated herein by this reference. Page 20 50. ATTACHMENTS. Attached hereto are the following documents which constitute a part of this Lease: - - EXHIBIT A Floor Plan - - EXHIBIT B Rules & Regulations - - EXHIBIT C Work Letter ADDITIONAL PARAGRAPHS 51. RENT INCREASES. Base rent shall increase per the following schedule: Months 1-24 $3.40 per rentable square foot Months 24-36 $3.46 per rentable square foot Months 37-60 $3.55 per rentable square foot 52. IMPROVEMENT ALLOWANCE. (a) Lessor shall provide an allowance of $7.25 per square foot to be used for improvements to the Premises only (the "Allowance'); Lessor shall retain any unused portion of the Allowance. The contractors bidding on the construction shall be mutually agreed to by Lessor and Lessee. (b) Lessor shall be solely responsible for the cost of demising the Premises and bringing existing improvements into compliance with all applicable local, state and federal regulations and codes, including without limitation, ADA and Title 24. It is Lessor's belief that the improvements are currently in 100% compliance with all applicable codes. (c) Lessor shall be solely responsible for the cost of retrofitting the building HVAC, energy management and lighting systems as described in the Executive Summary prepared by Viron Energy Services. Owner will conduct any such work not completed by the Commencement Date after normal building hours. (d) Any costs incurred by Lessor pursuant to (b) or (c) above shall not reduce or modify the Allowance. 53. OPTION TO RENEW. Lessee is granted two (2) options to extend the Term of the Lease Agreement for an additional five (5) years each, herein defined as the "Extension Period". Such extension shall be on the same terms and conditions as provided in the Lease Agreement with the exception of Base Rent. Base Rent for the Extension Period shall be a sum equal to: For the Extension Period(s) the Base Rent will be the fair market rental for the Leased Premises as of the date six (6) months prior to expiration of the initial Lease Term or the first Extension Period if so exercised. However, the Base Rent for the Extension Periods shall not be less than the Base Rent as of the expiration of the initial lease Term and the Base year will be adjusted to reflect the year the Extension Period commenced. It shall be a condition precedent to the exercise of this option that Tenant shall not be in default under the Lease Agreement at the time of exercise of the option and at the commencement of the extension term. If Lessee elects to exercise this option, Lessee shall exercise said option only by written notice delivered to Lessor at least one hundred eighty (180) days prior the expiration date of the Initial Term or last Extension Period, as applicable but not earlier than three hundred sixty (360) days prior to the expiration of the Initial Term or last Extension Period, as applicable. In the event that the option rental is based upon the fair market rental for the Premises, the parties shall thereafter immediately meet and endeavor to agree upon the fair market rental of the Lease Premises. If the parties are unable to agree upon the amount of rental for the Extension Period at least ninety (90) days prior to the commencement of said Extension Period ("Initial Meeting Period"), then the determination of the rental shall be promptly submitted to arbitration. Each party hereto will select, within fifteen (15) days of the expiration of the Initial Meeting Period, referred to above, a licensed real estate agent with at least five years commercial experience in the City in which the Lease Premises are located involving properties similar to the Property under this Lease and said arbitrators shall meet for the purpose of determining the rental for the Extension Period. If one party fails to so select an agent the one agent retained shall set the fair market rental. If the two arbitrators do not agree, within thirty (30) days of their selection, they shall select a third arbitrator with the qualifications referred to above, within fifteen (15) days, and if they cannot agree on a third arbitrator, the third arbitrator shall be appointed by the presiding judge of the Superior Court in the County in Initials ------ Page 21 Initials ------ which the Leased Premises are located. Lessor or Lessee may petition such Court within ten (10) days of the expiration date of the time for the selection of the third arbitrator requesting the earliest possible determination by the Court. The three arbitrators shall determine values within a thirty (30) day period of the appointment of the third arbitrator and if they cannot agree upon a fair market rental the three values shall be added together and the total shall be divided by three. If any value is lower or higher than ten percent (10%) from the middle value such higher or lower value shall be excluded from the calculations and the two remaining values shall be divided by two or if only one value remains, such value shall be the value used. Each party shall pay his own agent and the cost of the third, if necessary, shall be paid equally. The determination shall be signed by both parties and shall thereupon become a part of the lease agreement. If the Base Rent for the Extension Period has not been determined as of the commencement of the Extension Period, Lessee shall pay an estimated Base Rent of One Hundred Ten percent (110%) of the Base Rent due for the last month prior to commencement of the Extension Period. Any deficiency shall be payable by Lessee to Lessor within ten (10) days of the arbitrator's determination of the Base Rent for the Extension Period. Any surplus shall be a credit for Base Rent to become thereafter due. 54. RIGHT OF FIRST OFFER. Lessee shall have the first right to lease any space becoming available on the first or second floor of the Building during the initial lease term or option periods. Lessor shall notify Lessee in writing describing the space coming available and offering it at the fair market rental rate, to be arrived at by the method described in Paragraph 53 above. Lessee shall have ten (10) business days from receipt in which to deliver their written acceptance of the offer. Failure to respond to the offer within the stated response time shall constitute a rejection of the offer. 55. NON-DISTURBANCE AGREEMENT. Lessor shall provide non-disturbance agreements from all lenders and ground lessors on the Building prior to the Commencement Date. In addition, Lessor shall provide non-disturbance agreements from all future lenders and ground lessors on the Building as a condition to Lessee's subordination of its leasehold interest to such lenders. 56. SIGNAGE. Pharsight will receive building directory and monument signage, subject to Lessor's reasonable approval. Initials ------ Page 22 Initials ------ LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR: LESSEE: ASSET GROWTH PARTNERS, LTD. PHARSIGHT CORPORATION, INC. BY: EL CAMINO EQUITY MANAGER, INC. GENERAL PARTNER By /s/ Thomas J. Rees By /s/ Arthur H. Reidel -------------------------------- ------------------------------- Thomas J. Rees Its President Its President ------------------------------- By By -------------------------------- ------------------------------- Its Its -------------------------------- -------------------------------- Date 7/23/98 Date -------------------------------- -------------------------------- Address for Notices: Address for Notices: 2570 W. El Camino Real Suite 502 ------------------------------- Mountain View, CA 94040 -------------------------------- Initials ------ Page 23 Initials ------ [Exhibit A is a picture depicting a floor schematic of the second floor of the building located at 800 El Camino Real, Mountain View, CA 94040.] Page 24 EXHIBIT B RULES AND REGULATIONS FOR STANDARD OFFICE LEASE GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety, reputation, or property of the Office Building Project and its occupants. 3. Lessee shall not make or permit any noise or odors that UNREASONABLY annoy or interfere with other lessees or persons handling business within the Office Building Project. 4. Lessee shall not keep animals or birds within the Office Building Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks or bolts without written permission from Lessor. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the premises or Office Building Project. 9. Lessee shall not Suffer or permit anything in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Office Building Project. 10. Furniture, significant freight, and equipment shall be moved into or out of the building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Lessor reserves the right to close and lock the Building on Saturdays, Sundays and legal holidays, and on other days between the hours of 6:00 P.M. and 8:00 A.M. of the following day. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry. 12. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 13. No window coverings, shades or awnings shall be installed or used by Lessee. 14. No Lessee, employee or invitee shall go upon the roof of the Building without written permission from Lessor. 15. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 16. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 17. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 18. The Premises shall not be used for lodging or manufacturing. 19. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agency. 20. Lessor reserves the right to waive any one of these rules or regulations and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 21. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required. 22. Lessor reserves the right to make such other reasonable AND NON-DISCRIMINATORY rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Office Building Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded or parked in areas other than those REASONABLY designated by Lessor for such activities. 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges. Lessee will pay such replacement charge as is reasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entry that willfully refuses to comply with the applicable rules, regulations, laws and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent offsite location(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws, ordinances and regulations. 6. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 7. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 8. VALIDATION, IF ESTABLISHED, WILL BE PERMISSIBLE ONLY BY SUCH METHOD OR METHODS AS LESSOR AND/OR ITS LICENSEE MAY ESTABLISH AT RATES GENERALLY APPLICABLE TO VISITOR PARKING. 9. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements. 11. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. 12. Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. FULL SERVICE-GROSS Initials ------ Page 25 Initials ------ EXHIBIT C WORK LETTER TO STANDARD OFFICE LEASE Dated: JULY 16, 1998 By and Between: ASSET GROWTH PARTNERS ("LESSOR") AND PHARSIGHT, INC. ("LESSEE") The premised shall be constructed in accordance with Lessor's Standard Improvements, as follows: 1. PARTITIONS Per Exhibit C-1 attached. 2. WALL SURFACES Per Exhibit C-1 attached. 3. WINDOW COVERINGS Lessor to repair or replace to match existing as required. 4. FLOORING Per Exhibit C-1 attached. Building standard books to be provided by owner. 5. DOORS Per Exhibit C-1 attached. 6. ELECTRICAL AND TELEPHONE OUTLETS Two duplex outlets and one mudring with pullstring per new or existing office. 7. CEILING Per Exhibit C-1 attached. 8. LIGHTING 2x4 and 2x2 Lithonia or comparable magnetic ballast fixtures with 6" paracube lens installed in accordance with Title 24. 9. HEATING AND AIR CONDITIONING DUCTS One supply and return in each private office and per 250 square feet of common area. 10. PLUMBING All plumbing is an overstandard item to be specified by Lessee. 11. ENTRANCE DOORS Per Exhibit C-1 attached. 12. COMPLETION OF IMPROVEMENTS Lessor shall construct and complete improvements to the Premises in accordance with the plans and specifications prepared by ____________________, dated __________________ consisting of sheets _________ (the Improvements). 13. PREPARATION OF PLANS AND SPECIFICATIONS Within FIVE (5) days after the date of this Lease lessor shall prepare at its cost and deliver to Lessee for its approval THREE (3) copies of preliminary plans and specifications for the completion of the improvements, which plans and specifications shall itemize the work to be done by each party, including a cost estimate of any work required of Lessor in excess of Lessor's Standard Improvements. Lessee shall approve said preliminary plans and specifications and preliminary cost estimate or specify with particularity its objection thereto within THREE (3) days following receipt thereof. Failure to so approve or disapprove within said period of time shall constitute approval thereof. 14. CONSTRUCTION If Lessor's costs of constructing the Improvements to the Premises APPROVED BY LESSEE exceeds AN AMOUNT Initials ------ Page 26 Initials ------ EQUAL TO $7.25 PER SQUARE FOOT OF PREMISES, OR $116,000.00, Lessee shall pay to Lessor in cash before the commencement of such construction a sum equal to such excess. If the plans and specifications are approved by Lessor and Lessee, and Lessee pays Lessor for such excess, then Lessor shall, at its sole cost and expense, construct the Improvements in accordance with said approved final plans and specifications and all applicable rules, regulations, laws or ordinances. 15. COMPLETION 15.1 Lessor shall obtain a building permit to construct the Improvements as soon as possible. 15.2 Lessor shall complete the construction of the Improvements as soon as reasonably possible after the obtaining of necessary building permits. 15.3 The term "Completion" as used in the Work Letter, is hereby defined to mean the date the building department of the municipality having jurisdiction of the Premises shall have made a final inspection of the Improvements and authorized a final release of restrictions on the use of public utilities in connection therewith and the same are in a broom-clean condition, or if no permit is obtained for the Improvements, the date that Lessee is able to move in its furniture and equipment and conduct business on the Premises. 15.4 Lessor shall use its best efforts to achieve Completion of the Improvements on or before the Commencement Date set forth in Paragraph 1.5 of the Basic Lease Provisions. 15.5 In the event that the Improvements or any portion thereof have not reached Completion by the Commencement Date, this Lease shall not be invalid, but rather Lessor shall complete the same as soon thereafter as is possible and Lessor shall not be liable to Lessee for damages in any respect whatsoever. 15.6 If Lessor shall be delayed at any time in the progress of the construction of the Improvements or any portion thereof by extra work, changes in construction ordered by Lessee, or by strikes, lockouts, fire, delay in transportation, unavoidable casualties, rain or weather conditions, governmental procedures or delay or by any other cause beyond Lessor's control, the Commencement date established in paragraph 1.5 of the Lease shall be extended by the period of such delay. 16. TERM Upon Completion of the Improvements as defined in paragraph 15.3 above, Lessor and Lessee shall execute an amendment to the Lease setting forth the date of Tender of Possession as defined in paragraph 3.2.1 of the Lease of actual taking possession, whichever first occurs, as the Commencement date of this Lease. 17. WORK DONE BY LESSEE Any work done by Lessee shall be done only with Lessor's prior written consent and in conformity with a valid building permit and all applicable rules, regulations, laws and ordinances, and be done in a good and workmanlike manner with good and sufficient materials. All work shall be done only by contractors approved by Lessor, it being understood that all plumbing, mechanical, electrical wiring and ceiling work are to be done only by contractors designated by Lessor. 18. TAKING OF POSSESSION OF PREMISES Lessor shall notify Lessee of the Estimated Completion Date at least ten (10) days before said date. Lessee shall thereafter have the right to enter the Premises to commence construction of any Improvements Lessee is to construct and to equip and fixturize the Premises, as long as such entry does not interfere with Lessor's work. Lessee shall take possession of the Premises upon the tender thereof as provided in paragraph 3.2.1 of the Lease to which this Work Letter is attached. Any entry by Lessee of the Premises under this paragraph shall be under all of the terms and provisions of the Lease to which this Work Letter is attached. 19. ACCEPTANCE OF PREMISES Lessee shall notify Lessor in writing of any items that Lessee deems incomplete or incorrect in order for the Premises to be acceptable to Lessee within ten (10) days following Tender of Possession as set forth in paragraph 3.2.1 of the Lease to which this Work Letter is attached. Lessee shall be deemed to have accepted the Premises and approved construction if Lessee does not deliver such a list to Lessor within said number of days. Initials ------ Page 27 Initials ------ EXHIBIT C-1 01045 CUTTING AND PATCHING DESCRIPTION: Contractor will be responsible for inspection of the existing condition an all cutting, fitting and patching required to complete the work or to: Make its several parts fit together properly. Uncover portions of the work to provide for installation of ill-timed work. Remove and replace defective work. Remove and replace work not conforming to requirements of Contract Documents. Remove samples of installed work as specified for testing. Provide routine penetrations of non-structural surfaces for installation of piping and electrical conduit. - -METHODS: Inspect existing conditions of the project, including elements subject to damage or to movement during cutting and patching. Execute cutting and demolition by methods which will prevent damage to other work and will provide proper surfaces to receive installation of repairs. Refinish entire surfaces as necessary to provide an even finish to match adjacent finishes. 01300 SUBMITTALS DESCRIPTION: Contractor will be required to review submittals for compliance with Contract Documents prior to submission. Submittals will be required for finish materials, color selection, fabricated items, equipment and administrative procedures such as certificates, inspections, etc., as follows: Shop Drawings: One sepia transparency and three prints. Product Data: Number contractor requires to be returned plus two. Samples: Will vary usually two of sufficient size to represent color, texture, utility or other qualities. Maintenance Data: Two copies for inclusion in Owner's Maintenance Manual for finish materials, equipment, etc., that will be maintained by Owner. Certificates, Test Reports, etc.: Number contractor requires plus three. 01410 TESTING LABORATORY SERVICES DESCRIPTION: Contractor will be required to arrange for all test and inspections that are required by law, ordinances, rules and regulations, order of approval of governing authorities. Owner will employ and pay for the services of an Independent testing Laboratory to perform testing that will be specified for items such as Structural Bracing, etc. 01500 TEMPORARY FACILITIES AND CONTROLS DESCRIPTION: Contractor shall provide connections to existing facilities, sized to provide service required for power, lighting and water. Arrange with local telephone service company and Owner to provide direct-line telephone service at construction site if required for use of personnel and employees. Pay all costs for installation, maintenance and removal and service charges. Existing sanitary facilities may be used during construction period by arrangement with and on approval of Owner. Completely remove temporary materials and equipment when no longer needed and restore existing facilities to original condition. Initials ------ Page 28 Initials ------ 01600 MATERIALS AND EQUIPMENT DESCRIPTION: Contractor will be required to comply with specified or otherwise approved make, type, quality, etc., and to manufacture and assemble in accordance with the best engineering and shop practices. Handling: Arrange deliveries in accordance with construction schedule; deliver materials and equipment in undamaged condition, suitably packaged and identified. Storage and Protection: Store properly until installed, protect from damage after installation. 01631 SUBSTITUTIONS AND PRODUCT OPTIONS DESCRIPTION: Within 30 days of contract date, contractor will be required to submit list of major products to be used. Architect will consider substitutions for specified projects in accordance with the following options, if submitted in writing: Products Specified in the Contract Documents by Reference Standard Only: Select any product meeting that standard. Products Specified in Contract Documents by naming Several Products or manufacturers: Select any named manufacturer of product that complies with the specifications. Products Specified in the Contract Documents by Naming One or More Manufacturer of Products and "Or Equal": Submit request for substitution if proposed product or manufacturer is other than those specifically named. Products Specified in the Contract Documents by Naming Only One Product and Manufacturer: There are no options. 01700 CONTRACT CLOSEOUT DESCRIPTION: When the Contractor considers the work substantially complete, he shall submit to the Owner a written notice that the work has been completed in accordance with the Contract Documents and a list of items to be completed or corrected. Within a reasonable time after receipt of the notice, Owner and Architect will make a inspection to determine the status of completion. Contractor will be required to obtain and process all required certificate and notices, arrange for all final inspections, and submit final adjustment of accounts prior to final payment. For a period of one year from the date of Final Acceptance, the Contractor will be required to provide supervisor, labor transportation and materials for investigation and correction of failures of deficiencies in the Work. 01710 CLEANING DESCRIPTION: Contractor will be required to keep the Work, site and adjacent properties free from accumulation of trash and debris resulting from construction operations, and to periodically dispose of trash and debris at a legal disposal area away from the site. Immediately prior to final acceptance. Contractor will be required to clean the work, including removal of all stains and other foreign materials from exposed surfaces, and washing and polishing of glass and mirrors. 01720 PROJECT RECORD DOCUMENTS DESCRIPTION: Contractor will be required to maintain project record documents, recording information as construction progresses. Prior to final acceptance, the Contractor will be required to transfer information to sepia transparencies and submit to the Architect. Initials ------ Page 29 Initials ------ DRAWINGS: Legibly mark to record actual construction: Location of internal utilities and appurtenances concealed in the construction, including mechanical and electrical systems installed above furred ceilings, referred to visible and accessible features of the structure. Filed changes by Field Order or by Change Order. Changes made by Filed Order or by Change Order. Details not on original contract drawings. SPECIFICATIONS: Legibly mark each section to record: Addenda. Manufacturer, trade name, catalog number, and supplier of each product and item of equipment actually installed. Changes made by Field Order or by Change Order. 06410 CASEWORK GENERAL: Provide base and upper plastic laminated faced cabinets, adjustable shelves, work surfaces, and storage cabinets as shown on drawings. MATERIALS: CASEWORK: Plastic Laminate: WIC Custom Grade, Flush overlay construction, plastic laminate veneer as manufactured by Wilsonart, Exxon Chemical (Novamar), LaminArt, or equal. Grades: As recommended by manufacturer for each application and in accordance with Reference Standards. Colors and Finish: As indicated on schedule and drawings. Painted Finish: WIC Custom Grade, flush overlay construction, opaque finish unless otherwise shown. Exposed surfaces of casework scheduled for opaque finish: a) Face Veneer: White Birch, rotary sliced, "Sound Grade." b) Solid Stock White Birch, plain-sawn. Semi-exposed and concealed surfaces: Any species allowed by specified Grade or finish system, except that shelf edges exposed when doors are open shall be edged with close-grain hardwood. COUNTERTOPS: Plastic laminate conforming to WIC Custom Grade. Minimum 3/4 inch thick hardwood plywood core. CASEWORK HARDWARE IS AS FOLLOWS: Hinges: Grass Self Closing No. 1200 overlay at end panels. Grass Self Closing No 1201 at intermediate stiles. Finish: Polished chrome. PULLS: Stanley #4433-1/2. Finish: Polished chrome. SHELVING STANDARDS: Knape & Vogt No. 255 No. 239 support. Polished chrome. DRAWER SLIDES: File Drawers: Full extension, roller side guides: No. 100 pound capacity; positive out stop: Accuride #3017, Grant No. 527, KV No. 1429. TYPICAL DRAWERS. Full extension guides; roller side guides: 75 pound capacity; positive out stop; Accuride No. 3800, Grass No. V503, KV No. 8300. INSTALLATION Set and secure casework in place rigid, plumb and level in accordance with WIC Section 26. Use purpose designed fixture attachments at concealed location for wall mounted components. Carefully scribe casework which is against other building materials, leaving gaps of 1/32 inch maximum. Do not use additional overlay trim for this purpose. Secure cabinet and counter bases to floor using appropriate angles and anchorages. Counter-sink anchorage devices at exposed locations used to wall-mount components, and conceal with solid plugs of hardwood with finish to match surround. Finish flush with surrounding surfaces. DIVISION 7: THERMAL AND MOISTURE PROTECTION 07200 INSULATION 1. GENERAL: Provide Acoustical Insulation as shown on drawings. Provide Insulation in root/ceiling spaces as shown on drawings. Provide Insulation in exterior walls between studs as shown on drawings. MATERIALS: MANUFACTURER: Acceptable manufacturers: United Stated Gypsum Company (USG). Manville. Owens Corning Fiberglass. MATERIALS: SOUND ATTENUATION INSULATION: Paperless, semi-rigid spun mineral fiber mat, 2-1/2 inch thick: United States Gypsum. "Thermafiber Sound Attenuation Blankets." BLANKET INSULATION: Glass fiber manufactured by Owens Corning or Manville or Mineral Wool Manufactured by U.S. gypsum conforming to Federal Specifications HH-I-521F. All insulation materials must be certified to meet the requirements of Sec. 2-5311 (a) and installed to meet the requirements of Section 2-5311(b) of the BUILDING ENERGY EFFICIENCY STANDARDS. 1986 edition as published by the California Energy Commission. ACCESSORY MATERIALS: Miscellaneous Fastenings, Accessories: As acceptable to insulation manufacturer. INSTALLATION: Install insulation in accordance with manufacturer's recommendations, securely anchored, complete with all required fastenings and accessories. Vapor barrier: Orient to warm side of areas to be insulated. Joints: Butt tightly to form a continuous insulated layer free of voids or open space. Initials ------ Page 30 Initials ------ Do not install insulation until building is sufficiently enclosed or protected against absorption of moisture by the insulation, and do not install insulation unless supporting framing and surrounding construction is thoroughly dry. 07900 SEALANTS GENERAL: Seal exterior and interior joints to provide acoustical integrity. MATERIALS: ACOUSTICAL TAPE: Type and size required as a detailed, performed PVC foam tape, adhesive backed, "Norseal V730", Norton Specialty Plastics Division. Use at acoustical partitions. Locate between ceiling and top of partition, under floor runners, and as detailed. ACOUSTICAL SEALANT PADS: Resilient pads, composed of polybutene-butyl and inert fillers, "Lowry Outlet Box Pads", Harry A. Lowry & Associates, Van Nuys, California 91406, or approved equal. Use at acoustical partitions to seal edges of gypsum wallboard not being taped and as detailed. NEOPRENE GASKETS: ASTM D2000, grade BC610; dense neoprene rubber, 60 duro-meter, 1000 psi tensile strength; 1/8 inch thick; Williams Products, Inc. Series 1200 dense Neoprene rubber or equal product substituted under provisions of section 01631. DIVISION 8: DOORS, WINDOWS AND GLASS 08100 STEEL DOORS AND FRAMES GENERAL: U.L. LABEL: Where the Underwriters Laboratories, Inc. labeled openings are called for on the door schedule, doors and frames shall be constructed in accordance with the U.L. procedure issued to the manufacturer and shall bear the designated U.L. labels. MATERIALS: DOORS: Ceco Corporation, Regent doors fabricated from 2-18 gauge steel sheets with flush seamless face sheets and honeycomb core. The top and bottom of the doors shall be closed flush by 16 gauge channels. FRAMES: Ceco Corporation 16 gauge steel hot-dipped galvanized frames. SF (Standard Frame) Series: For concrete and masonry wall applications. DWS or DWC Series: For drywall frame construction. Frames shall be knocked-down field assembled type designed specifically for installation after drywall partitions are erected. Glazing Provisions: Window frames shall be provided with glazing pockets prepared to receive glazing and shall include steel glazing beads. EXECUTION: Doors and frames shall be installed and erected plumb and in true alignment. Frames shall be rigid and securely in place. Clearances at top and sides of doors shall be not less than 1/16" and not more than 1/8". CLEAN-UP: Clean up all debris resulting from the operation. 08200 WOOD DOORS Page 31 GENERAL: SUBMITTALS: In accordance with Section 01300 For Review: Manufacturer's Literature of all products. Shop Drawings: Submit schedule of doors, using the same reference numbers for openings as those on the contract drawings, indicating the core type, veneer grade, site, location, and extent of hardware blocking, and other pertinent data. FOR INFORMATION AND RECORD: Warranty: Submit written agreement on door manufacturer's standard form signed by Manufacturer, Installer and Contractor, agreeing to repair or replace defective doors which have warped (bow, cup or twist) or which show telegraphing of core construction below in lace veneers, or do not conform to tolerance limitations of W.I.C. Warranty shall be in effect for the life of the door. MATERIALS TYPE: Wood doors shall be flush panel, solid core and manufactured to the standard of "Custom Grade" as defined in the manual of Millwork of the Woodwork Institute of California (W.I.C.). FLUSH PANEL DOORS: Core construction particle board. Veneer for opaque finish, any W.I.C. custom grade, closed grain, hardwood at mill option. EXECUTION SEALING: Insure that top and bottom edges of doors are sealed when they arrive at the job site. INSTALLATION: Wood doors and finish hardware installed under section 06200 Finish Carpentry. 08710 FINISH HARDWARE GENERAL: Finish Hardware within tenant suite. MATERIALS: FINISH HARDWARE SCHEDULE: all finishes to match existing building hardware U.O.N. HARDWARE GROUPS: To Be Determined 08800 GLASS AND GLAZING GENERAL: Full Height Glass Partitions. MATERIALS: CLEAR GLASS: Conforming to Reference Standards FS-DD-G-451, Type 1, Class 1, Quality q3, thickness and shown on drawings, tempered where shown on drawings, PPG "Clear Glass". SILICON GLAZING SEALANT: One-part, gun-grade, General Electric "Silglaze" or equal. Color: Black GLAZING GASKETS: types and sizes as required, performed, premoulded corners, as manufactured by F.H. Moloney, D.S. Brown, Kirkhill Rubber, or equal. Full-Density EPDM: Conforming to NAAMM Standard SG-1, 60-70 Shore A hardness, 25% compression set. Closed-cell Neoprene: Capable of 24% - 40% compression. GLAZING BLOCKS, SHIMS: Neoprene, 70-9- Shore A hardness. Page 32 GLAZING TAPES: Types and sizes as required, 100% solids, Polyisobutylene-butyl, preformed sealant tape, as manufactured by Tremco, Pocora, or equal, black. GLASS CUTTING: Cut all glass to proper size in accordance with details, Reference Standards, and manufacturer's recommendations for technique, tolerances, edge bit, clearance, and climatic conditions. EDGE TREATMENT: Edge treatment at butt-joint glazing will be flat ground with 1/16" ground 45 degree seam and polished unless otherwise shown on drawings. DIMENSIONAL TOLERANCES: Glass shall comply with Reference Standard except for the following: Edge bow in open or closed joint butt-glazed situation shall not cause misalignment of adjacent panels in excess of 1/8". Width of joint dimension shall not vary within any butt-joint by more than 1/16". Width of joint dimension shall not vary from nominal dimension by more than 1/16". TEMPERING: All tempered glass shall be horizontally tempered and waves shall be horizontal. DIVISION 9: FINISHES 09110 METAL SUPPORT SYSTEMS GENERAL: Interior walls, partitions and ceilings. MATERIALS: METAL STUDS: Standard (25) gage, sizes as shown on Drawings, punched steel type, Milcor "Drywall Steel Studs", unless otherwise noted. Steel: ASTM C-645, galvanized. Track and Bridging: Standard (25) gage, unpunched type as standard with manufacturer of metal studs. Use at non-bearing partitions as detailed. METAL STUDS: heavy (20) gage, sizes as shown on the Drawings, punched steel type, USG "Type CWS", unless noted otherwise. Steel: ASTM C-645, galvanized. Track and Bridging: Type CWR, 20 gage, unpunched type as standard with manufacturer of metal studs. Use at non-bearing partitions as detailed. TOP TRACK: Partition Specialties, Inc. "Tapeable Top Track" or approved equal. GYPSUM BOARD CEILING SUSPENSION SYSTEM: Direct suspension, United States Gypsum, or equal. Main Beam: 1/-1/2" cold rolled, 16 gage, galvanized for exterior softits. Furning Channel: 7/8" roll formed, 26 gage-shaped channel, galvanized. Miscellaneous Moldings, Clips, fasteners, Hanger Wire, etc.: As recommended by manufacturer and approved by governing authorities. CHANNELS: 16 gage galvanized cold-rolled steel channels, sizes shown, Milcor "Cold-Rolled Channel," or approved equal. Deflection Channel at Partition Heads: 1-3/4" flanges. Page 33 Bridging: Sized to fit stud cells. FURRING CHANNELS: Standard 25 gage galvanized steel, Milcor "Drywall Furring Channel", or approved equal. HANGER AND TILE WIRE: galvanized steel wire conforming to federal Standard QQ-W-461, finish 5, class 1, soft temper. Hanger Wire: 10 gage Diagonal Bracing Wire: 16 gage Double-Strand Tie Wire: 18 gage EXECUTION Comply with the requirements of ASTM C 754 for installation of framing to receive gypsum wallboard. Full Height Partitions: Secure top and bottom runners at 24 inch centers. Align to configuration required. Install studs vertically at 24 inch centers and not more than 2 inches from abutting construction, each side of openings, and at corners. Fit runners under and above openings secure intermediate studs at spacing of wall studs. 09250 GYPSUM WALLBOARD SYSTEMS GENERAL: Interior walls, partition and ceilings. MATERIALS GYPSUM BOARD: Paper-faced, type "SW" edges, ASTM C36, USG "Sheetrock Firecode" (type "x") at non-fire-rated and fire-rated construction. MISCELLANEOUS ACCESSORIES: Expansion Joint: USG #093. Corner Bead: Metal reinforced paper, Beadex manufacturing Co., "Paper Bead". Metal Trim: USG #200B. Column Furring Clips: Parker Devices Inc., "PDI Single Step Clips," or approval equal. Miscellaneous Clips, Screed, and Fastenings: As recommended by manufacturer of gypsum board and as approved by governing authorities. Caulk: Acrylic Latex type. 09510 ACOUSTICAL CEILING SYSTEM DESCRIPTION: Provide new Suspended acoustical tile system as shown on drawings. MATERIALS: EXPOSED SUSPENSION SYSTEM: Direct suspension, double web T-bulb steel construction; Donn Corporation "Supraline Grid". Page 34 Size of Panel: 2 x 4 Perimeter Trim: Shadow Molding. Finish: Manufacturer's standard white enamel finish, with white painted recess. ACOUSTICAL PANELS: Mineral fiberboard lay-in panels. Armstrong "Second Look IV Supraline Score", No. 2767B, Tapered edge, compatible with Donn ceiling system. Size: 24 inches x 48 inches x 3/4 inch. Flame Spread: UL labeled, 25 or under. Noise reduction Coefficient: .50-.60. Color: White PLENURN BARRIER: Lead Sheet, 1/64" thickness, 1 pound per sq. ft. weight, Acoustilead "Sound barrier". 09650 RESILIENT FLOORING GENERAL: Flooring as indicated on drawings. MATERIALS: RESILIENT STRAIGHT BASE: Burke Rubber, 1/8" thickness, 2 1/2 high, "Covered Base" at hard surfaces, "Carpet Base" at carpet areas. RESILIENT TILE: Vinyl Composition, FS SS-T-312, Type IV, 12 x 12 inch, 1/8" gage. Armstrong Excelon, Imperial texture or approved equal. CARPET REDUCER STRIP: Mercer Plastics, "Royal Custom Edge #1" color as shown on drawings. EXECUTION: Mix tiles from containers to ensure share variations are consistent. Clean, seal and wax floor and base surface in accordance with manufacturer's instructions. 09680 CARPET GENERAL: Flooring as indicated on drawings. Manufacturer as listed on the drawings or substitutions under provisions of section 01631. FOR REVIEW: Seaming diagram indicating carpet configuration in a manner to show proper seams and pattern match. Submit (2) samples of each type of carpet for Architect's approval. 9" x9" minimum. FOR INFORMATION AND RECORDS: Warranty: submit a written warranty including, but not limited to: 10 year wear warranty (including manufacturing defects such as edge ravel and delamination) Static Warranty Tip Shear Warranty MATERIALS: Carpets as specified on the drawings. Page 35 Provide 5% overage plus 110 additional square yards of each carpet type for the owner's future use. ACCESSORY MATERIALS Sub-floor filler: Cementitions type recommended by carpet manufacturer. Primer and adhesives: Types recommended by carpet manufacturer to suit application and expected service. Edge strips: Carpet to resilient and resinous floorings; rubber tile/carpet joiner, Roppe Stock number 50; color #100 "Black." Carpet to ceramic tile: Rubber tile/carpet joiner Roppe Stock number 56; color #100 "Black". Carpet Pad: Fairmont Dubl-Bac DB 1416.5/32" double stick pad. Substitutions under provisions of Section 01631. INSTALLATION: Apply carpet and adhesive in accordance with manufacturers instructions. Check matching of carpet before cutting and ensure there is no visible variation between dye lots. Install carpet in configurations and colors indicated on drawings. Cut carpet, where required, in manner to allow proper seams and pattern match. Ensure cuts are straight, true and unfrayed. No pieces less than 24 inches wide will be permitted. Where possible and practical, locate seams in areas of least amount of traffic. Apply adhesive to edges of carpet at seams and join in manner so as not to detract from the appearance of the carpet installation and decrease its life expectancy. Ensure seams are straight, not overlapped or peaked and free of gaps. Spread adhesive in quantity recommended by manufacturer after primer application to ensure proper adhesive over full area of installation. Apply only enough adhesive to permit proper adhesion of carpet before initial set. Lay carpet on floors with the run of the pile in same direction of anticipated traffic. Do not change run of pile in any one room or from one room to next where continuous through a wall opening. Cut and fit carpet neatly around projection through floor and to walls and other vertical surfaces. Fit carpet snugly to walls or other vertical surfaces, leaving no gaps. Entire carpet installation is to be laid tight and flat to subfloor, well fastened at edges, and present a uniform pleasing appearance. Ensure monolithic color, pattern and texture match within any one area. Install edging strips where carpet terminates at other floor coverings. Use full length pieces only. Butt tight to vertical surfaces. Where splicing cannot be avoided butt ends tight and flush. Clean and vacuum all debris resulting from this work. 09900 PAINTING GENERAL PRIMING: All Millwork items and finish carpentry items (except materials remaining natural) shall be primed immediately upon arrival on job. SUBSTITUTIONS: These specifications set quality standards. Kelley- Moore Products have been used to give a basis for specifications. In addition, painting material may be first line products of Pratt and Lambert, Sherwin-Williams, National Lead, Sinclair, and W.P. Fuller, providing the Page 36 manufacturer submits a list of substituted items as they relate to the specified items. Other manufacturers will be required to submit technical data to the Architect for approval no later than 35 days after award of contract. SCOPE: It is the intent that work under this section of the specifications shall include the finishing of all surfaces normally requiring a paint finish. Interior partitions, trims, gypsum board ceilings, and all other items that are not factory- finished and shop primed. INSPECTIONS: Notify the Architect 24 hours prior to the time each coat of finish is to be applied. Failure to so notify will cause the work in question to be recoated or rejected. Obtain Architect's approval of surface or finish prior to application of each succeeding coat of finish. COLOR SELECTION: The Architect will furnish to Contractor a complete color schedule of paint colors for the project prior to commencement of the painting operation. Color to be approved in writing by the Architect prior to commencement of painting. Colors will be chosen from the paint manufacturer's total range of color mixes. The Contractor shall provide all requested color information and samples required by the Architect for color selection, including test samples of approved colors on the building. MATERIALS PAINT SCHEDULE: Finish surfaces in accordance with the following schedule and as further shown on the drawings. Material shown is Kelly Moore unless shown otherwise. INTERIOR GYPSUM BOARD 1st Coat: 970 Wall Sealer 2nd Coat: 555 acrylic flat wall paint INTERIOR METAL DOORS AND FRAMES AND ALL EXPOSED FERROUS METALS 1st Coat: (touch up only if already primed) 1777 rust inhibiting primer 2nd Coat: 1625 Alkyd Eggshell enamel 3rd Coat: (for doors and frames) 1625 Alkyd Eggshell enamel INTERIOR GALVANIZED METAL Each treatment:Yosemite Galvan Prime 1st Coat (touch up only if already primed) 1722 Galvanized iron primer 2nd Coat: 1625 Eggshell enamel EXECUTION The workmanship shall be of the very best quality. All materials shall be applied under adequate illumination, evenly spread, and smoothly flowed on without runs or sags. Cut paint sharply to lines. Only skilled mechanics shall be employed. Regardless of number of coats specified the paint shall completely cover material surface to Architect's satisfaction. CLEAN-UP: After all work has been completed, the Contractor shall clean up all debris resulting from his work and shall clean all paint from all surfaces adjacent to his work, and leave the premises in perfect condition, subject to acceptance by the Owner. Remedy all work that is defective or defaced from any cause, as directed by the Architect. Page 37 FIRST AMENDMENT TO THE LEASE DATED JUNE 11, 1998 BY AND BETWEEN ASSET GROWTH PARTNERS, LTD AS LESSOR AND PHARSIGHT CORPORATION AS LESSEE This amendment, executed pursuant to Paragraph 3.4 of the Lease, shall establish the following: 1) Lessor and Lessee agree that the Rent Commencement Date under the lease is September 26, 1998. 2) The Expiration Date shall be September 25, 2003. LESSOR: LESSEE: ASSET GROWTH PARTNERS, LTD. PHARSIGHT CORPORATION A CALIFORNIA LIMITED PARTNERSHIP A CALIFORNIA CORPORATION BY: REES PROPERTIES, INC. GENERAL PARTNER /s/ Thomas J. Rees /s/ Robin A. Kehoe - ----------------------------------- ----------------------------------- Thomas J. Rees By: Robin A. Kehoe President Its: Chief Financial Officer Date: 11/24/98 Date: November 19, 1998 ---------------------------- ---------------------------- Page 38 SECOND AMENDMENT TO THE LEASE DATED JUNE 11, 1998 BY AND BETWEEN ASSET GROWTH PARTNERS, LTD AS LESSOR AND PHARSIGHT CORPORATION AS LESSEE This amendment dated December 10, 1999, shall amend the lease as follows: 1. As of January 1, 2000, the Premises shall be revised to include Suite 280, measuring 5,160 rentable square feet and shown on the attached Exhibit A. 2. Rent for Suite 280 shall be per the following schedule: January 1, 2000 - September 25, 2000 $20,124.00 ($3.90 per square foot) September 26, 2000 - September 25, 2001 $20,485.20 ($3.97 per square foot) September 26, 2001 - September 25, 2003 $21,001.20 ($4.07 per square foot) 3. As of the Suite 240 Commencement Date (as defined below), the Premises shall be revised to include Suite 240, measuring 10,840 rentable square feet and shown on the attached Exhibit A. Suite 240 is currently occupied by Blue Pumpkin Software, who is expected to vacate the Premises on or about January 31, 2000. The Suite 240 Commencement Date shall be ten (10) calendar days after the space is vacated, which date shall be confirmed by Lessor in writing to Lessee. 4. Rent for Suite 240 shall be per the following schedule: Suite 240 Commencement Date - September 25, 2000 $42,276.00 ($3.90 per square foot) September 26, 2000 - September 25, 2001 $43,034.80 ($3.97 per square foot) September 26, 2001 - September 25, 2003 $44,118.80 ($4.07 per square foot) 5. Operating Expense pass-throughs for Suite 240 and 280 will be based on actual increases in building operating expenses over the Base Year 2000. 6. Lessee shall provide additional security deposit in the amount of $62,400.00 upon the execution of this Amendment. 7. Lessor to repaint and clean carpets. Any other improvements to the expansion premises shall be at Lessee's sole expense, and shall be subject to Lessor's prior written approval as provided in the Lease. Lessor warrants that all building systems in Suites 240 and 280 are in good repair and operational. 8. All other terms and conditions of the Lease shall remain unchanged. LESSOR: LESSEE: ASSET GROWTH PARTNERS, LTD. PHARSIGHT CORPORATION A CALIFORNIA LIMITED PARTNERSHIP A CALIFORNIA CORPORATION BY: REES PROPERTIES, INC. GENERAL PARTNER /s/ Thomas J. Rees /s/ Robin A. Kehoe - ----------------------------------- ----------------------------------- Thomas J. Rees By: Robin A. Kehoe President Its: Chief Financial Officer Date: 12/21/99 Date: 12/23/99 ---------------------------- ------------------------------ Page 39 EX-10.3 8 EXHIBIT 10.3 Exhibit 10.3 CO-OWNERSHIP AGREEMENT THIS CO-OWNERSHIP AGREEMENT (the "Agreement") is by and between PHARSIGHT CORPORATION, a California corporation having its principal place of business at 299 California Avenue, Suite 300, Palo Alto, CA. 94306 ("Pharsight") and MITCHELL AND GAUTHIER ASSOCIATES, INC., a Delaware corporation having its principal place of business at 200 Baker Avenue, Concord, Massachusetts 01742 ("MGA"). This Agreement is effective as of May 27, 1998 (the "Effective Date"). Except as specified herein, all the capitalized terms used in this Agreement shall retain the same meaning as defined in the Asset Purchase Agreement. RECITALS A. MGA owns certain computer software programs that are based on the Advanced Continuous Simulation Language; and B. MGA is willing to assign a fifty percent (50%) undivided interest in certain of these software programs to Pharsight in conjunction with the execution of the Asset Purchase Agreement to be entered into among Pharsight, MGA, Edward E. L. Mitchell and Joseph S. Gauthier on this date (the "Asset Purchase Agreement"). AGREEMENT The parties, intending to be legally bound, hereby agree as follows: 1. DEFINITIONS. 1.1 "ACSL Products" shall mean the object code version of the products which are listed and described in Exhibit A. 1.2 "Derivative Work" shall mean a work which is based on the Software, such as a revision, enhancement, modification, translation, abridgement, condensation, expansion, or any other form in which the Software may be recast, transformed, or adapted, and which, if prepared without authorization of the owner of the copyright in the Software, would constitute a copyright infringement. For purposes hereof, Derivative Work shall also include any compilation that incorporates the Software. 1.3 "Golden Master" shall mean, with respect to a given software program, program module, or documentation, a copy of such item that (i) is under source code control, (ii) is complete and accurate, (iii) represents the producer's best efforts to meet the applicable specifications, (iv) has passed all applicable test procedures, and (v) complies with normal industry practices for verification and duplication. 1.4 "Intellectual Property" means any or all of the following and all statutory and/or common law rights throughout the world in, arising out of, or associated therewith: (i) all patents and applications therefor and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (ii) all inventions (whether patentable or not), invention disclosures and improvements, all trade secrets, proprietary information, know-how 1. and technology; (iii) all works of authorship, "moral rights", copyrights (including derivative works thereof), mask works, copyright and mask work registrations and applications; (iv) all industrial designs and any registrations and applications therefor; (v) all trade names, logos, trademarks and service marks, trademark and service mark registrations and applications together with the good will of the business symbolized by the names and the marks; (vi) all computer software and related documentation including all Source Code, Object Code, firmware, installation programs, source code control archives, development tools, test plans, test files, test data, build scripts, file specifications, design and implementation documents, interface specifications, requirements specifications, data bases, utilities, bug databases, and all media on which any of the foregoing is recorded; (vii) any similar, corresponding or equivalent rights to any of the foregoing; and (viii) all goodwill associated with any of the foregoing. 1.5 "Intellectual Property Rights" shall mean any interest or right protectable under the law of any country as to any form of Intellectual Property. 1.6 "MGA Fields" shall mean all fields other than the Pharsight Fields. 1.7 "Object Code" shall mean the machine-executable object code form of the Software. 1.8 "Pharsight Fields" shall mean the biotechnology, pharmaceutical (including over-the-counter), veterinary, medical devices, environmental and healthcare fields. 1.9 "Software" shall mean the computer programs which are listed and described in Exhibit A, including any upgrades, updates, works in progress and all associated documentation (existing as of the Effective Date), developed by or for MGA and any other components, programs or utilities required for the operation or execution thereof, except those identified in Exhibit D. Unless otherwise specified, software shall include both Source Code and Object Code. 1.10 "Source Code" shall mean the human-readable source code version of the Software and all related program documentation such that a programmer reasonably skilled in the programming language could read, understand and modify the Software. 2. ASSIGNMENT OF FIFTY PERCENT UNDIVIDED INTEREST. 2.1 Assignment. MGA hereby irrevocably assigns to Pharsight a fifty percent (50%) undivided right, title and interest worldwide in and to the Software including, without limitation, patents, copyrights, trade secrets and any other Intellectual Property Rights (excluding any related trademarks and trade names) incorporated in the Software, whether in the United States or abroad. Pharsight acknowledges that MGA has not filed any patent applications nor obtained any issued patents on the Software as of the Effective Date. It is the intention of the parties that the Intellectual Property Rights (excluding any related trademarks and trade names) in the Software shall be jointly owned without any duty to account or share any royalties based on the licensing or use of the Software by the other party and as permitted under Section 5. 2.2 Waiver or Assignment of Other Rights. If MGA has any rights in or to the Software in which a fifty percent (50%) interest cannot be assigned to Pharsight, MGA 2. unconditionally and irrevocably waives the enforcement of such rights, and all claims and causes of action of any kind against Pharsight with respect to such rights, and agrees, at Pharsight's request and expense, to consent to and join in any action to enforce such rights. If MGA has any rights in or to the Software that cannot be assigned to Pharsight or waived by MGA, MGA unconditionally and irrevocably grants to Pharsight during the term of such rights, an irrevocable, perpetual, worldwide, fully paid and royalty-free license, with rights to sublicense through multiple levels of sublicensees, to reproduce, create derivative works of, distribute, publicly perform and publicly display by all means now known or later developed, such rights in or to the Software. 2.3 Further Assistance. MGA agrees to cooperate with Pharsight or its designee(s) in the procurement and maintenance of Pharsight's rights in the Software and to execute, when requested, any other documents deemed necessary by Pharsight to carry out the purpose of this Agreement. MGA agrees to execute a signed transfer of a fifty percent (50%) undivided interest of copyright to Pharsight in the form attached to this Agreement as Exhibit B for all Software and related documentation. 2.4 Enforcement of Intellectual Property Rights. Upon reasonable request, each party (the "Assisting Party") will assist the other party (the "Requesting Party") in every proper way to obtain and from time to time enforce, United States and foreign Intellectual Property Rights related to the Software in any and all countries. To that end, the Assisting Party will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Requesting Party may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Intellectual Property Rights and the ownership of a fifty percent (50%) undivided interest thereof. The Assisting Party's obligation to assist the Requesting Party with respect to such Intellectual Property Rights relating to the Software in any and all countries shall continue in perpetuity, but the Requesting Party shall compensate the Assisting Party at a reasonable rate for the time actually spent by such party in providing such assistance. In addition, the Assisting Party will execute any license agreement requiring the names of both co-owners to make the license enforceable. 2.5 Execution of Documents. In the event Pharsight is unable for any reason, after reasonable effort, to secure MGA's signature on any document needed in connection with the actions specified in Section 2.3 above, MGA hereby irrevocably designates and appoints Pharsight and its duly authorized officers and agents as its agent and attorney in fact, which appointment is coupled with an interest, to act for and in its behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by MGA. Also, in the event the Requesting Party is unable for any reason, after reasonable effort, to secure the Assisting Party's signature on any document needed in connection with the actions specified in Section 2.4 above, the Assisting Party hereby irrevocably designates and appoints the Requesting Party and its duly authorized officers and agents as its agent and attorney in fact, which appointment is coupled with an interest, to act for and in its behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by the Assisting Party. 3. 2.6 Copyright Notice. MGA and Pharsight agree that all copies of the Software and any Derivative Works, whether or not modified, made by MGA or Pharsight, or their respective licensees or sublicensees, will contain applicable proprietary notices. In addition, MGA and Pharsight agree to include an applicable copyright notice in or on the media of all copies of the Software or any Derivative Work. 2.7 Patent Applications. Notwithstanding the provisions of Section 7, either party (the "Proposing Party") may prepare and file a patent application for a Derivative Work in any country; provided that the Proposing Party (i) notifies the other party (the "Co-Owner"), in writing, at least sixty (60) days prior to submitting such patent application; (ii) describes the scope of the proposed patent application and the countries in which it desires to seek patent protection; and (iii) permits the Co-Owner to participate, at Co-Owner's expense, in the prosecution of the patent. The ownership of the patent in a particular country shall be proportional to the parties' contributions for the payment of the patent prosecution and maintenance fees. In the event that the Co-Owner elects not to participate in the patent prosecution, the Co-Owner shall provide information reasonably necessary for the Proposing Party to prosecute such patent applications, at the expense of the Proposing Party. If either party ("Abandoning Party") desires to abandon a patent application or a patent issued thereto, such party shall provide the other party ("Objecting Party") with sixty (60) days' prior written notice of its intent to abandon such application or patent. If the Objecting Party desires to continue such prosecution or maintenance of the patent, the Abandoning Party shall assign all right, title and interest in and to the application and/or the issued patent to the Objecting Party and the Objecting Party shall be the sole owner of the application and/or the issued patent. Notwithstanding any of the foregoing, in no event shall any issued patent, whether owned solely or jointly, preclude either party from exercising its rights, exclusive or otherwise, in or to the Software as set forth in this Agreement. 3. DELIVERY. Upon execution of this Agreement, MGA shall provide to Pharsight five (5) Golden Masters of the Object Code, two (2) electronic copies of the Source Code corresponding to the Golden Master Object Code, and five (5) Golden Masters and two (2) printed copies of any end-user documentation for all programs included in the Software. Without limiting the foregoing, MGA's delivery shall include everything Pharsight needs to recreate the most current released version, and every supported prior version, of each of the programs included in the software for all currently supported platforms, including copies of all firmware, installation programs, source code control archives, development tools, test plans, test files, test data, build scripts, file specifications, design and implementation documents, interface specifications, requirements specifications, data bases, utilities, and bug databases. 4. LICENSE GRANTS. 4.1 MGA Grant to Pharsight. Subject to the terms and conditions of this Agreement and except for the termination periods of the distribution agreements referenced in Section 2.4 (a) (viii) of the Asset Purchase Agreement, MGA hereby grants to Pharsight an exclusive (even as to MGA), perpetual, irrevocable, worldwide, royalty-free license to use, reproduce, create Derivative Works of, distribute, sublicense (through multiple tiers of sublicensees), perform and publicly display the Software in the Pharsight Fields. 4. 4.2 Pharsight Grant to MGA. Subject to the terms and conditions of this Agreement, Pharsight hereby grants to MGA an exclusive (even as to Pharsight, except as set forth in this provision), perpetual, irrevocable, worldwide, royalty-free license to use, reproduce, create Derivative Works of, distribute, sublicense (through multiple tiers of sublicensees), perform and publicly display the Software in the MGA Fields. Notwithstanding the foregoing, Pharsight hereby expressly reserves the right to use, reproduce, create Derivative Works of, distribute, sublicense (through multiple tiers of sublicensees), perform and publicly display the Software, and any Derivative Works thereof, in the MGA Fields, incorporated in or bundled with an additional Pharsight product (including, without limitation, ACSL BioMed or ACSL Tox) so long as the resultant product (i) is designed for use in the Pharsight Fields and (ii) represents an enhancement and/or transformation of the Software (with regard to both value and function). 4.3 Trademark License. MGA hereby grants to Pharsight an unrestricted, perpetual, irrevocable, exclusive (even as to MGA), royalty-free, world-wide license to use all trademarks and trade names owned by MGA and associated with the Software (herein the "Trademarks") in conjunction with any product designed for use in the Pharsight Fields. Pharsight agrees to state in appropriate places that the Trademarks are the trademarks of MGA and to include the symbols (TM) and (R) as appropriate. Pharsight may grant sublicenses of its rights to use the Trademarks provided such sublicensees have executed written agreements with Pharsight containing terms and conditions substantially similar to those contained herein. Pharsight agrees to maintain the quality of the software products licensed using the Trademarks, to use the Trademarks in accordance with guidelines and instructions as may be reasonably promulgated by MGA from time to time, and to provide to MGA, upon reasonable request but no more often than once per year, representative samples of product packaging using the Trademarks. MGA agrees to take all actions reasonably necessary to protect Pharsight's rights in the Trademarks including, without limitation: (i) maintaining all required registrations; and (ii) promptly notifying Pharsight of any adverse use by a third party of the Trademarks or of a mark or a name confusingly similar to the Trademarks. 5. LICENSING OF THE SOFTWARE. 5.1 MGA Object Code Licenses. Pharsight acknowledges and agrees that MGA may license the Object Code and/or MGA's Derivative Works in Object Code format (herein "MGA Object Code") to third parties in accordance with its standard licensing practices; provided that such licenses are granted only to third parties in fields other than the Pharsight Fields and include prohibitions on obtaining the Source Code through reverse engineering. (a) Such MGA Object Code licenses may include a Source Code escrow provision; provided that (i) a reputable Source Code escrow agency will maintain the Source Code or the Source Code of the Derivative Work; (ii) the license to use the Source Code or the Source Code of the Derivative Work in the event the licensee rightfully receives the Source Code from the escrow agent shall be restricted to fields other than the Pharsight Fields; and (iii) MGA agrees to promptly notify Pharsight of any release of the Source Code or the Source Code of the Derivative Work from the escrow account. 5. (b) To the extent necessary, such MGA Object Code licenses may include provisions requiring MGA to provide the third party with interpreted code for models, libraries, etc. 5.2 Pharsight Object Code Licenses. MGA acknowledges and agrees that Pharsight may license the Object Code and/or Pharsight's Derivative Works in Object Code format (herein Pharsight Object Code") to third parties in accordance with its standard licensing practices; provided that such licenses are granted only to third parties in the fields other than the MGA Fields and include prohibitions on obtaining the Source Code through reverse engineering. (a) Such Pharsight Object Code licenses may include a Source Code escrow provision; provided that (i) a reputable Source Code escrow agency will maintain the Source Code or the Source Code of the Derivative Work; (ii) the license to use the Source Code or the Source Code of the Derivative Work in the event the licensee rightfully receives the Source Code from the escrow agent shall be restricted to fields other than the MGA Fields; and (iii) Pharsight agrees to promptly notify MGA of any release of the Source Code or the Source Code of the Derivative Work from the escrow account. (b) To the extent necessary, such Pharsight Object Code licenses may include provisions requiring Pharsight to provide the third party with interpreted code for models, libraries, etc. 5.3 MGA Source Code Licenses. MGA acknowledges and agrees that in order to maintain the economic value of the Software, any license entered into by MGA of all or any portion of the Source Code or of any Derivative Work in Source Code format (herein "MGA Source Code") shall be restricted as follows: (a) All such licenses shall be in writing and executed by the third party and shall include, at a minimum, provisions substantially similar to those contained in Exhibit C; (b) Pharsight shall be named as a third party beneficiary of such licenses; (c) The third party shall agree to use the MGA Source Code solely for its internal purposes and agree to maintain written records of the location of each copy of the MGA Source Code and permit audit of such records by MGA and Pharsight; (d) The licenses shall restrict the use of the MGA Source Code, and any derivative works created by or for the third party, to the MGA Fields; (e) MGA shall promptly send a copy of all such licenses to Pharsight, although MGA may delete information relating to license fees and other financial terms from such copies; and (f) MGA agrees to report any violations by any third party of the confidentiality, notice and other provisions that are important to maintain the value of the Intellectual Property Rights in the Software and to assist Pharsight in enforcing such provisions. 6. 5.4 Pharsight Source Code Licenses. Pharsight acknowledges and agrees that in order to maintain the economic value of the Software, any license entered into by Pharsight of all or any portion of the Source Code or of any Derivative Work in Source Code format (herein "Pharsight Source Code"), shall be restricted as follows: (a) All such licenses shall be in writing and executed by the third party and shall include, at a minimum, provisions substantially similar to those contained in Exhibit C; (b) MGA shall be named as a third party beneficiary of such licenses; (c) The third party shall agree to use the Pharsight Source Code solely for its internal purposes and agree to maintain written records of the location of each copy of the Pharsight Source Code and permit audit of such records by Pharsight and MGA; (d) The licenses shall restrict the use of the Pharsight Source Code, and any derivative works created by or for the third party, to the Pharsight Fields; (e) Pharsight shall promptly send a copy of all such licenses to MGA, although Pharsight may delete information relating to license fees and other financial terms from such copies; and (f) Pharsight agrees to report any violations by any third party of the confidentiality, notice and other provisions that are important to maintain the value of the Intellectual Property Rights in the Software and to assist MGA in enforcing such provisions. 5.5 No Other Transfer of Right, Title or Interest. Except as set forth in Sections 5.1, 5.2, 5.3, 5.4 and 13.2, neither party shall grant any right, title or interest in or to the Software or any Derivative Work without the prior written consent of the other party, which consent shall not be unreasonably withheld. 6. OWNERSHIP OF DERIVATIVE WORKS. Upon execution of this Agreement, MGA and Pharsight shall each own a fifty percent (50%) undivided interest in and to the Software as it exists on the Effective Date. After the Effective Date, each party shall be the sole and exclusive owner of any right, title and interest in or to any Derivative Works of the Software, including any Intellectual Property Rights contained therein, created by or for such party, other than the original Software. 