AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PHARSIGHT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 7372 77-0401273 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification No.) organization) 800 WEST EL CAMINO REAL SUITE 200 MOUNTAIN VIEW, CALIFORNIA 94040 (650) 314-3800 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ ARTHUR H. REIDEL PRESIDENT AND CHIEF EXECUTIVE OFFICER PHARSIGHT CORPORATION 800 WEST EL CAMINO REAL SUITE 200 MOUNTAIN VIEW, CALIFORNIA 94040 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: COPIES TO: BRETT D. WHITE, ESQ. STEVEN B. STOKDYK, ESQ. THOMAS L. MACMITCHELL, ESQ. SULLIVAN & CROMWELL COOLEY GODWARD LLP 1888 CENTURY PARK EAST FIVE PALO ALTO SQUARE LOS ANGELES, CALIFORNIA 90067 3000 EL CAMINO REAL (310) 712-6600 PALO ALTO, CALIFORNIA 94306-2155 (650) 843-5000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE Common Stock, $0.001 par value.............................. $75,000,000 $19,800 (1) Estimated solely for the purposes of computing the registration fee in accordance with Rule 457(o). ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY UNITED STATES FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. SUBJECT TO COMPLETION--DATED APRIL 17, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS , 2000 [LOGO] SHARES OF COMMON STOCK - -------------------------------------------------------------------------------- PHARSIGHT CORPORATION: THE OFFERING: - We are offering shares. - - We develop and market integrated - The underwriters have an option to products and services that help purchase an additional shares pharmaceutical and biotechnology from us to cover over-allotments. companies improve the drug - This is our initial public offering development process. Our solution and no public market currently exists combines proprietary computer-based for our shares. simulation, statistical and data - Closing: , 2000 analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics. PROPOSED NASDAQ NATIONAL MARKET SYMBOL: PHST - ------------------------------------------------------------------------------------- Per Share Total - ------------------------------------------------------------------------------------- Public offering price $ $ Underwriting fees Proceeds to us THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE CHASE H&Q WIT SOUNDVIEW DLJDIRECT INC. Inside Front Cover [The words "Accelerating Drug Development for Today's Competitive Environment" centered against a faded background collage including pictures of pharmaceutical drugs, computer equipment and people.] Gatefold [A box running vertically down the left side of the page with the heading "Pharsight Solution" divided into three labeled pieces. The first labeled piece contains the text "Model and Trial Workbench" and to its right an arrow pointing to a computer screen-shot depicting the components of a clinical trial plan. This screen-shot is labeled "Scenario" and to its right another arrow pointing at a second screen-shot of four dose vs. response graphs, labeled "Prediction." The second labeled piece of the vertical box contains the text "Decision and Scientific Services" and to its right an arrow pointing to a screen-shot upon which is depicted a decision tree. This screen-shot is labeled "Information" and is followed by another arrow pointing to the right at a second screen-shot depicting a graph with two circles showing when to go forward or skip a phase, labeled "Decision." The third labeled piece of the vertical box contains the text "Clinical Workbench and Information Products (Under Development)" and to its right an arrow pointing to a screen-shot depicting a query for information. This screen-shot is labeled "Query" and is followed by another arrow pointing to the right at a second screen shot with a graph depicting the outcome of the query, labeled "Answers."] TABLE OF CONTENTS PAGE Prospectus Summary.................... 1 Risk Factors.......................... 5 Forward-Looking Statements............ 12 Use of Proceeds....................... 13 Dividend Policy....................... 13 Capitalization........................ 14 Dilution.............................. 15 Selected Financial Data............... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 17 Business.............................. 23 PAGE Management............................ 37 Certain Relationships and Related Transactions........................ 50 Principal Stockholders................ 53 Description of Capital Stock.......... 55 Shares Eligible for Future Sale....... 58 Underwriting.......................... 61 Legal Matters......................... 64 Experts............................... 64 Additional Information................ 64 Index to Financial Statements......... F-1 ------------------------ PHARSIGHT AND WINNONLIN ARE REGISTERED TRADEMARKS, AND WINNONMIX IS A TRADEMARK, OF OUR COMPANY. THIS PROSPECTUS ALSO INCLUDES TRADEMARKS AND SERVICE MARKS OF OTHER COMPANIES. PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. WE URGE YOU TO READ THE ENTIRE PROSPECTUS CAREFULLY. PHARSIGHT CORPORATION We develop and market integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. Our solution combines proprietary computer-based simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics and consists of: - SCIENTIFIC AND DECISION SERVICES. Our multidisciplinary research teams collaborate with customers to design more efficient drug development programs by applying a more rigorous and integrated scientific approach than is currently used. - COMPUTER-BASED DEVELOPMENT APPLICATIONS AND SERVICES. Customers use our software applications, including drug and disease modeling and clinical trial simulation and related services, to improve their drug development process. - INFORMATION PRODUCTS. We are developing medical databases and software products for the analysis of these databases, to enable our customers to obtain objective and quantitative answers to important questions in trial and program decision-making. We have an integrated solution to address the critical steps in designing clinical trials and drug development programs. Our solution is designed to help our customers use a more rigorous scientific and statistical process to identify earlier those drug candidates that will not be successful and to enhance the likelihood that the remaining candidates will successfully complete clinical trials. We believe our solution helps reduce the time, cost and risk of drug development and may improve the marketing and use of pharmaceutical products. Pharmaceutical and biotechnology companies have invested substantial resources in new technologies, such as high throughput screening and combinatorial chemistry, to accelerate the drug discovery process. According to the Pharmaceutical Research and Manufacturers Association, as a result of advances in genetic research, the number of distinct targets for drug intervention is expected to increase from approximately 500 currently to more than 3,000 by 2005. While new technologies have been developed to expand the number of new drug candidates and accelerate the speed with which they can be evaluated, and to better and more rapidly capture and organize data for submission to regulatory agencies, the clinical development process continues to be lengthy and unpredictable. In fact, the FDA reports that clinical development prior to regulatory submission takes five years on average, and that 80% of drugs that enter human clinical trials ultimately fail to receive regulatory approval. 1 Twelve of the world's 20 largest pharmaceutical companies have begun to apply our computer-assisted drug development solution, and our computer-based development applications are currently used on more than 1,800 researcher desktops. Fourteen of our top sixteen customers by revenue to us in the fiscal year ended March 31, 2000 were, listed in alphabetical order: Anesta Corporation AstraZeneca PLC Chiron Corporation Durect Corporation F. Hoffmann-La Roche Ltd. Glaxo Wellcome Inc. Guilford Pharmaceuticals Inc. Johnson & Johnson Novartis Pharmaceuticals Corporation Pfizer Limited Proctor & Gamble Pharmaceuticals, Inc. Sankyo Company Ltd. SmithKline Beecham Pharmaceuticals Warner-Lambert Company Our strategy is to help pharmaceutical and biotechnology companies accelerate clinical development and to assist large healthcare organizations in the adoption and use of pharmaceutical products. Elements of our strategy include: - Expand our presence within the clinical development market; - Expand our activities in pharmaceutical marketing and phase IV study design; - Broaden our content and data-related product offerings; - Maintain and enhance our scientific and technology leadership; and - Pursue strategic alliances and acquisitions. We were incorporated in California in April 1995, and reincorporated in Delaware in 2000. Our executive offices are located at 800 West El Camino Real, Suite 200, Mountain View, CA 94040, and our telephone number is (650) 314-3800. Our website address is www.pharsight.com. We do not incorporate the information on our website into this prospectus, and you should not consider it part of this prospectus. 2 THE OFFERING Common stock offered............. shares Common stock to be outstanding after the offering............. shares Use of proceeds.................. Approximately $6.1 million to the holders of our series C preferred stock, research and development of new and existing products and services, and working capital and other general corporate purposes, including potential acquisition of products, technologies or businesses. See "Use of Proceeds." Proposed Nasdaq National Market symbol......................... PHST Risk Factors..................... See "Risk Factors," beginning on page 5, for a discussion of factors you should consider carefully before deciding to buy our common stock. The number of shares outstanding after this offering is based on shares outstanding as of March 31, 2000, assuming the conversion of our preferred stock into 10,686,717 shares of common stock, and excludes an aggregate of: - 1,835,369 shares issuable upon exercise of outstanding stock options at a weighted average exercise price of $1.06 per share; and - 296,881 shares of common stock reserved for issuance under outstanding warrants at a weighted average exercise price of $1.45 per share. ASSUMPTIONS WHICH APPLY TO THIS PROSPECTUS Unless otherwise indicated, all share amounts and financial information presented in this prospectus assume the underwriters' over-allotment option is not exercised and give effect to: - conversion of our convertible preferred stock into our common stock, which will occur automatically upon completion of this offering; - our reincorporation from a California corporation to a Delaware corporation, which will occur at or prior to the completion of this offering; and - the filing of our restated certificate of incorporation, which will occur immediately following the completion of this offering. 3 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The tables below summarize our financial data set forth in more detail in the financial statements at the end of this prospectus. The financial data below are based on the following assumptions: - The pro forma basic and diluted net loss per share includes shares of common stock issued on the conversion of our outstanding preferred stock on a one-for-one basis into common stock. - The as adjusted balance sheet data reflect the conversion of all outstanding shares of preferred stock into common stock, the sale by us of shares of common stock offered by this prospectus at an assumed initial public offering price of $ per share after deducting the estimated underwriting discounts and commissions and offering expenses payable by us, and the payment of approximately $6.1 million to the holders of our series C preferred stock. NINE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------------------------------ ------------------- 1997 1998 1999 1998 1999 (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Revenues..................................... $ -- $ 1,106 $ 4,085 $ 2,657 $ 6,252 Operating expenses........................... 1,974 5,402 13,858 10,250 13,061 Operating loss............................... (1,974) (4,296) (9,773) (7,593) (6,809) Net loss applicable to common shareholders... (1,934) (5,216) (10,696) (8,308) (7,755) Basic and diluted net loss per common share...................................... $ (2.57) $ (3.96) $ (4.41) $ (3.64) $ (2.50) Shares used in computing basic and diluted net loss per common share.................. 752 1,318 2,424 2,281 3,107 Pro forma basic and diluted net loss per common share............................... $ (1.23) $ (0.64) Shares used in computing pro forma basic and diluted net loss per common share.......... 8,670 12,194 DECEMBER 31, 1999 ---------------------- ACTUAL AS ADJUSTED (UNAUDITED) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments......... $18,339 $ Working capital........................................... 16,992 Total assets.............................................. 23,514 Long-term obligations, net of current portion............. 2,129 Redeemable convertible preferred stock.................... 18,272 Total stockholders' equity (deficit)...................... (1,426) 4 RISK FACTORS BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE THAT THERE ARE VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE YOU DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF LOSSES THAT WE EXPECT WILL CONTINUE, AND WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUES TO ACHIEVE PROFITABILITY. We commenced our operations in April 1995 and have incurred net losses since that time. As of December 31, 1999, we had an accumulated deficit of $25.8 million. We expect our net losses to continue as we increase our research and development costs and other costs to develop our business. We cannot assure you that we will generate sufficient revenues to achieve profitability. If our losses exceed the expectations of investors, the price of our common stock may decline. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND MAY FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE. We expect our quarterly operating results may fluctuate in the future, and may vary from securities analysts' and investors' expectations, depending on a number of factors described below and elsewhere in this "Risk Factors" section of the prospectus, including: - variances in demand for our products and services; - timing of the introduction of new products or services and enhancements of existing products or services; - changes in research and development expenses; - our ability to complete fixed-price service contracts without committing additional resources; and - changes in industry conditions affecting our customers. As a result, quarterly comparisons may not indicate reliable trends of future performance. We also expect to increase activities and spending in substantially all of our operational areas. We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short term. If we have lower revenue, we may not be able to reduce our spending in the short term in response. Any shortfall in revenue would have a direct impact on our results of operations. For these and other reasons, we may not meet the earnings estimates of securities analysts or investors, and the price of our common stock may decline. BECAUSE OUR SALES AND IMPLEMENTATION CYCLES ARE LONG AND UNPREDICTABLE, OUR REVENUES ARE DIFFICULT TO PREDICT AND MAY NOT MEET OUR EXPECTATIONS OR THOSE OF OUR INVESTORS. The lengths of our sales and implementation cycles are difficult to predict and depend on a number of factors, including the type of product or services being provided, the nature and size of the potential customer and the extent of the commitment being made by the potential customer. Our sales cycle is unpredictable and may take six months or more. Our implementation cycle is also difficult to predict and can be longer than one year. Each of these can result in delayed revenues, increased selling expenses and difficulty in matching revenues with expenses, which may contribute to fluctuations in our results of operations and cause our stock price to be volatile. A key element of our strategy is to market our product and service offerings to large organizations. These organizations can have elaborate decision-making processes and may require evaluation periods which could extend the sales and implementation cycle. Moreover, we often must provide a significant level of education to our 5 prospective customers regarding the use and benefit of our product and service offerings, which may cause additional delays during the evaluation and acceptance process. We therefore have difficulty forecasting the timing and recognition of revenues from sales of our product and service offerings. OUR REVENUE IS CONCENTRATED IN A FEW CUSTOMERS, AND IF WE LOSE ANY OF THESE CUSTOMERS OUR REVENUE MAY DECREASE SUBSTANTIALLY. We receive a substantial majority of our revenue from a limited number of customers. In fiscal year 2000, sales to our top customer, Johnson & Johnson, accounted for a substantial portion of our revenue and sales to our top five customers accounted for 40.8% of our revenue. We expect that a significant portion of our revenue will continue to depend on sales to a small number of customers. If we do not generate as much revenue from these major customers as we expect to, or if we lose any of them as customers, our total revenue may be significantly reduced. IF WE ARE UNABLE TO GENERATE ADDITIONAL SALES FROM EXISTING CUSTOMERS AND GENERATE SALES TO NEW CUSTOMERS, WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUES TO BECOME PROFITABLE. Our success depends on our ability to develop our existing customer relationships and establish relationships with additional pharmaceutical and biotechnology companies. If we lose any significant relationships with existing customers or fail to establish additional relationships, we may not be able to execute our business plan and our business will suffer. As of March 31, 2000, we have only performed a limited number of projects with twelve of the twenty largest pharmaceutical companies and a number of smaller companies. Developing customer relationships with pharmaceutical companies can be difficult for a number of reasons. These companies are often very large organizations with complex decision-making processes that are difficult to change. In addition, because our products and services relate to the core technologies of these companies, these organizations are generally cautious about working with outside companies. Some potential customers may also resist working with us until our products and services have achieved more widespread market acceptance. Our existing customers could also reassess their commitment to us, not renew existing agreements or choose not to expand the scope of their relationship with us. WE MAY LOSE EXISTING CUSTOMERS OR BE UNABLE TO ATTRACT NEW CUSTOMERS IF WE DO NOT DEVELOP NEW PRODUCTS AND SERVICES OR IF OUR OFFERINGS DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGES. The successful growth of our business depends on our ability to develop new products and services and incorporate new capabilities into our existing offerings on a timely basis. If we cannot adapt to changing technologies, emerging industry standards, new scientific developments and increasingly sophisticated customer needs, our products and services may become obsolete and our business could suffer. We have suffered product delays in the past, resulting in lost product revenues. In addition, early releases of software often contain errors or defects. We cannot assure you that, despite our extensive testing, errors will not be found in our products before or after commercial release, which could result in product redevelopment costs and loss of, or delay in, market acceptance. Furthermore, a failure by us to introduce new products or services on schedule could harm our business prospects. Any delay or problems in the installation or implementation of new products or services may cause customers to forego purchases from us. IF THE SECURITY OF OUR CUSTOMERS' DATA IS COMPROMISED, WE COULD BE LIABLE FOR DAMAGES AND OUR REPUTATION COULD BE HARMED. As part of implementing our products and services, we inherently gain access to certain highly confidential proprietary customer information. It is critical that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Despite our implementation of a number of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, 6 programming errors, attacks by third parties or similar disruptive problems. If we fail to meet our customers' security expectations, we could be liable for damages and our reputation could suffer. IF WE ARE REQUIRED TO COMMIT UNANTICIPATED RESOURCES TO COMPLETE FIXED-PRICE SERVICE CONTRACTS, WE MAY INCUR LOSSES ON THESE CONTRACTS WHICH COULD CAUSE OUR OPERATING RESULTS TO DECLINE. A significant portion of our revenue has been derived from service contracts that are billed on a fixed-price basis. These contracts specify certain obligations and deliverables to be met by us regardless of our actual costs incurred. Our failure to accurately estimate the resources required for a fixed-price service contract could cause us to commit additional resources to a project, which could cause our operating results to decline. We cannot assure you that we can successfully complete these contracts on budget, and our inability to do so could harm our business. IF WE ARE UNABLE TO COMPLETE A PROJECT DUE TO SCIENTIFIC LIMITATIONS OR OTHERWISE MEET OUR CUSTOMERS' EXPECTATIONS, OUR REPUTATION MAY BE ADVERSELY AFFECTED AND WE MAY NOT BE ABLE TO GENERATE NEW BUSINESS. Because our projects may contain scientific risks which are difficult to foresee, we cannot guarantee that we will always be able to complete them. Any failure to meet our customers' expectations could harm our reputation and ability to generate new business. On a few occasions, we have encountered scientific limitations and been unable to complete a project. In each of these cases, we have been able to successfully renegotiate the terms of the project with the particular customer. We cannot assure you that we will be able to renegotiate our customer agreements if such circumstances occur in the future. Moreover, even if we complete a project, we may not meet our customers' expectations regarding the quality of our products and services or the timeliness of our services. IF WE ARE UNABLE TO HIRE ADDITIONAL SPECIALIZED PERSONNEL, WE WILL NOT BE ABLE TO GROW OUR BUSINESS. Growth in the demand for our products and services will require additional personnel, particularly qualified scientific and technical personnel. We currently have limited personnel and other resources to staff and complete projects. In addition, as we grow our business, we expect an increase in the number of complex projects and large deployments of our products and services, which require a significant amount of personnel for extended periods of time. However, there is currently a shortage of these personnel worldwide, and competition for these personnel from numerous companies and academic institutions may limit our ability to hire these persons on commercially reasonable terms. Staffing projects and deploying our products and services will also become more difficult as our operations and customers become more geographically diverse. If we are not able to adequately staff and complete our projects, we may lose customers and our reputation may be harmed. Any difficulties we may have in completing customer projects may impair our ability to grow our business. IF WE LOSE KEY MEMBERS OF OUR MANAGEMENT, SCIENTIFIC OR DEVELOPMENT STAFF, OR OUR SCIENTIFIC ADVISORS, OUR REPUTATION MAY BE HARMED AND WE MAY LOSE BUSINESS. We are highly dependent on the principal members of our management, scientific and development staff. Our reputation is also in part based on our association with key scientific advisors. The loss of any of these personnel might adversely impact our reputation in the market and harm our business. Failure to attract and retain key management, scientific and technical personnel could prevent us from achieving our strategy and developing our products and services. WE HAVE ONLY RECENTLY UNDERTAKEN DEVELOPMENT OF OUR INFORMATION PRODUCTS, AND OUR FUTURE REVENUE AND OPERATING RESULTS COULD BE HARMED IF THESE PRODUCTS DO NOT ACHIEVE COMMERCIAL SUCCESS. An important component of our business strategy relates to our information products. We have only recently undertaken to develop these products and, as of March 31, 2000, we had generated no 7 revenues from them. We expect to release the initial versions of these products later this year, although we cannot guarantee you that we will be able to release these products on time. In addition, because the market for these products is new and emerging, it is difficult to predict the level of market acceptance. Our future business could be harmed if we do not release these products on time or if they do not achieve commercial success. IF WE ARE UNABLE TO OBTAIN SUFFICIENT DATA FROM THIRD-PARTY PROVIDERS, OUR INFORMATION PRODUCTS WILL NOT BE ATTRACTIVE TO CUSTOMERS. As of March 31, 2000, we have only established relationships with three organizations to provide data for inclusion in our information products. We may not be able to enter into additional agreements with content providers on commercially favorable terms, if at all. If we are unable to obtain adequate data, our information products will not be attractive to customers and, therefore, may not achieve commercial success. In addition, we cannot assure you that our existing or prospective data providers will not reassess their commitment to us in the future or develop competitive products internally. IF THERE IS A SYSTEM FAILURE OR NATURAL DISASTER AT OUR HOSTING FACILITY, WE MAY NOT BE ABLE TO PROVIDE ACCESS TO OUR INFORMATION PRODUCTS AND OUR BUSINESS COULD SUFFER. Our information products data are stored at a third party's computer data facility located in Santa Clara, California, an area prone to earthquakes. We currently have no backup systems at other sites. Accordingly, there is a significant risk to our ability to provide access to our information products from a natural disaster or system failure at such facility. OUR BUSINESS DEPENDS ON OUR INTELLECTUAL PROPERTY RIGHTS, AND IF WE ARE UNABLE TO ADEQUATELY PROTECT THEM, OUR COMPETITIVE POSITION WILL SUFFER. Our intellectual property is important to our competitive position. We protect our proprietary information and technology through a combination of trademark, trade secret and copyright law, confidentiality agreements and technical measures. We may also seek to protect our intellectual property through patents, but do not currently have any patents issued or filed. We cannot assure you that the steps we have taken will prevent misappropriation of our proprietary information and technology, nor can we guarantee that we will be successful in obtaining any patents or that the rights granted under such patents will provide a competitive advantage. Misappropriation of our intellectual property could harm our competitive position. In addition, we may need to engage in litigation in the future to enforce or protect our intellectual property rights or to defend against claims of invalidity, and we may incur substantial costs as a result. IF WE BECOME SUBJECT TO INFRINGEMENT CLAIMS BY THIRD PARTIES, WE COULD INCUR UNANTICIPATED EXPENSE AND BE PREVENTED FROM PROVIDING OUR PRODUCTS AND SERVICES. We cannot assure you that infringement claims by third parties will not be asserted against us or, if asserted, will be unsuccessful. These claims, whether or not meritorious, could be expensive and divert management resources from operating our company. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could block our ability to provide products or services, unless we obtain a license to such technology. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or at all. 8 FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND DILUTE STOCKHOLDER VALUE. In order to expand our product and service offerings and reach new customers, we may continue to acquire products, technologies or businesses that we believe are complementary. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, services, products and personnel of the acquired company, the diversion of management's attention from other business concerns, the potential loss of key employees of the acquired company and our inability to maintain the goodwill of the acquired businesses. We also cannot predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. Future acquisitions may result in: - potentially dilutive issuances of equity securities; - the incurrence of additional debt; - the assumption of known and unknown liabilities; and - the write-off of software development costs, and the amortization of expenses related to goodwill and other intangible assets and charges against earnings. Any of the above factors, if they occur, could harm our business. RISKS RELATED TO OUR INDUSTRY OUR MARKET MAY NOT DEVELOP AS QUICKLY AS EXPECTED, AND COMPANIES MAY ENTER OUR MARKET, THEREBY INCREASING THE AMOUNT OF COMPETITION AND IMPAIRING OUR BUSINESS PROSPECTS. Because our products and services are new and still evolving, there is significant uncertainty and risk as to the demand for, and market acceptance of, these products and services. As a result, we are not able to predict the size and growth rate of our market with any certainty. In addition, other companies, including potential strategic partners, may enter our market. Our existing customers may also elect to terminate our services and internally develop products and services similar to ours. If our market fails to develop, grow more slowly than expected or become saturated with competitors, our business prospects will be impaired. LAWS PROTECTING THE PRIVACY OF CONFIDENTIAL PATIENT INFORMATION MAY LIMIT THE RANGE OF SERVICES WE CAN PROVIDE AND, IF WE VIOLATE ANY OF THESE LAWS, COULD SUBJECT US TO CIVIL AND CRIMINAL PENALTIES. The healthcare industry is regulated by a number of federal, state, local and international governmental entities. These entities may enact laws that limit our operations or the operations of our customers. In particular, state laws aimed at protecting the privacy of confidential patient health information, including information regarding conditions like AIDS, substance abuse and mental illness, vary widely. The application of these laws in the context of research and internet health services is evolving. While these laws primarily are directed at healthcare providers, facilities and payors, and generally do not apply to the "anonymized" data we use, from which patient identifiable information has been removed, some of these laws could be applied to aspects of our business or to limit providers' ability to provide us with access to such data. We cannot predict which laws might be found applicable to our business, or assure you that our operations would be found to be in full compliance. Compliance with regulatory laws may be expensive and may limit our ability to provide a full range of services. In addition, a challenge under any of these laws could result in adverse publicity and, if successful, imposition of civil and criminal penalties, any of which could harm our business. 9 GOVERNMENT REGULATIONS MAY BE ENACTED THAT RESTRICT OUR OPERATIONS OR THE OPERATIONS OF OUR CUSTOMERS AND, THEREFORE, ADVERSELY AFFECT OUR BUSINESS. The pharmaceutical industry is regulated by a number of federal, state, local and international governmental entities. Although our products and services are not directly regulated by the United States Food and Drug Administration or comparable international agencies, the use of some of our analytical software products by our customers may be regulated. We currently provide assistance to our customers in achieving compliance with these regulations. The regulatory agencies could enact new regulations or amend existing regulations with regard to these or other products that could restrict the use of our products or the business of our customers, which could harm our business. CONSOLIDATION IN THE PHARMACEUTICAL INDUSTRY COULD CAUSE DISRUPTIONS OF OUR CUSTOMER RELATIONSHIPS AND INTERFERE WITH OUR ABILITY TO ENTER INTO NEW CUSTOMER RELATIONSHIPS. In recent years, the worldwide pharmaceutical industry has undergone substantial consolidation. If any of our customers consolidate with another business, they may delay or cancel projects, lay off personnel or reduce spending, any of which could cause our revenues to decrease. In addition, our ability to complete sales or implementation cycles may be impaired as these organizations undergo internal restructuring. REDUCTION IN THE RESEARCH AND DEVELOPMENT BUDGETS OF OUR CUSTOMERS MAY IMPACT OUR SALES. Our customers include researchers at pharmaceutical and biotechnology companies, academic institutions and government and private laboratories. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Research and development budgets fluctuate due to changes in available resources, spending priorities, internal budgetary policies and the availability of grants from government agencies. Our business could be harmed by any significant decrease in research and development expenditures by pharmaceutical and biotechnology companies, academic institutions or government and private laboratories. RISKS RELATED TO THIS OFFERING AND OUR STOCK THE PUBLIC MARKET FOR OUR COMMON STOCK MAY BE VOLATILE. We expect the market price of our common stock to be highly volatile and to fluctuate significantly in response to various factors, including: - actual or anticipated variations in our quarterly operating results; - announcements of technological innovations or new services or products by us or our competitors; - timeliness of our introductions of new products; - changes in financial estimates by securities analysts; and - changes in the conditions and trends in the pharmaceutical market. In addition, the stock markets, including the Nasdaq National Market, have experienced extreme price and volume fluctuations that have affected the market prices of equity securities of many technology companies. These fluctuations have often been unrelated or disproportionate to operating performance. These broad market factors may materially affect the trading price of our common stock. General economic, political and market conditions, such as recessions and interest rate fluctuations, may also have an adverse effect on the market price of our common stock. 10 OUR SECURITIES HAVE NO PRIOR MARKET AND WE CANNOT ASSURE YOU THAT OUR STOCK PRICE WILL NOT DECLINE AFTER THE OFFERING. Our common stock has never been sold in a public market. An active trading market for our common stock may not develop or be sustained after completion of this offering. The initial public offering price may not be indicative of the prices that will prevail in the public market after this offering, and the market price of the common stock could fall below the initial public offering price. WE MAY HAVE SUBSTANTIAL SALES OF OUR COMMON STOCK AFTER THIS OFFERING THAT COULD CAUSE OUR STOCK PRICE TO FALL. Sales of substantial amounts of our common stock in the public market after this offering, including shares issued upon the exercise of outstanding options, or the perception that such sales could occur, could reduce the market price of our common stock. These sales also might make it more difficult for us to raise funds through future offerings of common stock. Upon completion of this offering, there will be shares of our common stock outstanding. All of the shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, except for shares purchased by our "affiliates," as defined in Rule 144 under the Securities Act. The remaining shares of common stock that will be outstanding upon completion of this offering are "restricted securities" as defined in Rule 144. These restricted securities may be sold in the future without registration under the Securities Act to the extent permitted under Rule 144, Rule 701 or another exemption under the Securities Act. We and our officers, directors and stockholders holding approximately shares of common stock have agreed not to, without the prior written consent of Donaldson, Lufkin & Jenrette, directly or indirectly sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of common stock or any securities convertible into, or exchangeable, or exercisable for, or any other rights to purchase or acquire shares of common stock owned by them during the 180-day period commencing on the date of this prospectus. Some of the shares subject to the lockup agreements may be released from this restriction earlier depending on the trading price of our common stock. See "Shares Eligible for Future Sale" for a more detailed discussion. BECAUSE OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE SUBSTANTIAL CONTROL OF OUR VOTING STOCK, TAKEOVERS NOT SUPPORTED BY THEM WILL BE MORE DIFFICULT, POSSIBLY PREVENTING YOU FROM OBTAINING OPTIMAL SHARE PRICE. The control of a significant amount of our stock by insiders could adversely affect the market price of our common stock. After this offering, our executive officers and directors will beneficially own or control 7,447,144 shares or % of the outstanding common stock. If our executive officers and directors choose to act or vote together, they will have the power to significantly influence all matters requiring the approval of our stockholders, including the election of directors and the approval of significant corporate transactions. Without the consent of these stockholders, we could be prevented from entering into transactions that could result in our stockholders receiving a premium for their stock. OUR CHARTER DOCUMENTS CONTAIN ANTI-TAKEOVER PROVISIONS THAT MAY DISCOURAGE TAKE-OVER ATTEMPTS AND MAY REDUCE OUR STOCK PRICE. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of any preferred stock that may be issued in the future. Other provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of us without the consent of our board of directors, even if the changes were favored by a majority of the 11 stockholders. These include provisions that provide for a staggered board of directors, prohibit stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings. INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION. The initial price to the public in this offering will be substantially higher than the net tangible book value per share of common stock. If we sell shares in the offering at an assumed initial price to public of $ per share, our pro forma net tangible book value per share will be $ , which is $ below the per share initial price to public. If we issue additional common stock in the future or outstanding options or warrants to purchase our common stock are exercised, there will be further dilution. WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS, AND OUR INVESTMENT OF THESE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN. Our management will have considerable discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds of this offering, after payment of $6.1 million to the holders of series C preferred stock, may be used for corporate purposes that do not increase our results of operations or fail to yield a favorable return. Pending any uses, we plan to invest the net proceeds of the offering in investment-grade, interest-bearing securities. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements based on our current expectations, assumptions, estimates and projections about our business and our industry that involve risks and uncertainties. These forward-looking statements are usually accompanied by words like "believe," "anticipate," "plan," "seek," "expect," "intend" and similar expressions. Our actual results may differ materially from the results expressed or implied by these forward-looking statements because of the risk factors and other factors disclosed in this prospectus. We undertake no obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. 12 USE OF PROCEEDS Our net proceeds from the sale of the shares of our common stock in this offering are estimated to be approximately $ , or $ if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. We expect to use approximately $6.1 million of the net proceeds for payment to the holders of our series C preferred stock at the closing of the offering as required by the terms of the series C preferred stock. We intend to use the remainder of the net proceeds of this offering for research and development of new and existing products and services, working capital and other general corporate purposes, including potential acquisition of products, technologies or businesses. However, we are not party to any agreements, understandings or commitments regarding acquisitions at the present time. Pending these uses, the net proceeds will be invested in short-term, investment-grade, interest-bearing securities. Based on our current operating plan, we anticipate that the net proceeds of this offering, together with our available cash and expected interest income thereon and funds from operations, should be sufficient to finance our capital requirements through at least two years. This estimate is based on assumptions that could be negatively impacted by the matters discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock and do not anticipate paying such cash dividends in the foreseeable future. We currently anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operation, financial condition and other factors as our board of directors, in its discretion, deems relevant. In addition, under the terms of some of our debt agreements, we are prohibited from paying dividends without the consent of the lender. 13 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999 on an actual basis, and as adjusted to give effect to the receipt of net proceeds from the sale of the shares of our common stock at an assumed initial public offering price of $ per share, the payment of $6.1 million to the holders of our series C preferred stock and the conversion of all outstanding preferred stock into common stock. The table should be read in conjunction with "Use of Proceeds" and our financial statements and our related notes included elsewhere in this prospectus. AS OF DECEMBER 31, 1999 --------------------------- ACTUAL AS ADJUSTED (IN THOUSANDS) Capital leases and notes payable............................ $ 3,792 $ 3,792 Redeemable convertible preferred stock: 5,511,640 shares authorized, 5,455,094 shares issued and outstanding actual; no shares authorized, no shares issued and outstanding as adjusted................................................... 18,272 -- Stockholders' equity: Convertible preferred stock: 5,253,052 shares authorized, 5,231,623 shares issued and outstanding actual; 5,000,000 shares authorized, no shares issued and outstanding as adjusted................................. 22,552 -- Common stock: 19,235,308 shares authorized, 3,915,172 shares issued and outstanding actual; 120,000,000 shares authorized, shares issued and outstanding as adjusted................................................ 4,754 Warrants.................................................. -- Notes receivable from stockholders........................ (133) (133) Deferred stock compensation............................... (2,743) (2,743) Accumulated other comprehensive income.................... (23) (23) Accumulated deficit....................................... (25,833) (25,833) -------- -------- Total stockholders' equity (deficit)........................ (1,426) -------- -------- Total capitalization........................................ $ 20,638 $ ======== ======== 14 DILUTION Our pro forma net tangible book value as of December 31, 1999 was approximately $16.1 million, or $1.10 per share. Pro forma net tangible book value per share represents the amount of pro forma stockholders' equity, less intangible assets, divided by the pro forma number of shares of common stock outstanding as of December 31, 1999. Our as adjusted pro forma net tangible book value as of December 31, 1999 would have been $ million, or $ per share after giving effect to the sale of shares of common stock offered by us at the assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to investors purchasing our common stock in this offering, as illustrated in the following table: Assumed initial public offering price per share. $ ------ Pro forma net tangible book value per share before this offering................................................ $ 1.10 Increase per share attributable to new investors.......... ------ As adjusted pro forma net tangible book value per share after this offering....................................... ------ Dilution per share to new investors......................... $ ====== The table below summarizes, on a pro forma basis, the differences between our existing stockholders and the new investors purchasing our common stock in this offering with respect to the total number of shares purchased from us, the total consideration paid and the average price per share paid. For this table, we have assumed an initial public offering price of $ per share. TOTAL SHARES PURCHASED CONSIDERATION --------------------- ------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE Existing stockholders....................... 14,601,889 % $ % $ New investors............................... ---------- ---- ----- ---- Total..................................... 100% $ 100% ========== ==== ===== ==== These tables do not assume the exercise of stock options and warrants outstanding as of December 31, 1999. To the extent that outstanding options and warrants are exercised, there will be additional dilution to investors. As of December 31, 1999, there were 1,819,318 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $0.61 per share and 296,881 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.45 per share. The pro forma net tangible book value per share would be $ , the dilution per share to new investors would be $ after giving effect to the exercise of the options and warrants outstanding and exercisable as of December 31, 1999. 15 SELECTED FINANCIAL DATA You should read the following historical selected financial data in conjunction with the financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. We have derived our balance sheet data as of March 31, 1998 and 1999 and statements of operations data for each of the years ended March 31, 1997, 1998 and 1999 from our audited financial statements included in this prospectus. We have derived our balance sheet data as of March 31, 1996 and 1997 and statements of operations data for the period from April 4, 1995 to March 31, 1996 from our audited financial statements not included in this prospectus. We have derived our balance sheet data as of December 31, 1999 and statements of operations data for the nine months ended December 31, 1998 and 1999 from our unaudited condensed financial statements. We believe that the unaudited financial data fairly reflect our results of operations and financial condition for the respective periods. NINE MONTHS ENDED APRIL 4, 1995 YEARS ENDED MARCH 31, DECEMBER 31, (INCEPTION) TO ------------------------------ ------------------- STATEMENTS OF OPERATIONS DATA MARCH 31, 1996 1997 1998 1999 1998 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.............................. $ -- $ -- $ 1,106 $ 4,085 $ 2,657 $ 6,252 Costs and expenses: Cost of revenues.................... -- -- 714 2,520 1,647 3,042 Research and development............ 126 720 2,134 4,327 3,004 3,759 Sales and marketing................. 67 816 1,366 2,292 1,592 2,773 General and administrative.......... 47 438 744 1,105 707 1,332 Amortization of deferred stock compensation...................... -- -- -- 57 -- 1,391 Amortization of intangible assets... -- -- 82 965 708 764 Acquired in-process research and development....................... -- -- 362 2,592 2,592 -- ------ ------- ------- -------- ------- ------- Total operating expenses.............. 240 1,974 5,402 13,858 10,250 13,061 ------ ------- ------- -------- ------- ------- Loss from operations.................. (240) (1,974) (4,296) (9,773) (7,593) (6,809) Other income (expense), net........... 8 40 172 (120) (223) (15) ------ ------- ------- -------- ------- ------- Net loss.............................. $ (232) $(1,934) $(4,124) $ (9,893) $(7,816) $(6,824) Accretion on convertible preferred stock............................... -- -- (448) (803) (492) (931) Series C redeemable convertible preferred stock dividend............ -- -- (644) -- -- -- ------ ------- ------- -------- ------- ------- Net loss applicable to common stockholders........................ $ (232) $(1,934) $(5,216) $(10,696) $(8,308) $(7,755) ====== ======= ======= ======== ======= ======= Basic and diluted net loss per share............................... $(1.30) $ (2.57) $ (3.96) $ (4.41) $ (3.64) $ (2.50) ====== ======= ======= ======== ======= ======= Shares used to compute basic and diluted net loss per share.......... 178 752 1,318 2,424 2,281 3,107 Pro forma basic and diluted net loss per share........................... $ (1.23) $ (0.64) ======== ======= Shares used to compute pro forma basic and diluted net loss per share........................... 8,670 12,194 AS OF AS OF MARCH 31, DECEMBER 31, ----------------------------------------- ------------ BALANCE SHEET DATA 1996 1997 1998 1999 1999 (IN THOUSANDS) Cash, cash equivalents and short-term investments.................................... $1,549 $ 662 $ 3,701 $ 6,147 $ 18,339 Working capital.................................. 1,552 459 2,922 2,604 16,992 Total assets..................................... 1,605 899 5,399 9,655 23,514 Long-term obligations, net of current portion.... 0 180 1,221 2,812 2,129 Redeemable convertible preferred stock........... -- -- 7,176 17,341 18,272 Deferred stock compensation...................... 0 0 0 (239) (2,743) Accumulated deficit.............................. (232) (2,166) (7,382) (18,078) (25,833) Total stockholders' equity (deficit)............. 1,582 472 (4,556) (15,086) (1,426) 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN CONJUNCTION WITH "SELECTED FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO HISTORICAL INFORMATION, THE DISCUSSION IN THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THESE FORWARD-LOOKING STATEMENTS DUE TO FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW We develop and market integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. Our solution combines proprietary computer-based simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics. We have an integrated solution to address the critical steps in designing clinical trials and drug development programs. Our solution is designed to help our customers use a more rigorous scientific and statistical process to identify earlier those drug candidates that will not be successful and to enhance the likelihood that the remaining candidates will successfully complete clinical trials. During the period from our inception in April 1995 through March 1997, we were a development stage enterprise. Our operating activities during this period related primarily to developing products, building our corporate infrastructure and raising capital. In the second quarter of fiscal 1998 we released our first version of software for trial simulation and started offering our scientific and decision services. In December 1997 we acquired Scientific Consulting, Inc. and the model workbench family of products. The majority of our sales activities are conducted through a dedicated direct sales organization located in the United States and Europe. In addition, our technical support personnel and scientific consultants conduct sales and marketing activities. In fiscal 2000, we entered into licensing agreements with three organizations to gain access to their proprietary medical data on a royalty basis for use in our information products. In the future, we expect to enter into alliances and license arrangements to gain access to other medical data on a royalty basis. We expect this data to provide the foundation for our information products. We intend to provide these products to our customers on a subscription basis. REVENUE RECOGNITION We recognize revenue from our products and services when we determine that evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, we defer revenue recognition until all of the criteria are met. We consider all arrangements with payment terms extending beyond twelve months and other arrangements with payment terms longer than normal not to be fixed or determinable. If we do not consider collectibility probable, we recognize revenue when the fee is collected. No customer has the right of return. For contracts from which we receive solely license and maintenance fees, we recognize license revenue based upon the residual method after all elements other than maintenance have been delivered. We recognize maintenance revenues over the term of the maintenance contract as vendor-specific objective evidence of fair value for maintenance exists. We determine whether vendor-specific objective evidence of fair value of maintenance exists by reference to the price the customer will be required to pay when it is sold separately, i.e. the renewal rate. Each license agreement offers 17 additional maintenance renewal periods at a stated price. Maintenance contracts are typically one year in duration. We recognize revenue on software that is licensed on a per copy basis when each copy of the license requested by the customer is delivered. We recognize revenue through our Japanese distributor on shipment if the distributor has identified a valid end-user for the product, if other software revenue recognition criteria are met and since there is no right of return or price protection. We recognize revenues from scientific and training services as services are performed. For those contracts that include contract milestones or acceptance criteria, we recognize revenues as these milestones are achieved or as acceptance occurs. For contracts that are on a fixed price basis, we determine if losses should be recognized at the end of each accounting period. During the nine months ended December 31, 1999, we entered into arrangements that consist of licenses, maintenance and scientific and training services. For these arrangements, we assess whether the service element of the arrangement is essential to the functionality of the other elements of the arrangement. In those instances where we determine that the service elements are essential to the other elements of the arrangement, we will account for the entire arrangement using contract accounting. For those arrangements accounted for using contract accounting that do not include contractual milestones or other acceptance criteria, we will utilize the percentage of completion method based upon input measures of hours. For those contracts that include contract milestones or acceptance criteria, we will recognize revenue as such milestones are achieved or as such acceptance occurs. Our revenue recognition policy is in accordance with Statement of Position No. 97-2, "Software Revenue Recognition," as amended by Statement of Position No. 98-4, "Referral of the Effective Date of SOP 97-2, Software Revenue Recognition", and Statement of Position No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions." ACQUISITIONS In December 1997 we purchased all of the outstanding shares of Scientific Consulting, Inc., a developer of scientific software products for the pharmaceutical industry, for an aggregate purchase price of $1.3 million, consisting of cash, a note payable and shares of our common stock. The acquisition was accounted for using the purchase method, and the results of operations of Scientific Consulting, Inc. have been included in our operations since acquisition. We charged to expense $362,000 for in-process technology acquired from this acquisition. The valuation methodology used by an independent appraiser to establish this charge included an analysis and estimation of the fair market value and remaining economic life of both the core and the acquired in-process technologies on a going concern basis. In May 1998 we purchased biomedical modeling and simulation technology from Mitchell and Gauthier Associates, Inc., a provider of software and services principally to the aerospace and defense industries. We acquired the exclusive right to use the technology in the biopharmaceutical market. We purchased these assets for an aggregate purchase price of $4.7 million, consisting of cash, notes payable and shares of our common stock. The acquisition of the assets was accounted for using the purchase method. We charged to expense $2.6 million for the in-process technology acquired. The valuation methodology used by an independent appraiser to establish this charge included an analysis and estimation of the fair market value and remaining economic life of both the core and the acquired in-process technologies on a going concern basis. DEFERRED STOCK COMPENSATION For the year ended March 31, 1999 and the nine month period ended December 31, 1999, in connection with the grant of stock options to employees, we recorded deferred stock compensation totaling $296,000 and $3.9 million, respectively, representing the difference between the deemed fair value of our common stock for financial reporting purposes on the date these options were granted and 18 the exercise price. This amount is included as a reduction of stockholders' equity and is being amortized over the vesting period of the individual options, generally four years, using the graded vesting method. The graded vesting method provides for vesting of portions of the overall award at interim dates and results in higher vesting in earlier years than straight-line vesting. We recorded amortization of deferred stock compensation of $57,000 and $1.4 million for the year ended March 31, 1999 and the nine month period ended December 31, 1999, respectively. As of December 31, 1999, we had a total of $2.7 million remaining to be amortized over the vesting periods of the stock options. You should read Note 12 of notes to the financial statements. RESULTS OF OPERATIONS NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998 REVENUES. Revenues increased $3.6 million, or 135%, from $2.7 million for the nine months ended December 31, 1998 to $6.3 million for the nine months ended December 31, 1999. The majority of this increase was revenue recognized during fiscal 2000 under five new strategic agreements with major pharmaceutical companies. In addition, revenue also increased as the number of our customers increased significantly, and we enhanced our software and services and increased the prices we charged for them. COST OF REVENUES. Cost of revenues increased $1.4 million, or 85%, from $1.6 million for the nine months ended December 31, 1998 to $3.0 million for the nine months ended December 31, 1999. The increase was due primarily to increased service personnel in scientific and decision services. Cost of revenue as a percentage of total revenues decreased from 62% to 49%. Because of the direct relationship of personnel to projects undertaken, we anticipate that as we take on new projects, cost of revenues will reflect changes in total revenue. RESEARCH AND DEVELOPMENT. Research and development expenses increased $755,000, or 25%, from $3.0 million for the nine months ended December 31, 1998 to $3.8 million for the nine months ended December 31, 1999. The increase resulted primarily from an increase in the number of software developers and the use of outside contractors. In particular, we dedicated considerable resources to the development of the clinical workbench and information products. As a percentage of revenues, research and development expenses decreased from 113% to 60%. The decrease in research and development expenses as a percentage of total revenue primarily reflects the greater increase in revenue relative to the increase in research and development staff. We believe that our research and development expenses in absolute dollars will increase as we continue to expand our product offerings. SALES AND MARKETING. Sales and marketing expenses increased $1.2 million, or 74%, from $1.6 million for the nine months ended December 31, 1998 to $2.8 million for the nine months ended December 31, 1999. The increase in sales and marketing expenses is related primarily to an expansion in our sales force personnel. As a percentage of total revenues, sales and marketing expenses decreased from 60% to 44%. The decrease in marketing and sales expenses as a percentage of total revenue reflects the more rapid growth in our revenues compared to the growth of marketing and sales expenses. We expect our sales and marketing expenses to increase as we continue expansion of our field sales force in both the United States and Europe. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $625,000, or 88%, from $707,000 for the nine months ended December 31, 1998 to $1.3 million for the nine months ended December 31, 1999. The increase in general and administrative expenses is related to growth in management and administrative support staff. We expect to continue expansion of our management and administrative support staff as our management and corporate infrastructure grows. We also expect our general and administrative expenses to grow as we incur the costs of being a public company. As a percentage of total revenues, general and administrative expenses decreased from 27% to 21%. 19 OTHER INCOME (EXPENSE). Other expense decreased $208,000 from $223,000 for the nine months ended December 31, 1998 to $15,000 for the nine months ended December 31, 1999. This decrease occurred as a result of higher interest income on a larger average balance of cash and short-term investments during the period. PROVISION FOR INCOME TAXES. As a result of our net operating losses, no provision was recorded for income taxes during the nine months ended December 31, 1998 and 1999. YEARS ENDED MARCH 31, 1999 AND 1998 REVENUES. Revenues increased $3.0 million, or 269%, from $1.1 million in fiscal 1998 to $4.1 million in fiscal 1999. The overall increase in revenue was primarily attributable to the growth of our scientific and decision services and model and trial workbench applications. COST OF REVENUES. Cost of revenues increased $1.8 million, or 253%, from $714,000 in fiscal 1998 to $2.5 million in fiscal 1999. The increase was due to growth in scientific and decision services personnel. Cost of revenue as a percentage of total revenues decreased from 65% to 62%. RESEARCH AND DEVELOPMENT. Research and development expenses increased $2.2 million, or 103%, from $2.1 million in fiscal 1998 to $4.3 million in 1999. The increase resulted primarily from growth in the number of software developers as we continued development of new products, including updates and upgrades to our existing model and trial workbench families of products. As a percentage of revenues, research and development expenses decreased from 193% to 106%. SALES AND MARKETING. Sales and marketing expenses increased $926,000, or 68%, from $1.4 million in fiscal 1998 to $2.3 million in fiscal 1999. The increase in sales and marketing expenses was related primarily to the expansion of sales force personnel and marketing activities, including trade shows and public relations. As a percentage of total revenues, sales and marketing expenses decreased from 124% to 56%. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $361,000, or 49%, from $744,000 in fiscal 1998 to $1.1 million in fiscal 1999. The increase in general and administrative expenses was related primarily to growth in management and administrative support staff. As a percentage of total revenues, general and administrative expenses decreased from 67% to 27%. OTHER INCOME (EXPENSE). Other income decreased $292,000 from $172,000 in fiscal 1998 to an expense of $120,000 in fiscal 1999. This decrease occurred as a result of higher debt balance, which was due to interest expense paid on notes issued in connection with the acquisition of assets from Mitchell and Gauthier Associates, Inc. and increased capital leases. PROVISION FOR INCOME TAXES. As a result of our net operating losses, no provision was recorded for income taxes during the years ended March 31, 1998 and 1999. YEARS ENDED MARCH 31, 1998 AND 1997 REVENUES. We recognized no revenues for fiscal 1997. Revenues for fiscal 1998 were $1.1 million. The revenues in fiscal 1998 were primarily attributable to the introduction of our trial and model workbench applications and scientific services. COST OF REVENUES. We had no cost of revenues for fiscal 1997. Cost of revenues for fiscal 1998 was $714,000. Cost of revenues for fiscal 1998 was due to product royalties and hiring of service personnel. RESEARCH AND DEVELOPMENT. Research and development expenses increased $1.4 million, or 196%, from $720,000 in fiscal 1997 to $2.1 million in fiscal 1998. The increase resulted primarily from growth in the number of software developers as we continued development of new products. 20 SALES AND MARKETING. Sales and marketing expenses increased $550,000, or 67%, from $816,000 in fiscal 1997 to $1.4 million in fiscal 1998. The increase in sales and marketing expenses was related primarily to the expansion of sales force personnel. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $306,000, or 70%, from $438,000 in fiscal 1997 to $744,000 in fiscal 1998. The increase in general and administrative expenses was related primarily to growth in management and administrative support staff. OTHER INCOME (EXPENSE). Other income increased $132,000 from $40,000 in fiscal 1997 to $172,000 in fiscal 1998. This increase occurred as a result of higher interest income on a larger average balance of cash and short-term investments during the period. PROVISION FOR INCOME TAXES. As a result of our net operating losses, no provision was recorded for income taxes during the years ended March 31, 1997 and 1998. LIQUIDITY AND CAPITAL RESOURCES Since our inception we have funded operations through the private sale of preferred stock, with net proceeds of approximately $38 million, limited borrowings and equipment leases. All shares of our preferred stock will be converted automatically into common stock immediately prior to the closing of this offering. As of December 31, 1999, we had $18.3 million in cash and short-term investments, an increase of $12.2 million from cash and short-term investments held as of March 31, 1999, and a $1.5 million secured revolving line of credit against 80% of eligible accounts receivable, which bears a variable interest rate of prime plus 1% and expires in January 2001, if not extended. As of December 31, 1999, there were no borrowings under the line of credit. Our working capital, defined as current assets less current liabilities, at December 31, 1999 was $17.0 million, an increase of $14.4 million in working capital from March 31, 1999. The increase in the working capital is attributable to the increase in cash from the sales of our preferred stock and the increase in accounts receivable. Net cash used in operating activities was $1.8 million in fiscal 1997, $3.3 million in fiscal 1998, $5.6 million in fiscal 1999, and $5.4 million in the nine months ended December 31, 1999. The cash used in these periods was primarily attributable to net losses of $1.9 million in fiscal 1997, $4.1 million in fiscal 1998, $9.9 million in fiscal 1999, and $6.8 million in the nine months ended December 31, 1999. Of the loss in fiscal 1998 and 1999, $362,000 and $2.6 million, respectively, was attributable to a noncash in-process research and development charge incurred in connection with our acquisition of Scientific Consulting, Inc.'s business and certain assets from Mitchell and Gauthier Associates, Inc. Net cash used in investing activities was $178,000 in fiscal 1997, $1.9 million in fiscal 1998, $4.0 million in fiscal 1999, and $11.2 million in the nine months ended December 31, 1999. Net cash used in investing activities included purchase of short-term investments, capital expenditures and, in fiscal 1999, $2.4 million paid to acquire Scientific Consulting, Inc. and some of the assets of Mitchell and Gauthier Associates, Inc. Financing activities provided net cash of $1.1 million in fiscal 1997, $7.2 million in fiscal 1998, $11.0 million in fiscal 1999, and $18.1 million in the nine months ended December 31, 1999. These amounts were primarily proceeds from the sale of preferred stock and issuances of notes payable in connection with acquisitions. We currently anticipate that the net proceeds from this offering, together with our current cash, cash equivalents and available credit facilities, will be sufficient to meet our anticipated cash needs for operations, working capital and capital expenditures for at least the next two years. However, we may need to raise additional funds sooner through public or private financing or other sources to fund our operations and for potential acquisitions. We may not be able to obtain adequate or favorable financing 21 at that time. Failure to raise capital when needed could harm our business. If we raise additional funds through the issuance of equity securities, the percentage of ownership of our stockholders would be reduced. Furthermore, these equity securities might have rights, preferences or privileges senior to our common stock. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998 the FASB issued Statement of Financial Accounting Standards 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS 133 as deferred by SFAS 137, will be effective for our fiscal year ending March 31, 2001. We do not expect that the adoption of SFAS 133 will have a material impact on our results of operations, financial position or cash flows in the foreseeable future. In December 1999 the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." Although we are currently evaluating the potential impact of this bulletin, we do not believe its adoption will materially change our financial position, results of operation or cash flows. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS We have operated primarily in the United States and all funding activities and sales have been denominated in U.S. dollars. Accordingly, we have not had any exposure to foreign currency rate fluctuations. Our interest income is sensitive to changes in the general level of United States interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we believe that there is no material market risk exposure. As of March 31, 1999 and December 31, 1999, our cash, cash equivalents and short-term investments consisted primarily of demand deposits, money market funds, treasury instruments and commercial paper. 22 BUSINESS OVERVIEW We develop and market integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. Our solution combines proprietary computer-based simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics. Our solution consists of scientific and decision services, computer-based development applications and related services, and information products. We believe our solution helps pharmaceutical and biotechnology companies reduce the time, cost and risk of drug development activities, and may improve the marketing and use of pharmaceutical products. This is significant because the process of taking a drug through clinical development has remained lengthy and unpredictable while the productivity of discovery research has accelerated dramatically in recent years. Twelve of the world's largest 20 pharmaceutical companies have begun to apply our computer-assisted drug development solution, and our computer-based development applications are currently used on more than 1,800 researcher desktops. To date, we have been engaged in over 60 projects in more than nine therapeutic areas. BACKGROUND DRUG RESEARCH AND DEVELOPMENT PROCESS OVERVIEW The process of developing a new drug and bringing it to market is complex and lengthy. The process consists of four basic stages: - DISCOVERY STAGE. Researchers use various methods and techniques to discover new compounds as well as to identify targets they may affect. The recent emergence of technologies such as high throughput screening, combinatorial chemistry and genomics has substantially increased the number of drug candidates and potential targets. - PRECLINICAL STAGE. Once lead drug candidates have been identified, scientists test the chemical activity of the newly synthesized compounds in a variety of assays and animal models. - CLINICAL STAGE. Next, a drug candidate enters human testing to demonstrate safety and efficacy. Depending on the drug and the potential disease target, this process can consist of 50 to 100 separate studies. The process typically includes three pre-approval phases. In phase I, drug candidates are evaluated for safety at varying dose levels in healthy volunteers. In phase II, efficacy of the drug is tested in a small to moderate number of patients with the targeted disease indication. In phase III, trials are conducted to evaluate safety and efficacy in large groups of patients with the disease to be treated. - APPROVAL AND POST-APPROVAL STAGE. Next, data and analysis from prior stages of development are consolidated into a new drug application, which is submitted to the United States Food and Drug Administration or comparable international regulatory authorities. The regulatory authority reviews the application to manufacture, distribute and market the drug for specific indications and patient groups. After approval, pharmaceutical companies often conduct phase IV studies, which are sometimes a condition of approval, to study long-term safety or efficacy, or to expand the label of a drug. PHARMACEUTICAL AND BIOTECHNOLOGY RESEARCH AND DEVELOPMENT MARKET OVERVIEW According to industry sources, worldwide pharmaceutical market revenues totaled $302 billion in 1998 and are expected to grow to $406 billion in 2002. These growth expectations coincide with a 23 continuing number of patent expirations for high profile drugs. In addition, with increasing numbers of pharmaceutical companies developing competing compounds directed at the same disease targets, the amount of time during which a pharmaceutical company can expect to have exclusivity in a major market has declined substantially. As a result of these factors, to achieve targeted revenue growth, pharmaceutical companies have substantially increased the number of new drugs in their research and development pipelines. Many of these drugs target increasingly complex diseases that have clinical outcomes which are more difficult to measure. In their attempts to increase the number of new drugs ultimately introduced to the market, and in response to the increasingly complex nature of research and development activities, pharmaceutical companies have dramatically increased their research and development spending. According to the Pharmaceutical Research and Manufacturers Association, or PhRMA, as a percentage of sales, pharmaceutical research and development spending has increased from 12% in 1980 to 21% in 1999. Pharmaceutical and biotechnology companies have invested substantial resources in new technologies, such as high throughput screening and combinatorial chemistry, to accelerate the drug discovery process. According to PhRMA, as a result of advances in genetic research, the number of distinct targets for drug interventions is expected to increase from approximately 500 currently to more than 3,000 by 2005. Overall drug development success rates remain limited while the number of new drug candidates and targets have increased substantially. In fact, the FDA reports that 80% of compounds that enter human clinical trials ultimately fail to receive regulatory approval. The clinical development process continues to be time consuming and costly despite the development of new technologies to better and more rapidly capture and organize data for submission to regulatory agencies. According to the FDA, clinical development prior to regulatory submission takes an average of 5 years. The current decision process for drug development programs is imprecise and does not incorporate many of the new research information technologies utilized in drug discovery. We believe that communication across all key disciplines within an organization is crucial to rapid and efficient assessment of all the factors and data needed to design a successful trial or program. These organizations need solutions that systematically track and organize information from previous trials and that integrate external data to help design and statistically predict the outcome of future projects. PHARSIGHT CAPABILITIES We have an integrated offering of products and services to address the critical steps in designing clinical trials and drug development programs. Our offerings combine proprietary simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics. Our solution is designed to help drug development experts use a more rigorous scientific and statistical process to design trials and make program decisions. We believe our offerings help pharmaceutical and biotechnology companies reduce the time, cost and risk of drug development and may help improve the marketing and use of pharmaceutical products. We believe typical customer benefits of our capabilities include the following: - more rapid and objective decision-making with quantified assessment of value versus risk; - more effective trial designs with higher probability of success and greater information yield; - more efficient development programs requiring fewer clinical trials and patients, less time and lower cost to reach market; and - strengthened competitive position due to improved product labels. 24 The following examples illustrate typical customer applications of our solution: - In designing phase II clinical trials, companies often face significant uncertainty in selecting the appropriate doses to test. Our solution integrates information from phase I and pre-clinical activities, information concerning related drugs which have been developed by the customer, information in the scientific literature about other drugs in the same therapeutic area, and knowledge of the relevant physiological and disease processes. This information, along with carefully identified assumptions, is used to develop a mathematical model enabling a computer simulation of the proposed trial. Using this approach, customers are often able to identify proposed doses which have little chance of success and should be excluded or to identify additional doses which are more likely to yield important information. - In designing phase III clinical trials, companies often face significant uncertainty concerning the most appropriate treatment strategy, patient inclusion/exclusion criteria and/or clinical measurements. Our solution uses an information gathering and modeling approach similar to that described above, but incorporates phase II data and detailed mathematical models of the relevant patient populations. We are often able to identify patient groups with low chance of demonstrating efficacy, or an unacceptable chance of demonstrating side effects, prior to conducting the actual trial. In addition, we may be able to predict which clinical measurements will be most likely to provide conclusive results in the proposed trial. - In making drug portfolio decisions, companies need to integrate scientific and clinical results, such as those described above, with market and financial information for all of the drug candidates in the development pipeline. We believe that our solution helps companies make better decisions concerning "go/no-go" criteria, prioritization of potential label objectives to be pursued and optimal sequencing of clinical trials within a development program. Our solution can also help customers adopt a more quantitative and scientific approach to resource allocation among programs within their drug portfolios. We have developed significant expertise in key disciplines, including clinical pharmacology, drug and disease modeling, human genetics, biostatistics, decision science, clinical development and information technology. We believe our focus on communications and information sharing, together with the combined expertise of our personnel in these areas, increases our effectiveness and is only partially duplicated within any pharmaceutical or biotechnology company. STRATEGY Our strategy is to help pharmaceutical and biotechnology companies accelerate clinical development and to assist large healthcare organizations in the adoption and use of pharmaceutical products. Elements of our strategy include: - EXPAND OUR PRESENCE WITHIN THE CLINICAL DEVELOPMENT MARKET. Our customers include 12 of the world's largest 20 pharmaceutical companies as measured by total revenues. We intend to expand our relationships with these customers by extending our services to new therapeutic areas. In addition, we intend to expand our base of more than 1,800 software users through the launch of our information products and the expansion of our software offerings and to expand our customer base to include more of the world's largest 50 pharmaceutical and biotechnology companies. In order to achieve a broader customer presence, we plan to expand our service, marketing and sales activities and focus on establishing new relationships around therapeutic areas where we already have substantial experience and could provide the most near-term value to new customers. 25 - EXPAND OUR ACTIVITIES IN PHARMACEUTICAL MARKETING AND PHASE IV STUDY DESIGN. We believe our experience in the clinical development process, and the substantial data and analyses we help create during that process, position us to provide marketing program design services for our customers, including the design of post-approval studies. We believe this is a natural extension of the services we provide during other phases of the process. We plan to add personnel and develop new information products to focus on these business opportunities, with an initial focus on our existing customers and therapeutic areas where we have the most experience. - BROADEN OUR CONTENT AND DATA RELATED PRODUCT OFFERINGS. In addition to helping customers better evaluate and organize internally generated data, we review and incorporate external data sources when conducting our trial and program design services. We are organizing data libraries and information products that access multiple data sources and are updated on a consistent basis. We are applying our medical and statistical capabilities to develop these information products in our major therapeutic areas of expertise. We expect to introduce our first information products later this year, including products in the diabetes and cardiovascular areas, initially focusing on current customers. - MAINTAIN AND ENHANCE OUR SCIENTIFIC AND TECHNOLOGY LEADERSHIP. We believe the expertise of our staff and scientific advisors, and our relationships with major academic institutions, help us to identify and develop scientific, medical and technical advances important to our business. For example, advances in genomics may allow early identification of drug metabolism problems, reduce the number of patients required to statistically prove safety and efficacy, and stratify patient populations for improved competitive labeling and market success. We expect to continue investing a significant portion of our revenues in research and development in order to incorporate advances such as these into our products. - PURSUE STRATEGIC ALLIANCES AND ACQUISITIONS. We intend to evaluate and, where advantageous, pursue acquisitions, alliances and technology licensing opportunities that may extend the range of products and services we offer to our customers. We also intend to pursue strategic alliances to market our information products to managed care, hospital, physician and clinical laboratory organizations that are attempting to more effectively utilize drug therapies and target the appropriate patient populations for certain drugs. We may also license certain of our technologies to organizations in other fields of use. OUR PRODUCTS AND SERVICES We provide scientific and decision services and computer-based development applications and services. We first offered our workbench applications and scientific services in 1997, and have been providing our decision services since 1998. We are also developing our information products and we expect to launch our first group of information products, to be accessed over the internet, later this year. In a typical project, our products and services are used together to design clinical trials or development programs. In many cases our computer-based development applications and services continue to be utilized upon completion of a project as our customers seek to further redesign their 26 drug development processes. The following chart depicts typical issues that we are asked to address in projects. PHASE I PHASE II PHASE III PHASE IV - Balance efficacy with side effects. - - Bridge preclinical results to - Explore trial sensitivity to - Explore new indications and label clinical process. patient compliance and dropout. changes. - - Explore dose ranging and population - Investigate impact of - Plan life-cycle strategy, e.g. variability. population genetic variability. generic defense and "over-the- - - Determine surrogate endpoint - Evaluate alternate protocols. counter" switch. relevance, i.e. alternate - Assess time/cost versus - Evaluate special patient indicators of efficacy. populations. - - Support early "go/no-go" decisions. information trade-off. - Assess capital productivity and - - Assess strategic fit in franchise. - Develop licensing/acquisition franchise strategy. strategy. Our solution provides an iterative method for enhancing the design of a clinical trial or development program, based on a series of steps. Each step utilizes available data to produce and validate a mathematical model that is in turn used to select a better strategy for moving to the next stage of clinical development. The following diagram and discussion describe this process. 