-----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, IOX9YqkO4W+CsRCwDGSA+9fj2cPyFBQETNUrQXtBOVSzBEHVHeETSvJHPVnT4wEu kYWn3xW0Q3sP8dn40sqDDA== /in/edgar/work/20000612/0000912057-00-028269/0000912057-00-028269.txt : 20000919 0000912057-00-028269.hdr.sgml : 20000919 ACCESSION NUMBER: 0000912057-00-028269 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20000612 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARSIGHT CORP CENTRAL INDEX KEY: 0001040853 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 770401273 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-34896 FILM NUMBER: 653655 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/A 1 s-1a.txt FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 2000 REGISTRATION NO. 333-34896 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO 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. / / ------------------------------ 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 JUNE 12, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS , 2000 [LOGO] 3,750,000 SHARES OF COMMON STOCK - -------------------------------------------------------------------------------- PHARSIGHT CORPORATION: THE OFFERING: - We are offering 3,750,000 shares. - - We develop and market computer- - The underwriters have an option to based products and services that purchase an additional 562,500 help pharmaceutical and shares from us to cover biotechnology companies improve the over-allotments. drug development process. - This is our initial public offering and no public market currently exists for our shares. We anticipate the price range to be between $12.00 and $15.00 per share. - Closing: , 2000 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 4. - -------------------------------------------------------------------------------- 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.......................... 4 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............................ 38 Related Party Transactions............ 51 Principal Stockholders................ 54 Description of Capital Stock.......... 56 Shares Eligible for Future Sale....... 59 Underwriting.......................... 62 Legal Matters......................... 65 Experts............................... 65 Additional Information................ 65 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 strategic decision making and the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics, a branch of statistics applied to biological phenomena, 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. 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. 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. Our top five customers by revenue to us in the fiscal year ended March 31, 2000 were, listed in alphabetical order, AstraZeneca PLC, Glaxo Wellcome Inc., Johnson & Johnson, SmithKline Beecham Pharmaceuticals and 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. We were incorporated in California in April 1995, and will reincorporate in Delaware prior to the closing of this offering. 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. 1 THE OFFERING Common stock offered............. 3,750,000 shares Common stock to be outstanding after the offering............. 18,491,939 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" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Proposed Nasdaq National Market symbol......................... PHST Risk Factors..................... See "Risk Factors," beginning on page 4, 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 common stock, and excludes 2,132,250 shares issuable upon exercise of outstanding stock options and warrants at a weighted average exercise price of $1.11 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. 2 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 3,750,000 shares of common stock offered by this prospectus at an assumed initial public offering price of $13.50 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.
YEARS ENDED MARCH 31, ------------------------------ 1998 1999 2000 STATEMENTS OF OPERATIONS DATA: Revenues.................................................. $ 1,106 $ 4,085 $ 9,298 Operating expenses........................................ 5,402 13,858 19,147 Loss from operations...................................... (4,296) (9,773) (9,849) Net loss applicable to common shareholders................ (5,216) (10,696) (10,905) Basic and diluted net loss per common share............... $ (3.96) $ (4.41) $ (3.38) Shares used in computing basic and diluted net loss per common share............................................ 1,318 2,424 3,225 Pro forma basic and diluted net loss per common share..... $ (0.86) Shares used in computing pro forma basic and diluted net loss per common share................................... 12,712
MARCH 31, 2000 ---------------------- ACTUAL AS ADJUSTED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments......... $16,482 $56,104 Working capital........................................... 13,624 53,246 Total assets.............................................. 21,096 60,718 Long-term obligations, net of current portion............. 708 708 Redeemable convertible preferred stock.................... 18,582 -- Total stockholders' equity (deficit)...................... (3,737) 54,467
3 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 March 31, 2000, we had an accumulated deficit of $29.0 million. We expect our net losses to continue as we increase our research and development costs and other costs to develop our business. Since the amounts we may determine to invest to grow our business are uncertain, we are unable to predict when, if ever, we may become profitable. We cannot assure you that we will ever 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 4 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 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 50.4% 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 5 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, programming errors, attacks by third parties or similar disruptive problems. We do not have insurance to cover us for losses incurred in many of these events. 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. However, we only carry key man insurance on our chief executive officer, Arthur H. Reidel, in the amount of $1.0 million dollars. We do not believe that the proceeds from this insurance would be sufficient to cover the loss that our business would suffer as a result of the loss of his services. 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. 6 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 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. Although we carry insurance to cover us in the event of losses caused by natural disasters such as earthquakes, depending on the amount of damage this insurance may not be sufficient to cover our losses. Furthermore, any interruption in our services could damage our reputation and, therefore, our ability to conduct business in the future. We do not carry insurance that protects us from losses caused as a result of damage to our reputation. 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. We have filed two patent applications, but do not currently have any patents issued. 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. We may also 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. In addition, the laws of some foreign countries provide less protection of intellectual property rights than the laws of the United States and Europe. As a result, we may have an increasingly difficult time adequately protecting our intellectual property rights as our sales in foreign countries grow. 7 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. 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 8 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. EXISTING OR FUTURE LAWS THAT APPLY TO COMMUNICATIONS AND COMMERCE OVER THE INTERNET COULD HARM OUR BUSINESS. Laws and regulations that specifically apply to communications and commerce over the Internet are becoming more prevalent. Existing laws and regulations as well as new laws and regulations could place restrictions or impose costs on us that adversely affect our business. The United States Congress has passed laws regarding, among other things, Internet privacy, copyrights and taxation. The Federal Trade Commission has recently recommended that Congress enact further federal legislation protecting consumer privacy on the Internet. The European Union has also enacted its own directive regarding privacy in relation to the Internet. We have not fully assessed how these laws and regulations may affect our business. However, we have access to, manage, transmit and store sensitive customer information that may be subject to these privacy and other laws and regulations. As a result, in the future we may be subject to claims associated with invasion of privacy or inappropriate disclosure, use or loss of this information. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could harm our reputation and our business. In addition, these laws may make it more costly to enter into, or prevent us from entering into, additional license agreements with information providers for our information products. Laws regulating communications and commerce over the Internet remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, content, libel and taxation apply to the Internet. The adoption or modification of laws or regulations relating to the Internet, or interpretations of existing law, could harm our business. GOVERNMENT REGULATION OF THE PHARMACEUTICAL INDUSTRY MAY 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. 9 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. 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 18,491,939 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 14,741,939 shares of common stock that will be outstanding upon completion of this offering are "restricted securities" as defined in Rule 144. 10 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 14,591,771 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 40.3% 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 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 3,750,000 shares in the offering at an assumed initial price to public of $13.50 per share, our pro forma net tangible book value per share will be $2.91, which is $10.59 below the assumed 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 11 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 3,750,000 shares of our common stock in this offering are estimated to be approximately $45.7 million, or $52.8 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $13.50 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 March 31, 2000 on an actual basis, and as adjusted to give effect to the receipt of net proceeds from the sale of the 3,750,000 shares of our common stock at an assumed initial public offering price of $13.50 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 MARCH 31, 2000 --------------------------- ACTUAL AS ADJUSTED (IN THOUSANDS) Capital leases and notes payable............................ $ 708 $ 708 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................................................... 18,582 -- Stockholders' equity: Convertible preferred stock: 5,253,052 shares authorized, 5,231,623 shares issued and outstanding actual; no shares authorized, issued and outstanding as adjusted... 22,552 -- Common stock: 19,235,308 shares authorized, 4,055,222 shares issued and outstanding actual; 120,000,000 shares authorized, 18,491,939 shares issued and outstanding as adjusted................................................ 6,160 86,916 Deferred stock compensation............................... (3,310) (3,310) Accumulated deficit....................................... (28,981) (28,981) Accumulated other comprehensive loss...................... (23) (23) Notes receivable from stockholders........................ (135) (135) -------- ------- Total stockholders' equity (deficit)........................ (3,737) 54,467 -------- ------- Total capitalization........................................ $ 15,553 $55,175 ======== =======
14 DILUTION Our pro forma net tangible book value as of March 31, 2000 was approximately $14.3 million, or $0.97 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 March 31, 2000. Our as adjusted pro forma net tangible book value as of March 31, 2000 would have been $53.9 million, or $2.91 per share after giving effect to the sale of 3,750,000 shares of common stock offered by us at the assumed initial public offering price of $13.50 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the payment of $6.1 million to the holders of our series C preferred stock. This represents an immediate increase in pro forma net tangible book value of $1.94 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $10.59 per share to investors purchasing our common stock in this offering, as illustrated in the following table:
Assumed initial public offering price per share. $ 13.50 ------ Pro forma net tangible book value per share before this offering................................................ $ .97 Increase per share attributable to new investors.......... 1.94 ------ As adjusted pro forma net tangible book value per share after this offering....................................... 2.91 ------ Dilution per share to new investors......................... $10.59 ======
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 $13.50 per share.
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE Existing stockholders................... 14,741,939 80% $32,737,788(1) 39% $ 2.22 New investors........................... 3,750,000 20 50,625,000 61 13.50 ---------- --- ----------- --- Total................................. 18,491,939 100% $83,362,768 100% ========== === =========== ===
- ------------------------ (1) Existing stockholders total consideration is reduced by $6,109,480 for the payment of $6.1 million to the holders of our Series C stock. These tables do not assume the exercise of stock options and warrants outstanding as of March 31, 2000. To the extent that outstanding options and warrants are exercised, there will be additional dilution to investors. As of March 31, 2000, there were 1,835,369 shares of common stock 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 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 $2.73, and the dilution per share to new investors would be $10.77, after giving effect to the exercise of the options and warrants outstanding and exercisable as of March 31, 2000. 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, 1999 and 2000 and statements of operations data for each of the years ended March 31, 1998, 1999 and 2000 from our audited financial statements included in this prospectus. We have derived our balance sheet data as of March 31, 1996, 1997 and 1998 and statements of operations data for the period from April 4, 1995 to March 31, 1996 and the year ended March 31, 1997 from our audited financial statements not included in this prospectus.
APRIL 4, 1995 YEARS ENDED MARCH 31, (INCEPTION) TO ----------------------------------------- STATEMENTS OF OPERATIONS DATA MARCH 31, 1996 1997 1998 1999 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues..................................... $ -- $ -- $ 1,106 $ 4,085 $ 9,298 Costs and expenses: Cost of revenues........................... -- -- 714 2,520 4,541 Research and development................... 126 720 2,134 4,327 5,451 Sales and marketing........................ 67 816 1,366 2,292 4,059 General and administrative................. 47 438 744 1,105 1,967 Amortization of deferred stock compensation............................. -- -- -- 57 2,188 Amortization of intangible assets.......... -- -- 82 965 941 Acquired in-process research and development.............................. -- -- 362 2,592 -- ------ ------- ------- -------- -------- Total operating expenses..................... 240 1,974 5,402 13,858 19,147 ------ ------- ------- -------- -------- Loss from operations......................... (240) (1,974) (4,296) (9,773) (9,849) Other income (expense), net.................. 8 40 172 (120) 185 ------ ------- ------- -------- -------- Net loss..................................... $ (232) $(1,934) $(4,124) $ (9,893) (9,664) Accretion on convertible preferred stock..... -- -- (448) (803) (1,241) Series C redeemable convertible preferred stock dividend............................. -- -- (644) -- -- ------ ------- ------- -------- -------- Net loss applicable to common stockholders... $ (232) $(1,934) $(5,216) $(10,696) $(10,905) ====== ======= ======= ======== ======== Basic and diluted net loss per share......... $(1.30) $ (2.57) $ (3.96) $ (4.41) $ (3.38) ====== ======= ======= ======== ======== Shares used to compute basic and diluted net loss per share............................. 178 752 1,318 2,424 3,225 Pro forma basic and diluted net loss per share...................................... $ (0.86) ======== Shares used to compute pro forma basic and diluted net loss per share.................................. 12,712
AS OF MARCH 31, ---------------------------------------------------- BALANCE SHEET DATA 1996 1997 1998 1999 2000 (IN THOUSANDS) Cash, cash equivalents and short-term investments...................................... $1,549 $ 662 $ 3,701 $ 6,147 $ 16,482 Working capital.................................... 1,552 459 2,922 2,604 13,624 Total assets....................................... 1,605 899 5,399 9,655 21,096 Long-term obligations, net of current portion...... -- 180 1,221 2,812 708 Redeemable convertible preferred stock............. -- -- 7,176 17,341 18,582 Deferred stock compensation........................ -- -- -- (239) (3,310) Accumulated deficit................................ (232) (2,166) (7,382) (18,078) (28,981) Total stockholders' equity (deficit)............... 1,582 472 (4,556) (15,086) (3,737)
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. 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, Duke University, Lovelace Respiratory Research Institute and Protocare Sciences, Inc., 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. Our standard payment terms range from "net 15 days" to "net 30 days." 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 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 17 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 year ended March 31, 2000, 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." Profit margins from scientific and training services have been lower than those obtained from license and support revenues. Services revenues increased at a greater rate than license and support revenues during fiscal 1999 and fiscal 2000. Whether this trend will continue will depend upon the introduction and acceptance of new software and information products which we are unable to predict. 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 years ended March 31, 1999 and 2000, in connection with the grant of stock options to employees, we recorded deferred stock compensation totaling $296,000 and $5.3 million, respectively, representing the difference between the deemed fair value of our common stock for financial reporting 18 purposes on the date these options were granted and 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 $2.2 million for the years ended March 31, 1999 and 2000, respectively. As of March 31, 2000, we had a total of $3.3 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 YEARS ENDED MARCH 31, 2000 AND 1999 REVENUES. License and support revenues increased $1.5 million, or 84%, from $1.8 million in fiscal 1999 to $3.3 million in fiscal 2000. Of this increase, $900,000 was due to an approximately 50% increase in the number of licenses sold from fiscal 1999 to fiscal 2000, and approximately $600,000 reflected an increase in annual renewal revenue due to the growth in the installed base. Services revenues increased $3.7 million, or 162%, from $2.3 million in fiscal 1999 to $6.0 million in fiscal 2000. The majority of this increase was revenue recognized during fiscal 2000 under five new services agreements with major pharmaceutical companies. COST OF REVENUES. Cost of revenues increased $2.0 million, or 80%, from $2.5 million in fiscal 1999 to $4.5 million in fiscal 2000. 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 $1.1 million, or 26%, from $4.3 million in fiscal 1999 to $5.5 million in fiscal 2000. 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 106% to 59%. 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 $1.8 million, or 77%, from $2.3 million in fiscal 1999 to $4.1 million in fiscal 2000. 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 56% 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 $862,000, or 78%, from $1.1 million in fiscal 1999 to $2.0 million in fiscal 2000. 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 income (expense) changed $305,000 from other expense of $120,000 in fiscal 1999 to other income of $185,000 in fiscal 2000. This change 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 fiscal years 1999 and 2000. YEARS ENDED MARCH 31, 1999 AND 1998 REVENUES. License and support revenues increased $1.2 million, or 177%, from $649,000 in fiscal 1998 to $1.8 million in fiscal 1999. Approximately $665,000 of the increase is attributable to increased sales of WinNonlin Pro and WinNonlin Standard initial licenses. Growth of the installed base from fiscal 1998 to fiscal 1999 caused annual renewal revenue to increase approximately $484,000 from the prior period. Services revenues increased $1.8 million, or 400%, from $457,000 in fiscal 1998 to $2.3 million in fiscal 1999. The majority of this increase was due to an increased volume of projects from 12 during fiscal 1998 to 45 during fiscal 1999. 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. 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 March 31, 2000, we had $16.5 million in cash and short-term investments, an 20 increase of $10.3 million from cash and short-term investments held as of March 31, 1999, and a $1.5 million secured revolving line of credit with Silicon Valley Bank 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 March 31, 2000, there were no borrowings under the line of credit. Our working capital, defined as current assets less current liabilities, at March 31, 2000 was $13.6 million, an increase of $11.0 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 $3.3 million in fiscal 1998, $5.6 million in fiscal 1999, and $6.6 million in fiscal 2000. The cash used in these periods was primarily attributable to net losses of $4.1 million in fiscal 1998, $9.9 million in fiscal 1999, and $9.7 million in fiscal 2000. 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 $1.9 million in fiscal 1998, $4.0 million in fiscal 1999, and $10.0 million in fiscal 2000. 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 $7.2 million in fiscal 1998, $11.0 million in fiscal 1999, and $17.7 million in fiscal 2000. These amounts were primarily proceeds from the sale of preferred stock and issuances of notes payable in connection with acquisitions. Under the terms of the Series C preferred stock in our certificate of incorporation, we are required to repay the entire initial purchase price of the Series C preferred stock, approximately $6.1 million, to the holders of this preferred stock at the closing of this offering. We currently anticipate that the net proceeds from this offering, after payment of $6.1 million to the holders of our Series C preferred stock, 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 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. In addition, the necessity of raising additional funds could force us to incur debt on terms that could restrict our ability to make capital expenditures and incur additional indebtedness. 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. 21 In January 2000, the Emerging Issues Task Force issued EITF 00-2, "Accounting for Web Site Development Costs." We do not believe our adoption will materially change our financial position, results of operations, or cash flows. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25 and, among other issues, clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of the previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. We do not expect the application of FIN 44 to have a material impact on our financial position or results of operations. 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, 2000, 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 strategic decision making and the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics. 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. 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. 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, the study of all genes and their functions in biological pathways, 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, or tests, 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. 23 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 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 is expected to increase from 12% in 1980 to 20% in 2000. 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 five 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 24 - strengthened competitive position due to improved product labels. 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 two 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. As of March 31, 2000, our scientific and decision services group full-time personnel includes 21 people. 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 pharmacokinetics, the study of how the body absorbs and eliminates drugs, and pharmacodynamics, the study of how a drug affects the disease process in the body. 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 32 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 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. Our top 15 customers by revenue to us in fiscal 2000 were, listed in alphabetical order: Anesta Corporation AstraZeneca PLC BASF Durect Corporation F. Hoffmann-La Roche Ltd. Glaxo Wellcome Inc. Guilford Pharmaceuticals Inc. Johnson & Johnson Novartis Pharmaceuticals Corporation Novo Nordisk A/S 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. We compensate members of our advisory groups through stock option grants and, under limited circumstances, with cash. - 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 28 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 $2.1 million, $4.3 million and $5.5 million, in fiscal 1998, 1999 and 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 have also filed two patent applications. We 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. In addition, the laws of some foreign countries provide less protection of intellectual property rights than the laws of the United States and Europe. As a result, we may have an increasingly difficult time adequately protecting our intellectual property rights as our sales in foreign countries grow. 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. 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. 35 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 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. Our business may also be impacted by government regulation regarding the Internet. The United States Congress has passed laws regarding, among other things, Internet privacy, copyrights and taxation. The Federal Trade Commission has recently recommended that Congress enact further federal legislation protecting consumer privacy on the Internet. The European Union has also enacted its own directive regarding privacy in relation to the Internet. These existing, as well as new, laws and regulations could place restrictions or impose costs on us that adversely affect our business. We have not fully assessed how these laws and regulations may affect our business. However, we have access to, manage, transmit and store sensitive customer information that may be subject to these privacy and other laws and regulations. As a result, in the future we may be subject to claims associated with invasion of privacy or inappropriate disclosure, use or loss of this information. These laws may also make it more difficult or costly to enter into licenses to information for our information products. 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 36 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 92 employees, consisting of 25 in services and support, 28 in research and development, 21 in sales and marketing and 18 in finance and operations. Thirty-eight 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. 37 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table provides information concerning our directors, executive officers and key employees as of May 31, 2000:
NAME AGE POSITION Arthur H. Reidel(1)................. 49 Chairman of the Board, President and Chief Executive Officer Robin A. Kehoe...................... 43 Senior Vice President, Finance and Chief Financial Officer Michael A. Emley.................... 53 Senior Vice President, Sales and Professional Services Steven L. Shafer, M.D............... 46 Vice President, Product Development Daniel L. Weiner, Ph.D.............. 50 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, Research and Development Andrew Levine....................... 37 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.(3).......................... 42 Director Robert B. Chess(2).................. 44 Director Douglas E. Kelly, M.D.(1)........... 39 Director Dean O. Morton(3)................... 67 Director Gary L. Neil, Ph.D.(1)(2)........... 59 Director W. Ferrell Sanders(3)............... 63 Director
- ------------------------ (1) Member of the Nominating Committee. (2) Member of the Audit Committee. (3) Member of the Compensation 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 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 38 of Digidesign and facilitated its initial public offering and subsequent merger into Avid Technology. From 1988 to 1993, Ms. Kehoe held various positions with Coopers & Lybrand, an accounting and consulting firm, 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., 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., a manufacturer of computer-aided design systems. 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, a pharmaceutical company. 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 software application company in the field of genomic discovery, 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. 39 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, a provider of software applications for manufacturing engineering, 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, a software and database provider. 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, a healthcare company, 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, was Vice President, Engineering since September 1995 and is currently our Vice President, Research and Development. 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. ANDREW LEVINE joined us as Vice President, Engineering in May 1998. From September 1993 to May 1998, Mr. Levine was Vice President for Research & Development at MGA Software, a developer of simulation software products. From 1986 to 1993, Mr. Levine held technical and management 40 positions with Bachman Information Systems, a database design and computer-aided software engineering vendor, with his last position being Vice President of R&D of the Database Tools division. Mr. Levine received a B.S. in Computer Science from Harvard University. 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, 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 which she joined in June 1995. From January 1982 to June 1995, she was Director of Worldwide Industry Sales at Interleaf, Inc., 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., a payroll accounting firm, QRS Corporation, a provider of business-to-business online applications and solutions, and Veritas Software Corporation, an application storage management software company. 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 management consulting firm. From September 1987 to April 1993, Dr. Chambon was an executive with Sandoz Pharmaceuticals Corporation (Novartis), a pharmaceutical company, where he had late stage product development and pre-marketing responsibilities. He is currently a director of Deltagen, Inc., a provider of data on the functional role of newly discovered genes, and Variagenetics, Inc., a gene research company, 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 of Inhale Therapeutic Systems, Inc., a provider of pulmonary delivery systems for biotechnology drugs. 41 He has been at Inhale since 1991 and served as its President and Chief Executive Officer until August 1998 and as its co-Chief Executive Officer until April 2000. 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. 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., a manufacturer of surgical products, 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., a supplier of process control and yield management solutions for the semiconductor and microelectronics industry, Centigram Communications Corporation, a provider of unified communications services, BEA Systems Inc., a provider of middleware for enterprise applications, The Clorox Company, a manufacturer of household products and products for institutional markets, and ALZA Corporation, a research-based pharmaceutical company. 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 pharmaceutical company. Dr. Neil is a director of Allergan Specialty Therapeutics, Inc., a pharmaceutical company, and Geron Corporation, a biotechnology company. 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, a computer hardware and software provider. 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 42 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, M.D., 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 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 Mr. Brooks, Mr. Chess and Dr. Neil. 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, Mr. Morton 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, Dr. Kelly and Mr. Reidel. 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. 43 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 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 $100,000. We refer to these officers as the "named executive officers." 44 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------ SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS Arthur H. Reidel ........................................... $200,000 $ -- 107,250 President and Chief Executive Officer Robin A. Kehoe ............................................. $143,750 $ -- 72,500 Senior Vice President, Finance and Chief Financial Officer Michael A. Emley ........................................... $141,250 $56,148 60,000 Senior Vice President, Sales and Professional Services Daniel L. Weiner ........................................... $175,000 $ -- -- Senior Vice President, Technology Deployment
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 NUMBER OF PERCENTAGE OF PRICE APPRECIATION FOR OPTION SECURITIES TOTAL OPTIONS EXERCISE TERM(4) UNDERLYING OPTIONS GRANTED DURING PRICE PER EXPIRATION ------------------------------------ GRANTED(1) FISCAL YEAR(2) SHARE($/SH)(3) DATE 0% 5% 10% ------------------ -------------- -------------- ---------- ---------- ---------- ---------- Arthur H. Reidel(5).. 107,250 8.16% 0.35 5/13/09 $1,410,338 $2,320,898 $3,717,877 Robin A. Kehoe(5).... 72,500 5.52% 0.35 5/13/09 953,375 1,568,906 2,513,250 Michael A. Emley(6).. 60,000 4.56% 0.35 5/13/09 789,000 1,298,405 2,079,931
- ------------------------ (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. The potential realizable value is calculated based on the ten-year term of the option at the time of grant. Stock price appreciation at the specified rates is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent our prediction of our stock price performance. 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. The potential realizable values at the specified rates of appreciation are calculated by: - multiplying the number of shares of common stock under the option by the assumed initial public offering price of $13.50 per share; 45 - assuming that the aggregate stock value derived from that calculation compounds at the annual specified rate shown in the table until the expiration of the options; and - subtracting from that result the aggregate option exercise price. (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. In addition, in May 2000 Mr. Reidel received an option to purchase 167,250 shares of common stock at an exercise price of $6.50 per share, and an additional option to purchase 442,750 shares of common stock at an exercise price of $6.83 per share under a separate stock option plan just for this grant. (6) This option vests in equal monthly installments over 48 months. 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 UNEXERCISABLE NAME ----------- ------------- ----------- ------------- Arthur H. Reidel............. 121,830 $41,183 -- -- -- -- Robin A. Kehoe............... 82,220 27,805 -- -- -- -- Michael A. Emley............. -- -- 13,750 46,250 $185,625 $624,375
- ------------------------ (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 $13.50 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 in May, 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. 46 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, 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 47 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 May, 2000. 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. 48 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. 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 in 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 1,740,619 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 and on May 15, 2000 our Board of Directors granted an option to purchase an additional 167,250 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 49 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 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. 2000 CEO NON-QUALIFIED STOCK OPTION PLAN Our board of directors adopted the 2000 CEO Non-qualified Stock Option Plan on May 15, 2000. The sole person eligible to receive an option under the plan is Arthur H. Reidel, our Chief Executive Officer. Mr. Reidel received an option to purchase all 442,750 shares authorized for issuance under the plan. The exercise price of options issued under the plan is $6.83, which was 105% of the fair market value of our common stock on the date of grant as determined by our board. The option vests in equal monthly installments over 34 months. In certain change in control circumstances, a surviving or acquiring corporation may either assume all outstanding awards under the plan or substitute other awards for the outstanding awards. If the surviving or acquiring corporation does not assume or substitute outstanding option, then the vesting will accelerate and the options will terminate prior to the event if not otherwise exercised. 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. 50 RELATED PARTY 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 intend to enter 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 51 rate of 6.74% and 5.77% per year, respectively, compounded annually. The interest rates represent the minimum applicable federal rate for the respective periods to avoid imputed income. 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 interest rate represents the minimum applicable federal rate to avoid imputed income. 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 Alloy Ventures(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) Consists solely of shares held by Asset Management Assoc. 1996, L.P. 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. 52 (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 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. 53 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 3,750,000 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% 5.0% Robin A. Kehoe......................... 253,328 2,215 1.7 1.4 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 4.9 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 17.3 Philippe O. Chambon(6)................. 1,804,350 -- 12.2 9.8 Robert B. Chess........................ -- -- * * W. Ferrell Sanders(5).................. 3,124,596 91,646 21.7 17.3 Dean O. Morton......................... -- -- * * All directors and officers as a group (12 persons)(7)...................... 7,447,144 147,631 51.0 40.8 5% STOCKHOLDERS Alloy Ventures(5)...................... 3,124,596 91,646 21.7 17.3 McKesson HBOC, Inc.(8)................. 2,777,778 -- 18.8 15.0 The Sprout Entities(6)................. 1,804,350 -- 12.2 9.8 The Weiss, Peck & Greer Entities(9).... 1,223,242 -- 8.3 6.6
- ------------------------ * Represents less than 1%. (1) Percentage of ownership is based on 14,741,939 shares of common stock outstanding before this offering and 18,491,939 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. 54 (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, 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. WPG VC Fund Advisor, L.L.C. is the fund advisor for each of these funds. Gill Cogan is the senior managing member of WPG VC Fund Advisor, L.L.C. and has sole voting and investment power over the shares held by each of the funds. Mr. Cogan disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the shares. The Weiss, Peck & Greer Entities are located at 555 California Street, Suite 3130, San Francisco, CA 94104. 55 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 18,491,939 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, 56 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. 57 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 Our transfer agent and registrar is Computershare Investor Services LLC. Its phone number is 213-239-0672. 58 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 18,491,939 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 3,750,000 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 14,439,310 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; 59 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. Of the shares subject to these lock-up agreements, 2,800,288 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, an additional 2,800,288 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 60 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 stock option and equity incentive plans; - 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. 61 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....................................................... 3,750,000 =========
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 $1,350,000. 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 562,500 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 62 rata portion of 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 14,591,771 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 63 - 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. 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 187,500 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. 64 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 Ernst & Young LLP, independent auditors, have audited our financial statements at March 31, 1999 and 2000 and for each of the three years in the period ended March 31, 2000 as described in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given upon their authority 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. 65 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
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, 1999 and 2000, 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, 2000. 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, 1999 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2000 in conformity with accounting principles generally accepted in the United States. San Jose, California /s/ ERNST & YOUNG LLP May 22, 2000 F-2 PHARSIGHT CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PRO FORMA STOCKHOLDERS' MARCH 31, EQUITY (DEFICIT) ------------------- MARCH 31, 1999 2000 2000 -------- -------- ---------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 4,148 $ 5,286 Short-term investments.................................... 1,999 11,196 Accounts receivable, net of allowance for bad debts of $27 for March 31 1999 and 2000.............................. 745 2,000 Prepaids and other current assets......................... 300 685 ------- -------- Total current assets........................................ 7,192 19,167 Property and equipment, net................................. 845 1,191 Intangible assets, net Core technology........................................... 880 442 Other..................................................... 651 148 ------- -------- 1,531 590 Other assets................................................ 87 148 ------- -------- Total assets................................................ $ 9,655 $ 21,096 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 213 $ 315 Accrued interest.......................................... 157 166 Accrued expenses.......................................... 143 396 Accrued compensation...................................... 404 1,088 Deferred revenue.......................................... 753 913 Current portion of notes payable.......................... 2,660 2,293 Current obligations under capital leases.................. 258 372 ------- -------- Total current liabilities................................... 4,588 5,543 Notes payable............................................... 2,293 -- Obligations under capital leases............................ 519 708 Commitments Series C redeemable convertible preferred stock: Authorized shares--2,581,640 for March 31, 1999 and 2000 Issued and outstanding shares--2,577,840 for March 31, 1999 and 2000 (Liquidation preference at March 31, 2000 of $6,109) (no shares pro forma)........................ 7,665 8,154 $ 6,109 Series D redeemable convertible preferred stock: Authorized shares--2,930,000 for March 31, 1999 and 2000 Issued and outstanding shares--2,877,254 for March 31, 1999 and 2000 (Liquidation preference at March 31, 2000 of $9,408) (no shares pro forma)........................ 9,676 10,428 --
F-3 PHARSIGHT CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PRO FORMA STOCKHOLDERS' MARCH 31, EQUITY (DEFICIT) ------------------- MARCH 31, 1999 2000 2000 -------- -------- ---------------- (UNAUDITED) Stockholders' equity (deficit): Series A convertible preferred stock, no par value: Authorized shares--1,935,274 for March 31, 1999 and 2000 Issued and outstanding shares--1,913,845 for March 31, 1999 and 2000 (Liquidation preference at March 31, 2000 of $1,897) (no shares pro forma)................. 1,787 1,787 -- Series B convertible preferred stock, no par value: Authorized shares--540,000 for March 31, 1999 and 2000 Issued and outstanding shares--540,000 for March 31, 1999 and 2000 (Liquidation preference at March 31, 2000 of $810) (no shares pro forma)................... 798 798 -- Series E convertible preferred stock, no par value: Authorized shares--2,777,778 for March 31, 2000 Issued and outstanding shares--2,777,778 for March 31, 2000 (Liquidation preference at March 31, 2000 of $20,000) (no shares pro forma)........................ -- 19,967 -- Common stock, no par value: Authorized shares--15,013,086 and 19,235,308, for March 31, 1999 and 2000, respectively Issued and outstanding shares--3,570,607, and 4,055,222 for March 31, 1999 and 2000, respectively (14,741,939 shares pro forma)..................................... 751 6,160 47,294 Deferred stock compensation............................... (239) (3,310) (3,310) Accumulated deficit....................................... (18,078) (28,981) (28,981) Accumulated other comprehensive loss...................... -- (23) (23) Notes receivable from stockholders........................ (105) (135) (135) ------- -------- -------- Total stockholders' equity (deficit)........................ (15,086) (3,737) $ 14,845 ------- -------- ======== Total liabilities and stockholders' equity (deficit)........ $ 9,655 $ 21,096 ======= ========
The accompanying notes are an integral part of these financial statements. F-4 PHARSIGHT CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31, ------------------------------ 1998 1999 2000 -------- -------- -------- Revenues: License and support....................................... $ 649 $ 1,800 $ 3,319 Services.................................................. 457 2,285 5,979 ------- -------- -------- Total revenues.............................................. 1,106 4,085 9,298 Costs and expenses: License and support(1).................................... 279 748 1,161 Services(2)............................................... 435 1,772 3,380 Research and development(3)............................... 2,134 4,327 5,451 Sales and marketing(4).................................... 1,366 2,292 4,059 General and administrative(5)............................. 744 1,105 1,967 Amortization of deferred stock compensation............... -- 57 2,188 Amortization of intangible assets......................... 82 965 941 Acquired in-process research and development.............. 362 2,592 -- ------- -------- -------- Total operating expenses.................................... 5,402 13,858 19,147 ------- -------- -------- Loss from operations........................................ (4,296) (9,773) (9,849) Other income (expense): Interest expense.......................................... (44) (602) (498) Interest income and other, net............................ 216 482 683 ------- -------- -------- 172 (120) 185 ------- -------- -------- Net loss.................................................... (4,124) (9,893) (9,664) Accretion on Series C and D redeemable convertible preferred stock..................................................... (448) (803) (1,241) Series C redeemable convertible preferred stock dividend.... (644) -- -- ------- -------- -------- Net loss applicable to common stockholders.................. $(5,216) $(10,696) $(10,905) ======= ======== ======== Basic and diluted net loss per share........................ $ (3.96) $ (4.41) $ (3.38) Shares used to compute basic and diluted net loss per share..................................................... 1,318 2,424 3,225 Pro forma basic and diluted net loss per share.............. $ (0.86) Shares used to compute pro forma basic and diluted net loss per share................................................. 12,712
- -------------------------- (1) Excluding $3 and $126 in amortization of deferred stock-based compensation for the twelve months ended March 31, 1999 and 2000, respectively. (2) Excluding $20 and $501 in amortization of deferred stock-based compensation for the twelve months ended March 31, 1999 and 2000, respectively. (3) Excluding $3 and $539 in amortization of deferred stock-based compensation for the twelve months ended March 31, 1999 and 2000, respectively. (4) Excluding $15 and $579 in amortization of deferred stock-based compensation for the twelve months ended March 31, 1999 and 2000, respectively. (5) Excluding $16 and $443 in amortization of deferred stock-based compensation for the twelve months ended March 31, 1999 and 2000, respectively. 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 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............................ -- -- 2,778 19,967 -- -- -- Issuance of common stock under employee benefit plans, net of repurchases...................... -- -- -- -- 484 150 -- Deferred stock compensation related to stock option grants........... -- -- -- -- -- 5,259 (5,259) Amortization of deferred stock compensation..................... -- -- -- -- -- -- 2,188 Accretion of Series C preferred stock............................ -- 489 -- -- -- -- -- Accretion of Series D preferred stock............................ -- 752 -- -- -- -- -- Comprehensive loss Unrealized loss on short-term investments.................... -- -- -- -- -- -- -- Net loss......................... -- -- -- -- -- -- -- Total comprehensive loss........... -- -- -- -- -- -- -- ----- ------- ----- ------- ----- ------ ------- Balance at March 31, 2000.......... 5,455 $18,582 5,232 $22,552 4,055 $6,160 $(3,310) ===== ======= ===== ======= ===== ====== ======= ACCUMULATED NOTES OTHER RECEIVABLE ACCUMULATED COMPREHENSIVE FROM DEFICIT LOSS STOCKHOLDERS TOTAL ------------- ---------------- ------------- -------- 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............................ -- -- -- 19,967 Issuance of common stock under employee benefit plans, net of repurchases...................... -- -- (30) 120 Deferred stock compensation related to stock option grants........... -- -- -- -- Amortization of deferred stock compensation..................... -- -- -- 2,188 Accretion of Series C preferred stock............................ (489) -- -- (489) Accretion of Series D preferred stock............................ (752) -- -- (752) Comprehensive loss Unrealized loss on short-term investments.................... -- (23) -- (23) Net loss......................... (9,662) -- -- (9,662) Total comprehensive loss........... -- -- -- (9,685) -------- ---- ----- -------- Balance at March 31, 2000.......... $(28,981) $(23) $(135) $ (3,737) ======== ==== ===== ========