7. CONFIDENTIALITY. The parties acknowledge and agree that the Source Code contains valuable trade secrets and each party shall take all reasonable steps to prevent unauthorized disclosure or use of the Source Code and to prevent it from falling into the public domain (other than pursuant to a patent filing related to a Derivative Work made in accordance with Section 2.7) or into the possession of unauthorized persons. Except as provided in Sections 5.3 and 5.4 of this Agreement, neither party shall disclose the Source Code or any Derivative Work in Source Code form, in whole or in part, to any person or entity other than its officers, employees or contractors that have entered into written confidentiality agreements with such party that protect the confidentiality of the Source Code and/or the Source Code of the Derivative Work. Each party shall give notice to the other party of any unauthorized use or disclosure of the Source Code or Source Code of the Derivative Work and agrees to assist the other party in 7. remedying any such unauthorized use or disclosure. This obligation shall not extend to any Intellectual Property information in the Software if such information (i) has been published or is otherwise readily available to the public other than by a breach of this Agreement; (ii) has been rightfully received from a third party without confidential limitations; (iii) has been independently developed for the party by personnel or agents having no access to the Source Code or Source Code of the Derivative Work; or (iv) was known to Pharsight prior to Pharsight's first receipt of such information from MGA. 8. INFRINGEMENT BY THIRD PARTIES. 8.1 Prior Notice. The parties shall consult with each other prior to filing any action alleging that a third party has infringed or misappropriated any Intellectual Property Rights of the Software. The parties may agree to jointly pay for the suit or otherwise share such costs and any resulting liability or monetary judgment. Except as provided in Section 8.2, if no agreement is reached within sixty (60) days, the party wishing to file such action may do so, but shall pay the entire cost of such action and shall indemnify and hold harmless the non-filing party from any claim, suit or proceeding (including, without limitation, counterclaims) against such party arising from the action brought by the filing party. If only one party decides to proceed with an action and it prevails, that party shall be entitled to retain the entire amount of any monetary award arising out of that action. 8.2 Immediate Relief. If one party believes that immediate relief is necessary to protect the trade secrets or other Intellectual Property Rights in and to the Software, it may, upon written notice to the other party, immediately file an action to protect such rights. Unless the parties agree otherwise, the party filing such an immediate action shall have the same rights and obligations as if no agreement was reached between the parties and one party proceeded to file a suit as provided in Section 8.1 above. 8.3 Indemnity. To be eligible for the indemnity under Section 8.1 above, a party must give prompt written notice of any claim, suit or proceeding filed or threatened against it and let the indemnifying party control the defense. 8.4 Assistance. If only one party files an action as provided in Section 8.1 or 8.2 above, the other party agrees to assist in such action so long as the filing party pays its out-of-pocket expenses. 9. REPRESENTATIONS, WARRANTIES AND COVENANTS. Each party hereby represents and warrants that (i) it will not grant, directly or indirectly, any rights or interest in the Software to third parties that are inconsistent with the rights assigned to, or retained by, the other party herein; and (ii) it has the full right and power to enter into and perform this Agreement without the consent of any third parties. 10. INDEMNITY. Each party (the "Indemnifying Party") shall indemnify and hold harmless the other party, its officers, directors, employees, sublicensees, customers, contractors and agents (the "Indemnitees") from any and all claims, losses, liabilities, damages, expenses and costs (including attorneys' fees and court costs) which result from a breach or an alleged breach of any representation or warranty by the Indemnifying Party identified in Section 9 ("Representations, 8. Warranties and Covenants") or any covenant by the Indemnifying Party set forth in this Agreement. 11. SUPPORT OBLIGATIONS. In addition to the obligations set forth in this Agreement, the parties hereby acknowledge and agree to provide the support services set forth in the Support Appendix attached hereto. 12. TERM. Except as expressly provided herein, the terms of this Agreement shall commence upon execution and continue in perpetuity. 13. GENERAL PROVISIONS. 13.1 Governing Law. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the State of California (without giving effect to principles of conflicts of laws). (b) Any dispute, claim or controversy of any nature arising out of or relating to this Agreement, including without limitation any action or claim based on tort, contract, statute, or for any other cause of action, and which relates in any way to the interpretation, effect, termination, validity, enforcement, performance and/or breach of this Agreement, shall be resolved by final binding arbitration administered by the American Arbitration Association ("AAA"). The arbitration shall be conducted before a panel of three arbitrators under the commercial arbitration rules of the AAA and shall be held at an AAA facility (i) in Boston, Massachusetts, if brought by Buyer, and (ii) in Santa Clara County, California, if brought by Sellers. The parties hereto agree that all arbitrators serving on such panel must be available to serve on the panel in accordance with the timetable of the arbitration. (c) Not for the adjudication of any matters (other than judicial review for fraud or undisclosed bias), but for the enforcement of an arbitration award (which shall be brought in California if Buyer is enforcing the arbitration award or in Massachusetts if one or more Sellers are enforcing the arbitration award) or the granting of injunctive relief (which shall be brought in Massachusetts if Buyer is seeking injunctive relief or in California if one or more Sellers are seeking injunctive relief), the parties hereto irrevocably elect as the sole two judicial forums for the adjudication of any matters arising under or in connection with this Agreement, and consent to the jurisdiction of, the courts of the State of California and the Commonwealth of Massachusetts. 13.2 No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. Neither this Agreement nor any rights or obligations hereunder may be assigned by either party in whole or in part without the prior written consent of the other party. Notwithstanding the foregoing, either party may assign this Agreement to an entity that acquires all or substantially all of the assets of such party; provided that such permitted assignee agrees to be bound by the terms hereof and to assume all obligations of the assigning party hereunder. 9. 13.3 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 13.4 Severability. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 13.5 Notices. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received (i) when delivered by hand, (ii) five days after deposit in the United States mail if by certified mail, (iii) on the next business day if sent by courier or express delivery service that guarantees next business day delivery, or (iv) upon confirmation if sent by facsimile, to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto): If to MGA: MITCHELL AND GAUTHIER ASSOCIATES, INC. 919 B Willowbrook Drive Huntsville, Alabama 35802 Attention: President Facsimile: (205) 883-5516 Copy to: Richard Stein Hutchins, Wheeler & Dittmar 101 Federal Street Boston, MA 02110 Facsimile: (617) 951-1295 If to Pharsight: PHARSIGHT CORPORATION 299 California Ave. Suite 300 Palo Alto, CA 94306 Attention: Arthur H. Reidel, President Facsimile: (650) 462-5610 10. Copy to: Cooley Godward LLP 5 Palo Alto Square Palo Alto, California 94306 Attention: Andrei M. Manoliu, Esq. Facsimile: (650) 857-0663 13.6 Legal Fees. If any dispute arises between the parties with respect to the matters covered by this Agreement which leads to a proceeding to resolve such dispute, the prevailing party in such proceeding shall be entitled to receive its reasonable attorneys' fees, expert witness fees and out-of-pocket costs incurred in connection with such proceeding, in addition to any other relief it may be awarded. 13.7 Injunctive Relief. A breach of any of the promises or agreements contained in this Agreement by one party may result in irreparable and continuing damage to the other party for which there may be no adequate remedy at law, and the non-breaching party is therefore entitled to seek injunctive relief as well as such other and further relief as may be appropriate. 13.8 Waiver. No waiver by either party of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by either party of any right under this Agreement shall be construed as a waiver of any other right. The parties shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 13.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 13.10 Entire Agreement. This Agreement, including the Exhibits and Appendix attached hereto, together with the Asset Purchase Agreement, is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. IN WITNESS WHEREOF, the parties have caused this Co-Ownership Agreement to be executed by their duly authorized representative. PHARSIGHT CORPORATION: /s/ Arthur H. Reidel - --------------------------------------- Arthur H. Reidel - --------------------------------------- (Printed Name) By: Arthur H. Reidel ----------------------------------- Title: President ----------------------------------- MITCHELL AND GAUTHIER ASSOCIATES, INC.: /s/ Michael Gauthier - --------------------------------------- Michael Gauthier - --------------------------------------- (Printed Name) By: Michael Gauthier ----------------------------------- Title: illegible ----------------------------------- 11. EXHIBIT A ACSL SOFTWARE PROGRAMS Existing products: ACSL: A translator program, a system macro file, a run time library, a builder program, a run time front end program, programs/procedures to install/uninstall all of the preceding on all supported computer systems. ACSL GM: A graphic modeling program, standard racks, programs/procedures to install/uninstall all of the preceding on all supported computer systems. ACSL Math: An analysis and visualization program, directories of standard m-files, programs/procedures to install/uninstall all of the preceding on all supported compute systems. ACSL Optimize: The optimization extension of ACSL Math. ACSL Viewer: The viewer extension of ACSL GM. ACSL Model: A combination of ACSL, ACSL GM and ACSL MATH, bundled together for marketing purposes. ACSL Server: An interface to the model.prx file (the .dll file) that represents the user model so that it can be driven and interrogated by an external program such as Visual Basic or any other OLE driver. Only works on a PC. ACSL Vision: This is ACSL bundled with a DataViews product that really only runs on a Unix/X Windows system. ACSL Real Time: A real-time system for a PC version that allows the user to simulate plants (physical systems represented by differential equations) and test out hardware controllers on these plants using a real-time clock. 1. EXHIBIT B ASSIGNMENT OF COPYRIGHT For good and valuable consideration which has been received, the undersigned sells, assigns and transfers to Pharsight, a California corporation, and its successors and assigns, a fifty percent (50%) undivided interest in the copyright in and to the following work, which was created by the following indicated author(s): Title: ________________________________ Author(s): ____________________________ ____________________________ Copyright Office Identification No. (if any): _________________________ and all of the right, title and interest of the undersigned, vested and contingent, therein and thereto. Executed this ________________ day of _________ , 1998. Signature: _______________________________________ Printed Name: ____________________________________ 1. EXHIBIT C MINIMUM TERMS AND CONDITIONS 1. Ownership. The Software is licensed, not sold, to Licensee for use only under the terms of this Agreement, and Licensor and its Co-owner reserve all rights not expressly granted to Licensee. Licensee owns the media, if any, on which the Software is recorded, but Licensor and its Co-owner retain ownership of all copies of the Software itself. 2. Reservation of Rights. Except as stated above, this Agreement does not grant Licensee any intellectual property rights in the Software. 3. Termination. Licensor shall have the right to terminate this Agreement in the event Licensee materially breaches any term or condition herein. Licensee agrees upon termination to promptly destroy the Software and all copies. 1. EXHIBIT D SOFTWARE EXCEPTIONS Watcom Fortran from Sybase Corporation (formerly Powersoft) GRG2 Software from Windward Technology FlexLM Software from Globetrotter (formerly Highland Software) MainWin Software from Mainsoft 1. SUPPORT APPENDIX This Support Appendix sets forth the terms and conditions pursuant to which MGA and Pharsight will provide support and training services to the other party related to the MGA Restricted Software and shall be incorporated by reference into the Co-Ownership Agreement. Such terms and conditions are applicable only to the support and training services described below. All capitalized terms used in this Appendix shall retain the same meaning as defined in the Co-Ownership Agreement and/or the Asset Purchase Agreement. 1. TYPES OF SUPPORT 1.1 Mutual Support. a. Support and Training. Each party will provide to the other party support and training related to the MGA Restricted Software. b. Ownership. Any new inventions, discoveries or developments jointly conceived by the parties resulting from the support or training provided under this Support Appendix shall be "co-owned" by the parties pursuant to the terms and conditions of the Co-Ownership Agreement. c. Travel and Expenses. Travel and expenses, if any, shall be pre-approved and paid by the party requesting the support or training. 1.2 MGA Transition Support. Pharsight will provide limited assistance to MGA for transitioning MGA's business to Huntsville, Alabama. Such assistance may include the following: a. Assistance with moving, copying and storing development tools and programs. b. Assistance with electronic file transmissions. c. Assistance transitioning MGA's website, mail server, media duplication and information technology. d. Assistance shipping computers to Huntsville, Alabama and support in re-activating them 1.3 MGA Unix and VAX ACSL Support. MGA shall provide to Pharsight "support and maintenance" for existing customers in the Pharsight Fields using Unix and VAX-based ACSL software. "Support and Maintenance" means (a) second-tier customer support; and (b) assisting Pharsight developers with bug fixes and resolving technical questions. a. MGA shall provide second-tier customer support to Pharsight consisting of the following: (i) MGA to ensure a maximum of four hour initial response on incoming technical support-related calls during normal business hours. 1. (ii) MGA to respond to email support questions within 24 hours, excluding weekends and holidays. b. New releases, upgrades and/or bug fixes provided by MGA shall be subject to the indemnification provisions of the Asset Purchase Agreement for 3rd party claims based upon infringement. 2. LIMITATIONS ON SUPPORT AND TRAINING. 2.1 Support. Support provided by one party to the other during the first 3 months following the Closing shall not exceed 80 person-hours and thereafter shall not exceed 15 person-hours per month or a total of 225 person-hours over the term of this Support Appendix. Additional support in excess of these amounts may be provided, at the discretion of the providing party, at such party's then-current support rates. 2.2 Training. Pharsight employees Sining Fang, Mike Dunlavey and Ken Busch will be available, upon reasonable request, for a combined total of 90 hours to provide training to MGA related to the MGA Restricted Software during the first 6 months following the Closing. A comparable number of hours actually used by MGA for such training shall be provided by MGA to Pharsight for additional support and/or training upon reasonable request. 3. TERM AND TERMINATION. 3.1 Term. The obligations of this Support Appendix shall commence on date of closing and continue for a period of two (2) years. 3.2 Termination for Breach. Either party may terminate this Support Appendix upon thirty (30) days' written notice of a material breach of this Support Appendix if such breach is not cured within such thirty (30) day period. 4. WARRANTY DISCLAIMER. EXCEPT AS EXPRESSLY PROVIDED HEREIN, THE SUPPORT AND TRAINING SERVICES PROVIDED IN THIS SUPPORT APPENDIX ARE PROVIDED ON AN "AS IS" BASIS WITHOUT ANY WARRANTY WHATSOEVER, AND EACH PARTY EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED, AND STATUTORY INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY, TITLE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS AND FITNESS FOR A PARTICULAR PURPOSE. 5. LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY LOSS OF USE, INTERRUPTION OF BUSINESS OR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND (INCLUDING LOST PROFITS) REGARDLESS OF THE FORM OF ACTION WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE RELATED TO THE PERFORMANCE OF THIS SUPPORT APPENDIX, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 2. EX-10.4 9 EXHIBIT 10.4 Exhibit 10.4 NONCOMPETITION AGREEMENT This NON-COMPETITION AGREEMENT (the "Agreement") is made this 27th day of May, 1998, by and between PHARSIGHT CORPORATION, a California corporation ("Pharsight"), and Joseph S.Gauthier ("Gauthier"). RECITALS Gauthier is a substantial shareholder of MITCHELL AND GAUTHIER ASSOCIATES, INC., a Delaware corporation ("the Company"). Pharsight, the Company, Edward E. L. Mitchell and Gauthier have entered into an Asset Purchase Agreement dated as of even date hereof (the "Acquisition Agreement") providing for the acquisition (the "Acquisition") by Pharsight of certain of the assets of the Company (the "Acquired Assets"), and the assumption of specified liabilities of the Company. In connection therewith, Gauthier has agreed not to compete with Pharsight in the manner and to the extent herein set forth. Gauthier is entering into this Agreement as an inducement to Pharsight to execute the Acquisition Agreement and consummate the Acquisition, with all of the attendant financial benefits to Gauthier as a shareholder of the Company, and for the other consideration set forth herein. AGREEMENT In consideration of the mutual covenants herein contemplated and intending to be legally bound hereby, Pharsight and Gauthier agree as follows: 1. Acknowledgements by Gauthier. Gauthier acknowledges that by virtue of his position with the Company he has developed considerable expertise in the business operations of the Company and has had access to extensive confidential information with respect to the Company. Gauthier recognizes that Pharsight would be irreparably damaged, and its substantial investment in the Acquired Assets materially impaired, if Gauthier were to enter into an activity competing with Pharsight's business in violation of the terms of this Agreement or if Gauthier were to disclose or make unauthorized use of any confidential information concerning the Acquired Assets or the business of the Company conducted with the Acquired Assets. Accordingly, Gauthier expressly acknowledges that he is voluntarily entering into this Agreement and that the terms and conditions of this Agreement are fair and reasonable to Gauthier in all respects. 2. Confidentiality. Gauthier hereby agrees that, for a period of ten (10) years from the date hereof, he will hold in confidence and not disclose to any third party without the prior written consent of Pharsight, any material or other information that contains trade secrets or information that has otherwise been treated as confidential by the Company and related to the Acquired Assets or treated as confidential by Pharsight (the "Confidential Information"). Gauthier further agrees that during this period of time, without the prior written consent of Pharsight, he will not: (a) transfer the Confidential Information to any third party; (b) use the Confidential Information for any purpose other than the benefit of the Company or Pharsight; or (c) assist any person other than Pharsight to secure any benefit from the Confidential Information. Gauthier further agrees that, at any time Pharsight requests, he shall return to Pharsight all documents and materials of any nature containing Confidential Information, and shall not make, retain or give to any other person or entity any copies thereof. 3. Non-competition. Until two (2) years after the date hereof, Gauthier shall not, directly or indirectly, without the prior written consent of Pharsight, (i) own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant, licensor or otherwise with, any business or enterprise engaged in any business which is competitive with the business of the Company, within each of the geographical units which are listed in Appendix A hereto (the "Territory"), or (ii) engage in any other manner, within the Territory, in any business which is competitive with the business of the Company. For the purposes of this Section 3, the "business of the Company" shall be defined as set forth in Appendix B hereto. Notwithstanding the above, Gauthier shall not be deemed to be engaged directly or indirectly in any business in contravention of subparagraphs (i) or (ii) above, if: (x) Gauthier participates in any such business solely as a passive investor in up to 1% of the equity securities of a company or partnership, the securities of which are publicly traded; (y) Gauthier is employed by a business or enterprise that is engaged primarily in a business other than the business of the Company and Gauthier takes scrupulous care not to and does in fact not apply his expertise at such business or enterprise to that part of such business or enterprise that is or could be competitive with the business of the Company; or (z) Gauthier is employed by a large multi-divisional business, one or more divisions of which compete with the Company's business, and Gauthier takes scrupulous care not to and does in fact not consult with or otherwise apply his expertise at such division(s) of business which compete with the Company's business. 4. Non-interference. Gauthier further agrees that until two (2) years following the date hereof he will not, without the prior written consent of Pharsight, (i) interfere with the business of Pharsight by soliciting, attempting to solicit, inducing, or otherwise causing any employee or consultant of Pharsight to terminate his or her employment as such in order to become an employee, consultant or independent contractor to or for any business that competes with the business of Pharsight or to or for any company with which Gauthier is associated in any way; or (ii) induce or attempt to induce any customers, suppliers, distributors, resellers, or independent contractor of Pharsight to terminate their relationships with, or to take any action that would be disadvantageous to the business of, Pharsight. 5. Consideration. In addition to the consideration set forth in the recitals to this Agreement, as consideration for the obligations of Gauthier under this Agreement, Pharsight shall pay to Gauthier, in cash, (i) on the first anniversary of the date of this Agreement, the amount of $135,000, and (ii) on the second anniversary of the date of this Agreement, the amount of $145,000. The amounts payable hereunder are subject to Pharsight's right of setoff as set forth in Section 6.8 of the Acquisition Agreement. 6. Independence of Obligations. The covenants of Gauthier set forth in this Agreement shall be construed as independent of any other agreement or arrangement between Gauthier, on the one hand, and Pharsight or any of its subsidiaries, on the other, and the 2 existence of any claim or cause of action by Gauthier against Pharsight or any of its subsidiaries shall not constitute a defense to the enforcement of such covenants against Gauthier. 7. Equitable Relief. Gauthier expressly acknowledges that damages alone will not be an adequate remedy for any breach by Gauthier of the covenants set forth in Sections 2, 3, and 4 hereof and that the other parties hereto, in addition to any other remedies which they may have, whether at law, in equity, by contract or otherwise, shall be entitled, as a matter of right, to injunctive relief, including specific performance, in any court of competent jurisdiction with respect to any actual or threatened breach by Gauthier of any of said covenants. 8. Severability, etc. a. If any provision of this Agreement or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (i) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (ii) the invalidity or unenforceability of such provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (iii) such invalidity of enforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement. Each provision of this Agreement is separable from every other provision of this Agreement, and each part of each provision of this Agreement is separable from every other part of such provision. b. The parties intend that the covenant contained in Section 3 above shall be construed as a series of separate covenants, one for each geographical unit specified. Except for geographical coverage, each such separate covenant shall be deemed identical in terms to the covenant contained in Section 3 above. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants deemed included in this Agreement, then the unenforceable covenant shall be deemed eliminated from these provisions for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. 9. Notices. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received (i) when delivered by hand, (ii) five days after deposit in the United States mail if by certified mail, (iii) on the next business day if sent by courier or express delivery service that guarantees next business day delivery, or (iv) upon confirmation if sent by facsimile, to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto): 3 If to Gauthier: Joseph S. Gauthier MITCHELL AND GAUTHIER ASSOCIATES, INC. 919 B Willowbrook Drive Huntsville, Alabama 35802 Facsimile: (205) 883-5516 Copy to: Richard Stein Hutchins, Wheeler & Dittmar 101 Federal Street Boston, MA 02110 Facsimile: (617) 951-1295 If to Pharsight: PHARSIGHT CORPORATION 299 California Ave. Suite 300 Palo Alto, CA 94306 Attention: Arthur H. Reidel, President Facsimile: (650) 462-5610 Copy to: Cooley Godward LLP 5 Palo Alto Square Palo Alto, California 94306 Attention: Andrei M. Manoliu, Esq. Facsimile: (650) 857-0663 10. Waiver of Breach. The failure or delay by Pharsight in enforcing any provision of this Agreement shall not operate as a waiver thereof, and the waiver by Pharsight or a breach of any provision of this Agreement by Gauthier shall not operate or be construed as a waiver of any subsequent breach or violation thereof. All waivers shall be in writing and signed by the party to be bound. 11. Assignment. This Agreement shall be assignable by Pharsight only to any person, firm or corporation which may become a successor in interest by purchase, merger or otherwise to Pharsight or the business operated by Pharsight. This Agreement is not assignable by Gauthier. 12. Entire Agreement; Amendment. This Agreement represents the entire agreement and understanding of the parties with respect to the subject matter hereof and 4 supersede all prior agreements and understandings of the parties in connection therewith. It may not be altered or amended except by an agreement in writing signed by the parties to be bound. 13. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Pharsight and its permitted successors and assigns and Gauthier and Gauthier's heirs and legal representatives. 14. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Massachusetts as applied to contracts entered into between Massachusetts residents and to be performed entirely within Massachusetts. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. /s/ Joseph S. Gauthier -------------------------------------- Joseph S. Gauthier PHARSIGHT CORPORATION, a California corporation By: /s/ Arthur H. Reidel ----------------------------------- Gauthier Noncompetition Agreement 5 APPENDIX A TERRITORY (1) Each county of Massachusetts, (2) all other states and territories of the United States of America and provinces and territories of Canada, and (3) any foreign country or territory in which the business of Pharsight is carried on, or in which Pharsight intends to carry on business, as evidenced by Pharsight's policy of seeking trademark protection for its product names or otherwise. 6 APPENDIX B BUSINESS The "business of Pharsight" consists of (1) the development and marketing of software tools for distribution and licensing on a commercial basis to third parties for use in (i) the design, execution, management, and analysis of clinical drug trials and pre-clinical drug investigations, (ii) the simulation and modeling of clinical trials and pharmacokinetic and pharmacodynamic data and relationships, (iii) information management related to clinical and pre-clinical drug development programs, and (iv) the creation and maintenance of clinical and pre-clinical data repositories and retrieval systems and other pharmaceutical information management systems; and (2) the provision of consulting services in the foregoing areas. 7 EX-10.5 10 EXHIBIT 10.5 Exhibit 10.5 LOAN AND SECURITY AGREEMENT PHARSIGHT CORPORATION TABLE OF CONTENTS
PAGE 1 ACCOUNTING AND OTHER TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . .4 2 LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2.1 Advances.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2.2 Overadvances.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2.3 Interest Rate, Payments. . . . . . . . . . . . . . . . . . . . . . . . . .4 2.4 Fees.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 3 CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 3.1 Conditions Precedent to Initial Advance. . . . . . . . . . . . . . . . . .5 3.2 Conditions Precedent to all Advances.. . . . . . . . . . . . . . . . . . .5 4 CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . .5 4.1 Grant of Security Interest.. . . . . . . . . . . . . . . . . . . . . . . .5 5 REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . .5 5.1 Due Organization and Authorization.. . . . . . . . . . . . . . . . . . . .5 5.2 Collateral.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 5.3 Litigation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 5.4 No Material Adverse Change in Financial Statements.. . . . . . . . . . . .6 5.5 Solvency.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 5.6 Regulatory Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . .6 5.7 Subsidiaries.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 5.8 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 6 AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 6.1 Government Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . .7 6.2 Financial Statements, Reports, Certificates. . . . . . . . . . . . . . . .7 6.3 Inventory; Returns.. . . . . . . . . . . . . . . . . . . . . . . . . . . .7 6.4 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 6.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 6.6 Primary Accounts.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 6.7 Financial Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . .8 6.8 Further Assurances.. . . . . . . . . . . . . . . . . . . . . . . . . . . .8 7 NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 7.1 Dispositions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 7.2 Changes in Business, Ownership, Management or Business Locations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 7.3 Mergers or Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . .9 7.4 Indebtedness.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 7.5 Encumbrance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 7.6 Distributions; Investments.. . . . . . . . . . . . . . . . . . . . . . . .9 7.7 Transactions with Affiliates.. . . . . . . . . . . . . . . . . . . . . . .9 7.8 Subordinated Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 7.9 Compliance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 8 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.1 Payment Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.2 Covenant Default.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.3 Material Adverse Change. . . . . . . . . . . . . . . . . . . . . . . . . 10 8.4 Attachment.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.5 Insolvency.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.6 Other Agreements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.7 Judgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.8 Misrepresentations.. . . . . . . . . . . . . . . . . . . . . . . . . . . 11 9 BANK'S RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . 11 9.1 Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . 11 9.2 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 9.3 Accounts Collection. . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.4 Bank Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.5 Bank's Liability for Collateral. . . . . . . . . . . . . . . . . . . . . 12 9.6 Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.7 Demand Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 10 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER . . . . . . . . . . . . . . . . . 12 12 GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12.1 Successors and Assigns.. . . . . . . . . . . . . . . . . . . . . . . . . 13 12.2 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12.3 Time of Essence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12.4 Severability of Provision. . . . . . . . . . . . . . . . . . . . . . . . 13 12.5 Amendments in Writing, Integration.. . . . . . . . . . . . . . . . . . . 13 12.6 Counterparts.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12.7 Survival.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12.8 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 12.9 Attorneys' Fees, Costs and Expenses. . . . . . . . . . . . . . . . . . . 14 13 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 13.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 14
THIS LOAN AND SECURITY AGREEMENT dated January 18, 2000, between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and PHARSIGHT CORPORATION ("Borrower"), whose address is 800 W. El Camino Real, Suite 200, Mountain View, California 94040 provides the terms on which Bank will lend to Borrower and Borrower will repay Bank. The parties agree as follows: 1 ACCOUNTING AND OTHER TERMS Accounting terms not defined in this Agreement will be construed following GAAP. Calculations and determinations must be made following GAAP. The term "financial statements" includes the notes and schedules. The terms "including" and "includes" always mean "including (or includes) without limitation," in this or any Loan Document. 2 LOAN AND TERMS OF PAYMENT 2.1 ADVANCES. Borrower will pay Bank the unpaid principal amount of all Advances and interest on the unpaid principal amount of the Advances. 2.1.1 REVOLVING ADVANCES. (a) Bank will make Advances not exceeding the lesser of (A) the Committed Revolving Line or (B) the Borrowing Base. Amounts borrowed under this Section may be repaid and reborrowed without penalty or premium during the term of this Agreement. (b) To obtain an Advance, Borrower must notify Bank by facsimile or telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be made. Borrower must promptly confirm the notification by delivering to Bank the Payment/Advance Form attached as Exhibit B. Bank will credit Advances to Borrower's deposit account. Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any telephone notice given by a person whom Bank reasonably believes is a Responsible Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due to such reliance, except for any loss resulting from Bank's gross negligence or intentional misconduct. (c) The Committed Revolving Line terminates on the Revolving Maturity Date, when all Advances are immediately payable. 2.2 OVERADVANCES. If Borrower's Obligations under Section 2.1.1 exceed the lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower must immediately pay Bank the excess. 2.3 INTEREST RATE, PAYMENTS. (a) Interest Rate. Advances accrue interest on the outstanding principal balance at a per annum rate of 1 percentage point above the Prime Rate. After and during the continuance of an Event of Default, Obligations accrue interest at 4 percent above the rate effective immediately before the Event of Default. The interest rate increases or decreases when the Prime Rate changes. Interest is computed on a 360 day year for the actual number of days elapsed. (b) Payments. Interest due on the Committed Revolving Line is payable on the 15th of each month. Bank may debit any of Borrower's deposit accounts including Account Number 3300027682 for principal and interest payments owing or any amounts Borrower owes Bank. Bank will promptly notify Borrower when it debits Borrower's accounts. These debits are not a set-off. Payments received after 12:00 noon Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue. 2.4 FEES. Borrower will pay: (a) Facility Fee. A fully earned, non-refundable Facility Fee of $9,750 due on the Closing Date; and (b) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees and reasonable expenses) incurred through and after the date of this Agreement, are payable when due. 3 CONDITIONS OF LOANS 3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. Bank's obligation to make the initial Advance is subject to the condition precedent that it receive the agreements, documents and fees it requires, as specified herein. 3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. Bank's obligations to make each Advance, including the initial Advance, is subject to the following: (a) timely receipt of any Payment/Advance Form; and (b) the representations and warranties in Section 5 must be materially true on the date of the Payment/Advance Form and on the effective date of each Advance and no Event of Default may have occurred and be continuing, or result from the Advance. Each Advance is Borrower's representation and warranty on that date that the representations and warranties of Section 5 remain materially true. 4 CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower grants Bank a continuing security interest in all presently existing and later acquired Collateral to secure all Obligations and performance of each of Borrower's duties under the Loan Documents. Except for Permitted Liens, any security interest will be a first priority security interest in the Collateral. In the event of and during the continuance of an Event of Default, Bank may place a "hold" on any deposit account pledged as Collateral. If this Agreement is terminated, Bank's lien and security interest in the Collateral will continue until Borrower fully satisfies its Obligations. 5 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1 DUE ORGANIZATION AND AUTHORIZATION. Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower's formation documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change. 5.2 COLLATERAL. Borrower has good title to the Collateral, free of Liens except Permitted Liens. The Accounts are bona fide, existing obligations, and the service or property has been performed or delivered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has no notice of any actual or imminent Insolvency Proceeding of any account debtor whose accounts are an Eligible Account in any Borrowing Base Certificate. All Inventory is in all material respects of good and marketable quality, free from material defects. 5.3 LITIGATION. Except as shown in the Schedule, there are no actions or proceedings pending or, to the knowledge of Borrower's Responsible Officers, threatened by or against Borrower or any Subsidiary in which a likely adverse decision could reasonably be expected to cause a Material Adverse Change. 5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank fairly present in all material respects Borrower's consolidated financial condition and Borrower's consolidated results of operations. There has not been any material deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements submitted to Bank. 5.5 SOLVENCY. The fair salable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 5.6 REGULATORY COMPLIANCE. Borrower is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change. None of Borrower's or any Subsidiary's properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary have timely filed all required tax returns and paid, or made adequate provision to pay, all material taxes, except those being contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiary have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. 5.7 SUBSIDIARIES. Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments. 5.8 FULL DISCLOSURE. No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank (taken together with all such written certificates and written statements to Bank) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading. It being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected and forecasted results. 6 AFFIRMATIVE COVENANTS Borrower will do all of the following: 6.1 GOVERNMENT COMPLIANCE. Borrower will maintain its and all Subsidiaries' legal existence and good standing in its jurisdiction of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to cause a material adverse effect on Borrower's business or operations. Borrower will comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which would reasonably be expected to have a material adverse effect on Borrower's business or operations or would reasonably be expected to cause a Material Adverse Change. 6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. (a) Borrower will deliver to Bank: (i) as soon as available, but no later than 30 days after the last day of each month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during the period, in a form and certified by a Responsible Officer reasonably acceptable to Bank; (ii) as soon as available, but no later than 120 days after the last day of Borrower's fiscal year, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Bank; (iii) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary in which a likely adverse determination could reasonably be expected to result in damages or costs to Borrower or any Subsidiary of $250,000 or more; and (iv) promptly, but in no event within 3 Business Days, budgets, sales projections, operating plans or other financial information as Bank reasonably from time to time requests. (b) Within 20 days after the last day of each month, Borrower will deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in the form of Exhibit C, with aged listings of accounts receivable and accounts payable. (c) Within 30 days after the last day of each month, Borrower will deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in the form of Exhibit D. (d) Bank has the right to audit Borrower's Collateral at Borrower's expense, but the audits will be conducted no more often than every year unless an Event of Default has occurred and is continuing. 6.3 INVENTORY; RETURNS. Borrower will keep all Inventory in good and marketable condition, free from material defects. Returns and allowances between Borrower and its account debtors will follow Borrower's customary practices as they exist at execution of this Agreement. Borrower must promptly notify Bank of all returns, recoveries, disputes and claims, that involve more than $50,000. 6.4 TAXES. Borrower will make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments unless contested in good faith and Borrower has adequate reserve under GAAP and will deliver to Bank, on demand, appropriate certificates attesting to the payment. 6.5 INSURANCE. Borrower will keep its business and the Collateral insured for risks and in amounts, as Bank may reasonably request. Insurance policies will be in a form, with companies, and in amounts that are customary for companies in Borrower's industry. All property policies will have a lender's loss payable endorsement showing Bank as an additional loss payee and all liability policies will show the Bank as an additional insured and provide that the insurer must give Bank at least 20 days notice before canceling its policy. At Bank's reasonable request, Borrower will deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy will, at Bank's option, be payable to Bank on account of the Obligations. 6.6 PRIMARY ACCOUNTS. Borrower will maintain its primary depository and operating accounts with Bank. 6.7 FINANCIAL COVENANTS. Borrower will maintain as of the last day of each month, unless otherwise noted: (i) QUICK RATIO (ADJUSTED). A ratio of Quick Assets to Current Liabilities minus Deferred Maintenance Revenue of at least 1.80 to 1.00. (ii) QUARTERLY NET INCOME. Quarterly net income before taxes of not less than 70% of that approved plan by the Borrower's Board of Directors as attached hereto by Borrower as Schedule I (to be tested on a quarterly basis). 6.8 FURTHER ASSURANCES. Borrower will execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank's security interest in the Collateral or to effect the purposes of this Agreement. 7 NEGATIVE COVENANTS Borrower will not do any of the following without Bank's prior written consent, which will not be unreasonably withheld: 7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than Transfers (i) of Inventory in the ordinary course of business; (ii) of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; or (iii) of worn-out or obsolete Equipment. 7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS. Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or reasonably related thereto or have a material change in its ownership or management (other than the sale of Borrower's equity securities in a public offering or to venture capital investors reasonably acceptable to Bank) of greater than 49% Borrower will not, without at least 30 days prior written notice, relocate its chief executive office or add any new offices or business locations. 7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, except where (i) no Event of Default has occurred and is continuing or would result from such action during the term of this Agreement and (ii) result in a decrease of more than 25% of Tangible Net Worth. A Subsidiary may merge or consolidate into another Subsidiary or into Borrower. 7.4 INDEBTEDNESS. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness. 7.5 ENCUMBRANCE. Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted here, subject to Permitted Liens. 7.6 DISTRIBUTIONS; INVESTMENTS. Directly or indirectly acquire or own any Person, or make any Investment in any Person, other than Permitted Investments, or permit any of its Subsidiaries to do so. Pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock. 7.7 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter or permit any material transaction with any Affiliate except transactions that are in the ordinary course of Borrower's business, on terms less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person. 7.8 SUBORDINATED DEBT. Make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt without Bank's prior written consent, which consent shall not be unreasonably withheld. 7.9 COMPLIANCE. Become an "investment company" or a company controlled by an "investment company," under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Advance for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonable be expected to have a material adverse effect on Borrower's business or operations or would reasonably be expected to cause a Material Adverse Change, or permit any of its Subsidiaries to do so. 8 EVENTS OF DEFAULT Any one of the following is an Event of Default: 8.1 PAYMENT DEFAULT. If Borrower fails to pay any of the Obligations within 3 days after their due date. During the additional period the failure to cure the default is not an Event of Default (but no Advance will be made during the cure period); 8.2 COVENANT DEFAULT. If Borrower does not perform any obligation in Section 6 or violates any covenant in Section 7 or does not perform or observe any other material term, condition or covenant in this Agreement, any Loan Documents, or in any agreement between Borrower and Bank and as to any default under a term, condition or covenant that can be cured, has not cured the default within 10 days after it occurs, or if the default cannot be cured within 10 days or cannot be cured after Borrower's attempts within 10 day period, and the default may be cured within a reasonable time, then Borrower has an additional period (of not more than 30 days) to attempt to cure the default. During the additional time, the failure to cure the default is not an Event of Default (but no Advances will be made during the cure period); 8.3 MATERIAL ADVERSE CHANGE. (i) If there occurs a material impairment in the perfection or priority of the Bank's security interest in the Collateral or in the value of such Collateral (other than normal depreciation) which is not covered by adequate insurance or (ii) if the Bank determines, based upon information available to it and in its reasonable judgment, that there is a reasonable likelihood that Borrower will fail to comply with one or more of the financial covenants in Section 6 during the next succeeding financial reporting period. 8.4 ATTACHMENT. If any material portion of Borrower's assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in 10 days, or if Borrower is enjoined, restrained, or prevented by court order from conducting a material part of its business or if a judgment or other claim becomes a Lien on a material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed against any of Borrower's assets by any government agency and not paid within 10 days after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Advances will be made during the cure period); 8.5 INSOLVENCY. If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within 45 days (but no Advances will be made before any Insolvency Proceeding is dismissed); 8.6 OTHER AGREEMENTS. If there is a default in any agreement between Borrower and a third party that gives the third party the right to accelerate any Indebtedness exceeding $100,000 or that could cause a Material Adverse Change; 8.7 JUDGMENTS. If a money judgment(s) in the aggregate of at least $100,000 is rendered against Borrower and is unsatisfied and unstayed for 10 days (but no Advances will be made before the judgment is stayed or satisfied); or 8.8 MISREPRESENTATIONS. If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement as of the date made in any warranty or representation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document. 9 BANK'S RIGHTS AND REMEDIES 9.1 RIGHTS AND REMEDIES. When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) Declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank); (b) Stop advancing money or extending credit for Borrower's benefit under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, on terms and in any order that is commercially reasonable and Bank considers advisable; (d) Make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral. Borrower will assemble the Collateral if Bank requires and make it available as Bank reasonably designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank's rights or remedies; (e) Apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral; and (g) Dispose of the Collateral according to the Code. 9.2 POWER OF ATTORNEY. Effective only when an Event of Default occurs and continues, Borrower irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name on any checks or other forms of payment or security; (ii) sign Borrower's name on any invoice or bill of lading for any Account or drafts against account debtors, (iii) make, settle, and adjust all claims under Borrower's insurance policies; (iv) settle and adjust disputes and claims about the Accounts directly with account debtors, for amounts and on terms Bank determines reasonable; and (v) transfer the Collateral into the name of Bank or a third party as the Code permits. Bank may exercise the power of attorney to sign Borrower's name on any documents necessary to perfect or continue the perfection of any security interest regardless of whether an Event of Default has occurred. Bank's appointment as Borrower's attorney in fact, and all of Bank's rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Bank's obligation to provide Advances terminates. 9.3 ACCOUNTS COLLECTION. When an Event of Default occurs and continues, Bank may notify any Person owing Borrower money of Bank's security interest in the funds and verify the amount of the Account. Borrower must collect all payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in the form received from the account debtor, with proper endorsements for deposit. 9.4 BANK EXPENSES. If Borrower fails to pay any amount or furnish any required proof of payment to third persons, Bank may make all or part of the payment or obtain insurance policies required in Section 6.5, and take any action under the policies Bank deems prudent in its reasonable judgement. Any amounts paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then applicable rate and secured by the Collateral. No payments by Bank are deemed an agreement to make similar payments in the future or Bank's waiver of any Event of Default. 9.5 BANK'S LIABILITY FOR COLLATERAL. If Bank complies with reasonable banking practices and Section 9-207 of the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other person. Borrower bears all risk of loss, damage or destruction of the Collateral when in Borrower's control and possession. 9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank's exercise of one right or remedy is not an election, and Bank's waiver of any Event of Default is not a continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given. 9.7 DEMAND WAIVER. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 10 NOTICES All notices or demands by any party about this Agreement or any other related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth at the beginning of this Agreement. A party may change its notice address by giving the other party written notice. 11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California. BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 12 GENERAL PROVISIONS 12.1 SUCCESSORS AND ASSIGNS. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights under it without Bank's prior written consent which may be granted or withheld in Bank's discretion. Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits under this Agreement. 12.2 INDEMNIFICATION. Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys fees and expenses), except, with respect to (a) and (b) above, for losses caused by Bank's gross negligence or willful misconduct. 12.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations in this Agreement. 12.4 SEVERABILITY OF PROVISION. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 12.5 AMENDMENTS IN WRITING, INTEGRATION. All amendments to this Agreement must be in writing and signed by Borrower and Bank. This Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement merge into this Agreement and the Loan Documents. 12.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement. 12.7 SURVIVAL. All covenants, representations and warranties made in this Agreement continue in full force while any Obligations remain outstanding. The obligations of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of limitations for actions that may be brought against Bank have run. 12.8 CONFIDENTIALITY. In handling any confidential information, Bank will exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made (i) to Bank's subsidiaries or affiliates in connection with their business with Borrower, (ii) to prospective transferees or purchasers of any interest in the loans, (iii) as required by law, regulation, subpoena, or other order, (iv) as required in connection with Bank's examination or audit and (v) as Bank reasonably considers appropriate exercising remedies under this Agreement. Confidential information does not include information that either: (a) is in the public domain or in Bank's possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (b) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information. 12.9 ATTORNEYS' FEES, COSTS AND EXPENSES. In any action or proceeding between Borrower and Bank arising out of the Loan Documents, the prevailing party will be entitled to recover its reasonable attorneys' fees and other reasonable costs and expenses incurred, in addition to any other relief to which it may be entitled. 13 DEFINITIONS 13.1 DEFINITIONS. In this Agreement: "ACCOUNTS" are all existing and later arising accounts, contract rights, and other obligations owed Borrower in connection with its sale or lease of goods (including licensing software and other technology) or provision of services, all credit insurance, guaranties, other security and all merchandise returned or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "ADVANCE" or "ADVANCES" is a loan advance (or advances) under the Committed Revolving Line. "AFFILIATE" of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person's managers and members. "BANK EXPENSES" are all audit fees and expenses and reasonable costs and expenses (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings). "BORROWER'S BOOKS" are all Borrower's books and records including ledgers, records regarding Borrower's assets or liabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information. "BORROWING BASE" is 80% of Eligible Accounts as determined by Bank from Borrower's most recent Borrowing Base Certificate. "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which the Bank is closed. "CLOSING DATE" is the date of this Agreement. "CODE" is the California Uniform Commercial Code. "COLLATERAL" is the property described on EXHIBIT A. "COMMITTED REVOLVING LINE" is an Advance of up to $1,500,000. "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but "Contingent Obligation" does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement. "CURRENT LIABILITIES" are the aggregate amount of Borrower's Total Liabilities which mature within one (1) year. "DEFERRED MAINTENANCE REVENUE" is all amounts received in advance of performance under maintenance contract and not yet recognized as revenue. "ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's business that meet all Borrower's representations and warranties in Section 5; BUT Bank may change eligibility standards by giving Borrower notice. Unless Bank agrees otherwise in writing, Eligible Accounts will not include: (a) Accounts that the account debtor has not paid within 90 days (60 days for Foreign Accounts as defined in (e) below) of invoice date; (b) Accounts for an account debtor, 50% or more of whose Accounts have not been paid within 90 days of invoice date; (c) Credit balances over 90 days from invoice date; (d) Accounts for an account debtor, including Affiliates, whose total obligations to Borrower exceed 25% of all Accounts, for the amounts that exceed that percentage, unless the Bank approves in writing; (e) Accounts for which the account debtor does not have its principal place of business in the United States ("Foreign Accounts"), which in the aggregate exceed 35% of total Accounts; (f) Accounts for which the account debtor is a federal, state or local government entity or any department, agency, or instrumentality; (g) Accounts for which Borrower owes the account debtor, but only up to the amount owed (sometimes called "contra" accounts, accounts payable, customer deposits or credit accounts); (h) Accounts for demonstration or promotional equipment, or in which goods are consigned, sales guaranteed, sale or return, sale on approval, bill and hold, or other terms if account debtor's payment may be conditional; (i) Accounts for which the account debtor is Borrower's Affiliate, officer, employee, or agent; (j) Accounts in which the account debtor disputes liability or makes any claim and Bank believes there may be a basis for dispute (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business; (k) Accounts for which Bank reasonably determines collection to be doubtful. "EQUIPMENT" is all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" is the Employment Retirement Income Security Act of 1974, and its regulations. "GAAP" is generally accepted accounting principles. "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations. "INSOLVENCY PROCEEDING" are proceedings by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "INVENTORY" is present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or later owned by or in the custody or possession, actual or constructive, of Borrower, including inventory temporarily out of its custody or possession or in transit and including returns on any accounts or other proceeds (including insurance proceeds) from the sale or disposition of any of the foregoing and any documents of title. "INVESTMENT" is any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or guaranties executed by Borrower or Guarantor, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated. "MATERIAL ADVERSE CHANGE" is defined in Section 8.3. "OBLIGATIONS" are debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, including cash management services, letters of credit and foreign exchange contracts, if any and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank. "PERMITTED INDEBTEDNESS" is: (a) Borrower's indebtedness to Bank under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and shown on the Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; (e) Indebtedness secured by Permitted Liens; (f) Other Indebtedness of Borrower, not exceeding $100,000 in the aggregate at any time outstanding; and (g) Extensions, renewals, refunding, refinancing, modifications, amendments and restatements of the items of Permitted Indebtedness (a) through (e) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms on the Borrower. "PERMITTED INVESTMENTS" are: (a) Investments shown on the Schedule and existing on the Closing Date; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any State maturing within 1 year from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of deposit issued maturing no more than 1 year after issue; and (c) Other Investments not exceeding $250,000 in the aggregate at any time. "PERMITTED LIENS" are: (a) Liens existing on the Closing Date and shown on the Schedule or arising under this Agreement or other Loan Documents; (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, IF they have no priority over any of Bank's security interests; (c) Purchase money Liens (i) on Equipment acquired or held by Borrower or its Subsidiaries incurred for financing the acquisition of the Equipment, or (ii) existing on equipment when acquired, IF the Lien is confined to the property and improvements and the proceeds of the equipment; (d) Leases or subleases and licenses or sublicenses granted in the ordinary course of Borrower's business and any interest or title of a lessor, licensor or under any lease or license, IF the leases, subleases, licenses and sublicenses permit granting Bank a security interest; (e) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), BUT any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase. "PERSON" is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. "PRIME RATE" is Bank's most recently announced "prime rate," even if it is not Bank's lowest rate. "QUICK ASSETS" is, on any date, the Borrower's consolidated, unrestricted cash, plus accounts receivable. "RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "REVOLVING MATURITY DATE" is January 18, 2001. "SCHEDULE" is any attached schedule of exceptions. "SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's debt to Bank (and identified as subordinated by Borrower and Bank). "SUBSIDIARY" is for any Person, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person. "TANGIBLE NET WORTH" is, on any date, the consolidated total assets of Borrower and its Subsidiaries MINUS, (i) any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, Patents, trade and service marks and names, Copyrights and research and development expenses except prepaid expenses, and (c) reserves not already deducted from assets, AND (ii) Total Liabilities. "TOTAL LIABILITIES" is on any day, obligations that should, under GAAP, be classified as liabilities on Borrower's consolidated balance sheet, including all Indebtedness, and current portion Subordinated Debt allowed to be paid, but excluding all other Subordinated Debt. BORROWER: PHARSIGHT CORPORATION By: /s/ Robin A. Kehoe ----------------------------------- Title: CFO -------------------------------- BANK: SILICON VALLEY BANK By: /s/ R. Bryan Jadot ----------------------------------- Title: AVP -------------------------------- EXHIBIT A The Collateral consists of all of Borrower's right, title and interest in and to the following: All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above; All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower; All documents, cash, deposit accounts, securities, securities entitlements, securities accounts, investment property, financial assets, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and All Borrower's Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. Notwithstanding the foregoing, the Collateral shall not be deemed to include any copyrights, copyright applications, copyright registration and like protection in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; any patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, trademarks, servicemarks and applications therefor, whether registered or not, and the goodwill of the business of Borrower connected with and symbolized by such trademarks, any trade secret rights, including any rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; or any claims for damage by way of any past, present and future infringement of any of the foregoing (collectively, the "Intellectual Property"), except that the Collateral shall include the proceeds of all the Intellectual Property that are accounts, (i.e. accounts receivable) of Borrower, or general intangibles consisting of rights to payment, if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual Property is necessary to have a security interest in such accounts and general intangibles of Borrower that are proceeds of the Intellectual Property, then the Collateral shall automatically, and effective as of the Closing Date, include the Intellectual Property to the extent necessary to permit perfection of Bank's security interest in such accounts and general intangibles of Borrower that are proceeds of the Intellectual Property. EXHIBIT B LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: ----------------------- FAX#: (408) 496-2426 TIME: ----------------------- - ------------------------------------------------------------------------------ FROM: Pharsight Corporation ----------------------------------------------------------------------- CLIENT NAME (BORROWER) REQUESTED BY: ----------------------------------------------------------------- AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE: --------------------------------------------------------- PHONE NUMBER: ----------------------------------------------------------------- FROM ACCOUNT # TO ACCOUNT # ---------------- ----------------------------------
REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT PRINCIPAL INCREASE (ADVANCE) $ ------------------------------------- PRINCIPAL PAYMENT (ONLY) $ ------------------------------------- INTEREST PAYMENT (ONLY) $ ------------------------------------- PRINCIPAL AND INTEREST (PAYMENT) $ -------------------------------------
OTHER INSTRUCTIONS: ----------------------------------------------------------- - ------------------------------------------------------------------------------ All Borrower's representations and warranties in the Loan and Security Agreement are true, correct and complete in all material respects on the date of the telephone request for and Advance confirmed by this Borrowing Certificate; but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of that date. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ BANK USE ONLY TELEPHONE REQUEST: The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me. - --------------------------------------- --------------------------------- Authorized Requester Phone # - --------------------------------------- --------------------------------- Received By (Bank) Phone # ------------------------------------------------------- Authorized Signature (Bank) - ------------------------------------------------------------------------------ EXHIBIT C BORROWING BASE CERTIFICATE - ------------------------------------------------------------------------------ Borrower: Pharsight Corporation Bank: Silicon Valley Bank 3003 Tasman Drive Santa Clara, CA 95054 Commitment Amount: $1,500,000 - ------------------------------------------------------------------------------ ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of $_________ 2. Additions (please explain on reverse) $_________ 3. TOTAL ACCOUNTS RECEIVABLE $_________ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due (60 days for Foreign Accounts) $_________ 5. Balance of 50% over 90 day accounts $_________ 6. Credit balances over 90 days $_________ 7. Concentration Limits $_________ 8. Foreign Accounts* $_________ 9. Governmental Accounts $_________ 10. Contra Accounts $ 11. Promotion or Demo Accounts $_________ 12. Intercompany/Employee Accounts $_________ 13. Other (please explain on reverse) $_________ 14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_________ 15. Eligible Accounts (#3 minus #14) $_________ 16. LOAN VALUE OF ACCOUNTS (80% of #15) $_________ *in excess of 35% of the total Accounts. BALANCES 17. Maximum Loan Amount $_________ 18. Total Funds Available: Lesser of #17 or #16 $_________ 19. Present balance owing on Line of Credit $_________ 20. Outstanding under Sublimits ( none ) $_________ 21. RESERVE POSITION (#18 minus #19 and #20) $_________
THE UNDERSIGNED REPRESENTS AND WARRANTS THAT THIS IS TRUE, COMPLETE AND CORRECT, AND THAT THE INFORMATION IN THIS BORROWING BASE CERTIFICATE COMPLIES WITH THE REPRESENTATIONS AND WARRANTIES IN THE LOAN AND SECURITY AGREEMENT BETWEEN THE UNDERSIGNED AND SILICON VALLEY BANK. COMMENTS: _________________________ BANK USE ONLY Rec'd By:____________ Auth. Signer Pharsight Corporation Date:________________ Verified:____________ By:____________________________ Auth. Signer Authorized Signer Date:________________ _____________________ _________________________ EXHIBIT D COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK 3003 Tasman Drive Santa Clara, CA 95054 FROM: PHARSIGHT CORPORATION The undersigned authorized officer of Pharsight Corporation ("Borrower") certifies that under the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below and (ii) all representations and warranties in the Agreement are true and correct in all material respects on this date. Attached are the required documents supporting the certification. The Officer certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES Monthly financial statements + CC Monthly within 30 days Yes No Annual (Audited) FYE within 120 days Yes No A/R & A/P Agings Monthly within 20 days Yes No Borrowing Base Certificate Monthly within 20 days Yes No FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES Maintain on a monthly basis (unless otherwise noted): Minimum Quick Ratio (Adjusted) 1.80:1.00 ____:1.00 Yes No Quarterly Net Income* Yes No
* Borrower shall maintain quarterly net income before taxes at least 70% of the approved plan by the Borrower's Board of Directors as attached hereto as Schedule I (tested quarterly). ___________________________________ COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY Received by:____________________ Sincerely, AUTHORIZED SIGNER Date: Pharsight Corporation Verified:_______________________ AUTHORIZED SIGNER ___________________________________ SIGNATURE Date:___________________________ ___________________________________ Compliance Status: Yes No TITLE ___________________________________ ___________________________________ DATE
[Logo] SILICON VALLEY BANK PRO FORMA INVOICE FOR LOAN CHARGES BORROWER: PHARSIGHT CORPORATION LOAN OFFICER: BRYAN JADOT DATE: JANUARY 18, 2000 REVOLVING LOAN FEE $9,750.00 CREDIT REPORT 35.00 UCC SEARCH FEE 200.00 UCC FILING FEE 40.00 DOCUMENTATION FEE 1,000.00 LEGAL FEE 250.00 TOTAL FEE DUE $11,275.00 ------------- ========== PLEASE INDICATE THE METHOD OF PAYMENT: { } A CHECK FOR THE TOTAL AMOUNT IS ATTACHED. {X} DEBIT DDA # 3300027682 FOR THE TOTAL AMOUNT. { } LOAN PROCEEDS BORROWER: BY: /s/ Robin A. Kehoe ----------------------------------- (AUTHORIZED SIGNER) /s/ R. Bryan Jadot 1/26/00 - --------------------------------------- SILICON VALLEY BANK (Date) ACCOUNT OFFICER'S SIGNATURE NEGATIVE PLEDGE AGREEMENT This Negative Pledge Agreement is made as of January 18, 2000 by and between Pharsight Corporation ("Borrower") and Silicon Valley Bank ("Bank"). In connection with, among other documents, the Loan and Security Agreement (the "Loan Documents") being concurrently executed herewith between Borrower and Bank, Borrower agrees as follows: 1. Borrower shall not sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of Borrower's intellectual property, including, without limitation, the following: a. Any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held; b. All mask works or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; c. Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; d. Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; e. All patents, patent applications and like protections including, without limitation, improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, including without limitation the patents and patent applications; f. Any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks, including without limitation; g. Any and all claims for damages by way of past, present and future infringements of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; h. All licenses or other rights to use any of the Copyrights, Patents, Trademarks or Mask Works, and all license fees and royalties arising from such use to the extent permitted by such license or rights; and i. All amendments, extensions, renewals and extensions of any of the Copyrights, Trademarks, Patents, or Mask Works; and j. All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing; 2. It shall be an event of default under the Loan Documents between Borrower and Bank if there is a breach of any term of this Negative Pledge Agreement. 3. Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Documents. BORROWER: Pharsight Corporation By: /s/ Robin A. Kehoe ---------------------------- Name: Robin A. Kehoe -------------------------- Title: Chief Financial Officer ------------------------- BANK: SILICON VALLEY BANK By: /s/ R. Bryan Jadot ---------------------------- Name: R. Bryan Jadot -------------------------- Title: AVP ------------------------- CORPORATE BORROWING RESOLUTION BORROWER: PHARSIGHT CORPORATION BANK: SILICON VALLEY BANK 800 W. EL CAMINO REAL 3003 TASMAN DRIVE SUITE 200 SANTA CLARA, CA 95054-1191 MOUNTAIN VIEW, CA 94040 I, THE SECRETARY OR ASSISTANT SECRETARY OF PHARSIGHT CORPORATION ("BORROWER"), CERTIFY that Borrower is a corporation existing under the laws of the State of California. I certify that at a meeting of Borrower's Directors (or by other authorized corporate action) duly held the following resolutions were adopted. It is resolved that ANY ONE of the following officers of Borrower, whose name, title and signature is below: NAMES POSITIONS ACTUAL SIGNATURES _________________________ _________________________ __________________________ _________________________ _________________________ __________________________ _________________________ _________________________ __________________________ _________________________ _________________________ __________________________ may act for Borrower and: BORROW MONEY. Borrow money from Silicon Valley Bank ("Bank"). EXECUTE LOAN DOCUMENTS. Execute any loan documents Bank requires. GRANT SECURITY. Grant Bank a security interest in any of Borrower's assets. NEGOTIATE ITEMS. Negotiate or discount all drafts, trade acceptances, promissory notes, or other indebtedness in which Borrower has an interest and receive cash or otherwise use the proceeds. LETTERS OF CREDIT. Apply for letters of credit from Bank. FOREIGN EXCHANGE CONTRACTS. Execute spot or forward foreign exchange contracts. ISSUE WARRANTS. Issue warrants for Borrower's stock. FURTHER ACTS. Designate other individuals to request advances, pay fees and costs and execute other documents or agreements (including documents or agreement that waive Borrowers right to a jury trial) they think necessary to effectuate these Resolutions. Further resolved that all acts authorized by these Resolutions and performed before they were adopted are ratified. These Resolutions remain in effect and Bank may rely on them until Bank receives written notice of their revocation. I certify that the persons listed above are Borrower's officers with the titles and signatures shown following their names and that these resolutions have not been modified are currently effective. CERTIFIED TO AND ATTESTED BY: X ______________________________________________ *Secretary or Assistant Secretary X ______________________________________________ *NOTE: In case the Secretary or other certifying officer is designated by the foregoing resolutions as one of the signing officers, this resolution should also be signed by a second Officer or Director of Borrower. EX-10.6 11 EXHIBIT 10.6 Exhibit 10.6 LOAN AND SECURITY AGREEMENT Agreement No._______________ Dated as of March 31, 1998 between MMC/GATX PARTNERSHIP NO. 1 Four Embarcadero Center Suite 2200 San Francisco, CA 94111 as Lender and PHARSIGHT CORPORATION a California corporation 299 California Avenue, Suite 300 Palo Alto, CA 94306 as Borrower CREDIT AMOUNT: $1,000,000 Treasury Note Maturity: 36 months Loan Margin: 200 basis points Commitment Termination Date: March 31, 1998 The defined terms and information set forth on this cover page are a part of the Loan and Security Agreement, dated as of the date first written above (this "Agreement"), entered into by and between MMC/GATX PARTNERSHIP NO. I ("Lender") and the borrower ("Borrower") set forth above. The terms and conditions of this Agreement agreed to between Lender and Borrower are as follows: ARTICLE I INTERPRETATION 1.01. Certain Definitions. Unless otherwise indicated in this Agreement or any other Operative Document, the following terms, when used in this Agreement or any other Operative Document, shall have the following respective meanings: "Affiliate" means (i) any director, officer or employee of such Person, (ii) any Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person, and (iii) any Person beneficially owning or holding 10% or more of any class of voting securities of such Person or any corporation of which such Person beneficially owns or holds, in the aggregate, 10% or more of any class of voting securities. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. The term "Affiliate," when used herein without reference to any Person, shall mean an Affiliate of Borrower. "Borrower's Home State" shall mean the state in which Borrower's principal place of business is located. "Business Day" shall mean any day other than a Saturday, Sunday or public holiday under the laws of California, Illinois or Borrower's Home State or other day on which banking institutions are authorized or obligated to close in California, Illinois or Borrower's Home State. "Claim" has the meaning given to that term in Section 10.03. "Collateral" has the meaning given to that term in Section 5.01. "Commitment Fee" has the meaning given to that term in Section 2.04. "Commitment Termination Date" shall mean the date specified on the cover page of this Agreement. "Credit Amount" shall mean the maximum amount that Lender is committed to lend (if the conditions specified in Schedule 3 are satisfied), which amount is set forth following such term on the cover page of this Agreement. "Current Assets" shall mean the aggregate amount of all of the consolidated assets of Borrower and its Subsidiaries that would, in accordance with GAAP, be classified on a balance sheet as current assets. "Current Liabilities" shall mean the aggregate amount of all of the consolidated liabilities of Borrower and its Subsidiaries that would, in accordance with GAAP, be classified on a balance sheet as current liabilities. "Default" shall mean any event which with the passing of time or the giving of notice or both would become an Event of Default hereunder. "Default Rate" shall mean the per annum rate of interest equal to the higher of (i) 15% or (ii) the Prime Rate plus 4%, but such rate shall in no event be more than the highest rate permitted by applicable law. "Disclosure Schedule" has the meaning set forth in the definition of the term "Permitted Liens." "Environmental Law" shall mean the Resource Conservation and Recovery Act of 1987, the Comprehensive Environmental Response, Compensation and Liability Act, and any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree (in each case having the force of law) regulating or imposing liability or standards of conduct concerning any Hazardous Material, as now or at any time hereafter in effect. "Equity Securities" of any Person shall mean (a) all common stock, preferred stock, participations, shares, partnership interests or other equity interests in and of such Person (regardless of how designated and whether or not voting or non-voting) and (b) all warrants, options and other rights to acquire any of the foregoing. "Event of Default" has the meaning given to that term in Section 9.01. "Funding Date" shall mean the date on which the Loan is made to or on account of Borrower under this Agreement. "GAAP" shall mean generally accepted accounting principles and practices as in effect in the United States of America from time to time, consistently applied. "Hazardous Material" means any hazardous, dangerous or toxic constituent material, pollutant, waste or other substance, whether solid, liquid or gaseous, which is regulated by any federal, state or local governmental authority. "Indebtedness" shall mean, with respect to Borrower or any Subsidiary, the aggregate amount of, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade payables aged less than 180 days), (d) all capital lease obligations of such Person, (e) all obligations or liabilities of others secured by a lien on any asset of such Person, whether or not such obligation or liability is assumed, (f) all obligations or liabilities of others guaranteed by such Person; and (g) any other obligations or liabilities which are required by GAAP to be shown as debt on the balance sheet of such Person. Unless otherwise indicated, the term "Indebtedness" shall include all Indebtedness of Borrower and the Subsidiaries. "Intellectual Property" shall mean all of Borrower's right, title and interest in and to patents, patent rights (and applications therefor), trademarks and service marks (and applications and registrations therefor), inventions, copyrights, mask works (and applications and registrations therefor), trade names, trade styles, software and computer programs, trade secrets, methods, processes, know how, drawings, specifications, descriptions, and all memoranda, notes, and records with respect to any research and development, all whether now owned or subsequently acquired or developed by Borrower and whether in tangible or intangible form or contained on magnetic media readable by machine together with all such magnetic media. "Investments"of any Person shall mean any loan or advance of funds by such Person to any other Person (other than advances to employees of such Person for moving and travel expense, drawing accounts and similar expenditures in the ordinary course of business), any purchase or other acquisition of any Equity Securities or Indebtedness of any other Person, any capital contribution by such Person to or any other investment by such Person in any other Person (including, without limitation, any Indebtedness incurred by such Person of the type described in clauses (a) and (b) of the definition of "Indebtedness" on behalf of any other Person); provided, however, that Investments shall not include accounts receivable or other indebtedness owed by customers of such Person which are current assets and arose from sales or non-exclusive licensing in the ordinary course of such Person's business or the endorsement of negotiable instruments for deposit or collection in the ordinary course of such Person's business. 2 "Lien" shall mean any pledge, bailment, lease, mortgage, hypothecation, conditional sales and title retention agreements, charge, claim, encumbrance or other lien in favor of any Person. "Loan" shall mean the loan advanced by Lender to Borrower under this Agreement. "Loan Margin" shall mean the number of basis points set forth following such term on the cover page of this Agreement. "Loan Rate" shall mean, with respect to the Loan, the per annum rate of interest equal to the sum of (a) the U.S. Treasury note rate of a term equal to the Treasury Note Maturity as quoted in The Wall Street Journal on the date the applicable Note is prepared, plus (b) the Loan Margin. "Note"shall mean the secured promissory note of Borrower substantially in the form of Exhibit A. "Obligations" has the meaning given to that term in Section 5.01. "Operative Documents" shall mean this Agreement, the Note, the Warrant, the Landlord Waiver and Consent(s) and all other documents, instruments and agreements executed and delivered in connection herewith or therewith or in respect of the closing of the transactions contemplated hereby or thereby. "Payment Date" means the first Business Day of each calendar month. "Permitted Indebtedness" shall mean and include: 1. Indebtedness of Borrower to Lender; 2. Indebtedness of Borrower secured by Liens permitted under clause (e) of the definition of Permitted Liens; 3. Indebtedness existing on the date hereof and set forth on the Disclosure Schedule; 4. Subordinated Indebtedness; 5. Prepaid royalties and deferred revenue in connection with prepaid support services; 6. Indebtedness to a seller incurred in connection with a transaction permitted under Section 7.01(f) so long as such Indebtedness is unsecured or secured only by the property acquired in such transaction; 7. Other Indebtedness of Borrower not exceeding Two Hundred Fifty Thousand Dollars ($250,000) at any time; and 8. Extensions, renewals, refundings, refinancings, modifications, amendments and restatements of any of the items of Permitted Indebtedness described in clauses (a) through (g) above, provided that the principal amount thereof is not increased, any Lien is limited to the property originally covered and the terms thereof are not modified to impose more burdensome terms upon Borrower. 3 "Permitted Investments" shall mean and include: 1. Deposits with commercial banks organized under the laws of the United States or a state thereof to the extent such deposits are fully insured by the Federal Deposit Insurance Corporation; 2. Investments in marketable obligations issued or fully guaranteed by the United States and maturing not more than one (1) year from the date of issuance; and 3. Investments in open market commercial paper rated at least "A-1" or "P-1" or higher by a national credit rating agency and maturing not more than one (1) year from the creation thereof. 4. Investments pursuant to or arising under currency agreements or interest rate agreements entered into in the ordinary course of business; 5. Investments consisting of deposit accounts of Borrower in which Lender has a perfected security interest; 6. Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; 7. Investments consisting of (i) travel advances and other employee loans and advances in the ordinary course of business, (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower, and (iii) other loans to officers and employees (including relocation loans) approved by the Board of directors and not exceeding $250,000 at any time outstanding; 8. Investments permitted under Borrower's current investment policy which is attached hereto as Schedule 5 or any amendment thereto, which in each case has been approved by Lender; 9. Investments in connection with transactions permitted under Section 7.01(f); and 10. Other Investments aggregating not in excess of Two Hundred Fifty Thousand Dollars ($250,000) at any time. "Permitted Liens" shall mean (a) the Lien created by this Agreement, (b) Liens for fees, taxes, levies, imposts, duties or other governmental charges of any kind which are not yet delinquent or which are being contested in good faith by appropriate proceedings which suspend the collection thereof (provided, however, that such proceedings do not involve any substantial danger of the sale, forfeiture or loss of any item of equipment and that Borrower has adequately bonded such Lien or reserves sufficient to discharge such Lien have been provided on the books of Borrower), (c) Liens existing as of the date of this Agreement identified on the disclosure schedule attached hereto as Schedule 2 ("Disclosure Schedule"), (d) Liens to secure payment of worker's compensation, employment insurance, old age pensions or other social security obligations of Borrower in the ordinary course of business of Borrower, (e) Liens upon any equipment or other personal property acquired by Borrower after the date hereof to secure (i) the purchase price of such equipment or other personal property or (ii) lease obligations or indebtedness incurred solely for the purpose of financing the acquisition of such equipment or other personal property; provided that (A) such Liens are confined solely to the equipment or other personal property so acquired and the amount secured does not exceed the acquisition price thereof, and (B) no such Lien shall be created, incurred, assumed or suffered to exist in favor of Borrower's officers, directors or shareholders holding five percent 4 (5%) or more of Borrower's Equity Securities, (f) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings, (g) non-exclusive licenses of Intellectual Property entered into in the ordinary course of business and licenses, Liens or similar arrangements entered into in connection with joint ventures or corporate collaborations, (h) non-exclusive licenses arising out of a merger or acquisition transaction permitted hereunder; (i) other Liens securing obligations which do not constitute Indebtedness, which obligations do not exceed $50,000 in the aggregate; and (j) Liens to secure Indebtedness. "Person" shall mean and include an individual, a partnership, a corporation, a business trust, a joint stock company, a limited liability company, an unincorporated association or other entity and any domestic or foreign national, state or local government, any political subdivision thereof, and any department, agency, authority or bureau of any of the foregoing. "Prime Rate" shall mean the interest rate per annum publicly announced from time to time by Bank of America NT & SA (or its successor) as its reference rate, but such rate shall in no event be more than the highest interest rate permitted by applicable law. "Subordinated Indebtedness" shall mean Indebtedness subordinated to the Obligations on terms and conditions acceptable to Lender in its sole discretion. "Subsidiary" shall mean any corporation of which a majority of the outstanding capital stock entitled to vote for the election of directors (otherwise than as the result of a default) is owned by Borrower directly or indirectly through Subsidiaries. "Term" shall mean the period from and after the date hereof until the payment or satisfaction in full of all Obligations under this Agreement and the other Operative Documents. "Treasury Note Maturity" shall mean the period of months set forth following such term on the cover page of this Agreement. "Warrant" shall mean a warrant to purchase securities of Borrower substantially in the form of Exhibit B. 1.02. Headings. Headings in this Agreement and each of the other Operative Documents are for convenience of reference only and are not part of the substance hereof or thereof. 1.03. Plural Terms. All terms defined in this Agreement or any other Operative Document in the singular form shall have comparable meanings when used in the plural form and vice versa. 1.04. Construction. This Agreement is the result of negotiations among, and has been reviewed by, Borrower and Lender and their respective counsel. Accordingly, this Agreement shall be deemed to be the product of all parties hereto, and no ambiguity shall be construed in favor of or against Borrower or Lender. 1.05. Entire Agreement. This Agreement, together with the terms set forth in each of the other Operative Documents, taken together, constitute and, contain the entire agreement of Borrower and Lender and, with regard to their respective subject matters, supersede any and all prior agreements, term sheets, negotiations, correspondence, understandings and communications among the parties, whether written or oral, with respect to their respective subject matters. 1.06. Other Interpretive Provisions. References in this Agreement to "Articles," "Sections," "Exhibits," "Schedules" and "Annexes" are to recitals, articles, sections, exhibits, schedules and annexes herein and hereto 5 unless otherwise indicated. References in this Agreement and each of the other Operative Documents to any document, instrument or agreement shall include (a) all exhibits, schedules, annexes and other attachments thereto, (b) all documents, instruments or agreements issued or executed in replacement thereof, and (c) such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement or any other Operative Document shall refer to this Agreement or such other Operative Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Operative Document, as the case may be. The words "include" and "including" and words of similar import when used in this Agreement or any other Operative Document shall not be construed to be limiting or exclusive. Unless otherwise indicated in this Agreement or any other Operative Document, all accounting terms used in this Agreement or any other Operative Document shall be construed, and all accounting and financial computations hereunder or thereunder shall be computed, in accordance with generally accepted accounting principles as in effect in the United States of America from time to time. ARTICLE II THE CREDIT 2.01. Credit Facility. (a) Commitment. On the terms and subject to the conditions hereof and relying upon the representations and warranties herein set forth as and when made or deemed to be made, Lender agrees to make a Loan in the principal amount of One Million Dollars ($1,000,000). (b) Loan Interest Rate. Borrower shall pay interest on the principal amount of the Loan from the date of the Loan until the Loan is paid in full, at a per annum rate of interest equal to the Loan Rate determined in accordance with the definition of Loan Rate. The Loan Rate applicable to the Loan shall not be subject to change in the absence of manifest error. All computations of interest on the Loan shall be based on a year of 360 days and twelve 30 day months. If Borrower pays interest on any Loan which is determined to be in excess of the then legal maximum rate, then that portion of each interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of the Loan. (c) Payments of Principal and Interest. On each Payment Date, commencing on April 1, 1998, and continuing for thirty-five (35) Payment Dates thereafter, Borrower shall make equal payments of principal and interest in an amount sufficient to fully amortize the principal and interest of the Loan in thirty-six (36) equal payments. The payment due on April 1, 1998, shall also include an additional interest payment for any days during the month of March 1998 that the Loan is outstanding. Payments of principal and interest on the Loan may not be prepaid prior to the first anniversary of the date hereof and shall be prepaid only in a minimum amount of 50% of the then outstanding principal balance of the Loan, but in no event less than $250,000; provided, however, that if Borrower requests that Lender consent to an acquisition which is otherwise prohibited under Section 7.01(f) and Lender does not give its consent thereto, Borrower may prepay the Loan in full within thirty (30) days of such refusal to give consent. (d) Final Payment. Borrower shall pay, in addition to the principal and accrued interest and all other amounts due with respect to the Loan, an additional payment or payments in the aggregate amount of $75,000 which shall be payable (i) in full, on the last Payment Date if no part of the Loan is prepaid or on the date of prepayment if the Loan is prepaid in full, (ii) in part, on the date of any partial prepayment in an amount equal to 7.5% of all principal amounts repaid (including the amount of the prepayment) since the date of the Loan or the last prepayment, as applicable, or (iii) in part, on the last Payment Date if the Loan has been prepaid in part, in an amount equal to the difference between $75,000 and the aggregate amount paid pursuant to the preceding clause (ii). 6 2.02. Use of Proceeds; the Loan and the Note; Disbursement. (a) Use of Proceeds. The proceeds of the Loan shall be used solely for acquisition costs of transaction permitted under Section 7.01(f). (b) The Loan and the Note. The obligation of Borrower to repay the unpaid principal amount of and interest on the Loan shall be evidenced by the Note. Lender may, and is hereby authorized by Borrower to, endorse on a grid annexed to the Note appropriate notations regarding the Loan; provided, however, that the failure to make, or an error in making, any such notation shall not limit or otherwise affect the obligations of Borrower hereunder or under the Note. (c) Disbursement. Subject to the satisfaction of the conditions set forth in this Agreement, Lender shall disburse such Loan by wire transfer to Borrower unless otherwise directed in writing by Borrower. (d) Termination of Commitment to Lend. Notwithstanding anything to the contrary in the Operative Documents, Lender's obligation to lend the undisbursed portion of the Credit Amount to Borrower hereunder shall terminate on the earlier of (i) upon notice to Borrower after the occurrence of any Event of Default hereunder, and (ii) the Commitment Termination Date. 2.03. Other Payment Terms. (a) Place and Manner. Borrower shall make all payments due to Lender in lawful money of the United States, in immediately available funds, at the address for payments and in the manner specified in Section 10.05(b). (b) Date. Whenever any payment due hereunder shall fall due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest or fees, as the case may be. (c) Default Rate. If either (i) any amounts required to be paid by Borrower under this Agreement or the other Operative Documents (including principal or interest payable on the Loan, any fees or other amounts required to be paid hereunder) remain unpaid after such amounts are due, or (ii) an Event of Default has occurred and is continuing, Borrower shall pay interest on the outstanding principal balance hereunder from the date due or from the date of the Event of Default, as applicable, until such past due amounts are paid in full or until all Events of Defaults are cured, as applicable, at a per annum rate equal to the Default Rate, such rate to change from time to time as the Prime Rate shall change. All computations of such interest at the Default Rate shall be based on a year of 360 days and twelve 30 day months. 2.04. Commitment Fee. Lender has received a commitment fee from Borrower in the amount of $5,000 (the "Commitment Fee"). Any portion of the Commitment Fee not utilized to pay Lender's expenses in connection with the negotiation, documentation and funding of the Loan will be applied by Lender to amounts due under the Note in the order in which such amounts are due. If the Loan is not made, any remaining balance of the Commitment Fee shall be retained by Lender. ARTICLE III REPRESENTATIONS AND WARRANTIES 3.01. Representations and Warranties. Except as set forth in the Disclosure Schedule, Borrower makes the following representations and warranties to Lender as of the date hereof and again on the Funding Date: 7 (a) Organization and Qualification. Borrower is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and is duly qualified to do business in Borrower's Home State. (b) Authority. Borrower has all necessary corporate power, authority and legal right and has obtained all approvals and consents and has given all notices necessary to execute and deliver this Agreement and the other Operative Documents and to perform the terms hereof and thereof. Borrower has all requisite corporate power and authority to own and operate its properties and to carry on its businesses as now conducted. (c) Conflict with Other Instruments, etc. Neither the execution and delivery of any Operative Document to which Borrower is a party nor the consummation of the transactions therein contemplated nor compliance with the terms, conditions and provisions thereof will conflict with or result in a breach of any of the terms, conditions or provisions of the charter or the bylaws of Borrower or, to its knowledge, any law or any regulation, order, writ, injunction or decree of any court or governmental instrumentality or any material agreement or instrument to which Borrower is a party or by which it or any of its properties is bound or to which it or any of its properties is subject, or constitute a default thereunder or result in the creation or imposition of any Lien, other than Permitted Liens. (d) Title to Properties. Borrower has good and marketable title to the Collateral, free and clear of all Liens, other than Permitted Liens. Borrower has title and ownership of, or is licensed under, all Intellectual Property, with no known infringement of the rights of others. Neither the Chief Executive Officer nor Chief Financial Officer of Borrower is aware of receipt by Borrower of any communications alleging that Borrower has violated, or by conducting its business as proposed, would violate any proprietary rights of any other Person. Neither the Chief Executive Officer nor Chief Financial Officer of Borrower is aware of any infringement or violation by it of the intellectual property rights of any third party and has no knowledge of any violation or infringement by a third party of any of its Intellectual Property. The Collateral and the Intellectual Property constitute substantially all of the assets and property of Borrower. Borrower does not own any right, title or interest in or to any real property or motor vehicles, other than motor vehicles leased for executives as part of a benefit arrangement and leaseholds in real property. (e) Authorization, Governmental Approvals, etc. The execution and delivery by Borrower of each Operative Document, the granting of the security interest in the Collateral, the issuance of the Warrant, the issuance of the securities into which the Warrant is exercisable, the issuance of any securities into which the securities issuable upon exercise of the Warrant are convertible, and the performance of the obligations herein and therein contemplated have each been duly authorized by all necessary action on the part of Borrower. No authorization, consent, approval, license or exemption of, and no registration, qualification, designation, declaration or filing with, or notice to, any Person is, was or will be necessary to (i) the valid execution and delivery of any Operative Document to which Borrower is a party, (ii) the performance of Borrower's obligations under any Operative Document, or (iii) the granting of the security interest in the Collateral, except for filings in connection with the perfection of the security interest in any of the Collateral or the issuance of the Warrant. The Operative Documents have been or will be duly executed and delivered and constitute or will constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws of general application relating to or affecting the enforcement of creditors' rights or by general principles of equity. (f) Litigation. There are no actions, suits, proceedings or investigations pending or, to the knowledge of Borrower, threatened against or affecting Borrower, or the business or any property or asset owned by it, before any court or governmental department, agency or instrumentality which, if adversely determined, is reasonably likely to have a material adverse effect on the financial condition, business or operations of Borrower. (g) Security Interest. Assuming the proper filing of one or more financing statement(s) identifying the Collateral with the proper state and/or local authorities, the security interests in the Collateral granted to Lender pursuant to this Agreement (i) constitute and will continue to constitute first priority security interests (except to the extent any other Permitted Lien existing on the date of this Agreement may create any priority to Lender's Lien under this Agreement) to the extent a security interest in such Collateral can be perfected by the filing of a UCC-1 financing statement and (ii) are and will continue to be superior and prior to the rights in the Collateral of all other creditors of Borrower (except to the extent of such Permitted Liens). 8 (h) Executive Offices. The principal place of business and chief executive office of Borrower, and the office where Borrower will keep all records and files regarding the Collateral, is set forth on the cover page of this Agreement. (i) Solvency, Etc. Borrower is Solvent (as defined below) and, after the execution and delivery of the Operative Documents and the consummation of the transactions contemplated thereby, Borrower will be Solvent. "Solvent" shall mean, with respect to any Person on any date, that on such date (a) the fair value of the property of such Person is greater than the fair value of the liabilities (including, without limitation, contingent liabilities) of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in a business or a transaction, for which such Person's property would constitute an unreasonably small capital. (j) Catastrophic Events; Labor Disputes. None of Borrower or its properties is or has been affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or other casualty that could reasonably be expected to have a material adverse effect on the financial condition, business or operations of Borrower. There are no disputes presently subject to grievance procedure, arbitration or litigation under any of the collective bargaining agreements, employment contracts or employee welfare or incentive plans to which Borrower is a party, and there are no strikes, lockouts, work stoppages or slowdowns, or, to the best knowledge of Borrower, jurisdictional disputes or organizing activity occurring or threatened which could reasonably be expected to have a material adverse effect on the financial condition, business or operations of Borrower. (k) No Material Adverse Effect. No event has occurred and no condition exists which is reasonably likely to have a material adverse effect on the financial condition, business or operations of Borrower since December 31, 1997. (l) Accuracy of Information Furnished. None of the Operative Documents and none of the other certificates, statements or information furnished to Lender in writing by an officer of Borrower in connection with the Operative Documents or the transactions contemplated thereby contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading in any material respect. The Lender recognizes that all financial projections furnished to the Lender by or on behalf of Borrower in connection with the Operative Documents or the transactions contemplated thereby are not to be viewed as facts and that actual results during the period or periods covered by such projections may differ from the projected or forecasted results. (m) Certain Agreements of Officers, Employees and Consultants. (i) Neither the Chief Executive Officer nor Chief Financial Officer of Borrower is aware that any officer, employee or consultant of Borrower is in violation of any material term of any material employment contract, proprietary information agreement, nondisclosure agreement, noncompetition agreement, or any other material contract or agreement or any material restrictive covenant relating to the right of any such officer, employee or consultant to be employed by Borrower because of the nature of the business conducted or to be conducted by Borrower or relating to the use of trade secrets or proprietary information of others which the Chief Executive Officer and the Chief Financial Officer believe is likely to have a material adverse effect, and neither 9 the Chief Executive Officer nor Chief Financial Officer of Borrower is aware that continued employment of Borrower's officers, employees and consultants would subject Borrower to any material liability for any claim or claims arising out of or in connection with any such material contract, agreement, or covenant. (ii) To the knowledge of the chief executive officer of Borrower and the chief financial officer of Borrower, no officers of Borrower, and no employee or consultant of Borrower whose termination, either individually or in the aggregate, is reasonably likely to have a Material Adverse Effect, has any present intention of terminating his or her employment or consulting relationship with Borrower. ARTICLE IV REPORTING REQUIREMENTS 4.01. Furnishing Reports. Borrower shall furnish to Lender: (a) Financial Statements. So long as Borrower is not subject to the reporting requirements of Section 12 or Section 15 of the Securities and Exchange Act of 1934, as amended, promptly as they are available, unaudited monthly and audited annual financial statements of Borrower and such other financial information as Lender may reasonably request from time to time. From and after such time as Borrower becomes a publicly reporting company, promptly as they are available and in any event: (i) at the time of filing of Borrower's Form 10-K with the Securities and Exchange Commission after the end of each fiscal year of Borrower, the financial statements of Borrower filed with such Form 10-K; and (ii) at the time of filing of Borrower's Form 10-Q with the Securities and Exchange Commission after the end of each of the first three fiscal quarters of Borrower, the financial statements of Borrower filed with such Form 10-Q. (b) Notice of Defaults. As soon as possible, and in any event within five (5) Business Days after the discovery of a Default or Event of Default provide Lender with an Officer's Certificate of Borrower setting forth the facts relating to or giving rise to such Default or Event of Default and the action which Borrower proposes to take with respect thereto. (c) Miscellaneous. Such other information as Lender may reasonably request from time to time. ARTICLE V GRANT OF SECURITY INTEREST GENERAL PROVISIONS CONCERNING SECURITY 5.01. Grant of Security Interest. Borrower, in order to secure the payment of the principal and interest with respect to the Loan made pursuant to this Agreement, all other sums due under and in respect hereof and of the other Operative Documents, including fees, charges, expenses and attorneys' fees and costs and the performance and observance by Borrower of all other terms, conditions, covenants and agreements herein and in the other Operative Documents (all such amounts and obligations being herein sometimes called the "Obligations"), does hereby grant to Lender and its successors and assigns, a security interest in and to the following property (collectively, the "Collateral"): All right, title, interest, claims and demands of Borrower in and to: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all laboratory equipment, computer equipment, office equipment, machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; 10 (b) All inventory now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's books relating to any of the foregoing; (c) All contract rights and general intangibles, (except to the extent included within the definition of Intellectual Property), now owned or hereafter acquired, including, without limitation, goodwill, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer disks, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower (subject, in each case, to the contractual rights of third parties to require funds received by Borrower to be expended in a particular manner), whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's books relating to any of the foregoing; (e) All documents, cash, deposit accounts, letters of credit, certificates of deposit, instruments, chattel paper and investment property, including, without limitation, all securities, whether certificated or uncertificated, security entitlements, securities accounts, commodity contracts and commodity accounts, and all financial assets held in any securities account or otherwise, wherever located, now owned or hereafter acquired and Borrower's books relating to the foregoing; (f) Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof, including, without limitation, insurance, condemnation, requisition or similar payments and proceeds of the sale or licensing of Intellectual Property to the extent such proceeds no longer constitute Intellectual Property Notwithstanding the foregoing, in no event shall Collateral include any Intellectual Property. 5.02. Duration of Security Interest. Lender's security interest in the Collateral shall continue until the payment in full and the satisfaction of all Obligations, whereupon such security interest shall terminate. Lender, upon payment in full and the satisfaction of the Obligations, shall execute such further documents and take such further actions as may be necessary to effect the release and/or termination contemplated by this Section 5.02, including duly executing and delivering termination statements for filing in all relevant jurisdictions. 5.03. Possession of Collateral. Except as set forth in Section 5.04, so long as no Event of Default has occurred and is continuing, Borrower shall remain in full possession, enjoyment and control of the Collateral (except only as may be otherwise required by Lender for perfection of its security interest therein) and to manage, operate and use the same and each part thereof with the rights and franchises appertaining thereto; provided, however, that the possession, enjoyment, control and use of the Collateral shall at all times be subject to the observance and performance of the terms of this Agreement. 11 5.04 Location of Collateral. The Collateral is and shall remain in the possession of Borrower at Borrower's addresses stated on the cover page of this Agreement, 425 Sherman Ave., Suite 210, Palo Alto, CA 94306 and 5625 Dillard Road, Suite 215, Cary, North Carolina 27511. 5.05 Lien Subordination. Lender agrees that the Liens granted to it hereunder shall be subordinate to the Liens of existing and future lenders providing equipment financing and equipment lessors; provided that such Liens are confined solely to the equipment so financed and the proceeds thereof; and provided, further, that the Obligations hereunder shall not be subordinate in right of payment to any obligations to other lenders or equipment lessors and Lender's rights and remedies hereunder shall not in any way (except to the extent resulting from Lien subordination) be subordinate to the rights and remedies of any such lenders or equipment lessors. Lender agrees to execute and deliver such agreements and documents as may be reasonably requested by Borrower from time to time which set forth the lien subordination described in this Section 5.05 and are reasonably acceptable to Lender. Lender shall have no obligation to execute any agreement or document which would impose obligations, restrictions or lien priority on Lender which are less favorable to Lender than those described in this Section 5.05. ARTICLE VI AFFIRMATIVE COVENANTS 6.01. Affirmative Covenants. (a) Payment of Taxes, etc. Borrower shall pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a Lien upon any of its properties; provided that there shall be no requirement to pay any such tax, assessment, charge, levy or claim (i) which is being contested in good faith and by appropriate proceedings or which presents no risk of seizure, forfeiture, levy or other event which could jeopardize any Collateral or (ii) for which payment in full is bonded or reserved in Borrower's financial statements. (b) Inspection Rights. Subject to the confidentiality provisions of Section 10.14, Borrower shall, at any reasonable time and from time to time, but no more than twice per year except during the occurrence and continuation of an Event of Default, permit Lender or any of its agents or representatives to inspect the Collateral, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, Borrower and to discuss the affairs, finances and accounts of Borrower with any of its officers or directors relating in each case to Lender's capacity as lender and secured party hereunder and with respect to the Collateral. (c) Maintenance of Equipment and Similar Assets. Borrower shall keep and maintain all items of equipment and other similar types of personal property that form any significant portion or portions of the Collateral in good operating condition and repair and shall make all necessary replacements thereof and renewals thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Borrower shall not permit any such material item of Collateral to become a fixture to real estate or an accession to other personal property, without the prior written consent of Lender. Borrower shall not permit any such material item of Collateral to be operated or maintained in violation of any applicable law, statute, rule or regulation. With respect to items of leased equipment (to the extent Lender has any security interest in any residual Borrower's interest in such equipment under the lease), Borrower shall keep, maintain, repair, replace and operate such leased equipment in accordance with the terms of the applicable lease. (d) Insurance. (i) Borrower shall, obtain and maintain for the Term, at its own expense, (x) "all risk" insurance against loss or damage to the Collateral, (y) commercial general liability insurance (including contractual liability, products liability and completed operations coverages) reasonably satisfactory to Lender, and (z) such other insurance against such other risks of loss and with such terms, as shall in each case be reasonably satisfactory to 12 or reasonably required by Lender (as to carriers, amounts and otherwise). The amount of the "all risk" insurance shall be determined to Lender's reasonable satisfaction as of each anniversary date of this Agreement and the appropriate amount of coverage shall be put in effect on the next succeeding renewal or inception date of such insurance. (ii) The deductible with respect to "all-risk" insurance required by clause (x) above and product liability insurance required by clause (y) above shall not exceed $25,000; otherwise there shall be no deductible with respect to any insurance required to be maintained hereunder. The amount of commercial general liability insurance (other than products liability coverage and completed operations insurance) required by clause (y) above shall be at least $2,000,000 per occurrence. The amount of the products liability and completed operations insurance required by clause (y) above shall be at least $1,000,000 per occurrence. Each "all risk" policy shall: (x) name Lender as loss payee as its interests appear, (y) provide for each insurer's waiver of its right of subrogation against Lender, and (z) provide that such insurance (A) shall not be invalidated by any action of, or breach of warranty by, Borrower of a provision of any of its insurance policies, and (B) shall waive set-off, counterclaim or offset against Lender. Each liability policy shall (w) name Lender as an additional insured in the full amount of Borrower's liability coverage limits (or the coverage limits of any successor to Borrower or such successor's parent which is providing coverage) and (x) provide that such insurance shall have cross-liability and severability of interest endorsements (which shall not increase the aggregate policy limits of Borrower's insurance). All insurance policies shall (y) provide that Borrower's insurance shall be primary without a right of contribution of Lender's insurance, if any, or any obligation on the part of Lender to pay premiums of Borrower, and (z) shall contain a clause requiring the insurer to give Lender at least 30 days' prior written notice of its cancellation (other than cancellation for non-payment for which 10 days' notice shall be sufficient). Borrower shall on or prior to the first Funding Date and prior to each policy renewal, furnish to Lender certificates of insurance or other evidence satisfactory to Lender that such insurance coverage is in effect. ARTICLE VII NEGATIVE AND FINANCIAL COVENANTS 7.01. Negative Covenants. So long as the Obligations remain outstanding, Borrower shall not without the prior written consent of Lender: (a) Name; Location of Chief Executive Office and Collateral. Without thirty (30) days prior written notice to Lender, change its chief executive office or principal place of business or remove or cause to be removed from the location set forth on the cover page hereof or those set forth in Section 5.04 or move any material, tangible Collateral to a location other than that set forth on the cover page hereof or those set forth in Section 5.04. (b) Liens on Collateral. Create, incur, assume or suffer to exist any Lien of any kind upon any Collateral, whether now owned or hereafter acquired, except Permitted Liens. (c) Negative Pledge Regarding Intellectual Property. Create, incur, assume or suffer to exist any Lien of any kind upon any Intellectual Property, whether now owned or hereafter acquired, except Permitted Liens. (d) Dispositions of Collateral or Intellectual Property. Convey, sell, offer to sell, lease, transfer, exchange or otherwise dispose of (collectively, a "Transfer") all or any part of the Collateral or Intellectual Property to any Person, other than: (i) Transfers of inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements (or exclusive licenses or similar arrangements for geographic regions) for the use of the property of Borrower in the ordinary course of business; (iii) Transfers of worn-out or obsolete equipment; (iv) expenditures of cash in the ordinary course of business; and (v) other Transfers in the ordinary course of business not exceeding $50,000 in the aggregate. It is expressly agreed and understood that the ordinary course of Borrower's business includes entering into agreements and arrangements with third parties for research, development, manufacturing, sale or marketing of products and the licensing of Intellectual Property in connection with such agreements and arrangements. (e) Distributions. (i) Pay any dividends or make any distributions of assets, Equity Securities or other obligations or securities on its Equity Securities; (ii) purchase, redeem, retire, defease or otherwise acquire for value 13 any of its Equity Securities (other than repurchases by cancellation of indebtedness pursuant to the terms of employee stock purchase plans, employee restricted stock agreements or similar arrangements in an aggregate amount not to exceed $250,000); (iii) return any capital to any holder of its Equity Securities as such; (iv) set apart any sum for any such purpose; provided, however, that the foregoing shall not prevent Borrower from (x) paying dividends payable solely in Common Stock; or (y) redeeming or making any payment with respect to the Company's Series C Preferred Stock which is provided for in the Company's Articles of Incorporation on the date hereof. (f) Mergers or Acquisitions. Merge or consolidate with or into any other Person or acquire all or substantially all of the capital stock or assets of another Person or permit any Person to acquire all or substantially all of the capital stock or assets of Borrower; provided that Borrower may enter into transactions in connection with the acquisition of Scientific Consulting, Incorporated ("SCI") and subsequently merge SCI into Borrower. (g) Transactions With Affiliates. Enter into any contractual obligation with any Affiliate or engage in any other transaction with any Affiliate, except, in each case, upon terms at least as favorable to Borrower as an arms-length transaction with unaffiliated Persons; provided, however, that the Company may enter into transactions having a fair market value not to exceed $50,000 in the aggregate without complying with the terms of this Section 7.01(g). (h) Maintenance of Accounts. Maintain any deposit accounts or accounts holding securities owned by Borrower except (i) accounts located at Silicon Valley Bank and (ii) other accounts with respect to which Borrower has given Lender thirty (30) days prior written notice and taken such actions as Lender may reasonably request to perfect Lender's security interest in such accounts, including without limitation executing notices to the depositary institution of Lender's security interest and obtaining control agreements with respect to securities accounts; provided that Borrower may maintain a securities account with Morgan Stanley & Company for up to forty-five (45) days after the date the Loan is made so long as Borrower is diligently attempting to obtain an agreement from Morgan Stanley & Company which would perfect Lender's security interest in such account. (i) Indebtedness Payments. Prepay, redeem, purchase, defease or otherwise satisfy in any manner prior to the scheduled repayment thereof any Indebtedness for borrowed money (other than amounts due under this Loan Agreement or the Note) or lease obligations, (ii) amend, modify or otherwise change the terms of any Indebtedness for borrowed money (other than the Obligations) or lease obligations so as to accelerate the scheduled repayment thereof or (iii) repay any notes to officers, directors or shareholders (except those described on Schedule 4 or if Lender has consented in advance to the terms of the repayment of such notes). (j) Indebtedness. Create, incur, assume or permit to exist any Indebtedness except Permitted Indebtedness. (k) Investments. Make any Investment except for Permitted Investments. (l) Stock Pledges. Fail to execute and deliver to Lender a Stock Pledge Agreement in the form of Exhibit D hereto (and comply with the perfection requirements contained therein) with respect to the Equity Securities of any Person acquired by Lender if such Person is not merged with and into Borrower within thirty (30) days of the date of closing of the acquisition (or in the case of Scientific Consulting, Incorporated by April 30, 1998). ARTICLE VIII 14 CONDITIONS PRECEDENT 8.01. Closing. At the time of execution and delivery of this Agreement, Borrower shall have duly executed and/or delivered to Lender the items set forth in Part I of Schedule 3. 8.02. Other Conditions. The obligation of Lender to make the Loan shall be subject to the execution and/or delivery to Lender of each of the items set forth in Part I of Schedule 3 and the satisfaction of by Borrower of each condition set forth in Part II of Schedule 3. 8.03. Covenant to Deliver. Borrower agrees (not as a condition but as a covenant) to deliver to Lender each item required to be delivered to Lender as a condition to the Loan, if the Loan is advanced. Borrower expressly agrees that the extension of the Loan prior to the receipt by Lender of any such item shall not constitute a waiver by Lender of Borrower's obligation to deliver such item (other than under clause (j) of Part I of Schedule 3 unless the Lender has specifically requested an item under this clause). ARTICLE IX DEFAULT AND REMEDIES 9.01. Events of Default. An "Event of Default" shall mean the occurrence of one or more of the following described events: (a) Borrower shall (i) default in the payment of principal of or interest on the Loan for five (5) days after the same is due, or (ii) default in the payment of any expense or other amount payable hereunder or thereunder for five (5) days after receipt of written notice from Lender that the same is due; or (b) Borrower shall breach any provision of Section 7.01 or Section 6.01(d); or (c) Borrower shall default in the performance of any covenant, agreement or obligation (other than a covenant, agreement or obligation referred to in, Section 9.01(a) or Section 9.01(b)) contained in any Operative Document (other than the Warrant) and Borrower shall fail to cure within thirty (30) days after receipt of written notice from Lender any default in the performance of any such covenant, agreement or obligation contained therein; or (d) Borrower shall have breached the terms of the Warrant; or (e) Any representation or warranty made herein or on the Funding Date by Borrower in any Operative Document, or any certificate or financial statement furnished pursuant to the provisions of any Operative Document, shall prove to have been false or misleading in any material respect as of the time made or furnished; or (f) Any Operative Document shall in any material respect cease to be, or Borrower shall assert that any Operative Document is not, a legal, valid and binding obligation of Borrower enforceable in accordance with its terms; or (g) A default shall exist under any agreement with any third party or parties which consists of the failure to pay any Indebtedness at maturity or which results in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness of Borrower in an amount in excess of Two Hundred Fifty Thousand Dollars ($250,000); or 15 (h) A proceeding shall have been instituted in a court of competent jurisdiction seeking a decree or order for relief in respect of Borrower in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian, trustee (or similar official) of Borrower or for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of forty-five (45) consecutive days or such court shall enter a decree or order granting the relief sought in such proceeding; or (i) Borrower shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian (or other similar official) of Borrower or for any substantial part of its property, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action in furtherance of any of the foregoing; or (j) A final judgment or order for the payment of money in excess of Two Hundred Fifty Thousand Dollars ($250,000) (exclusive of amounts covered by insurance issued by an insurer not an Affiliate of Borrower) shall be rendered against Borrower and the same shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed, or any judgment, writ, assessment, warrant of attachment, or execution or similar process shall be issued or levied against a substantial part of the property of Borrower and such judgment, writ, or similar process shall not be released, stayed, vacated or otherwise dismissed within thirty (30) days after issue or levy. 9.02. Consequences of Event of Default. (a) If an Event of Default specified under any of clauses (a) through (g) or (j) of Section 9.01 shall occur and be continuing, Lender may (i) declare the Loan, together with interest thereon, and all other liabilities of Borrower hereunder and under the other Operative Documents to be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived, and (ii) terminate its commitment to make the Loan and terminate any commitment to advance money or extend credit to or for the benefit of Borrower pursuant to any other agreement or commitment extended by Lender to Borrower. (b) If an Event of Default specified under clause (h) or (i) of Section 9.01 shall occur, then immediately and without notice (i) the Loan, together with interest thereon, and all other liabilities of Borrower hereunder and under the other Operative Documents shall automatically become due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and (ii) Lender's commitment hereunder to make the Loan and any other commitment of Lender to Borrower to advance money or extend credit pursuant to any other agreement or commitment shall be terminated. 9.03. Rights Regarding Collateral. Borrower agrees that when any Event of Default has occurred and is continuing, Lender shall have the rights, options, duties and remedies of a secured party as permitted by law and, in addition to and without limiting the foregoing, Lender may exercise any one or more or all, and in any order, of the remedies herein set forth, including the following: (a) Lender, personally or by agents or attorneys, shall have the right (subject to compliance with any applicable mandatory legal requirements) to require Borrower to assemble the Collateral and make it available to Lender at a place to be designated by Lender or to take immediate possession of the Collateral, or any portion thereof, and for that purpose may pursue the same wherever it may be found, and may enter any of premises of Borrower, with or without notice, demand, process of law or legal procedure, to the extent permitted by applicable law, and search for, take possession of, remove, keep and store the same, or use and operate or lease the same until sold. In furtherance of Lender's rights hereunder, Borrower hereby grants to Lender an irrevocable, non-exclusive license (exercisable without royalty or other payment by Lender) to use, license or sublicense any patent, 16 trademark, trade name, copyright or other intellectual property in which Borrower now or hereafter has any right, title or interest together with the right of access to all media in which any of the foregoing may be recorded or stored; provided, however, that such license shall only be exercisable in connection with the disposition of Collateral upon Lender's exercise of its remedies hereunder. (b) Lender may, if at the time such action may be lawful and always subject to compliance with any mandatory legal requirements, either with or without taking possession and either before or after taking possession, without instituting any legal proceedings whatsoever, having first given notice of such sale by registered or certified mail to Borrower once at least ten (10) days prior to the date of such sale, and having first given any other notice which may be required by law, sell and dispose of the Collateral, or any part thereof, at a private sale or at public auction, to the highest bidder, in one lot as an entirety or in separate lots, and either for cash or on credit and on such terms as Lender may determine, and at any place (whether or not it be the location of the Collateral or any part thereof) designated in the notice referred to above. To the extent permitted by applicable law, any such sale or sales may be adjourned from time to time by announcement at the time and place appointed for such sale or sales, or for any such adjourned sale or sales, without further published notice, and Borrower, Lender or the holder or holders of the Note, or of any interest therein, may bid and become the purchaser at any such sale. (c) Lender may proceed to protect and enforce this Agreement and the other Operative Documents by suit or suits or proceedings in equity, at law or in bankruptcy, and whether for the specific performance of any covenant or agreement herein contained or in execution or aid of any power herein granted; or for foreclosure hereunder, or for the appointment of a receiver or receivers for any real property security or any part thereof, or for the recovery of judgment for the Obligations or for the enforcement of any other proper, legal or equitable remedy available under applicable law. 9.04. Effect of Sale. Any sale, whether under any power of sale available to Lender or by virtue of judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either at law or in equity, of Borrower in and to the property sold, and shall be a perpetual bar, both at law and in equity, against Borrower, its successors and assigns, and against any and all persons claiming the property sold or any part thereof under, by or through Borrower, its successors or assigns. 