27 - Step one focuses on collecting all available information on the new drug being tested, including data from the discovery and preclinical stages. Additionally, we often use proprietary resources and gather data from external sources, including public literature. In cases where adequate information is not initially available, assumptions based on prior experience with a similar type of compound or therapeutic area may be developed. These assumptions are often validated and refined via later analysis and activities as data from the actual clinical trials or other experiments become available. - Steps two and three involve the building and validation of a model that predicts how a new drug compound may behave in or be absorbed by the body. Our models are designed to take into account sources of variability due to demographics and experimental error. We also check and validate the model against other data for related or similar drugs, as well as for different treatment regimens and different drug dose levels. If necessary, the first three steps are iterated to incorporate new data and analysis results into the drug model. - In step four, a proposed protocol or design for the clinical trial is developed using the model and other information, such as the commercialization objectives for the new drug. The proposed trial design includes assumptions and recommendations around suitable patient population and number of patients necessary, a set of [Graphic with nine boxes arranged in a vertical treatment or dosing regimens, as well as a plan for column with the accompanying text contained in analysis of the data generated by the trial. a box next to each labeled step and a final - In steps five, six and seven, the trial is simulated unlabeled box containing the text "Conduct using our workbench applications. The results are then trial." Step 1-Gather, analyze available data analyzed to determine the range of possible outcomes for and assumptions; Step 2-Build drug model; the trial. The assumptions and models are then altered Step 3-Validate drug model; Step 4-Design and simulations are repeated to determine the relative proposed trial; Step 5-Simulate trial as impact of individual aspects of a trial design on the designed; Step 6-Analyze simulated trial range of possible outcomes. This process is iterated results; Step 7-Vary assumptions, modify trial until the relative merits of a set of trial design protocol; Step 8-Select optimal trial design; choices are quantified and an optimal trial design can be Conduct trial. Arrows point from one box to selected. another, showing the progression from Step 1 - In the eighth step, an optimal trial design is selected through Step 8. Arrows labeled "iterate" point and the trial is conducted. New experimental data from Step 3 to Step 1, from Step 7 to Step 5 generated by the trial are used as input in the design of and from the final box to Step 1.] subsequent trials. 28 The table below categorizes each of our products and services and describes the primary function and benefits of each offering. SCIENTIFIC AND DECISION SERVICES PRODUCT OR SERVICE PRIMARY FUNCTION PRIMARY BENEFITS Scientific Consulting We use our proprietary technology - Reduce repeated trials. and methodology to analyze and - Improve label quality and drug quantify scenarios related to competitive positioning. specific clinical development - Understand unexpected trial issues and to determine the range results. of plausible outcomes a trial could - Help to determine optimal patient produce prior to actually population and treatment conducting the trial. strategy. - Evaluate time/cost vs. information yield. Decision Services We focus on major decision points - Improve communication. in the drug development process, - Speed decision-making. including selection of disease - Quantify value and risk indications to be targeted by a tradeoffs. clinical trial or program, whether - Enhance overall economic to continue or terminate a clinical productivity of development trial or program and evaluation of investments. a licensing decision or structure. - Allow proactive risk management. - Identify information gaps. COMPUTER-BASED DEVELOPMENT APPLICATIONS AND SERVICES Model Workbench Our software allows researchers to - Optimize dose and treatment analyze data from clinical studies regimens based on early phase to build drug models and generate clinical data. standard reports. It provides the - Identify potential drug effects inputs required for our trial and interactions. workbench application. - Speed preparation of internal and regulatory reports. - Determine impact of population characteristics on drug response. - Build and validate drug models for use in trial simulation. 29 Trial Workbench Our software allows clinical - Identify more efficient designs. researchers to perform "virtual - Shorten time to market by clinical trials" on the computer reducing chances of failed or through an easy-to-use graphical inconclusive trials. interface. - Increase information yield of trials. - Quantify uncertainty to guide decision-making. Clinical Workbench Our software is designed to provide - Improve planning of enrollment, (UNDER DEVELOPMENT) a powerful and easy-to-use trial duration, and costs. interface to patient medical record - Help to identify the most databases. Its Web-based technology promising outcomes and surrogate allows clinical researchers to markers. access data and analysis anywhere, - Improve confidence in decisions anytime without special training. by providing objective support for "expert opinion." - Save time in clinical trial and program design. Applications and We conduct on-site training in the - Improve staff productivity and Methodology Training use of our workbench applications, efficiency. and Support data analysis techniques and - Accelerate adoption / overall methodology. implementation of new process. Process Design and We develop and standardize - Improve efficiency and reduce Automation reporting and analysis formats, and cost and errors. design and standardize work flow processes. INFORMATION PRODUCTS Information Products Our products are designed to - Address questions requiring (UNDER DEVELOPMENT) provide data, including medical, broad, population-level data and laboratory and genetic data in questions requiring highly specific therapeutic areas. They detailed patient data. are being designed to work in - Improve trial designs by allowing conjunction with our clinical access to highest-quality data on workbench applications, and will be outcomes, disease patterns and sold on a subscription basis. demographics. - Discover genetic predictors of disease course and response to therapy. SCIENTIFIC AND DECISION SERVICES Our scientific and decision services consist of on-site consulting, training and process redesign projects conducted by our clinical and decision scientists. These projects span all phases of clinical 30 development, and range from single trial design to portfolio strategy optimization. These services consist of four specific categories: - SCIENTIFIC CONSULTING. In a typical project, our consultants, representing several technical disciplines, devote two to three months working with the customer team. The following steps comprise this effort: - creating alternative development strategies or trial designs to be evaluated; - constructing a drug-disease model, commercial model and/or a model of the trial or program being evaluated; - quantifying the clinical and/or economic risk involved in each strategy or trial design and conducting sensitivity analysis; - documenting the information and logic used in the evaluation; and - presenting results and recommendations to the client development team and senior management. - DECISION SERVICES. In a typical project, we devote one to three months working with a customer team. We often perform these services in conjunction with our scientific consulting services. We begin by defining the scope of the project, identifying the decisions and appropriate methods to be employed, and formulating appropriate alternatives to be considered. Next, we build comprehensive mathematical models, gather relevant data and information, and assess all team inputs to the decision. Finally, we perform detailed analysis, modify and re-analyze strategies and prepare and present recommendations. Our scientific and decision services group currently includes 21 full-time personnel. Our personnel are located throughout the United States and Europe. Most have M.D. or Ph.D. degrees with post-doctoral training in clinical pharmacology, biostatistics, human genetics, decision analysis or other relevant disciplines. We bring these skill sets to bear in an integrated fashion to address our customers' challenges. Senior consultants have more than a decade of experience in drug-disease modeling, trial design or strategic consulting. We also utilize an extensive network of part-time consultants with expertise in various specialized disciplines and therapeutic areas. We are continually refining our methodologies and introducing new technologies. We are also expanding our activities at the portfolio level and in newer therapeutic areas. In addition, we are beginning to address customer needs to improve their marketing and sales processes by applying the same quantitative methods that we apply to their development processes. COMPUTER-BASED DEVELOPMENT APPLICATIONS AND SERVICES Our software and services provide the analytical tools and conceptual framework to help clinical researchers optimize the decision-making required to perform clinical testing needed to bring drugs to market. By applying mathematical modeling and simulation to all available information on the compound being tested, researchers can clarify and quantify which trial and treatment design factors will influence the success of clinical trials. We currently provide our applications software for installation either on customer desktops or on customer intranets for shared access by their personnel. Our new clinical workbench application, currently under development, will be hosted by us and accessed by web browser over the internet. Our workbench applications are commonly deployed together with our scientific and decision services and include: - MODEL WORKBENCH. These products are used to build a drug model within a flexible framework, and validate the assumptions and information on which it is based. The models constructed and validated with these tools are used by our trial workbench in later steps of the computer-assisted trial design process. The output of these tools is also used in regulatory reporting as part of the 31 drug approval process. Our WinNonlin product is the most widely used product in the pharmaceutical industry for analysis of data from pharmacokinetic and pharmacodynamic studies. Our WinNonMix product is used to analyze the data from a wide range of studies when the user wishes to determine the influence of demographic and environmental factors as well as other sources of variability. Available enterprise editions provide additional data connectivity to data sources such as clinical data management systems and laboratory information management systems. Custom query builders for specific data management systems are included along with a software development kit to allow information technology staff to easily construct new interfaces for nonstandard data sources. We also provide validation kits that automate execution of standardized test scripts to reduce the manual time and effort required to operate and install these products in accordance with regulatory requirements. - TRIAL WORKBENCH. The trial workbench provides a structured framework for clinical trial simulation based on mathematical models that integrate existing knowledge and assumptions about a drug and the targeted patient population. The trial workbench supports the use of simulation scenarios, allowing a number of trial design parameters to be tested in a single step, thereby reducing the number of iterations needed to select an optimal trial design. It is designed for use by clinical and scientific personnel without extensive computer skills and supports a full range of trial designs, powerful drug and disease modeling and flexible definition of patient populations. The trial simulator includes integrated and extensive analysis tools, automatically generates protocol documents and supports data archiving. We are currently developing new trial workbench products, called therapeutic area editions, that bundle the trial simulator software with pre-built models, templates and usage guides relevant to a specific therapeutic area. - CLINICAL WORKBENCH. The clinical workbench, currently under development, is intended to enable testing of critical assumptions throughout clinical development by collecting data on target population, disease progression, current therapeutic approaches and characteristics of the potential market for relevant drugs. It is designed to access our information products currently under development and, in later versions, internal customer databases. Integrating internal sources of information helps leverage prior experience with specific disease mechanisms or a class of therapeutic compounds. Query results may be used in conjunction with future therapeutic area editions of the trial workbench and directly incorporated into the proposed trial design. This product is designed to enable clinicians to receive immediate answers to sophisticated questions that previously required at least several weeks to answer. The clinical workbench is designed to provide advanced statistical, temporal-logic (queries with a complex time dimension) and genetic analysis capabilities. Our workbench application related services are as follows: - APPLICATIONS AND METHODOLOGY TRAINING AND SUPPORT. Our services team works with customers to deploy our clinical drug development technology and methodologies. We work to improve our customers' overall clinical development productivity by using our cumulative experience and knowledge of our scientific and decision services' best practices. We tailor our training to specific functional and client needs. Our deployment programs typically focus on a specific therapeutic area within the customer's organization. In a typical training program, each individual is offered extensive class work, with support provided by us over the course of twenty-four months, before achieving full fluency in the relevant topics. During these programs we typically use the customer's own project data in the training activities. - PROCESS DESIGN AND AUTOMATION. Pharmaceutical scientists spend considerable time on non-scientific activities, such as formatting tables and graphs and cutting and pasting information from numerous software packages into reports. We provide scripts to automate the production of standard tables, figures and listings. This reduces the potential for mistakes, and enables scientific staff to work on other, higher return areas. We also assist in designing optimum 32 work-flow processes to accompany the process changes being implemented, and with integration of our tools into the customer's existing information technology infrastructure. With some customers, following the completion of pilot projects, we perform work at the portfolio level. We then develop a plan with our customer for ongoing analysis support, process design, capability development efforts and software infrastructure creation. Implementation may last up to one year once planning is completed. Our applications and methodology training group is currently staffed by four scientists with pharmaceutical industry experience. This group provides training in the efficient use of our products both at client sites and at our training center in Cary, North Carolina. Trainers also provide technical support for our products, so they are in an excellent position to understand client training needs. We also provide training in mathematical drug modeling and computer-assisted trial design methodology. Our training sessions involve lectures and hands-on problem solving using real case studies. INFORMATION PRODUCTS Our information products, which we expect to launch later this year, are intended to combine anonymized patient level medical, laboratory and genetic data with software to access, analyze and present informative results to sophisticated queries. These information products permit clinical and scientific personnel to obtain objective and quantitative answers to important questions in trial and program decision-making concerning, for example, the correlation of various disease markers with clinical outcomes, the frequency of adverse events under specific conditions, detailed patient demographics and response to placebo and standard therapies. We intend to obtain our data from world-class medical research centers, and expect that it will be regularly updated and extensively analyzed and processed by our statisticians and medical specialists. Our information products will be organized by therapeutic area beginning in the diabetes and cardiovascular areas. Over the course of the next several years we plan to extend our coverage to most major therapeutic areas, and to extend the application of these products from clinical development to the pharmaceutical selling and marketing processes. We currently have alliances, which include licenses to medical data, with Duke University, Lovelace Respiratory Research Institute and Protocare Sciences, Inc., and expect to enter into similar alliances with other third parties. We currently intend to sell our information products on an annual subscription basis for each therapeutic area. CUSTOMERS Our customers currently consist of large pharmaceutical companies and biotechnology companies. During our fiscal year ended March 31, 2000, we provided products and services for which we recognized revenue to more than 200 customers. Johnson & Johnson, our top customer, accounted for in excess of 10% of our revenue, in fiscal 2000. Fourteen of our top 16 customers by revenue to us in fiscal 2000 were, listed in alphabetical order: Anesta Corporation AstraZeneca PLC Chiron Corporation Durect Corporation F. Hoffmann-La Roche Ltd. Glaxo Wellcome Inc. Guilford Pharmaceuticals Inc. Johnson & Johnson Novartis Pharmaceuticals Corporation Pfizer Limited Proctor & Gamble Pharmaceuticals, Inc. Sankyo Company Ltd. SmithKline Beecham Pharmaceuticals Warner-Lambert Company 33 SALES AND MARKETING We currently employ nine professionals who sell our products and services to customers in the United States and throughout Europe and Japan. Some of our software products are also sold by a Japanese scientific software distribution company. Our direct sales and business development team is composed of individuals with a range of skills including scientific, medical and business disciplines. This blend of skills is necessary because of the complex nature of the clinical development process and the need to interact with a broad range of disciplines and levels of management, during the sales process. Our telesales group complements and supplements our direct sales staff selling primarily the model and trial workbench applications. The telesales group also supports our telemarketing activities for new product launches and workshop activities. We plan to significantly expand the direct and telesales staff in the future. Our sales and business development personnel work closely with our scientific and decision consultants to understand customer requirements and to educate customers about our solution. While our solution comprises an integrated suite of products and services, we typically employ a "services-led" sales strategy to quickly and efficiently prove the value of our offerings to new customers. After several initial projects with each customer, we seek to negotiate multi-year agreements for the broad deployment of our solution in one therapeutic area within their organization. In the future, we will seek to penetrate additional therapeutic areas at each customer. Our marketing department employs various media and methods to educate potential customers about our products and services and to inform customers of new developments and enhancements to existing offerings. We advertise in various journals and magazines, participate in scientific, medical and pharmaceutical business conferences, conduct educational seminars, provide comprehensive information about our offerings on our website, and conduct an ongoing public relations program. RESEARCH AND DEVELOPMENT We employ engineers with expertise in software development, web-based applications, database systems, and mathematical modeling, and scientists and medical doctors with expertise in clinical development, statistical modeling, human genetics, and clinical pharmacology and development. Our research and development personnel work closely with our service personnel in designing and testing products to meet customer requirements. We have a scientific advisory board and three scientific advisory groups which also help guide our product development efforts. - The modeling advisory group is chaired by Lewis B. Sheiner, M.D., Professor of Laboratory Medicine, Biopharmaceutical Sciences and Medicine at the University of California, San Francisco. Dr. Sheiner has also chaired our scientific advisory board since our inception. - The simulation advisory group is chaired by Nicholas H.G. Holford, M.B., Ch.B., M.R.C.P., Associate Professor, Department of Pharmacology and Clinical Pharmacology at the University of Auckland. - The information products advisory group is chaired by Donald B. Rubin, Ph.D., Professor and Chairman of Statistics at Harvard University. As of March 31, 2000, we had 30 employees engaged in research and development. Our research and development efforts are focused on improving and enhancing our existing products and services as well as developing new products and services. Our research and development efforts take place at our executive offices in Mountain View, California, and our development facilities in Lexington, Massachusetts and Cary, North Carolina. Our research and development expenses were $720,000, $2.1 million, $4.3 million and $3.8 million, in fiscal 1997, 1998, 1999 and the first nine months of fiscal 2000, respectively. We intend to increase our research and development budget and staffing levels during fiscal 2001. 34 INTELLECTUAL PROPERTY Our intellectual property consists primarily of our software, including software we license from third parties for inclusion in our products, our proprietary algorithms and methodologies, our documentation and training materials, and our trademarks. We rely on a combination of trademark, copyright and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality and proprietary rights agreements with our customers, employees and consultants and control access to software, documentation and other proprietary information. However, we cannot be certain that the steps we have taken to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate our proprietary rights. TECHNOLOGY LICENSING Although our products are based on our research and development, we license software from third parties when it is more efficient to incorporate pre-existing programs or routines, when there are novel technologies available by license that would improve our products, or when brand-recognition of established products provides a marketing advantage. For some of the third-party software we use, we have paid a one-time fee that allows unlimited use. We also incorporate third-party software that we have rights to use under the terms of license agreements that require us to pay royalties to the licensor based upon either a percentage of the sales of products containing the licensed software or a fixed fee for each product shipped. Although all of the software we license for use in our products is replaceable with software from other vendors or our own development efforts, the loss of a license could delay the sales of certain of our products. DATA LICENSING Our information products are designed to offer customers access, through the clinical workbench product or through our scientific and decision services, to databases of anonymized patient level information in various therapeutic areas that we have licensed from medical providers and other sources. Our ability to identify and license sources of high quality patient-level data is critical to our information products. We currently have database licenses from Duke University, Lovelace Respiratory Research Institute and Protocare Sciences, Inc. in the diabetes and cardiovascular areas. Including our renewal options, the Lovelace Respiratory Research Institute license and the Duke University license have terms of three and four years, respectively, running from database delivery, which is due at the end of May 2000, and the Protocare Sciences license has a term ending in October, 2002. Each of these licenses has a fixed or minimum royalty fee per customer as well as a minimum royalty payment each year. We plan to license additional data from multiple sources in diabetes, cardiovascular and additional therapeutic areas over the next several years. While we have been successful in negotiating license agreements so far, we may not be able to obtain all of the databases we seek to offer on favorable terms. GOVERNMENT REGULATION The pharmaceutical industry is regulated by a number of federal, state, local and international governmental entities. Although our products and services are not directly regulated by the United States Food and Drug Administration or comparable international agencies, the use of certain of our analytical software products by our customers may be regulated. We currently provide assistance to our customers in achieving compliance with these regulations. State laws aimed at protecting the privacy of confidential patient health information are many and varied, and states frequently adopt new laws in this area. Most state health information privacy laws apply only to specified providers of health care and/or healthcare payors, but some of these laws could 35 be found to apply to businesses such as ours that handle health information obtained from such providers for research purposes. Although our agreements with medical data providers require them to "anonymize" or remove patient-identifiable information before providing their data to us, and most health information privacy laws do not apply to anonymized data, definitions of whether data has been anonymized vary and we cannot provide assurance that the data we receive would be considered to be anonymous under all state laws. Violations of these laws may result in civil and/or criminal penalties. While we intend to comply with all applicable laws, and our medical data providers have asserted to us that they comply with such laws, we cannot predict how interpretations of existing law or changes in the law may affect our business, and compliance may be time consuming and expensive. The ways in which these laws could affect our operations include the following: - some state health privacy laws may directly regulate entities such as ours that obtain and use health information from third party providers; - some state laws directly regulating healthcare providers may extend their confidentiality protections to information transmitted by those entities to another entity, such as us; and - some state laws specifically restrict the disclosure of certain types of particularly sensitive health information, and if healthcare providers fail to obtain any necessary consents or otherwise comply with these restrictions, we could be liable for the improper use or disclosure of such information. While we cannot assure you that our position would prevail if challenged, we believe that in general our ways of doing business should not be the subject of enforcement proceedings or lead to liability under these laws. The confidentiality of health information is a high priority for us, and we have policies and procedures in place to protect against unauthorized access to the information and to ensure that such information is handled appropriately. Although the Secretary of the U.S. Department of Health and Human Services has promulgated proposed regulations dealing with privacy of electronically transmitted health information, as required by the Health Insurance Portability and Accountability Act of 1996, these regulations are not currently in effect, and may be changed substantially before they are finalized. Accordingly, at present, there is no federal law securing or regulating the privacy of confidential health information of a patient. We intend to monitor the development of federal laws and regulations and to adapt our business to comply with requirements that may become applicable in the future. COMPETITION We compete based on a number of factors, including cost, the quality and effectiveness of our services, and the functionality, reliability and ease of implementation and use of our products. Our model workbench product line competes with products produced by InnaPhase Corporation. Although we believe we currently do not have direct competitors for our trial workbench and clinical workbench product lines or our scientific and decision services, other companies may compete with us in the future. Potential competitors may have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the pharmaceutical industry than we have. In addition, competitors may merge or form strategic alliances and be able to offer, or bring to market earlier, services that are superior to our own. In addition, our customers are primarily large pharmaceutical companies that have substantial research and development budgets, and these customers may internally develop the expertise that we provide. EMPLOYEES As of March 31, 2000, we had 93 employees, consisting of 25 in services and support, 30 in research and development, 21 in sales and marketing and 17 in finance and operations. Thirty-five of our employees have either an M.D. or Ph.D. in relevant disciplines. None of our employees is a member of a union and we consider our relationship with our employees to be good. FACILITIES We lease approximately 32,000 square feet of space in Mountain View, California under a lease that expires in 2003. We also lease offices in Cary, North Carolina where we conduct development and training activities, and offices in Lexington, Massachusetts and San Diego, California where we conduct development activities. We believe our current facilities will be adequate for our needs for at least the next two years. 