The accompanying notes are an integral part of these financial statements. F-6 PHARSIGHT CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED MARCH 31, ------------------------------ 1998 1999 2000 -------- -------- -------- OPERATING ACTIVITIES Net loss.................................................... $(4,124) $(9,893) $ (9,662) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred stock compensation............... -- 57 2,188 Depreciation.............................................. 89 275 482 Amortization.............................................. 82 965 941 Write-off of acquired in-process research and development............................................. 362 2,592 -- Changes in operating assets and liabilities: Accounts receivable..................................... (116) (297) (1,255) Other current assets.................................... (245) 31 (384) Intangible and other assets............................. 40 (37) (61) Accounts payable........................................ 274 (76) 102 Accrued expenses........................................ 53 (21) 253 Accrued compensation.................................... 92 268 684 Deferred revenue........................................ 187 401 160 Interest payable........................................ -- 157 2 ------- ------- -------- Net cash used in operating activities....................... (3,306) (5,578) (6,550) INVESTING ACTIVITIES Purchases of property and equipment......................... (263) (738) (828) Proceeds from sale of property and equipment................ -- 86 -- Purchases of short-term investments......................... (1,246) (2,000) (13,220) Maturities of short-term investments........................ 245 1,000 4,000 Acquisition of MGA and SCI.................................. (638) (2,368) -- ------- ------- -------- Net cash used in investing activities....................... (1,902) (4,020) (10,048) FINANCING ACTIVITIES Proceeds from lease line.................................... 211 527 611 Proceeds from issuance of notes payable..................... 1,000 2,000 -- Principal payments on notes payable......................... -- (753) (2,660) Principal payments on capital lease obligations............. (63) (132) (309) Proceeds from the issuance of common stock.................. 15 41 127 Proceeds from the issuance of convertible preferred stock, net....................................................... 6,084 9,362 19,967 ------- ------- -------- Net cash provided by financing activities................... 7,247 11,045 17,736 ------- ------- -------- Net increase (decrease) in cash and cash equivalents........ 2,039 1,447 1,138 Cash and cash equivalents at the beginning of the period.... 662 2,701 4,148 ------- ------- -------- Cash and cash equivalents at the end of the period.......... $ 2,701 $ 4,148 $ 5,286 ======= ======= ======== SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES Common stock issued in exchange for notes................... $ 76 $ 16 $ 30 Property and equipment acquired under capital leases........ 211 527 611 Common stock issued for acquisition......................... 100 68 -- Common stock issued for noncompetition agreement............ 74 -- -- Note payable issued for acquisition......................... 456 2,250 -- Accretion of preferred stock................................ 448 803 1,241 Dividend on preferred stock................................. 644 -- -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest...................................... $ 34 $ 388 $ 436 Cash paid for taxes......................................... -- 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 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. Our standard payment terms range from "net 15 days" to "net 30 days." 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, 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. F-8 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. ARRANGEMENTS CONSISTING OF LICENSE, MAINTENANCE AND SCIENTIFIC SERVICES. For arrangements that consist of licenses, maintenance, and scientific and training services, 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, 1999 and 2000, 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. 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 F-9 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Short-term investments consisted of the following:
GROSS GROSS FAIR UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------- ---------- ---------- -------- MARCH 31, 1999 United States government and federal agency obligations......................................... $ 1,999 $ -- $ -- $ 1,999 ======= ========= ==== ======= MARCH 31, 2000 United States government and federal agency obligations......................................... $ 7,489 $ -- $ (6) $ 7,483 Corporate notes....................................... 3,730 -- (17) 3,713 ------- --------- ---- ------- $11,219 $ -- $(23) $11,196 ======= ========= ==== =======
Proceeds from sales and maturities of securities available-for-sale were $1,000 and $4,000 for the years ended March 31, 1999 and 2000, respectively. Gross realized sales and losses were insignificant for all periods presented. F-10 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PREPAID EXPENSES Prepaid expenses include minimum annual royalty payments for databases of information, which will be charged to cost of sales upon sale and delivery of the databases to customers. 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, ------------------- 1999 2000 -------- -------- Developed technology........................................ $ 387 $ 387 Core technology............................................. 1,316 1,316 Assembled workforce......................................... 258 258 Goodwill.................................................... 117 117 Covenants not to compete.................................... 500 500 ------- ------- 2,578 2,578 Accumulated amortization.................................... (1,047) (1,988) ------- ------- $ 1,531 $ 590 ======= =======
DEFERRED REVENUE Deferred revenue is primarily comprised of maintenance, which is typically recognized over one year. In addition, deferred revenue includes deferred services and training revenue which will be recognized as services are performed. 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. F-11 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per share:
YEARS ENDED MARCH 31, ------------------------------ 1998 1999 2000 -------- -------- -------- Net loss.................................................... $(4,124) $ (9,893) $ (9,664) Accretion of preferred stock................................ (448) (803) (1,241) Series C redeemable convertible preferred stock dividend.... (644) -- -- ------- -------- -------- Net loss attributable to common stockholders................ $(5,216) $(10,696) $(10,905) ======= ======== ======== Basic and diluted: Weighted average common shares outstanding................ 2,313 3,399 3,791 Less weighted average common shares subject to repurchase.............................................. (995) (975) (566) ------- -------- -------- Shares used to compute basic and diluted net loss per share..................................................... 1,318 2,424 3,225 ======= ======== ======== Basic and diluted net loss per common share................. $ (3.96) $ (4.41) $ (3.38) ======= ======== ======== Pro forma basic and diluted: Shares used above........................................... 3,225 Weighted average convertible preferred stock outstanding, as if converted......................................... 9,488 -------- Shares used to compute pro forma basic and diluted net loss per share.......................................... 12,712 ======== Pro forma basic and diluted net loss per share.............. $ (0.86) ========
F-12 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, 1999 and 2000 is detailed in the following table:
MARCH 31, ------------------- 1999 2000 -------- -------- Preferred stock............................................. 7,908 10,687 Shares subject to repurchase................................ 673 366 Outstanding options......................................... 1,125 1,835 Warrants.................................................... 303 297 ------ ------ 10,009 13,185 ====== ======
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 March 31, 2000 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 March 31, 2000. OTHER COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), requires Pharsight to display comprehensive income (loss) and its components as part of the financial statements. Other comprehensive income (loss) includes certain changes in equity that are excluded from net income (loss). Pharsight's only component of other comprehensive income (loss), is unrealized loss on short-term investments for the year ended March 31, 2000. Comprehensive loss for this period was $23. 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, 2002. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). Pharsight does not believe its adoption will materially change Pharsight's financial position, results of operations, or cash flows. F-13 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In January, 2000, the Emerging Issues Task Force issued EITF 00-2, "Accounting for Web Site Development Costs". Pharsight does not believe its adoption will materially change Pharsight's financial position, results of operations, or cash flows. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB Opinion No. 25 and, among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of the previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. Pharsight does not expect the application of FIN 44 to have a material impact on Pharsight's financial position or results of operations. 3. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and consist of the following:
MARCH 31, ------------------- 1999 2000 -------- -------- Furniture and fixtures...................................... $ 274 $ 365 Computers and equipment..................................... 863 1,469 Leasehold improvements...................................... 27 72 ------ ------ 1,164 1,906 Accumulated depreciation and amortization................... (319) (715) ------ ------ $ 845 $1,191 ====== ======
Property and equipment include assets acquired under capital lease obligations with a cost of approximately $948 and $1,491 and accumulated amortization of $242 and $591 at March 31, 1999 and 2000, 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 F-14 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. BUSINESS AND OTHER ACQUISITIONS (CONTINUED) 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 ======
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 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 on the date the acquisition was consummated. 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 F-15 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. BUSINESS AND OTHER ACQUISITIONS (CONTINUED) 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. 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 year ended March 31, 1999 as a non-recurring charge upon consummation of the acquisition. Goodwill is assigned to identifiable tangible and intangible assets. In June 1998, Pharsight began amortizing goodwill, developed technology, core technology, covenants not to compete, 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. F-16 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 5. CONCENTRATIONS OF CREDIT RISK (CONTINUED) 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, 1999 and 2000. Four customers comprised 15%, 13%, 11% and 10% of accounts receivable at March 31, 1999, respectively. No customers comprised over 10% of accounts receivable at March 31, 2000. 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 year ended March 31, 2000, one customer accounted for 26% of revenues, as well as 15% of revenues in 1999. 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, 2000, are as follows: 2001........................................................ $1,261 2002........................................................ 1,569 2003........................................................ 1,578 2004........................................................ 780 ------ Total minimum payments...................................... $5,188 ======
Sublease income and future sublease payments are insignificant. Rent expense was $221 for the year ended March 31, 1998, $676 for the year ended March 31, 1999, and $955 for the year ended March 31, 2000. Pharsight is required to pay royalties based on license revenue or license shipments for some products. As of March 31, 2000, required minimum payments under such royalty agreements are $110. Royalty expense totaled $144 for the year ended March 31, 1999 and $328 for the year ended March 31, 2000. Royalty expense for the year ended March 31, 1998 was insignificant. These amounts have 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-17 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, 2000 are as follows: 2001........................................................ $ 482 2002........................................................ 418 2003........................................................ 334 2004........................................................ 57 ------ Total minimum payments...................................... 1,291 Less amounts representing interest.......................... 211 ------ Present value of minimum lease payments..................... 1,080 Less current portion........................................ 372 ------ $ 708 ======
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 certain MGA assets, Pharsight issued a note payable to a stockholder for $1,750 and two notes payable in the amount of $250 each relating to non-compete agreements. All of the aforementioned notes bear interest at a rate of 8% per year. Principal and accrued interest are due in two annual payments, with the remaining payment due in May 2000. Long-term debt obligations as of March 31, 2000, of $2,293, mature in fiscal year 2001. 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 plus 1% at March 31, 2000 is payable monthly with principal due January 2001 upon the line's expiration, if not extended. No amounts were outstanding as of March 31, 2000. 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 F-18 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED) 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 $10.88. In addition, each share of Series C preferred stock shall be entitled to receive the original issue price of $2.37 upon conversion. The $644 included in the statement of operations for the year ended March 31, 1998 represents the fair market value of the common shares, relating to the conversion of the outstanding Series C preferred shares, on the date of issuance of the Series C preferred shares. 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, 2000, 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 $489 increase to the carrying value of the Series C stock for the years ended March 31, 1998, 1999 and 2000, respectively. The accretion resulted in a $314 and $752 increase in the carrying value of the Series D stock for the years ended March 31, 1999 and 2000. 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, B and E convertible preferred stock (Series A stock, B stock and E 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 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 $10.88 or the election of the holders of at least 51% of the respective series of the outstanding preferred stock. Each share of Series A stock, B stock and E stock may be voted as if converted to common stock. Each share of Series A stock, B stock and E stock entitles the holder to receive, in preference to F-19 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 9. CONVERTIBLE PREFERRED STOCK (CONTINUED) holders of common shares, cash dividends at an annual rate of $0.098, $0.15 and $0.72 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, 2000, 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, D and E stock shall be paid, in preference to the holders of common stock, an amount equal to $0.98, $1.50, $2.37, $3.27 and $7.20 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. 10. COMMON STOCK Pharsight is authorized to issue up to 19,235 shares of common stock. At March 31, 2000, a total of 4,055 shares of common stock were issued and outstanding. At March 31, 2000, 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...................... 2,930 Conversion of Series E preferred stock...................... 2,778 Warrants outstanding........................................ 297 Stock option plans.......................................... 2,135 ------ 13,197 ======
Pharsight common stock sales 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. For the year ended March 31, 1999, Pharsight has sold 2,169 shares. For the year ended March 31, 2000, Pharsight has sold 2,981 restricted stock shares. At March 31, 2000, 366 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 July 1999 to purchase additional shares of common stock. The interest on this loan is 6% per year, with the principal and accrued interest 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 F-20 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. COMMON STOCK (CONTINUED) 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 272 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 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 F-21 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. STOCK-BASED BENEFIT PLANS (CONTINUED) 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, 1998, 1999 and 2000 is as follows:
WEIGHTED NUMBER OF AVERAGE OPTIONS EXERCISE PRICE OUTSTANDING PER SHARE ----------- -------------- 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..................................... 1,315 1.44 Options exercised................................... (437) 0.34 Options canceled.................................... (168) 0.44 ------- Balance at March 31, 2000........................... 1,835 $1.06 =======
At March 31, 1999 and March 31, 2000, 1,237 and 2,510 shares were authorized under the plans, respectively, and 113 and 299 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. Members of the Scientific Advisory Board have been granted options as compensation for their past services. At March 31, 2000, the Scientific Advisory Board Members had 32 unvested options that will be marked to market under EITF No. 96.18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjuction with Selling, Goods or Services." F-22 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. STOCK-BASED BENEFIT PLANS (CONTINUED) The following table summarizes information about stock options outstanding and exercisable at March 31, 2000:
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 (YEARS) PER SHARE EXERCISABLE PER SHARE - ----------------------------------- ----------- ------------ -------------- ----------- -------------- $0.10 - $0.15...................... 102 6.51 $0.13 73 $0.12 $0.25 - $0.35...................... 1,071 7.97 $0.29 1,071 $0.29 $0.70 - $1.40...................... 297 8.69 $1.39 297 $1.39 $2.15 - $2.90...................... 202 9.18 $2.44 202 $2.44 $4.35 - $4.35...................... 163 9.67 $4.35 163 $4.35 ----- ----- $0.10 - $4.35...................... 1,835 8.29 $1.06 1,806 $1.07 ===== =====
Pharsight recorded deferred compensation of $296 and $5,259 for the years ended March 31, 1999 and March 31, 2000. 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 and $2,188 for fiscal 1999 and 2000, respectively, based on a graded vesting method. At March 31, 2000, Pharsight had a total of approximately $3,310 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 per share and $.05 per share during both 1998 and 1999, respectively. The weighted average grant date fair value of options and restricted stock granted was $.74 per share and $.19 per share during fiscal F-23 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. STOCK-BASED BENEFIT PLANS (CONTINUED) 2000. 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, ---------------------------------------- ---------------------------------------- 1998 1999 2000 1998 1999 2000 -------- -------- -------- -------- -------- -------- Expected life (years)...... 6.00 6.00 4.00 4.00 4.00 4.00 Expected stock price volatility............... 0.00% 0.00% 0.50% 0.00% 0.00% 0.50% Risk-free interest rate.... 6.11% 5.00% 6.25% 5.25% 5.00% 6.25% Dividend yield............. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
YEARS ENDED MARCH 31, ------------------------------ 1998 1999 2000 -------- -------- -------- Net loss: As reported............................................... $(5,216) $(10,696) $(10,905) Pro forma................................................. (5,230) (10,734) (11,079) Basic and diluted net loss per share: As reported............................................... $ (3.96) $ (4.41) $ (3.38) Pro forma................................................. (3.97) (4.43) (3.44)
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, 2000, Pharsight has federal and state net operating loss carryforwards of approximately $19,000 and $9,000, respectively. The Company also has federal and California research and development tax credit carryforwards of approximately $500 and $200, respectively. The net operating losses will expire at various dates beginning in 2002 through 2020, 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-24 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, ------------------- 1999 2000 -------- -------- Deferred tax assets: Net operating loss carryforwards........................ $ 4,600 $ 7,000 Research and development tax credits.................... 300 600 Amortization of intangible assets....................... 200 300 Other................................................... 100 600 ------- ------- Total deferred tax assets............................... 5,200 8,500 Valuation allowance..................................... (5,200) (8,500) ------- ------- Net deferred tax assets............................... $ -- $ -- ======= =======
The valuation allowance for deferred tax assets increased by approximately $2,700 and $3,300 in the years ended March 31, 1999 and 2000, respectively. 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 March 31, 2000, Pharsight has made no contributions to the plan. 16. SUBSEQUENT EVENTS DEBT In March 2000, Pharsight committed to a $1,000 equipment lease line which expires on February 28, 2001. Principal and interest is due in 42 monthly installments with a final balloon payment equal to 10% of the original amount borrowed. A warrant for 4 shares of common stock with an exercise price per share of $7.20 has yet to be issued to the lender in connection with this financing. The warrant expires the earlier of ten years from the date of issuance or five years after an IPO. The fair value assigned to this warrant was immaterial. F-25 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 16. SUBSEQUENT EVENTS (CONTINUED) 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 March 31, 2000. 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-26 - --------------------------------------------------------- - --------------------------------------------------------- , 2000 [LOGO] 3,750,000 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............................................ $ 19,800 NASD filing fee............................................. 6,969 Nasdaq National Market fee.................................. 95,000 Blue sky qualification fees and expenses.................... 20,000 Printing and engraving expenses............................. 250,000 Legal fees and expenses..................................... 550,000 Accounting fees and expenses................................ 350,000 Transfer agent and registrar fees........................... 10,000 Miscellaneous............................................... 48,231 Total....................................................... $1,350,000 ==========
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 (unless otherwise 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. In addition, on May 15, 2000 Pharsight granted an option to purchase 167,250 shares of common stock at an exercise price of $6.50 per share pursuant to the 1997 Stock Option Plan. II-1 (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 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. (16) In May 2000, Pharsight granted an option to purchase 442,750 shares to Arthur H. Reidel, Chief Executive Officer of Pharsight, pursuant to the 2000 CEO Non-Qualified Stock Option Plan at II-2 an exercise price of $6.83 per share. No shares under this option have been exercised, cancelled or repurchased. 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. The sale and issuance of securities described in paragraphs (2), (3), (4), (5), (7), (9), (10), (11), (14), (15) and (16) 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 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. 10.11.1 Amendment No. 1 to Data Set License Agreement, dated as of April 11, 2000, 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.