9.05. Application of Collateral Proceeds. The proceeds and/or avails of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Lender at the time of, or received by Lender after, the occurrence of an Event of Default hereunder) shall be paid to and applied as follows: (a) First, to the payment of reasonable costs and expenses, including all amounts expended to preserve the value of the Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys' fees, incurred or made hereunder by Lender; (b) Second, to the payment to Lender of the amount then owing or unpaid on the Note, and in case such proceeds shall be insufficient to pay in full the whole amount so due, owing or unpaid upon the Note, then first, to the unpaid interest thereon, second, to unpaid principal thereof and third to the remaining balance of the Obligations under the Note; such application to be made upon presentation of the Note, and the notation thereon of the payment, if partially paid, or the surrender and cancellation thereof, if fully paid; (c) Third, to the payment of other amounts then payable to Lender under any of the Operative Documents; and 17 (d) Fourth, to the payment of the surplus, if any, to Borrower, its successors and assigns, or to whomsoever may be lawfully entitled to receive the same. 9.06. Reinstatement of Rights. If Lender shall have proceeded to enforce any right under this Agreement or any other Operative Document by foreclosure, sale, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then and in every such case (unless otherwise ordered by a court of competent jurisdiction), Lender shall be restored to its former position and rights hereunder with respect to the property subject to the security interest created under this Agreement. ARTICLE X MISCELLANEOUS 10.01. Modifications, Amendments or Waivers. The provisions of any Operative Document may be modified, amended or waived only by a written instrument signed by the parties thereto. 10.02. No Implied Waivers; Cumulative Remedies; Writing Required. No delay or failure of Lender in exercising any right, power or remedy hereunder shall affect or operate as a waiver thereof; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or remedy preclude any further exercise thereof or of any other right, power or remedy. The rights and remedies hereunder of Lender are cumulative and not exclusive of any rights or remedies which it would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of Lender of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only in the specified instance and to the extent specifically set forth in such writing. 10.03. Expenses; Indemnification. Borrower agrees upon demand to pay or reimburse Lender for all liabilities, obligations and out-of-pocket expenses, including reasonable fees and expenses of counsel for Lender, from time to time arising in connection with the enforcement or collection of sums due under the Operative Documents. Borrower shall indemnify, reimburse and hold Lender, each of Lender's general partners, and each of their respective successors, assigns, agents, officers, directors, shareholders, servants, agents and employees harmless from and against all liabilities, losses, damages, actions, suits, demands, claims of any kind and nature (including claims relating to environmental discharge, cleanup or compliance), all costs and expenses whatsoever to the extent they may be incurred or suffered by such indemnified party in connection therewith (including reasonable attorneys' fees and expenses), fines, penalties (and other charges of applicable governmental authorities), licensing fees relating to any item of Collateral, damage to or loss of use of property (including consequential or special damages to third parties or damages to Borrower's property), or bodily injury to or death of any person (including any agent or employee of Borrower) (each, a "Claim"), directly or indirectly relating to or arising out of the use of the proceeds of the Loan or otherwise, the falsity of any representation or warranty of Borrower or Borrower's failure to comply with the terms of this Agreement or any other Operative Document during the Term. The foregoing indemnity shall cover, without limitation, (i) any Claim in connection with a design or other defect (latent or patent) in any item of equipment included in the Collateral, (ii) any Claim for infringement of any patent, copyright, trademark or other intellectual property right, (iii) any Claim resulting from the presence on or under or the escape, seepage, leakage, spillage, discharge, emission or release of any Hazardous Materials on the premises of Borrower, including any Claims asserted or arising under any Environmental Law, or (iv) any Claim for negligence or strict or absolute liability in tort; provided, however, that Borrower shall not indemnify Lender for any liability to the extent incurred by Lender as a result of Lender's gross negligence or willful misconduct. Such indemnities shall continue in full force and effect, notwithstanding the expiration or termination of this Agreement. Upon Lender's written demand, Borrower shall assume and diligently conduct, at its sole cost and expense, the entire defense of Lender, each of its partners, and each of their respective, agents, employees, directors, officers, shareholders, successors and assigns against any indemnified Claim described in this Section 10.03. Borrower shall not settle or compromise any Claim against or involving Lender without first obtaining Lender's written consent thereto, which consent shall not be unreasonably withheld. 10.04. Certain Damages. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT OR ANYWHERE ELSE, BORROWER AGREES THAT IT SHALL NOT SEEK FROM LENDER UNDER ANY THEORY OF LIABILITY (INCLUDING ANY THEORY IN TORTS), ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES. 10.05. Notices; Payments. (a) All notices and other communications given to or made upon any party hereto in connection with this Agreement shall be in writing (including telexed, telecopied or telegraphic communication) and mailed (by certified or registered mail), telexed, telegraphed, telecopied or delivered to the respective parties, as follows: 18 Borrower: At the address set forth on the cover page of this Agreement. Lender: MMC/GATX PARTNERSHIP NO. I c/o GATX Capital Corporation Four Embarcadero Center Suite 2200 San Francisco, California 94111 Telephone No.: 415-955-3200 Telecopier No.: 415-955-3493 Attention: Contract Administration with a copy of all financial information to: MEIER MITCHELL & COMPANY 4 Orinda Way, Suite 200B Orinda, California 94563 or in accordance with any subsequent written direction from either party to the other. All such notices and other communications shall, except as otherwise expressly herein provided, be effective when received; or in the case of delivery by messenger or overnight delivery service, when left at the appropriate address. (b) Unless Lender specifies otherwise in writing, all payments shall be made to: GATX Capital Corporation NationsBank Box 198592 Atlanta, Georgia 30384-8592 Ref: Pharsight Invoice #___________ 10.06. Termination. This Agreement shall terminate at the end of the Term; provided, however, that the termination of this Agreement shall not affect any of the rights and remedies of Lender hereunder, it being understood and agreed that all such rights and remedies shall continue in full force and effect until payment of all amounts owed to Lender under or in connection with the Operative Documents, whether on account of principal, interest, fees or otherwise. 10.07. Severability. If any provision of any Operative Document is held invalid or unenforceable to any extent or in any application, the remainder of such Operative Document and all other Operative Documents, or the application of such provision to different Persons or circumstances or in different jurisdictions, shall not be affected thereby. 10.08. Survival. All representations, warranties, covenants and agreements of Borrower contained herein or made in writing in connection herewith shall survive the execution and delivery of the Operative Documents, the making of the Loan hereunder, the granting of security and the issuance of the Note. 10.09. Governing Law. THIS AGREEMENT, THE OTHER OPERATIVE DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO AND THERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. ANY ACTION TO ENFORCE THIS AGREEMENT AGAINST BORROWER MAY BE BROUGHT IN CALIFORNIA OR, WITH REGARD TO COLLATERAL, MAY ALSO BE BROUGHT WHEREVER SUCH COLLATERAL IS LOCATED. 10.10. Successors and Assigns. This Agreement and the other Operative Documents shall be binding upon and inure to the benefit of Lender, all future holders of the Note, Borrower and their respective successors and permitted assigns, except that Borrower may not assign or transfer its rights hereunder or any interest herein without the prior written consent of Lender. Lender may sell to any other financial entity (a "Participant") participation interests in Lender's rights under this Agreement and the other Operative Documents; provided that notwithstanding the sale of participations, Lender shall remain solely responsible for the performance of its obligations under this Agreement, Lender shall remain the holder of the Note for all purposes under this Agreement and Borrower shall continue to deal solely and directly with Lender in connection with this Agreement and the other Loan Documents. Lender may disclose the Operative Documents and any other financial or other 19 information relating to Borrower or any Subsidiary to any potential Participant, provided that such Participant agrees to protect the confidentiality of such documents and information using the same measures that it uses to protect its own confidential information. 10.11. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. 10.12. Further Assurances. Borrower will, at its own expense, from time to time do, execute, acknowledge and deliver all further acts, deeds, conveyances, transfers and assurances, and all financing and continuation statements and similar notices, reasonably necessary or proper for the perfection of the security interest being herein provided for in the Collateral, whether now owned or hereafter acquired. 10.13. Power of Attorney in Respect of the Collateral. Borrower does hereby irrevocably appoint Lender (which appointment is coupled with an interest), the true and lawful attorney-in-fact of Borrower with full power of substitution, for it and in its name (a) to perform (but Lender shall not be obligated to and shall incur no liability to Borrower or any third party for failure to perform) any act which Borrower is obligated by this Agreement to perform, (b) to ask, demand, collect, receive, receipt for, sue for, compound and give acquittance for any and all rents, issues, profits, avails, distributions, income, payment draws and other sums in which a security interest is granted under Section 5.01 with full power to settle, adjust or compromise any claim thereunder as fully as if Lender were Borrower itself, (c) to receive payment of and to endorse the name of Borrower to any items of Collateral (including checks, drafts and other orders for the payment of money) that come into Lender's possession or under Lender's control, (d) to make all demands, consents and waivers, or take any other action with respect to, the Collateral, (e) in Lender's discretion, to file any claim or take any other action or institute proceedings, either in its own name or in the name of Borrower or otherwise, which Lender may reasonably deem necessary or appropriate to protect and preserve the right, title and interest of Lender in and to the Collateral, and (f) to otherwise act with respect thereto as though Lender were the outright owner of the Collateral; provided, however, that the power of attorney herein granted shall be exercisable only upon the occurrence and during the continuation of an Event of Default unless in Lender's reasonable opinion and commercially prudent judgment immediate action is necessary to preserve or protect the Collateral. Borrower agrees to reimburse Lender upon demand for all reasonable costs and expenses, including attorneys' fees and expenses, which Lender may incur while acting as Borrower's attorney in fact hereunder, all of which costs and expenses are included within the Obligations. 10.14 Confidentiality. All information (other than periodic reports filed by Borrower with the Securities and Exchange Commission) disclosed by Borrower to Lender in writing or through inspection pursuant to this Agreement shall be considered confidential. Lender agrees to use the same degree of care to safeguard and prevent disclosure of such confidential information as Lender uses with its own confidential information, but in any event no less than a reasonable degree of care. Lender shall not disclose such information to any third party (other than Lender's or Lender's partner's attorneys and auditors subject to the same confidentiality obligation set forth herein) and shall use such information only for purposes of evaluation of its investment in Borrower and the exercise of Lender's rights and the enforcement of its remedies under this Agreement and the other Operative Agreements. The obligations of confidentiality shall not apply to any information that (a) was known to the public prior to disclosure by Borrower under this Agreement, (b) becomes known to the public through no fault of Lender, (c) is disclosed to Lender by a third party' having a legal right to make such disclosure, or (d) is independently developed by Lender. 20 IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. PHARSIGHT CORPORATION By: /s/ Robin A. Kehoe -------------------------------------------- Name: Robin A. Kehoe ------------------------------------------ Title: Chief Financial Officer ------------------------------------------ MMC/GATX PARTNERSHIP NO. I By: Meier Mitchell & Company, as general partner By: /s/ Patricia W. Leicher -------------------------------------------- Name: Patricia W. Leicher ------------------------------------------ Title: Vice President ------------------------------------------ SCHEDULES 1 Funding Certificate 2 Disclosure Schedule 3 Conditions Precedent 4 Schedule of Indebtedness Payments 5 Investment Policy EXHIBITS A Form of Secured Promissory Note B Form of Warrant C Form of Opinion of Counsel D Form of Stock Pledge Agreement SCHEDULE 1 FUNDING CERTIFICATE The undersigned, _________________________, being the duly elected and acting __________________ of PHARSIGHT CORPORATION, a California corporation ("Borrower"), does hereby certify to MMC/GATX Partnership No. I, in connection with that certain Loan and Security Agreement dated as of March 31, 1998, (the "Loan Agreement"; with other capitalized terms used below having the meanings ascribed thereto in the Loan Agreement) that: 1. The representations and warranties made by Borrower in Article III of the Loan Agreement and in the other Operative Documents are true and correct in all material respects as of the date hereof. 2. No event or condition has occurred and is continuing that would constitute a Default or an Event of Default under the Loan Agreement or any other Operative Document. 3. Borrower is in compliance with the covenants and requirements contained in Articles IV, VI and VII of the Loan Agreement. 4. All conditions referred to in Article VIII of the Loan Agreement to the making of the Loan to be made on or about the date hereof been satisfied or waived in writing by Lender. 5. No material adverse change in the general affairs, management, results of operations, condition (financial or otherwise) or prospects of Borrower, whether or not arising from transactions in the ordinary course of business, has occurred. Dated: March 31, 1998 PHARSIGHT CORPORATION By: ________________________________ Name: ______________________________ Title: _____________________________ SCHEDULE 2 DISCLOSURE SCHEDULE SCHEDULE 3 CONDITIONS PRECEDENT PART I: At the time of execution and delivery of this Agreement, there shall also have been duly executed and delivered to Lender: (a) The Warrant; (b) An opinion of counsel for Borrower, dated as of the closing date, substantially in the form attached hereto as Exhibit C; (c) Copies, certified by the Secretary, Assistant Secretary or Chief Financial Officer of Borrower as of the closing date, of Borrower's charter documents and bylaws and of all documents evidencing corporate action taken by Borrower authorizing the execution, delivery and performance of the Operative Documents to which Borrower is a party, in form and substance satisfactory to Lender and its counsel; (d) Good standing certificate from Borrower's state of incorporation and the state in which Borrower's principal place of business is located, together with certificates of the applicable governmental authorities that Borrower is in compliance with the franchise tax laws of each such state, each dated as of a recent date; (e) Evidence of the insurance coverage required by Section 6.01(d) of this Agreement; (f) Copies certified by the secretary or an assistant secretary of Borrower, all necessary consents of shareholders and other third parties with respect to the execution, delivery and performance of this Agreement, the Warrant, the Note and the other Operative Documents; (g) Form UCC-1 Financing Statements, duly executed by Borrower, or other documents, and Borrower shall have taken such actions, if any, as Lender shall reasonably determine are necessary or desirable to perfect and protect its security interest in the Collateral; (h) Notices of Security Interest to Depository Banks in the forms provided by Lender; and (i) All other documents as Lender shall have reasonably requested. PART II On or prior to the Funding Date of the Loan, each of the items set forth in Part I of this Schedule 3 shall have been delivered to Lender and the following conditions shall have been satisfied or waived by Lender: (a) Borrower shall have provided to Lender such documents, instruments and agreements as Lender shall reasonably request to evidence the perfection and priority of the security interests granted to Lender pursuant to Article V; (b) No Event of Default or Default shall have occurred and be continuing; (c) Borrower shall have duly executed and delivered to Lender the Note; (d) In Lender's sole discretion, there shall not have occurred any material adverse change in the general affairs, management, results of operations, condition (financial or otherwise) or prospects of Borrower, whether or not arising from transactions in the ordinary course of business, and there shall not have occurred since the date first written on the cover page of this Agreement any material adverse deviation by Borrower from the business plan of Borrower presented to and not disapproved by Lender; (e) The representations and warranties contained in this Agreement and the other Operative Documents to which Borrower is a party shall be true and correct in all material respects as if made on such Funding Date; (f) Lender shall have received an officer's certificate attesting that the closing of the acquisition of Scientific Consulting, Incorporated has occurred. (g) Each of the Operative Documents remains in full force and effect; and (h) The Funding Date of the Loan shall not be later than the Commitment Termination Date. SCHEDULE 4 INDEBTEDNESS PAYMENTS Under a Promissory Note Dated December 17, 199_ executed in favor of Dan Weiner an amount equal to $246,250 the first year, and $265,940 the following year EXHIBIT A SECURED PROMISSORY NOTE $1,000,000 Dated: March 31, 1998 FOR VALUE RECEIVED, the undersigned, PHARSIGHT CORPORATION ("Borrower"), a California corporation, HEREBY PROMISES TO PAY to the order of MMC/GATX PARTNERSHIP NO. 1, a California general partnership ("Lender") the principal amount of One Million ($1,000,000) or such lesser amount as shall equal the outstanding principal balance of the Loan made by Lender to Borrower pursuant to the Loan and Security Agreement referred to below (the "Loan Agreement"), and to pay all other amounts due with respect to the Loan on the dates and in the amounts set forth in the Loan Agreement. Interest on the principal amount of this Note from the date of this Note shall accrue at the Loan Rate or, if applicable, the Default Rate. The Loan Rate for this Note is 7.68% per annum based on a year of twelve 30 day months. On each Payment Date, commencing on April 1, 1998, and continuing for thirty-five (35) Payment Dates thereafter, Borrower shall make a payment in an amount in the amount of $30,990.61 which is sufficient to fully amortize the principal and interest of the Loan in thirty-six (36) equal payments. The payment due on April 1, 1998, shall also include an additional interest payment for any days during the month of March 1998 that the Loan is outstanding. Borrower shall pay, in addition to the principal and accrued interest and all other amounts due with respect to the Loan, an additional payment or payments in the aggregate amount of $75,000 which shall be payable (i) in full, on the last Payment Date if no part of the Loan is prepaid or on the date of prepayment if the Loan is prepaid in full, (ii) in part, on the date of any partial prepayment in an amount equal to 7.5% of all principal amounts repaid (including the amount of the prepayment) since the date of the Loan or the last prepayment, as applicable, or (iii) in part, on the last Payment Date if the Loan has been prepaid in part, in an amount equal to the difference between $75,000 and the aggregate amount paid pursuant to the preceding clause (ii). Payments of principal and interest on the Loan may not be prepaid prior to the first anniversary of the date hereof and shall be prepaid only in a minimum amount of 50% of the then outstanding principal balance of the Loan, but in no event less than $250,000; provided, however, that if Borrower requests that Lender consent to an acquisition which is otherwise prohibited under Section 7.01(f) of the Loan Agreement and Lender does not give its consent thereto, Borrower may prepay the Loan in full within thirty (30) days of such refusal to give consent. Principal, interest and all other amounts due with respect to the Loan, are payable in lawful money of the United States of America to Lender as follows: GATX Capital Corporation, P.O. Box 71316, Chicago, Illinois 60694, in immediately available funds. The Loan made by Lender to Borrower and the interest rate applicable thereto, and all payments made with respect thereto, shall be recorded by Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Note. This Note is the Note referred to in, and is entitled to the benefits of, the Loan and Security Agreement, dated as of March 31, 1998, between Borrower and Lender. The Loan Agreement, among other things, (a) provides for the making of a secured Loan by Lender to Borrower in the principal amount first above mentioned, and (b) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events. This Note and the obligation of Borrower to repay the unpaid principal amount of the Loan, interest on the Loan and all other amounts due Lender under the Loan Agreement is secured under the Loan Agreement. Presentment for payment, demand, notice of protest and all other demands and notices of any kind in connection with the execution, delivery, performance and enforcement of this Note are hereby waived. Borrower shall pay all reasonable fees and expenses, including, without limitation, reasonable attorneys' fees and costs, incurred by Lender in the enforcement or attempt to enforce any of Borrower's obligations hereunder not performed when due. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of California. A-1 IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed by one of its officers thereunto duly authorized on the date hereof. PHARSIGHT CORPORATION By: /s/ Robin A. Kehoe -------------------------------------------- Name: Robin A. Kehoe ------------------------------------------ Title: CFO ----------------------------------------- A-2 LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL Principal Scheduled Date Amount Interest Rate Payment Amount Notation By ---- --------- ------------- -------------- ----------- A-3 EXHIBIT B WARRANT EXHIBIT C FORM OF OPINION OF COUNSEL March 31, 1998 MMC/GATX Partnership No. I c/o GATX Capital Corporation, Agent Four Embarcadero Center Suite 2200 San Francisco, California 94111 Gentlemen: We have acted as counsel for PHARSIGHT CORPORATION (the "Borrower") in connection with (i) the execution of the Loan and Security Agreement of even date herewith (the "Loan") between Borrower and MMC/GATX Partnership No. I ("Lender"), (ii) the issuance of a warrant to purchase shares of Borrower's Series C Preferred Stock (the "Warrant") and (iii) the transactions contemplated thereby. This opinion is being rendered to you pursuant to Section 8.01 of the Loan Agreement. Capitalized terms not otherwise defined in this opinion have the meaning given them in the Loan Agreement. In connection with this opinion and our representation, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following: (i) The Loan Agreement; (ii) The Warrant and exhibits thereto dated as of March 31, 1998, issued by Borrower to Lender; (iii) The Note dated as of March 31, 1998; (iv) The Restated [Certificate] [Articles] of Incorporation and the Bylaws of Borrower, each as in effect on the date hereof; (v) The certificate of an officer of Borrower as to certain factual matters ("Officer Certificate"); (vi) Certificates issued by the Secretary of State of the State of _________________________ dated _______________________, 199_____, [and the Secretary of State of the State of ______________________, dated _________________________, 199_____,] certifying the good standing of Borrower; (vi) Such other documents, records, and certificates as we have deemed necessary or appropriate as a basis for the opinions hereafter expressed. The Loan Agreement, the Note and the Warrant are hereinafter referred to as the "Transaction Documents." In such examinations we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to originals of all documents submitted to us as certified, facsimile, telecopied or photostatic copies thereof. As to certain matters of fact material to our opinion, we have relied upon the Officer Certificate and upon your representations in the Transaction Documents. As used in this opinion, the expression "to the best of our knowledge," means the actual present knowledge or belief of those attorneys in our firm who have or who are currently representing Borrower. We have not undertaken any independent investigation to determine the existence or nonexistence of other facts, and no inference as to our knowledge of the existence or nonexistence of other facts should be drawn from the fact of this firm's representation of Borrower in connection with the Transaction Documents. Based upon and subject to the foregoing and subject to the qualifications contained herein, we are of the opinion that: (a) Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of California [and is duly qualified to do business and in good standing in the State of ____________]. (b) Borrower has the requisite corporate power and authority to execute, deliver and perform the Transaction Documents and to issue the Warrant. All action on the part of Borrower, its directors and its shareholders necessary for the authorization, execution, delivery and performance of the Transaction Documents, has been taken. The Transaction Documents have been duly executed and delivered by an authorized officer of Borrower. (c) The execution, delivery and performance of the Transaction Documents do not conflict with or violate any provision of Borrower's Restated [Certificate] [Articles] of Incorporation or Bylaws or of applicable law and, to the best of our knowledge, do not conflict with or constitute a default under any provision of any judgment, writ, decree, order or material agreement, indenture, or instrument to which Borrower is a party or by which it is bound. (d) The Transaction Documents constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms. To our knowledge, no filing need be made with any governmental authority with respect to the Transaction Documents in connection with an exemption from state usury laws or in connection with any other matter. (e) The Series C Preferred Stock issuable upon exercise of the Warrant have been duly authorized and reserved for issuance upon such exercise, and when issued in accordance with the terms of the Warrant, will be duly authorized, validly issued, fully paid and non-assessable. (f) The shares of Common Stock issuable upon conversion of the Series C Preferred Stock into which the Warrant is convertible, have been duly authorized and reserved and for issuance, when so issued in accordance with the terms of Borrower's Restated [Certificate] [Articles] of Incorporation, will be validly issued, fully paid and non-assessable. The opinions set forth above are subject to the following additional qualifications, assumptions, limitations and exceptions: (A) The effect of bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar laws relating to or affecting the rights and remedies of creditors generally. (B) Limitations imposed by general equitable principles upon the specific enforceability of any of the provisions of the Transaction Documents and upon the availability of injunctive relief or other equitable remedies. (C) We express no opinion as to the enforceability of any choice of law provision in the documents. (D) We express no opinion as to the compliance or noncompliance with applicable antifraud statutes under the rules and regulations of state and federal securities laws concerning the issuance of the Warrant. (E) We express no opinion herein concerning any law other than the law of the State of California, [the general corporate law of the State of Delaware] and the federal laws of the United States of America. This opinion is furnished to you solely for your benefit and may not be relied upon by any other person (other than assignees of any of your rights) without our prior written consent, which consent shall not be unreasonably withheld or delayed. Very truly yours, _______________________________ EXHIBIT D FORM OF STOCK PLEDGE AGREEMENT EX-10.7 12 EXHIBIT 10.7 Exhibit 10.7 LOAN AND SECURITY AGREEMENT Agreement No. _______ Dated as of June 8, 1998 between MMC/GATX PARTNERSHIP NO. 1 Four Embarcadero Center Suite 2200 San Francisco, CA 94111 as Lender and PHARSIGHT CORPORATION a California corporation 299 California Avenue, Suite 300 Palo Alto, CA 94306 as Borrower CREDIT AMOUNT: $2,000,000 Treasury Note Maturity: 30 months Loan Margin: 800 basis points Commitment Termination Date: June 30, 1998 The defined terms and information set forth on this cover page are a part of the Loan and Security Agreement, dated as of the date first written above (this "Agreement"), entered into by and between MMC/GATX PARTNERSHIP NO. I ("Lender") and the borrower ("Borrower") set forth above. The terms and conditions of this Agreement agreed to between Lender and Borrower are as follows: ARTICLE I INTERPRETATION 1.01. Certain Definitions. Unless otherwise indicated in this Agreement or any other Operative Document, the following terms, when used in this Agreement or any other Operative Document, shall have the following respective meanings: "Affiliate" means (i) any director, officer or employee of such Person, (ii) any Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person, and (iii) any Person beneficially owning or holding 10% or more of any class of voting securities of such Person or any corporation of which such Person beneficially owns or holds, in the aggregate, 10% or more of any class of voting securities. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. The term "Affiliate," when used herein without reference to any Person, shall mean an Affiliate of Borrower. "Borrower's Home State" shall mean the state in which Borrower's principal place of business is located. "Business Day" shall mean any day other than a Saturday, Sunday or public holiday under the laws of California, Illinois or Borrower's Home State or other day on which banking institutions are authorized or obligated to close in California, Illinois or Borrower's Home State. "Claim" has the meaning given to that term in Section 10.03. "Collateral" has the meaning given to that term in Section 5.01. "Commitment Fee" has the meaning given to that term in Section 2.04. "Commitment Termination Date" shall mean the date specified on the cover page of this Agreement. "Credit Amount" shall mean the maximum amount that Lender is committed to lend (if the conditions specified in Schedule 3 are satisfied), which amount is set forth following such term on the cover page of this Agreement. "Current Assets" shall mean the aggregate amount of all of the consolidated assets of Borrower and its Subsidiaries that would, in accordance with GAAP, be classified on a balance sheet as current assets. "Current Liabilities" shall mean the aggregate amount of all of the consolidated liabilities of Borrower and its Subsidiaries that would, in accordance with GAAP, be classified on a balance sheet as current liabilities. "Default" shall mean any event which with the passing of time or the giving of notice or both would become an Event of Default hereunder. "Default Rate" shall mean the per annum rate of interest equal to the higher of (i) 15% or (ii) the Prime Rate plus 4%, but such rate shall in no event be more than the highest rate permitted by applicable law. "Disclosure Schedule" has the meaning set forth in the definition of the term "Permitted Liens." "Environmental Law" shall mean the Resource Conservation and Recovery Act of 1987, the Comprehensive Environmental Response, Compensation and Liability Act, and any other federal, state or local 1 statute, law, ordinance, code, rule, regulation, order or decree (in each case having the force of law) regulating or imposing liability or standards of conduct concerning any Hazardous Material, as now or at any time hereafter in effect. "Equity Securities" of any Person shall mean (a) all common stock, preferred stock, participations, shares, partnership interests or other equity interests in and of such Person (regardless of how designated and whether or not voting or non-voting) and (b) all warrants, options and other rights to acquire any of the foregoing. "Event of Default" has the meaning given to that term in Section 9.01. "Existing Loan Agreement" shall mean the Loan and Security Agreement, dated as of March 31, 1998, between Borrower and Lender. "Funding Date" shall mean the date on which the Loan is made to or on account of Borrower under this Agreement. "GAAP" shall mean generally accepted accounting principles and practices as in effect in the United States of America from time to time, consistently applied. "Hazardous Material" means any hazardous, dangerous or toxic constituent material, pollutant, waste or other substance, whether solid, liquid or gaseous, which is regulated by any federal, state or local governmental authority. "Indebtedness" shall mean, with respect to Borrower or any Subsidiary, the aggregate amount of, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade payables aged less than 180 days), (d) all capital lease obligations of such Person, (e) all obligations or liabilities of others secured by a lien on any asset of such Person, whether or not such obligation or liability is assumed, (f) all obligations or liabilities of others guaranteed by such Person; and (g) any other obligations or liabilities which are required by GAAP to be shown as debt on the balance sheet of such Person. Unless otherwise indicated, the term "Indebtedness" shall include all Indebtedness of Borrower and the Subsidiaries. "Intellectual Property" shall mean all of Borrower's right, title and interest in and to patents, patent rights (and applications therefor), trademarks and service marks (and applications and registrations therefor), inventions, copyrights, mask works (and applications and registrations therefor), trade names, trade styles, software and computer programs, trade secrets, methods, processes, know how, drawings, specifications, descriptions, and all memoranda, notes, and records with respect to any research and development, all whether now owned or subsequently acquired or developed by Borrower and whether in tangible or intangible form or contained on magnetic media readable by machine together with all such magnetic media. "Investments"of any Person shall mean any loan or advance of funds by such Person to any other Person (other than advances to employees of such Person for moving and travel expense, drawing accounts and similar expenditures in the ordinary course of business), any purchase or other acquisition of any Equity Securities or Indebtedness of any other Person, any capital contribution by such Person to or any other investment by such Person in any other Person (including, without limitation, any Indebtedness incurred by such Person of the type described in clauses (a) and (b) of the definition of "Indebtedness" on behalf of any other Person); provided, however, that Investments shall not include accounts receivable or other indebtedness owed by customers of such 2 Person which are current assets and arose from sales or non-exclusive licensing in the ordinary course of such Person's business or the endorsement of negotiable instruments for deposit or collection in the ordinary course of such Person's business. "Lien" shall mean any pledge, bailment, lease, mortgage, hypothecation, conditional sales and title retention agreements, charge, claim, encumbrance or other lien in favor of any Person. "Loan" shall mean the loan advanced by Lender to Borrower under this Agreement. "Loan Margin" shall mean the number of basis points set forth following such term on the cover page of this Agreement. "Loan Rate" shall mean, with respect to the Loan, the per annum rate of interest equal to the sum of (a) the U.S. Treasury note rate of a term equal to the Treasury Note Maturity as quoted in The Wall Street Journal on the date the applicable Note is prepared, plus (b) the Loan Margin. "Note"shall mean the secured promissory note of Borrower substantially in the form of Exhibit A. "Obligations" has the meaning given to that term in Section 5.01. "Operative Documents" shall mean this Agreement, the Note, the Warrant, and all other documents, instruments and agreements executed and delivered in connection herewith or therewith or in respect of the closing of the transactions contemplated hereby or thereby. "Payment Date" means the tenth (10th) day of each calendar month. "Permitted Indebtedness" shall mean and include: 1. Indebtedness of Borrower to Lender; 2. Indebtedness of Borrower secured by Liens permitted under clause (e) of the definition of Permitted Liens; 3. Indebtedness existing on the date hereof and set forth on the Disclosure Schedule; 4. Subordinated Indebtedness; 5. Prepaid royalties and deferred revenue in connection with prepaid support services; 6. Indebtedness to a seller incurred in connection with a transaction permitted under Section 7.01(f) so long as such Indebtedness is unsecured or secured only by the property acquired in such transaction; 7. Other Indebtedness of Borrower not exceeding Two Hundred Fifty Thousand Dollars ($250,000) at any time; and 8. Extensions, renewals, refundings, refinancings, modifications, amendments and restatements of any of the items of Permitted Indebtedness described in clauses (a) through (g) above, provided that the 3 principal amount thereof is not increased, any Lien is limited to the property originally covered and the terms thereof are not modified to impose more burdensome terms upon Borrower. "Permitted Investments" shall mean and include: 1. Deposits with commercial banks organized under the laws of the United States or a state thereof to the extent such deposits are fully insured by the Federal Deposit Insurance Corporation; 2. Investments in marketable obligations issued or fully guaranteed by the United States and maturing not more than one (1) year from the date of issuance; and 3. Investments in open market commercial paper rated at least "A-1" or "P-1" or higher by a national credit rating agency and maturing not more than one (1) year from the creation thereof. 4. Investments pursuant to or arising under currency agreements or interest rate agreements entered into in the ordinary course of business; 5. Investments consisting of deposit accounts of Borrower in which Lender has a perfected security interest; 6. Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; 7. Investments consisting of (i) travel advances and other employee loans and advances in the ordinary course of business, (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower, and (iii) other loans to officers and employees (including relocation loans) approved by the Board of directors and not exceeding $250,000 at any time outstanding; 8. Investments permitted under Borrower's current investment policy which is attached hereto as Schedule 5 or any amendment thereto, which in each case has been approved by Lender; 9. Investments in connection with transactions permitted under Section 7.01(f); and 10. Other Investments aggregating not in excess of Two Hundred Fifty Thousand Dollars ($250,000) at any time. "Permitted Liens" shall mean (a) the Lien created by this Agreement and the Existing Loan Agreement, (b) Liens for fees, taxes, levies, imposts, duties or other governmental charges of any kind which are not yet delinquent or which are being contested in good faith by appropriate proceedings which suspend the collection thereof (provided, however, that such proceedings do not involve any substantial danger of the sale, forfeiture or loss of any item of equipment and that Borrower has adequately bonded such Lien or reserves sufficient to discharge such Lien have been provided on the books of Borrower), (c) Liens existing as of the date of this Agreement identified on the disclosure schedule attached hereto as Schedule 2 ("Disclosure Schedule"), (d) Liens to secure payment of worker's compensation, employment insurance, old age pensions or other social security obligations of Borrower in the ordinary course of business of Borrower, (e) Liens upon any equipment or other personal property acquired by Borrower after the date hereof to secure (i) the purchase price of such equipment or other personal property or (ii) lease obligations or indebtedness incurred solely for the purpose of financing the 4 acquisition of such equipment or other personal property; provided that (A) such Liens are confined solely to the equipment or other personal property so acquired and the amount secured does not exceed the acquisition price thereof, and (B) no such Lien shall be created, incurred, assumed or suffered to exist in favor of Borrower's officers, directors or shareholders holding five percent (5%) or more of Borrower's Equity Securities, (f) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings, (g) non-exclusive licenses of Intellectual Property entered into in the ordinary course of business and licenses, Liens or similar arrangements entered into in connection with joint ventures or corporate collaborations, (h) non-exclusive licenses arising out of a merger or acquisition transaction permitted hereunder; (i) other Liens securing obligations which do not constitute Indebtedness, which obligations do not exceed $50,000 in the aggregate; and (j) Liens to secure Indebtedness. "Person" shall mean and include an individual, a partnership, a corporation, a business trust, a joint stock company, a limited liability company, an unincorporated association or other entity and any domestic or foreign national, state or local government, any political subdivision thereof, and any department, agency, authority or bureau of any of the foregoing. "Prime Rate" shall mean the interest rate per annum publicly announced from time to time by Bank of America NT & SA (or its successor) as its reference rate, but such rate shall in no event be more than the highest interest rate permitted by applicable law. "Qualified Financing" shall mean the closing of and receipt of net proceeds of at least $5,000,000 from the sale of Equity Securities of Borrower (in addition to the conversion of any Indebtedness to Equity Securities in connection with such financing). "Subordinated Indebtedness" shall mean Indebtedness subordinated to the Obligations on terms and conditions acceptable to Lender in its sole discretion. "Subsidiary" shall mean any corporation of which a majority of the outstanding capital stock entitled to vote for the election of directors (otherwise than as the result of a default) is owned by Borrower directly or indirectly through Subsidiaries. "Term" shall mean the period from and after the date hereof until the payment or satisfaction in full of all Obligations under this Agreement and the other Operative Documents. "Treasury Note Maturity" shall mean the period of months set forth following such term on the cover page of this Agreement. "Warrant" shall mean a warrant to purchase securities of Borrower substantially in the form of Exhibit B. 1.02. Headings. Headings in this Agreement and each of the other Operative Documents are for convenience of reference only and are not part of the substance hereof or thereof. 1.03. Plural Terms. All terms defined in this Agreement or any other Operative Document in the singular form shall have comparable meanings when used in the plural form and vice versa. 1.04. Construction. This Agreement is the result of negotiations among, and has been reviewed by, Borrower and Lender and their respective counsel. Accordingly, this Agreement shall be deemed to be the product of all parties hereto, and no ambiguity shall be construed in favor of or against Borrower or Lender. 5 1.05. Entire Agreement. This Agreement, together with the terms set forth in each of the other Operative Documents, taken together, constitute and, contain the entire agreement of Borrower and Lender and, with regard to their respective subject matters, supersede any and all prior agreements, term sheets, negotiations, correspondence, understandings and communications among the parties, whether written or oral, with respect to their respective subject matters. 1.06. Other Interpretive Provisions. References in this Agreement to "Articles," "Sections," "Exhibits," "Schedules" and "Annexes" are to recitals, articles, sections, exhibits, schedules and annexes herein and hereto unless otherwise indicated. References in this Agreement and each of the other Operative Documents to any document, instrument or agreement shall include (a) all exhibits, schedules, annexes and other attachments thereto, (b) all documents, instruments or agreements issued or executed in replacement thereof, and (c) such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement or any other Operative Document shall refer to this Agreement or such other Operative Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Operative Document, as the case may be. The words "include" and "including" and words of similar import when used in this Agreement or any other Operative Document shall not be construed to be limiting or exclusive. Unless otherwise indicated in this Agreement or any other Operative Document, all accounting terms used in this Agreement or any other Operative Document shall be construed, and all accounting and financial computations hereunder or thereunder shall be computed, in accordance with generally accepted accounting principles as in effect in the United States of America from time to time. ARTICLE II THE CREDIT 2.01. Credit Facility. (a) Commitment. On the terms and subject to the conditions hereof and relying upon the representations and warranties herein set forth as and when made or deemed to be made, Lender agrees to make a Loan in the principal amount of Two Million Dollars ($2,000,000). (b) Loan Interest Rate. Borrower shall pay interest on the principal amount of the Loan from the date of the Loan until the Loan is paid in full, at a per annum rate of interest equal to the Loan Rate determined in accordance with the definition of Loan Rate. The Loan Rate applicable to the Loan shall not be subject to change in the absence of manifest error. All computations of interest on the Loan shall be based on a year of 360 days and twelve 30 day months. If Borrower pays interest on any Loan which is determined to be in excess of the then legal maximum rate, then that portion of each interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of the Loan. (c) Payments of Principal and Interest. On each of the first six Payment Dates, commencing on July 10, 1998, Borrower shall make a payment of interest only on the outstanding principal balance hereof. Commencing on January 10, 1999, and continuing for twenty-three (23) Payment Dates thereafter, Borrower shall make twenty-three (23) payments of $83,333.33 plus accrued and unpaid interest on the outstanding balance on each such Payment Date and a final payment of $83,333.41 plus accrued and unpaid interest. Payments of principal and interest on the Loan may not be prepaid prior to December 10, 1999, and shall be prepaid only in a minimum amount of 50% of the then outstanding principal balance of the Loan, but in no event less than $250,000; provided, however, that if Borrower requests that Lender consent to an acquisition which is otherwise prohibited under Section 7.01(f) and Lender does not give its consent thereto, Borrower may prepay the Loan in full within thirty (30) days of such refusal to give consent. 6 2.02. Use of Proceeds; the Loan and the Note; Disbursement. (a) Use of Proceeds. The proceeds of the Loan shall be used for a portion of the purchase price of certain assets from MGA Software. (b) The Loan and the Note. The obligation of Borrower to repay the unpaid principal amount of and interest on the Loan shall be evidenced by the Note. Lender may, and is hereby authorized by Borrower to, endorse on a grid annexed to the Note appropriate notations regarding the Loan; provided, however, that the failure to make, or an error in making, any such notation shall not limit or otherwise affect the obligations of Borrower hereunder or under the Note. (c) Disbursement. Subject to the satisfaction of the conditions set forth in this Agreement, Lender shall disburse such Loan by wire transfer to Borrower unless otherwise directed in writing by Borrower. (d) Termination of Commitment to Lend. Notwithstanding anything to the contrary in the Operative Documents, Lender's obligation to lend the undisbursed portion of the Credit Amount to Borrower hereunder shall terminate on the earlier of (i) upon notice to Borrower after the occurrence of any Event of Default hereunder, and (ii) the Commitment Termination Date. 2.03. Other Payment Terms. (a) Place and Manner. Borrower shall make all payments due to Lender in lawful money of the United States, in immediately available funds, at the address for payments and in the manner specified in Section 10.05(b). (b) Date. Whenever any payment due hereunder shall fall due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest or fees, as the case may be. (c) Default Rate. If either (i) any amounts required to be paid by Borrower under this Agreement or the other Operative Documents (including principal or interest payable on the Loan, any fees or other amounts required to be paid hereunder) remain unpaid after such amounts are due, or (ii) an Event of Default has occurred and is continuing, Borrower shall pay interest on the outstanding principal balance hereunder from the date due or from the date of the Event of Default, as applicable, until such past due amounts are paid in full or until all Events of Defaults are cured, as applicable, at a per annum rate equal to the Default Rate, such rate to change from time to time as the Prime Rate shall change. All computations of such interest at the Default Rate shall be based on a year of 360 days and twelve 30 day months. 2.04. Commitment Fee. Lender has received a commitment fee from Borrower in the amount of $2,500 (the "Commitment Fee"). Any portion of the Commitment Fee not utilized to pay Lender's expenses in connection with the negotiation, documentation and funding of the Loan will be applied by Lender to amounts due under the Note in the order in which such amounts are due. If the Loan is not made, any remaining balance of the Commitment Fee shall be retained by Lender. ARTICLE III REPRESENTATIONS AND WARRANTIES 3.01. Representations and Warranties. Except as set forth in the Disclosure Schedule, Borrower makes the following representations and warranties to Lender as of the date hereof and again on the Funding Date: (a) Organization and Qualification. Borrower is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and is duly qualified to do business in Borrower's Home State. 7 (b) Authority. Borrower has all necessary corporate power, authority and legal right and has obtained all approvals and consents and has given all notices necessary to execute and deliver this Agreement and the other Operative Documents and to perform the terms hereof and thereof. Borrower has all requisite corporate power and authority to own and operate its properties and to carry on its businesses as now conducted. (c) Conflict with Other Instruments, etc. Neither the execution and delivery of any Operative Document to which Borrower is a party nor the consummation of the transactions therein contemplated nor compliance with the terms, conditions and provisions thereof will conflict with or result in a breach of any of the terms, conditions or provisions of the charter or the bylaws of Borrower or, to its knowledge, any law or any regulation, order, writ, injunction or decree of any court or governmental instrumentality or any material agreement or instrument to which Borrower is a party or by which it or any of its properties is bound or to which it or any of its properties is subject, or constitute a default thereunder or result in the creation or imposition of any Lien, other than Permitted Liens. (d) Title to Properties. Borrower has good and marketable title to the Collateral, free and clear of all Liens, other than Permitted Liens. Borrower has title and ownership of, or is licensed under, all Intellectual Property, with no known infringement of the rights of others. Neither the Chief Executive Officer nor Chief Financial Officer of Borrower is aware of receipt by Borrower of any communications alleging that Borrower has violated, or by conducting its business as proposed, would violate any proprietary rights of any other Person. Neither the Chief Executive Officer nor Chief Financial Officer of Borrower is aware of any infringement or violation by it of the intellectual property rights of any third party and has no knowledge of any violation or infringement by a third party of any of its Intellectual Property. The Collateral constitutes substantially all of the assets and property of Borrower. Borrower does not own any right, title or interest in or to any real property or motor vehicles, other than motor vehicles leased for executives as part of a benefit arrangement and leaseholds in real property. The Notice of Security Interest in Trademarks executed in connection with this Agreement lists all trademarks and service marks of Borrower registered or applied for with the United States Patent and Trademark Office ("PTO"). (e) Authorization, Governmental Approvals, etc. The execution and delivery by Borrower of each Operative Document, the granting of the security interest in the Collateral, the issuance of the Warrant, the issuance of the securities into which the Warrant is exercisable, the issuance of any securities into which the securities issuable upon exercise of the Warrant are convertible, and the performance of the obligations herein and therein contemplated have each been duly authorized by all necessary action on the part of Borrower. No authorization, consent, approval, license or exemption of, and no registration, qualification, designation, declaration or filing with, or notice to, any Person is, was or will be necessary to (i) the valid execution and delivery of any Operative Document to which Borrower is a party, (ii) the performance of Borrower's obligations under any Operative Document, or (iii) the granting of the security interest in the Collateral, except for filings in connection with the perfection of the security interest in any of the Collateral or the issuance of the Warrant. The Operative Documents have been or will be duly executed and delivered and constitute or will constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws of general application relating to or affecting the enforcement of creditors' rights or by general principles of equity. (f) Litigation. There are no actions, suits, proceedings or investigations pending or, to the knowledge of Borrower, threatened against or affecting Borrower, or the business or any property or asset owned by it, before any court or governmental department, agency or instrumentality which, if adversely determined, is reasonably likely to have a material adverse effect on the financial condition, business or operations of Borrower. (g) Security Interest. Assuming the proper filing of one or more financing statement(s) identifying the Collateral with the proper state and/or local authorities, the United States Copyright Office (the "Copyright Office") and the PTO, the security interests in the Collateral granted to Lender pursuant to this Agreement (i) constitute and will continue to constitute first priority security interests (except to the extent any other Permitted Lien existing on the date of this Agreement may create any priority to Lender's Lien under this Agreement) to the extent a security interest in such Collateral can be perfected by the filing of a UCC-1 financing statement and by appropriate filings with the Copyright Office and the Patent and Trademark Office and (ii) are and will continue to be superior 8 and prior to the rights in the Collateral of all other creditors of Borrower (except to the extent of such Permitted Liens). (h) Executive Offices. The principal place of business and chief executive office of Borrower, and the office where Borrower will keep all records and files regarding the Collateral, is set forth on the cover page of this Agreement. (i) Solvency, Etc. Borrower is Solvent (as defined below) and, after the execution and delivery of the Operative Documents and the consummation of the transactions contemplated thereby, Borrower will be Solvent. "Solvent" shall mean, with respect to any Person on any date, that on such date (a) the fair value of the property of such Person is greater than the fair value of the liabilities (including, without limitation, contingent liabilities) of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in a business or a transaction, for which such Person's property would constitute an unreasonably small capital. (j) Catastrophic Events; Labor Disputes. None of Borrower or its properties is or has been affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or other casualty that could reasonably be expected to have a material adverse effect on the financial condition, business or operations of Borrower. There are no disputes presently subject to grievance procedure, arbitration or litigation under any of the collective bargaining agreements, employment contracts or employee welfare or incentive plans to which Borrower is a party, and there are no strikes, lockouts, work stoppages or slowdowns, or, to the best knowledge of Borrower, jurisdictional disputes or organizing activity occurring or threatened which could reasonably be expected to have a material adverse effect on the financial condition, business or operations of Borrower. (k) No Material Adverse Effect. No event has occurred and no condition exists which is reasonably likely to have a material adverse effect on the financial condition, business or operations of Borrower since December 31, 1997. (l) Accuracy of Information Furnished. None of the Operative Documents and none of the other certificates, statements or information furnished to Lender in writing by an officer of Borrower in connection with the Operative Documents or the transactions contemplated thereby contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading in any material respect. The Lender recognizes that all financial projections furnished to the Lender by or on behalf of Borrower in connection with the Operative Documents or the transactions contemplated thereby are not to be viewed as facts and that actual results during the period or periods covered by such projections may differ from the projected or forecasted results. (m) Certain Agreements of Officers, Employees and Consultants. (i) Neither the Chief Executive Officer nor Chief Financial Officer of Borrower is aware that any officer, employee or consultant of Borrower is in violation of any material term of any material employment contract, proprietary information agreement, nondisclosure agreement, noncompetition agreement, or any other material contract or agreement or any material restrictive covenant relating to the right of any such officer, employee or consultant to be employed by Borrower because of the nature of the business conducted or to be 9 conducted by Borrower or relating to the use of trade secrets or proprietary information of others which the Chief Executive Officer and the Chief Financial Officer believe is likely to have a material adverse effect, and neither the Chief Executive Officer nor Chief Financial Officer of Borrower is aware that continued employment of Borrower's officers, employees and consultants would subject Borrower to any material liability for any claim or claims arising out of or in connection with any such material contract, agreement, or covenant. (ii) To the knowledge of the chief executive officer of Borrower and the chief financial officer of Borrower, no officers of Borrower, and no employee or consultant of Borrower whose termination, either individually or in the aggregate, is reasonably likely to have a Material Adverse Effect, has any present intention of terminating his or her employment or consulting relationship with Borrower. ARTICLE IV REPORTING REQUIREMENTS 4.01. Furnishing Reports. Borrower shall furnish to Lender: (a) Financial Statements. So long as Borrower is not subject to the reporting requirements of Section 12 or Section 15 of the Securities and Exchange Act of 1934, as amended, promptly as they are available, unaudited monthly and audited annual financial statements of Borrower and such other financial information as Lender may reasonably request from time to time. From and after such time as Borrower becomes a publicly reporting company, promptly as they are available and in any event: (i) at the time of filing of Borrower's Form 10-K with the Securities and Exchange Commission after the end of each fiscal year of Borrower, the financial statements of Borrower filed with such Form 10-K; and (ii) at the time of filing of Borrower's Form 10-Q with the Securities and Exchange Commission after the end of each of the first three fiscal quarters of Borrower, the financial statements of Borrower filed with such Form 10-Q. (b) Notice of Defaults. As soon as possible, and in any event within five (5) Business Days after the discovery of a Default or Event of Default provide Lender with an Officer's Certificate of Borrower setting forth the facts relating to or giving rise to such Default or Event of Default and the action which Borrower proposes to take with respect thereto. (c) Miscellaneous. Such other information as Lender may reasonably request from time to time. ARTICLE V GRANT OF SECURITY INTEREST GENERAL PROVISIONS CONCERNING SECURITY 5.01. Grant of Security Interest. Borrower, in order to secure the payment of the principal and interest with respect to the Loan made pursuant to this Agreement, all other sums due under and in respect hereof and of the other Operative Documents, including fees, charges, expenses and attorneys' fees and costs and the performance and observance by Borrower of all other terms, conditions, covenants and agreements herein and in the other Operative Documents (all such amounts and obligations being herein sometimes called the "Obligations"), does hereby grant to Lender and its successors and assigns, a security interest in and to the following property (collectively, the "Collateral"): All right, title, interest, claims and demands of Borrower in and to: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all laboratory equipment, computer equipment, office equipment, machinery, fixtures, vehicles (including motor 10 vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's books relating to any of the foregoing; (c) All contract rights and general intangibles, including Intellectual Property, now owned or hereafter acquired, including, without limitation, goodwill, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer disks, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower (subject, in each case, to the contractual rights of third parties to require funds received by Borrower to be expended in a particular manner), whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's books relating to any of the foregoing; (e) All documents, cash, deposit accounts, letters of credit, certificates of deposit, instruments, chattel paper and investment property, including, without limitation, all securities, whether certificated or uncertificated, security entitlements, securities accounts, commodity contracts and commodity accounts, and all financial assets held in any securities account or otherwise, wherever located, now owned or hereafter acquired and Borrower's books relating to the foregoing; and (f) Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof, including, without limitation, insurance, condemnation, requisition or similar payments. 