36 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table provides information concerning our directors, executive officers and key employees as of April 10, 2000: NAME AGE POSITION Arthur H. Reidel(3)................. 49 Chairman of the Board, President and Chief Executive Officer Robin A. Kehoe...................... 42 Senior Vice President, Finance and Chief Financial Officer Michael A. Emley.................... 53 Senior Vice President, Sales and Professional Services Steven L. Shafer, M.D............... 45 Vice President, Product Development Daniel L. Weiner, Ph.D.............. 49 Senior Vice President, Technology Deployment Saeid Akhtari....................... 38 Vice President, Corporate Marketing and Strategic Development Ronald D. Beaver, Ph.D.............. 35 Managing Director, Decision Services Terrence F. Blaschke, M.D........... 57 Vice President, Collaborative Programs James D. Buzzard.................... 41 Vice President, Product Marketing Stuart M. Koretz, M.D., Ph.D........ 53 Vice President, Medical Affairs and Content Janice Kurth, M.D., Ph.D............ 37 Vice President, Genomics E. Gregory Lee, Ph.D................ 51 Vice President, Engineering Jacob W. Mandema, Ph.D.............. 36 Vice President and Chief Scientist Nancy Risch......................... 51 Vice President, Strategic Business Development Donald R. Stanski, M.D.............. 50 Vice President, Scientific and Medical Programs Steven D. Brooks(2)................. 48 Director Philippe O. Chambon, M.D., Ph.D.(1).......................... 41 Director Robert B. Chess(2).................. 44 Director Douglas E. Kelly, M.D.(2)........... 39 Director Dean O. Morton(3)................... 67 Director Gary L. Neil, Ph.D.(1)(3)........... 59 Director W. Ferrell Sanders(1)............... 63 Director - ------------------------ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. (3) Member of the Nominating Committee. ARTHUR H. REIDEL served as our President from April 1995 to August 1995 and has served as our President and Chief Executive Officer since February 1996. He has also served as our Chairman of the Board since May 1995. He was a private investor/consultant from April 1995 to March 1996, during which he was involved in the formation of three start-up companies and performed consulting services for two other companies. From October 1994 to March 1995, he served as Vice President, Business Development of Viewlogic Systems, Inc., a publicly held software firm. From 1992 to 1994, Mr. Reidel served as President and Chief Executive Officer of Sunrise Test Systems, Inc., a privately held software firm acquired by Viewlogic Systems, Inc. in September 1994. Mr. Reidel received a B.S. in Mathematics from Massachusetts Institute of Technology. ROBIN A. KEHOE joined us as Vice President, Finance and Chief Financial Officer in August 1996 and is currently our Senior Vice President, Finance and Chief Financial Officer. From January 1995 to July 1996, Ms. Kehoe was Vice President of Finance for Digidesign, a subsidiary of Avid Technology, a provider of digital tools for film, video, audio, and broadcast. Prior to that, Ms. Kehoe was Controller of Digidesign and facilitated its initial public offering and subsequent merger into Avid Technology. 37 From 1988 to 1993, Ms. Kehoe held various positions with Coopers & Lybrand in both the financial consulting and emerging business groups. Ms. Kehoe received a B.A. from Wesleyan University and an M.B.A. from San Francisco State University. MICHAEL A. EMLEY joined us as Vice President of Sales and Marketing in February 1997 and became our Vice President of Sales and Services in January 1999 and is currently Senior Vice President, Sales and Professional Services. From 1985 through January 1997, he was at Viewlogic Systems, Inc., a publicly-held software company, where he began as an Area Sales Manager and finished as Vice President of Corporate Marketing and of Strategic Account Services. In 1995 and 1996, he led the Viewlogic corporate marketing and worldwide consulting services groups. Before joining Viewlogic, Mr. Emley held positions at Analog Design Tools, Inc., an electronic design automation software company, Cimlinc, Inc., a provider of software and hardware to aerospace and defense companies worldwide, Calcomp Inc., a division of Lockheed Martin, and Perkin Elmer Data Systems, Inc. Mr. Emley received a B.S. from California State University at Los Angeles and an M.B.A. from Pepperdine University. STEVEN L. SHAFER, M.D. joined us as Vice President of Information Products in September 1999 and became Vice President, Product Development in March 2000. Prior to joining us, he was Associate Professor, Department of Anesthesia, at Stanford University School of Medicine, which he joined in 1988. Prior to joining the Stanford faculty, Dr. Shafer was founder, President and Chief Executive Officer of two software development companies. Dr. Shafer received an A.B. from Princeton University and his M.D. from Stanford University. DANIEL L. WEINER, PH.D. joined us as Vice President and General Manager, Scientific Products in January of 1998 and became Senior Vice President, Technology Deployment in March 2000. From 1994 to 1997, he held the positions of Vice President, Senior Vice President and Worldwide Director, Data Management and Biostatistics, and Principal Scientist at Quintiles, Inc., a contract research organization providing clinical development services to the pharmaceutical industry. Prior to that, Dr. Weiner held management positions in biostatistics and data management with Syntex Development Research, a research company that discovers and develops new and cost-effective prescription medicines, Statistical Consulting, Inc, a contract research organization, and Merrell Dow Pharmaceuticals. Dr. Weiner received a B.S. and his Ph.D. in Statistics from the University of Kentucky. SAEID AKHTARI joined us as Vice President for Business Development in February 1999 and became Vice President, Corporate Marketing and Strategic Development in October 1999. Prior to joining us, Mr. Akhtari was an independent consultant working with various genomics companies from June 1998 to January 1999. Mr. Akhtari was the Vice President of Sales, Marketing and Strategic Planning at Pangea Systems, now called DoubleTwist, Inc., a bioinformatics company from August 1996 to June 1998. From May 1988 to July 1996, he held senior management positions at IntelliGenetics, which was acquired in 1994 by Oxford Molecular Group, a provider of information technology and drug discovery research services to the pharmaceutical industry. His last position at Oxford Molecular Group was Executive Vice President of Sales and Services. Mr. Akhtari received a B.S. and an M.B.A. from the University of Utah. RONALD D. BEAVER, PH.D. has been responsible for developing our Decision Services group since joining us in January 1998; he is now our Managing Director, Decision Services. Prior to joining us, Dr. Beaver was a director of the Pope Street Group, a strategic management consulting company focusing on the pharmaceutical and oil and gas industries, which he founded in July 1995. Previously, he was at Strategic Decisions Group, an international strategic management consulting firm, which he joined in 1992. Dr. Beaver received a B.A. from Simpson College and an M.S. and Ph.D. in Finance and Decision Analysis from Stanford University's Department of Engineering-Economic Systems. 38 TERRENCE F. BLASCHKE, M.D. joined us in January 2000 as Vice President, Collaborative Programs. He has been a member of the Scientific Advisory Board since our formation in April 1995. Prior to joining us, he was Professor of Medicine and Molecular Pharmacology and Chief of the Division of Clinical Pharmacology at Stanford University School of Medicine, where he joined the faculty in 1974. Dr. Blaschke's research focuses on applying pharmacokinetics to the study of drug-disease interactions and the study of mechanisms underlying drug-drug interactions, to find the sources of variation in response to drugs and to develop computer-based systems to help monitor therapeutic decisions. Dr. Blaschke is a past president of the American Society for Clinical Pharmacology and Therapeutics and a former Chairman of the Generic Drugs Advisory Committee and is a consultant to the FDA. Dr. Blaschke received a B.S. from University of Denver and an M.D. from Columbia University College of Physicians and Surgeons. JAMES D. BUZZARD joined us in September 1997 and is currently our Vice President, Product Marketing, responsible for product direction and strategic technology alliances. Immediately prior to joining us, he was the General Manager and Vice President for the Pharma Division within Domain Solutions Corporation, a scientific software company and formerly a wholly-owned subsidiary of BBN Corporation, which he joined in October 1995. Mr. Buzzard also served as Chief Technology Officer for Domain Solutions Corporation and was responsible for overall technical direction and company product strategy in the health research and manufacturing industries. Prior to joining Domain Solutions Corporation, he was Senior Director of Business Development at Oracle Corporation. Mr. Buzzard received a B.S. in Biology from the University of California at Santa Cruz. STUART M. KORETZ, M.D., PH.D. joined us as Vice President, Medical Affairs and Business Development in September 1997 and became Vice President for Medical Affairs and Content in September 1999. From 1994 until September 1997, he was Vice President, New Products Discovery at ALZA Corporation, a pharmaceutical company. Prior to joining ALZA Corporation, Dr. Koretz held a variety of positions at Syntex Corporation, including Vice President of the Licensing/Business Development Division. Dr. Koretz received a B.S. from Clarkson College of Technology and received an M.D. and Ph.D. in Biochemistry from the University of Rochester. JANICE KURTH, M.D., PH.D. joined us as Vice President, Genomics in January 2000. Prior to joining us, Dr. Kurth was Director of Clinical Genetics at Phenogenex LLC, a human genomics company, from January 1999 to January 2000. From January 1998 to January 1999, Dr. Kurth worked at Genset Corporation, a human genome research company, to establish their molecular genetics research facility in the United States. Dr. Kurth was Director of Pharmacogenetics at Sequana Therapeutics, a gene and drug discovery company, from January 1997 to January 1998, where she directed scientific aspects and served as the medical advisor for their pharmacogenetics program. Prior to that time, Dr. Kurth spent six years doing independent human molecular genetic research in academic settings. Dr. Kurth received a B.A. from Austin College, and a Ph.D. in Human Molecular and Population Genetics from Stanford University, and an M.D. from the University of Arizona. E. GREGORY LEE, PH.D. one of our founders, has been Vice President, Engineering since September 1995. Prior to joining us, Dr. Lee was Director of Engineering at Sunrise Test Systems, a developer of electronic design automation software, from May 1993 to November 1995. From 1984 until 1993, he held technical and management positions at Weitek Corporation, a maker of high performance integrated circuits, with his last position being Director of Advanced Development. Dr. Lee received a B.A. from Reed College and a Ph.D. in Mathematics from Massachusetts Institute of Technology. JACOB ("JAAP") W. MANDEMA, PH.D. joined us as Vice President, Scientific Affairs, in December 1996 and is currently our Vice President and Chief Scientist. From January 1996 to December 1996, Dr. Mandema was Director of New Products Discovery at ALZA Corporation, a pharmaceutical company. Prior to that, he was Assistant Professor of Pharmaceutical Sciences, 39 Department of Anesthesia, at Stanford University School of Medicine, which he joined in 1992. Prior to joining Stanford, he completed a post-doctoral fellowship at the University of California, San Francisco. Dr. Mandema's research interests are mathematical modeling of population pharmacokinetics and pharmacodynamics. He received an undergraduate degree from the University of Utrecht, the Netherlands and a Ph.D. in Pharmacology from the University of Leiden. NANCY RISCH joined us as Vice President, Sales in July 1996 and became Vice President, Strategic Business Development in March 2000. Prior to joining us, Ms. Risch was Eastern Region Director for BBN Corporation, a provider of software applications for manufacturing engineering which she joined in June 1995. From January 1982 to June 1995, she was Director of Worldwide Industry Sales at Interleaf, a manufacturer of document preparation systems. DONALD R. STANSKI, M.D. joined us as Vice President, Scientific and Medical Programs, in July 1998. He has been a member of our Scientific Advisory Board since our formation. Prior to joining us, he was Professor in the Department of Anesthesia, and chair of that department, from 1992 to 1997, at Stanford University School of Medicine, where he joined the faculty in 1979. Dr. Stanski pursues research in developing innovative pharmacokinetic and pharmacodynamic data, especially in using surrogate measures of drug effect. He served as a member of the Anesthesia and Life Support Advisory Panel at the FDA. Dr. Stanski studied Pharmacy at the University of Alberta and received an M.D. from the University of Calgary. STEVEN D. BROOKS has been a member of our board of directors since June 1997. Since February 1999, Mr. Brooks has been Managing Director of Broadview Capital Partners, a private equity firm. From September 1997 to February 1999, Mr. Brooks was a managing director of Donaldson, Lufkin & Jenrette Securities Corporation, an investment banking firm. From 1996 to 1997, Mr. Brooks was a private investor and a consultant to technology companies. From 1994 to 1996, Mr. Brooks served as Managing Director and Head of Global Technology Investment Banking at the Union Bank of Switzerland Securities, LLC. Mr. Brooks is a director of Paychex, Inc., QRS Corporation and Veritas Software Corporation. Mr. Brooks currently serves as chair of our Audit Committee. Mr. Brooks received a B.A. from Yale College and a J.D. from University of Virginia Law School. PHILIPPE O. CHAMBON, M.D., PH.D. has been a member of our board of directors since May 1997. Since January 1997, Dr. Chambon has been a General Partner of the Sprout Group, a private equity firm. He joined the Sprout Group in May 1995. From May 1993 to April 1995, Dr. Chambon served as Manager in the Healthcare Practice of The Boston Consulting Group, a leading management consulting firm. From September 1987 to April 1993, Dr. Chambon was an executive with Sandoz Pharmaceuticals Corporation (Novartis), a leading pharmaceutical company, where he had late stage product development and pre-marketing responsibilities. He is currently a director of Deltagen, Inc. and Variagenetics, Inc., as well as several other private companies. Dr. Chambon received an M.D. and Ph.D. from the University of Paris and an M.B.A. from Columbia University. ROBERT B. CHESS became a member of our board of directors in April 2000. Mr. Chess is Chairman and co-Chief Executive Officer of Inhale Therapeutic Systems, Inc., a provider of pulmonary delivery systems for biotechnology drugs. He has been at Inhale since 1991 and served as President and Chief Executive Officer until August 1998. From September 1990 until October 1991, he was an Associate Deputy Director in the White House Office of Policy Development. In March 1987, Mr. Chess co-founded Penederm Incorporated, a topical dermatological drug delivery company, and served as its President from February 1989 until October 1989. Prior to co-founding Penederm, Mr. Chess held management positions at Intel Corp., a semiconductor manufacturer, and Metaphor, a computer software company that was acquired by International Business Machines. Mr. Chess received a B.S. in Engineering from the California Institute of Technology and an M.B.A. from the Harvard Business School. 40 DOUGLAS E. KELLY, M.D. has been a member of our board of directors since February 1996. Dr. Kelly has been a partner at Alloy Ventures, formerly Asset Management Associates, a venture capital and investment management firm, since 1993. Dr. Kelly is a director of Fusion Medical Technologies, Inc. and several privately-held companies. Dr. Kelly received a B.A. in Biochemistry and Molecular Biology from the University of California, San Diego, an M.D. from the Albert Einstein College of Medicine and an M.B.A. from the Stanford University Graduate School of Business. DEAN O. MORTON became a member of our board of directors in April 2000. Mr. Morton was the Executive Vice President, Chief Operating Officer and a Director of Hewlett-Packard Company, a manufacturer of computer systems and test and measurement instruments, from 1984 until his retirement in 1992. Mr. Morton is a director of KLA-Tencor Inc., Centigram Communications Corporation, BEA Systems Inc., The Clorox Company and ALZA Corporation. He is a trustee of the State Street Research Group of Funds, the State Street Research Portfolios, Inc. and the Metropolitan Series Fund Inc. Mr. Morton received a B.S. from Kansas State University and an M.B.A. from Harvard Business School. GARY L. NEIL, PH.D. has been a member of our board of directors since April 1996. Dr. Neil is President, Chief Executive Officer and a director of Crescendo Pharmaceuticals Corporation, a pharmaceutical development and commercialization company, which he joined in 1997. Dr. Neil was a director and the President and Chief Executive Officer of Therapeutic Discovery Corporation, a pharmaceutical development and commercialization company, from 1993 until September 1997. From 1989 to 1993, Dr. Neil served as Executive Vice President for Wyeth-Ayerst Research division of Wyeth Laboratories, Inc., a subsidiary of American Home Products Corporation, a large pharmaceutical company. Dr. Neil is a director of Allergan Specialty Therapeutics, Inc. and Geron Corporation. He received a B.S. from Queens University, Canada and a Ph.D. in Organic Chemistry at the California Institute of Technology. W. FERRELL SANDERS has been a member of our board of directors since February 1996. Mr. Sanders has served as a partner of Alloy Ventures, Inc., formerly Asset Management Associates, a venture capital and investment management firm, since March 1987. Mr. Sanders is a director of Adaptec, Inc. Mr. Sanders holds a B.S. in Electrical Engineering from North Carolina State and an M.B.A. from the University of Santa Clara. BOARD COMPOSITION We currently have eight directors. Upon the closing of this offering, the terms of office of the board of directors will be divided into three classes. As a result, a portion of our board of directors will be elected each year. The division of the three classes, the initial directors and their respective election dates will be as follows: - the class I directors will be Arthur H. Reidel, Philippe O. Chambon, Ph.D. and Douglas E. Kelly, M.D., and their term will expire at the annual meeting of stockholders to be held in 2001; - the class II directors will be Robert B. Chess, Dean O. Morton and W. Ferrell Sanders, and their term will expire at the annual meeting of stockholders to be held in 2002; and - the class III directors will be Steven D. Brooks and Gary L. Neil, Ph.D., and their term will expire at the annual meeting of stockholders to be held in 2003. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire, will be elected to serve from the time of election and qualification until the third annual meeting following their election. In addition, our certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be 41 distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in our control or management. BOARD COMMITTEES AUDIT COMMITTEE. Our audit committee reviews our internal accounting procedures and consults with and reviews the services provided by our independent auditors. Current members of our audit committee are Messrs. Brooks and Chess and Dr. Kelly. COMPENSATION COMMITTEE. Our compensation committee reviews and recommends general policy relating to compensation and benefits of our officers and employees. The compensation committee also administers the issuance of stock options and other awards under our stock plans. Current members of the compensation committee are Mr. Sanders, Dr. Neil and Dr. Chambon. NOMINATING COMMITTEE. Our nominating committee identifies possible candidates to our board of directors. The nominating committee identifies candidates to replace members who may resign their position or candidates for election at our annual meeting of stockholders. Current members of the nominating committee are Dr. Neil and Messrs. Reidel and Morton. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of our executive officers serves as members of the board of directors or compensation committee of any entity that has one or more executive officers who serve on our board or compensation committee. COMPENSATION OF DIRECTORS Directors currently do not receive cash compensation from us for their services as members of the board or committees or for attendance at any such meetings. Our directors may be reimbursed for certain reasonable expenses in connection with attendance at board of director and committee meetings. In May 1999, Dr. Gary L. Neil received options to purchase 10,000 shares of our common stock at an exercise price of $0.35 per share, in connection with his attendance at our board of director and committee meetings. In April 2000, we adopted the 2000 Equity Incentive Plan which provides for the automatic grant of options to purchase shares of common stock to our directors who are not our employees or an employee of any our affiliates. Each non-employee director who has not previously received an option to purchase our common stock and who is serving as a director after the closing of this offering will receive an initial option to purchase 5,000 shares of common stock. After this offering, each person who is not our employee who is first elected or appointed to the board of directors less than six months from the prior annual meeting will be granted an initial grant on the date of this election or appointment to purchase 5,000 shares of our common stock, or if first elected after six months from the prior annual meeting of stockholders 2,500 shares. Starting at the annual meeting of stockholders in 2001, all non-employee directors will receive an annual option to purchase 5,000 shares of common stock. See "--Employee Benefit Plans--2000 Equity Incentive Plan" for a more detailed explanation of the terms of these stock options. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS Our bylaws provide that we will indemnify our directors and executive officers and may indemnify our other officers, employees and other agents to the fullest extent permitted by Delaware law. We are also empowered under our bylaws to enter into indemnification contracts with our directors and 42 officers and to purchase insurance on behalf of any person we are required or permitted to indemnify. Pursuant to this provision, we expect to enter into indemnification agreements with each of our directors and executive officers. We have obtained officer and director liability insurance to cover liabilities our officers and directors may incur in connection with their services to us, including matters arising under the Securities Act. In addition, our certificate of incorporation provides that, to the fullest extent permitted by Delaware law, our directors will not be liable for monetary damages for breach of the directors' fiduciary duty of care to us and our stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances, equitable remedies including an injunction or other forms of non-monetary relief would remain available under Delaware law. Under current Delaware law, a director's liability to us or our stockholders may not be limited: - with respect to any breach of the director's duty of loyalty to us or our stockholders; - for acts or omissions not in good faith or involving intentional misconduct; - for knowing violations of law; - for any transaction from which the director derived an improper personal benefit; - for improper transactions between the director and us; and - for improper distributions to stockholders and loans to directors and officers. This provision also does not affect a director's responsibilities under any other laws including the federal securities laws or state or federal environmental laws. There is no pending litigation or proceeding involving our directors or officers in which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. EXECUTIVE COMPENSATION The following table presents summary information for the fiscal year ended March 31, 2000, regarding the compensation of our Chief Executive Officer and each of our other executive officers whose salary and bonus for fiscal 2000 were in excess of $100,000. We refer to these officers as the "named executive officers." SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION ------------------------------------ SHARES OF COMMON STOCK ISSUABLE UPON FISCAL EXERCISE OF NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS Arthur H. Reidel ..................................... 2000 $200,000 $ -- 107,250 President and Chief Executive Officer Robin A. Kehoe ....................................... 2000 $143,750 $ -- 72,500 Senior Vice President, Finance and Chief Financial Officer Michael A. Emley ..................................... 2000 $141,250 $56,148 60,000 Senior Vice President, Sales and Professional Services Daniel L. Weiner ..................................... 2000 $175,000 $ -- -- Senior Vice President, Technology Deployment 43 OPTION GRANTS The following table contains information about the stock option grants to the named executive officers in fiscal 2000: OPTION GRANTS IN FISCAL YEAR 2000 POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE NUMBER OF PERCENTAGE OF APPRECIATION FOR SECURITIES TOTAL OPTIONS EXERCISE OPTION TERM(4) UNDERLYING OPTIONS GRANTED DURING PRICE PER EXPIRATION ------------------- GRANTED(1) FISCAL YEAR(2) SHARE($/SH)(3) DATE 5% 10% ------------------ -------------- -------------- ---------- -------- -------- Arthur H. Reidel(5)....... 107,250 8.16% 0.35 5/13/09 Robin A. Kehoe(5)......... 72,500 5.52% 0.35 5/13/09 Michael A. Emley(6)....... 60,000 4.56% 0.35 5/13/09 Daniel L. Weiner.......... -- -- -- -- -- -- - ------------------------ (1) Options are granted under our 1997 Stock Option Plan. These options expire 10 years from the date of grant, or earlier upon termination of employment. See "Management--Employee Benefit Plans." (2) Based on an aggregate of 1,314,575 options granted during fiscal 2000 to our employees and consultants, including the named executive officers. (3) The exercise price per share of each option was equal to the fair market value of our common stock on the date of grant as determined by our board of directors. (4) Amounts reported in this column represent hypothetical values that may be realized upon exercise of the options immediately prior to the expiration of their term, assuming that the stock price based upon an assumed initial public offering price of $ per share appreciates at the specified annual rates of appreciation, compounded annually over the term of the options. These numbers are calculated based on rules promulgated by the Securities and Exchange Commission. Actual gains, if any, on stock option exercises and common stock holdings are dependent on the time of such exercise and the future performance of our common stock. (5) Options to purchase 7,250 shares granted to Mr. Reidel and options to purchase 7,500 shares granted to Ms. Kehoe were fully vested on May 14, 1999. The remaining options held by Mr. Reidel and Ms. Kehoe vest in equal monthly installments over four years. (6) This option vests in equal monthly installments over 48 months. 