II-3
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 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 Pharsight's 2000 Equity Incentive Plan and related documents. 10.20 Pharsight's 2000 Employee Stock Purchase Plan and related documents. 10.21(1) 2000 CEO Non-Qualified Stock Option Plan. 23.1 Consent of Ernst & Young, LLP. 23.2(1) Consent of Cooley Godward LLP. (See Exhibit 5.1.) 24.1* Power of Attorney. 27.1 Financial Data Schedule.
- ------------------------ * Previously filed. (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 Amendment No. 1 to 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 12th day of June, 2000. PHARSIGHT CORPORATION By: /s/ ARTHUR H. REIDEL ----------------------------------------- Arthur H. Reidel PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to Registration Statement has been signed below by the following persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE /s/ ARTHUR H. REIDEL President, Chief Executive Officer -------------------------------------- and Chairman of the Board June 12, 2000 Arthur H. Reidel (Principal Executive Officer) /s/ ROBIN A. KEHOE Senior Vice President, Finance and -------------------------------------- Chief Financial Officer (Principal June 12, 2000 Robin A. Kehoe Financial and Accounting Officer) * -------------------------------------- Director June 12, 2000 Steven D. Brooks * -------------------------------------- Director June 12, 2000 Philippe O. Chambon, M.D., Ph.D. * -------------------------------------- Director June 12, 2000 Robert B. Chess * -------------------------------------- Director June 12, 2000 Douglas E. Kelly, M.D. * -------------------------------------- Director June 12, 2000 Dean O. Morton * -------------------------------------- Director June 12, 2000 Gary L. Neil, Ph.D. * -------------------------------------- Director June 12, 2000 W. Ferrell Sanders
*By: /s/ ARTHUR H. REIDEL --------------------------------- Arthur H. Reidel ATTORNEY-IN-FACT
II-5 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 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. 10.11.1 Amendment No. 1 to Data Set License Agreement, dated as of April 11, 2000, 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.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 10.19 Pharsight's 2000 Equity Incentive Plan and related documents. 10.20 Pharsight's 2000 Employee Stock Purchase Plan and related documents. 10.21(1) 2000 CEO Non-Qualified Stock Option Plan. 23.1 Consent of Ernst & Young, LLP. 23.2(1) Consent of Cooley Godward LLP. (See Exhibit 5.1.) 24.1* Power of Attorney. 27.1 Financial Data Schedule.
- ------------------------ * Previously filed. (1) To be filed by amendment. (2) Confidential treatment has been requested for portions of this exhibit. EX-1.1 2 ex-1_1.txt EXHIBIT 1.1 __________ Shares PHARSIGHT CORPORATION Common Stock UNDERWRITING AGREEMENT __________, 2000 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION CHASE SECURITIES INC. SOUNDVIEW TECHNOLOGY GROUP INC. As representatives of the several Underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Dear Sirs: PHARSIGHT CORPORATION, a Delaware corporation (the "COMPANY"), proposes to issue and sell ____________ shares of its Common Stock, $0.001 par value (the "FIRM SHARES"), to the several underwriters named in Schedule I hereto (the "UNDERWRITERS"). The Company also proposes to issue and sell to the several Underwriters not more than an additional _______ shares of its Common Stock, $0.001 par value (the "ADDITIONAL SHARES"), if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter referred to collectively as the "SHARES". The shares of common stock of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK". 1 SECTION 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "COMMISSION") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "ACT"), a registration statement on Form S-1, including a prospectus, relating to the Shares. The registration statement, as amended at the time it became effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT"; and the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS". If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Act registering additional shares of Common Stock (a "RULE 462(b) REGISTRATION STATEMENT"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell, and each Underwriter agrees, severally and not jointly, to purchase from the Company at a price per Share of $______ (the "PURCHASE PRICE") the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell the Additional Shares and the Underwriters shall have the right to purchase, severally and not jointly, up to an aggregate of _______ Additional Shares from the Company at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Company within 30 days after the date of this Agreement. You shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof, which date shall be a business day (i) no earlier than two business days after such notice has been given (and, in any event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no later than ten business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of Firm 2 Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. The Company hereby agrees not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise), except to the Underwriters pursuant to this Agreement, for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the foregoing, during such period (i) the Company may grant stock options and issue stock pursuant to the Company's existing stock option and employee stock purchase plans and (ii) the Company may issue shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof. The Company also agrees not to file any registration statement, other than on Form S-8, with respect to any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. The Company shall, prior to or concurrently with the execution of this Agreement, deliver an agreement executed by (i) each of the directors and officers of the Company and (ii) each stockholder listed on Annex I hereto to the effect that such person will not, during the period commencing on the date such person signs such agreement and ending 180 days after the date of the Prospectus, or any earlier date that is permitted by the terms of such agreement, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, (A) engage in any of the transactions described in the first sentence of this paragraph or (B) make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock.. The Company hereby confirms its engagement of , Chase Securities Inc. ("CHASE H&Q") as, and Chase H&Q hereby confirms its agreement with the Company to render services as, a "qualified independent underwriter" within the meaning of Section (b)(15) of Rule 2720 of the National Association of Securities Dealers, Inc. with respect to the offering and sale of the Shares. Chase H&Q, solely in its capacity as the qualified independent underwriter and not otherwise, is referred to herein as the "QIU". As compensation for the services of the QIU hereunder, the Company agrees to pay the QIU $5,000 on the Closing Date. The price at which the Shares will be sold to the public shall not be higher than the maximum price recommended by the QIU. 3 As part of the offering contemplated by this Agreement, Donaldson, Lufkin & Jenrette Securities Corporation has agreed to reserve, of the Shares set forth opposite its name on the Schedule I to this Agreement, up to ___________________shares, for sale to the Company's employees, officers, and directors and other parties designated by or associated with the Company (collectively, "PARTICIPANTS"), as set forth in the Prospectus under the heading "Underwriting" (the "DIRECTED SHARE PROGRAM"). The Shares to be sold by Donaldson, Lufkin & Jenrette Securities Corporation pursuant to the Directed Share Program (the "DIRECTED SHARES") will be sold by Donaldson, Lufkin & Jenrette Securities Corporation pursuant to this Agreement at the public offering price. Any Directed Shares not orally confirmed for purchase by any Participants by the end of the business day on which this Agreement is executed will be offered to the public by Donaldson, Lufkin & Jenrette Securities Corporation as set forth in the Prospectus. SECTION 3. Terms of Public Offering. The Company is advised by you that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the execution and delivery of this Agreement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. SECTION 4. Delivery and Payment. The Shares shall be represented by definitive certificates and shall be issued in such authorized denominations and registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation shall request no later than two business days prior to the Closing Date or the applicable Option Closing Date (as defined below), as the case may be. The Company shall deliver the Shares to Donaldson, Lufkin & Jenrette Securities Corporation through the facilities of The Depository Trust Company ("DTC"), for the respective accounts of the several Underwriters, against payment to the Company of the Purchase Price therefore by wire transfer of Federal or other funds immediately available in New York City. The certificates representing the Shares shall be made available for inspection not later than 9:30 A.M., New York City time, on the business day prior to the Closing Date or the applicable Option Closing Date, as the case may be, at the office of DTC or its designated custodian (the "DESIGNATED OFFICE"). The time and date of delivery and payment for the Firm Shares shall be 9:00 A.M., New York City time, on ________, 2000 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing. The time and date of delivery for the Firm Shares are hereinafter referred to as the "CLOSING DATE". The time and date of delivery and payment for any Additional Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City time, on the date specified in the applicable exercise notice given by you pursuant to Section 2 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing. The time and date 4 of delivery for any Additional Shares are hereinafter referred to as an "OPTION CLOSING DATE". The documents to be delivered on the Closing Date or any Option Closing Date on behalf of the parties hereto pursuant to Section 9 of this Agreement shall be delivered at the offices of Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, California, 94306 and the Shares shall be delivered at the Designated Office, all on the Closing Date or such Option Closing Date, as the case may be. SECTION 5. Agreements of the Company. The Company agrees with you: (a) To advise you promptly and, if requested by you, to confirm such advice in writing, (i) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes, (iii) when any amendment to the Registration Statement becomes effective, (iv) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, when the Rule 462(b) Registration Statement has become effective and (v) of the happening of any event during the period referred to in Section 5(d) below which makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish to you five signed copies of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (c) To prepare the Prospectus, the form and substance of which shall be satisfactory to you, and to file the Prospectus in such form with the Commission within the applicable period specified in Rule 424(b) under the Act; during the period specified in Section 5(d) below, not to file any further amendment to the Registration Statement and not to make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object after being so advised; and, during such period, to prepare 5 and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or amendment or supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its best efforts to cause any such amendment to the Registration Statement to become promptly effective. (d) Prior to 10:00 A.M., New York City time, on the first business day after the date of this Agreement and from time to time thereafter for such period as in the reasonable opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish in New York City to each Underwriter and any dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request. (e) If during the period specified in Section 5(d), any event shall occur or condition shall exist as a result of which, in the reasonable opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the reasonable opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with applicable law, and to furnish to each Underwriter and to any dealer as many copies thereof as such Underwriter or dealer may reasonably request. (f) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as you may request, to continue such registration or qualification in effect so long as required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; PROVIDED, HOWEVER, that the Company shall not be required in connection therewith to qualify as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation other than as to matters and transactions relating to the Prospectus, the Registration Statement, any preliminary prospectus or the offering or sale of the Shares, in any jurisdiction in which it is not now so subject. (g) To mail and make generally available to its stockholders as soon as practicable an earnings statement covering the twelve-month period ending 6 June 30, 2001 that shall satisfy the provisions of Section 11(a) of the Act, and to advise you in writing when such statement has been so made available. (h) During the period of three years after the date of this Agreement, to furnish to you as soon as available copies of all reports or other communications furnished to the record holders of Common Stock or furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed and such other publicly available information concerning the Company and its subsidiaries as you may reasonably request. (i) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of the Company's obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants in connection with the registration and delivery of the Shares under the Act and all other fees and expenses in connection with the preparation, printing, filing and distribution of the Registration Statement (including financial statements and exhibits), any preliminary prospectus, the Prospectus and all amendments and supplements to any of the foregoing, including the mailing and delivering of copies thereof to the Underwriters and dealers in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) all expenses in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states and all costs of printing or producing any Preliminary and Supplemental Blue Sky Memoranda in connection therewith (including the filing fees and reasonable fees and reasonable disbursements of counsel for the Underwriters in connection with such registration or qualification and memoranda relating thereto), (iv) the filing fees and disbursements of counsel for the Underwriters in connection with the review and clearance of the offering of the Shares by the National Association of Securities Dealers, Inc., (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to the listing of the Shares on the Nasdaq National Market, (vii) the cost of printing certificates representing the Shares, (viii) the costs and charges of any transfer agent, registrar and/or depositary, (ix) the fees and expenses of the QIU (including the fees and disbursements of counsel to the QIU) not to exceed $5,000, and (x) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. (j) To use its best efforts to list for quotation the Shares on the Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq National Market or, with the written reasonable consent of Donaldson, Lufkin & Jenrette 7 Securities Corporation, the New York Stock Exchange for a period of three years after the date of this Agreement. (k) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. (l) If the Registration Statement at the time of the effectiveness of this Agreement does not cover all of the Shares, to file a Rule 462(b) Registration Statement with the Commission registering the Shares not so covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of this Agreement and to pay to the Commission the filing fee for such Rule 462(b) Registration Statement at the time of the filing thereof or to give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. (m) The Company will, for so long as any of the Common Stock is outstanding and if, in the reasonable judgment of any Underwriter, such Underwriter or any of its affiliates (as defined in the Act) is required to deliver a prospectus in connection with sales of Common Stock (i) periodically amend the Registration Statement so that the information contained in the Registration Statement complies with the requirements of Section 10(a) of the Act, (ii) amend the Registration Statement or amend or supplement the Prospectus when necessary to reflect any material changes in the information provided therein and promptly file such amendment or supplement with the Commission, (iii) provide such Underwriter with copies of each amendment or supplement so filed and such other documents, including opinions of counsel and "comfort" letters, as such Underwriter may reasonably request and (iv) indemnify such Underwriter and if applicable, contribute to any amount paid or payable by such Underwriter, in each case, pursuant to Section 7 hereof. (n) That in connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. Donaldson, Lufkin & Jenrette Securities Corporation will notify the Company as to which Participants will need to be so restricted. The Company will direct the removal of such transfer restrictions upon the expiration of such period of time. (o) To pay all reasonable fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program. 8 Furthermore, the Company covenants with Donaldson, Lufkin & Jenrette Securities Corporation that the Company will comply with all applicable securities and other applicable laws, rules and regulations in each foreign jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program. SECTION 6. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) The Registration Statement has become effective (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement); any Rule 462(b) Registration Statement filed after the effectiveness of this Agreement will become effective no later than 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement), when it became effective, did not contain and, as amended, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement) and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act, (iii) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement and any amendments thereto, when they become effective (A) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (B) will comply in all material respects with the Act and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the 9 Act, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in any preliminary prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (d) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties, and is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. The Company has no subsidiaries. (e) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens granted or issued by the Company relating to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of the Company, except as otherwise disclosed in the Registration Statement. (f) All the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; and the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (g) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (h) The Company is not in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company is a party or by which the Company or its property is bound. (i) The execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the 10 consummation of the transactions contemplated hereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company to which the Company is a party or by which the Company or its property is bound, (iii) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company or its property or (iv) result in the suspension, termination or revocation of any Authorization (as defined below) of the Company or any other impairment of the rights of the holder of any such Authorization. (j) There are no legal or governmental proceedings pending or threatened to which the Company is or could be a party or to which any of its property is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described; nor are there any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required. (k) The Company has not violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the Employee Retirement Income Security Act of 1974, as amended, or any provisions of the Foreign Corrupt Practices Act, or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a material adverse effect on the business, prospects, financial condition or results of operation of the Company. (l) The Company has such permits, licenses, consents, exemptions, franchises, authorizations and other approvals (each, an "AUTHORIZATION") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. Each such Authorization is valid and in full force and effect and the Company is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the 11 receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Company; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. (m) The Company owns no real property and has good and marketable title to all personal property owned by it which is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company, in each case except as described in the Prospectus. (n) The Company owns or possesses, or can acquire on reasonable terms, all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("INTELLECTUAL PROPERTY") currently employed by it in connection with the business now operated by it except where the failure to own or possess or otherwise be able to acquire such intellectual property would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operation of the Company; and the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any of such intellectual property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the business, prospects, financial condition or results of operations of the Company. (o) This Agreement has been duly authorized, executed and delivered by the Company. (p) To the best knowledge of the Company after due inquiry, Ernst & Young LLP are independent public accountants with respect to the Company as required by the Act. 12 (q) The financial statements included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), together with related schedules and notes, present fairly the financial position, results of operations and changes in financial position of the Company on the basis stated therein at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; the supporting schedules, if any, included in the Registration Statement present fairly in accordance with generally accepted accounting principles the information required to be stated therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (r) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (s) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company other than as described in the Prospectus or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement other than as have been waived. (t) No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company on the other hand, which is required by the Act to be described in the Registration Statement or the Prospectus which is not so described. (u) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (v) All material tax returns required to be filed by the Company in any jurisdiction have been filed, other than those filings being contested in good faith, 13 and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company have been paid, other than those being contested in good faith and for which adequate reserves have been provided. (w) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there has not been any material adverse change or any development involving a prospective material adverse change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries has incurred any material liability or obligation, direct or contingent. (x) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. Furthermore, the Company represents and warrants to Donaldson, Lufkin & Jenrette Securities Corporation that (i) the Registration Statement, the Prospectus and any preliminary prospectus comply, and any further amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus or any preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program, and that (ii) no authorization, approval, consent, license, order, registration or qualification of or with any government, governmental instrumentality or court, other than such as have been obtained, is necessary under the securities laws and regulations of foreign jurisdictions in which the Directed Shares are offered outside the United States. SECTION 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus, or caused by 14 any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished in writing to the Company by such Underwriter through you expressly for use therein; PROVIDED, HOWEVER, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter who failed to deliver a Prospectus, as then amended or supplemented, (so long as the Prospectus and any amendments or supplements thereto was provided by the Company to the several Underwriters in the requisite quantity and on a timely basis to permit proper delivery on or prior to the Closing Date) to the person asserting any losses, claims, damages, liabilities or judgments caused by any untrue statement or alleged untrue statement of a material fact contained in such preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in the Prospectus, as so amended or supplemented, and such Prospectus was required by law to be delivered at or prior to the written confirmation of sale to such person. (b) The Company agrees to indemnify and hold harmless Donaldson, Lufkin & Jenrette Securities Corporation and each person, if any, who controls Donaldson, Lufkin & Jenrette Securities Corporation within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act ("DLJ ENTITIES"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in the prospectus wrapper material prepared by or with the consent of the Company for distribution in foreign jurisdictions in connection with the Directed Share Program attached to the Prospectus or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein, when considered in conjunction with the Prospectus or any applicable preliminary prospectus, not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to Donaldson, Lufkin & Jenrette Securities Corporation furnished in writing to the Company by Donaldson, Lufkin & Jenrette Securities Corporation expressly for use therein; (ii) caused by the failure of any Participant to pay for and accept delivery of the shares which immediately following the effective of the Registration Statement, were subject to a properly confirmed agreement to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program, PROVIDED THAT, the Company shall not be responsible under this subparagraph (iii) for any losses, 15 claim, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of DLJ Entities. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company to such Underwriter but only with reference to information relating to such Underwriter furnished in writing to the Company by such Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus. (d) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 7(a), 7(b) or 7(c) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to Sections 7(a), 7(b) and 7(c), the Underwriter (in the case of Sections 7(a) and 7(b)) and Donaldson, Lufkin & Jenrette Securities Corporation (in the case of Section 7(c)) shall not be required to assume the defense of such action pursuant to this Section 7(d), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of such Underwriter). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one eparate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be 16 reimbursed as they are incurred. Such firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation, in the case of parties indemnified pursuant to Sections 7(a) or 7(b), and by the Company, in the case of parties indemnified pursuant to Section 7(c). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than twenty business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. Notwithstanding anything contained herein to the contrary, if indemnity may be sought pursuant to Section 7(b) hereof in respect of such action or proceeding, then in addition to such separate fir for the indemnified parties, the indemnifying party shall be liable for the reasonable fees and expenses of not more than one separate firm (in addition to any local counsel) for Donaldson, Lufkin & Jenrette Securities Corporation for the defense of any losses, claims, damages and liabilities arising out of the Directed Share Program, and all persons, if any, who control Donaldson, Lufkin & Jenrette Securities Corporation within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act. (e) To the extent the indemnification provided for in this Section 7 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 7(e)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 7(e)(i) above but also the relative fault of the Company on the one hand and the Underwriters on the other hand in connection with the statements or 17 omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (after deducting underwriting discounts and commissions, but before deducting expenses) received by the Company, and the total underwriting discounts and commissions received by the Underwriters, bear to the total price to the public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7(e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7(e) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. (f) The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. SECTION 8. INDEMNIFICATION OF QIU. (a) The Company agrees to indemnify and hold harmless the QIU, its directors, its officers and each person, if any, who controls the QIU within the meaning of Section 15 of the Act or Section 18 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) related to, based upon or arising out of (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to the QIU furnished in writing to the Company by the QIU expressly for use therein, and or (ii) the QIU's activities as QIU under its engagement pursuant to Section 2 hereof, except in the case of this clause (ii) insofar as any such losses, claims, damages, liabilities or judgments are found in a final judgment by a court of competent jurisdiction, not subject to further appeal, to have resulted solely from the willful misconduct or gross negligence of the QIU. (b) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) (the "QIU INDEMNIFIED PARTY"), the QIU Indemnified Party shall promptly notify the Company in writing and the Company shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the QIU Indemnified Party and the payment of all fees and expenses of such counsel, as incurred. Any QIU Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the QIU Indemnified Party unless (i) the employment of such counsel shall have been specifically authorized in writing by the Company, (ii) the Company shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the QIU Indemnified Party or (iii) the named parties to any such action (including any impleaded parties) include both the QIU Indemnified Party and the Company, and the QIU Indemnified Party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company (in which case the Company shall not have the right to assume the defense of such action on behalf of the QIU Indemnified Party). In any such case, the Company shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all QIU Indemnified Parties, which firm shall be designated by the QIU, and all such fees and expenses shall be reimbursed as they are incurred. The Company shall indemnify and hold harmless the QIU 19 Indemnified Party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more thantwenty business days after the Company shall have received a request from the QIU Indemnified Party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the Company) and, prior to the date of such settlement, the Company shall have failed to comply with such reimbursement request. The Company shall not, without the prior written consent of the QIU Indemnified Party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the QIU Indemnified Party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the QIU Indemnified Party, unless such settlement, compromise or judgment (i) includes an unconditional release of the QIU Indemnified Party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the QIU Indemnified Party. (c) To the extent the indemnification provided for in this Section 8 is unavailable to a QIU Indemnified Party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then the Company, in lieu of indemnifying such QIU Indemnified Party, shall contribute to the amount paid or payable by such QIU Indemnified Party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the QIU on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 8(c)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(c)(i) above but also the relative fault of the Company on the one hand and the QIU on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the QIU on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company as set forth in the table on the cover page of the Prospectus, and the fee received by the QIU pursuant to Section 2 hereof, bear to the sum of such total net proceeds and such fee. The relative fault of the Company on the one hand and the QIU on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the QIU and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission and whether the QIU's activities as QIU under its engagement pursuant to Section 2 hereof involved any willful misconduct or 20 gross negligence on the part of the QIU. The Company and the QIU agree that it would not be just and equitable if contribution pursuant to this Section 8(c) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by a QIU Indemnified Party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such QIU Indemnified Party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (d) The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any QIU Indemnified Party at law or in equity. SECTION 9. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) If the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission. (c) You shall have received on the Closing Date a certificate dated the Closing Date, signed by Arthur H. Reidel and Robin A. Kehoe, on behalf of the Company in their capacities as the President and Chief Executive Officer and the Chief Financial Officer, respectively, of the Company, confirming the matters set forth in Sections 6(x), 9(a) and 9(b) and that the Company has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by the Company on or prior to the Closing Date. (d) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments 21 or supplements thereto subsequent to the date of this Agreement), (i) there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company, (ii) there shall not have been any change or any development involving a prospective change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) the Company shall not have incurred any liability or obligation, direct or contingent, the effect of which, in any such case described in clause 9(d)(i), 9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (e) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Cooley Godward LLP, counsel for the Company, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties; (ii) the Company is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company; (iii) all the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or, to the best of such counsel's knowledge, similar rights; (iv) the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or, to the best of such counsel's knowledge, similar rights; (v) this Agreement has been duly authorized, executed and delivered by the Company; 22 (vi) the authorized capital stock of the Company conforms as to legal matters in all material respects to the description thereof contained in the Prospectus; (vii) the Registration Statement has become effective under the Act, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are, to the best of such counsel's knowledge, pending before or contemplated by the Commission; (viii) the statements under the captions "Risk Factors - Internet Privacy Laws", "Business - Governmental Regulation", "Management - Employee Benefit Plans", "Management -- Limitations on Liability and indemnification Matters", "Certain Relationships and Related Transactions", Shares Eligible for Future Sale", "Description of Capital Stock", "Underwriting" and "Additional Information" in the Prospectus and Items 14 and 15 of Part II of the Registration Statement, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings to the extent required by the Act; (ix) the Company is not in violation of its respective charter or by-laws and, to the best of such counsel's knowledge, the Company is not in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company to which the Company is a party or by which the Company or its property is bound; (x) the execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not (A) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (B) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is filed as an exhibit to the Registration Statement, (C) violate or conflict with any applicable law or any rule, regulation of any governmental body or agency having jurisdiction over the Company or its property (except as with regard to the securities or Blue Sky laws of the various states, as to which such counsel need not opine) or (D) to the best of such counsel's knowledge, violate or conflict with any judgment, order 23 or decree of any court or any governmental body or agency entered against the Company or its property; (xi) to the best of such counsel's knowledge, there are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is or, in the case of threatened proceedings, could be a party or to which any of their respective property is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described, or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required; (xii) the Company has not violated any provisions of the Foreign Corrupt Practices Act, or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a material adverse effect on the business, prospects, financial condition or results of operation of the Company; (xiii) the Company has such Authorizations of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company; each such Authorization is valid and in full force and effect and the Company is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Company; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company; 24 (xiv) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xv) to the best of such counsel's knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company other than are described in the Prospectus or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement other than as waived; and (xvi) the Registration Statement and the Prospectus and any supplement or amendment thereto (except for the financial statements and other financial and statistical data included therein as to which no opinion need be expressed) comply as to form with the Act. In addition, such counsel shall also furnish to you a written statement to the effect that during the course of the preparation of the Registration and the prospectus, such counsel participated in conferences with you and with officers and other representatives of the Company, its counsel and its independent public accountants at which the contents of the Registration Statement and the Prospectus were discussed, and while such counsel has not independently verified and does not pass upon the accuracy, completeness or fairness of the statements made in the Registration Statement and Prospectus, on the basis of the foregoing, no facts have come to such counsel's attention that have caused such counsel to believe that the Registration Statement, as of the time it became effective, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date or the date hereof, contained or contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that such counsel shall express no comment with respect to the financial statements and schedules, related notes, other financial and statistical data derived therefrom included in the Registration Statement and Prospectus. The opinion of Cooley Godward LLP described in Section 9(e) above shall be rendered to you at the request of the Company and shall so state therein. 25 (f) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date of Hogan and Hartson LLP, special regulatory counsel for the Company, to the effect that the statements under the captions "Risk Factors -- Risks Related to Our Industry - 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", "Risk Factors - Government regulations may be enacted that restrict our operations or the operations of our customers and, therefore, adversely affect our business" and "Business - Governmental Regulation" in the Prospectus, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings to the extent required by the Act. (g) You shall have received on the Closing Date an opinion, dated the Closing Date, of Sullivan & Cromwell, counsel for the Underwriters, as to the matters referred to in Sections 9(e)(iv), 9(e)(v), 9(e)(viii) (but only with respect to the statements under the caption "Description of Capital Stock" and "Underwriting") and 9(e)(xvi) and the second last paragraph in Section 9(e). In giving such opinions with respect to the matters covered by Section 9(e)(xvi), Cooley Godward LLP and Sullivan & Cromwell may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (h) You shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to you, from Ernst & Young LLP, independent public accountants, containing the information and statements of the type ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (i) The Company shall have delivered to you the agreements specified in Section 2 hereof which agreements shall be in full force and effect on the Closing Date. (j) The Shares shall have been duly listed for quotation on the Nasdaq National Market. (k) The Company shall not have failed on or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company on or prior to the Closing Date. 26 The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of such Additional Shares and other matters related to the issuance of such Additional Shares. SECTION 10. Effectiveness of Agreement and Termination. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time on or prior to the Closing Date by you by written notice to the Company if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any securities of the Company on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Company, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it has or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the total number of Firm Shares or Additional Shares, as the case may be, to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares 27 which all the non-defaulting Underwriters have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; PROVIDED that in no event shall the number of Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 10 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased by all Underwriters and arrangements satisfactory to you and the Company for purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter and the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase such Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase on such date in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. SECTION 11. Miscellaneous. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company, to Pharsight Corporation, 800 West El Camino Real, Suite 200, Mountain View, California 94040, Attention: President, and (ii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company and the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the officers or directors of any Underwriter, any 28 person controlling any Underwriter, any QIU Indemnified Party, the Company, the officers or directors of the Company or any person controlling the Company, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If for any reason the Shares are not delivered by or on behalf of the Company as provided herein (other than as a result of any termination of this Agreement pursuant to Section 10), the Company agrees to reimburse the several Underwriters for all out-of-pocket expenses (including the fees and disbursements of counsel) incurred by them. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 5(i) hereof. The Company also agrees to reimburse the several Underwriters, their directors and officers, any persons controlling any of the Underwriters and the QIU Indemnified Parties for any and all fees and expenses (including, without limitation, the fees disbursements of counsel) incurred by them in connection with enforcing their rights hereunder (including, without limitation, pursuant to Section 7 hereof). Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Underwriters, the Underwriters' directors and officers, any controlling persons referred to herein, the QIU Indemnified Parties, the Company's directors and the Company's officers who sign the Registration Statement and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. 29 Please confirm that the foregoing correctly sets forth the agreement between the Company and the several Underwriters. Very truly yours, PHARSIGHT CORPORATION By:_________________________ Title: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION CHASE SECURITIES INC. SOUNDVIEW TECHNOLOGY GROUP INC. Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto By DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By_________________________________ SCHEDULE I NUMBER OF FIRM SHARES UNDERWRITERS TO BE PURCHASED Donaldson, Lufkin & Jenrette Securities Corporation Chase Securities Inc. SoundView Technology Group Inc. ---------------------------------- Total ---------------------------------- Annex I TABLE OF CONTENTS PAGE ---- SECTION 1. Registration Statement and Prospectus. . . . . . . . . . . . 2 SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements . . . 2 SECTION 3. Terms of Public Offering . . . . . . . . . . . . . . . . . . 4 SECTION 4. Delivery and Payment . . . . . . . . . . . . . . . . . . . . 4 SECTION 5. Agreements of the Company. . . . . . . . . . . . . . . . . . 5 SECTION 6. Representations and Warranties of the Company. . . . . . . . 9 SECTION 7. Indemnification. . . . . . . . . . . . . . . . . . . . . . .14 SECTION 8. Indemnification of QIU . . . . . . . . . . . . . . . . . . .18 SECTION 9. Conditions of Underwriters' Obligations. . . . . . . . . . .21 SECTION 10. Effectiveness of Agreement and Termination . . . . . . . . .27 SECTION 11. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . .28 i EX-10.11-1 3 ex-10_111.txt EXHIBIT 10.11.1 EXHIBIT 10.11.1 AMENDMENT NO. 1 This Amendment No. 1 (the "Amendment") to the parties' Data Set License Agreement dated as of March 1, 2000 is entered into as of April 11, 2000 by and between Pharsight Corporation, a California corporation, (hereinafter "Pharsight") and the Lovelace Respiratory Research Institute (hereinafter "Lovelace"). WHEREAS, Pharsight and Lovelace have entered into an Agreement dated as of March 1, 2000 (the "Agreement") whereby the parties agreed on the terms and conditions under which Lovelace would grant Pharsight the right to use certain Data Sets in its products; and WHEREAS, the parties have determined that certain of the terms and conditions set forth in the Agreement should be modified; NOW, THEREFORE, the parties agree as follows: 1. All capitalized terms used but not defined in this Amendment shall have the meaning specified therefor in the Agreement. All section and exhibit numbers refer to sections and exhibits of the Agreement unless otherwise specified. 2. Section 6.4 is hereby amended to read in its entirety as follows: 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 have the option to substitute for the missing Consortium member's data, equivalent years of data from one or more of the existing Consortium members, and in the event of such substitution, all rights and obligations with respect to the Data Set shall continue unchanged. In the event that Lovelace is unable to make such a substitution or determines not to exercise its option to do so, then 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 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. 3. Section 5.2 is hereby amended to read in its entirety as follows: 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) an action arising from Lovelace's breach of the warranties set forth in Section 5.1. 4. The first paragraph of Part II.C. of Appendix E is hereby amended to read in its entirety as follows: "The health care data that underlie the Pharsight (PRODUCT/CONSULTING SERVICE) are currently derived from two 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 two 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 network model managed health care plan in the mid-Atlantic region of the United States." 5. Except as set forth herein, the Agreement shall remain unmodified and in full force and effect in accordance with its terms. IN WITNESS WHEREOF, THE PARTIES HAVE EXECUTED THIS AMENDMENT AS OF THE DATE FIRST ABOVE WRITTEN. 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 -2- EX-10.19 4 ex-10_19.txt EXHIBITI 10.19 Exhibit 10.19 PHARSIGHT CORPORATION 2000 EQUITY INCENTIVE PLAN Adopted April 7, 2000 Approved By Stockholders May __, 2000 Effective Date: Date of Initial Public Offering Termination Date: April 7, 2010 1. PURPOSES. (a) Eligible Stock Award Recipients. The persons eligible to receive Stock Awards are the Employees, Directors and Consultants of the Company and its Affiliates. (b) Available Stock Awards. The purpose of the Plan is to provide a means by which eligible recipients of Stock Awards may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to acquire restricted stock. The Plan also provides for non-discretionary grants of Nonstatutory Stock Options to Non-Employee Directors of the Company. (c) General Purpose. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. DEFINITIONS. (a) "Affiliate" means any parent corporation or subsidiary corporation of the Company, 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) "Cause" means the occurrence of any one or more of the following: (i) the Participant's conviction of any felony or any crime involving moral turpitude or dishonesty; (ii) the Participant's participation in a fraud or act of dishonesty against the Company which results in material harm to the business of the Company; or (iii) the Participant's intentional, material violation of any contract between the Company and the Participant or any statutory duty the Participant owes to the Company that the Participant does not correct within thirty (30) days after written notice thereof has been provided to the Participant. (d) "Change in Control" means the occurrence of any one or more of the following: (i) a Corporate Transaction after which persons who were not stockholders of the Company immediately prior to such Corporate Transaction own, directly or indirectly, 1 immediately following such Corporate Transaction, fifty percent (50%) or more of the outstanding voting power of each of (a) the continuing or surviving entity and (b) any direct or indirect parent corporation of the continuing or surviving entity; (ii) after the IPO Date, an acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or an Affiliate) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of Directors; provided that such acquisition does not occur in connection with, in contemplation of or as a result of a Corporate Transaction; or (iii) after the IPO Date, during any consecutive two (2) year period the individuals who, as of the start of such period, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least fifty percent (50%) of the Board, provided that such change in the Incumbent Board does not occur in connection with, in contemplation of or as a result of a Corporate Transaction, and further provided that if the election, or nomination for election, by the Company's stockholders of any new Director was approved by a vote of at least fifty percent (50%) of the Incumbent Board, such new Director shall be considered as a member of the Incumbent Board. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Committee" means a committee of one or more members of the Board appointed by the Board in accordance with subsection 3(c). (g) "Common Stock" means the common stock of the Company. (h) "Company" means Pharsight Corporation, a Delaware corporation. (i) "Consultant" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the term "Consultant" shall not include either Directors who are not compensated by the Company for their services as Directors or Directors who are merely paid a director's fee by the Company for their services as Directors. (j) "Continuous Service" means that the Participant's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Participant's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may 2 determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (k) "Corporate Transaction" means the occurrence of any one or more of the following: (i) a sale, lease or other disposition of all or substantially all of the securities or assets of the Company; (ii) a merger or consolidation following which the Company is not the surviving corporation; (iii) a reverse merger following which the Company is the surviving corporation but the shares of 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; or (iv) any other transaction described as a "corporate transaction" in Treasury Regulations ss.1.425-1(a)(1)(ii). (l) "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. (m) "Director" means a member of the Board of Directors of the Company. (n) "Disability" means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (o) "Eligible Director" means a Non-Employee Director or any other Director who is not an Employee or Consultant at the time of grant of an Nonstatutory Stock Option under section 7 hereof. (p) "Employee" means any person employed by the Company or an Affiliate. Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (q) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (r) "Fair Market Value" means, as of any date, the value of the Common Stock determined as follows: (i) 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 Common Stock) on the last market trading day prior to the day 3 of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (s) "Good Reason" means that one or more of the following are undertaken by the Company without the Participant's express written consent: (i) the assignment to the Participant of any duties or responsibilities that results in a diminution in the Participant's position or function as in effect immediately prior to the effective date of the Change in Control; provided, however, that a mere change in the Participant's title or reporting relationships shall not constitute Good Reason; (ii) a reduction by the Company in the Participant's annual base salary, as in effect on the effective date of the Change in Control; (iii) any failure by the Company to continue in effect any benefit plan or program, including incentive plans or plans with respect to the receipt of securities of the Company, in which the Participant was participating immediately prior to the effective date of the Change in Control (hereinafter referred to as "Benefit Plans"), or the taking of any action by the Company that would adversely affect the Participant's participation in or reduce the Participant's benefits under the Benefit Plans or deprive the Participant of any fringe benefit that the Participant enjoyed immediately prior to the effective date of the Change in Control; provided, however, that Good Reason shall not be deemed to have occurred if the Company provides for the Participant's participation in benefit plans and programs that, taken as a whole, are comparable to the Benefit Plans; (iv) a relocation of the Participant's business office to a location more than thirty (30) miles from the location at which the Participant performs duties as of the effective date of the Change in Control, except for required travel by the Participant on the Company's business to an extent substantially consistent with the Participant's business travel obligations prior to the Change in Control; (v) a material breach by the Company of any provision of the Plan or the Stock Award Agreement or any other material agreement between the Participant and the Company concerning the terms and conditions of the Participant's employment; or (vi) any failure by the Company to obtain the assumption of the Plan and Stock Award Agreement by any successor or assign of the Company. (t) "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. (u) "IPO Date" means the effective date of the Company's Form S-1 Registration Statement filed under the Securities Act in connection with the initial public offering of the Common Stock. (v) "Non-Employee Director" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or a subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or a 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 4 business relationship as to which disclosure 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. (w) "Non-Employee Director Option" shall have the meaning subscribed in section 7 hereof. (x) "Non-Employee Director Option Agreement" means a written agreement between the Company and an Eligible Director, evidencing the terms and conditions of a Non-Employee Director Option grant. Each Non-Employee Director Option Agreement shall be subject to the terms and conditions of the Plan. (y) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (z) "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. (aa) "Option" means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan. (bb) "Option Agreement" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (cc) "Optionholder" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (dd) "Outside Director" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of 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. (ee) "Participant" means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award. (ff) "Plan" means this Pharsight Corporation 2000 Equity Incentive Plan. (gg) "Predecessor Plans" means the Company's 1995 Stock Option Plan and the 1997 Stock Option Plan (hh) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (ii) "Securities Act" means the Securities Act of 1933, as amended. 5 (jj) "Stock Award" means any right granted under the Plan, including an Option, a Non-Employee Director Option, a stock bonus and a right to acquire restricted stock. (kk) "Stock Award Agreement" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (ll) "Ten Percent Stockholder" means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates. 3. ADMINISTRATION. (a) Administration by Board. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) Powers of Board. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to a Stock Award; and the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person. (ii) To construe and interpret the Plan and Stock Awards 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 Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or a Stock Award as provided in Section 13. (iv) 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 which are not in conflict with the provisions of the Plan. (c) Delegation to Committee. (i) General. The Board may delegate administration of the Plan to a Committee or Committees of one (1) or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. 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 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 subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the 6 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. (ii) Committee Composition when Common Stock is Publicly Traded. At such time as the Common Stock is publicly traded, in the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, and/or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such authority, the Board or the Committee may (1) delegate to a committee of one or more members of the Board who are not Outside Directors the authority to grant Stock Awards to eligible persons who are either (a) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award or (b) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or) (2) delegate to a committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act. (d) Effect of Board's Decision. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. 4. SHARES SUBJECT TO THE PLAN. (a) Share Reserve. Subject to the provisions of Section 12 relating to adjustments upon changes in Common Stock, the Common Stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate four million (4,000,000) shares of Common Stock (the "Reserved Shares"). As of each January 1, beginning with January 1, 2001 and continuing through and including January 1, 2010 (the "Anniversary Date"), the number of Reserved Shares will be increased automatically by the least of (i) 5% of the total number of shares of Common Stock outstanding on such Anniversary Date, (ii) Two Million (2,000,000) shares, or (iii) such fewer number of shares as determined by the Board prior to such Anniversary Date. (b) Reversion of Shares to the Share Reserve. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. (c) Source of Shares. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Eligibility for Specific Stock Awards. Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors (whether or not an Eligible Director for purposes of section 7 hereof) and Consultants. 7 (b) Ten Percent Stockholders. A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common 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) Section 162(m) Limitation. Subject to the provisions of Section 12 relating to adjustments upon changes in the shares of Common Stock, no Employee shall be eligible to be granted Options covering more than One Million (1,000,000) shares of Common Stock during any calendar year. (d) Consultants. (i) A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("Form S-8") is not available to register either the offer or the sale of the Company's securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not a natural person, or as otherwise provided by the rules governing the use of Form S-8, unless the Company determines both (i) that such grant (A) shall be registered in another manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or (B) does not require registration under the Securities Act in order to comply with the requirements of the Securities Act, if applicable, and (ii) that such grant complies with the securities laws of all other relevant jurisdictions. (ii) Form S-8 generally is available to consultants and advisors only if (i) they are natural persons; (ii) they provide bona fide services to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer's parent; and (iii) the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer's securities. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be issued for shares of Common Stock purchased on exercise of each type of Option. 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. Subject to the provisions of subsection 5(b) regarding Ten Percent Stockholders, no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) Exercise Price of an Incentive Stock Option. Subject to the provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set 8 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) Exercise Price of a Nonstatutory Stock Option. The exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, 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. (d) Consideration. The purchase price of Common 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 at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the Company of other Common Stock, (2) according to a deferred payment or other similar arrangement with the Optionholder or (3) in any other form of legal consideration that may be acceptable to the Board. Unless otherwise specifically provided in the Option, the purchase price of Common Stock acquired pursuant to an Option that is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Common Stock of the Company that have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. (e) Transferability of an Incentive Stock Option. An Incentive Stock 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 Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder 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 Optionholder, shall thereafter be entitled to exercise the Option. (f) Transferability of a Nonstatutory Stock Option. A Nonstatutory Stock Option shall be transferable to the extent provided in the Option Agreement. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock 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 Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder 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 Optionholder, shall thereafter be entitled to exercise the Option. (g) Vesting Generally. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. 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 9 criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(g) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised. (h) Termination of Continuous Service. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option 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 Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (i) Extension of Termination Date. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in subsection 6(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (j) Disability of Optionholder. In the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option 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 specified in the Option Agreement) or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (k) Death of Optionholder. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder'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 Optionholder's death pursuant to subsection 6(e) or 6(f), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement) or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. 10 (l) Early Exercise. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. (m) Re-Load Options. (i) Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionholder to a further Option (a "Re-Load Option") in the event the Optionholder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Unless otherwise specifically provided in the Option, the Optionholder shall not surrender shares of Common Stock acquired, directly or indirectly from the Company, unless such shares have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). (ii) Any such Re-Load Option shall (1) provide for a number of shares of Common Stock equal to the number of shares of Common Stock surrendered as part or all of the exercise price of such Option; (2) have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (3) have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option shall be subject to the same exercise price and term provisions heretofore described for Options under the Plan. (iii) Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on the exercisability of Incentive Stock Options described in subsection 11(d) and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares of Common Stock under subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options under subsection 5(c) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. NON-EMPLOYEE DIRECTOR STOCK OPTIONS Without any further action from the Board, each Eligible Director shall be granted Nonstatutory Stock Options as described in subsections 7(a) and 7(b) (collectively, the "Non- 11 Employee Director Options"). Each Non-Employee Director Option shall include the substance of the terms set forth in subsection 7(c) through 7(k) and such other terms and conditions as shall be determined by the Board as appropriate. (a) Initial Grants and Interim Grants. (i) On the IPO Date, each Eligible Director who has not received a Stock Award under any of the Company's Predecessor Plans shall, upon the IPO Date, be granted an Nonstatutory Stock Option to purchase Five Thousand (5,000) shares of Common Stock on the terms and conditions set forth herein (the "Initial Grant"). (ii) After the IPO Date, each Eligible Director who is elected or appointed to the Board less than six (6) from the prior annual meeting of the stockholders of the Company (the "Annual Meeting"), shall receive a Nonstatutory Stock Option to purchase Five Thousand (5,000) shares of Common Stock on the terms and conditions set forth herein (the "Interim Grant"); provided, however, that the Interim Grant shall be reduced to Two Thousand Five Hundred (2,500) shares of Common Stock if the Eligible Director is elected or appointed to serve on the Board six (6) months or more from the prior Annual Meeting. (b) Annual Grants. On the day following each Annual Meeting commencing with the Annual Meeting in calendar year 2001, each person who is then an Eligible Director automatically shall be granted an Annual Grant to Purchase Five Thousand (5,000) shares of Common Stock on the terms and conditions set forth herein. (c) Term. Each Non-Employee Director Option shall have a term of ten (10) years from the date it is granted. (d) Exercise Price. The exercise price of each Non-Employee Director Option shall be one hundred percent (100%) of the Fair Market Value of the stock subject to the Non-Employee Director Option on the date of grant. Notwithstanding the foregoing, a Non-Employee Director Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Non-Employee Director 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. (e) Vesting. Non-Employee Director Options shall vest and become exercisbable as follows: (i) Initial Grants shall vest in full on the day of the Company's Annual Meeting immediately following the IPO Date; provided however, that the Initial Grant shall terminate in the event the Eligible Director is not providing service to the Company at the time of the commencement of such Annual Meeting. (ii) Interim Grants shall vest in full on the day of the Company's Annual Meeting next following the date of grant; provided, however, that the Interim Grant shall terminate if the Eligible Director is not providing service to the Company at the time of the commencement of such Annual Meeting. 12 (iii) Annual Grants shall vest in full on the day of the Annual Meeting next following the date of grant was made; provided, however, that the Annual Grant shall terminate in the event the Eligible Director is not providing service to the Company at the time of the commencement of such Annual Meeting. (f) Consideration. The purchase price of stock acquired pursuant to a Non-Employee Director Option may be paid, to the extent permitted by applicable statutes and regulations, in any combination of (i) cash or check, (ii) delivery to the Company of other Common Stock owned by the Director for at least six (6) months; (iii) deferred payment or (iv) any other form of legal consideration that may be acceptable to the Board and provided in the Non-Employee Director Option Agreement; provided, however, that at any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware Corporation Law, shall not be made by deferred payment. (g) Transferability. A Non-Employee Director Option shall be transferable to the extent provided in the Non-Employee Director Option Agreement. If the Non-Employee Director Option Agreement does not provide for transferability, then the Non-Employee Director 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 Eligible Director only by the Eligible Director. Notwithstanding the foregoing, the Eligible Director 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 Eligible Director, shall thereafter be entitled to exercise the Non-Employee Director Option. (h) Termination of Continuous Service. In the event an Eligible Director's Continuous Service terminates (other than upon the Eligible Director's death or Disability), the Eligible Director may exercise his or her Non-Employee Director Option (to the extent that the Eligible Director 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 six (6) months following the termination of the Eligible Director's Continuous Service, or (ii) the expiration of the term of the Non-Employee Director Option as set forth in the Non-Employee Director Option Agreement. If, after termination, the Eligible Director does not exercise his or her Non-Employee Director Option within the time specified herein, the Non-Employee Director Option shall terminate. (i) Extension of Termination Date. If the exercise of the Non-Employee Director Option following the termination of the Eligible Director's Continuous Service (other than upon the Eligible Director's death or Disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Non-Employee Director Option shall terminate on the earlier of (i) the expiration of the term of the Non-Employee Director Option set forth in subsection 7(c) or (ii) the expiration of a period of three (3) months after the termination of the Eligible Director's Continuous Service during which the exercise of the Non-Employee Director Option would not violate such registration requirements. (j) Disability of Eligible Director. In the event an Eligible Director's Continuous Service terminates as a result of the Eligible Director's Disability, the Eligible Director may exercise his or her Non-Employee Director Option (to the extent that the Eligible Director was 13 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 (ii) the expiration of the term of the Non-Employee Director Option as set forth in the Non-Employee Director Option Agreement. If, after termination, the Eligible Director does not exercise his or her Non-Employee Director Option within the time specified herein, the Non-Employee Director Option shall terminate. (k) Death of Eligible Director. In the event (i) an Eligible Director's Continuous Service terminates as a result of the Eligible Director's death or (ii) the Eligible Director dies within the six-month period after the termination of the Eligible Director's Continuous Service for a reason other than death, then the Non-Employee Director Option may be exercised (to the extent the Eligible Director was entitled to exercise the Non-Employee Director Option as of the date of death) by the Eligible Director's estate, by a person who acquired the right to exercise the Non-Employee Director Option by bequest or inheritance or by a person designated to exercise the Non-Employee Director Option upon the Eligible Director's death, but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death or (2) the expiration of the term of such Non-Employee Director Option as set forth in the Non-Employee Director Option Agreement. If, after death, the Non-Employee Director Option is not exercised within the time specified herein, the Non-Employee Director Option shall terminate. 8. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS. (a) Stock Bonus Awards. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical, but each stock bonus agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) Consideration. A stock bonus may be awarded in consideration for past services actually rendered to the Company or an Affiliate for its benefit. (ii) Vesting. Shares of Common Stock awarded under the stock bonus agreement may, but need not, be subject to a share reacquisition right in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iii) Termination of Participant's Continuous Service. In the event a Participant's Continuous Service terminates, the Company may reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the stock bonus agreement. (iv) Transferability. Rights to acquire shares of Common Stock under the stock bonus agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the stock bonus agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the stock bonus agreement remains subject to the terms of the stock bonus agreement. 14 (b) Restricted Stock Purchase Awards. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) Purchase Price. The purchase price under each restricted stock purchase agreement shall be such amount as the Board shall determine and designate in such restricted stock purchase agreement. The purchase price shall not be less than eighty-five percent (85%) of the Common Stock's Fair Market Value on the date such award is made or at the time the purchase is consummated. (ii) Consideration. The purchase price of Common Stock acquired pursuant to the restricted stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other similar arrangement with the Participant; or (iii) in any other form of legal consideration that may be acceptable to the Board in its discretion; provided, however, that at any time that the Company is incorporated in Delaware, then payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. (iii) Vesting. Shares of Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iv) Termination of Participant's Continuous Service. In the event a Participant's Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the restricted stock purchase agreement. (v) Transferability. Rights to acquire shares of Common Stock under the restricted stock purchase agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the restricted stock purchase agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the restricted stock purchase agreement remains subject to the terms of the restricted stock purchase agreement. 9. COVENANTS OF THE COMPANY. (a) Availability of Shares. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards. (b) Securities Law Compliance. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or 15 issuable pursuant to any such Stock Award. 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 Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. 10. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to Stock Awards shall constitute general funds of the Company. 11. MISCELLANEOUS. (a) Acceleration of Exercisability and Vesting. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) Stockholder Rights. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) No Employment or other Service Rights. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder 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. (e) Investment Assurances. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant'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 Stock Award; and (ii) to give written assurances satisfactory to 16 the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (2) 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, 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 Common Stock. (f) Withholding Obligations. To the extent provided by the terms of a Stock Award Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under a Stock Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stock under the Stock Award, provided, however, that the Company shall not be authorized to withheld shares of Common Stock in excess if the minimum statutory rates for federal or state tax purposes including payroll taxes; or (iii) delivering to the Company owned and unencumbered shares of Common Stock. 12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. (a) Capitalization Adjustments. If any change is made in the Common Stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, 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 be appropriately adjusted in the class(es) 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 pursuant to subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) Dissolution or Liquidation. In the event of a dissolution or liquidation of the Company, then all outstanding Stock Awards shall terminate immediately prior to such event. (c) Corporate Transaction. In the event of a Corporate Transaction, any surviving corporation or acquiring corporation may assume any Stock Awards outstanding under the Plan or may substitute similar stock awards (including an award to acquire the same consideration 17 paid to the stockholders pursuant to the Corporate Transaction). In the event any surviving corporation or acquiring corporation refuses to assume such Stock Awards or to substitute similar stock awards for those outstanding under the Plan, then with respect to Stock Awards held by Participants whose Continuous Service has not terminated as of the effective date of the Corporate Transaction, the vesting of such Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated in full, and the Stock Awards shall terminate if not exercised (if applicable) at or prior to such effective date. With respect to any other Stock Awards outstanding under the Plan, such Stock Awards shall terminate if not exercised (if applicable) prior the effective date of the Corporate Transaction. (d) Change in Control. If a Change in Control occurs and within thirteen (13) months after the effective date of such Change in Control the Continuous Service of a Participant terminates due to an involuntary termination (not including death or Disability) without Cause or due to a voluntary termination with Good Reason, then the vesting and exercisability of all Stock Awards held by such Participant shall be accelerated in full. 13. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) Amendment of Plan. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 12 relating to adjustments upon changes in Common Stock, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements. (b) Stockholder Approval. 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 thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) Contemplated Amendments. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees 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) No Impairment of Rights. Rights under any Stock Award 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 Participant and (ii) the Participant consents in writing. (e) Amendment of Stock Awards. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. 14. TERMINATION OR SUSPENSION OF THE PLAN. 18 (a) Plan Term. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) No Impairment of Rights. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the Participant. 15. EFFECTIVE DATE OF PLAN. The Plan shall become effective on the IPO Date, but no Stock Award shall be exercised (or, in the case of a stock bonus, shall be granted) 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. 16. CHOICE OF LAW. The law of the State of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules. 19 PHARSIGHT CORPORATION 2000 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT (INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION) Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock Option Agreement, Pharsight Corporation (the "Company") has granted you an option under its 2000 Equity Incentive (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: I. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. II. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan. III. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in your Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of your option is permitted) and subject to the provisions of your option, you may elect at any time that is both (i) during the period of your Continuous Service and (ii) during the term of your option, to exercise all or part of your option, including the nonvested portion of your option; provided, however, that: a. a partial exercise of your option shall be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock; b. any shares of Common Stock so purchased from installments that have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Company's form of Early Exercise Stock Purchase Agreement; c. you shall enter into the Company's form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred; and d. if your option is an incentive stock option, then, as provided in the Plan, to the extent that the aggregate Fair Market Value (determined at the time of grant) of the shares of Common Stock with respect to which your option plus all other incentive stock options you hold 20 are exercisable for the first time by you during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), your option(s) or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as nonstatutory stock options. IV. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner permitted by your Grant Notice, which may include one or more of the following: e. In the Company's sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. f. Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Company's reported earnings (generally six months) or that you did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. "Delivery" for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. g. Pursuant to the following deferred payment alternative: 1) Not less than one hundred percent (100%) of the aggregate exercise price, plus accrued interest, shall be due four (4) years from date of exercise or, at the Company's election, upon termination of your Continuous Service. 2) 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 portion of any amounts other than amounts stated to be interest under the deferred payment arrangement. 3) At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall be made in cash and not by deferred payment. 4) In order to elect the deferred payment alternative, you must, as a part of your written notice of exercise, give notice of the election of this payment 21 alternative and, in order to secure the payment of the deferred exercise price to the Company hereunder, if the Company so requests, you must tender to the Company a promissory note and a security agreement covering the purchased shares of Common Stock, both in form and substance satisfactory to the Company, or such other or additional documentation as the Company may request. V. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock. VI. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations. VII. TERM. You may not exercise your option before the commencement of its term or after its term expires. The term of your option commences on the Date of Grant and expires upon the earliest of the following: h. three (3) months after the termination of your Continuous Service for any reason other than your Disability or death, provided that if during any part of such three- (3-) month period your option is not exercisable solely because of the condition set forth in the preceding paragraph relating to "Securities Law Compliance," your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; i. twelve (12) months after the termination of your Continuous Service due to your Disability; j. eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates; k. the Expiration Date indicated in your Grant Notice; or l. the day before the tenth (10th) anniversary of the Date of Grant. If your option is an incentive stock option, note that, to obtain the federal income tax advantages associated with an "incentive stock option," the Code requires that at all times beginning on the date of grant of your option and ending on the day three (3) months before the date of your option's exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or Disability. The Company has provided for extended exercisability of your option under certain circumstances for your benefit but cannot guarantee that your option will necessarily be treated as an "incentive stock option" if you continue to provide services to 22 the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your option more than three (3) months after the date your employment terminates. VIII. EXERCISE. m. You may exercise the vested portion of your option (and the unvested portion of your option if your Grant Notice so permits) during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. n. By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise. o. If your option is an incentive stock option, by exercising your option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurs within two (2) years after the date of your option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option. p. By exercising your option you agree that the Company (or a representative of the underwriter(s)) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, require that you not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by you, for a period of time specified by the underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your shares of Common Stock until the end of such period. IX. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. X. RIGHT OF REPURCHASE. Unvested shares that are received upon an early exercise of your option are subject to any right of repurchase that may be described in the form of 23 Early Exercise Stock Purchase Agreement by which you acquire shares of Common Stock pursuant to the early exercise of your option. XI. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. XII. WITHHOLDING OBLIGATIONS. q. At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "same day sale" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your option. r. Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable conditions or restrictions of law, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law. If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility. s. You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein. XIII. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by 24 mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. XIV. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. 25 PHARSIGHT CORPORATION 2000 EQUITY INCENTIVE PLAN NON-EMPLOYEE DIRECTOR OPTION AGREEMENT Pursuant to your Non-Employee Director Option Grant Notice ("Grant Notice") and this Non-Employee Director Option Agreement, Pharsight Corporation (the "Company") has granted you an option under its 2000 Equity Incentive Plan (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Non-Employee Director Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: XV. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. XVI. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan. XVII. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in your Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of your option is permitted) and subject to the provisions of your option, you may elect at any time that is both (i) during the period of your Continuous Service and (ii) during the term of your option, to exercise all or part of your option, including the nonvested portion of your option; provided, however, that: t. a partial exercise of your option shall be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock; u. any shares of Common Stock so purchased from installments that have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Company's form of Early Exercise Stock Purchase Agreement; and 26 v. you shall enter into the Company's form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred. XVIII. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner permitted by your Grant Notice, which may include one or more of the following: w. In the Company's sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. x. Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Company's reported earnings (generally six months) or that you did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. "Delivery" for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. y. Pursuant to the following deferred payment alternative: 1) Not less than one hundred percent (100%) of the aggregate exercise price, plus accrued interest, shall be due four (4) years from the date of exercise, at the Company's election, upon termination of your Continuous Service. 2) 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 portion of any amounts other than amounts stated to be interest under the deferred payment arrangement. 3) At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall be made in cash and not be deferred payment. 4) In order to elect the deferred payment alternative, you must, as a part of your written notice of exercise, give notice of the election of this 27 payment alternative and, in order to secure the payment of the deferred exercise price to the Company hereunder, if the Company so requests, you must tender to the Company a promissory note and a security agreement covering the purchased shares of Common Stock, both in form and substance satisfactory to the Company, or such other or additional documentation as the Company may request. XIX. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock. XX. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations. XXI. TERM. You may not exercise your option before the commencement of its term or after its term expires. The term of your option commences on the Date of Grant and expires upon the earliest of the following: z. Six (6) months after the termination of your Continuous Service for any reason other than your Disability or death, provided that if during any part of such six (6) month period your option is not exercisable solely because of the condition set forth in the preceding paragraph relating to "Securities Law Compliance," your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; aa. twelve (12) months after the termination of your Continuous Service due to your Disability; bb. eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates; cc. the Expiration Date indicated in your Grant Notice; or dd. the day before the tenth (10th) anniversary of the Date of Grant. XXII. EXERCISE. ee. You may exercise the vested portion of your option (and the unvested portion of your option if your Grant Notice so permits) during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. 28 ff. By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise. gg. By exercising your option you agree that the Company (or a representative of the underwriter(s)) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, require that you not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by you, for a period of time specified by the underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your shares of Common Stock until the end of such period. 9. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 10. RIGHT OF REPURCHASE. Unvested shares that are received upon an early exercise of your option are subject to any right of repurchase that may be described in the form of Early Exercise Stock Purchase Agreement by which you acquire shares of Common Stock of the Company pursuant to the early exercise of your option. XXIII.OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. XXIV. WITHHOLDING OBLIGATIONS. a. At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "same day sale" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to 29 satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your option. b. Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable conditions or restrictions of law, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law. If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility. c. You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein. XXV. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 11. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. 30 PHARSIGHT CORPORATION STOCK OPTION GRANT NOTICE (2000 EQUITY INCENTIVE PLAN) Pharsight Corporation (the "Company"), pursuant to its 2000 Equity Incentive Plan (the "Plan"), hereby grants to Optionholder an option to purchase the number of shares of the Company's Common Stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in the Stock Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety. Optionholder: _________________________________________ Date of Grant: _________________________________________ Vesting Commencement Date: _________________________________________ Number of Shares Subject to Option: _________________________________________ Exercise Price (Per Share): _________________________________________ Total Exercise Price: _________________________________________ Expiration Date: _________________________________________ Type of Grant: |_| Incentive Stock Option |_| Nonstatutory Stock Option Exercise Schedule: |_| Same as Vesting Schedule |_| Early Exercise Permitted Vesting Schedule: 1/4th of the shares vest one year after the Vesting Commencement Date. 1/48th of the shares vest monthly thereafter over the next three years. Payment: By one or a combination of the following items (described in the Stock Option Agreement): By cash or check Pursuant to a Regulation T Program if the Shares are publicly traded By delivery of already-owned shares if the Shares are publicly traded [By deferred payment] Additional Terms/Acknowledgements: The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Grant Notice, the Stock Option Agreement and the Plan. Optionholder further acknowledges that as of the Date of Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject with the exception of (i) options previously granted and delivered to Optionholder under the Plan, and (ii) the following agreements only: OTHER AGREEMENTS: _________________________________________________ _________________________________________________ 31 PHARSIGHT CORPORATION OPTIONHOLDER: By___________________________________ By_____________________________________ Signature Signature Title:_______________________________ Date:__________________________________ Date:________________________________ ATTACHMENTS: Stock Option Agreement, 2000 Equity Incentive Plan and Notice of Exercise 32 Exhibit I STOCK OPTION AGREEMENT 33 Exhibit II 2000 EQUITY INCENTIVE PLAN 34 Exhibit III NOTICE OF EXERCISE 35 NOTICE OF EXERCISE Pharsight Corporation 800 West El Camino Real, Suite 200 Mountain View, California 94040 Date of Exercise: _______________ Ladies and Gentlemen: This constitutes notice under my stock option that I elect to purchase the number of shares for the price set forth below. Type of option (check one): Incentive |_| Nonstatutory |_| Stock option dated: _______________ Number of shares as to which option is exercised: _______________ Certificates to be issued in name of: _______________ Total exercise price: $______________ Cash payment delivered herewith: $______________ Value of ________ shares of Pharsight Corporation common stock delivered herewith: $______________] By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the 2000 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this option, and (iii) if this exercise relates to an incentive stock option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the shares of Common Stock issued upon exercise of this option that occurs within two (2) years after the date of grant of this option or within one (1) year after such shares of Common Stock are issued upon exercise of this option. I hereby make the following certifications and representations with respect to the number of shares of Common Stock of the Company listed above (the "Shares"), which are being acquired by me for my own account upon exercise of the Option as set forth above: I further acknowledge that I will not be able to resell the Shares for at least ninety (90) days after the stock of the Company becomes publicly traded (i.e., subject to the reporting 36 requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934) under Rule 701 and that more restrictive conditions apply to affiliates of the Company under Rule 144. I further acknowledge that all certificates representing any of the Shares subject to the provisions of the Option shall have endorsed thereon appropriate legends reflecting the foregoing limitations, as well as any legends reflecting restrictions pursuant to the Company's Articles of Incorporation, Bylaws and/or applicable securities laws. I further agree that, if required by the Company (or a representative of the underwriters) in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, I will not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any