5.02. Duration of Security Interest. Lender's security interest in the Collateral shall continue until the payment in full and the satisfaction of all Obligations, whereupon such security interest shall terminate. Lender, upon payment in full and the satisfaction of the Obligations, shall execute such further documents and take such further actions as may be necessary to effect the release and/or termination contemplated by this Section 5.02, including duly executing and delivering termination statements for filing in all relevant jurisdictions. Upon the occurrence of a Qualified Financing, Lender shall release in writing the security interest in Borrower's Intellectual Property and Section 5.01 shall be amended to read in a manner identical to Section 5.01 of the Existing Credit Agreement. 5.03. Possession of Collateral. Except as set forth in Section 5.04, so long as no Event of Default has occurred and is continuing, Borrower shall remain in full possession, enjoyment and control of the Collateral (except only as may be otherwise required by Lender for perfection of its security interest therein) and to manage, operate and use the same and each part thereof with the rights and franchises appertaining thereto; provided, however, that the possession, enjoyment, control and use of the Collateral shall at all times be subject to the observance and performance of the terms of this Agreement. 11 5.04 Location of Collateral. The Collateral is and shall remain in the possession of Borrower at Borrower's addresses stated on the cover page of this Agreement, 425 Sherman Ave., Suite 210, Palo Alto, CA 94306 and 5625 Dillard Road, Suite 215, Cary, North Carolina 27511. 5.05 Lien Subordination. Lender agrees that the Liens granted to it hereunder shall be subordinate to the Liens of existing and future lenders providing equipment financing and equipment lessors; provided that such Liens are confined solely to the equipment so financed and the proceeds thereof; and provided, further, that the Obligations hereunder shall not be subordinate in right of payment to any obligations to other lenders or equipment lessors and Lender's rights and remedies hereunder shall not in any way (except to the extent resulting from Lien subordination) be subordinate to the rights and remedies of any such lenders or equipment lessors. Lender agrees to execute and deliver such agreements and documents as may be reasonably requested by Borrower from time to time which set forth the lien subordination described in this Section 5.05 and are reasonably acceptable to Lender. Lender shall have no obligation to execute any agreement or document which would impose obligations, restrictions or lien priority on Lender which are less favorable to Lender than those described in this Section 5.05. 5.6 Registration of Copyrights. On or prior to October 15, 1998, Borrower shall register the copyrights of its material software with the Copyright Office and shall give Lender written notice of such registration and the registration numbers of such copyrights. Borrower will subsequently execute and deliver to Lender a notice of such security interest in a form supplied by Lender or which is suitable for filing with the Copyright Office and reasonably satisfactory to Lender. ARTICLE VI AFFIRMATIVE COVENANTS 6.01. Affirmative Covenants. (a) Payment of Taxes, etc. Borrower shall pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a Lien upon any of its properties; provided that there shall be no requirement to pay any such tax, assessment, charge, levy or claim (i) which is being contested in good faith and by appropriate proceedings or which presents no risk of seizure, forfeiture, levy or other event which could jeopardize any Collateral or (ii) for which payment in full is bonded or reserved in Borrower's financial statements. (b) Inspection Rights. Subject to the confidentiality provisions of Section 10.14, Borrower shall, at any reasonable time and from time to time, but no more than twice per year except during the occurrence and continuation of an Event of Default, permit Lender or any of its agents or representatives to inspect the Collateral, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, Borrower and to discuss the affairs, finances and accounts of Borrower with any of its officers or directors relating in each case to Lender's capacity as lender and secured party hereunder and with respect to the Collateral. (c) Maintenance of Equipment and Similar Assets. Borrower shall keep and maintain all items of equipment and other similar types of personal property that form any significant portion or portions of the Collateral in good operating condition and repair and shall make all necessary replacements thereof and renewals thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Borrower shall not permit any such material item of Collateral to become a fixture to real estate or an accession to other personal property, without the prior written consent of Lender. Borrower shall not permit any such material item of Collateral to be operated or maintained in violation of any applicable law, statute, rule or regulation. With respect to items of leased equipment (to the extent Lender has any security interest in any residual Borrower's interest in such equipment under the lease), Borrower shall keep, maintain, repair, replace and operate such leased equipment in accordance with the terms of the applicable lease. 12 (d) Insurance. (i) Borrower shall, obtain and maintain for the Term, at its own expense, (x) "all risk" insurance against loss or damage to the Collateral, (y) commercial general liability insurance (including contractual liability, products liability and completed operations coverages) reasonably satisfactory to Lender, and (z) such other insurance against such other risks of loss and with such terms, as shall in each case be reasonably satisfactory to or reasonably required by Lender (as to carriers, amounts and otherwise). The amount of the "all risk" insurance shall be determined to Lender's reasonable satisfaction as of each anniversary date of this Agreement and the appropriate amount of coverage shall be put in effect on the next succeeding renewal or inception date of such insurance. (ii) The deductible with respect to "all-risk" insurance required by clause (x) above and product liability insurance required by clause (y) above shall not exceed $25,000; otherwise there shall be no deductible with respect to any insurance required to be maintained hereunder. The amount of commercial general liability insurance (other than products liability coverage and completed operations insurance) required by clause (y) above shall be at least $2,000,000 per occurrence. The amount of the products liability and completed operations insurance required by clause (y) above shall be at least $1,000,000 per occurrence. Each "all risk" policy shall: (x) name Lender as loss payee as its interests appear, (y) provide for each insurer's waiver of its right of subrogation against Lender, and (z) provide that such insurance (A) shall not be invalidated by any action of, or breach of warranty by, Borrower of a provision of any of its insurance policies, and (B) shall waive set-off, counterclaim or offset against Lender. Each liability policy shall (w) name Lender as an additional insured in the full amount of Borrower's liability coverage limits (or the coverage limits of any successor to Borrower or such successor's parent which is providing coverage) and (x) provide that such insurance shall have cross-liability and severability of interest endorsements (which shall not increase the aggregate policy limits of Borrower's insurance). All insurance policies shall (y) provide that Borrower's insurance shall be primary without a right of contribution of Lender's insurance, if any, or any obligation on the part of Lender to pay premiums of Borrower, and (z) shall contain a clause requiring the insurer to give Lender at least 30 days' prior written notice of its cancellation (other than cancellation for non-payment for which 10 days' notice shall be sufficient). Borrower shall on or prior to the first Funding Date and prior to each policy renewal, furnish to Lender certificates of insurance or other evidence satisfactory to Lender that such insurance coverage is in effect. ARTICLE VII NEGATIVE AND FINANCIAL COVENANTS 7.01. Negative Covenants. So long as the Obligations remain outstanding, Borrower shall not without the prior written consent of Lender: (a) Name; Location of Chief Executive Office and Collateral. Without thirty (30) days prior written notice to Lender, change its chief executive office or principal place of business or remove or cause to be removed from the location set forth on the cover page hereof or those set forth in Section 5.04 or move any material, tangible Collateral to a location other than that set forth on the cover page hereof or those set forth in Section 5.04. (b) Liens on Collateral. Create, incur, assume or suffer to exist any Lien of any kind upon any Collateral, whether now owned or hereafter acquired, except Permitted Liens. (c) Negative Pledge Regarding Intellectual Property. At any time at which Intellectual Property does not constitute Collateral, create, incur, assume or suffer to exist any Lien of any kind upon any Intellectual Property, whether now owned or hereafter acquired, except Permitted Liens. (d) Dispositions of Collateral or Intellectual Property. Convey, sell, offer to sell, lease, transfer, exchange or otherwise dispose of (collectively, a "Transfer") all or any part of the Collateral or, at any time that Intellectual Property does not constitute Collateral, Intellectual Property to any Person, other than: (i) Transfers of inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements (or exclusive licenses or similar arrangements for geographic regions) for the use of the property of Borrower in the ordinary course of business; (iii) Transfers of worn-out or obsolete equipment; (iv) expenditures of cash in the ordinary 13 course of business; and (v) other Transfers in the ordinary course of business not exceeding $50,000 in the aggregate. It is expressly agreed and understood that the ordinary course of Borrower's business includes entering into agreements and arrangements with third parties for research, development, manufacturing, sale or marketing of products and the licensing of Intellectual Property in connection with such agreements and arrangements. (e) Distributions. (i) Pay any dividends or make any distributions of assets, Equity Securities or other obligations or securities on its Equity Securities; (ii) purchase, redeem, retire, defease or otherwise acquire for value any of its Equity Securities (other than repurchases by cancellation of indebtedness pursuant to the terms of employee stock purchase plans, employee restricted stock agreements or similar arrangements in an aggregate amount not to exceed $250,000); (iii) return any capital to any holder of its Equity Securities as such; (iv) set apart any sum for any such purpose; provided, however, that the foregoing shall not prevent Borrower from (x) paying dividends payable solely in Common Stock; or (y) redeeming or making any payment with respect to the Company's Series C Preferred Stock which is provided for in the Company's Articles of Incorporation on the date hereof. (f) Mergers or Acquisitions. Merge or consolidate with or into any other Person or acquire all or substantially all of the capital stock or assets of another Person or permit any Person to acquire all or substantially all of the capital stock or assets of Borrower; provided that Borrower may acquire certain assets of MGA Software ("MGA"). (g) Transactions With Affiliates. Enter into any contractual obligation with any Affiliate or engage in any other transaction with any Affiliate, except, in each case, upon terms at least as favorable to Borrower as an arms-length transaction with unaffiliated Persons; provided, however, that the Company may enter into transactions having a fair market value not to exceed $50,000 in the aggregate without complying with the terms of this Section 7.01(g). (h) Maintenance of Accounts. Maintain any deposit accounts or accounts holding securities owned by Borrower except (i) accounts located at Silicon Valley Bank and (ii) other accounts with respect to which Borrower has given Lender thirty (30) days prior written notice and taken such actions as Lender may reasonably request to perfect Lender's security interest in such accounts, including without limitation executing notices to the depositary institution of Lender's security interest and obtaining control agreements with respect to securities accounts; provided that Borrower may maintain a securities account with Morgan Stanley & Company for up to forty-five (45) days after the date the Loan is made so long as Borrower is diligently attempting to obtain an agreement from Morgan Stanley & Company which would perfect Lender's security interest in such account. (i) Indebtedness Payments. (i) Prepay, redeem, purchase, defease or otherwise satisfy in any manner prior to the scheduled repayment thereof any Indebtedness for borrowed money (other than amounts due under this Loan Agreement or the Note) or lease obligations, (ii) amend, modify or otherwise change the terms of any Indebtedness for borrowed money (other than the Obligations) or lease obligations so as to accelerate the scheduled repayment thereof or (iii) repay any notes to officers, directors or shareholders (except those described on Schedule 4 or if Lender has consented in advance to the terms of the repayment of such notes). (j) Indebtedness. Create, incur, assume or permit to exist any Indebtedness except Permitted Indebtedness. (k) Investments. Make any Investment except for Permitted Investments. 14 (l) Stock Pledges. Fail to execute and deliver to Lender a Stock Pledge Agreement in the form of Exhibit D hereto (and comply with the perfection requirements contained therein) with respect to the Equity Securities of any Person acquired by Lender if such Person is not merged with and into Borrower within thirty (30) days after the date of closing of the acquisition. ARTICLE VIII CONDITIONS PRECEDENT 8.01. Closing. At the time of execution and delivery of this Agreement, Borrower shall have duly executed and/or delivered to Lender the items set forth in Part I of Schedule 3. 8.02. Other Conditions. The obligation of Lender to make the Loan shall be subject to the execution and/or delivery to Lender of each of the items set forth in Part I of Schedule 3 and the satisfaction of by Borrower of each condition set forth in Part II of Schedule 3. 8.03. Covenant to Deliver. Borrower agrees (not as a condition but as a covenant) to deliver to Lender each item required to be delivered to Lender as a condition to the Loan, if the Loan is advanced. Borrower expressly agrees that the extension of the Loan prior to the receipt by Lender of any such item shall not constitute a waiver by Lender of Borrower's obligation to deliver such item (other than under clause (j) of Part I of Schedule 3 unless the Lender has specifically requested an item under this clause). ARTICLE IX DEFAULT AND REMEDIES 9.01. Events of Default. An "Event of Default" shall mean the occurrence of one or more of the following described events: (a) Borrower shall (i) default in the payment of principal of or interest on the Loan for five (5) days after the same is due, or (ii) default in the payment of any expense or other amount payable hereunder or thereunder for five (5) days after receipt of written notice from Lender that the same is due; or (b) Borrower shall breach any provision of Section 7.01 or Section 6.01(d); or (c) Borrower shall default in the performance of any covenant, agreement or obligation (other than a covenant, agreement or obligation referred to in, Section 9.01(a) or Section 9.01(b)) contained in any Operative Document (other than the Warrant) and Borrower shall fail to cure within thirty (30) days after receipt of written notice from Lender any default in the performance of any such covenant, agreement or obligation contained therein; or (d) Borrower shall have breached the terms of the Warrant; or (e) Any representation or warranty made herein or on the Funding Date by Borrower in any Operative Document, or any certificate or financial statement furnished pursuant to the provisions of any Operative Document, shall prove to have been false or misleading in any material respect as of the time made or furnished; or (f) Any Operative Document shall in any material respect cease to be, or Borrower shall assert that any Operative Document is not, a legal, valid and binding obligation of Borrower enforceable in accordance with its terms; or 15 (g) A default shall exist under any agreement with any third party or parties which consists of the failure to pay any Indebtedness at maturity or which results in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness of Borrower in an amount in excess of Two Hundred Fifty Thousand Dollars ($250,000); or (h) A proceeding shall have been instituted in a court of competent jurisdiction seeking a decree or order for relief in respect of Borrower in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian, trustee (or similar official) of Borrower or for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of forty-five (45) consecutive days or such court shall enter a decree or order granting the relief sought in such proceeding; or (i) Borrower shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian (or other similar official) of Borrower or for any substantial part of its property, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action in furtherance of any of the foregoing; or (j) A final judgment or order for the payment of money in excess of Two Hundred Fifty Thousand Dollars ($250,000) (exclusive of amounts covered by insurance issued by an insurer not an Affiliate of Borrower) shall be rendered against Borrower and the same shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed, or any judgment, writ, assessment, warrant of attachment, or execution or similar process shall be issued or levied against a substantial part of the property of Borrower and such judgment, writ, or similar process shall not be released, stayed, vacated or otherwise dismissed within thirty (30) days after issue or levy. 9.02. Consequences of Event of Default. (a) If an Event of Default specified under any of clauses (a) through (g) or (j) of Section 9.01 shall occur and be continuing, Lender may (i) declare the Loan, together with interest thereon, and all other liabilities of Borrower hereunder and under the other Operative Documents to be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived, and (ii) terminate its commitment to make the Loan and terminate any commitment to advance money or extend credit to or for the benefit of Borrower pursuant to any other agreement or commitment extended by Lender to Borrower. (b) If an Event of Default specified under clause (h) or (i) of Section 9.01 shall occur, then immediately and without notice (i) the Loan, together with interest thereon, and all other liabilities of Borrower hereunder and under the other Operative Documents shall automatically become due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and (ii) Lender's commitment hereunder to make the Loan and any other commitment of Lender to Borrower to advance money or extend credit pursuant to any other agreement or commitment shall be terminated. 9.03. Rights Regarding Collateral. Borrower agrees that when any Event of Default has occurred and is continuing, Lender shall have the rights, options, duties and remedies of a secured party as permitted by law and, in addition to and without limiting the foregoing, Lender may exercise any one or more or all, and in any order, of the remedies herein set forth, including the following: 16 (a) Lender, personally or by agents or attorneys, shall have the right (subject to compliance with any applicable mandatory legal requirements) to require Borrower to assemble the Collateral and make it available to Lender at a place to be designated by Lender or to take immediate possession of the Collateral, or any portion thereof, and for that purpose may pursue the same wherever it may be found, and may enter any of premises of Borrower, with or without notice, demand, process of law or legal procedure, to the extent permitted by applicable law, and search for, take possession of, remove, keep and store the same, or use and operate or lease the same until sold. In furtherance of Lender's rights hereunder, Borrower hereby grants to Lender an irrevocable, non-exclusive license (exercisable without royalty or other payment by Lender) to use, license or sublicense any patent, trademark, trade name, copyright or other intellectual property in which Borrower now or hereafter has any right, title or interest together with the right of access to all media in which any of the foregoing may be recorded or stored; provided, however, that such license shall only be exercisable in connection with the disposition of Collateral upon Lender's exercise of its remedies hereunder. In connection with the grant hereunder of a security interest in Borrower's intellectual property rights, Borrower has executed and delivered a Special Power of Attorney to Lender. Such Special Power of Attorney shall only be exercisable in connection with Lender's exercise of its remedies hereunder. (b) Lender may, if at the time such action may be lawful and always subject to compliance with any mandatory legal requirements, either with or without taking possession and either before or after taking possession, without instituting any legal proceedings whatsoever, having first given notice of such sale by registered or certified mail to Borrower once at least ten (10) days prior to the date of such sale, and having first given any other notice which may be required by law, sell and dispose of the Collateral, or any part thereof, at a private sale or at public auction, to the highest bidder, in one lot as an entirety or in separate lots, and either for cash or on credit and on such terms as Lender may determine, and at any place (whether or not it be the location of the Collateral or any part thereof) designated in the notice referred to above. To the extent permitted by applicable law, any such sale or sales may be adjourned from time to time by announcement at the time and place appointed for such sale or sales, or for any such adjourned sale or sales, without further published notice, and Borrower, Lender or the holder or holders of the Note, or of any interest therein, may bid and become the purchaser at any such sale. (c) Lender may proceed to protect and enforce this Agreement and the other Operative Documents by suit or suits or proceedings in equity, at law or in bankruptcy, and whether for the specific performance of any covenant or agreement herein contained or in execution or aid of any power herein granted; or for foreclosure hereunder, or for the appointment of a receiver or receivers for any real property security or any part thereof, or for the recovery of judgment for the Obligations or for the enforcement of any other proper, legal or equitable remedy available under applicable law. 9.04. Effect of Sale. Any sale, whether under any power of sale available to Lender or by virtue of judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either at law or in equity, of Borrower in and to the property sold, and shall be a perpetual bar, both at law and in equity, against Borrower, its successors and assigns, and against any and all persons claiming the property sold or any part thereof under, by or through Borrower, its successors or assigns. 9.05. Application of Collateral Proceeds. The proceeds and/or avails of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Lender at the time of, or received by Lender after, the occurrence of an Event of Default hereunder) shall be paid to and applied as follows: (a) First, to the payment of reasonable costs and expenses, including all amounts expended to preserve the value of the Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or 17 remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys' fees, incurred or made hereunder by Lender; (b) Second, to the payment to Lender of the amount then owing or unpaid on the Note, and in case such proceeds shall be insufficient to pay in full the whole amount so due, owing or unpaid upon the Note, then first, to the unpaid interest thereon, second, to unpaid principal thereof and third to the remaining balance of the Obligations under the Note; such application to be made upon presentation of the Note, and the notation thereon of the payment, if partially paid, or the surrender and cancellation thereof, if fully paid; (c) Third, to the payment of other amounts then payable to Lender under any of the Operative Documents; and (d) Fourth, to the payment of the surplus, if any, to Borrower, its successors and assigns, or to whomsoever may be lawfully entitled to receive the same. 9.06. Reinstatement of Rights. If Lender shall have proceeded to enforce any right under this Agreement or any other Operative Document by foreclosure, sale, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then and in every such case (unless otherwise ordered by a court of competent jurisdiction), Lender shall be restored to its former position and rights hereunder with respect to the property subject to the security interest created under this Agreement. ARTICLE X MISCELLANEOUS 10.01. Modifications, Amendments or Waivers. The provisions of any Operative Document may be modified, amended or waived only by a written instrument signed by the parties thereto. 10.02. No Implied Waivers; Cumulative Remedies; Writing Required. No delay or failure of Lender in exercising any right, power or remedy hereunder shall affect or operate as a waiver thereof; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or remedy preclude any further exercise thereof or of any other right, power or remedy. The rights and remedies hereunder of Lender are cumulative and not exclusive of any rights or remedies which it would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of Lender of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only in the specified instance and to the extent specifically set forth in such writing. 10.03. Expenses; Indemnification. Borrower agrees upon demand to pay or reimburse Lender for all liabilities, obligations and out-of-pocket expenses, including reasonable fees and expenses of counsel for Lender, from time to time arising in connection with the enforcement or collection of sums due under the Operative Documents. Borrower shall indemnify, reimburse and hold Lender, each of Lender's general partners, and each of their respective successors, assigns, agents, officers, directors, shareholders, servants, agents and employees harmless from and against all liabilities, losses, damages, actions, suits, demands, claims of any kind and nature (including claims relating to environmental discharge, cleanup or compliance), all costs and expenses whatsoever to the extent they may be incurred or suffered by such indemnified party in connection therewith (including reasonable attorneys' fees and expenses), fines, penalties (and other charges of applicable governmental authorities), licensing fees relating to any item of Collateral, damage to or loss of use of property (including consequential or special damages to third parties or damages to Borrower's property), or bodily injury to or death of any person (including any agent or employee of Borrower) (each, a "Claim"), directly or indirectly relating to or arising out of the use of the proceeds of the Loan or otherwise, the falsity of any representation or warranty of Borrower or Borrower's failure to comply with the terms of this Agreement or any other Operative Document during the Term. The foregoing indemnity shall cover, without limitation, (i) any Claim in connection with a design or other defect (latent or patent) in any item of equipment included in the Collateral, (ii) any Claim for infringement of any patent, copyright, trademark or other intellectual property right, (iii) any Claim resulting from the presence on or under or the escape, seepage, leakage, spillage, discharge, emission or release of any Hazardous Materials on the premises of Borrower, including any Claims asserted or arising under any Environmental Law, or (iv) any Claim for negligence or strict or absolute liability in tort; provided, however, that Borrower shall not indemnify Lender for any liability to the extent incurred by Lender as a result of Lender's gross negligence or 18 willful misconduct. Such indemnities shall continue in full force and effect, notwithstanding the expiration or termination of this Agreement. Upon Lender's written demand, Borrower shall assume and diligently conduct, at its sole cost and expense, the entire defense of Lender, each of its partners, and each of their respective, agents, employees, directors, officers, shareholders, successors and assigns against any indemnified Claim described in this Section 10.03. Borrower shall not settle or compromise any Claim against or involving Lender without first obtaining Lender's written consent thereto, which consent shall not be unreasonably withheld. 10.04. Certain Damages. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT OR ANYWHERE ELSE, BORROWER AGREES THAT IT SHALL NOT SEEK FROM LENDER UNDER ANY THEORY OF LIABILITY (INCLUDING ANY THEORY IN TORTS), ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES. 10.05. Notices; Payments. (a) All notices and other communications given to or made upon any party hereto in connection with this Agreement shall be in writing (including telexed, telecopied or telegraphic communication) and mailed (by certified or registered mail), telexed, telegraphed, telecopied or delivered to the respective parties, as follows: Borrower: At the address set forth on the cover page of this Agreement. Lender: MMC/GATX PARTNERSHIP NO. I c/o GATX Capital Corporation Four Embarcadero Center Suite 2200 San Francisco, California 94111 Telephone No.: 415-955-3200 Telecopier No.: 415-955-3493 Attention: Contract Administration with a copy of all financial information to: MEIER MITCHELL & COMPANY 4 Orinda Way, Suite 200B Orinda, California 94563 or in accordance with any subsequent written direction from either party to the other. All such notices and other communications shall, except as otherwise expressly herein provided, be effective when received; or in the case of delivery by messenger or overnight delivery service, when left at the appropriate address. (b) Unless Lender specifies otherwise in writing, all payments shall be made to: GATX Capital Corporation NationsBank Box 198592 Atlanta, Georgia 30384-8592 Ref: Pharsight Invoice #___________ 10.06. Termination. This Agreement shall terminate at the end of the Term; provided, however, that the termination of this Agreement shall not affect any of the rights and remedies of Lender hereunder, it being understood and agreed that all such rights and remedies shall continue in full force and effect until payment of all amounts owed to Lender under or in connection with the Operative Documents, whether on account of principal, interest, fees or otherwise. 10.07. Severability. If any provision of any Operative Document is held invalid or unenforceable to any extent or in any application, the remainder of such Operative Document and all other Operative Documents, or the application of such provision to different Persons or circumstances or in different jurisdictions, shall not be affected thereby. 19 10.08. Survival. All representations, warranties, covenants and agreements of Borrower contained herein or made in writing in connection herewith shall survive the execution and delivery of the Operative Documents, the making of the Loan hereunder, the granting of security and the issuance of the Note. 10.09. Governing Law. THIS AGREEMENT, THE OTHER OPERATIVE DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO AND THERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. ANY ACTION TO ENFORCE THIS AGREEMENT AGAINST BORROWER MAY BE BROUGHT IN CALIFORNIA OR, WITH REGARD TO COLLATERAL, MAY ALSO BE BROUGHT WHEREVER SUCH COLLATERAL IS LOCATED. 10.10. Successors and Assigns. This Agreement and the other Operative Documents shall be binding upon and inure to the benefit of Lender, all future holders of the Note, Borrower and their respective successors and permitted assigns, except that Borrower may not assign or transfer its rights hereunder or any interest herein without the prior written consent of Lender. Lender may sell to any other financial entity (a "Participant") participation interests in Lender's rights under this Agreement and the other Operative Documents; provided that notwithstanding the sale of participations, Lender shall remain solely responsible for the performance of its obligations under this Agreement, Lender shall remain the holder of the Note for all purposes under this Agreement and Borrower shall continue to deal solely and directly with Lender in connection with this Agreement and the other Loan Documents. Lender may disclose the Operative Documents and any other financial or other information relating to Borrower or any Subsidiary to any potential Participant, provided that such Participant agrees to protect the confidentiality of such documents and information using the same measures that it uses to protect its own confidential information. 10.11. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. 10.12. Further Assurances. Borrower will, at its own expense, from time to time do, execute, acknowledge and deliver all further acts, deeds, conveyances, transfers and assurances, and all financing and continuation statements and similar notices, reasonably necessary or proper for the perfection of the security interest being herein provided for in the Collateral, whether now owned or hereafter acquired. 10.13. Power of Attorney in Respect of the Collateral. Borrower does hereby irrevocably appoint Lender (which appointment is coupled with an interest), the true and lawful attorney-in-fact of Borrower with full power of substitution, for it and in its name (a) to perform (but Lender shall not be obligated to and shall incur no liability to Borrower or any third party for failure to perform) any act which Borrower is obligated by this Agreement to perform, (b) to ask, demand, collect, receive, receipt for, sue for, compound and give acquittance for any and all rents, issues, profits, avails, distributions, income, payment draws and other sums in which a security interest is granted under Section 5.01 with full power to settle, adjust or compromise any claim thereunder as fully as if Lender were Borrower itself, (c) to receive payment of and to endorse the name of Borrower to any items of Collateral (including checks, drafts and other orders for the payment of money) that come into Lender's possession or under Lender's control, (d) to make all demands, consents and waivers, or take any other action with respect to, the Collateral, (e) in Lender's discretion, to file any claim or take any other action or institute proceedings, either in its own name or in the name of Borrower or otherwise, which Lender may reasonably deem necessary or appropriate to protect and preserve the right, title and interest of Lender in and to the Collateral, and (f) to otherwise act with respect thereto as though Lender were the outright owner of the Collateral; provided, however, that the power of attorney herein granted shall be exercisable only upon the occurrence and during the continuation of an Event of Default unless in Lender's reasonable opinion and commercially prudent judgment immediate action is necessary to preserve or protect the Collateral. Borrower agrees to reimburse Lender upon demand for all reasonable costs and expenses, including attorneys' fees and expenses, which Lender may incur while acting as Borrower's attorney in fact hereunder, all of which costs and expenses are included within the Obligations. 10.14 Confidentiality. All information (other than periodic reports filed by Borrower with the Securities and Exchange Commission) disclosed by Borrower to Lender in writing or through inspection pursuant to this Agreement shall be considered confidential. Lender agrees to use the same degree of care to safeguard and prevent disclosure of such confidential information as Lender uses with its own confidential information, but in any event 20 no less than a reasonable degree of care. Lender shall not disclose such information to any third party (other than Lender's or Lender's partner's attorneys and auditors subject to the same confidentiality obligation set forth herein) and shall use such information only for purposes of evaluation of its investment in Borrower and the exercise of Lender's rights and the enforcement of its remedies under this Agreement and the other Operative Agreements. The obligations of confidentiality shall not apply to any information that (a) was known to the public prior to disclosure by Borrower under this Agreement, (b) becomes known to the public through no fault of Lender, (c) is disclosed to Lender by a third party' having a legal right to make such disclosure, or (d) is independently developed by Lender. 21 IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. PHARSIGHT CORPORATION By: /s/ Robin A. Kehoe ----------------------------------- Name: Robin A. Kehoe -------------------------------- Title: Chief Financial Officer ------------------------------- MMC/GATX PARTNERSHIP NO. I By: Meier Mitchell & Company, as general partner By: /s/ Patricia W. Leicher ----------------------------------- Name: Patricia W. Leicher -------------------------------- Title: Vice President ------------------------------- SCHEDULES 1 Funding Certificate 2 Disclosure Schedule 3 Conditions Precedent 4 Schedule of Indebtedness Payments 5 Investment Policy EXHIBITS A Form of Secured Promissory Note B Form of Warrant C Form of Opinion of Counsel D Form of Stock Pledge Agreement SCHEDULE 1 FUNDING CERTIFICATE The undersigned,____________________, being the duly elected and acting ____________________ of PHARSIGHT CORPORATION, a California corporation ("Borrower"), does hereby certify to MMC/GATX Partnership No. I, in connection with that certain Loan and Security Agreement dated as of June 8, 1998, (the "Loan Agreement"; with other capitalized terms used below having the meanings ascribed thereto in the Loan Agreement) that: 1. The representations and warranties made by Borrower in Article III of the Loan Agreement and in the other Operative Documents are true and correct in all material respects as of the date hereof. 2. No event or condition has occurred and is continuing that would constitute a Default or an Event of Default under the Loan Agreement or any other Operative Document. 3. Borrower is in compliance with the covenants and requirements contained in Articles IV, VI and VII of the Loan Agreement. 4. All conditions referred to in Article VIII of the Loan Agreement to the making of the Loan to be made on or about the date hereof been satisfied or waived in writing by Lender. 5. No material adverse change in the general affairs, management, results of operations, condition (financial or otherwise) or prospects of Borrower, whether or not arising from transactions in the ordinary course of business, has occurred. Dated: June 10, 1998 PHARSIGHT CORPORATION By: ----------------------------------- Name: -------------------------------- Title: ------------------------------- SCHEDULE 2 DISCLOSURE SCHEDULE SCHEDULE 3 CONDITIONS PRECEDENT PART I: At the time of execution and delivery of this Agreement, there shall also have been duly executed and delivered to Lender: (a) The Warrant; (b) An opinion of counsel for Borrower, dated as of the closing date, substantially in the form attached hereto as Exhibit C; (c) Copies, certified by the Secretary, Assistant Secretary or Chief Financial Officer of Borrower as of the closing date, of Borrower's charter documents and bylaws and of all documents evidencing corporate action taken by Borrower authorizing the execution, delivery and performance of the Operative Documents to which Borrower is a party, in form and substance satisfactory to Lender and its counsel; (d) Good standing certificate from Borrower's state of incorporation and the state in which Borrower's principal place of business is located, together with certificates of the applicable governmental authorities that Borrower is in compliance with the franchise tax laws of each such state, each dated as of a recent date; (e) Evidence of the insurance coverage required by Section 6.01(d) of this Agreement; (f) Copies certified by the secretary or an assistant secretary of Borrower, all necessary consents of shareholders and other third parties with respect to the execution, delivery and performance of this Agreement, the Warrant, the Note and the other Operative Documents; (g) Form UCC-1 Financing Statements, duly executed by Borrower, or other documents, and Borrower shall have taken such actions, if any, as Lender shall reasonably determine are necessary or desirable to perfect and protect its security interest in the Collateral; (h) Notices of Security Interest to Depository Banks in the forms provided by Lender; (i) Notices of Security Interest in Trademarks; and (j) All other documents as Lender shall have reasonably requested. PART II On or prior to the Funding Date of the Loan, each of the items set forth in Part I of this Schedule 3 shall have been delivered to Lender and the following conditions shall have been satisfied or waived by Lender: (a) Borrower shall have provided to Lender such documents, instruments and agreements as Lender shall reasonably request to evidence the perfection and priority of the security interests granted to Lender pursuant to Article V; (b) No Event of Default or Default shall have occurred and be continuing; (c) Borrower shall have duly executed and delivered to Lender the Note; (d) In Lender's sole discretion, there shall not have occurred any material adverse change in the general affairs, management, results of operations, condition (financial or otherwise) or prospects of Borrower, whether or not arising from transactions in the ordinary course of business, and there shall not have occurred since the date first written on the cover page of this Agreement any material adverse deviation by Borrower from the business plan of Borrower presented to and not disapproved by Lender; (e) The representations and warranties contained in this Agreement and the other Operative Documents to which Borrower is a party shall be true and correct in all material respects as if made on such Funding Date; (f) Each of the Operative Documents remains in full force and effect; and (g) The Funding Date of the Loan shall not be later than the Commitment Termination Date. SCHEDULE 4 INDEBTEDNESS PAYMENTS Under a Promissory Note Dated December 17, 1998 executed in favor of Dan Weiner an amount equal to $246,250 the first year, and $265,940 the following year; Under a Non-Competition Agreement dated May 27, 1998, with Edward Mitchell, an amount equal to $135,000 in the first year and $145,000 in the following year; Under a Non-Competition Agreement dated May 27, 1998, with Joseph Gauthier, an amount equal to $135,000 in the first year and $145,000 in the following year; Under an obligation to pay costs associated with the closing of the Mitchell and Gauthier Associates asset acquisition, including severance costs, in an amount not to exceed $250,000 during the year following the May 27, 1998 closing. EXHIBIT A SECURED PROMISSORY NOTE $2,000,000 Dated: June 10, 1998 FOR VALUE RECEIVED, the undersigned, PHARSIGHT CORPORATION ("Borrower"), a California corporation, HEREBY PROMISES TO PAY to the order of MMC/GATX PARTNERSHIP NO. 1, a California general partnership ("Lender") the principal amount of Two Million ($2,000,000) or such lesser amount as shall equal the outstanding principal balance of the Loan made by Lender to Borrower pursuant to the Loan and Security Agreement referred to below (the "Loan Agreement"), and to pay all other amounts due with respect to the Loan on the dates and in the amounts set forth in the Loan Agreement. Interest on the principal amount of this Note from the date of this Note shall accrue at the Loan Rate or, if applicable, the Default Rate. The Loan Rate for this Note is ____% per annum based on a year of twelve 30 day months. On each of the first six Payment Dates (as defined in the Loan Agreement), commencing on July 10, 1998, Borrower shall make a payment of interest only on the outstanding principal balance hereof. On each of the first six Payment Dates, commencing on July 10, 1998, Borrower shall make a payment of interest only on the outstanding principal balance hereof. Commencing on January 10, 1999, and continuing for twenty-three (23) Payment Dates thereafter, Borrower shall make twenty-three (23) payments of $83,333.33 plus accrued and unpaid interest on the outstanding balance on each such Payment Date and a final payment of $83,333.41 plus accrued and unpaid interest. Payments of principal and interest on the Loan may not be prepaid prior to December 10, 1999, and shall be prepaid only in a minimum amount of 50% of the then outstanding principal balance of the Loan, but in no event less than $250,000; provided, however, that if Borrower requests that Lender consent to an acquisition which is otherwise prohibited under Section 7.01(f) of the Loan Agreement and Lender does not give its consent thereto, Borrower may prepay the Loan in full within thirty (30) days of such refusal to give consent. Principal, interest and all other amounts due with respect to the Loan, are payable in lawful money of the United States of America to Lender as follows: GATX Capital Corporation, P.O. Box 71316, Chicago, Illinois 60694, in immediately available funds. The Loan made by Lender to Borrower and the interest rate applicable thereto, and all payments made with respect thereto, shall be recorded by Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Note. This Note is the Note referred to in, and is entitled to the benefits of, the Loan and Security Agreement, dated as of June 8, 1998, between Borrower and Lender. The Loan Agreement, among other things, (a) provides for the making of a secured Loan by Lender to Borrower in the principal amount first above mentioned, and (b) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events. This Note and the obligation of Borrower to repay the unpaid principal amount of the Loan, interest on the Loan and all other amounts due Lender under the Loan Agreement is secured under the Loan Agreement. Presentment for payment, demand, notice of protest and all other demands and notices of any kind in connection with the execution, delivery, performance and enforcement of this Note are hereby waived. Borrower shall pay all reasonable fees and expenses, including, without limitation, reasonable attorneys' fees and costs, incurred by Lender in the enforcement or attempt to enforce any of Borrower's obligations hereunder not performed when due. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of California. IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed by one of its officers thereunto duly authorized on the date hereof. PHARSIGHT CORPORATION By: /s/ Robin A. Kehoe ----------------------------------- Name: Robin A. Kehoe -------------------------------- Title: Chief Financial Officer ------------------------------- LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL Principal Scheduled Date Amount Interest Rate Payment Amount Notation By ---- ------ ------------- -------------- ----------- EXHIBIT B WARRANT EXHIBIT C FORM OF OPINION OF COUNSEL [To Come from Cooley Godward] EXHIBIT D FORM OF STOCK PLEDGE AGREEMENT EX-10.8 13 EXHIBIT 10.8 Exhibit 10.8 Customer No. 1198 MASTER LOAN AND SECURITY AGREEMENT THIS AGREEMENT dated as of February 26, 1999, is made by Pharsight Corporation (the "Borrower"), a California corporation having its principal place of business and chief executive office at 800 W. El Camino Real, Mountain View, California, 94040 in favor of Transamerica Business Credit Corporation, a Delaware corporation (the "Lender"), having its principal office at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018. WHEREAS, the Borrower has requested that the Lender make Loans to it from time to time; and WHEREAS, the Lender has agreed to make such Loans on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and to induce the Lender to extend credit, the Borrower hereby agrees with the Lender as follows: SECTION 1. DEFINITIONS. As used herein, the following terms shall have the following meanings, and shall be equally applicable to both the singular and plural forms of the terms defined: Agreement shall mean this Master Loan and Security Agreement together with all schedules and exhibits hereto, as amended, supplemented, or otherwise modified from time to time. Applicable Law shall mean the laws of the State of Illinois (or any other jurisdiction whose laws are mandatorily applicable notwithstanding the parties' choice of Illinois law) or the laws of the United States of America, whichever laws allow the greater interest, as such laws now exist or may be changed or amended or come into effect in the future. Business Day shall mean any day other than a Saturday, Sunday, or public holiday or the equivalent for banks in New York City. Code shall have the meaning specified in Section 8(d). Collateral shall have the meaning specified in Section 2. Collateral Access Agreement shall mean any landlord waiver, mortgagee waiver, bailee letter, or similar acknowledgement of any warehouseman or processor in possession of any Equipment. Effective Date shall mean the date on which all of the conditions specified in Section 3.3 shall have been satisfied. Equipment shall have the meaning specified in Section 2. Event of Default shall mean any event specified in Section 7. Financial Statements shall have the meaning specified in Section 6.1. GAAP shall mean generally accepted accounting principles in the United States of America, as in effect from time to time. Loans shall mean the loans and financial accommodations made by the Lender to the Borrower in accordance with the terms of this Agreement and the Notes. Loan Documents shall mean, collectively, this Agreement, the Notes, and all other documents, agreements, certificates, instruments, and opinions executed and delivered in connection herewith and therewith, as the same may be modified, extended, restated, or supplemented from time to time. "Material Adverse Change", "Material Adverse Effect" and/or "material" as each of those terms may appear in the Loan Documents, shall mean, each in context, a negative result arising directly from facts that, in the totality of the circumstances, are substantive and germane to (a) the business, assets, operations, financial or other condition of Borrower; (b) the ability of Borrower to pay or perform in accordance with the terms of this Agreement or any other Loan Document; (c) the rights and remedies of Lender under this Agreement or any of the Loan Documents. Note shall mean each Promissory Note in the form of Exhibit B attached hereto and incorporated herein by this reference, made by the Borrower in favor of the Lender, as amended, supplemented, or otherwise modified from time to time. Obligations shall mean all indebtedness, obligations, and liabilities of the Borrower under the Notes and under this Agreement, whether on account of principal, interest, indemnities, fees (including, without limitation, reasonable attorneys' fees, remarketing fees, origination fees, collection fees, and all other professionals' fees), out-of-pocket costs, out-of-pocket expenses, taxes, or otherwise. Permitted Liens shall mean such of the following as to which no enforcement, collection, execution, levy, or foreclosure proceeding shall have been commenced: (a) liens for taxes, assessments, and other governmental charges or levies or the claims or demands of landlords, carriers, warehousemen, mechanics, laborers, materialmen, and other like Persons arising by operation of law in the ordinary course of business for sums which are not yet due and payable, or liens which are being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves are maintained to the extent required by GAAP; (b) deposits or pledges to secure the payment of worker's compensation, unemployment insurance, or other social security benefits or obligations, public or statutory obligations, surety or appeal bonds, bid or performance bonds, or other obligations of a like nature incurred in the ordinary course of business; (c) licenses, restrictions, or covenants for or on the use of the Equipment which do not materially impair either the use of the Equipment in the operation of the business of the Borrower or the value of the Equipment; and (d) attachment or judgment liens that do not constitute an Event of Default. Person shall mean any individual, sole proprietorship, partnership, limited liability partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, entity, party, or government (including any division, agency, or department thereof), and the successors, heirs, and assigns of each. Schedule shall mean each Schedule in the form of Schedule A hereto delivered by the Borrower to the Lender from time to time. Solvent means, with respect to any Person, that as of the date as to which such Person's solvency is measured: (a) the fair saleable value of its assets is in excess of the total amount of its liabilities (including contingent liabilities as valued in accordance with GAAP) as they become absolute and matured; (b) it has sufficient capital to conduct its business; and (c) it is able generally to meet its debts as they mature. Taxes shall have the meaning specified in Section 5.5. SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. The Borrower hereby assigns and grants to the Lender a continuing general, first priority lien on, and security interest in, all the 2 Borrower's right, title, and interest in and to the collateral described in the next sentence (the "Collateral") to secure the payment and performance of all the Obligations. The Collateral consists of all equipment set forth on all the Schedules delivered from time to time under the terms of this Agreement (the "Equipment"), together with all present and future additions, parts, accessories, attachments, substitutions, repairs, improvements, and replacements thereof or thereto, and any and all proceeds thereof, including, without limitation, proceeds of insurance and all manuals, blueprints, know-how, warranties, and records in connection therewith, all rights against suppliers, warrantors, manufacturers, sellers, or others in connection therewith, and together with all substitutes for any of the foregoing; provided, however, that there shall be excluded from Collateral all general intangibles including, without limitation, contract rights, which by their terms, or as a matter of law, are nonassignable without the consent of the licensor or other third person where and to the extent that the assignment effected by the foregoing creation of a security interest (and the perfection thereof) would result in a default under such general intangible for which the available remedies include the right to terminate such general intangible. SECTION 3. THE CREDIT FACILITY. SECTION 3.1. Borrowings. Each Loan shall be in an amount not less than $50,000, and in no event shall the sum of the aggregate Loans made exceed the amount of the Lender's written commitment to the Borrower in effect from time to time. Notwithstanding anything herein to the contrary, the Lender shall be obligated to make the initial Loan and each other Loan only after the Lender, in its good faith business judgment, determines that the applicable conditions for borrowing contained in Sections 3.3 and 3.4 are satisfied. The timing and financial scope of Lender's obligation to make Loans hereunder are limited as set forth in a commitment letter executed by Lender and Borrower, dated as of December 11, 1998 and attached hereto as Exhibit A (the "Commitment Letter"). SECTION 3.2. Application of Proceeds. The Borrower shall not directly or indirectly use any proceeds of the Loans, or cause, assist, suffer, or permit the use of any proceeds of the Loans, for any purpose other than for the purchase, acquisition, installation, or upgrading of Equipment or the reimbursement of the Borrower for its purchase, acquisition, installation, or upgrading of Equipment. SECTION 3.3. Conditions to Initial Loan. (a) The obligation of the Lender to make the initial Loan is subject to the Lender's receipt of the following, each dated the date of the initial Loan or as of an earlier date acceptable to the Lender, in form and substance reasonably satisfactory to the Lender and its counsel: (i) completed requests for information (Form UCC-11) listing all effective Uniform Commercial Code financing statements naming the Borrower as debtor and all tax lien, judgment, and litigation searches for the Borrower as the Lender shall deem necessary or desirable; (ii) Uniform Commercial Code financing statements (Form UCC-1) duly executed by the Borrower (naming the Lender as secured party and the Borrower as debtor and in form acceptable for filing in all jurisdictions that the Lender deems necessary or desirable to perfect the security interests granted to it hereunder) and, if applicable, termination statements or other releases duly filed in all jurisdictions that the Lender deems necessary or desirable to perfect and protect the priority of the security interests granted to it hereunder in the Equipment related to such initial Loan; (iii) a Note duly executed by the Borrower evidencing the amount of such Loan; (iv) a Collateral Access Agreement duly executed by the lessor or mortgagee, as the case may be, of each premises where the Equipment is located; (v) certificates of insurance required under Section 5.4 of this Agreement together with loss payee endorsements for all such policies naming the Lender as lender loss payee and as 3 an additional insured; (vi) a copy of the resolutions of the Board of Directors of the Borrower (or a unanimous consent of directors in lieu thereof) authorizing the execution, delivery, and performance of this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, attached to which is a certificate of the Secretary or an Assistant Secretary of the Borrower certifying (A) that the copy of the resolutions is true, complete, and accurate, that such resolutions have not been amended or modified since the date of such certification and are in full force and effect and (B) the incumbency, names, and true signatures of the officers of the Borrower authorized to sign the Loan Documents to which it is a party; and (vii) such other agreements and instruments as the Lender reasonably deems necessary in connection with the transactions contemplated hereby. (b) There shall be no pending or, to the knowledge of the Borrower after due inquiry, threatened litigation, proceeding, inquiry, or other action (i) seeking an injunction or other restraining order, damages, or other relief with respect to the transactions contemplated by this Agreement or the other Loan Documents or thereby or (ii) which affects or could reasonably be expected to affect the business, operations, assets, liabilities, or condition (financial or otherwise) of the Borrower, except, in the case of clause (ii), where such litigation, proceeding, inquiry, or other action could not be expected to have a Material Adverse Effect in the good faith business judgment of the Lender. (c) The Borrower shall have paid all fees and expenses required to be paid by it to the Lender as of such date. (d) The security interests in the Equipment related to the initial Loan granted in favor of the Lender under this Agreement shall have been duly perfected and shall constitute first priority liens. SECTION 3.4. Conditions Precedent to Each Loan. The obligation of the Lender to make each Loan is subject to the satisfaction of the following conditions precedent: (a) the Lender shall have received the documents, agreements, and instruments set forth in Section 3.3(a)(i) through (v) applicable to such Loan, each in form and substance reasonably satisfactory to the Lender and its counsel and each dated the date of such Loan or as of an earlier date acceptable to the Lender; (b) the Lender shall have received a Schedule of the Equipment and a duly executed UCC-1 financing statement pertaining to such Equipment related to such Loan, in form and substance reasonably satisfactory to the Lender and its counsel, and there shall be no prior security interests in such Equipment related to such Loan; (c) all representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct on and as of the date of such Loan as if then made, other than representations and warranties that expressly relate solely to an earlier date, in which case they shall have been true and correct as of such earlier date; (d) no Event of Default or event which with the giving of notice or the passage of time, or both, would constitute an Event of Default shall have occurred and be continuing or would result from the making of the requested Loan as of the date of such request; and (e) the Borrower shall be deemed to have hereby reaffirmed and ratified all security interests, liens, and other encumbrances heretofore granted by the Borrower to the Lender hereunder. 