44 YEAR-END VALUES The table below provides information about the number and value of options held by the named executive officers at March 31, 2000. NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED AT MARCH 31, 2000 AT MARCH 31, 2000(1) ON EXERCISE VALUE REALIZED(1) --------------------------- ------------------------- ----------- ------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE NAME ----------- ------------- ------------------------- Arthur H. Reidel.............. 121,830 $ -- -- -- Robin A. Kehoe................ 82,220 -- -- -- Michael A. Emley.............. -- -- 13,750 46,250 $ Daniel L. Weiner.............. -- -- -- -- -- VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT MARCH 31, 2000(1) ------------------------- UNEXERCISABLE NAME ------------------------- Arthur H. Reidel.............. -- Robin A. Kehoe................ -- Michael A. Emley.............. $ Daniel L. Weiner.............. -- - ------------------------ (1) There was no public trading market for our common Stock as of March 31, 2000. Accordingly, these values have been calculated on the basis of an assumed initial public offering price of $ per share, less the applicable exercise price. EMPLOYEE BENEFIT PLANS 2000 EQUITY INCENTIVE PLAN Our board of directors adopted our 2000 Equity Incentive Plan on April 7, 2000, and our stockholders approved it on , 2000. We have reserved a total of 4,000,000 shares of our common stock for issuance under the incentive plan. On each January 1, starting with January 2001 and continuing through and including the calendar year 2010, the share reserve automatically will be increased by a number of shares equal to the LEAST of: - 5% of our then outstanding shares of common stock; - 2,000,000 shares; or - a lesser number determined by our board. If the recipient of a stock award does not purchase the shares subject to such stock award before the stock award expires or otherwise terminates, the shares that are not purchased will again become available for issuance under the incentive plan. ADMINISTRATION AND ELIGIBILITY. The board administers the incentive plan unless it delegates administration to a committee. The board may grant incentive stock options to our employees and to the employees of our affiliates. The board also may grant nonstatutory stock options, stock bonuses and restricted stock purchase awards to our employees, directors and consultants as well as to the employees, directors and consultants of our affiliates. OPTION TERMS. The board may grant incentive stock options with an exercise price of 100% or more of the fair market value of a share of our common stock on the grant date. It may grant nonstatutory stock options with an exercise price as low as 85% of the fair market value of a share on the grant date. In addition, the incentive plan provides for automatic stock option grants to non-employee directors on our board. After this offering, each person who is not our employee who is first elected or appointed to the board of directors less than six months from the prior annual meeting will be granted an initial grant on the date of this election or appointment to purchase 5,000 shares of our common stock, or if first elected after six months from the prior annual meeting of stockholders 2,500 shares, at fair market value of the common stock on the date of grant. On the date of this offering, 45 non-employee directors of our board of directors who have not previously been granted options to purchase common stock will receive an initial stock option to purchase 5,000 shares of our common stock. The non-employee directors become fully vested in the stock option grant at the next annual meeting of stockholders following the date of the grant, provided that the non-employee directors are providing services to us at that time. After this offering, each person who is a non-employee director on the day after each annual stockholder's meeting, shall, on that date, be granted an annual stock option grant to purchase 5,000 shares of our common stock at the fair market value of our common stock on that date of grant. The non-employee directors become fully vested in each stock option grant at the next annual meeting of stockholders following the date of the grant, provided that the non-employee directors are providing service to us at that time. STOCK BONUS AND RESTRICTED STOCK PURCHASE AWARDS. The board may also grant stock bonus awards and restricted stock purchase awards. Stock bonus awards are granted for services past rendered. Restricted stock purchase awards can be granted, but the purchase price cannot be less than 85% of the fair market value on the date of grant or at the time of purchase. EFFECT OF TRANSACTIONS ON OPTIONS. Transactions not involving our receipt of consideration, such as a merger, consolidation, reorganization, stock dividend, or stock split, may change the class and number of shares subject to the incentive plan and to outstanding awards. In that event, the board will appropriately adjust the incentive plan as to the class and the maximum number of shares subject to the incentive plan and to the limits on the number of shares that the board may grant under an option as provided in Section 162(m) of the Internal Revenue Code. It also will adjust outstanding awards as to the class, number of shares and price per share applicable to such awards. If we dissolve or liquidate, then outstanding stock awards will terminate immediately prior to such event. However, we treat outstanding stock awards differently in the following situations: - a sale, lease or other disposition of all or substantially all of our assets or stock; - a merger or other consolidation in which we are not the surviving corporation; - a reverse merger following which we are the surviving corporation but where our common stock outstanding immediately prior to the merger is converted into other property. In these situations, the surviving or acquiring corporation may either assume all outstanding awards under the incentive plan or substitute other awards for the outstanding awards. If the surviving or acquiring corporation does not assume or substitute outstanding options, then, for option holders who are then providing services to us or our affiliates, the vesting and exercisability, if applicable, of the options will accelerate and the options will terminate immediately prior to the occurrence of the event described above if not otherwise exercised. The vesting and exercisability of options held by option holders who are no longer providing services to us or one of our affiliates will not accelerate. However, those options will also terminate immediately prior to the occurrence of the event described above. In certain change in control circumstances, the vesting provisions of the outstanding stock options will be accelerated if a holder of a stock option is terminated due to a constructive termination or involuntarily terminated without cause within 13 months after a change in control. 2000 EMPLOYEE STOCK PURCHASE PLAN Our board adopted the 2000 Employee Stock Purchase Plan on April 7, 2000, and our stockholders approved it on , 2000. 46 SHARE RESERVE. We have authorized the issuance of 600,000 shares of our common stock pursuant to purchase rights granted to eligible employees under the purchase plan. On each January 1, starting with January 2001, the share reserve will automatically be increased by a number of shares equal to the LESSER of: - 1.5% of our then outstanding shares of common stock; - 600,000 shares; or - such fewer number of shares determined by the board. ELIGIBILITY. The purchase plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. The purchase plan provides a means by which eligible employees may purchase our common stock through payroll deductions. We implement the purchase plan by offerings of purchase rights to eligible employees. Generally, all of our full-time employees and the full-time employees of our affiliates incorporated in the United States may participate in offerings under the purchase plan. However, no employee may participate in the purchase plan if, immediately after we grant the employee a purchase right, the employee would have voting power over 5% or more of our outstanding capital stock. As of the date hereof, no shares of common stock have been purchased under the purchase plan. ADMINISTRATION. Under the purchase plan, the board may specify offerings of up to 27 months. Unless the board otherwise determines, common stock will be purchased for accounts of participating employees at a price per share equal to the lower of: - 85% of the fair market value of a share on the first day of the offering; or - 85% of the fair market value of a share on the purchase date. For the first offering, which will begin on the effective date of this initial public offering, and all additional offerings, we intend to register the shares being offered on a Form S-8 registration statement. The fair market value of the shares on the first date of the first offering will be the price per share at which our shares are first sold to the public as specified in the final prospectus with respect to our initial public offering. Otherwise, fair market value generally means the closing sales price (rounded up where necessary to the nearest whole cent) for such shares (or the closing bid, if no sales were reported) as quoted on the Nasdaq National Market on the trading day prior to the relevant determination date, as reported in THE WALL STREET JOURNAL. The board may provide that employees who become eligible to participate after the offering period begins nevertheless may enroll in the offering. These employees will purchase our stock at the lower of: - 85% of the fair market value of a share on the day they began participating in the purchase plan; or - 85% of the fair market value of a share on the purchase date. If authorized by the board, participating employees may authorize payroll deductions of up to 20% of their base compensation for the purchase of stock under the purchase plan. Generally employees may end their participation in the offering at any time up to 10 days before a purchase period ends. Their participation ends automatically on termination of their employment or loss of full-time status. OTHER PROVISIONS. The board may grant eligible employees purchase rights under the purchase plan only if the purchase rights, together with any other purchase rights granted under other employee stock purchase plans established by us or by our affiliates, if any, do not permit the employee's rights to purchase our stock to accrue at a rate which exceeds $25,000 of fair market value of our stock for each calendar year in which the purchase rights are outstanding. 47 Upon the happening of certain corporate transactions, a surviving corporation may assume outstanding purchase rights or substitute other purchase rights therefor. If the surviving corporation does not assume or substitute the purchase rights, the offering period may be shortened and our stock may be purchased for the participants immediately before the corporate transactions. 1997 STOCK OPTION PLAN Our board of directors initially adopted our 1997 stock option plan on February 17, 1997, and our stockholders initially approved it on March 17, 1997. It was last amended by the board of directors on April 7, 2000 and our stockholders approved the amendment on April , 2000. We have reserved a total of 3,800,000 shares of our common stock for issuance under the option plan. As of March 31, 2000, under the 1997 stock option plan (a) options to purchase 1,742,119 shares of common stock were outstanding and (b) options to purchase 470,179 shares had been exercised. On April 10, 2000, our Compensation Committee granted options to purchase an additional 812,625 shares of our common stock. If the recipient of a stock option does not purchase the shares subject to such stock option before the stock option expires or otherwise terminates, the shares that are not purchased will again become available for issuance under the option plan. The 1997 stock option plan provides that it will be administered by the board, or a committee appointed by the board, which determines recipients and types of options to be granted, including number of shares under the option and the exercisability of the shares. Transactions not involving our receipt of consideration, such as a merger, consolidation, reorganization, stock dividend, or stock split, may change the class and number of shares subject to the option plan and to outstanding options. In that event, the board will appropriately adjust the option plan as to the class and the maximum number of shares subject to the option plan and to the limits on the number of shares that the board may grant under an option as provided in Section 162(m) of the Internal Revenue Code. It also will adjust outstanding options as to the class, number of shares and price per share applicable to such options. In the event of a corporate transaction including a dissolution or liquidation, the sale, lease or disposition of all or substantially all of our assets or a merger or consolidation, then all outstanding options may be either assumed or substituted for by any surviving entity. If the surviving entity refuses to assume or substitute for such options, then the vesting and exercisability of the options held by person who are then providing services to us or our affiliates will be accelerated prior to such transaction and the options will terminate immediately prior to the occurrence of the corporate transaction. The vesting and exercisability of all other options will terminate immediately prior to the occurrence of the corporate transaction. 1995 STOCK OPTION PLAN Our board of directors initially adopted our 1995 stock option plan on May 12, 1995, and our stockholders initially approved it on May 2, 1996. It was last amended by the board of directors on April 19, 1996. The board authorized and reserved a total of 507,000 shares of our common stock for issuance under the 1995 stock option plan. The 1995 stock option plan provides for the grant of incentive stock options to our employees and to the employees of our affiliates. Under the 1995 stock option plan, the board also may grant nonstatutory stock options to our employees, directors and consultants as well as to the employees, directors and consultants of our affiliates. The 1995 stock option plan provides that it will be administered by the board, or a committee appointed by the board, which determines recipients and types of options to be granted, including number of shares under the option and the exercisability of the shares. As of March 31, 2000, under the 1995 stock option plan (a) options to purchase 94,750 shares of common stock were outstanding and (b) options to purchase 179,850 shares had been exercised. In 48 February 1997, the board voted that no additional grants would be made under the 1995 stock option plan and all shares that had been authorized and reserved but not granted under the plan were returned to our authorized common stock. Transactions not involving our receipt of consideration, such as a merger, consolidation, reorganization, stock dividend, or stock split, may change the class and number of shares subject to the option plan and to outstanding options. In that event, the board will appropriately adjust the option plan as to the class and the maximum number of shares subject to the option plan. It also will adjust outstanding options as to the class, number of shares and price per share applicable to such options. In the event of a corporate transaction including a dissolution or liquidation, the sale, lease or disposition of all or substantially all of our assets or a merger or consolidation, then all outstanding options may be either assumed or substituted for by any surviving entity. If the surviving entity refuses to assume or substitute for such options, the plan provides that the options will expire upon consummation of the transaction but the board has adopted a policy that in such a transaction, the vesting and exerciseability will be accelerated prior to the consummation of the transaction. SECTION 401(K) PLAN We maintain a retirement and deferred savings plan for our U.S. employees. The retirement and deferred savings plan is intended to qualify as a tax-qualified plan under Section 401 of the Internal Revenue Code. The retirement and deferred savings plan provides that each participant may contribute up to 20% of his or her pre-tax compensation, up to a statutory limit, which is $10,500 in calendar year 2000. Under the plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plan's trustee. The retirement and deferred savings plan also permits us to make discretionary contributions, subject to established limits and a vesting schedule. 49 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AGREEMENTS WITH EXECUTIVE OFFICERS In December 1997, we completed the acquisition of Scientific Consulting, Inc., of which Dr. Weiner was the majority shareholder. We purchased all of Dr. Weiner's interest in Scientific Consulting, Inc. in exchange for $760,000 and 400,000 shares of our common stock. In connection with the acquisition, Dr. Weiner entered into a two year non-competition agreement with us in consideration for which we issued him 300,000 shares of our common stock. Dr. Weiner became an executive officer in January 1998. In connection with becoming an officer and employee of the Company, Dr. Weiner purchased 300,000 shares of our common stock for $75,000 in the form of a promissory note. This stock is subject to a right of repurchase in favor of us in the event Dr. Weiner ceases to provide services to us or we terminate his employment for cause. This right of repurchase lapses over a four year period at the end of which all shares will become fully vested. If we should terminate Dr. Weiner's employment other than for cause prior to December 17, 2001, the vesting of these shares will accelerate and all of the shares will become fully vested as of the date of termination. Ms. Kehoe purchased 120,000 shares in July 1996, 40,000 shares in June 1998 and 65,000 shares in June 1999. These shares are subject to a right of repurchase in favor of us. This right of repurchase lapses over a four year period at the end of which all shares will become fully vested. If we should engage in a transaction resulting in change in control, and Ms. Kehoe is subsequently terminated within four years of such transaction, the vesting of these shares will accelerate and all of the shares will become fully vested at that time. INVESTOR RIGHTS AGREEMENT We have entered into an agreement with the holders of our preferred stock, including entities with which our directors are affiliated, that provides these stockholders certain rights relating to the registration of their stock. These rights have been waived as to this offering by the holders of preferred stock, but will survive this offering and will terminate no later than five years after the closing date of this offering. This agreement also entitles the holders of our preferred stock to rights to receive financial information regarding us and a right of first refusal to purchase shares of our stock we issue, both of which rights terminate at the close of this offering. SHAREHOLDER AGREEMENT We have entered into an agreement with institutional holders of our preferred stock and our three largest common stockholders, including entities with which our directors are affiliated, that provides for the voting of their shares in favor of the election of designated persons to our board of directors, including the current members of our board other than Messrs. Chess and Morton. In addition, some of our preferred stockholders have the right to designate, individually or mutually, up to four candidates to be elected by these stockholders as members of our board of directors. This agreement will terminate upon the closing of this offering. INDEMNIFICATION AGREEMENTS We have entered into indemnification agreements with our directors and officers for the indemnification of these persons to the full extent permitted by law. We also intend to execute these agreements with our future directors and officers. LOANS TO EXECUTIVE OFFICERS We loaned Ms. Kehoe $12,000 in July 1996 and $10,000 in June 1998 in connection with the purchase of our common stock. Each of these loans is a full recourse note and accrues interest at a 50 rate of 6.74% and 5.77% per year, respectively, compounded annually. The principal and accrued interest on each loan is due July 25, 2001 and may be prepaid without penalty. The promissory notes will accelerate and become due and payable 30 days after Ms. Kehoe's employment with us is terminated for any reason. In addition, we loaned Ms. Kehoe $22,750 in 1999 to purchase additional shares of our common stock. The interest on this loan is 6% per year, with the principal and accrued interest due May 1, 2003. This promissory note may be prepaid without penalty and will accelerate and become immediately due and payable should Ms. Kehoe's employment with us be terminated for any reason. In January 1998 we loaned Dr. Weiner $75,000 in connection with the purchase of our common stock. This loan is a full recourse note and accrues interest at a rate of 5.93% per year, compounded annually. The principal and accrued interest is due December 17, 2002 and may be prepaid without penalty. This promissory note will accelerate and become due and payable 90 days after Dr. Weiner's employment with us is terminated. STOCK SALES The following executive officers, directors or holders of more than 5% percent of our securities purchased shares of our stock in the amounts set forth below during the last three fiscal years. SHARES OF PREFERRED STOCK COMMON --------------------------------- STOCK WARRANTS(1) SERIES C SERIES D SERIES E -------- ----------- --------- --------- --------- DIRECTORS AND EXECUTIVE OFFICERS Arthur H. Reidel........................ 121,830 -- -- -- -- Robin A. Kehoe.......................... 122,220 2,215 -- 11,108 -- Steven L. Shafer........................ 7,500 -- -- -- -- Daniel L. Weiner(2)..................... 907,000 -- -- -- -- Steven D. Brooks........................ 40,000 4,747 73,840 23,762 -- Gary L. Neil............................ -- 633 -- 3,174 -- 5% STOCKHOLDERS Asset Management Assoc. 1996, L.P.(3)... -- 91,646 970,465 611,121 -- The Sprout Entities(4).................. -- -- 1,265,823 538,527 -- McKesson HBOC, Inc...................... -- -- -- -- 2,777,778 Weiss, Peck & Greer Entities(5)......... -- -- -- 1,223,242 -- Per Share Price......................... $0.25 to $ 0.25 $ 2.37 $ 3.27 $ 7.20 $1.40 Date of Purchase........................ 9/97 to 5/98 5/97 10/98 9/99 3/00 - ------------------------ (1) These warrants represent warrants to purchase shares of our common stock. (2) Includes 3,000 shares held of record by Dr. Weiner's spouse. Also includes 604,000 shares issued to Dr. Weiner in conjunction with our acquisition of his interest in Scientific Consulting, Inc. in December 1997. (3) AMC Partners 96, L.P. is the general partner of Asset Management Associates 1996, L.P. Mr. Sanders and Dr. Kelly, two of our directors, are general partners of AMC Partners 96, L.P. (4) Consists of 1,569,595 shares held by Sprout Capital VII, L.P., 18,233 shares held by Sprout CEO Fund, L.P., 180,435 shares held by DLJ First ESC, L.P. and 36,087 shares held by DLJ Capital Corp. Dr. Chambon, one of our directors, is an employee of DLJ Capital Corp., which is the managing general partner of Sprout Capital VII, L.P. and a general partner of the Sprout CEO 51 Fund, and he is a Vice President of the Sprout Group, which is a division of DLJ Capital Corp. Dr. Chambon is a general partner of DLJ Associates VII, L.P. which is a general partner of Sprout VII, L.P. DLJ First ESC, L.P. is a fund that invests for the benefit of an employee deferred compensation plan for employees of DLJ Capital Corp. Dr. Chambon disclaims beneficial ownership of these shares except to the extent of his pecuniary or partnership interests. (5) Consists of 534,679 shares held by WPG Enterprise Fund III, L.L.C., 611,376 shares held by Weiss, Pech & Greer Venture Associates IV, L.L.C. and 77,187 shares held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P. All future transactions, including loans, between us and our officers, directors, principal stockholders and their affiliates will be approved by a majority of our board of directors, including a majority of the independent and disinterested directors in these transactions. 52 PRINCIPAL STOCKHOLDERS The following table sets forth information concerning the beneficial ownership of the shares of our common stock as of March 31, 2000, and as adjusted to give effect to the sale of shares of our common stock in this offering assuming conversion of all of the outstanding shares of preferred stock into common stock and no exercise of the underwriters' over-allotment option, by: - each person known by us to be the beneficial owner of 5% or more of the outstanding shares of common stock together with the affiliates of such person; - each named executive officer; - each of our directors; and - all executive officers and current directors as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock under options held by that person that are currently exercisable or exercisable within 60 days of March 31, 2000 are considered outstanding. Except pursuant to applicable community property laws or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power with respect to all shares of common stock shown as beneficially owned by such stockholder. Unless otherwise indicated in the footnotes, the address of the individuals listed below is: c/o Pharsight Corporation, 800 West El Camino Real, Mountain View, CA 94040. BENEFICIAL OWNERSHIP PRIOR TO OFFERING -------------------------------------------- SHARES BENFICALLY OWNED PERCENTAGE THAT ARE ISSUABLE BENEFICIALLY NUMBER OF SHARES PURSUANT TO OPTIONS AND OWNED(1) BENEFICIALLY OWNED WARRANTS EXERCISABLE ------------------- NAME PRIOR TO THE WITHIN 60 DAYS OF BEFORE AFTER DIRECTORS AND EXECUTIVE OFFERING MARCH 31, 2000 OFFERING OFFERING OFFICERS ------------------ ----------------------- -------- -------- Arthur H. Reidel....................... 926,350 -- 6.3% Robin A. Kehoe......................... 253,328 2,215 1.7 Michael A. Emley....................... 100,000 16,250 * * Steven L. Shafer(2).................... 152,744 2,500 1.1 Daniel L. Weiner(3).................... 907,000 -- 6.2 Steven D. Brooks....................... 137,602 4,747 * * Gary L. Neil(4)........................ 41,174 32,708 * * Douglas E. Kelly(5).................... 3,124,596 91,646 21.7 Philippe O. Chambon(6)................. 1,804,350 -- 12.2 Robert B. Chess........................ -- -- * * W. Ferrell Sanders(5).................. 3,124,596 91,646 21.7 Dean O. Morton......................... -- -- * * All directors and officers as a group (12 persons)(7)...................... 7,447,144 147,631 51.0 5% STOCKHOLDERS Asset Management Associates 1996, L.P.(5).............................. 3,124,596 91,646 21.7 McKesson HBOC, Inc.(8)................. 2,777,778 -- 18.8 The Sprout Entities(6)................. 1,804,350 -- 12.2 The Weiss, Peck & Greer Entities(9).... 1,223,242 -- 8.3 - ------------------------ * Represents less than 1%. (1) Percentage of ownership is based on 14,741,939 shares of common stock outstanding before this offering and shares of common stock outstanding after this offering. (2) Includes 8,000 shares held by Mr. Shafer as custodian for his children under the California Uniform Gifts to Minors Act. 53 (3) Includes 3,000 shares held of record by Dr. Weiner's spouse. (4) Includes 21,174 shares and warrants to purchase 633 shares held by The Neil Family Trust dated 12/16/93, of which Dr. Neil is a trustee. (5) Consists solely of shares and warrants held by Asset Management Associates 1996, L.P. AMC Partners 96, L.P. is the general partner of Asset Management Associates 1996, L.P. W. Ferrell Sanders and Douglas E. Kelly, two of our directors, are general partners of AMC Partners 96, L.P. and disclaim beneficial ownership of these shares except to the extent of each of their proportionate partnership interest in these shares. The address for Asset Management Associates 1996, L.P. is c/o Alloy Ventures, 480 Cowper Street, Palo Alto, CA 94301. (6) Consists of 1,569,595 shares held by Sprout Capital VII, L.P., 18,233 shares held by Sprout CEO Fund, L.P., 180,435 shares held by DLJ First ESC, L.P. and 36,087 shares held by DLJ Capital Corp. Dr. Chambon is an employee of DLJ Capital Corp., which is the managing general partner of Sprout Capital VII, L.P. and a general partner of the Sprout CEO Fund, and he is a Vice President of the Sprout Group, which is a division of DLJ Capital Corp. Dr. Chambon is a general partner of DLJ Associates VII, L.P. which is a general partner of Sprout VII, L.P. DLJ First ESC, L.P. is a fund that invests for the benefit of an employee deferred compensation plan for employees of DLJ Capital Corp. Dr. Chambon disclaims beneficial ownership of these shares except to the extent of his pecuniary or partnership interests. The address for the Sprout Entities is 277 Park Avenue, New York, NY 10172. (7) Consists of 4,961,120 shares of common stock and warrants to purchase 92,279 shares of common stock held by entities affiliated with directors and executive officers. See footnotes 2 through 6 above. (8) McKesson HBOC, Inc. is located at One Post Street, Floor 33, San Francisco, CA 94104. (9) Consists of 534,679 shares held by WPG Enterprise Fund III, L.L.C., 611,376 shares held by Weiss, Peck & Greer Venture Associates IV, L.L.C. and 77,187 shares held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Weiss, Peck & Greer, L.L.C., is a Class A limited partner of WPG Venture Partners III, L.P., the Fund Investment Advisory Member for WPG Enterprise Fund III, L.L.C., Weiss, Peck & Greer Venture Associates IV, L.L.C. and Weiss, Peck & Greer Venture Associates IV Cayman, L.P. The Weiss, Peck & Greer Entities are located at 555 California Street, Suite 3130, San Francisco, CA 94104. 