Shares or other securities of the Company held by me, for a period of time specified by the underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act. I further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to my Shares until the end of such period. Very truly yours, _____________________________________ 37 PHARSIGHT CORPORATION NON-EMPLOYEE DIRECTOR OPTION GRANT NOTICE INITIAL GRANT 2000 EQUITY INCENTIVE PLAN Pharsight Corporation (the "Company"), pursuant to its 2000 Equity Incentive Plan (the "Plan"), hereby grants to Optionholder an option to purchase the number of shares of the Company's Common Stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in the Non-Employee Director Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety. Optionholder: ---------------------------------------- Date of Grant: ---------------------------------------- Vesting Commencement Date: ---------------------------------------- Number of Shares Subject to Option: Five Thousand (5,000) ---------------------------------------- Exercise Price (Per Share): ---------------------------------------- Total Exercise Price: ---------------------------------------- Expiration Date: Ten (10) years from Date of Grant TYPE OF GRANT: Nonstatutory Stock Option (Initial Grant) EXERCISE SCHEDULE: / / Same as Vesting / / Early Exercise Schedule Permitted VESTING SCHEDULE: 100% of the shares vest one year after the Vesting Commencement Date. PAYMENT: By one or a combination of the following items (described in the Non-Employee Director Option Agreement): By cash or check Pursuant to a Regulation T Program if the Common Stock is publicly traded By delivery of already-owned shares if the Common Stock is publicly traded [By deferred payment] ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Grant Notice, the Non-Employee Director Option Agreement and the Plan. Optionholder further acknowledges that as of the Date of Grant, this Grant Notice, the Non-Employee Director Option Agreement and the Plan set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject with the exception of (i) stock awards previously granted and delivered to Optionholder under the Plan or a Predecessor Plan, and (ii) the following agreements only: OTHER AGREEMENTS: ----------------------------------- ----------------------------------- PHARSIGHT CORPORATION OPTIONHOLDER: By: ------------------------------------ ----------------------------------- Signature Signature Title: Date: --------------------------------- ------------------------------ Date: ---------------------------------- ATTACHMENTS: Non-Employee Director Option Agreement, 2000 Equity Incentive Plan and Notice of Exercise EXHIBIT I NON-EMPLOYEE DIRECTOR OPTION AGREEMENT EXHIBIT II 2000 EQUITY INCENTIVE PLAN EXHIBIT III NOTICE OF EXERCISE PHARSIGHT CORPORATION NON-EMPLOYEE DIRECTOR OPTION GRANT NOTICE ANNUAL GRANT 2000 EQUITY INCENTIVE PLAN Pharsight Corporation (the "Company"), pursuant to its 2000 Equity Incentive Plan (the "Plan"), hereby grants to Optionholder an option to purchase the number of shares of the Company's Common Stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in the Non-Employee Director Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety. Optionholder: ---------------------------------------- Date of Grant: ---------------------------------------- Vesting Commencement Date: ---------------------------------------- Number of Shares Subject to Option: Five thousand (5,000) ---------------------------------------- Exercise Price (Per Share): ---------------------------------------- Total Exercise Price: ---------------------------------------- Expiration Date: Ten (10) years from Date of Grant TYPE OF GRANT: Nonstatutory Stock Option (Annual Grant) EXERCISE SCHEDULE: / / Same as Vesting / / Early Exercise Schedule Permitted VESTING SCHEDULE: 100% of the shares vest one year after the Vesting Commencement Date. PAYMENT: By one or a combination of the following items (described in the Non-Employee Director Option Agreement): By cash or check Pursuant to a Regulation T Program if the Common Stock is publicly traded By delivery of already-owned shares if the Common Stock is publicly traded [By deferred payment] ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Grant Notice, the Non-Employee Director Option Agreement and the Plan. Optionholder further acknowledges that as of the Date of Grant, this Grant Notice, the Non-Employee Director Option Agreement and the Plan set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject with the exception of (i) stock awards previously granted and delivered to Optionholder under the Plan or a Predecessor Plan, and (ii) the following agreements only: OTHER AGREEMENTS: ----------------------------------- ----------------------------------- PHARSIGHT CORPORATION OPTIONHOLDER: By: ------------------------------------ ----------------------------------- Signature Signature Title: Date: --------------------------------- ------------------------------ Date: ---------------------------------- ATTACHMENTS: Non-Employee Director Option Agreement, 2000 Equity Incentive Plan and Notice of Exercise EXHIBIT I NON-EMPLOYEE DIRECTOR OPTION AGREEMENT EXHIBIT II 2000 EQUITY INCENTIVE PLAN EXHIBIT III NOTICE OF EXERCISE EX-10.20 5 ex-10_20.txt EXHIBIT 10.20 Exhibit 10.20 PHARSIGHT CORPORATION 2000 EMPLOYEE STOCK PURCHASE PLAN Adopted April 7, 2000 Approved by the Stockholders on May __, 2000 Effective Date: Date of Initial Public Offering 1. PURPOSE. (a) The purpose of this 2000 Employee Stock Purchase Plan (the "Plan") is to provide a means by which employees of Pharsight Corporation, a Delaware corporation (the "Company"), and its Affiliates, as defined in subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be given an opportunity to purchase stock of the Company. (b) The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company, as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended (the "Code"). (c) The Company, by means of the Plan, seeks to retain the services of its employees, to secure and retain the services of new employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company. (d) The Company intends that the rights to purchase stock of the Company granted under the Plan be considered options issued under an "employee stock purchase plan" as that term is defined in Section 423(b) of the Code. 2. ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors (the "Board") of the Company unless and until the Board delegates administration to a committee as provided in subparagraph 2(c). Whether or not the Board has delegated administration the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine when and how rights to purchase stock of the Company shall be granted and the provisions of each offering of such rights (which need not be identical). (ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan. (iii) To construe and interpret the Plan and rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the 1. exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iv) To amend the Plan as provided in paragraph 13. (v) Generally, to exercise such powers and to perform such acts as the Board or the Committee deems necessary or expedient to promote the best interests of the Company and its Affiliates and to carry out the intent that the Plan be treated as an "employee stock purchase plan" within the meaning of Section 423 of the Code. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the "Committee"). 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, 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. 3. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of paragraph 12 relating to adjustments upon changes in stock, the shares of the Company's common stock (the "Common Stock") that may be sold pursuant to rights granted under the Plan shall not exceed in the aggregate Six Hundred Thousand (600,000) shares Common Stock (the "Reserved Shares"). As of each January 1, beginning with January 1, 2001 and continuing through and including January 1, 2010 (the "Anniversary Date"), the number of Reserved Shares will be increased automatically by the least of (i) 1.5% of the total number of shares of Common Stock outstanding on such Anniversary Date, (ii) Six Hundred Thousand (600,000) shares, or (iii) such fewer number of shares as determined by the Board prior to such Anniversary Date. If any right granted under the Plan shall for any reason terminate without having been exercised, the shares of Common Stock not purchased under such right shall again become available for the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 4. GRANT OF RIGHTS; OFFERING. (a) The Board or the Committee may from time to time grant or provide for the grant of rights to purchase Common Stock under the Plan to eligible employees (an "Offering") on a date or dates (the "Offering Date(s)") selected by the Board or the Committee. Each Offering shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate, which shall comply with the requirements of Section 423(b)(5) of the Code that all employees granted rights to purchase stock under the Plan shall have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the document comprising the Offering or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning 2. with the Offering Date, and the substance of the provisions contained in paragraphs 5 through 8, inclusive. (b) If an employee has more than one right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (1) each agreement or notice delivered by that employee will be deemed to apply to all of his or her rights under the Plan, and (2) a right with a lower exercise price (or an earlier-granted right, if two rights have identical exercise prices), will be exercised to the fullest possible extent before a right with a higher exercise price (or a later-granted right, if two rights have identical exercise prices) will be exercised. 5. ELIGIBILITY. (a) Rights may be granted only to employees of the Company or, as the Board or the Committee may designate as provided in subparagraph 2(b), to employees of any Affiliate of the Company. Except as provided in subparagraph 5(b), an employee of the Company or any Affiliate shall not be eligible to be granted rights under the Plan unless, on the Offering Date, such employee has been in the employ of the Company or any Affiliate for such continuous period preceding such grant as the Board or the Committee may require, but in no event shall the required period of continuous employment be greater than two (2) years. In addition, unless otherwise determined by the Board or the Committee and set forth in the terms of the applicable Offering, no employee of the Company or any Affiliate shall be eligible to be granted rights under the Plan unless, on the Offering Date, such employee's customary employment with the Company or such Affiliate is for more than twenty (20) hours per week and more than five (5) months per calendar year. (b) The Board or the Committee may provide that each person who, during the course of an Offering, first becomes an eligible employee of the Company or designated Affiliate will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an eligible employee or occurs thereafter, receive a right under that Offering, which right shall thereafter be deemed to be a part of that Offering. Such right shall have the same characteristics as any rights originally granted under that Offering, as described herein, except that: (i) the date on which such right is granted shall be the "Offering Date" of such right for all purposes, including determination of the exercise price of such right; (ii) the period of the Offering with respect to such right shall begin on its Offering Date and end coincident with the end of such Offering; and (iii) the Board or the Committee may provide that if such person first becomes an eligible employee within a specified period of time before the end of the Offering, he or she will not receive any right under that Offering. (c) No employee shall be eligible for the grant of any rights under the Plan if, immediately after any such rights are granted, such employee would own stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subparagraph 5(c), the rules of Section 424(d) 3. of the Code shall apply in determining the stock ownership of any employee, and stock which such employee may purchase under all outstanding rights and options shall be treated as stock owned by such employee. (d) An eligible employee may be granted rights under the Plan only if such rights, together with any other rights granted under "employee stock purchase plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such employee's rights to purchase stock of the Company or any Affiliate to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of fair market value of such stock (determined at the time such rights are granted) for each calendar year in which such rights are outstanding at any time. (e) Officers of the Company and any designated Affiliate shall be eligible to participate in Offerings under the Plan, provided, however, that the Board or the Committee may provide in an Offering that certain employees who are highly compensated employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate. 6. RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each eligible employee, pursuant to an Offering made under the Plan, shall be granted the right to purchase up to the number of shares of Common Stock purchasable with a percentage designated by the Board or the Committee not exceeding twenty percent (20%) of such employee's Earnings (as defined by the Board for each Offering) during the period which begins on the Offering Date (or such later date as the Board or the Committee determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering. The Board or the Committee shall establish one or more dates during an Offering (each of which is hereinafter referred to as a "Purchase Date") on which rights granted under the Plan shall be exercised and purchases of Common Stock carried out in accordance with such Offering. (b) In connection with each Offering made under the Plan, the Board or the Committee may specify a maximum number of shares that may be purchased by any employee as well as a maximum aggregate number of shares that may be purchased by all eligible employees pursuant to such Offering. In addition, in connection with each Offering that contains more than one Purchase Date, the Board or the Committee may specify a maximum aggregate number of shares which may be purchased by all eligible employees on any given Purchase Date under the Offering. If the aggregate purchase of shares upon exercise of rights granted under the Offering would exceed any such maximum aggregate number, the Board or the Committee shall make a pro rata allocation of the shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable. (c) The purchase price of stock acquired pursuant to rights granted under the Plan shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Purchase Date. 4. 7. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) An eligible employee may become a participant in the Plan pursuant to an Offering by delivering a participation agreement to the Company within the time specified in the Offering, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board or the Committee of such employee's Earnings (as defined by the Board for each Offering) during the Offering. The payroll deductions made for each participant shall be credited to an account for such participant under the Plan and shall be deposited with the general funds of the Company. A participant may reduce (including to zero) or increase such payroll deductions, and an eligible employee may begin such payroll deductions, after the beginning of any Offering only as provided for in the Offering. A participant may make additional payments into his or her account only if specifically provided for in the Offering and only if the participant has not had the maximum amount withheld during the Offering. (b) At any time during an Offering, a participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Offering except as provided by the Board or the Committee in the Offering. Upon such withdrawal from the Offering by a participant, the Company shall distribute to such participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the participant) under the Offering, without interest, and such participant's right to acquire Common Stock under that Offering shall be automatically terminated. A participant's withdrawal from an Offering will have no effect upon such participant's eligibility to participate in any other Offerings under the Plan but such participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan. (c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of a participant's employment with the Company and any designated Affiliate, for any reason, and the Company shall distribute to such terminated employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the terminated employee), under the Offering, without interest. (d) Rights granted under the Plan shall not be transferable by a participant other than by will or the laws of descent and distribution, or by a beneficiary designation as provided in paragraph 14, and during a participant's lifetime, shall be exercisable only by such participant. 8. EXERCISE. (a) On each Purchase Date specified in the relevant Offering, each participant's accumulated payroll deductions and any other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of whole shares of stock of the Company, up to the maximum number of shares permitted pursuant to the terms of 5. the Plan and the applicable Offering, at the purchase price specified in the Offering. Unless otherwise provided for in the applicable Offering, no fractional shares shall be issued upon the exercise of rights granted under the Plan. The amount, if any, of accumulated payroll deductions remaining in each participant's account after the purchase of shares which is less than the amount required to purchase one share of stock on the final Purchase Date of an Offering shall be held in each such participant's account for the purchase of shares under the next Offering under the Plan, unless such participant withdraws from such next Offering, as provided in subparagraph 7(b), or is no longer eligible to be granted rights under the Plan, as provided in paragraph 5, in which case such amount shall be distributed to the participant after such final Purchase Date, without interest. The amount, if any, of accumulated payroll deductions remaining in any participant's account after the purchase of shares which is equal to the amount required to purchase whole shares of Common Stock on the final Purchase Date of an Offering shall be distributed in full to the participant after such Purchase Date, without interest. (b) No rights granted under the Plan may be exercised to any extent unless the shares to be issued upon such exercise under the Plan (including rights granted thereunder) are covered by an effective registration statement pursuant to the Securities Act of 1933, as amended (the "Securities Act") and the Plan is in material compliance with all applicable state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date in any Offering hereunder the Plan is not so registered or in such compliance, no rights granted under the Plan or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the Plan is subject to such an effective registration statement and such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If on the Purchase Date of any Offering hereunder, as delayed to the maximum extent permissible, the Plan is not registered and in such compliance, no rights granted under the Plan or any Offering shall be exercised then all payroll deductions accumulated during the Offering (reduced to the extent, if any, such deductions have been used to acquire stock) shall be distributed to the participants, without interest. 9. COVENANTS OF THE COMPANY. (a) During the terms of the rights granted under the Plan, the Company shall at all times make reasonable efforts to keep available the number of shares of stock required to satisfy such rights, provided that this section shall not require the Company to take any action that would result in adverse tax, accounting or financial consequences to the Company. (b) The Company shall seek to obtain from each federal, state, foreign or other 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 rights granted under the Plan. 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 rights unless and until such authority is obtained. 6. 10. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock to participants pursuant to rights granted under the Plan shall constitute general funds of the Company. 11. RIGHTS AS A STOCKHOLDER. A participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to rights granted under the Plan unless and until the participant's shares acquired upon exercise of rights hereunder are recorded in the books of the Company (or its transfer agent). 12. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any rights granted under the Plan (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 and outstanding rights will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding rights. Such adjustments shall be made by the Board or the 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 or liquidation 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 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, as determined by the Board in its sole discretion, (i) any surviving or acquiring corporation may assume outstanding rights or substitute similar rights for those under the Plan, (ii) such rights may continue in full force and effect, or (iii) participants' accumulated payroll deductions may be used to purchase Common Stock immediately prior to the transaction described above and the participants' rights under the ongoing Offering terminated. 13. AMENDMENT OF THE PLAN. (a) The Board or the Committee at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 12 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 if such amendment requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3 promulgated under the Exchange Act. (b) The Board or the Committee may amend the Plan in any respect the Board or the Committee deems necessary or advisable to provide eligible employees with the maximum 7. benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to employee stock purchase plans and/or to bring the Plan and/or rights granted under it into compliance therewith. (c) Rights and obligations under any rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan, except with the consent of the person to whom such rights were granted, or except as necessary to comply with any laws or governmental regulations, or except as necessary to ensure that the Plan and/or rights granted under the Plan comply with the requirements of Section 423 of the Code. 14. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of an Offering but prior to delivery to the participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death during an Offering. (b) Such designation of beneficiary may be changed by the participant at any time by written notice in the form prescribed by the Company. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board or the Committee in its discretion, may suspend or terminate the Plan at any time. No rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any rights granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except as expressly provided in the Plan or with the consent of the person to whom such rights were granted, or except as necessary to comply with any laws or governmental regulation, or except as necessary to ensure that the Plan and/or rights granted under the Plan comply with the requirements of Section 423 of the Code. 8. 16. EFFECTIVE DATE OF PLAN. The Plan shall become effective upon the effective date of the initial public offering of Common Stock (the "Effective Date"), but no rights granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted by the Board, which date may be prior to the Effective Date. 9. EX-23.1 6 ex-23_1.txt 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 22, 2000, in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-34896) and related Prospectus of Pharsight Corporation for the registration of 4,312,500 shares of its common stock. /s/ ERNST & YOUNG LLP San Jose, California June 12, 2000 EX-27.1 7 ex-27_1.txt 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 MAR-31-2000 MAR-31-1999 MAR-31-1998 5,286 4,148 2,701 11,196 1,999 1,000 2,027 772 475 (27) (27) (27) 0 0 0 19,167 7,192 4,480 1,906 1,164 502 (715) (319) (121) 21,096 9,655 5,399 5,543 4,588 1,558 708 2,812 1,221 41,134 19,926 9,761 0 0 0 6,160 751 330 (32,449) (18,422) (7,471) 21,096 9,655 5,399 0 0 0 9,298 4,085 1,106 0 0 0 4,541 2,520 714 15,847 12,141 5,780 0 0 0 (185) 120 (172) (10,905) (10,696) (5,216) 0 0 0 (10,905) (10,696) (5,216) 0 0 0 0 0 0 0 0 0 (10,905) (10,696) (5,216) (3.38) (4.41) (3.96) (3.38) (4.41) (3.96)
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