4 SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES. SECTION 4.1. Good Standing; Qualified to do Business. The Borrower (a) is duly organized, validly existing, and in good standing under the laws of the State of its organization, (b) has the power and authority to own its properties and assets and to transact the businesses in which it is presently, or proposes to be, engaged, and (c) is duly qualified and authorized to do business and is in good standing in every jurisdiction in which the failure to be so qualified could reasonably be expected to have a Material Adverse Effect on (i) the Borrower, (ii) the Borrower's ability to perform its obligations under the Loan Documents, or (iii) the rights of the Lender hereunder. SECTION 4.2. Due Execution, etc. The execution, delivery, and performance by the Borrower of each of the Loan Documents to which it is a party are within the powers of the Borrower, do not contravene the organizational documents, if any, of the Borrower, and do not (a) violate any material law or regulation, or any order or decree of any court or governmental authority, (b) conflict with or result in a material breach of, or constitute a material default under, any material indenture, mortgage, or deed of trust or any material lease, agreement, or other instrument binding on the Borrower or any of its properties, or (c) require the consent, authorization by, or approval of or notice to or filing or registration with any governmental authority or other Person. This Agreement is, and each of the other Loan Documents to which the Borrower is or will be a party, when delivered hereunder or thereunder, will be, the legal, valid, and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, or similar laws affecting creditors' rights generally and by general principles of equity. SECTION 4.3. Solvency; No Liens. The Borrower is Solvent and will be Solvent upon the completion of all transactions contemplated to occur hereunder (including, without limitation, the Loan to be made on the Effective Date); the security interests granted herein constitute and shall at all times constitute the first and only liens on the Collateral other than Permitted Liens; and the Borrower is, or will be at the time additional Collateral is acquired by it, the absolute owner of the Collateral with full right to pledge, sell, consign, transfer, and create a security interest therein, free and clear of any and all claims or liens in favor of any other Person other than Permitted Liens. SECTION 4.4. No Judgments, Litigation. No judgments are outstanding against the Borrower nor is there now pending or, to the best of the Borrower's knowledge after due inquiry, threatened any litigation, contested claim, or governmental proceeding by or against the Borrower except judgments and pending or threatened litigation, contested claims, and governmental proceedings which would not, in the aggregate, have a Material Adverse Effect on the Borrower. SECTION 4.5. No Defaults. The Borrower is not in material default or has not received a notice of default under any material contract, lease, or commitment to which it is a party or by which it is bound. The Borrower knows of no dispute regarding any contract, lease, or commitment which could reasonably be expected to have a Material Adverse Effect on the Borrower. SECTION 4.6. Collateral Locations. On the date hereof, each item of the Collateral is located at the place of business specified in the applicable Schedule. SECTION 4.7. No Events of Default. No Event of Default has occurred and is continuing nor has any event occurred which, with the giving of notice or the passage of time, or both, would constitute an Event of Default. SECTION 4.8. No Limitation on Lender's Rights. Except as permitted herein, none of the Collateral is subject to contractual obligations that restrict or inhibit the Lender's rights or abilities to sell or dispose of the Collateral or any part thereof after the occurrence of an Event of Default. SECTION 4.9. Perfection and Priority of Security Interest. This Agreement creates a valid and, upon completion of all required filings of financing statements, perfected first priority security 5 interest in the Collateral, securing the payment of all the Obligations, to the extent such a security interest can be perfected by the filing of such financing statements. SECTION 4.10. Model and Serial Numbers. To the Borrower's knowledge, the Schedules set forth the true and correct model number and serial number of each item of Equipment that constitutes Collateral. SECTION 4.11. Accuracy and Completeness of Information. All data, reports, and information heretofore, contemporaneously, or hereafter furnished by or on behalf of the Borrower in writing to the Lender or for purposes of or in connection with this Agreement or any other Loan Document, or any transaction contemplated hereby or thereby, are or will be true and accurate in all material respects on the date as of which such data, reports, and information are dated or certified and not incomplete by omitting to state any material fact necessary to make such data, reports, and information not materially misleading at such time. There are no facts now known to the Borrower which individually or in the aggregate would reasonably be expected to have a Material Adverse Effect and which have not been specified herein, in the Financial Statements, or in any certificate, opinion, or other written statement previously furnished by the Borrower to the Lender. SECTION 4.12. Price of Equipment. To the best of Borrower's knowledge, the cost of each item of Equipment does not exceed the fair and usual price for such type of equipment purchased in like quantity and reflects all discounts, rebates and allowances for the Equipment (including, without limitation, discounts for advertising, prompt payment, testing, or other services) given to the Borrower by the manufacturer, supplier, or any other person. SECTION 5. COVENANTS OF THE BORROWER. SECTION 5.1. Existence, etc. The Borrower shall: (a) retain its existence and its current yearly accounting cycle, (b) use best efforts to maintain in full force and effect all licenses, bonds, franchises, leases, trademarks, patents, contracts, and other rights necessary or desirable to the profitable conduct of its business unless the failure to do so could not reasonably be expected to have a Material Adverse Effect on the Borrower, (c) continue in, and limit its operations to, the same general lines of business as those presently conducted by it, and (d) use best efforts to comply with all applicable laws and regulations of any federal, state, or local governmental authority, except for such laws and regulations the violations of which would not, in the aggregate, have a Material Adverse Effect on the Borrower. SECTION 5.2. Notice to the Lender. As soon as possible, and in any event within five business days after the Borrower learns of the following, the Borrower will give written notice to the Lender of (a) any proceeding instituted or threatened to be instituted by or against the Borrower in any federal, state, local, or foreign court or before any commission or other regulatory body (federal, state, local, or foreign) involving a sum, together with the sum involved in all other similar proceedings, in excess of $100,000 in the aggregate, (b) any contract that is terminated or amended and which has had or could reasonably be expected to have a Material Adverse Effect on the Borrower, (c) the occurrence of any Material Adverse Change with respect to the Borrower, and (d) the occurrence of any Event of Default or event or condition which, with notice or lapse of time or both, would constitute an Event of Default, together with a statement of the action which the Borrower has taken or proposes to take with respect thereto. SECTION 5.3. Maintenance of Books and Records. The Borrower will maintain books and records pertaining to the Collateral in such detail, form, and scope as is commercially reasonable and in accordance with generally accepted accounting principles. The Borrower agrees that the Lender or its agents may enter upon the Borrower's premises once during each quarter upon reasonable notice during normal business hours, and at any time upon the occurrence and continuance of an Event of Default, for the purpose of inspecting the Collateral and any and all records pertaining thereto. SECTION 5.4. Insurance. The Borrower will maintain insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, and covering such risks as are at 6 all times satisfactory to the Lender in the exercise of its good faith business judgment. All such policies shall be made payable to the Lender, in case of loss, under a standard non-contributory "lender" or "secured party" clause and are to contain such other provisions as the Lender may reasonably require to protect the Lender's interests in the Collateral and to any payments to be made under such policies. Certificates of insurance policies are to be delivered to the Lender, premium prepaid, with the loss payable endorsement in the Lender's favor, and shall provide for not less than thirty days' prior written notice to the Lender, of any alteration or cancellation of coverage. If the Borrower fails to maintain such insurance, the Lender may arrange for (at the Borrower's expense and without any responsibility on the Lender's part for) obtaining the insurance. During an Event of Default hereunder, the Lender shall have the right, in the name of the Lender or the Borrower, to file claims under any insurance policies, to receive and give acquittance for any payments that may be payable thereunder, and to execute any endorsements, receipts, releases, assignments, reassignments, or other documents that may be necessary to effect the collection, compromise, or settlement of any claims under any such insurance policies. SECTION 5.5. Taxes. The Borrower will pay, when due, all taxes, assessments, claims, and other charges ("Taxes") lawfully levied or assessed against the Borrower or the Collateral other than taxes that are being diligently contested in good faith by the Borrower by appropriate proceedings promptly instituted and for which an adequate reserve is being maintained by the Borrower in accordance with GAAP. If any Taxes remain unpaid after the date fixed for the payment thereof, or if any lien shall be claimed therefor, then, with notice to the Borrower, on the Borrower's behalf, the Lender may pay such Taxes, and the amount thereof shall be included in the Obligations. SECTION 5.6. Borrower to Defend Collateral Against Claims; Fees on Collateral. The Borrower will defend the Collateral against all claims of which it is aware and demands of which it is aware of all Persons at any time claiming the same or any interest therein. The Borrower will not permit any notice creating or otherwise relating to liens on the Collateral or any portion thereof to exist or be on file in any public office other than Permitted Liens. The Borrower shall promptly pay, when payable, all transportation, storage, and warehousing charges and license fees, registration fees, assessments, charges, permit fees, and taxes (municipal, state, and federal) which may now or hereafter be imposed upon the ownership, leasing, renting, possession, sale, or use of the Collateral, other than taxes on or measured by the Lender's income and fees, assessments, charges, and taxes which are being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves are maintained to the extent required by GAAP. SECTION 5.7. No Change of Location, Structure, or Identity. The Borrower will not (a) change the location of its chief executive office or establish any place of business other than those specified herein or (b) move or permit the movement of any item of Collateral from the location specified in the applicable Schedule, except that the Borrower may change its chief executive office and keep Collateral at other locations within the United States provided that the Borrower has delivered to the Lender (i) prompt written notice thereof and (ii) duly executed financing statements and other agreements and instruments (all in form and substance reasonably satisfactory to the Lender) necessary or, in the opinion of the Lender, desirable to perfect and maintain in favor of the Lender a first priority security interest in the Collateral to the extent a first priority security interest can be maintained by the execution of such financing statements and agreements. Notwithstanding anything to the contrary in the immediately preceding sentence, the Borrower may keep any Collateral consisting of motor vehicles or rolling stock at any location in the United States provided that the Lender's security interest in any such Collateral is conspicuously marked on the certificate of title thereof and the Borrower has complied with the provisions of Section 5.9. SECTION 5.8. Use of Collateral; Licenses; Repair. The Collateral shall be operated by competent, qualified personnel as determined by Borrower in its good faith business judgment, in connection with the Borrower's business purposes, for the purpose for which the Collateral was designed and in accordance with applicable operating instructions, laws, and government regulations, and the Borrower shall use every commercially reasonable precaution to prevent loss or damage to the Collateral from fire and other hazards. The Collateral shall not be used or operated for personal, family, or household purposes. The Borrower shall procure and maintain in effect all material orders, licenses, certificates, permits, approvals, and consents required by federal, state, or local laws or by any governmental body, agency, or authority in connection with the delivery, 7 installation, use, and operation of the Collateral. The Borrower shall keep all of the Equipment in a satisfactory state of repair and satisfactory operating condition in accordance with industry standards, and will make all repairs and replacements when and where necessary and practical as determined by Borrower in its good faith business judgment. The Borrower will not waste or destroy the Equipment or any part thereof, and will not be negligent in the care or use thereof. The Equipment shall not be annexed or affixed to or become part of any realty without the Lender's prior written consent, which consent shall not be unreasonably withheld. SECTION 5.9. Further Assurances. The Borrower will, promptly upon request by the Lender, execute and deliver or use its best efforts to obtain any document reasonably required by the Lender (including, without limitation, warehouseman or processor disclaimers, mortgagee waivers, landlord disclaimers, or subordination agreements with respect to the Obligations and the Collateral), give any notices, execute and file any financing statements, mortgages, or other documents (all in form and substance reasonably satisfactory to the Lender), mark any chattel paper, deliver any chattel paper or instruments to the Lender, and take any other actions that are necessary or, in the good faith opinion of the Lender, desirable to perfect or continue the perfection and the first priority of the Lender's security interest in the Collateral, to protect the Collateral against the rights, claims, or interests of any Persons, or to effect the purposes of this Agreement. The Borrower hereby authorizes the Lender to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of the Borrower where permitted by law. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. To the extent required under this Agreement, the Borrower will pay all costs incurred in connection with any of the foregoing. SECTION 5.10. No Disposition of Collateral. The Borrower will not in any way hypothecate or create or permit to exist any lien, security interest, charge, or encumbrance on or other interest in any of the Collateral, except for the lien and security interest granted hereby and Permitted Liens which are junior to the lien and security interest of the Lender, and the Borrower will not sell, transfer, assign, pledge, collaterally assign, exchange, or otherwise dispose of any of the Collateral except used, worn out or obsolete Equipment or Equipment which is no longer useful in Borrower's business having an aggregate value of not more than $25,000, provided, however, that such $25,000 limitation shall not apply to the disposal of any Collateral which is no longer useful in Borrower's business so long as such Collateral is replaced with equipment of equal or greater value and Lender is granted a first priority security interest thereunder. In the event the Collateral, or any part thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in violation of these provisions, the security interest of the Lender shall continue in such Collateral or part thereof notwithstanding such sale, transfer, assignment, exchange, or other disposition, and the Borrower will hold the proceeds thereof in a separate account for the benefit of the Lender. Following such a sale, the Borrower will transfer such proceeds to the Lender in kind. SECTION 5.11. No Limitation on Lender's Rights. The Borrower will not enter into any contractual obligations which may restrict or inhibit the Lender's rights or ability to sell or otherwise dispose of the Collateral or any part thereof. SECTION 5.12. Protection of Collateral. Upon notice to the Borrower (provided that if an Event of Default has occurred and is continuing the Lender need not give any notice), the Lender shall have the right at any time to make any payments and do any other acts the Lender may deem necessary to protect its security interests in the Collateral, including, without limitation, the rights to satisfy, purchase, contest, or compromise any encumbrance, charge, or lien which, in the reasonable judgment of the Lender, appears to be prior to or superior to the security interests granted hereunder, and appear in, and defend any action or proceeding purporting to affect its security interests in, or the value of, any of the Collateral. The Borrower hereby agrees to reimburse the Lender for all payments made and expenses incurred under this Agreement including reasonable fees, expenses, and disbursements of attorneys and paralegals (including the allocated costs of in-house counsel) acting for the Lender, including any of the foregoing payments under, or acts taken to protect its security interests in, any of the Collateral, which amounts shall be secured under this Agreement, and agrees it shall be bound by any payment made or act taken by the Lender hereunder absent the Lender's gross negligence or willful misconduct. The Lender shall have no obligation to make any of the foregoing payments or perform any of the foregoing acts. 8 SECTION 5.13. Delivery of Items. The Borrower will (a) promptly (but in no event later than one Business Day) after its receipt thereof, deliver to the Lender any documents or certificates of title issued with respect to any property included in the Collateral, and any promissory notes, letters of credit or instruments related to or otherwise in connection with any property included in the Collateral, which in any such case come into the possession of the Borrower, or shall cause the issuer thereof to deliver any of the same directly to the Lender, in each case with any necessary endorsements in favor of the Lender and (b) deliver to the Lender as soon as available copies of any and all press releases and other similar communications issued by the Borrower. SECTION 5.14. Solvency. The Borrower shall be and remain Solvent at all times. SECTION 5.15. Name Change. The Borrower shall not amend or modify its name, unless the Borrower delivers to the Lender thirty days prior to any such proposed amendment or modification written notice of such amendment or modification and within ten days before such amendment or modification delivers executed Uniform Commercial Code financing statements (in form and substance satisfactory to the Lender). SECTION 5.16. Fundamental Changes. The Borrower shall not (a) merge or consolidate with any other entity or make any material change in its capital structure, in each case without the Lender's prior written consent which shall not be unreasonably withheld, provided, however, that if the Borrower is the surviving entity in the transaction and the transaction will have no Material Adverse Effect on the financial condition of the Borrower, then the Borrower need only provide ten (10) days' advance notice of the transaction and Lender's consent will not be required, or (b) permit, without the prior written consent of the Lender (unless such consent is not required pursuant to the foregoing clause (a)), a change resulting from a single transaction or series of related transactions, but not from the sale of newly issued securities to investors, in more than 35% of the ownership of the combined voting power of the Borrower's then outstanding voting securities or permit more than 35% of such voting securities to become subject to any contractual, judicial, or statutory lien, charge, security interest, or encumbrance. Notwithstanding the foregoing, in the event that Lender declines to consent to any transaction described in (a) or (b) of this Section 5.16, Borrower may prepay the Notes by paying an amount equal to the present value of the remaining payments (principal and interest) due thereunder discounted at 6% simple interest per annum, together with all interest, fees and other amounts payable on the amount so prepaid or in connection therewith to the date of such prepayment. SECTION 5.17. Additional Requirements. The Borrower shall take all such further actions and execute all such further documents and instruments as the Lender may reasonably request. SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction in full of all Obligations, the Borrower shall deliver to the Lender the following financial information: SECTION 6.1. Annual Financial Statements. As soon as available, but not later than 120 days after the end of each fiscal year of the Borrower and its consolidated subsidiaries, the consolidated balance sheet, income statement, and statements of cash flows and shareholders equity for the Borrower and its consolidated subsidiaries (the "Financial Statements") for such year, reported on by independent certified public accountants without an adverse qualification; and SECTION 6.2. Quarterly Financial Statements. As soon as available, but not later than 60 days after the end of each of the first three fiscal quarters in any fiscal year of the Borrower and its consolidated subsidiaries, the Financial Statements for such fiscal quarter, together with a certification duly executed by a responsible officer of the Borrower that such Financial Statements have been prepared in accordance with GAAP and are fairly stated in all material respects (subject to normal year-end audit adjustments). SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an Event of Default hereunder: (a) the Borrower shall fail to pay within two days after notice of failure to pay when due any amount required to be paid by the Borrower under or in connection with any Note and this Agreement; 9 (b) any representation or warranty made by the Borrower under or in connection with any Loan Document or any Financial Statement shall prove to have been false or incorrect in any material respect when made; (c) the Borrower shall fail to perform or observe (i) any of the terms, covenants or agreements contained in Sections 5.4, 5.10, 5.14, or 5.15 hereof or (ii) any other term, covenant, or agreement contained in any Loan Document (other than the other Events of Default specified in this Section 7) and such failure remains unremedied for the earlier of fifteen days from (A) the date on which the Lender has given the Borrower written notice of such failure and (B) the date on which the Borrower knew of such failure; (d) any material provision of any Loan Document to which the Borrower is a party shall for any reason cease to be valid and binding on the Borrower, or the Borrower shall so state and the foregoing has an adverse effect on the Borrower or impairs the ability of the Lender to be repaid or to exercise its rights in accordance with the terms hereof; (e) dissolution, liquidation, winding up, or cessation of the Borrower's business, failure of the Borrower generally to pay its debts as they mature, admission in writing by the Borrower of its inability generally to pay its debts as they mature, or calling of a meeting of the Borrower's creditors for purposes of compromising any of the Borrower's debts; (f) the commencement by or against the Borrower of any bankruptcy, insolvency, arrangement, reorganization, receivership, or similar proceedings under any federal or state law and, in the case of any such involuntary proceeding, such proceeding remains undismissed or unstayed for sixty days following the commencement thereof, or any action by the Borrower is taken authorizing any such proceedings; (g) an assignment for the benefit of creditors is made by the Borrower, whether voluntary or involuntary, the appointment of a trustee, custodian, receiver, or similar official for the Borrower or for any substantial property of the Borrower, or any action by the Borrower authorizing any such proceeding; (h) the Borrower shall default in (i) the payment of principal or interest on any indebtedness in excess of $100,000 (other than the Obligations) beyond the period of grace, if any, provided in the instrument or agreement under which such indebtedness was created; or (ii) the observance or performance of any other agreement or condition relating to any such indebtedness or contained in any instrument or agreement relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such indebtedness to cause, with the giving of notice if required, such indebtedness to become due prior to its stated maturity; or (iii) any loan or other agreement under which the Borrower has received financing from Transamerica Corporation or any of its affiliates; (i) the Borrower suffers or sustains a Material Adverse Change; (j) any tax lien, other than a Permitted Lien, is filed of record against the Borrower and is not bonded or discharged within twenty Business Days; (k) any judgment which has had or could reasonably be expected to have a Material Adverse Effect on the Borrower and such judgment shall not be stayed, vacated, bonded, or discharged within sixty days; (l) any material covenant, agreement, or obligation, as determined in the good faith judgment of the Lender, made by the Borrower and contained in or evidenced by any of the Loan Documents shall cease to be enforceable, or shall be determined to be unenforceable, in accordance with its terms; the Borrower shall deny or disaffirm the Obligations under any of the Loan Documents or any liens granted in connection therewith; or any liens granted on any of the Collateral in favor of the Lender shall be determined to be void, voidable, or invalid, or shall not be given the priority contemplated by this Agreement; or 10 (m) more than 35% of the ownership of any equity interests of the Borrower become subject to any contractual, judicial, or statutory lien, charge, security interest, or encumbrance. SECTION 8. REMEDIES. If any Event of Default shall have occurred and be continuing: (a) The Lender may, without prejudice to any of its other rights under any Loan Document or Applicable Law, declare all Obligations to be immediately due and payable (except with respect to any Event of Default set forth in Section 7(f) hereof, in which case all Obligations shall automatically become immediately due and payable without necessity of any declaration) without presentment, representation, demand of payment, or protest, which are hereby expressly waived. (b) The Lender may take possession of the Collateral and, for that purpose may enter, with the aid and assistance of any person or persons, any premises where the Collateral or any part hereof is, or may be placed, and remove the same. (c) The obligation of the Lender, if any, to make additional Loans or financial accommodations of any kind to the Borrower shall immediately terminate. (d) The Lender may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein (or in any Loan Document) or otherwise available to it, all the rights and remedies of a secured party under the applicable Uniform Commercial Code (the "Code") whether or not the Code applies to the affected Collateral and also may (i) require the Borrower to, and the Borrower hereby agrees that it will at its expense and upon request of the Lender forthwith, assemble all or part of the Collateral as directed by the Lender and make it available to the Lender at a place to be designated by the Lender that is reasonably convenient to both parties and (ii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Lender's offices or elsewhere, for cash, on credit, or for future delivery, and upon such other terms as the Lender may deem commercially reasonable. The Borrower agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (e) All cash proceeds received by the Lender in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Lender, be held by the Lender as collateral for, or then or at any time thereafter applied in whole or in part by the Lender against, all or any part of the Obligations in such order as the Lender shall elect. Any surplus of such cash or cash proceeds held by the Lender and remaining after the full and final payment of all the Obligations shall be paid over to the Borrower or to such other Person to which the Lender may be required under applicable law, or directed by a court of competent jurisdiction, to make payment of such surplus. SECTION 9. MISCELLANEOUS PROVISIONS. SECTION 9.1. Notices. Except as otherwise provided herein, all notices, approvals, consents, correspondence, or other communications required or desired to be given hereunder shall be given in writing and shall be delivered by overnight courier, hand delivery, or certified or registered mail, postage prepaid, if to the Lender, then to Transamerica Technology Finance Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice President, Lease Administration, with a copy to the Lender at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal Department, and if to the Borrower, then to Pharsight Corporation, 800 W. El Camino Real, Mountain View, California 94040, Attention: Chief Financial Officer or such other address as shall be designated by the Borrower or the Lender to the other party in accordance herewith. All such notices and correspondence shall be effective when received. 11 SECTION 9.2. Headings. The headings in this Agreement are for purposes of reference only and shall not affect the meaning or construction of any provision of this Agreement. SECTION 9.3. Assignments. The Borrower shall not have the right to assign any Note or this Agreement or any interest therein unless the Lender shall have given the Borrower prior written consent and the Borrower and its assignee shall have delivered assignment documentation in form and substance satisfactory to the Lender in its sole discretion. The Lender may assign its rights and delegate its obligations under any Note or this Agreement. SECTION 9.4. Amendments, Waivers, and Consents. Any amendment or waiver of any provision of this Agreement and any consent to any departure by the Borrower from any provision of this Agreement shall be effective only by a writing signed by the Lender and shall bind and benefit the Borrower and the Lender and their respective successors and assigns, subject, in the case of the Borrower, to the first sentence of Section 9.3. SECTION 9.5. Interpretation of Agreement. Time is of the essence in each provision of this Agreement of which time is an element. All terms not defined herein or in a Note shall have the meaning set forth in the applicable Code, except where the context otherwise requires. To the extent a term or provision of this Agreement conflicts with any Note, or any term or provision thereof, and is not dealt with herein with more specificity, this Agreement shall control with respect to the subject matter of such term or provision. Acceptance of or acquiescence in a course of performance rendered under this Agreement shall not be relevant in determining the meaning of this Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. SECTION 9.6. Continuing Security Interest. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the indefeasible payment in full of the Obligations, (ii) be binding upon the Borrower and its successors and assigns and (iii) inure, together with the rights and remedies of the Lender hereunder, to the benefit of the Lender and its successors, transferees, and assigns. SECTION 9.7. Reinstatement. To the extent permitted by law, this Agreement and the rights and powers granted to the Lender hereunder and under the Loan Documents shall continue to be effective or be reinstated if at any time any amount received by the Lender in respect of the Obligations is rescinded or must otherwise be restored or returned by the Lender upon the insolvency, bankruptcy, dissolution, liquidation, or reorganization of the Borrower or upon the appointment of any receiver, intervenor, conservator, trustee, or similar official for the Borrower or any substantial part of its assets, or otherwise, all as though such payments had not been made. SECTION 9.8. Survival of Provisions. All representations, warranties, and covenants of the Borrower contained herein shall survive the execution and delivery of this Agreement, and shall terminate only upon the full and final payment and performance by the Borrower of the Obligations secured hereby. SECTION 9.9. Indemnification. The Borrower agrees to indemnify and hold harmless the Lender and its directors, officers, agents, employees, and counsel from and against any and all costs, expenses, claims, or liability incurred by the Lender or such Person hereunder and under any other Loan Document or in connection herewith or therewith, unless such claim or liability shall be due to willful misconduct or gross negligence on the part of the Lender or such Person. SECTION 9.10. Counterparts; Telecopied Signatures. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be an original, but both of which shall together constitute one and the same instrument. This Agreement and each of the other Loan Documents and any notices given in connection herewith or therewith may be executed and delivered by telecopier or other facsimile transmission all with the same force and effect as if the same was a fully executed and delivered original manual counterpart. 12 SECTION 9.11. Severability. In case any provision in or obligation under this Agreement or any Note or any other Loan Document shall be invalid, illegal, or unenforceable in any jurisdiction, the validity, legality, and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 9.12. Delays; Partial Exercise of Remedies. No delay or omission of the Lender to exercise any right or remedy hereunder, whether before or after the happening of any Event of Default, shall impair any such right or shall operate as a waiver thereof or as a waiver of any such Event of Default. No single or partial exercise by the Lender of any right or remedy shall preclude any other or further exercise thereof, or preclude any other right or remedy. SECTION 9.13. Entire Agreement. The Borrower and the Lender agree that this Agreement, the Schedule hereto, and the Commitment Letter are the complete and exclusive statement and agreement between the parties with respect to the subject matter hereof, superseding all proposals and prior agreements, oral or written, and all other communications between the parties with respect to the subject matter hereof. Should there exist any inconsistency between the terms of the Commitment Letter and this Agreement, the terms of this Agreement shall prevail. SECTION 9.14. Setoff. In addition to and not in limitation of all rights of offset that the Lender may have under Applicable Law, and whether or not the Lender has made any demand or the Obligations of the Borrower have matured, the Lender shall have the right to appropriate and apply to the payment of the Obligations of the Borrower all deposits and other obligations then or thereafter owing by the Lender to or for the credit or the account of the Borrower. SECTION 9.15. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SECTION 9.16. GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. SECTION 9.17. Venue; Service of Process. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING, (a) ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (b) THE RIGHT TO INTERPOSE ANY NONCOMPULSORY SETOFF, COUNTERCLAIM, OR CROSS-CLAIM. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS FOR IT SPECIFIED IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH RESPECT TO RIGHTS AND REMEDIES. 13 IN WITNESS WHEREOF, the undersigned Borrower has caused this Agreement to be duly executed and delivered by its proper and duly authorized officer as of the date first set forth above. PHARSIGHT CORPORATION By: /s/ Robin A. Kehoe ---------------------------------- Name: Robin A. Kehoe Title: CFO Federal Tax ID: 77-0401273 Accepted as of the 26th day of February, 1999 TRANSAMERICA BUSINESS CREDIT CORPORATION By: /s/ Gary P. Moro ---------------------------------- Name: Gary P. Moro Title: Vice President Form16 14 EX-10.9 14 EXHIBIT 10.9 *** TEXT OMITTED AND FILED SEPARATELY CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R.SECTIONS 200.80(b)(4), 200.83 AND 240.24b-2 EXHIBIT 10.9 PHARSIGHT CORPORATION INFORMATION PRODUCT DISTRIBUTION AGREEMENT This Information Product Distribution Agreement (this "Agreement") is made and entered into as of June 25, 1999 (the "Effective Date") by and between Pharsight Corporation, a California corporation, (hereinafter "Pharsight") and Protocare Sciences, Inc., a Delaware corporation (hereinafter "Protocare"). RECITALS Pharsight is engaged in the sale of software and services relating to clinical trial design and modeling to pharmaceutical and biotechnology companies and desires to have the right to reproduce, use, and distribute as part of its Patient Information Resource (PIR) product a selection of patient therapeutic data collected by Protocare in the diabetes area. Protocare is the owner of or has appropriate licenses to all US and foreign copyrights and all other intellectual property rights pertaining to the database that is the subject of this Agreement and is willing to grant to Pharsight a non-exclusive right and license to reproduce, use, and distribute that database on the terms and conditions set forth herein. NOW, THEREFORE, IN CONSIDERATION OF THESE PREMISES, AS WELL AS THE OBLIGATIONS HEREIN MADE AND UNDERTAKEN, THE PARTIES HERETO DO HEREBY AGREE AS FOLLOW, WITH THE CAPITALIZED TERMS HAVING THE MEANING SET FORTH IN EXHIBIT AS: 1. GRANT OF LICENSE. 1.1 LICENSE GRANT. Subject to the payment of royalties as set forth in Section 5, Protocare hereby grants Pharsight a non-exclusive world-wide right and license (a) to reproduce the Database and Documentation and to display, sell, license, and otherwise distribute copies of the Database or portions thereof and the Documentation to Customers, either alone or bundled with other Pharsight products or services; (b) to use the Database and the Documentation for purposes of technical support for Customers; (c) to use a reasonable number of copies of the Database and Documentation for purposes of marketing, training, and demonstrations; (d) to use the Protocare name in connection with the distribution and marketing of the Database and the products derived therefrom; (e) to license Customers to use the data in the Database and to publish summarized and non-patient-specific portions of the data, or derivatives of the data as part of works describing their use of the data and to include the data and derivatives of the data in regulatory submissions, (f) to authorize its distributors to exercise any or all of the rights set forth in (a) through (e) above; (g) to use the Database and Documentation in connection with consulting services provided to Customers and to distribute to such Customers models and other analyses based on the Database; and (h) to modify the Database and the Documentation and to create derivative works of the Database and Documentation, including incorporating the Database or 1 Documentation or modifications of either into an internet-based medical query and response system, and to license the use of such system to Customers. 1.2 COPYRIGHT/TRADEMARK NOTICES. All copies of the Database distributed by Pharsight will include appropriate copyright and trademark notices as supplied by Protocare. Pharsight will identify the Database as a product of Protocare on printed promotional materials and web pages that reference the Database and on any packaging it develops. 1.3 CUSTOMER RESTRICTIONS. Customers will be licensed to use the data in the Database and related products, including Database Derivatives, for in-house drug development but will have no right to further distribute the Database or Database Derivatives. The Customer license agreement for products containing the Database or Database Derivatives will authorize use substantially as follows: user is granted a license for the use of this product for drug discovery and clinical development purposes. In the event that Pharsight becomes aware that the Database or Database Derivative licensed by Pharsight to a Customer is being used for post-approval marketing purposes, and such use is not terminated upon notice to the Customer, Pharsight will promptly notify Protocare and the parties will discuss the appropriate actions to take to enforce the use restrictions. If the parties are in disagreement over the actions to take and Pharsight's actions are not effectual in terminating the unauthorized use, Pharsight will pay to Protocare a marketing license fee of [...***...] and Protocare will authorize use of the Database and Database Derivatives by the Customer for post-approval marketing purposes. 1.4 OWNERSHIP. Protocare will retain ownership of the Database and the underlying data. Pharsight and its suppliers will own all right, title, and interest in and to any Database Derivatives, subject to Protocare's ownership of the underlying data and Database. Pharsight will own all right, title, and interest in and to any query or interface or other software developed by or for Pharsight and integrated or bundled with the Database or a Database Derivative. Pharsight may register its own copyright in any derivative works, provided the Database is identified in such registration as an underlying work of Protocare. Pharsight's ownership of any Database Derivative notwithstanding, it may not license or otherwise distribute such Database Derivative except in accordance with the provisions of this Agreement, including the use restriction set forth in Section 1.3. 2. DELIVERY AND ACCEPTANCE 2.1 DELIVERY OF INITIAL DATABASE. Protocare will build the Database in accordance with the specifications in Exhibit B and test it against the Acceptance Criteria in Exhibit C. Protocare will deliver the Database (except for the practice review system (PRS) elements) to Pharsight electronically within six weeks of the Effective Date; the addition of the PRS data elements will be completed within ten weeks after the Effective Date. 2.2 ACCEPTANCE. Pharsight will have thirty (30) working days from receipt of the Database (including the PRS elements) to test for adherence to the Acceptance Criteria and will notify Protocare promptly if the Database fails to conform to such criteria. Protocare will have twenty (20) working days to correct such nonconformity, and upon redelivery Pharsight will again test the Database against the Acceptance Criteria. This process will be repeated (except that each subsequent test period and repair period will be limited to fifteen (15) working days) until Pharsight either provides Protocare with written - ---------------- * Confidential treatment requested. 2 notice of acceptance of the Database or is deemed to have accepted the Database under the provisions of this section, provided, however, that if the Database fails to meet the Acceptance Criteria on the third delivery, Pharsight shall have the right to terminate this Agreement and receive a full refund of the initial license fee. Pharsight shall be deemed to have accepted the Database if it fails to notify Protocare of any nonconformity therein within thirty (30) working days of delivery (or within fifteen (15) working days of redelivery in the case of nonconformities in the original delivery). 3. PRODUCT DEVELOPMENT AND DISTRIBUTION 3.1 PRODUCT DESCRIPTION. Pharsight will distribute the Database to Customers as part of its PIR product line. Pharsight will make PIR products available to Customers in three forms: (a) distribution of the full Database (Direct Product or PIR-DP); (b) use of the Database as a resource by Pharsight's professional consultants in the course of providing consulting services (Consulting Product or PIR-CP); and (c) use of the Database in an automated, internet-based medical query-response service product (Internet-Product or PIR-IP). 3.2 PRODUCT DEVELOPMENT. For the PIR-DP, Pharsight will distribute the Database either as received from Protocare or with minor changes to improve its usability. For the PIR-CP, Pharsight employees and consultants will utilize information from the Database in developing models that will be delivered to customers. For the PIR-IP, Pharsight will utilize the Database as a resource that is accessed with Pharsight proprietary query software and a customized user interface for answering customer queries. The proprietary search software and user interface are currently under development; Pharsight has targeted the PIR-IP product for release in late 1999. 3.3 PRICING AND PROMOTION. Subject to the other restrictions contained in this Agreement, Pharsight is free to price, promote, and distribute the Database in any manner it deems appropriate. Pharsight will be responsible for all decisions and costs involved in the marketing and distribution of the PIR, including pricing, Customer license terms, promotional materials, packaging, distribution channels, and customer evaluation and training. Pharsight may include material describing the Database on its web site, in promotional materials, and during training and professional presentations. Subject to complying with Section 1.2, Pharsight may repackage, at its own expense, the Database products prior to shipment to Customers and may include in such packaging the Pharsight logo, references to Pharsight's website and other products, and the words to the effect that the product is distributed by Pharsight. 3.4 MARKETING RESTRICTION. Pharsight will not market the PIR product containing the Database to post-approval marketing groups. Protocare reserves all rights not granted to Pharsight hereunder, provided, however, that Protocare agrees that it will not market the Database to clinical development groups. In addition, Protocare agrees that it will not market any web-based drug development and clinical trial query and response system that is competitive with Pharsight's internet query PIR-IP product within the disease types for which Protocare has provided a Database to Pharsight. 3.5 COSTS. Protocare will be fully responsible for all development costs of the Database and any updates, including any royalties or payments due to third-parties. Pharsight will be fully responsible for any and all expenses involved in the development of the proprietary search software and user interface for the PIR-IP product, any other software or other tools it develops to enhance usability of the Database, and distribution of the Database to its customers, including manufacturing, marketing, and shipping expenses. 3 4. UPDATES; CUSTOMER SUPPORT 4.1 MID-YEAR UPDATES. Protocare will provide Pharsight with an update for the Database at the half-year point of each year of this Agreement to extend the histories of earlier selected patients by an additional six (6) months. 4.2 RENEWAL UPDATES. Protocare will provide Pharsight with totally refreshed update (i.e., new statistical database extraction) for the Database at each annual renewal. The refreshed Database will be subject to QA testing in accordance with the criteria established by the parties. All copies of the prior year database and its update held by Pharsight must be returned to Protocare upon acceptance of the renewal update. 4.3 CUSTOMER SUPPORT. Pharsight will provide all customer support for the PIR product. Protocare will make a person familiar with the Database available to resolve problems Pharsight may encounter from time to time with the data quality. For each [...***... ] in royalties paid by Pharsight to Protocare (including the initial license fee), Protocare will provide an aggregate of two days of problem resolution assistance without charge; further assistance will be provided as necessary at [...***...] per day, prorated on an hourly basis for usage of less than a full day. 5 PAYMENTS 5.1 INITIAL LICENSE FEE. Pharsight will pay Protocare a license fee of [...***...] upon execution of this Agreement or upon the agreement of the parties on Database fields and Acceptance Criteria, whichever is later; this amount will be credited against actual royalties due with respect to product sales during the initial term of this Agreement. Upon each renewal of this Agreement, Pharsight will pay Protocare a license renewal fee of [...***...], which will be credited against actual royalties due with respect to product sales during the one-year renewal term. In no event may Pharsight license products containing the Database or Database Derivatives to its Customers prior to payment of the [...***...] license fee. 5.2 PER-COPY ROYALTY. Pharsight will pay Protocare a royalty of (i) [...***...] for each annual license sold to a Customer for the PIR-DP containing the Database; (ii) [...***...] for each annual license sold to a Customer for the PIR-IP utilizing the Database or a Database Derivative; and (iii) [...***...] for each Customer Project for which Pharsight's staff accesses the Database in connection with providing consulting services to the Customer. For purposes of calculating the royalty due hereunder for the PIR-DP, each copy of the media containing the Database will constitute a separate license. For purposes of calculating the royalty due hereunder for the PIR-IP, the clinical development team for each therapeutic area (e.g. diabetes, cardio-vascular, etc.) shall constitute a separate license. No royalty will be due for copies of the PIR product used for evaluation or training. 5.3 PAYMENTS. Royalty payments will be made on a quarterly basis with payment due thirty (30) days after the end of each calendar quarter for all revenue received during such quarter. Refunds to Customers for products returned by customers will be credited in the quarter in which they are returned. - ---------------- * Confidential treatment requested. 4 Each payment will be accompanied by a report setting forth the number of each type of product sold during the quarter. 5.4 AUDIT. Pharsight will, upon written request, during normal business hours, but not more frequently than once each calendar year, provide access for purposes of audit to pertinent records relating to royalties payable in connection with the Database to an independent accounting firm chosen and compensated (other than on a contingent fee basis) by Protocare and reasonably acceptable to Pharsight. Such accounting firm will be authorized to report to Protocare only the amount of royalties due and payable for the period examined. If the amount under-reported by Pharsight is equal to or greater than ten percent (10%) of the total payment due to Protocare for the payment period so audited, then the cost of the audit shall be borne by Pharsight. 5.5 CONFIDENTIALITY. Protocare will not disclose to any third party any sales or customer information received from Pharsight in connection with royalty payments and will use such information solely for the purpose of carrying out its obligations under this Agreement. Pharsight shall restrict access to information contained in the Database to the person(s) assigned to analyze it or who otherwise have a need to know it for legitimate health research purposes. Each Customer license agreement shall require the Customer to restrict access to information contained in the Database to person(s) assigned to analyze it or who otherwise have a need to know it for legitimate health research purposes. Each person given such access must first be advised that information contained in the Database is confidential and may be used only as specifically permitted by this Agreement or the applicable Customer license agreement and may not otherwise be discussed or disclosed. The information contained in the Database is being licensed to Pharsight and may be licensed to Pharsight's Customers solely for drug discovery and development purposes, which shall include the right to publish summarized and non-patient-specific portions of the information, or derivatives of the information, as part of works describing their use of the information and to include the data and derivatives of the data in regulatory submissions, but shall not include any use that would reveal any information from individual patient records unless so required by the FDA. Pharsight will not and each Customer's license agreement will provide that the Customer will not make any attempt to ascertain the names of patients or providers who are the sources of the information contained in the Database or of any other information that is "confidentialized" by substituting codes for identifying information before Protocare provides Database to Pharsight. If Protocare reveals to Pharsight the source of the data in the Database, Pharsight shall not discuss with such source the existence of this Agreement or the business conducted pursuant to this Agreement. Pharsight shall not name or provide information enabling any person to determine the source of the data in any presentation, marketing material or report unless Protocare gives its prior written consent. 6. WARRANTIES; INDEMNIFICATION; LIMITATION OF LIABILITY 6.1 WARRANTY. Protocare warrants to Pharsight (a) that the Database does not infringe the patent, copyright, or trade secret rights of any third party; (b) that Protocare has all rights and authority necessary for the grant of rights and licenses effected by this Agreement; (c) that the Database as supplied to Pharsight was developed in accordance with the quality assurance procedures described in Exhibit D and Exhibit E for generating and validating the data; (d) that all appropriate and required consents to use and redistribute the data in the Database have been obtained; and (e) that use and distribution of the Database as authorized herein will not violate federal or state patient-privacy laws or regulations. The warranty in clause (e) shall apply to the initial Database only on the basis of the federal or state patient-privacy laws or regulations in effect at the time of delivery of the initial Database. and to 5 each revision of the Database only on the basis of the federal or state patient-privacy laws or regulations in effect at the time of delivery of such revision. 6.2 INDEMNIFICATION. Protocare will defend, indemnify, and hold Pharsight harmless from and against any action or other proceeding brought against Pharsight to the extent that it is based on (i) a claim that any part of the Database or Documentation infringes any copyright or patent or incorporates any misappropriated trade secrets of any third party or (ii) a claim that use or distribution of the Database as authorized herein violates federal or state patient-privacy laws or regulations or the privacy rights of any patient included in the Database as such laws were in effect at the time of delivery of the version of the Database that is the subject of such claim (either claim, an "Action"). Protocare will pay any and all costs, damages, and expenses (including but not limited to reasonable attorneys' fees) incurred by Pharsight in any such Action and will refund to Pharsight any royalties paid on any copies of the Database for which Pharsight is required to give a refund to a Customer because such Customer's rights to continue to use the Database have been terminated or restricted. Protocare will have no obligation under this Section 6.2 as to any Action unless (i) Protocare is promptly notified of the Action; (ii) Protocare has sole control of the defense and settlement of the Action; and (iii) Pharsight provides Protocare, at Protocare' expense, with reasonable assistance in defense and settlement of the Action. Protocare will have no obligation under this Section 6.2 for any Action if the claim arises from the combination, operation, or use of the Database with non-Protocare programs, data, or documentation if such claim would have been avoided by the use of the Database without combination with such programs, data, or documentation. 6.3 LIMITATION ON LIABILITY. EXCEPT WITH RESPECT TO THE INDEMNIFICATION OBLIGATIONS UNDER SECTION 6.2, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, CONSEQUENTIAL, SPECIAL OR INCIDENTAL DAMAGES (INCLUDING DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE) ARISING OUT OF THIS AGREEMENT EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT WITH RESPECT TO THE INDEMNIFICATION OBLIGATIONS UNDER SECTION 6.2, NEITHER PARTY'S LIABILITY UNDER THIS AGREEMENT SHALL EXCEED THE AMOUNTS PAID OR PAYABLE TO PROTOCARE UNDER THIS AGREEMENT. BOTH PARTIES ACKNOWLEDGE THAT THE FOREGOING LIMITATION REFLECTS A BARGAINED-FOR ALLOCATION OF RISK AND THAT THE ROYALTIES SET FORTH HEREIN REFLECT SUCH RISK. 7. TERM AND TERMINATION 7.1 TERM OF AGREEMENT. The initial term of this Agreement will be the period beginning on the Effective Date of this Agreement and ending on the first anniversary of the date on which Pharsight accepts (in accordance with Section 2.2) the initial Database (including the PRS elements). This Agreement may be renewed for two successive additional one-year periods at Pharsight's option and beyond that may be renewed by mutual agreement of the parties. 7.2 TERMINATION FOR NON-DELIVERY. If Protocare fails to deliver the initial Database in a form meeting the Acceptance Criteria within six (6) months of the Effective Date, then Pharsight shall have the option to terminate this Agreement, return any copies of the Database in its possession, and receive from Protocare a refund of the initial license fee. 6 7.3 TERMINATION FOR BREACH. Each party has the right to terminate this Agreement if the other party has materially breached any obligation herein and such breach remains uncured for a period of thirty (30) days after written notice thereof is sent to the other party. 7.4 EFFECT OF TERMINATION. Upon termination or expiration of this Agreement, all rights and licenses granted to Pharsight hereunder shall terminate (except as provided in this Section 7.4). Pharsight shall destroy all remaining copies of the Database in its possession except for the number necessary in its judgment to carry out its support obligations to Customers. Termination will have no effect on the rights of any Customer to continue to use any Database in accordance with its original license terms or on the rights of Pharsight to provide technical support to such Customers. Notwithstanding any such termination, Protocare shall remain entitled to fees owed pursuant to this Agreement resulting from use or license of the Database prior to termination of this Agreement. 8. MEDIATION AND ARBITRATION. 8.1 MEDIATION. Any dispute arising under this Agreement will be resolved through a mediation and arbitration approach. The parties agree to select a mutually agreeable, neutral third party to help them mediate any dispute that arises under the terms of this Agreement. Costs and fees associated with the mediation will be shared equally by the parties. 8.2 ARBITRATION. If the mediation is unsuccessful, the parties agree that the dispute will be decided by binding arbitration under the rules of the American Arbitration Association. The decision of the arbitrators will be final and binding on the parties and may be entered and enforced in any court of competent jurisdiction by either party. The prevailing party in the arbitration proceedings will be awarded reasonable attorney fees, expert witness costs and expenses, and all other reasonable costs and expenses incurred in connection with the proceedings, unless the arbitrators for good cause determine otherwise. 9. GENERAL 9.1 NOTICES. Any notice required or permitted hereunder must be in writing, and will be effective on the date of delivery when delivered personally, the next business day after dispatch when sent by Federal Express or other recognized overnight courier service, or the fifth business day after dispatch when sent by certified mail, postage prepaid, return receipt requested. Notices should be addressed to the other party at the address shown below or at such other address as a party may designate by ten days' advance written notice to the other party: Pharsight Corporation Protocare Sciences, Inc. 800 West El Camino Real, Suite 200 2400 Broadway Mountain View, CA 94040 Santa Monica, CA 90404 Attention: Chief Financial Officer Attn: Chief Executive Officer Phone: (650) 314-3800 Phone: Fax: (650) 314-3810 Fax: 9.2 ENTIRE AGREEMENT; MODIFICATIONS. This Agreement, including all exhibits, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior 7 representations, proposals, discussions, and communications, whether oral or in writing. This Agreement may be modified or amended only by a writing executed by a duly authorized representative of each party. 9.3 FORCE MAJEURE. Neither party will be liable to the other for any failure or delay caused by events beyond such party's control, including, without limitation, sabotage, riots, insurrections, fires, flood, storm, explosions, war, or earthquakes. However, if such events shall continue for thirty (30) days or more, the other party shall have the option of terminating this Agreement by giving written notice of termination. 9.4 CHANGE IN LAW; CHANGE IN CIRCUMSTANCES. No party shall make or receive any payment or take any action under this Agreement if any judicial decision, legislative action, or regulatory or other administrative interpretation, whether federal or state, would render illegal the conduct of either party under this Agreement. If performance by either party of any term of this Agreement should be deemed illegal by any party or third party who is essential to performance of this Agreement for any such reason, either party shall have the right to require that the other party renegotiate the terms of this Agreement. If Protocare's data relationships shall be altered or interrupted, Protocare shall notify Pharsight and the parties shall attempt to renegotiate the terms of this Agreement. If the parties fail to reach an agreement satisfactory to both parties within fifteen (15) days after the receipt of any request for renegotiation, either party may terminate this Agreement upon fifteen (15) days prior written notice to the other party, or sooner if required by law. In the event of such termination, Protocare will refund to Pharsight a pro-rated amount of the [...*** ...] initial licensing fee or renewal license fee paid for the year in which termination occurs. 9.5 ASSIGNMENT. This Agreement will be binding upon and inure to the benefit of the parties hereto, their successors and permitted assigns. Either party may assign this Agreement in its entirety to a successor corporation upon notice to the other party in the event of a merger or an acquisition of all or substantially all of the assets of the assigning party. 9.6 GOVERNING LAW. All questions concerning the validity, operation, interpretation, and construction of this Agreement will be governed by and determined in accordance with the laws of the State of California, without regard to its conflict of laws provisions. Application of the United Nations Convention on Contracts for the International Sale of Goods is specifically excluded. 9.7 SEVERABILITY. If a court of competent jurisdiction determines that any provision of this Agreement is invalid, illegal, or otherwise unenforceable, such provision shall be replaced with a valid, enforceable provision as nearly as possible in accordance with the stated intention of the parties, while the remainder of this Agreement shall remain in full force and effect. To the extent any provision cannot be enforced in accordance with the stated intentions of the parties, such provision shall be deemed not to be a part of this Agreement. 9.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which together will constitute one and the same instrument. - ---------------- * Confidential treatment requested. 8 IN WITNESS THEREOF, THE PARTIES HAVE CAUSED THIS AGREEMENT TO BE EXECUTED BY THEIR RESPECTIVE DULY AUTHORIZED REPRESENTATIVES AS SET FORTH BELOW: PHARSIGHT CORPORATION PROTOCARE SCIENCES, INC. By: /s/ Robin A. Kehoe By: /s/ Robert Dubois ------------------------------ ------------------------------ Robin A. Kehoe Robert Dubois Chief Financial Officer Chief Executive Officer 9 EXHIBIT A DEFINITIONS DATABASE means the diabetes database as described in Exhibit B and all updates to the initial database when and as delivered to Pharsight. DATABASE DERIVATIVE means any derivative works, modifications, or new compilations of the Database prepared by or on behalf of Pharsight. DOCUMENTATION means any and all materials provided to Pharsight by Protocare describing the features, structure, functions, fields, contents, collection methods, etc. of the Database. CUSTOMER means a customer of Pharsight or of its distributors to whom Pharsight has licensed the use of the Database or Database Derivatives or to whom Pharsight has provided services utilizing the Database or Database Derivatives. CUSTOMER PROJECT means a set of consulting services provided to a Customer by Pharsight pursuant to a single statement of work with respect to a single drug or related set of drugs. A single Customer Project may include follow-on work based on the results of the initial work so long as the possibility of such follow-on work is contemplated in the original statement of work. ACCEPTANCE CRITERIA means the quality requirements for the Database set forth in Exhibit C or otherwise agreed upon in writing by the parties. 10 EXHIBIT B PHARSIGHT DIABETES DATABASE SPECIFICATION Using claims from January 1, 1997 through December 31, 1997, all patients who meet the following criteria for diabetes will be identified: [...***...] The data files will be delivered to Pharsight on CDs as 1) Version 5 SAS Transport Format and 2) Fixed format ASCII files with an accompanying Oracle 7 SQL*Loader control file describing their layout, datatypes, etc. [...***...] - ---------------- * Confidential treatment requested. 11 EXHIBIT C ACCEPTANCE CRITERIA [to be agreed upon] 12 EXHIBIT D DATABASE QUALITY ASSURANCE PROCEDURES When building a database for a client, there are specific steps taken by the database analyst to assure quality: POPULATION SELECTION AND DATA ACQUISITION 1. [...***...] DATA SCRUBBING 2. Once all claims are assembled, our analyst `scrubs' the data to assure completeness of each field. The following document outlines check list for the data quality edits: DATA SCRUBBING EDIT CHECKS [...***...] DATABASE ELEMENT INCLUSION CHECK LIST: [...***...] - ---------------- * Confidential treatment requested. 13 EXHIBIT E PROTOCARE SCIENCES DATA WAREHOUSE QUALITY ASSURANCE PROCEDURES Protocare Sciences maintains an in-house proprietary database comprised of claims and eligibility records from patient populations covered under various benefit plans. Protocare receives monthly paid claims files from the plans and "scrubs" the data for entry into the warehouse. The warehouse is updated on a quarterly basis. The data cleansing process begins prior to extracts being sent to Protocare. The typical process is as follows: 1. Protocare works with the data source to assign a quality level to the data. Issues that are of highest importance in determining data quality are: the percentage of complete encounter claims, usually for capitated services, that are included in the claims source; the predominant coding schemes used for diagnoses and procedures, preferably ICD-9-CM, CPT4, and HCPCS; and, the ability to uniquely identify members/patients across all types of data within the source. 2. Protocare works with the data source to address volume and processing issues, "claims experts" who can address current and historic issues with the data source, and business analysts who currently use the data and are aware of its anomalies. 3. Prior to receiving all claims from the data source, Protocare asks the source to send a sample extract of all data formats for further analysis. Protocare typically evaluates eligibility, provider, and claims data formats. The values stored within the sample data are compared to data dictionary and database questionnaire information. 4. When this process is complete, Protocare asks the source to send a historic load. Before loading the data into the, the data is "scrubbed". 5. For claims, the scrubbing process includes subsetting the raw, source data to include only those data elements of interest to Protocare; including only final, paid claims; and, verifying that dollar fields at the line level for each claim sum to the claim level values. Data are not deleted if they contain invalid diagnosis, procedure, or NDC codes; however, reference files are available to compare these codes to valid values. On a study by study basis, inappropriate or incorrect diagnostic, procedural, and drug codes are removed. 6. For eligibility, the scrubbing process includes collapsing multiple eligibility records for a patient into one continuous record and supplementing the demographic fields (such as residence state) with information from claims data when the information is not available in the eligibility file. The Protocare data warehouse is stored in a relational database. These data are arrayed in chronological order to provide a very detailed longitudinal profile of all medical and pharmacy services used by a patient. Services typically include the following types of information: demographics, inpatient and outpatient diagnoses by ICD-9-CM codes, inpatient and outpatient procedures, billed and reimbursed charges, outpatient drugs dispensed, and dates of service for drug and medical information. As stated above, the data scrubbing process does not exclude claims that may have "homegrown" or "invalid" diagnosis, procedure, or outpatient pharmacy drug codes. Many times, invalid codes contribute to an analysis. For example, the diagnosis code "250" (diabetes) is invalid because fourth and/or fifth digits are required in reporting diabetes diagnoses; however, a claim with this diagnosis indicates that a patient was treated for diabetes. It just does not specify what type of diabetes. In conducting a cost and utilization analysis, excluding this claim would result in under representation of the condition of diabetes. These claims can easily be excluded from an analysis if it is appropriate. 14 Protocare employs a team of experts who are skilled in data extraction, data hygiene and cleansing, and data translation and manipulation. Within the data warehouse: - Data extraction is accomplished in one of three ways: (1) ad hoc isql queries to unload tables and/or fields of interest, (2) Oracle applications to create subsets of the relational database, or (3) ad hoc isql queries to ASCII files which are then loaded into SAS-Registered Trademark- for further analysis. - Data cleansing is performed prior to loading the data into the Protocare warehouse. Additional "data hygiene" activities are executed on an ad hoc, project by project basis. The most common of these activities are to compare diagnosis, procedure, and drug codes to reference sources to determine the validity of each code used in a study. - The data can be translated and manipulated in many ways through the use of analysis tools such as SAS-Registered Trademark-. Common manipulations include building inpatient hospitalization shells from all of the facility and professional claims that are associated with each hospitalization. From these shells, inpatient length of stay and total cost of services can be captured. Additional data manipulation may include data summarizations across key dimensions such as the types of services provided within different provider specialties or the number and type of drug classes used in treating a specific condition. Finally, we can apply PRS to the claims data to create a more enhanced database. 15 EX-10.10 15 EXHIBIT 10.10 *** TEXT OMITTED AND FILED SEPARATELY CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R.SECTIONS 200.80(b)(4), 200.83 AND 240.24b-2 EXHIBIT 10.10 PHARSIGHT CORPORATION DATABASE LICENSE AGREEMENT This Database License Agreement (this "Agreement") is made and entered into as of February 24, 2000 (the "Effective Date") by and between Pharsight Corporation, a California corporation, (hereinafter "Pharsight") and Duke University, a nonprofit educational and healthcare institution (hereinafter "Duke"). RECITALS Pharsight is engaged in the sale of software and services relating to clinical trial design and modeling to pharmaceutical and biotechnology companies and desires to have the right to use certain databases developed by Duke, through its Duke Clinical Research Institute, both as a data resource for an Internet-based query-response product and internally in its professional consulting practice. Duke is the owner of or has appropriate licenses to all US and foreign copyrights and all other intellectual property rights pertaining to the databases that are the subject of this Agreement and has the right to grant licenses under such copyrights and other intellectual property rights. Duke wishes to have these databases utilized in the public interest and is willing to grant to Pharsight a non-exclusive right and license to use, reproduce, modify, and create derivatives of the subject database on the terms and conditions set forth herein. NOW, THEREFORE, IN CONSIDERATION OF THESE PREMISES, AS WELL AS THE OBLIGATIONS HEREIN MADE AND UNDERTAKEN, THE PARTIES HERETO DO HEREBY AGREE AS FOLLOW, WITH THE CAPITALIZED TERMS HAVING THE MEANING SET FORTH IN APPENDIX A: 1. DATABASE DELIVERY, TESTING, AND UPDATES 1.1 DELIVERY OF DATABASES. Duke will perform the statistical extraction of its patient-level data to create the Databases in accordance with the specifications in Appendix B and will test the Databases against the Acceptance Criteria. As a first step, Duke will prepare and deliver to Pharsight electronically within four (4) weeks of the Effective Date a sample database based on the Databases that Pharsight can use for testing purposes. The complete Databases will be delivered within twelve (12) weeks of the Effective Date. 1.2 ACCEPTANCE. Pharsight will have thirty (30) working days from receipt of each Database to test for adherence to the Acceptance Criteria and will notify Duke promptly if the Database fails to conform to such criteria. Duke will have twenty (20) working days to correct such nonconformity, and upon redelivery Pharsight will again test the Database against the Acceptance Criteria. This process will be repeated (except that each subsequent test period and repair period will be limited to fifteen (15) 1 working days) until Pharsight either provides Duke with written notice of acceptance of the Database or is deemed to have accepted the Database under the provisions of this section, provided, however, that if the Database fails to meet the Acceptance Criteria on the third delivery, Pharsight shall have the right to terminate this Agreement with respect to that particular Database and receive a full refund of all payments made to Duke prior to such termination for the licensing of said Database. Pharsight shall be deemed to have accepted the Database if it fails to notify Duke of any nonconformity therein within thirty (30) working days of delivery (or within fifteen (15) working days of redelivery in the case of nonconformities in the original delivery). 1.3 PATIENT ANONYMITY. The Databases will be totally anonymous as to the identity of individual patients, the study in which those patients participated, the sponsors of clinical trials in which data may have been collected, and the identity of medical practitioners and institutions providing treatment. Pharsight will not make any attempt to ascertain such information or any other information that was "confidentialized" by substituting codes for identifying information before Duke provided the Databases to Pharsight. Pharsight will promptly notify Duke if it finds that any such information has inadvertently been included in a Database and will promptly purge such information from the Database. 1.4 DATA ACCESS. Customers using the Product will have access only to summary statistics presented in numeric, tabular, and graphical form. The Product will be constructed so that it is not possible for Customers to access data records for individual patients or to identify individual practitioners or institutions providing treatment or the sponsors of clinical trials in which data may have been collected. Pharsight will maintain sufficient security measures, including firewalls and secure transmission protocols, to ensure that patient records from the Databases are always under Pharsight's control and cannot be accessed by its Customers. Pharsight will provide its consulting services Customers with tabular, graphical, numerical or narrative results based upon statistical analysis of data extracted from the Databases by its own consultants. All results provided to Customers will be in summary and non-patient specific form, and Pharsight's consultants will not share data from individual patient records in the Databases with Customers unless required to do so by the FDA. 1.5 UPDATES. During the term of this Agreement, Duke will provide Pharsight with an Update for each Database within thirty (30) days after the beginning of each year of this Agreement (including any renewal terms). The Update will be subject to QA testing in accordance with the criteria established by the parties. 1.6 COSTS. Duke will be fully responsible for all development and extraction costs of the Databases and any Updates, including any royalties or payments due to third-parties. 2. GRANT OF LICENSE 2.1 LICENSE GRANT FOR PRODUCT. Subject to the payment of royalties as set forth in Section 4.2, Duke hereby grants Pharsight a world-wide right and license (a) to use, reproduce, and modify the Databases and Documentation and to create Database Derivatives for development of the Product; (b) to license the Product to its Customers; (c) to license its Customers to use results obtained through the use of the Product for drug development and marketing activities, including regulatory submissions and research publications; (d) to use the Databases, the Documentation, and the Database Derivatives for purposes of technical support for Customers; and (e) to use a reasonable number of copies of the 2 Product, Databases, Documentation, and Database Derivatives for purposes of marketing, training, and demonstrations. 2.2 LICENSE GRANT FOR CONSULTING . Pharsight will have unrestricted access to data in the Databases and Database Derivatives for use in its consulting activities and, subject to the royalty obligations of Section 4.3 and other material terms of this Agreement, Duke hereby grants Pharsight a world-wide right and license (a) to use the Databases, the Database Derivatives, and the Documentation to prepare statistical results and conclusions based on data extracted from the Databases and Database Derivatives under consulting contracts with Customers; (b) to distribute to such Customers models, other analyses, and conclusions based on its analysis of the data in the Databases and Database Derivatives; and (c) to allow such Customers to use such models, analyses, and conclusions for drug development and marketing activities, including regulatory submissions and research publications. 2.3 OWNERSHIP. Pharsight acknowledges that the Databases and the underlying data are, and shall remain, the exclusive property of Duke, that Pharsight has no rights in such properties except those expressly granted by this Agreement and that those properties shall not be used in any way not specifically allowed by this Agreement. Duke acknowledges that Pharsight will own all right, title, and interest in and to the query, user interface, and other software developed by or for Pharsight as part of the Product and that Duke has no rights in the Product except as may be expressly granted by Pharsight. Database Derivatives created by Pharsight, including but not limited to a loading or other translation of the Databases from one format to another, shall be owned by Pharsight, but such ownership of the Database Derivatives shall be subject to Duke's underlying ownership of the data and shall not give Pharsight any rights to use such Database Derivatives, to the extent they contain such data, in any way not authorized by this Agreement. Pharsight will treat any Database Derivative and the underlying data contained therein with the same care and under the same restrictions defined in this Agreement. 2.4 LIMITED EXCLUSIVITY. During the term of this Agreement, Duke will not sell or license either Database to any third party for use in or development of commercial Internet-based query-response products or services similar to those provided by Pharsight. This Agreement shall not be taken to place any other restriction on Duke's rights to license its data to third parties or to use its data in providing services to third parties. This Agreement shall not be taken to place any restrictions on Duke's right to use, copy, or modify the Databases for Duke's research, educational, and healthcare purposes, including in projects that may be sponsored by commercial third parties, except that Duke will not make such use in support of any commercial Internet-based query-response products or services similar to those provided by Pharsight. 2.5 LIMITED LICENSE TO DUKE FOR PRODUCT. Pharsight hereby grants Duke a royalty-free, non-exclusive license (limited to ten users to be identified by Duke) to use the Product for Duke's internal research purposes, including research sponsored by governmental organizations, non-profit foundations, or through gifts, and for educational and other non-profit purposes, including the preparation of scientific publications by Duke personnel. Duke will acknowledge the contribution of Pharsight in any scientific publication resulting from Duke's use of the Product. 3. PRODUCT DEVELOPMENT, MARKETING AND DISTRIBUTION 3.1 PRODUCT DEVELOPMENT. Pharsight will develop the query, user interface, and other software for the Product that will allow licensed Customers to access the information in the Databases, as described 3 in the application overview in Appendix B. The target date for commercial release of the Product is June 2000. 3.2 PRODUCT MARKETING ACTIVITIES. Pharsight will be responsible for all decisions and costs involved in the marketing and distribution of the Product and consulting services utilizing the Databases, including pricing, end-user license terms, promotional materials, packaging, distribution channels, and customer evaluation and training. Pharsight may distribute the Product through Distributors so long as such Distributors have no direct access to the Databases. Pharsight may authorize its Distributors to use the Product for marketing, training, and demonstrations. 3.3 DATABASE SOURCE IDENTIFICATION. Neither party will, without the prior written consent of the other party: (a) use in advertising, publicity or otherwise, the name of any employee or agent, any trade-name, trademark, trade device, service mark, symbol, or any abbreviation, contraction or simulation thereof owned by the other party, or (b) represent, either directly or indirectly, that any product or service of the other party is a product or service of the representing party. Notwithstanding the foregoing, Pharsight may identify the Databases as having been prepared by Duke, subject to Duke's approval of the copy, which shall not be unreasonably withheld. Pharsight will submit all marketing materials referencing Duke to the Reviewers identified in Appendix A at the addresses set forth therein at least thirty (30) days prior to their intended use. Duke shall be deemed to have approved the marketing materials if it fails to notify Pharsight of any problems therein within thirty (30) days of submission. Pharsight will not represent or imply that use of the Databases represents any endorsement of the Product by Duke. 3.4 CUSTOMER SUPPORT. Pharsight will provide customer support for the Product. Duke will make one or more persons familiar with each Database available to assist Pharsight personnel in the resolution of problems they may encounter from time to time in use of the Databases. For each [...*** ...] in royalties paid by Pharsight to Duke (including the initial payment), Duke will provide one day of problem resolution assistance to Pharsight personnel without charge; further assistance will be provided as reasonably necessary at [...***...] per day, prorated on an hourly basis for usage of less than a full day (minimum charge of four hours per day). 3.5 PRESS ANNOUNCEMENTS. Pharsight will issue a press release announcing the relationship between Pharsight and Duke (target release date: ACC Scientific Session 2000), which announcement shall be subject to approval by Duke. Duke agrees that it will consider supplying a quotation for the press release. The parties agree that as further news about the relationship is generated in the future, they will cooperate with each other to issue appropriate press releases, subject to prior approval by Duke, to cover such news. 4. PAYMENTS 4.1 PREPAID ROYALTIES. To allow Duke to cover up-front expenses associated with the preparation of the Databases, Pharsight will make lump-sum, minimum royalty payments to Duke as follows:.(a) [...***...] upon execution of this Agreement and (b) [...***...] upon delivery of the Databases.; To cover the up-front costs for creating the Updates, Pharsight will make lump-sum, - ---------------- * Confidential treatment requested. 4 minimum royalty payments to Duke as follows: (a) [...*** ...] at the start of each subsequent year of this Agreement (including any renewal terms); and (d) [...***...] upon the delivery of the Updates in accordance with Section 1.5. All of these royalty payments, together with the [...***...] previously paid by Pharsight in connection with the parties' letter of intent on December 22, 1999, will be credited against actual royalties due in each year under section 4.2 and 4.3 below. Should the royalties due under sections 4.2 and 4.3 for a year be less than these minimum payments, then Duke shall be entitled to retain the full minimum payment. 4.2 PRODUCT ROYALTY. Pharsight will pay Duke a royalty of [...***...] for each annual Customer subscription license allowing use of the Product. No royalty will be due for evaluation licenses allowing a Customer limited use of the Product, provided Pharsight receives no revenue for such evaluation licenses, or for use of the Product in Customer training programs. 4.3 SERVICE USE ROYALTY. Pharsight will pay Duke a running royalty of [...***...] of revenues that Pharsight receives for consulting services where its professional staff utilize the Databases or Database Derivatives. Pharsight will invoice Customers separately for the portion of such services that utilizes the Databases or Database Derivatives, and the royalty will be based on the invoiced amounts. No royalty will be due for use of the Databases or Database Derivatives for Pharsight staff training. 4.4 PAYMENTS. Royalty payments will be made on a quarterly basis with payment due thirty (30) days after the end of each calendar quarter for all Product license revenue received during such quarter and all consulting service revenue recognizable (under generally accepted accounting principles) during such quarter. Each payment will be accompanied by a report setting forth the calculation of such payment amount. Checks shall be made payable to Duke University (EIN 56 0532129) and sent to the address supplied by Duke. Pharsight shall be responsible for all taxes (local, state and federal), including all sales and use taxes, that may now or hereafter be imposed upon this license or the possession or use of the Databases by Pharsight, provided, however, that Pharsight shall have no responsibility for any taxes based upon Duke's net income. 4.5 AUDIT. Pharsight will, upon written request, during normal business hours, but not more frequently than once each calendar year, provide access for purposes of audit to pertinent records relating to royalties payable in connection with the Databases to an independent accounting firm chosen and compensated (other than on a contingent fee basis) by Duke and reasonably acceptable to Pharsight. Such accounting firm will be authorized to report to Duke only the amount of royalties due and payable for the period examined. If the amount under-reported by Pharsight is equal to or greater than ten percent (10%) of the total payment due to Duke for the payment period so audited, then the cost of the audit shall be borne by Pharsight. 4.6 CONFIDENTIALITY. Duke will not disclose to any third party any sales or customer information received from Pharsight in connection with royalty payments and will use such information solely for the purpose of carrying out its obligations under this Agreement. Pharsight will protect the confidentiality of the Databases and will not disclose the Databases or the information contained therein to any third party except as expressly allowed by this Agreement. 5. WARRANTIES; INDEMNIFICATION; LIMITATION OF LIABILITY - ---------------- * Confidential treatment requested. 5 5.1 WARRANTIES. Duke represents and warrants to Pharsight (a) that Duke has all rights and authority necessary for the grant of rights and licenses effected by this Agreement; (b) that the data in the Databases were developed in substantial accordance with Duke's standard medical record-keeping procedures; (c) that all required consents to use and redistribute the data in the Databases have been obtained; and (d) that use and distribution of the Databases as authorized herein will not violate federal or state patient-privacy laws or regulations. The warranty in clause (d) shall apply to the Databases only on the basis of the federal or state patient-privacy laws or regulations in effect at the time of initial delivery of the Databases and to each Update only on the basis of the federal or state patient-privacy laws or regulations in effect at the time of delivery of such Update. If Pharsight is required to cancel any Customer license for the Product because of Duke's breach of one of the foregoing warranties, Duke will refund to Pharsight any royalties paid with respect to such cancelled licenses. 5.2 LIMITATIONS OF WARRANTY. THE FOREGOING WARRANTIES ARE THE ONLY WARRANTIES MADE BY DUKE. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE EXPRESSLY DISCLAIMED. 5.3 NON-INFRINGEMENT. Duke represents that to the best of its knowledge the Databases do not infringe upon any third party copyrights or other intellectual property rights, and that Duke has obtained all necessary consents to use and redistribute the data in the Databases as set forth in this agreement. If the Databases are found to infringe upon any third party rights, Duke agrees, at no cost to Pharsight to modify the infringing Database to eliminate such infringement, or if such modification is not practical to refund to Pharsight any royalties paid with respect to licenses that Pharsight cancels because of such infringement. 5.4 INDEMNIFICATION. Pharsight will defend, indemnify, and hold Duke harmless from and against any action or other proceeding brought against Duke arising from Pharsight's use, reproduction, modification, and creation of derivatives of the Databases, except where such action arises from negligence or willful misconduct on the part of Duke or from Duke's breach of the representations and warranties set forth in Section 5.1. Duke will defend, indemnify, and hold Pharsight harmless from and against any action or other proceeding brought against Pharsight to the extent that it is based on (i) Duke's negligence or willful misconduct; (ii) a claim that any part of the Databases or Documentation infringes any copyright or patent or incorporates any misappropriated trade secrets of any third party; or (iii) a claim that use or distribution of the Databases as authorized herein violates federal or state patient-privacy laws or regulations or the privacy rights of any patient included in the Databases as such laws were in effect at the time of delivery of the version of the Database that is the subject of such claim. 5.5 CONDITIONS OF INDEMNIFICATION. The indemnifying party will pay any and all costs, damages, and expenses (including but not limited to reasonable attorneys' fees) incurred by the indemnified party in any action or proceeding requiring indemnification under section 5.4 (an "Action"). The indemnifying party will have no obligation as to any Action unless (i) the indemnified party gives it prompt notice of the Action; (ii) the indemnifying party has sole control of the defense and settlement of the Action; and (iii) the indemnified party provides the indemnifying party, at the indemnifying party's expense, with reasonable assistance in defense and settlement of the Action. 5.6 LIMITATION ON LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INDIRECT, CONSEQUENTIAL, SPECIAL OR INCIDENTAL DAMAGES (INCLUDING DAMAGES FOR LOSS 6 OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE) ARISING OUT OF THIS AGREEMENT EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT WITH RESPECT TO THE INDEMNIFICATION OBLIGATIONS UNDER SECTIONS 5.4 AND 5.5, NEITHER PARTY'S LIABILITY UNDER THIS AGREEMENT SHALL EXCEED THE AMOUNTS PAID TO DUKE UNDER THIS AGREEMENT. BOTH PARTIES ACKNOWLEDGE THAT THE FOREGOING LIMITATION REFLECTS A BARGAINED-FOR ALLOCATION OF RISK AND THAT THE ROYALTIES SET FORTH HEREIN REFLECT SUCH RISK. 6. TERM AND TERMINATION 6.1 TERM OF AGREEMENT. The initial term of this Agreement will be the period beginning on the Effective Date of this Agreement and ending on the second anniversary of the date on which Pharsight accepts (in accordance with Section 2.2) both Databases. This Agreement may be renewed for two successive additional one-year periods at Pharsight's option and beyond that may be renewed by mutual agreement of the parties. 6.2 TERMINATION FOR NON-DELIVERY. If Duke fails to deliver both Databases in a form meeting the Acceptance Criteria within six (6) months of the Effective Date, then Pharsight shall have the option to terminate this Agreement, return any copies of the Databases in its possession, and receive from Duke a refund of all payments made to Duke prior to such termination, except that Duke may retain such portion of the payments, not to exceed [...*** ...], reflecting the cost of the statistical database development effort performed by Duke up to the date of termination under this Section 6.2. 6.3 TERMINATION FOR BREACH. Each party has the right to terminate this Agreement if the other party has materially breached any obligation herein and such breach remains uncured for a period of thirty (30) days after written notice thereof is sent to the other party. Either party may immediately terminate this Agreement for fraud, willful misconduct, or illegal conduct of the other party upon written notice of same to that other party. 6.4 EFFECT OF TERMINATION. Upon termination or expiration of this Agreement, all rights and licenses granted to Pharsight hereunder shall terminate and Pharsight shall promptly return, or at Duke's election destroy, the Databases and all copies thereof and shall cease use of any Database Derivatives to the extent such Database Derivatives contain data from the Databases. Termination will have no effect on the rights of any Customer to continue to use any information obtained from the Databases or Database Derivatives prior to such termination in accordance with its original license for the Product. Notwithstanding any termination of this Agreement, Duke shall remain entitled to fees owed pursuant to this Agreement resulting from use of the Databases or license of the Product prior to termination of this Agreement. 6.5 SURVIVAL. The provisions of Sections 2.3, 3.3, 4.5, 4.6, 5, 6.4, 6.5, 8, and 9 will survive any termination or expiration of this Agreement. 8. MEDIATION AND ARBITRATION - ---------------- * Confidential treatment requested. 7 8.1 MEDIATION. Any dispute arising under this Agreement will be resolved through a mediation and arbitration approach. The parties agree to select a mutually agreeable, neutral third party to help them mediate any dispute that arises under the terms of this Agreement. Costs and fees associated with the mediation will be shared equally by the parties. 8.2 ARBITRATION. If the mediation is unsuccessful, the parties agree that the dispute will be decided by binding arbitration under the rules of the American Arbitration Association through a panel of three arbitrators with each party nominating one arbitrator who will select the third who shall serve as chairman of the panel. The decision of the arbitrators will be final and binding on the parties and may be entered and enforced in any court of competent jurisdiction by either party. The findings of the arbitration panel may include an award of reasonable attorney fees, expert witness costs and expenses, and all other reasonable costs and expenses incurred in connection with the proceedings 9. GENERAL 9.1 NOTICES. Any notice required or permitted hereunder must be in writing, and will be effective on the date of delivery when delivered personally, the next business day after dispatch when sent by Federal Express or other recognized overnight courier service, or the fifth business day after dispatch when sent by certified mail, postage prepaid, return receipt requested. Notices should be addressed to the other party at the address shown below or at such other address as a party may designate by ten days' advance written notice to the other party: Pharsight Corporation Duke University 800 West El Camino Real, Suite 200 2400 Pratt Street Mountain View, CA 94040 Room 0311 Terrace Level Attention: Chief Financial Officer Durham, NC 27705 Phone: (650) 314-3800 Attention: Contracts Manager Fax: (650) 314-3810 Phone: (919) 886-6997 Fax: (919) 668-7009 9.2 ENTIRE AGREEMENT; MODIFICATIONS. This Agreement, including all appendices, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior representations, proposals, discussions, and communications, whether oral or in writing. This Agreement may be modified or amended only by a writing executed by a duly authorized representative of each party. 9.3 FORCE MAJEURE. Neither party will be liable to the other for any failure or delay caused by events beyond such party's control, including, without limitation, sabotage, riots, insurrections, fires, flood, storm, explosions, war, or earthquakes. However, if such events shall continue for thirty (30) days or more, the other party shall have the option of terminating this Agreement by giving written notice of termination. 9.4 CHANGE IN LAW; CHANGE IN CIRCUMSTANCES. No party shall make or receive any payment or take any action under this Agreement if any judicial decision, legislative action, or regulatory or other administrative interpretation, whether federal or state, would render illegal the conduct of either party under this Agreement. If performance by either party of any term of this Agreement should be deemed illegal by any party or third party who is essential to performance of this Agreement for any such reason, 8 either party shall have the right to require that the other party renegotiate the terms of this Agreement. If the parties fail to reach an agreement satisfactory to both parties within fifteen (15) days after the receipt of any request for renegotiation, either party may terminate this Agreement upon ten (10) days prior written notice to the other party, or sooner if required by law. 9.5 ASSIGNMENT. This Agreement will be binding upon and inure to the benefit of the parties hereto, their successors and permitted assigns. Neither party may assign its rights and obligations under this Agreement to a third party without the written permission of the other party, except that either party may assign this Agreement in its entirety to a successor corporation upon notice to the other party in the event of a merger or an acquisition of all or substantially all of the assets of the assigning party. 9.6 GOVERNING LAW. All questions concerning the validity, operation, interpretation, and construction of this Agreement will be governed by and determined in accordance with the laws of the State of North Carolina, without regard to its conflict of laws provisions. Application of the United Nations Convention on Contracts for the International Sale of Goods is specifically excluded. 9.7 SEVERABILITY. If a court of competent jurisdiction determines that any provision of this Agreement is invalid, illegal, or otherwise unenforceable, such provision shall be replaced with a valid, enforceable provision as nearly as possible in accordance with the stated intention of the parties, while the remainder of this Agreement shall remain in full force and effect. To the extent any provision cannot be enforced in accordance with the stated intentions of the parties, such provision shall be deemed not to be a part of this Agreement. 9.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which together will constitute one and the same instrument. IN WITNESS THEREOF, THE PARTIES HAVE CAUSED THIS AGREEMENT TO BE EXECUTED BY THEIR RESPECTIVE DULY AUTHORIZED REPRESENTATIVES AS SET FORTH BELOW: PHARSIGHT CORPORATION DUKE UNIVERSITY By: /s/ Robin A. Kehoe By: /s/ illegible ------------------------------- ------------------------------- Robin A. Kehoe Name: Chief Financial Officer Title 9 APPENDIX A DEFINITIONS DATABASE means the either of the cardio-vascular databases described in Appendix B and all Updates to such databases when and as delivered to Pharsight. DATABASE DERIVATIVE means any derivative works, modifications, or new compilations of one or both of the Databases prepared by or on behalf of Pharsight for use with the Product or in consulting services. DISTRIBUTOR means a third-party sales and marketing organization contracted by Pharsight to market and sell Product subscriptions in selected geographic regions or market segments, provided such organization has been approved by Duke. Pharsight will notify Duke of the names of its third-party sales organizations, and Duke shall be deemed to have approved such third parties as Distributors if it fails to notify Pharsight of its reasons for disapproval within thirty (30) days of submission. DOCUMENTATION means any and all materials provided to Pharsight by Duke describing the features, structure, functions, fields, contents, collection methods, etc. of the Databases. CUSTOMER means a customer of Pharsight or of its distributors to whom Pharsight has licensed the use of the Product or to whom Pharsight has provided consulting services utilizing the Databases. ACCEPTANCE CRITERIA means the specifications for the Databases set forth in Appendix B and the quality requirements for the Databases set forth in Appendix C or otherwise agreed upon in writing by the parties. PRODUCT means Pharsight's Internet query-response product utilizing the Databases or Database Derivatives in the fields of Acute Coronary Syndrome and Chronic Ischemic CHF, respectively, and all updates, upgrades, and new versions thereof. REVIEWER means the person authorized by Duke to approve marketing materials submitted by Pharsight. The initial Reviewer is Patricia Hodgson, with an address at 2400 Pratt Street, Room 0311 Terrace Level, Durham, NC 27705 (phone: 919 668-8914) with a copy to be sent to Gilbert Smith, Ph.D., Associate Director Science and Technology, Duke University Medical Center, Davison Building, Room M454, DUMC Box 3664, Durham, NC 27715. Duke shall notify Pharsight of changes in the Reviewer in accordance with section 9.1. UPDATE means a new version of the Database, consisting of a new statistical extraction made from the most recent provider database according to the specifications defined in Appendix B. 10 APPENDIX B SPECIFICATION AND APPLICATION FOR PHARSIGHT/DUKE CV DATABASES APPLICATION OVERVIEW The databases are intended for use with the Pharsight Internet query-response system, which 1) allows users to ask detailed drug development questions, 2) acts as an intelligent interface to find and extract the relevant information from the database, 3) performs relevant numerical analysis to produce summary results, and 4) presents the aggregate results to the users via lists, graphs and plots. Typical question areas include incidence and statistical distributions of specific patient characteristics in anonymous patient databases and determination of the time course of medical condition and status in both normal aging and pathological disease states. The system and its methods produce reports that can be used to improve the process of developing new medical therapeutics, including new drugs, drug delivery systems, and medical devices and supplies. The system uses secure Internet technology, allowing users to access the system 24-hours/day. OUTLINE OF SPECIFICATIONS FOR DATABASES I AND II The databases will focus on two important applications in the acute cardiovascular therapeutic area: acute coronary syndrome and chronic ischemic congestive heart failure. [...***...] - ---------------- * Confidential treatment requested. 11 APPENDIX C ACCEPTANCE CRITERIA A. GENERAL 1. Data types (e.g. alpha vs. numeric, etc.) are as described in Appendix B, "Variable Definitions Acute Coronary Syndrome Database". 2. Value ranges are as described in Appendix B, "Variable Definitions Acute Coronary Syndrome Database". 3. Missing values are encoded consistently within each field, using definitions provided by Duke. B. MISSING DATA [...***...] - ---------------- * Confidential treatment requested. 12 EX-10.11 16 EXHIBIT 10.11 *** TEXT OMITTED AND FILED SEPARATELY CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R.SECTIONS 200.80(b)(4), 200.83 AND 240.24b-2 EXHIBIT 10.11 PHARSIGHT CORPORATION DATA SET LICENSE AGREEMENT This Data Set License Agreement (this "Agreement") is made and entered into as of March 1, 2000 (the "Effective Date") by and between Pharsight Corporation, a California corporation, (hereinafter "Pharsight") and the Lovelace Respiratory Research Institute (hereinafter "Lovelace"). RECITALS Pharsight is engaged in the sale of software and services relating to clinical trial design and modeling to pharmaceutical and biotechnology companies and desires to have the right to use certain data sets developed by Lovelace both as a data resource for an Internet-based query-response product and internally in its professional consulting practice. Lovelace is the owner of all rights to the data set necessary to carry out this Agreement and is willing to grant to Pharsight a non-exclusive right and license to use, reproduce, modify, and create derivatives of the subject data set on the terms and conditions set forth herein. NOW, THEREFORE, IN CONSIDERATION OF THESE PREMISES, AS WELL AS THE OBLIGATIONS HEREIN MADE AND UNDERTAKEN, THE PARTIES HERETO DO HEREBY AGREE AS FOLLOW, WITH THE CAPITALIZED TERMS HAVING THE MEANING SET FORTH IN APPENDIX A: 1. DATA SET DELIVERY, TESTING, AND UPDATES 1.1 DELIVERY OF INITIAL DATA SET. Lovelace will pool patient-level healthcare data from the members of the Lovelace Data Consortium (the "Consortium") to create the Data Set in accordance with the specifications in Appendix B and the quality assurance procedures in Appendix C and will test the Data Set against the Acceptance Criteria in Appendix D. As a first step, Lovelace will prepare and deliver to Pharsight electronically within four (4) weeks of the Effective Date a sample data set based on the Data Set that Pharsight can use for testing and marketing purposes. The complete Data Set will be delivered within twelve (12) weeks of the Effective Date. 1.2 ACCEPTANCE. Pharsight will have thirty (30) working days from receipt of the Data Set to test for adherence to the Acceptance Criteria and will notify Lovelace promptly if the Data Set fails to conform to such criteria. Lovelace will have twenty (20) working days to correct such nonconformity, and upon redelivery Pharsight will again test the Data Set against the Acceptance Criteria. This process will be repeated (except that each subsequent test period and repair period will be limited to fifteen (15) working days) until Pharsight either provides Lovelace with written notice of acceptance of the Data Set or is deemed to have accepted the Data Set under the provisions of this section, provided, however, that if the Data Set fails to meet the Acceptance Criteria on the third delivery, Pharsight shall have the right 1 to terminate this Agreement and receive a full refund of any royalty or license payments made to Lovelace prior to such termination. Pharsight shall be deemed to have accepted the Data Set if it fails to notify Lovelace of any nonconformity therein within thirty (30) working days of delivery (or within fifteen (15) working days of redelivery in the case of nonconformities in the original delivery). 1.3 PATIENT ANONYMITY. The Data Set will be totally anonymous as to the identity of individual patients, the study, if any, in which those patients participated, and the identity of medical practitioners and institutions providing treatment and health plans covering treatment. Pharsight will not make any attempt to ascertain such information or any other information that was rendered confidential by substituting codes for identifying information before Lovelace provided the Data Set to Pharsight. The parties will follow the confidentiality protocol described in Appendix E hereto. 1.4 DATA ACCESS. Customers using the Product will have access only to summary statistics presented in numeric, tabular, and graphical form. The Product will be constructed so that it is not possible for Customers to access data records for individual patients. Pharsight will maintain sufficient security measures, including firewalls and secure transmission protocols, to ensure that patient records from the Data Set are always under Pharsight's control and cannot be accessed by its Customers. Pharsight will provide its consulting services Customers with tabular, graphical, numerical or narrative results based upon statistical analysis of data extracted from the Data Set by its own consultants. All results provided to Customers will be in summary and non-patient specific form, and Pharsight's consultants will not share data from individual patient records in the Data Set with Customers unless required to do so by the FDA, in which case Pharsight will notify Lovelace. 1.5 UPDATES. During the term of this Agreement, Lovelace will provide Pharsight with an Update for the Data Set within thirty (30) days after the beginning of each year of this Agreement (including any renewal terms). The Update will be subject to quality assurance testing in accordance with the criteria established by the parties. 1.6 COSTS. Lovelace will be fully responsible for all development and extraction costs of the Data Set and any Updates, including any royalties or payments due to third parties. 2. GRANT OF LICENSE 2.1 LICENSE GRANT FOR PRODUCT. Subject to the payment of royalties as set forth in Section 4.2, Lovelace hereby grants Pharsight a world-wide right and license (a) to use, reproduce, modify, and create derivatives of the Data Set and Documentation internally for development of the Product; (b) to license the Product to its Customers; (c) to license its Customers to use results obtained through the use of the Product for research in support of therapeutic innovation in drug development and related marketing activities, including regulatory submissions and research publications; (d) to use the Data Set and the Documentation for purposes of technical support for Customers; (e) to use a reasonable number of copies of the Product and Data Set for purposes of marketing, training, and demonstrations. 2.2 LICENSE GRANT FOR CONSULTING. Pharsight will have unrestricted access to the Data Set for use in its consulting activities related to research in support of therapeutic innovation in drug development and related marketing activities and, subject to the royalty obligations of Section 4.3 and the confidentiality clauses of Appendix E, Lovelace hereby grants Pharsight a world-wide right and license (a) to use the Data Set and Documentation to prepare statistical results and conclusions based on the Data Set under 2 consulting contracts with Customers; (b) to distribute to such Customers models, other analyses, and conclusions based on its analysis of the data in the Data Set; and (c) to allow such Customers to use such models, analyses, and conclusions for drug development and related marketing activities, including regulatory submissions and research publications. Pharsight will provide Lovelace with an anonymized summary list of the types of analyses performed for Customers every six months. 2.3 OWNERSHIP. Lovelace will retain ownership of the Data Set and the underlying data. Pharsight will own all right, title, and interest in and to the query, user interface, and other software developed by or for Pharsight as part of the Product, as well as all models and analyses created for Customers as part of its consulting activities. 2.4 LIMITED EXCLUSIVITY. During the term of this Agreement, Lovelace will not sell or license the Data Set or any other data set from the Consortium to any third party for use in or development of Internet-based software systems related to clinical drug development or for providing services related to clinical trial simulation or clinical drug development in the biopharmaceutical industry. 3. PRODUCT DEVELOPMENT, MARKETING AND DISTRIBUTION 3.1 PRODUCT DEVELOPMENT. Pharsight will develop the query, user interface, and other software for the Product that will allow licensed Customers to access the information in the Data Set, as described in the application overview in Appendix B. The target date for commercial release of the Product is June 2000. 3.2 PRODUCT MARKETING ACTIVITIES. Pharsight will be responsible for all decisions and costs involved in the marketing and distribution of the Product and consulting services utilizing the Data Set, including pricing, end-user license terms, promotional materials, packaging, distribution channels, and customer evaluation and training. Pharsight may distribute the Product through Distributors so long as such Distributors have no direct access to the Data Set. Pharsight may authorize its Distributors to use the Product for marketing, training, and demonstrations. 3.3 DATA SET SOURCE IDENTIFICATION. Pharsight may identify the Data Set as having been prepared by Lovelace, but will not represent that use of the Data Set represents any endorsement of the Pharsight product by Lovelace or any member of the consortium. Pharsight agrees to adhere to the organizational confidentiality clauses stipulated in Appendix E. Any marketing materials containing references to Lovelace other than identification of the source of the Data Set, as set forth in Appendix E, will be submitted to Lovelace (to the attention of Patricia J. Marx, Chief Operating Officer, via certified mail) for advance approval at least thirty (30) days prior to their intended use. Lovelace shall be deemed to have approved the marketing materials if it fails to notify Pharsight of any problems therein within thirty (30) days of submission. 3.4 CUSTOMER SUPPORT. Pharsight will provide customer support for the Product. Lovelace will make one or more persons familiar with the Data Set available to assist Pharsight personnel in the resolution of problems they may encounter from time to time in use of the Data Set. For each [...*** ...] in royalties paid by Pharsight to Lovelace (including the annual license fee), Lovelace will provide one day of problem resolution assistance to Pharsight personnel without charge; further - ---------------- * Confidential treatment requested. 3 assistance will be provided as reasonably necessary at [...***...] per day, prorated on an hourly basis for usage of less than a full day. 3.5 PRESS ANNOUNCEMENTS. Pharsight will issue a press release announcing the relationship between Pharsight and Lovelace (target release date: March 28, 2000), which announcement shall be subject to approval by Lovelace and subject to Sections 3.2, 3.3 and Appendix E. Lovelace agrees that it will supply a quotation for the press release. The parties agree that as further news about the relationship is generated in the future, they will cooperate with each other to issue appropriate press releases to cover such news. 4. PAYMENTS 4.1 ANNUAL LICENSE FEE. To allow Lovelace to cover up-front expenses associated with the preparation of the Data Set, Pharsight will make a lump-sum, minimum royalty payment to Lovelace as follows: (a) [...***...] upon execution of this Agreement and (b) [...***...] upon delivery of the Data Set. To cover the up-front expenses for creating the Updates, Pharsight will make lump-sum, minimum royalty payments to Lovelace as follows: (a) [...***...] at the start of each subsequent year of this Agreement (including renewal terms); and (b) [...***...] upon the delivery of the Updates in accordance with Section 1.5. These non-refundable payments will be credited against actual royalties due in each year under Section 4.2 and 4.3 below. Should the royalties due under Sections 4.2 and 4.3 for a year be less than these minimum payments, then Lovelace shall be entitled to retain the full minimum payment. 4.2 PRODUCT ROYALTY. Pharsight will pay Lovelace a royalty of [...***...] for each annual Customer subscription license allowing use of the Product. No royalty will be due for evaluation licenses allowing a Customer limited use of the Product, provided Pharsight receives no revenue for such evaluation licenses, or for use of the Product in Customer training programs. 4.3 SERVICE USE ROYALTY. Pharsight will pay Lovelace a royalty of [...***...] for each Customer project for which Pharsight's staff accesses the Data Set in connection with providing consulting services to the Customer. No royalty will be due for use of the Data Set for Pharsight staff training. 4.4 PAYMENTS. Royalty payments will be made on a quarterly basis with payment due thirty (30) days after the end of each calendar quarter for all Product license revenue received during such quarter and all consulting service revenue recognizable (under generally accepted accounting principles) during such quarter. Each payment will be accompanied by a report setting forth the calculation of such payment amount. 4.5 DELIVERY BONUS. Should Lovelace deliver the Data Set meeting the Acceptance Criteria to Pharsight by May 15, 2000, Lovelace shall receive a Delivery Bonus of [...***...]. Should Lovelace deliver the Data Set meeting the Acceptance Criteria to Pharsight by April 30, 2000, Lovelace shall receive a Delivery Bonus of [...***...]. The Delivery Bonus is a one-time payment and need not be credited against any other royalty payments. - ---------------- * Confidential treatment requested. 4 4.6 ADDITIONAL CONSORTIUM MEMBERS. For additional Consortium members in excess of three (3) members, up to and including six (6) members, Lovelace will receive the following payment increases: (a) the minimum annual royalty in Section 4.1 will be increased by [...*** ...] per new member to a maximum of [...***...], with [...***...] paid at signing or renewal of the Agreement, and [...***...] paid at delivery of the Data Set or Updates; (b) the product royalty in Section 4.2 will be increased by [...***...] per new member to a maximum of [...***...]; and (c) the service use royalty in Section 4.3 will be increased by [...***...] per new member to a maximum of [...***...]. These increased payments will apply only to minimum annual royalties, annual Customer subscription license royalties, or Customer consulting project royalties accrued after the Data Set has been contributed to by such added Consortium member(s). 4.7 AUDIT. Pharsight will, upon written request, during normal business hours, but not more frequently than once each calendar year, provide access for purposes of audit to pertinent records relating to royalties payable in connection with the Data Set to an independent accounting firm chosen and compensated (other than on a contingent fee basis) by Lovelace and reasonably acceptable to Pharsight. Such accounting firm will be authorized to report to Lovelace only the amount of royalties due and payable for the period examined. If the amount under-reported by Pharsight is equal to or greater than ten percent (10%) of the total payment due to Lovelace for the payment period so audited, then the cost of the audit shall be borne by Pharsight. 4.8 CONFIDENTIALITY. Lovelace will not disclose to any third party any sales or customer information received from Pharsight in connection with royalty payments and will use such information solely for the purpose of carrying out its obligations under this Agreement. 5. WARRANTIES; INDEMNIFICATION; LIMITATION OF LIABILITY 5.1 WARRANTY. Lovelace represents and warrants to Pharsight (a) that Lovelace will obtain prior to delivery of the Data Set, all rights and authority necessary for the grant of rights and licenses pertaining to this Agreement; (b) that the Data Set as supplied to Pharsight will be developed in substantial accordance with the quality assurance procedures described in Appendix C for generating and validating the data; (c) that no consents are required to use and redistribute the data in the Data Set as authorized in this Agreement; and (d) that agreements between Lovelace and the Consortium to use and redistribute the data in the Data Set will be obtained prior to delivery of the Data Set and will be available for review by Pharsight. If Pharsight is required to cancel any Customer license for the Product because of Lovelace's breach of one of the foregoing warranties, Lovelace will refund to Pharsight any royalties paid with respect to such cancelled licenses. 5.2 INDEMNIFICATION. Pharsight will defend, indemnify, and hold Lovelace harmless from and against any action or other proceeding brought against Lovelace arising from Pharsight's use of the Data Set, except where such action arises from negligence or willful misconduct on the part of Lovelace or from Lovelace's breach of the representations and warranties set forth in Section 5.1. Lovelace will defend, indemnify, and hold Pharsight harmless from and against any action or other proceeding brought against Pharsight to the extent that it is based on (i) Lovelace's negligence or willful misconduct; (ii) a claim that any part of the Data Set or Documentation infringes any copyright or patent or incorporates any misappropriated trade secrets of any third party; or (iii) a claim that use or distribution of the Data - ---------------- * Confidential treatment requested. 5 Set as authorized herein violates federal or state patient-privacy laws or regulations or the privacy rights of any patient included in the Data Set as such laws were in effect at the time of delivery of the version of the Data Set that is the subject of such claim. 5.3 CONDITIONS OF INDEMNIFICATION. The indemnifying party will pay any and all costs, damages, and expenses (including but not limited to reasonable attorneys' fees) incurred by the indemnified party in any action or proceeding requiring indemnification under section 5.2 (an "Action"). The indemnifying party will have no obligation as to any Action unless (i) the indemnified party gives it prompt notice of the Action; (ii) the indemnifying party has sole control of the defense and settlement of the Action; and (iii) the indemnified party provides the indemnifying party, at the indemnifying party's expense, with reasonable assistance in defense and settlement of the Action. 5.4 LIMITATION ON LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INDIRECT, CONSEQUENTIAL, SPECIAL OR INCIDENTAL DAMAGES (INCLUDING DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE) ARISING OUT OF THIS AGREEMENT EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT WITH RESPECT TO THE INDEMNIFICATION OBLIGATIONS UNDER SECTIONS 5.2 AND 5.3, NEITHER PARTY'S LIABILITY UNDER THIS AGREEMENT SHALL EXCEED THE AMOUNTS PAID TO LOVELACE UNDER THIS AGREEMENT. BOTH PARTIES ACKNOWLEDGE THAT THE FOREGOING LIMITATION REFLECTS A BARGAINED-FOR ALLOCATION OF RISK AND THAT THE ROYALTIES SET FORTH HEREIN REFLECT SUCH RISK. 6. TERM AND TERMINATION 6.1 TERM OF AGREEMENT. The initial term of this Agreement will be the period beginning on the Effective Date of this Agreement and ending on the first anniversary of the date on which Pharsight accepts (in accordance with Section 1.2) the Data Set. This Agreement may be renewed for two successive additional one-year periods at Pharsight's option and beyond that may be renewed by mutual agreement of the parties. 6.2 TERMINATION FOR NON-DELIVERY. If Lovelace fails to deliver the Data Set in a form meeting the Acceptance Criteria within six (6) months of the Effective Date, then Pharsight shall have the option to terminate this Agreement, return any copies of the Data Set in its possession, and receive from Lovelace a refund of any royalty or license payments made to Lovelace prior to such termination. If Lovelace fails to deliver an Update meeting the Acceptance Criteria within sixty (60) days of the start of the renewal term, then Pharsight shall have the option to terminate this Agreement, return any copies of the Data Set in its possession, and receive from Lovelace a refund of any royalty or license payments made to Lovelace with respect to such renewal term prior to such termination. 6.3 TERMINATION FOR BREACH. Each party has the right to terminate this Agreement if the other party has materially breached any obligation herein and such breach remains uncured for a period of thirty (30) days after written notice thereof is sent to the other party. 6.4 LOSS OF DATA ACCESS. In the event that at any time during the term of this Agreement there is a period of at least sixty (60) days in which the number of Consortium members having access to data to contribute to the Data Set is less than three (3), Lovelace shall so notify Pharsight and shall thereafter have no obligation to provide Updates. Pharsight's rights with respect to the Data Set shall continue for 6 one year from the date of such notice, but the royalties due under Sections 4.2 and 4.3 shall be reduced to fifty percent (50%) of the amount set forth in such sections during such one-year period. 6.5 EFFECT OF TERMINATION. Upon termination or expiration of this Agreement, all rights and licenses granted to Pharsight hereunder shall terminate. Termination will have no effect on the rights of any Customer to continue to use the Product or any information obtained from the Data Set or Product prior to such termination in accordance with its original license for the Product or grant of rights from Pharsight with respect to consulting services deliverables. Notwithstanding any termination of this Agreement, Lovelace shall remain entitled to royalties owed pursuant to this Agreement resulting from use or license of the Data Set or Product prior to termination of this Agreement. 6.6 SURVIVAL. The provisions of Sections 2.3, 3.3, 4.7, 4.8, 5, 6.5, 6.6, 8, and 9 will survive any termination or expiration of this Agreement. 7. ADDITIONAL DATA SETS If Pharsight identifies other therapeutic areas where Pharsight wishes to license a data set for its Internet query-response product and consulting use, Pharsight will propose specifications for data set development to Lovelace. Lovelace will respond within sixty (60) days, and if Lovelace agrees that the proposed data set is practicable to develop, the parties will then work together to finalize the specifications. At the time such specifications are agreed upon for a given data set, the parties will enter into an agreement similar to this Agreement setting forth the provisions for delivery, quality assurance testing, and licensing terms. The royalty provisions for any additional data set in any such agreement that is entered into during the term of this Agreement will be the same as those in this Agreement. 8. MEDIATION AND ARBITRATION 8.1 MEDIATION. Any dispute arising under this Agreement will be resolved through a mediation and arbitration approach. The parties agree to select a mutually agreeable, neutral third party to help them mediate any dispute that arises under the terms of this Agreement. Costs and fees associated with the mediation will be shared equally by the parties. 8.2 ARBITRATION. If the mediation is unsuccessful, the parties agree that the dispute will be decided by binding arbitration under the rules of the American Arbitration Association. The decision of the arbitrators will be final and binding on the parties and may be entered and enforced in any court of competent jurisdiction by either party. The prevailing party in the arbitration proceedings will be awarded reasonable attorney fees, expert witness costs and expenses, and all other reasonable costs and expenses incurred in connection with the proceedings, unless the arbitrators for good cause determine otherwise. 9. GENERAL 9.1 NOTICES. Any notice required or permitted hereunder must be in writing, and will be effective on the date of delivery when delivered personally, the next business day after dispatch when sent by Federal Express or other recognized overnight courier service, or the fifth business day after dispatch when sent 7 by certified mail, postage prepaid, return receipt requested. Notices should be addressed to the other party at the address shown below or at such other address as a party may designate by ten days' advance written notice to the other party: Pharsight Corporation Lovelace Respiratory Research Institute 800 West El Camino Real, Suite 200 P.O. Box 5890 Mountain View, CA 94040 Albuquerque, NM 87185-5890 Attention: Chief Financial Officer Attention: Patricia J. Marx, Phone: (650) 314-3800 Chief Operating Officer Fax: (650) 314-3810 Phone: (505) 845-1193 Fax: (505) 845-1067
9.2 ENTIRE AGREEMENT; MODIFICATIONS. This Agreement, including all appendices, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior representations, proposals, discussions, and communications, whether oral or in writing. This Agreement may be modified or amended only by a writing executed by a duly authorized representative of each party. 9.3 FORCE MAJEURE. Neither party will be liable to the other for any failure or delay caused by events beyond such party's control, including, without limitation, sabotage, riots, insurrections, fires, flood, storm, explosions, war, or earthquakes. However, if such events shall continue for thirty (30) days or more, the other party shall have the option of terminating this Agreement by giving written notice of termination. 9.4 CHANGE IN LAW; CHANGE IN CIRCUMSTANCES. No party shall make or receive any payment or take any action under this Agreement if any judicial decision, legislative action, or regulatory or other administrative interpretation, whether federal or state, would render illegal the conduct of either party under this Agreement. If performance by either party of any term of this Agreement should be deemed illegal by any party or third party who is essential to performance of this Agreement for any such reason, either party shall have the right to require that the other party renegotiate the terms of this Agreement. If the parties fail to reach an agreement satisfactory to both parties within fifteen (15) days after the receipt of any request for renegotiation, either party may terminate this Agreement upon ten (10) days prior written notice to the other party, or sooner if required by law. 9.5 ASSIGNMENT. This Agreement will be binding upon and inure to the benefit of the parties hereto, their successors and permitted assigns. Either party may assign this Agreement in its entirety to a successor corporation upon notice to the other party in the event of a merger or an acquisition of all or substantially all of the assets of the assigning party. 9.6 GOVERNING LAW. All questions concerning the validity, operation, interpretation, and construction of this Agreement will be governed by and determined in accordance with the laws of the State of New Mexico, without regard to its conflict of laws provisions. Application of the United Nations Convention on Contracts for the International Sale of Goods is specifically excluded. 9.7 SEVERABILITY. If a court of competent jurisdiction determines that any provision of this Agreement is invalid, illegal, or otherwise unenforceable, such provision shall be replaced with a valid, enforceable provision as nearly as possible in accordance with the stated intention of the parties, while the remainder of this Agreement shall remain in full force and effect. To the extent any provision cannot 8 be enforced in accordance with the stated intentions of the parties, such provision shall be deemed not to be a part of this Agreement. 9.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which together will constitute one and the same instrument. IN WITNESS THEREOF, THE PARTIES HAVE CAUSED THIS AGREEMENT TO BE EXECUTED BY THEIR RESPECTIVE DULY AUTHORIZED REPRESENTATIVES AS SET FORTH BELOW: PHARSIGHT CORPORATION LOVELACE RESPIRATORY RESEARCH INSTITUTE By: /s/ Robin A. Kehoe By: /s/ Patricia J. Marx ---------------------------------- ------------------------------------ Robin A. Kehoe Name: Patricia J. Marx Chief Financial Officer Title: Chief Operating Officer 9 APPENDIX A DEFINITIONS DATA SET means the anonymized database in the diabetes therapeutic area described in Appendix B and all Updates when and as delivered to Pharsight. DOCUMENTATION means any and all materials provided to Pharsight by Lovelace describing the features, structure, functions, fields, contents, collection methods, etc. of the Data Set. CUSTOMER means a customer of Pharsight or of its distributors to whom Pharsight has licensed the use of the Product or to whom Pharsight has provided consulting services utilizing the Data Set. ACCEPTANCE CRITERIA means the specifications for the Data Set set forth in Appendix B and the quality requirements for the Data Set set forth in Appendix D or otherwise agreed upon in writing by the parties. PRODUCT means Pharsight's Internet query-response product, and all updates, upgrades, and new versions thereof, utilizing the Data Set or any Updates. DISTRIBUTOR means a third-party sales and marketing organization contracted by Pharsight to market and sell Product subscriptions in selected geographic regions or market segments. UPDATE means a new version of the Data Set, consisting of a new statistical extraction made from the most recent provider database according to the specifications defined in Appendix B. 10 APPENDIX B SPECIFICATION AND APPLICATION FOR INITIAL DATA SET APPLICATION OVERVIEW The Data Set is intended for use with the Pharsight Internet query-response system, which 1) allows users to ask detailed drug development questions, 2) acts as an intelligent interface to find and extract the relevant information from the database, 3) performs relevant numerical analysis to produce summary results, and 4) presents the aggregate results to the users via lists, graphs and plots. Typical question areas include incidence and statistical distributions of specific patient characteristics in anonymous patient databases and determination of the time course of medical condition and status in both normal aging and pathological disease states. The system and its methods produce reports that can be used to improve the process of developing new medical therapeutics, including new drugs, drug delivery systems, and medical devices and supplies. The system uses secure Internet technology, allowing users to access the system 24-hours/day. OUTLINE OF SPECIFICATIONS FOR DATA SET DIABETES DATA SET SPECIFICATIONS [...***...] FILE FORMAT: The data shall be provided to Pharsight in the form of ascii files, with multiple files or tables acceptable (i.e., [...***...]). If multiple files are provided, all individual patient records shall be linkable across all files by a common encrypted patient identification number. DATA SETS IN OTHER THERAPEUTIC AREAS Should the Lovelace Data Consortium agree to provide databases to Pharsight Corporation in additional therapeutic areas, the data elements to be provided shall be substantively the same as those described above for the Diabetes Data; however, a different, mutually agreed upon algorithm appropriate to the therapeutic area will be used for identifying patients and laboratory values to be provided will be relevant to the therapeutic area. - ---------------- * Confidential treatment requested. 11 APPENDIX C DATABASE QUALITY ASSURANCE PROCEDURES For the purposes of this Appendix C, the variable "X" as it appears below is to be determined and agreed upon by the parties at a later date. Before providing the Data to Pharsight, Lovelace will perform the following quality assurance procedures: [...***...] - ---------------- * Confidential treatment requested. 12 APPENDIX D ACCEPTANCE CRITERIA 1. A completed Quality Assurance Checklist (as stipulated in Appendix C) is received from Lovelace with the delivered Data package. 2. The Quality Assurance Checklist indicates the Data conforms to the criteria outlined in Appendix C, Quality Assurance Procedures 3. [...***...] 6. The Data package contains a text file describing the contents and structure of the delivered Data files (a "ReadMe" file). - ---------------- * Confidential treatment requested. 13 APPENDIX E CONFIDENTIALITY PROTOCOL The purpose of this confidentiality protocol is to describe the means by which patient and organizational confidentiality will be protected during the term of Lovelace's agreement with Pharsight. I. PROTECTION OF PATIENT CONFIDENTIALITY A. Data Transfer from Lovelace to Pharsight 1. Data provided to Pharsight will be stripped of any patient identifiers before the Data is shipped to Pharsight. These patient identifiers include: - - Name - - Home address, including street number, building name, apartment number, city and zip code - - Home phone number - - Medical record number - - Plan ID number - - Plan guarantor ID number - - Social security number - - Complete birth date - - Physician name (primary care or other physician) - - Physician address - - Physician phone number - - Employer group or name - - Work address - - Work phone number - - Any other identifier identified by the contributing organization 2. [...***...] 3. If Pharsight inadvertently receives a data file that contains any of the identifying information listed in item 1 above, the Pharsight staff person working with the file will: - - Immediately note the location of the electronic file(s) - - Delete any electronic copies of the record(s) from Pharsight computers, floppy disks or tapes - - Shred any hard copies of the file output - - Provide written notification to Lovelace describing the identifying file information - - Place written documentation of the incident in Pharsight files - ---------------- * Confidential treatment requested. 14 II. PROTECTION OF ORGANIZATIONAL CONFIDENTIALITY A. The merged data file provided by Lovelace to Pharsight will contain no data element(s) that can be used to identify the organization that contributed the data for a given patient or group of patients. B. In its marketing, client consulting activities, or other activities, Pharsight will be prohibited from divulging the names of the contributing organizations, except when given prior written authorization by the appropriate Consortium member. C. Pharsight may describe the source of the Data as follows "The health care data which underlie the Pharsight (PRODUCT/CONSULTING SERVICE) are derived from three health care organizations that are members of the Lovelace Data Consortium. This Consortium was created and is managed by the Southwest Center for Managed Care Research of the Lovelace Respiratory Research Institute. The patient-level data from these three organizations have been merged into one combined database. One of the contributing organizations is a managed care organization in the southwestern United States. The second organization is a provider group with a capitated outpatient population in the southwestern United States. The third organization is a network model managed health care plan in the mid-Atlantic region of the United States." In addition to using the above language as a whole, Pharsight may alternatively use the first two sentences alone or the first three sentences alone. Any other wording that Pharsight uses to describe the source of the Data must first be approved by Lovelace in writing in accordance with Section 3.3. 15 EX-10.12 17 EXHIBIT 10.12 Exhibit 10.12 Secured Promissory Note $12,000.00 July 25, 1996 For Value Received, the undersigned ("Borrower") hereby promises to pay to the order of Pharsight Corporation, a California corporation ("Holder"), the principal sum of twelve thousand dollars ($12,000.00), together with interest thereon at the rate of 6.74% per annum, compounded annually, on the unpaid balance of such principal amount from the date hereof. The principal hereof, and all accrued and unpaid interest thereon, shall be due and payable on the earlier of (i) July 25, 2001, or (ii) 30 days after the termination of Borrower's employment by Holder. The principal hereof, and accrued interest thereon, may be prepaid at any time, in whole or in part, without premium or penalty. Payments of principal and interest on this Secured Promissory Note (this "Note") shall be made in legal tender of the United States of America and shall be made at the office of Holder at 299 California Avenue, Suite 300, Palo Alto, CA 94306 or at such other place as Holder shall have designated in writing to Borrower. If the date set for any payment on this Promissory Note is a Saturday, Sunday or legal holiday, then such payment shall be due on the next succeeding business day. As of the date hereof, Borrower has purchased 120,000 shares (the "Shares") of the Common Stock of Holder, pursuant to the terms of that certain Restricted Stock Purchase Agreement dated as of July 25, 1996 by and between Borrower and Holder. This Note shall be secured by the Shares as provided in that certain Stock Pledge Agreement (the "Pledge Agreement") of even date herewith by and between Holder and Borrower. In the event Borrower shall (i) fail to make complete payment of principal or accrued interest when due under this Note or (ii) commit a breach of, or default under, the Pledge Agreement, Holder may accelerate this Note and declare the entire unpaid principal amount of this Note and all accrued and unpaid interest thereon to be immediately due and payable and, thereupon, the unpaid principal amount and all such accrued and unpaid interest shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Borrower). The failure of Holder to accelerate this Note shall not constitute a waiver of any of Holder's rights under this Note as long as Borrower's default under this Note or breach of or default under the Pledge Agreement continues. The provisions of this Note shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of law rules thereof. In the event that Holder is required to take any action to collect or otherwise enforce payment of this Note, Borrower agrees to pay such attorneys' fees and court costs as Holder may incur as a result thereof, whether or not suit is commenced. In Witness Whereof, this Note has been duly executed and delivered by Borrower on the date first above written. /s/ Robin Kehoe - -------------------------------------------- Robin Kehoe EX-10.13 18 EXHIBIT 10.13 Exhibit 10.13 Secured Promissory Note $10,000.00 June 2, 1998 For Value Received, the undersigned ("Borrower") hereby promises to pay to the order of Pharsight Corporation, a California corporation ("Holder"), the principal sum of twelve thousand dollars ($10,000.00), together with interest thereon at the rate of 5.77% per annum, compounded annually, on the unpaid balance of such principal amount from the date hereof. The principal hereof, and all accrued and unpaid interest thereon, shall be due and payable on the earlier of (i) July 25, 2001, or (ii) 30 days after the termination of Borrower's employment by Holder. The principal hereof, and accrued interest thereon, may be prepaid at any time, in whole or in part, without premium or penalty. Payments of principal and interest on this Secured Promissory Note (this "Note") shall be made in legal tender of the United States of America and shall be made at the office of Holder at 299 California Avenue, Suite 300, Palo Alto, CA 94306 or at such other place as Holder shall have designated in writing to Borrower. If the date set for any payment on this Promissory Note is a Saturday, Sunday or legal holiday, then such payment shall be due on the next succeeding business day. As of the date hereof, Borrower has purchased 40,000 shares (the "Shares") of the Common Stock of Holder, pursuant to the terms of that certain Restricted Stock Purchase Agreement dated as of June 2, 1998 by and between Borrower and Holder. This Note shall be secured by the Shares as provided in that certain Stock Pledge Agreement (the "Pledge Agreement") of even date herewith by and between Holder and Borrower. In the event Borrower shall (i) fail to make complete payment of principal or accrued interest when due under this Note or (ii) commit a breach of, or default under, the Pledge Agreement, Holder may accelerate this Note and declare the entire unpaid principal amount of this Note and all accrued and unpaid interest thereon to be immediately due and payable and, thereupon, the unpaid principal amount and all such accrued and unpaid interest shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Borrower). The failure of Holder to accelerate this Note shall not constitute a waiver of any of Holder's rights under this Note as long as Borrower's default under this Note or breach of or default under the Pledge Agreement continues. The provisions of this Note shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of law rules thereof. In the event that Holder is required to take any action to collect or otherwise enforce payment of this Note, Borrower agrees to pay such attorneys' fees and court costs as Holder may incur as a result thereof, whether or not suit is commenced. In Witness Whereof, this Note has been duly executed and delivered by Borrower on the date first above written. /s/ Robin Kehoe - -------------------------------------------- Robin Kehoe EX-10.14 19 EXHIBIT 10.14 Exhibit 10.14 PROMISSORY NOTE $22,750.00 Palo Alto, California June 15, 1999 FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay to the order of PHARSIGHT CORPORATION, a California corporation (the "Company"), at 800 West El Camino Real, Suite 200, Mountain View, CA 94040, or at such other place as the holder hereof may designate in writing, in lawful money of the United States of America and in immediately available funds, the principal sum of twenty-two thousand seven hundred fifty Dollars ($22,750.00) together with interest accrued from the date hereof on the unpaid principal at the rate of 6% per annum, or the maximum rate permissible by law (which under the laws of the State of California shall be deemed to be the laws relating to permissible rates of interest on commercial loans), whichever is less, as follows: Principal Repayment. The outstanding principal amount hereunder shall be due and payable in full on May 1, 2003 (the "Principal Repayment Date"); and Interest Payments. Interest shall be payable in arrears on the Principal Repayment Date and shall be calculated on the basis of a 360-day year for the actual number of days elapsed; provided, however, that in the event that the undersigned's employment by or association with the Company or its Affiliate is terminated for any reason prior to payment in full of this Note, this Note shall be accelerated and all remaining unpaid principal and interest shall become due and payable immediately after such termination. If the undersigned fails to pay any of the principal and accrued interest when due, the Company, at its sole option, shall have the right to accelerate this Note, in which event the entire principal balance and all accrued interest shall become immediately due and payable, and immediately collectible by the Company pursuant to applicable law. This Note may be prepaid at any time without penalty. All money paid toward the satisfaction of this Note shall be applied first to the payment of interest as required hereunder and then to the retirement of the principal. The full amount of this Note is secured by a pledge of shares of Common Stock of the Company, and is subject to all of the terms and provisions of the Early Exercise Stock Purchase Agreement and Stock Pledge Agreement of even date herewith between the undersigned and the Company. The undersigned hereby represents and agrees that the amounts due under this Note are not consumer debt, and are not incurred primarily for personal, family or household purposes, but are for business and commercial purposes only. The undersigned hereby waives presentment, protest and notice of protest, demand for payment, notice of dishonor and all other notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Note. The holder hereof shall be entitled to recover, and the undersigned agrees to pay when incurred, all costs and expenses of collection of this Note, including without limitation, reasonable attorneys' fees. This Note shall be governed by, and construed, enforced and interpreted in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction. Signed /s/ Robin Kehoe ------------------------------ Robin Kehoe EX-10.15 20 EXHIBIT 10.15 Exhibit 10.15 SECURED PROMISSORY NOTE $75,000 January 25, 1998 For Value Received, the undersigned ("Borrower") hereby promises to pay to the order of Pharsight Corporation, a California corporation ("Holder"), the principal sum of Seventy-Five Thousand dollars ($75,000), together with interest thereon at the rate of 5.93% per annum, compounded annually, on the unpaid balance of such principal amount from the date hereof. The principal hereof, and all accrued and unpaid interest thereon, shall be due and payable on the earlier of (i) December 17, 2002 or (ii) 90 days after the termination of Borrower's employment by Holder. The principal hereof, and accrued interest thereon, may be prepaid at any time, in whole or in part, without premium or penalty. Payments of principal and interest on this Secured Promissory Note (this "Note") shall be made in legal tender of the United States of America and shall be made at the office of Holder at 299 California Avenue, Suite 300, Palo Alto, CA 94306 or at such other place as Holder shall have designated in writing to Borrower. If the date set for any payment on this Promissory Note is a Saturday, Sunday or legal holiday, then such payment shall be due on the next succeeding business day. As of the date hereof, Borrower has purchased 300,000 shares (the "Shares") of the Common Stock of Holder, pursuant to the terms of that certain Employee Restricted Stock Purchase Agreement of even date herewith by and between Borrower and Holder. This Note shall be secured by the Shares as provided in that certain Stock Pledge Agreement (the "Pledge Agreement") of even date herewith by and between Holder and Borrower. In the event Borrower shall (i) fail to make complete payment of principal or accrued interest when due under this Note or (ii) commit a breach of, or default under, the Pledge Agreement, Holder may, upon five (5) business days notice of any such event which shall not have been cured during such five (5) business day period, accelerate this Note and declare the entire unpaid principal amount of this Note and all accrued and unpaid interest thereon to be immediately due and payable and, thereupon, the unpaid principal amount and all such accrued and unpaid interest shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or other notices or demands of any kind (all of which are hereby expressly waived by Borrower). The failure of Holder to accelerate this Note shall not constitute a waiver of any of Holder's rights under this Note as long as Borrower's default under this Note or breach of or default under the Pledge Agreement continues. The provisions of this Note shall be governed by, and construed in accordance with, the laws of the State of California without regard to the conflicts of law rules thereof. In the event that Holder is required to take any action to collect or otherwise enforce payment of this Note, Borrower agrees to pay such attorneys' fees and court costs as Holder may incur as a result thereof, whether or not suit is commenced. 1 In Witness Whereof, this Note has been duly executed and delivered by Borrower on the date first above written. /s/ Daniel Weiner ----------------------------- Daniel Weiner 2 EX-10.16 21 EXHIBIT 10.16 Exhibit 10.16 INDEMNITY AGREEMENT THIS AGREEMENT is made and entered into this _____ day of ________________, 2000 by and between PHARSIGHT CORPORATION, a Delaware corporation (the "Corporation"), and __________ ("Agent"). RECITALS WHEREAS, Agent performs a valuable service to the Corporation in his capacity as _______ of the Corporation; WHEREAS, the stockholders of the Corporation have adopted bylaws (the "Bylaws") providing for the indemnification of the directors, officers, employees and other agents of the Corporation, including persons serving at the request of the Corporation in such capacities with other corporations or enterprises, as authorized by the Delaware General Corporation Law, as amended (the "Code"); WHEREAS, the Bylaws and the Code, by their non-exclusive nature, permit contracts between the Corporation and its agents, officers, employees and other agents with respect to indemnification of such persons; and WHEREAS, in order to induce Agent to continue to serve as _________ of the Corporation, the Corporation has determined and agreed to enter into this Agreement with Agent; NOW, THEREFORE, in consideration of Agent's continued service as ________ after the date hereof, the parties hereto agree as follows: AGREEMENT 1. Services to the Corporation. Agent will serve, at the will of the Corporation or under separate contract, if any such contract exists, as __________ of the Corporation or as a director, officer or other fiduciary of an affiliate of the Corporation (including any employee benefit plan of the Corporation) faithfully and to the best of his ability so long as he is duly elected and qualified in accordance with the provisions of the Bylaws or other applicable charter documents of the Corporation or such affiliate; provided, however, that Agent may at any time and for any reason resign from such position (subject to any contractual obligation that Agent may have assumed apart from this Agreement) and that the Corporation or any affiliate shall have no obligation under this Agreement to continue Agent in any such position. 2. Indemnity of Agent. The Corporation hereby agrees to hold harmless and indemnify Agent to the fullest extent authorized or permitted by the provisions of the Bylaws and the Code, as the same may be amended from time to time (but, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than the Bylaws or the Code permitted prior to adoption of such amendment). 1. 3. Additional Indemnity. In addition to and not in limitation of the indemnification otherwise provided for herein, and subject only to the exclusions set forth in Section 4 hereof, the Corporation hereby further agrees to hold harmless and indemnify Agent: (a) against any and all expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Agent becomes legally obligated to pay because of any claim or claims made against or by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative (including an action by or in the right of the Corporation) to which Agent is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Agent is, was or at any time becomes a director, officer, employee or other agent of Corporation, or is or was serving or at any time serves at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) otherwise to the fullest extent as may be provided to Agent by the Corporation under the non-exclusivity provisions of the Code and the Bylaws. 4. Limitations on Additional Indemnity. No indemnity pursuant to Section 3 hereof shall be paid by the Corporation: (a) on account of any claim against Agent solely for an accounting of profits made from the purchase or sale by Agent of securities of the Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (b) on account of Agent's conduct that is established by a final judgment as knowingly fraudulent or deliberately dishonest or that constituted willful misconduct; (c) on account of Agent's conduct that is established by a final judgment as constituting a breach of Agent's duty of loyalty to the Corporation or resulting in any personal profit or advantage to which Agent was not legally entitled; (d) for which payment is actually made to Agent under a valid and collectible insurance policy or under a valid and enforceable indemnity clause, bylaw or agreement, except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement; (e) if indemnification is not lawful (and, in this respect, both the Corporation and Agent have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication); or (f) in connection with any proceeding (or part thereof) initiated by Agent, or any proceeding by Agent against the Corporation or its directors, officers, employees or other agents, unless (i) such indemnification is expressly required to be made by law, (ii) the 2. proceeding was authorized by the Board of Directors of the Corporation, (iii) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Code, or (iv) the proceeding is initiated pursuant to Section 9 hereof. 5. Continuation of Indemnity. All agreements and obligations of the Corporation contained herein shall continue during the period Agent is a director, officer, employee or other agent of the Corporation (or is or was serving at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Agent shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Agent was serving in the capacity referred to herein. 6. Partial Indemnification. Agent shall be entitled under this Agreement to indemnification by the Corporation for a portion of the expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Agent becomes legally obligated to pay in connection with any action, suit or proceeding referred to in Section 3 hereof even if not entitled hereunder to indemnification for the total amount thereof, and the Corporation shall indemnify Agent for the portion thereof to which Agent is entitled. 7. Notification and Defense of Claim. Not later than thirty (30) days after receipt by Agent of notice of the commencement of any action, suit or proceeding, Agent will, if a claim in respect thereof is to be made against the Corporation under this Agreement, notify the Corporation of the commencement thereof; but the omission so to notify the Corporation will not relieve it from any liability which it may have to Agent otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Agent notifies the Corporation of the commencement thereof: (a) the Corporation will be entitled to participate therein at its own expense; (b) except as otherwise provided below, the Corporation may, at its option and jointly with any other indemnifying party similarly notified and electing to assume such defense, assume the defense thereof, with counsel reasonably satisfactory to Agent. After notice from the Corporation to Agent of its election to assume the defense thereof, the Corporation will not be liable to Agent under this Agreement for any legal or other expenses subsequently incurred by Agent in connection with the defense thereof except for reasonable costs of investigation or otherwise as provided below. Agent shall have the right to employ separate counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Agent unless (i) the employment of counsel by Agent has been authorized by the Corporation, (ii) Agent shall have reasonably concluded, and so notified the Corporation, that there is an actual conflict of interest between the Corporation and Agent in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Agent's separate counsel shall be at the 3. expense of the Corporation. The Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Corporation or as to which Agent shall have made the conclusion provided for in clause (ii) above; and (c) the Corporation shall not be liable to indemnify Agent under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which shall not be unreasonably withheld. The Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Agent without Agent's written consent, which may be given or withheld in Agent's sole discretion. 8. Expenses. The Corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by Agent in connection with such proceeding upon receipt of an undertaking by or on behalf of Agent to repay said amounts if it shall be determined ultimately that Agent is not entitled to be indemnified under the provisions of this Agreement, the Bylaws, the Code or otherwise. 9. Enforcement. Any right to indemnification or advances granted by this Agreement to Agent shall be enforceable by or on behalf of Agent in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Agent, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under Section 3 hereof (other than an action brought to enforce a claim for expenses pursuant to Section 8 hereof, provided that the required undertaking has been tendered to the Corporation) that Agent is not entitled to indemnification because of the limitations set forth in Section 4 hereof. Neither the failure of the Corporation (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Agent is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors or its stockholders) that such indemnification is improper shall be a defense to the action or create a presumption that Agent is not entitled to indemnification under this Agreement or otherwise. 10. Subrogation. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Agent, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Corporation effectively to bring suit to enforce such rights. 11. Non-Exclusivity of Rights. The rights conferred on Agent by this Agreement shall not be exclusive of any other right which Agent may have or hereafter acquire under any statute, provision of the Corporation's Certificate of Incorporation or Bylaws, agreement, vote of stockholders or directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. 4. 12. Survival of Rights. (a) The rights conferred on Agent by this Agreement shall continue after Agent has ceased to be a director, officer, employee or other agent of the Corporation or to serve at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and shall inure to the benefit of Agent's heirs, executors and administrators. (b) The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Corporation, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession had taken place. 13. Separability. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. Furthermore, if this Agreement shall be invalidated in its entirety on any ground, then the Corporation shall nevertheless indemnify Agent to the fullest extent provided by the Bylaws, the Code or any other applicable law. 14. Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. 15. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 16. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute but one and the same Agreement. Only one such counterpart need be produced to evidence the existence of this Agreement. 17. Headings. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 18. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) upon delivery if delivered by hand to the party to whom such communication was directed or (ii) upon the third business day after the date on which such communication was mailed if mailed by certified or registered mail with postage prepaid: (a) If to Agent, at the address indicated on the signature page hereof. 5. (b) If to the Corporation, to: Pharsight Corporation 800 West El Camino Real, Suite 200 Mountain View, CA 94040 or to such other address as may have been furnished to Agent by the Corporation. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. PHARSIGHT CORPORATION By:_________________________________________ Arthur Reidel President and Chief Executive Officer AGENT By:_________________________________________ Name:____________________________________ Address:_________________________________ _________________________________ 6. EX-10.17 22 EXHIBIT 10.17 Exhibit 10.17 PHARSIGHT CORPORATION 1997 STOCK OPTION PLAN Adopted February 17, 1997 Approved by the Shareholders March 17, 1997 Amended May 11, 1998 Amended May 14, 1999 Amended September 15, 1999 Amended April 7, 2000 1. PURPOSES. (a) The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company, and its Affiliates, may be given an opportunity to purchase stock of the Company. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Options issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either Incentive Stock Options or Nonstatutory Stock Options. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 2. DEFINITIONS. (a) "Affiliate" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "Company" means Pharsight Corporation, a California corporation. (f) "Consultant" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (g) "Continuous Service" means that the service of an individual to the Company, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Board or the 1 chief executive officer of the Company may determine, in that party's sole discretion, whether Continuous Service shall be considered interrupted in the case of: (i) any leave of absence approved by the Board or the chief executive officer of the Company, including sick leave, military leave, or any other personal leave; or (ii) transfers between the Company, Affiliates or their successors. (h) "Covered Employee" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (i) "Director" means a member of the Board. (j) "Employee" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Fair Market Value" means, as of any date, the value of the common stock of the Company determined as follows and in each case in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations. (1) If the common stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Company's common stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (2) In the absence of such markets for the common stock, the Fair Market Value shall be determined in good faith by the Board. (m) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (n) "Listing Date" means the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange, or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system if such securities exchange or interdealer quotation system has been certified in accordance with the provisions of Section 25100(o) of the California Corporate Securities Law of 1968. (o) "Non-Employee Director" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure 2 would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (p) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (q) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (r) "Option" means a stock option granted pursuant to the Plan. (s) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (t) "Optionee" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (u) "Outside Director" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (v) "Plan" means this 1997 Stock Option Plan. (w) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3 as in effect with respect to the Company at the time discretion is being exercised regarding the Plan. (x) "Securities Act" means the Securities Act of 1933, as amended. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (1) To determine from time to time which of the persons eligible under the Plan shall be granted Options; when and how each Option shall be granted; whether an Option will be an Incentive Stock Option or a Nonstatutory Stock Option; the provisions of each Option granted (which need not be identical), including the time or times such Option may be exercised in whole or in part; and the number of shares for which an Option shall be granted to each such person. 3 (2) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (3) To amend the Plan or an Option as provided in Section 11. (4) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company. (c) The Board may delegate administration of the Plan to a committee of the Board composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee may be, in the discretion of the Board, Non-Employee Directors and/or Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee of two (2) or more Outside Directors any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or such a subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Additionally, prior to the Listing Date, and notwithstanding anything to the contrary contained herein, the Board may delegate administration of the Plan to any person or persons and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. Notwithstanding anything in this Section 3 to the contrary, the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Options to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (i) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Option, or (ii) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to Options shall not exceed in the aggregate three million eight hundred thousand (3,800,000) shares of the Company's common stock. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not purchased under such Option shall revert to and again become available for issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Incentive Stock Options may be granted only to Employees. Nonstatutory Stock Options may be granted only to Employees, Directors or Consultants. (b) No person shall be eligible for the grant of an Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten 4 percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. (c) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, no person shall be eligible to be granted Options covering more than four hundred fifty thousand (450,000) shares of the Company's common stock in any calendar year. This subsection 5(c) shall not apply prior to the Listing Date and, following the Listing Date, shall not apply until (i) the earliest of: (A) the first material modification of the Plan (including any increase to the number of shares reserved for issuance under the Plan in accordance with Section 4); (B) the issuance of all of the shares of common stock reserved for issuance under the Plan; (C) the expiration of the Plan; or (D) the first meeting of stockholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security under Section 12 of the Exchange Act; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) Term. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) Price. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted; the exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) Consideration. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. 5 (d) Transferability. An Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person. A Nonstatutory Stock Option granted after the Listing Date shall only be transferable by the Optionee upon such terms and conditions as are set forth in the Option Agreement for such Nonstatutory Stock Option, as the Board or the Committee shall determine in its discretion. The person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. (e) Vesting. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary but in each case will provide for vesting of at least twenty percent (20%) per year of the total number of shares subject to the Option; provided, however, that an Option granted to an officer, director or consultant (within the meaning of Section 260.140.41 of Title 10 of the California Code of Regulations) may become fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company or of any of its Affiliates. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) Securities Law Compliance. The Company may require any Optionee, or any person to whom an Option is transferred under subsection 6(d), as a condition of exercising any such Option, (1) to give written assurances satisfactory to the Company as to the Optionee's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Option for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the Option has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may require the Optionee to provide such other representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities and other laws as a condition of granting an Option to such Optionee or permitting the Optionee to exercise such Option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (g) Termination of Employment or Relationship as a Director or Consultant. In the event an Optionee's Continuous Service terminates (other than upon the Optionee's death or disability), 6 the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionee's Continuous Service, or such longer or shorter period, which shall not be less than thirty (30) days, specified in the Option Agreement, or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (h) Disability of Optionee. In the event an Optionee's Continuous Service terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period, which in no event shall be less than six (6) months, specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (i) Death of Optionee. In the event of the death of an Optionee during, or within a period specified in the Option Agreement after the termination of, the Optionee's Continuous Service, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option as of the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period, which in no event shall be less than six (6) months, specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (j) Early Exercise. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased shall be subject to a repurchase right in favor of the Company, with the repurchase price to be equal to the original purchase price of the stock, or to any other restriction the Board determines to be appropriate; provided, however, that (i) the right to repurchase at the original purchase price shall lapse at a minimum rate of twenty percent (20%) per year over five (5) years from the date the Option was granted, and (ii) such right shall be exercisable only within (A) the ninety (90) day period following the termination of employment or the relationship as a Director or Consultant, or (B) such longer period as may be agreed to by the Company and the Optionee (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code (regarding "qualified small business stock")), and (iii) such right shall be exercisable only for cash or cancellation of purchase money 7 indebtedness for the shares. Notwithstanding the foregoing, shares received on exercise of an Option by an officer, director or consultant (within the meaning of Section 260.140.41 of Title 10 of the California Code of Regulations) may be subject to additional or greater restrictions. (k) Right of First Refusal. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to exercise a right of first refusal following receipt of notice from the Optionee of the intent to transfer all or any part of the shares exercised pursuant to the Option. Except as expressly provided in this Subsection (k), such right of first refusal shall otherwise comply with the provisions of the Bylaws of the Company. (l) Withholding. To the extent provided by the terms of an Option Agreement, the Optionee may satisfy any federal, state or local tax withholding obligation relating to the exercise of such Option by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the Optionee as a result of the exercise of the Option; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company. 7. COVENANTS OF THE COMPANY. (a) During the terms of the Options, the Company shall keep available at all times the number of shares of stock required to satisfy such Options. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Option or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Options unless and until such authority is obtained. 8. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Options shall constitute general funds of the Company. 9. MISCELLANEOUS. (a) Subject to any applicable provisions of the California Corporate Securities Law of 1968 and related regulations relied upon as a condition of issuing securities pursuant to the Plan, the Board shall have the power to accelerate the time at which an Option may first be exercised or the time during which an Option or any part thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in the Option stating the time at which it may first be exercised or the time during which it will vest. (b) Neither an Optionee nor any person to whom an Option is transferred under subsection 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any 8 shares subject to such Option unless and until such person has satisfied all requirements for exercise of the Option pursuant to its terms. (c) Throughout the term of any Option, the Company shall deliver to the holder of such Option, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the Option term, a balance sheet and an income statement. This section shall not apply (i) after the Listing Date, or (ii) when issuance is limited to key employees whose duties in connection with the Company assure them access to equivalent information. (d) Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Employee, Director, Consultant or Optionee any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee, with or without cause, to remove any Director as provided in the Company's Bylaws and the provisions of the General Corporation Law of the State of California, or to terminate the relationship of any Consultant subject to the terms of that Consultant's agreement with the Company or Affiliate to which such Consultant is providing services. (e) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (f) (1) The Board or the Committee shall have the authority to effect, at any time and from time to time (i) the repricing of any outstanding Options under the Plan and/or (ii) with the consent of the affected holders of Options, the cancellation of any outstanding Options and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of common stock, but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option or, in the case of a ten percent (10%) stockholder (as defined in subsection 5(b)), not less than one hundred and ten percent (110%) of the Fair Market Value) per share of common stock on the new grant date. (2) Shares subject to an Option canceled under this subsection 9(f) shall continue to be counted, for the applicable period in which it was granted, against the maximum award of Options permitted to be granted pursuant to subsection 5(c) of the Plan. The repricing of an Option under this subsection 9(f), resulting in a reduction of the exercise price, shall be deemed to be a cancellation of the original Option and the grant of a substitute Option; in the event of such repricing, both the original and the substituted Options shall be counted for the applicable period against the maximum awards of Options permitted to be granted pursuant to subsection 5(c) of the Plan. The provisions of this subsection 9(f)(2) shall be applicable only to the extent required by Section 162(m) of the Code. 10. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any Option (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will 9 be appropriately adjusted in the type(s) and maximum number of securities subject to the Plan pursuant to subsection 4(a) and the maximum number of securities subject to award to any person during any calendar year pursuant to subsection 5(c), and the outstanding Options will be appropriately adjusted in the type(s) and number of securities and price per share of stock subject to such outstanding Options. Such adjustments shall be made by the Board or Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) In the event of: (1) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then: (i) any surviving or acquiring corporation shall assume Options outstanding under the Plan or shall substitute similar options (including an option to acquire the same consideration paid to stockholders in the transaction described in this Subsection 10(b)) for those outstanding under the Plan, or (ii) in the event any surviving or acquiring corporation refuses to assume such Options or to substitute similar options for those outstanding under the Plan, (A) with respect to Options held by persons then performing services as Employees, Directors or Consultants and subject to any applicable provisions of the California Corporate Securities Law of 1968 and related regulations relied upon as a condition of issuing securities pursuant to the Plan, the vesting of such Options and the time during which such Options may be exercised shall be accelerated prior to such event and the Options terminated if not exercised after such acceleration and at or prior to such event, and (B) with respect to any other Options outstanding under the Plan, such Options shall be terminated if not exercised prior to such event. 11. AMENDMENT OF THE PLAN AND OPTIONS. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (1) Increase the number of shares reserved for Options under the Plan; (2) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or (3) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with applicable stock exchange listing requirements. (b) The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. 10 (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Optionees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing. (e) The Board at any time, and from time to time, may amend the terms of any one or more Options; provided, however, that the rights and obligations under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing. 12. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on February 16, 2007, which shall be within ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Option was granted. 13. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Options granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 11 EX-10.18 23 EXHIBIT 10.18 Exhibit 10.18 PHARSIGHT CORPORATION 1995 Stock Option Plan As Adopted May 12, 1995 As Amended January 26, 1996 As Amended April 19, 1996 Approved by the Shareholders May 2, 1996 1. Purpose. This 1995 Stock Option Plan (the "Plan") is established as a compensatory plan to attract, retain and provide equity incentives to selected persons to promote the financial success of Pharsight Corporation, a California corporation (the "Company"). Capitalized terms not previously defined herein are defined in Section 17 of this Plan. 2. Types of Options and Shares. Options granted under this Plan (the "Options") may be either (a) incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or (b) nonqualified stock options ("NQSOs"), as designated at the time of grant. The shares of stock that may be purchased upon exercise of Options granted under this Plan (the "Shares") are shares of the common stock of the Company. 3. Number of Shares. The aggregate number of Shares that may be issued pursuant to Options granted under this Plan is 507,000 Shares, subject to adjustment as provided in this Plan. If any Option expires or is terminated without being exercised in whole or in part, the unexercised or released Shares from such Option shall be available for future grant and purchase under this Plan. At all times during the term of this Plan, the Company shall reserve and keep available such number of Shares as shall be required to satisfy the requirements of outstanding Options under this Plan. 4. Eligibility. Options may be granted to employees, officers, directors, consultants, independent contractors and advisers of the Company or any Parent, Subsidiary or Affiliate of the Company (provided such consultants, independent contractors and advisers render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction). ISOs may be granted only to employees of the Company or of a Parent or Subsidiary of the Company (including officers and directors who are also employees). The Committee (as defined in Section 14) in its sole discretion shall select the recipients of Options ("Optionees"). An Optionee may be granted more than one Option under this Plan. The Company may also, from time to time, assume outstanding options granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (i) granting an Option under this Plan in replacement of the option assumed by the Company, or (ii) treating the assumed option as if it had been granted under this Plan if the terms of such assumed option could be applied to an Option granted under this Plan. Such assumption shall be permissible if the holder of the assumed option would have been eligible to be granted an Option under this Plan if the other company had applied the rules of this Plan to such grant. 5. Terms and Conditions of Options. The Committee shall determine whether each Option is to be an ISO or an NQSO, the number of Shares subject to the Option, the exercise price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: 1 (a) Form of Option Grant. Each Option granted under this Plan shall be evidenced by a written Stock Option Grant (the "Grant") in such form (which need not be the same for each Optionee) as the Committee shall from time to time approve, which Grant shall comply with and be subject to the terms and conditions of this Plan. (b) Date of Grant. The date of grant of an Option shall be the date on which the Committee makes the determination to grant such Option unless otherwise specified by the Committee. The Grant representing the Option will be delivered to the Optionee with a copy of this Plan within a reasonable time after the granting of the Option. The Committee shall also determine the vesting start date for each Option. Unless otherwise specified by the Committee, the vesting start date shall be (i) for employees of the Company, the first day of full-time employment, and (ii) for consultants, independent contractors and advisors, the date of grant. (c) Exercise Price. The exercise price of an Option shall be determined by the Committee; provided that (i) the exercise price of an NQSO shall not be less than 85% of the Fair Market Value of the Shares on the date the Option is granted; (ii) the exercise price of an ISO shall not be less than 100% of the Fair Market Value of the Shares on the date the Option is granted; and (iii) the exercise price of any Option granted to a person owning more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company ("Ten Percent Shareholder") shall not be less than 110% of the Fair Market Value of the Shares on the date the Option is granted. (d) Exercise Period. Options shall be exercisable within the times or upon the events determined by the Committee as set forth in the Grant; provided, however, that no Option shall be exercisable after the expiration of ten (10) years from the date the Option is granted, and provided further, that no ISO granted to a Ten Percent Shareholder shall be exercisable after the expiration of five (5) years from the date the Option is granted, and provided further, that all Options granted under this Plan must become exerciseable as to at least twenty percent (20%) of the Shares for each full year from the vesting start date so long as the Optionee is providing services to the Company. (e) Limitations on ISOs. The aggregate Fair Market Value (determined as of the time an Option is granted) of stock with respect to which ISOs are exercisable for the first time by an Optionee during any calendar year (under this Plan or under any other incentive stock option plan of the Company or any Parent or Subsidiary of the Company) shall not exceed $100,000. If the Fair Market Value of Shares with respect to which ISOs are exercisable for the first time by an Optionee during any calendar year exceeds $100,000, the Options for the first $100,000 worth of Shares to become exercisable in such calendar year shall be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year shall be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the effective date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit shall be incorporated herein and shall apply to any Options granted after the effective date of such amendment. (f) Options Non-Transferable. Options granted under this Plan, and any interest therein, shall not be transferable or assignable by the Optionee, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the Optionee only by the Optionee; provided, however, that NQSOs held by an Optionee who is not an officer or director of the Company or other person whose transactions in the Company's common stock are subject to Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (in each case, an "Insider"), may be transferred to such family members, trusts and charitable institutions as the Committee, in its sole discretion, shall approve at the time of the grant of such Option. 2 (g) Assumed Options. In the event the Company assumes an option granted by another company, the terms and conditions of such option shall remain unchanged (except the exercise price and the number and nature of shares issuable upon exercise, which will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new option rather than assuming an existing option (as specified in Section 4), such new option may be granted with a similarly adjusted exercise price. 6. Exercise of Options. The following provisions shall apply to the exercise of Options: (a) Notice. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "Exercise Agreement") in a form approved by the Committee (which need not be the same for each Optionee), stating the number of Shares being purchased, the restrictions imposed on the Shares, if any, and such representations and agreements regarding Optionee's investment intent and access to information, if any, as may be required by the Company to comply with applicable securities laws, together with payment in full of the exercise price for the number of Shares being purchased. (b) Payment. Payment for the Shares purchased upon exercise of an Option may be made in cash (by check) or, where approved by the Committee in its sole discretion at the time of grant and where permitted by law: (i) by cancellation of indebtedness of the Company to the Optionee; (ii) by surrender of shares of common stock of the Company (free and clear of all liens, claims, encumbrances and security interests) having a Fair Market Value equal to the applicable exercise price of the Options, that (A) have been owned by Optionee for more than six (6) months and have been paid for within the meaning of Securities and Exchange Commission ("SEC") Rule 144 and, if such Shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares, or (B) were obtained by Optionee in the open public market; (iii) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; (iv) by waiver of compensation due or accrued to Optionee for services rendered; (v) provided that a public market for the Company's stock exists, through a "same day sale" commitment from Optionee and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby Optionee irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the exercise price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; (vi) provided that a public market for the Company's stock exists, through a "margin" commitment from Optionee and an NASD Dealer whereby Optionee irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the exercise price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; or (vii) by any combination of the foregoing. Optionees who are not employees of the Company shall not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares. (c) Withholding Taxes. Prior to issuance of the Shares upon exercise of an Option, the Optionee shall pay or make adequate provision for any federal or state withholding obligations of the Company, if applicable. (d) Limitations on Exercise. Notwithstanding the exercise periods set forth in the Grant, exercise of an Option shall always be subject to the following: (i) If the Optionee ceases to be employed by the Company or any Parent, Subsidiary or Affiliate of the Company for any reason except death or disability, then the Optionee may exercise such Optionee's Options to the extent (and only to the extent) that they would have been exercisable upon the date of termination of Optionee's employment, within three (3) months after the date of termination (or such shorter time 3 period as may be specified in the Grant, so long as such shorter time period provides that the Optionee may exercise his or her Option for at least 30 days from the date of termination), but in any event no later than the expiration date of the Options. (ii) If the Optionee's employment with the Company or any Parent, Subsidiary or Affiliate of the Company is terminated because of the death of the Optionee or the disability of the Optionee, the Optionee's Options may be exercised to the extent (and only to the extent) that they would have been exercisable by the Optionee on the date of termination of the Optionee's employment, by the Optionee (or the Optionee's legal representative) within twelve (12) months after the date of termination of the Optionee's employment (or such shorter time period as may be specified in the Grant so long as such shorter time period is at least six (6) months), but in any event no later than the expiration date of the Options. If the Option is an ISO and if Optionee's disability does not fall within the meaning of that term in Section 22(e)(3) of the Code, then such ISO shall automatically become a NQSO if it has not been exercised prior to the end of three (3) months from the date of termination. (iii) The Committee shall have discretion to determine whether the Optionee has ceased to be employed by the Company or any Parent, Subsidiary or Affiliate of the Company and the effective date on which such employment terminated. (iv) In the case of an Optionee who is a director, consultant, independent contractor or adviser, the Committee will have the discretion to determine whether the Optionee is "employed by the Company or any Parent, Subsidiary or Affiliate of the Company" pursuant to the foregoing Sections. (v) The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Optionee from exercising the full number of Shares as to which the Option is then exercisable. (vi) An Option shall not be exercisable unless such exercise is in compliance with the Securities Act of 1933, as amended (the "Securities Act"), all applicable state securities laws and the requirements of any stock exchange or national market system upon which the Shares may then be listed, as they are in effect on the date of exercise. The Company shall be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or national market system, and the Company shall have no liability for any inability or failure to do so. 7. Restrictions on Shares. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Grant a right of first refusal to purchase all Shares that an Optionee (or a subsequent transferee) may propose to transfer to a third party. The Company may also reserve to itself and/or its assignee(s) in the Grant a right to repurchase a portion of or all Shares held by an Optionee upon Optionee's termination of employment or service with the Company or a Parent, Subsidiary or Affiliate of the Company, for any reason within 90 days of such termination for cash or cancellation of purchase money indebtedness at the higher of (i) Optionee's original purchase price or (ii) the Fair Market Value of such Shares on the date of termination. 8. Modification, Extension, and Renewal of Options. The Committee shall have the power to modify, extend or renew outstanding Options and to authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of the Optionee, impair any rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered shall be treated in accordance with Section 424(h) of the Code. The Committee shall have the power to reduce the exercise price of outstanding Options without the consent of Optionees by a written notice to the Optionees affected; 4 provided, however, that the exercise price per Share may not be reduced below the minimum exercise price that would be permitted under Section 5(c) of this Plan for Options granted on the date the action is taken to reduce the exercise price. 9. Privileges of Stock Ownership. No Optionee shall have any of the rights of a shareholder with respect to any Shares subject to an Option until such Option is properly exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to such date of exercise, except as provided in this Plan. The Company shall provide to each Optionee a copy of the annual financial statements of the Company within 120 days after the close of each fiscal year of the Company. 10. No Obligation to Employ. Nothing in this Plan or any Option granted under this Plan shall confer on any Optionee any right to continue in the employ of, or other relationship with, the Company or any Parent, Subsidiary or Affiliate of the Company or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate of the Company to terminate Optionee's employment or other relationship at any time, with or without cause. 11. Adjustment of Option Shares. In the event that the number of outstanding shares of common stock of the Company is changed by a stock dividend, stock split, reverse stock split, combination, reclassification or similar change in the capital structure of the Company without consideration, then the number of Shares available under this Plan and the number of Shares subject to outstanding Options and the exercise price per Share of such Options shall be proportionately adjusted, subject to any required action by the Board of Directors (the "Board") or shareholders of the Company and compliance with applicable securities laws; provided, however, that a fractional share shall not be issued upon exercise of any Option and any fractions of a Share that would have resulted shall either be cashed out at Fair Market Value or the number of Shares issuable under the Option shall be rounded up to the nearest whole number, as determined by the Committee; and provided further that the exercise price may not be decreased to below the par value, if any, for the Shares. 12. Assumption of Options by Successor. In the event of (a) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company and the Options granted under this Plan are assumed by the successor corporation), (b) a dissolution or liquidation of the Company, (c) the sale of all or substantially all of the assets of the Company, or (d) any other transaction which qualifies as a "corporate transaction" under Section 424(a) of the Code wherein the shareholders of the Company give up all of their equity interest in the Company (except for the acquisition of all or substantially all of the outstanding shares of the Company), any or all outstanding Options may be assumed by the successor corporation, which assumption shall be binding on all Optionees. In the alternative, the successor corporation may substitute an equivalent option or provide substantially similar consideration to Optionees as was provided to shareholders (after taking into account the existing provisions of Optionees' options, such as the exercise price and the vesting schedule). The successor corporation may also issue, in place of outstanding shares of the Company held by Optionee as a result of the exercise of an Option that are subject to repurchase, substantially similar shares or other property subject to similar repurchase restrictions no less favorable to Optionee. In the event such successor corporation, if any, refuses to assume or substitute Options, as provided above, the Options shall expire upon consummation of the transaction. Subject to the foregoing provisions of this Section 12, in the event of the occurrence of any transaction described in clauses (a) - (d) of this Section 12, all outstanding Options shall be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, sale of assets or other "corporate transaction". 5 13. Assumption of Options by the Company. The Company, from time to time, also may substitute or assume outstanding stock options granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Option under this Plan in substitution of such other company's option, or (b) assuming such other company's option as if it had been granted under this Plan if the terms of such assumed option could be applied to an Option granted under this Plan. Such substitution or assumption shall be permissible if the holder of the substituted or assumed Option would have been eligible to be granted an Option under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an option granted by another company, the terms and conditions of such option shall remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted exercise price. 14. Adoption and Shareholder Approval. This Plan shall become effective on the date that it is adopted by the Board of the Company. This Plan shall be approved by the shareholders of the Company, in any manner permitted by applicable corporate law, within twelve months before or after the date this Plan is adopted by the Board. Upon the effective date of the Plan, the Board may grant Options pursuant to this Plan; provided that, in the event that shareholder approval is not obtained within the time period provided herein, all Options granted hereunder shall terminate. No Option that is issued as a result of any increase in the number of shares authorized to be issued under this Plan shall be exercised prior to the time such increase has been approved by the shareholders of the Company and all such Options granted pursuant to such increase shall similarly terminate if such shareholder approval is not obtained. After the Company becomes subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of Rule 16b-3 of the Exchange Act ("Rule 16b-3") with respect to shareholder approval. 15. Administration. This Plan may be administered by the Board or a committee appointed by the Board (the "Committee"). If, at the time the Company registers its Common Stock under the Exchange Act, a majority of the Board is not comprised of Disinterested Persons, the Company will take appropriate steps to comply with the disinterested director requirements of Section 16(b) of the Exchange Act, which may consist of the appointment by the Board of a committee consisting of not less than three persons (who need not be members of the Board), each of whom is a Disinterested Person. As used in this Plan, references to the "Committee" shall mean either the committee appointed by the Board to administer this Plan or the Board if no committee has been established. After registration of the Company's Common Stock under the Exchange Act, Board members who are not Disinterested Persons may not vote on any matters affecting the administration of this Plan or on the grant of any Options pursuant to this Plan to Insiders, but any such member may be counted for determining the existence of a quorum at any meeting of the Board during which action is taken with respect to Options or administration of this Plan and may vote on the grant of any Options pursuant to this Plan otherwise than to Insiders. The interpretation by the Committee of any of the provisions of this Plan or any Option granted under this Plan shall be final and binding upon the Company and all persons having an interest in any Option or any Shares purchased pursuant to an Option. The Committee may delegate to officers of the Company the authority to grant Options under this Plan to Optionees who are not Insiders of the Company. 16. Term and Termination of Plan; Amendment. Options may be granted pursuant to this Plan from time to time within a period of ten (10) years from the date on which this Plan is adopted by the Board. The Committee may at any time terminate or amend this Plan in any respect including (but not limited to) amendment of any form of grant, exercise agreement or instrument to be executed pursuant to this Plan; provided, however, that the Committee shall not, without the approval of the shareholders of the Company, amend this Plan in any manner that requires shareholder approval pursuant to the Code or the regulations promulgated thereunder as such 6 provisions apply to ISO plans or pursuant to the Exchange Act or Rule 16b-3 (or its successor) promulgated thereunder. 17. Certain Definitions. As used in this Plan, the following terms shall have the following meanings: (a) "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of the granting of the Option, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (b) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (c) "Affiliate" means any corporation that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, another corporation, where "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of the corporation, whether through the ownership of voting securities, by contract or otherwise. (d) "Disinterested Person" shall have the meaning set forth in Rule 16b-3(d)(3) as promulgated by the SEC under Section 16(b) of the Exchange Act, as such rule is amended from time to time and as interpreted by the SEC. (e) "Fair Market Value" shall mean the fair market value of the Shares as determined by the Committee from time to time in good faith. If a public market exists for the Shares, the Fair Market Value shall be the average of the last reported bid and asked prices for common stock of the Company on the last trading day prior to the date of determination (or the average closing price over the number of consecutive working days preceding the date of determination as the Committee shall deem appropriate) or, in the event the common stock of the Company is listed on a stock exchange or on the NASDAQ National Market System, the Fair Market Value shall be the closing price on such exchange or quotation system on the last trading day prior to the date of determination (or the average closing price over the number of consecutive working days preceding the date of determination as the Committee shall deem appropriate). 7 EX-23.1 24 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated May 14, 1999 with respect to the financial statements of Pharsight Corporation and our report dated April 7, 2000 with respect to the financial statements of Scientific Consulting, Inc., in the Registration Statement and related Prospectus of Pharsight Corporation for the registration of shares of its common stock. /s/ ERNST & YOUNG LLP San Jose, California April 10, 2000 EX-27.1 25 EXHIBIT 27.1
5 1,000 YEAR YEAR YEAR MAR-31-2000 MAR-31-1999 MAR-31-1998 APR-01-1999 APR-01-1998 APR-01-1997 DEC-31-1999 MAR-31-1999 MAR-31-1998 5,660 4,148 2,701 12,679 1,999 1,000 2,685 772 475 (27) (27) (27) 0 0 0 21,531 7,152 4,480 1,710 1,164 502 (653) (319) (121) 23,514 9,655 5,399 4,539 4,588 1,558 2,129 2,812 1,221 40,824 19,926 9,761 0 0 0 4,754 751 330 (28,732) (18,422) (7,471) 23,514 9,655 5,399 0 0 0 6,252 4,085 1,106 0 0 0 3,042 2,520 714 10,950 12,141 5,780 0 0 0 15 120 (172) (7,555) (10,696) (5,216) 0 0 0 (7,555) (10,696) (5,216) 0 0 0 0 0 0 0 0 0 (7,755) (10,696) (5,216) (2.50) (4.41) (3.96) (2.50) (4.41) (3.96)
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