54 DESCRIPTION OF CAPITAL STOCK Upon completion of this offering, our authorized capital stock will consist of 120,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value. The following description of our capital stock does not purport to be complete and is subject to, and qualified in its entirety by, our certificate of incorporation and bylaws, which we have included as exhibits to the registration statement of which this prospectus forms a part. COMMON STOCK As of March 31, 2000, there were 14,741,939 shares of common stock outstanding, held of record by 94 stockholders. This amount assumes the conversion of all outstanding shares of preferred stock into common stock, which is to occur upon the closing of this offering. In addition, as of March 31, 2000, there were 1,835,369 shares of common stock subject to outstanding options. Upon completion of this offering, there will be shares of common stock outstanding, assuming no exercise of outstanding stock options or warrants or the underwriters' over-allotment option. Each share of common stock entitles its holder to one vote on all matters to be voted upon by stockholders. Subject to preferences that may apply to preferred stock that may be issued after this offering, holders of common stock may receive ratably any dividends that the board of directors may declare out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and any liquidation preference of preferred stock that may be issued after this offering. The common stock has no preemptive rights, conversion rights, subscription rights or redemption or sinking fund provisions. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and non-assessable. PREFERRED STOCK Our board of directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series. Our board may designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, sinking fund terms and number of shares constituting any series or the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock or delaying or preventing a change in control. We have no present plans to issue any shares of preferred stock after the completion of this offering. WARRANTS As of March 31, 2000, after giving effect to the conversion of all outstanding preferred stock into common stock, warrants to purchase 296,881 shares of common stock were outstanding at a weighted average exercise price of $1.45 per share. These warrants expire on various dates from the closing of this offering through the date that is five years after the closing of this offering. The warrants contain provisions for the adjustment of the exercise price and the aggregate number of shares that may be issued upon the exercise of the warrant if a stock dividend, stock split, reorganization, reclassification or consolidation occurs. REGISTRATION RIGHTS On the date 180 days after the completion of this offering, the holders of 10,686,717 shares of common stock or their permitted transferees, will be entitled to rights to register these shares under the Securities Act of 1933. If we propose to register any of our securities under the Securities Act, 55 either for our own account or for the account of other securities holders, the holders of these shares will be entitled to notice of the proposed registration and will be entitled to include, at our expense, their shares of common stock in the registration. In addition, the holders may require us, at our expense and on not more than two occasions, to file a registration statement under the Securities Act covering their shares of common stock, and we will be required to use our best efforts to have the registration statement declared effective. Further, the holders may require us at our expense, but not more than twice in any twelve month period, to register their shares on Form S-3 when use of this form becomes available to us. These rights shall terminate on the earlier of seven years after the effective date of this offering, or when a holder owns less than 1% of our outstanding common stock and is able to sell all its shares pursuant to Rule 144 under the Securities Act in any 90-day period. In addition, holders of warrants to purchase 296,881 shares of common stock will have similar registration rights upon exercise of these warrants. These registration rights are subject to conditions and limitations, including the right of the underwriters that may be engaged by us or the holders to limit the number of shares included in the registration statement. ANTI-TAKEOVER PROVISIONS DELAWARE LAW. We are subject to Section 203 of the Delaware General Corporation Law, which regulates acquisitions of some Delaware corporations. In general, Section 203 prohibits, with some exceptions, a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date the person becomes an interested stockholder, unless: - our board of directors approved the business combination or the transaction in which the person became an interested stockholder prior to the date the person attained this status; - upon consummation of the transaction that resulted in the person becoming an interested stockholder, the person owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - on or subsequent to the date the person became an interested stockholder, our board of directors approved the business combination and the stockholders other than the interested stockholder authorized the transaction at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding stock not owned by the interested stockholder. Section 203 defines a "business combination" to include: - any merger or consolidation involving us and the interested stockholder; - any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of our assets; - in general, any transaction that results in the issuance or transfer by us of any of our stock to the interested stockholder; - any transaction involving the corporation that has the effect of increasing the proportionate share of our stock owned by the interested stock holders; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through us. 56 In general, Section 203 defines an "interested stockholder" as any person who, together with the person's affiliates and associates, owns, or within three years prior to the determination of interested stockholder status did own, 15% or more of a corporation's voting stock. CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS. Our certificate of incorporation and bylaws include a number of provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of us. First, our certificate of incorporation provides that all stockholder actions upon completion of this offering must be effected at a duly called meeting of holders and not by a consent in writing. Second, our bylaws provide that special meetings of the stock holders may be called only by our chairman of the board of directors, our chief executive officer, our board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors or holders of 50% or more of our common stock. Third, our certificate of incorporation provides that our board of directors can issue up to 5,000,000 shares of preferred stock, as described under "--Preferred Stock" above. Fourth, our certificate of incorporation and the bylaws provide for a classified board of directors, in which approximately one-third of the directors would be elected each year. Consequently, any potential acquiror would need to successfully complete two proxy contests in order to take control of the board of directors. Finally, our bylaws establish procedures, including advance notice procedures with regard to the nomination of candidates for election as directors and stockholder proposals. These provisions of our certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control or management of us. TRANSFER AGENT AND REGISTRAR We are currently in the process of selecting a transfer agent and registrar. 57 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of common stock in the public market could reduce market prices prevailing from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after the restrictions lapse could reduce the market price of our stock and our ability to raise equity capital in the future. Upon completion of the offering, we will have shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options and warrants and based upon the number of shares outstanding as of March 31, 2000. Of these shares, the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless such shares are purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining 14,741,939 shares held by existing stockholders, and any shares purchased by affiliates in this offering, will be "restricted securities" as that term is defined in Rule 144 under the Securities Act. Our affiliates will hold 11,418,990 of the restricted shares. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 under the Securities Act, which are summarized below. Subject to the operation of lock-up agreements described below, upon completion of this offering, the holders of 10,686,717 shares of common stock, or their transferees, will be entitled to rights to require the registration of such shares under the Securities Act. Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by our affiliates, immediately upon the effectiveness of such registration. See "Description of Capital Stock--Registration Rights." LOCK-UP AGREEMENTS We, our officers, directors and stockholders holding approximately 12,733,622 shares of common stock have agreed that, for a period of 180 days from the date of the final prospectus, we and they will not, subject to some exceptions, transfer or otherwise dispose of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock. These restrictions shall cease to apply to: (a) 25% of our shares of common stock beneficially owned by each of these persons on the date of the final prospectus upon the later to occur of (i) the end of the 90-day period after the date of the final prospectus or (ii) the second trading day following the first public release of our quarterly results after the date of the final prospectus; and (b) an additional 25% of our shares of common stock beneficially owned by each of these persons on the date of the final prospectus, upon the end of the 135-day period after the date of the final prospectus; if, in the case of both clauses (a) and (b): (x) the reported last sale price of the common stock on the Nasdaq National Market is at least twice the price per share in the offering for 20 of the 30 trading days ending on (A) in the case of (a) above, the later of (1) the last trading day of the 90-day period after the date of the final prospectus or (2) the second trading day following the first public release of our quarterly results after the date of the final prospectus and (B) in the case of clause (b) above, the last trading day of the 135-day after the date of the final prospectus; and (y) such person is not, and has not been since the date of the final prospectus, our employee; 58 provided further, that such person agrees to give to us and Donaldson, Lufkin & Jenrette Securities Corporation written notice three business days prior to taking any of the actions described above and to execute any such action only through Donaldson, Lufkin & Jenrette Securities Corporation or any of its affiliates acting as broker, unless otherwise agreed in writing by Donaldson, Lufkin & Jenrette Securities Corporation. The underwriting agreement contains limited exceptions to these lock-up agreements. In addition, during this 180-day period, we have also agreed not to file any registration statement for, and each of our officers, directors and several stockholders has agreed not to make any demand for, or exercise any right for, the registration of any of our securities without Donaldson, Lufkin & Jenrette Securities Corporation's prior written consent. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144 and 701 of the Securities Act discussed below, shares subject to these lock-up agreements will not be salable until the shares are released from the agreements or the agreements expire or unless prior written consent is received from Donaldson, Lufkin & Jenrette Securities Corporation. Any early waiver of the lock-up agreements by the underwriters, which, if granted, could permit sales of a substantial number of shares and could adversely affect the trading price of our shares, may not be accompanied by an advance public announcement by us. Taking into account these lock-up agreements, 1,124,956 shares may be eligible for sale on the later of 90 days from the date of the final prospectus or the second trading day following the first public release of our quarterly results, and 1,124,956 shares may be eligible for sale 135 days from the date of the final prospectus. The remaining shares subject to the lockup requirements will become eligible for sale 180 days from the date of the final prospectus unless a portion of these shares have previously become eligible for sale as described above. RULE 144 In general, under Rule 144, beginning 90 days after the date of the final prospectus, a person, or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year, including a person who may be deemed our Rule 144 affiliate, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - one percent of the number of shares of our common stock then outstanding; or - the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the proposed sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. We are unable to estimate accurately the number of restricted shares that will be sold under Rule 144 because this will depend in part on the market price of our common stock, the personal circumstances of the seller and other factors. Under Rule 144(k), a person who is not deemed to have been our Rule 144 affiliate at any time during the 90 days preceding a sale, and who has beneficially owned for at least two years the shares proposed to be sold, would be entitled to sell those shares under Rule 144(k) without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, subject to the lock-up agreements, these shares may be sold upon completion of this offering. RULE 701 Beginning 90 days after the date of this prospectus, the shares of common stock issuable upon exercise of the options granted by us prior to the effective date of the registration statement will be eligible for sale in the public market pursuant to Rule 701 under the Securities Act, subject to the lock-up agreements. In general, Rule 701 permits resales of shares issued under specified compensatory 59 benefit plans and contracts commencing 90 days after the issuer becomes subject to the reporting requirements of the Securities Exchange Act in reliance upon Rule 144, but without compliance with restrictions, including the holding period requirements, contained in Rule 144. REGISTRATION STATEMENTS ON FORM S-8 Following this offering, we intend to file under the Securities Act one or more registration statements on Form S-8 to register all of the shares of our common stock eligible for this form of registration statement: - issuable upon exercise of outstanding options granted pursuant to our 1995 and 1997 stock option plans and 2000 equity incentive plan; - reserved for future option grants pursuant to individual option agreements or these plans; and - that we intend to offer for sale to our employees pursuant to our employee stock purchase plan. These registration statements are expected to become effective upon filing. Shares covered by these registration statements will be subject to vesting provisions and subject to expiration of the lock-up agreements. In the case of Rule 144 affiliates only, these shares will also remain subject to the restrictions of Rule 144 other than the holding period requirement. 60 UNDERWRITING Subject to the terms and conditions of an underwriting agreement, dated as of , 2000, the underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation, Chase Securities Inc., Wit SoundView Corporation and DLJDIRECT Inc. have severally agreed to purchase from us the respective number of shares of common stock shown opposite their names below. NUMBER OF UNDERWRITERS SHARES Donaldson, Lufkin & Jenrette Securities Corporation......... Chase Securities Inc........................................ Wit SoundView Corporation................................... DLJDIRECT Inc............................................... --------- Total....................................................... ========= The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares of common stock offered by this prospectus require the approval by their counsel of legal matters and other conditions. The underwriters must purchase and accept delivery of all of the shares of common stock offered through this prospectus, other than those shares covered by the over-allotment option described below, if any are purchased. The underwriters propose to initially offer some of the shares of common stock directly to the public at the public offering price on the cover page of this prospectus and some of the shares of common stock to dealers, including the underwriters, at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and these dealers may re-allow, to other dealers a concession not in excess of $ per share. After the initial offering of the common stock, the representatives of the underwriters may change the public offering price and other selling terms at any time without notice. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The following table shows the underwriting fees to be paid to the underwriters by us in this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of common stock. NO EXERCISE FULL EXERCISE ----------- ------------- Per Share............................................ Total................................................ We will pay the offering expenses, estimated to be $ . A prospectus in electronic format will be made available on websites maintained by DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation and Wit SoundView Corporation's affiliate, Wit Capital Corporation. Other than the prospectus in electronic format, the information on these websites relating to the offering is not part of this prospectus and has not been approved and/or endorsed by us or the underwriters, and should not be relied on by prospective investors. We have granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of additional shares of common stock at the public offering price less underwriting discounts and commissions. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with the offering. To the extent that the underwriters exercise this option, each underwriter will become obligated, under conditions specified in the underwriting agreement, to purchase its pro rata portion of 61 the additional shares based on that underwriter's percentage underwriting commitment as indicated in the preceding table. We have agreed to indemnify the underwriters against liabilities specified in the underwriting agreement, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make because of these liabilities. We, our officers, directors and stockholders holding approximately shares of common stock have agreed that, for a period of 180 days from the date of the final prospectus, we and they will not, subject to some exceptions, transfer or otherwise dispose of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock. These restrictions shall cease to apply to: (a) 25% of our shares of common stock beneficially owned by each of these persons on the date of the final prospectus upon the later to occur of (i) the end of the 90-day period after the date of the final prospectus or (ii) the second trading day following the first public release of our quarterly results after the date of the final prospectus; and (b) an additional 25% of our shares of common stock beneficially owned by each of these persons on the date of the final prospectus, upon the end of the 135-day period after the date of the final prospectus; if, in the case of both clauses (a) and (b): (x) the reported last sale price of the common stock on the Nasdaq National Market is at least twice the price per share in the offering for 20 of the 30 trading days ending on (A) in the case of (a) above, the later of (1) the last trading day of the 90-day period after the date of the final prospectus or (2) the second trading day following the first public release of our quarterly results after the date of the final prospectus and (B) in the case of clause (b) above, the last trading day of the 135-day after the date of the final prospectus; and (y) such person is not, and has not been since the date of the final prospectus, our employee; provided further, that such person agrees to give to us and Donaldson, Lufkin & Jenrette Securities Corporation written notice three business days prior to taking any of the actions described above and to execute any such action only through Donaldson, Lufkin & Jenrette Securities Corporation or any of its affiliates acting as broker, unless otherwise agreed in writing by Donaldson, Lufkin & Jenrette Securities Corporation. The underwriting agreement contains limited exceptions to these lock-up agreements. In addition, during this 180-day period, we have also agreed not to file any registration statement for, and each of our officers, directors and several of our stockholders have agreed not to make any demand for, or exercise any right for, the registration of any of our shares of common stock without Donaldson, Lufkin & Jenrette Securities Corporation's prior written consent. Prior to the offering, there has been no established trading market for the common stock. We and the underwriters negotiated the public offering price for the shares of common stock offered by this prospectus. The factors they considered in determining the public offering price included: - the history of and the prospects for the industry in which we compete; - our past and present operations; - our historical results of operations; - our prospects for future earnings; - the recent market prices of securities of generally comparable companies; and 62 - the general condition of the securities markets at the time of the offering. Other than in the United States, neither we nor the underwriters have taken any action that would permit a public offering of the shares of common stock offered by this prospectus in any jurisdiction where action for that purpose is required. The shares of common stock offered through this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements associated with the offer and sale of any the shares of common stock offered through this prospectus be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. You should inform yourself and observe any restrictions relating to the offering of the common stock and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of common stock offered in this prospectus in any jurisdiction in which an offer or a solicitation is unlawful. The Sprout Entities are affiliated with Donaldson, Lufkin & Jenrette Securities Corporation. The Sprout Entities have placed a sufficient number of their shares in a voting trust so that upon the closing of this offering, the Sprout Entities will exercise voting control over less than five percent of our outstanding common stock. The shares subject to the voting trust are held and voted by an independent third party, as voting trustee. An associated person of Donaldson, Lufkin & Jenrette Securities Corporation is a member of our board of directors. As a result of the offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot the offering, creating a syndicate short position. The underwriters may bid for and purchase shares of common stock in the open market to cover a syndicate short position or to stabilize the price of the common stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members if the syndicate repurchases previously distributed common stock in syndicate covering transactions, in stabilization transactions or in some other way or if Donaldson, Lufkin & Jenrette Securities Corporation receives a report that indicates clients of such syndicate members have "flipped" the common stock. These activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. The underwriters, at our request, have reserved for sale at the initial public offering price up to shares of common stock to be sold in this offering for sale to our employees, directors and other persons designated by us. The number of shares available for sale to the general public will be reduced to the extent that any reserved shares are purchased. Any reserved shares not so purchased will be offered by the underwriters on the same basis as the other shares offered through this prospectus. 63 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Cooley Godward LLP, Palo Alto, California and for the underwriters by Sullivan & Cromwell, Los Angeles, California. As of the date of this prospectus, GC&H Investments, an investment partnership composed of current and former partners and associates of Cooley Godward LLP, owns 21,174 shares of our common stock. EXPERTS The financial statements of Pharsight Corporation and Scientific Consulting, Inc. appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, to the extent indicated in their reports thereon also appearing elsewhere herein and in the registration statement. The financial statements have been included herein in reliance upon these reports given on the authority of Ernst & Young LLP as experts in accounting and auditing. ADDITIONAL INFORMATION We have filed with the SEC a Registration Statement, which term shall include any amendments thereto, on Form S-1 under the Securities Act with respect to our common stock offered hereby. This prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement. As used herein, the term "Registration Statement" means the initial registration statement, including the exhibits, schedules, financial statements and notes filed as part thereof and any and all amendments thereto. This prospectus omits information contained in the Registration Statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock offered hereby, reference is made to the Registration Statement. Statements herein concerning the contents of any contract or other document are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed with the SEC as an exhibit to the Registration Statement, each such statement being qualified by and subject to such reference in all respects. With respect to each such document filed with the SEC as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved. As a result of the offering hereunder, we will become subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, will file reports and other information with the SEC. Reports, registration statements, proxy statements, and other information filed by us with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of the material can be obtained at prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. We intend to furnish holders of our common stock with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited condensed financial information for the first three quarters of each fiscal year. We intend to furnish such other reports as we may determine or as may be required by law. 64 INDEX TO FINANCIAL STATEMENTS PAGE PHARSIGHT CORPORATION Report of Ernst & Young LLP, Independent Auditors........... F-2 Balance Sheets.............................................. F-3 Statements of Operations.................................... F-5 Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)............................ F-6 Statements of Cash Flows.................................... F-7 Notes to Financial Statements............................... F-8 SCIENTIFIC CONSULTING, INC. Report of Ernst & Young LLP, Independent Auditors........... F-28 Statement of Income......................................... F-29 Statement of Cash Flows..................................... F-30 Notes to Financial Statements............................... F-31 F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Pharsight Corporation We have audited the accompanying balance sheets of Pharsight Corporation as of March 31, 1998 and 1999, and the related statements of operations, redeemable convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the three years in the period ended March 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pharsight Corporation at March 31, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1999 in conformity with accounting principles generally accepted in the United States. San Jose, California /s/ ERNST & YOUNG LLP May 14, 1999 F-2 PHARSIGHT CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) PRO FORMA STOCKHOLDERS' MARCH 31, EQUITY (DEFICIT) ------------------- DECEMBER 31, DECEMBER 31, 1998 1999 1999 1999 -------- -------- ------------ ---------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 2,701 $ 4,148 $ 5,660 Short-term investments.................................... 1,000 1,999 12,679 Accounts receivable, net of allowance for bad debts of $27 for March 31 1998, 1999 and December 31, 1999........... 448 745 2,658 Prepaids and other current assets......................... 331 300 534 ------- -------- -------- Total current assets........................................ 4,480 7,192 21,531 Property and equipment, net................................. 381 845 1,057 Intangible assets, net Core technology........................................... 241 880 551 Other..................................................... 247 651 216 ------- -------- -------- 488 1,531 767 Other assets................................................ 50 87 159 ------- -------- -------- Total assets................................................ $ 5,399 $ 9,655 $ 23,514 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 289 $ 213 $ 23 Accrued interest.......................................... -- 157 145 Accrued expenses.......................................... 164 143 328 Accrued compensation...................................... 136 404 912 Deferred revenue.......................................... 352 753 1,468 Current portion of notes payable.......................... 503 2,660 1,307 Current obligations under capital leases.................. 114 258 356 ------- -------- -------- Total current liabilities................................... 1,558 4,588 4,539 Notes payable............................................... 953 2,293 1,316 Obligations under capital leases............................ 268 519 813 Commitments Series C redeemable convertible preferred stock: Authorized shares--2,581,640 for March 31, 1998, 1999 and December 31, 1999 $ 6,109 Issued and outstanding shares--2,577,840 for March 31, 1998, 1999 and December 31, 1999 (Liquidation preference at December 31, 1999 of $6,109) (no shares pro forma).................................................. 7,176 7,665 8,032 Series D redeemable convertible preferred stock: Authorized shares--2,930,000 for March 31, 1999 and December 31, 1999 Issued and outstanding shares--2,877,254 for March 31, 1999 and December 31, 1999 (Liquidation preference at December 31, 1999 of $9,408) (no shares pro forma)...... -- 9,676 10,240 -- F-3 PHARSIGHT CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) PRO FORMA STOCKHOLDERS' MARCH 31, EQUITY (DEFICIT) ------------------- DECEMBER 31, DECEMBER 31, 1998 1999 1999 1999 -------- -------- ------------ ---------------- (UNAUDITED) (UNAUDITED) Stockholders' equity (deficit): Series A convertible preferred stock, no par value: Authorized shares--1,935,274 for March 31, 1998, 1999 and December 31, 1999 Issued and outstanding shares--1,913,845 for March 31, 1998, 1999 and December 31, 1999 (Liquidation preference at December 31, 1999 of $1,897) (no shares pro forma)............................................ 1,787 1,787 1,787 -- Series B convertible preferred stock, no par value: Authorized shares--540,000 for March 31, 1998, 1999 and December 31, 1999 Issued and outstanding shares--540,000 for March 31, 1998, 1999 and December 31, 1999 (Liquidation preference at December 31, 1999 of $810) (no shares pro forma)............................................ 798 798 798 -- Series E convertible preferred stock, no par value: Authorized shares--2,777,778 for December 31, 1999 Issued and outstanding shares--2,777,778 for December 31, 1999 (Liquidation preference at December 31, 1999 of $20,000) (no shares pro forma)... -- -- 19,967 -- Common stock, no par value: Authorized shares--9,943,086, 15,013,086 and 19,235,308, for March 31, 1998, 1999 and December 31, 1999, respectively Issued and outstanding shares--3,040,166, 3,570,607, and 3,915,172 for March 31, 1998, 1999 and December 31, 1999, respectively (14,601,889 shares pro forma)...... 330 751 4,754 45,578 Deferred stock compensation............................... -- (239) (2,743) (2,743) Accumulated deficit....................................... (7,382) (18,078) (25,833) (25,833) Accumulated other comprehensive loss...................... -- -- (23) (23) Notes receivable from stockholders........................ (89) (105) (133) (133) ------- -------- -------- -------- Total stockholders' equity (deficit)........................ (4,556) (15,086) (1,426) $ 16,846 ------- -------- -------- ======== Total liabilities and stockholders' equity (deficit)........ $ 5,399 $ 9,655 $ 23,514 ======= ======== ======== The accompanying notes are an integral part of these financial statements. F-4 PHARSIGHT CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NINE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------------------------------ ------------------------- 1997 1998 1999 1998 1999 -------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: License and support...................... -- $ 649 $ 1,800 $ 1,315 $ 2,157 Services................................. -- 457 2,285 1,342 4,095 ------- ------- -------- ------- ------- Total revenues............................. -- 1,106 4,085 2,657 6,252 Costs and expenses: License and support...................... -- 279 748 596 762 Services................................. -- 435 1,772 1,051 2,280 Research and development................. 720 2,134 4,327 3,004 3,759 Sales and marketing...................... 816 1,366 2,292 1,592 2,773 General and administrative............... 438 744 1,105 707 1,332 Amortization of deferred stock compensation........................... -- -- 57 -- 1,391 Amortization of intangible assets........ -- 82 965 708 764 Acquired in-process research and development............................ -- 362 2,592 2,592 -- ------- ------- -------- ------- ------- Total operating expenses................... 1,974 5,402 13,858 10,250 13,061 ------- ------- -------- ------- ------- Loss from operations....................... (1,974) (4,296) (9,773) (7,593) (6,809) Other income (expense): Interest expense......................... (17) (44) (602) (454) (392) Interest income and other, net........... 57 216 482 231 377 ------- ------- -------- ------- ------- 40 172 (120) (223) (15) ------- ------- -------- ------- ------- Net loss................................... (1,934) (4,124) (9,893) (7,816) (6,824) Accretion on Series C and D redeemable convertible preferred stock.............. -- (448) (803) (492) (931) Series C redeemable convertible preferred stock dividend........................... -- (644) -- -- -- ------- ------- -------- ------- ------- Net loss applicable to common stockholders............................. $(1,934) $(5,216) $(10,696) $(8,308) $(7,755) ======= ======= ======== ======= ======= Basic and diluted net loss per share....... $ (2.57) $ (3.96) $ (4.41) $ (3.64) $ (2.50) Shares used to compute basic and diluted net loss per share....................... 752 1,318 2,424 2,281 3,107 Pro forma basic and diluted net loss per share.................................... $ (1.23) $ (0.64) Shares used to compute pro forma basic and diluted net loss per share............... 8,670 12,194 The accompanying notes are an integral part of these financial statements. F-5 PHARSIGHT CORPORATION STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS) REDEEMABLE CONVERTIBLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ------------------- ------------------- ------------------- DEFERRED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION -------- -------- -------- -------- -------- -------- --------------- Balance at April 1, 1996........... -- $ -- 1,914 $ 1,787 1,730 $ 27 $ -- Issuance of common stock........... -- -- -- -- 334 38 -- Issuance of Series B convertible preferred stock, net of issuance costs............................ -- -- 540 798 -- -- -- Net loss........................... -- -- -- -- -- -- -- ----- ------- ----- ------- ----- ------ ------- Balance at March 31, 1997.......... -- -- 2,454 2,585 2,064 65 -- Issuance of common stock under employee benefit plans, net of repurchases...................... -- -- -- -- 25 15 -- Issuance of common stock in connection with acquisition and other............................ -- -- -- -- 952 250 -- Issuance of Series C redeemable convertible preferred stock, net of issuance costs................ 2,578 6,084 -- -- -- -- -- Deemed dividend on Series C preferred stock.................. -- 644 -- -- -- -- -- Accretion of preferred stock....... -- 448 -- -- -- -- -- Net loss........................... -- -- -- -- -- -- -- ----- ------- ----- ------- ----- ------ ------- Balance at March 31, 1998.......... 2,578 7,176 2,454 2,585 3,041 330 -- Issuance of common stock under employee benefit plans, net of repurchases...................... -- -- -- -- 284 57 -- Issuance of common stock in connection with acquisition...... -- -- -- -- 246 68 -- Issuance of Series C redeemable convertible preferred stock, net of issuance costs................ -- -- -- -- -- -- -- Issuance of Series D redeemable convertible preferred stock, net of issuance costs................ 2,877 9,362 -- -- -- -- -- Accretion of Series C preferred stock............................ -- 489 -- -- -- -- -- Accretion of Series D preferred stock............................ -- 314 -- -- -- -- -- Deferred stock compensation related to stock option grants........... -- -- -- -- -- 296 (296) Amortization of deferred stock compensation..................... -- -- -- -- -- -- 57 Net loss........................... -- -- -- -- -- -- -- ----- ------- ----- ------- ----- ------ ------- Balance at March 31, 1999.......... 5,455 17,341 2,454 2,585 3,571 751 (239) Issuance of Series E convertible preferred stock, net of issuance costs (unaudited)................ -- -- 2,778 19,967 -- -- -- Issuance of common stock under employee benefit plans, net of repurchases (unaudited).......... -- -- -- -- 344 108 -- Deferred stock compensation related to stock option grants (unaudited)...................... -- -- -- -- -- 3,895 (3,895) Amortization of deferred stock compensation (unaudited)......... -- -- -- -- -- -- 1,391 Accretion of Series C preferred stock (unaudited)................ -- 367 -- -- -- -- -- Accretion of Series D preferred stock (unaudited)................ -- 564 -- -- -- -- -- Comprehensive loss Unrealized loss on short-term investments (unaudited)........ -- -- -- -- -- -- -- Net loss (unaudited)............. -- -- -- -- -- -- -- Total comprehensive loss (unaudited)...................... -- -- -- -- -- -- -- ----- ------- ----- ------- ----- ------ ------- Balance at December 31, 1999 (unaudited)...................... 5,455 $18,272 5,232 $22,552 3,915 $4,754 $(2,743) ===== ======= ===== ======= ===== ====== ======= ACCUMULATED NOTES OTHER RECEIVABLE ACCUMULATED COMPREHENSIVE FROM DEFICIT LOSS STOCKHOLDERS TOTAL ------------- ---------------- ------------- -------- Balance at April 1, 1996........... $ (232) $ -- $ -- $ 1,582 Issuance of common stock........... -- -- (13) 25 Issuance of Series B convertible preferred stock, net of issuance costs............................ -- -- -- 798 Net loss........................... (1,934) -- -- (1,934) -------- ---- ----- -------- Balance at March 31, 1997.......... (2,166) -- (13) 471 Issuance of common stock under employee benefit plans, net of repurchases...................... -- -- -- 15 Issuance of common stock in connection with acquisition and other............................ -- -- (76) 174 Issuance of Series C redeemable convertible preferred stock, net of issuance costs................ -- -- Deemed dividend on Series C preferred stock.................. (644) -- -- (644) Accretion of preferred stock....... (448) -- -- (448) Net loss........................... (4,124) -- -- (4,124) -------- ---- ----- -------- Balance at March 31, 1998.......... (7,382) -- (89) (4,556) Issuance of common stock under employee benefit plans, net of repurchases...................... -- -- (16) 41 Issuance of common stock in connection with acquisition...... -- -- -- 68 Issuance of Series C redeemable convertible preferred stock, net of issuance costs................ -- -- -- -- Issuance of Series D redeemable convertible preferred stock, net of issuance costs................ -- -- -- -- Accretion of Series C preferred stock............................ (489) -- -- (489) Accretion of Series D preferred stock............................ (314) -- -- (314) Deferred stock compensation related to stock option grants........... -- -- -- -- Amortization of deferred stock compensation..................... -- -- -- 57 Net loss........................... (9,893) -- -- (9,893) -------- ---- ----- -------- Balance at March 31, 1999.......... (18,078) -- (105) (15,086) Issuance of Series E convertible preferred stock, net of issuance costs (unaudited)................ -- -- -- 19,967 Issuance of common stock under employee benefit plans, net of repurchases (unaudited).......... -- -- (28) 80 Deferred stock compensation related to stock option grants (unaudited)...................... -- -- -- -- Amortization of deferred stock compensation (unaudited)......... -- -- -- 1,391 Accretion of Series C preferred stock (unaudited)................ (367) -- -- (367) Accretion of Series D preferred stock (unaudited)................ (564) -- -- (564) Comprehensive loss Unrealized loss on short-term investments (unaudited)........ -- (23) -- (23) Net loss (unaudited)............. (6,824) -- -- (6,824) Total comprehensive loss (unaudited)...................... -- -- -- (6,847) -------- ---- ----- -------- Balance at December 31, 1999 (unaudited)...................... $(25,833) $(23) $(133) $ (1,426) ======== ==== ===== ======== The accompanying notes are an integral part of these financial statements. F-6 PHARSIGHT CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS) NINE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------------------------------ ------------------- 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- (UNAUDITED) OPERATING ACTIVITIES Net loss.................................................... $(1,934) $(4,124) $(9,893) $(7,816) $(6,824) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred stock compensation............... -- -- 57 -- 1,391 Depreciation.............................................. 31 89 275 218 334 Amortization.............................................. -- 82 965 708 764 Write-off of acquired in-process research and development............................................. -- 362 2,592 2,592 -- Changes in operating assets and liabilities: Accounts receivable..................................... (19) (116) (297) (431) (1,914) Other current assets.................................... (14) (245) 31 (71) (234) Intangible and other assets............................. 16 40 (37) (57) (72) Accounts payable........................................ 88 274 (76) (121) (190) Accrued expenses........................................ -- 53 (21) 158 185 Accrued compensation.................................... 40 92 268 26 508 Deferred revenue........................................ 25 187 401 713 716 Interest payable........................................ -- -- 157 -- (19) ------- ------- ------- ------- ------- Net cash used in operating activities....................... (1,767) (3,306) (5,578) (4,081) (5,355) INVESTING ACTIVITIES Purchases of property and equipment......................... (178) (263) (738) (621) (546) Proceeds from sale of property and equipment................ -- -- 86 161 -- Purchases of short-term investments......................... (982) (1,246) (2,000) -- (11,679) Maturities of short-term investments........................ 982 245 1,000 -- 978 Acquisition of MGA and SCI.................................. -- (638) (2,368) (2,368) -- ------- ------- ------- ------- ------- Net cash used in investing activities....................... (178) (1,902) (4,020) (2,828) (11,247) FINANCING ACTIVITIES Proceeds from lease line.................................... 259 211 527 138 602 Proceeds from issuance of notes payable..................... -- 1,000 2,000 2,000 -- Principal payments on notes payable......................... -- -- (753) (431) (2,330) Principal payments on capital lease obligations............. (24) (63) (132) (138) (205) Proceeds from the issuance of common stock.................. 25 15 41 41 80 Proceeds from the issuance of convertible preferred stock, net....................................................... 798 6,084 9,362 9,391 19,967 ------- ------- ------- ------- ------- Net cash provided by financing activities................... 1,058 7,247 11,045 11,001 18,114 ------- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents........ (887) 2,039 1,447 4,092 1,512 Cash and cash equivalents at the beginning of the period.... 1,549 662 2,701 2,701 4,148 ------- ------- ------- ------- ------- Cash and cash equivalents at the end of the period.......... $ 662 $ 2,701 $ 4,148 $ 6,793 $ 5,660 ======= ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES Notes receivable from stockholders.......................... $ 13 $ 76 $ 16 $ 10 $ 28 Property and equipment acquired under capital leases........ 259 211 527 138 602 Common stock issued for acquisition......................... -- 100 68 68 -- Common stock issued for noncompetition agreement............ -- 74 -- -- -- Note payable issued for acquisition......................... -- 456 2,250 2,250 -- Accretion of preferred stock................................ -- 448 803 492 931 Dividend on preferred stock................................. -- 644 -- -- -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest...................................... $ 17 $ 34 $ 388 $ 146 $ 358 Cash paid for taxes......................................... -- -- 2 2 2 The accompanying notes are an integral part of these financial statements. F-7 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. DESCRIPTION OF BUSINESS Pharsight Corporation ("Pharsight") was incorporated in California on April 4, 1995. Pharsight develops and markets integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. In December 1997, Pharsight acquired Scientific Consulting, Inc. ("SCI"), based in Cary, North Carolina. SCI's operations were merged into Pharsight at acquisition. In May 1998, Pharsight acquired certain assets, mainly source code, from Mitchell and Gauthier Associates, Inc. ("MGA"). Pharsight operates in only one business segment comprised of products and services to pharmaceutical and biotechnology companies to improve the drug development process. Sales are primarily generated in the United States through a direct field sales organization. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTERIM FINANCIAL INFORMATION The financial information as of December 31, 1999 and for the nine months ended December 31, 1998 and 1999 is unaudited, but includes all adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of Pharsight's operating results and cash flows for such period. Results for the nine months ended December 31, 1999 are not necessarily indicative of results to be expected for the full fiscal year 2000 or for any future period. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Pharsight's revenues are derived from two sources: product licenses and scientific and training services. Pharsight enters into arrangements for sale of licenses of software products and related maintenance contracts usually for a period of one year. Pharsight's revenue recognition policy is in accordance with Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition", as amended by Statement of Position No. 98-4, "Referral of the Effective Date of SOP 97-2, 'Software Revenue Recognition' " ("SOP 98-4"), and Statement of Position No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions" ("SOP 98-9"). For each arrangement, Pharsight determines whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. Pharsight considers all arrangements with payment terms extending beyond twelve months and other arrangements with payment terms longer than normal not to be fixed or determinable. If collectibility is not considered probable, revenue is recognized when the fee is collected. No customer has the right of return. ARRANGEMENTS CONSISTING OF LICENSE AND MAINTENANCE FEES. For those contracts that consist solely of license and maintenance fees, Pharsight recognizes license revenue based upon the residual method after all elements other than maintenance have been delivered as prescribed by SOP 98-9. Pharsight recognizes maintenance revenues over the term of the maintenance contract as vendor-specific objective evidence of fair value for maintenance exists. In accordance with paragraph 10 of SOP 97-2, F-8 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) vendor-specific objective evidence of fair value of maintenance is determined by reference to the price the customer will be required to pay when it is sold separately (that is, the renewal rate). Each license agreement offers additional maintenance renewal periods typically one year in duration at a stated price. Maintenance contracts are typically one year in duration. Revenue is recognized on software that is licensed on a per copy basis when each copy of the license requested by the customer is delivered. Pharsight has one international distributor. There is no right of return or price protection for sales to the international distributor. In situations where the international distributor has a purchase order from the end user that is immediately deliverable, Pharsight recognizes revenue on shipment to the distributor, if other criteria in SOP 97-2 are met, since Pharsight has no risk of concessions. Pharsight defers the revenue on shipments to the international distributor if the international distributor does not have a purchase order from an end user that is immediately deliverable or other criteria in SOP 97-2 are not met. ARRANGEMENTS CONSISTING OF SERVICES. Revenues from services are recognized as services are performed. For those contracts that include contract milestones or acceptance criteria, Pharsight recognizes revenue as such milestones are achieved or as such acceptance occurs. For contracts that are on a fixed price basis, Pharsight determines if losses should be recognized at the end of each accounting period. During the nine months ended December 31, 1999 Pharsight entered into arrangements that consist of licenses, maintenance, and scientific and training services. For these arrangements Pharsight assesses whether the service element of the arrangement is essential to the functionality of the other elements of the arrangement. In those instances where Pharsight determines that the service elements are essential to the other elements of the arrangement, Pharsight accounts for the entire arrangement using contract accounting. For those arrangements accounted for using contract accounting that do not include contractual milestones or other acceptance criteria, Pharsight will utilize the percentage of completion method based upon input measures of hours. For those contracts that include contract milestones or acceptance criteria, Pharsight will recognize revenue as such milestones are achieved or as such acceptance occurs. CAPITALIZED SOFTWARE Pharsight capitalizes eligible computer software costs as products achieve technological feasibility, subject to net realizable value considerations. Pharsight has defined technological feasibility as completion of a working model. As of March 31, 1998 and 1999, and December 31, 1999, such internal capitalizable costs were insignificant. Accordingly, Pharsight has charged all such internal costs to research and development expenses in the accompanying statements of operations. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of Pharsight's cash and cash equivalents, short-term investments, accounts receivable and payable, and accrued liabilities approximate their fair values due to their short-term nature. The fair values of the capital lease obligations and notes payable are estimated based on current interest rates available to Pharsight for debt instruments with similar terms, degrees of risk, and remaining maturities. The carrying values of these obligations approximate their respective fair values. F-9 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT COSTS Since January 1, 1999, Pharsight has accounted for internal use software costs, including website development costs, in accordance with Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). In accordance with SOP 98-1, Pharsight capitalizes costs to develop software for its website and other internal uses when preliminary development efforts are successfully completed and management has authorized and committed project funding and it is probable that the project will be completed and the software will be used as intended. Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed. Costs incurred for upgrades and enhancements that are probable to result in additional functionality are capitalized. All capitalized costs are amortized to expense over their expected useful lives. Costs required to be capitalized under SOP 98-1 have been insignificant to date. Prior to the adoption of SOP 98-1, costs incurred by Pharsight to develop, enhance, manage, monitor and operate its website were expensed as incurred. ADVERTISING Pharsight expenses the cost of advertising as incurred. These costs were insignificant in all periods presented. CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of highly liquid financial instruments consisting primarily of investments in money market funds, commercial paper, and treasury instruments with insignificant interest rate risk and with original maturities of three months or less at the time of acquisition. SHORT-TERM INVESTMENTS All investments are designated as available-for-sale and are carried at fair value, with unrealized gains and losses, net of tax, reported in stockholders' equity. The cost of securities sold is based on the specific identification method. Realized gains or losses and declines in value, if any, judged to be other-than-temporary, are reported in interest income and other, net. Short-term investments consist of securities available-for-sale that mature within 12 months of purchase. F-10 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Short-term investments consisted of the following: GROSS GROSS FAIR UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------- ---------- ---------- -------- MARCH 31, 1998 Market auction rate senior note....................... $ 1,000 $ -- $ -- $ 1,000 ======= ========= ==== ======= MARCH 31, 1999 United States government and federal agency obligations......................................... $ 1,999 $ -- $ -- $ 1,999 ======= ========= ==== ======= DECEMBER 31, 1999 United States government and federal agency obligations......................................... $ 8,988 $ -- $(12) $ 8,976 Corporate notes....................................... 3,714 -- (11) 3,703 ------- --------- ---- ------- $12,702 $ -- $(23) $12,679 ======= ========= ==== ======= Proceeds from sales and maturities of securities available-for-sale were $982, $245, $1,000, and $978 for the years ended March 31, 1997, 1998, and 1999, and the nine months ended December 31, 1999, respectively. Gross realized sales and losses were insignificant for all periods presented. PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of three to five years. Property under capital leases is amortized over the lesser of the useful lives of the assets or the lease term. Amortization expense related to these assets is included in depreciation expense. INTANGIBLE ASSETS Intangible assets related to the purchase of SCI's business and the acquisition of certain assets of MGA which included core technology, assembled workforce, developed technology, goodwill, and covenants not to compete. The intangible assets are being amortized on a straight-line basis over periods ranging from two to three years. Intangibles consist of: MARCH 31, ------------------- DECEMBER 31, 1998 1999 1999 -------- -------- ------------ Developed technology........................................ $223 $ 387 $ 387 Core technology............................................. 241 1,316 1,316 Assembled workforce......................................... 82 258 258 Goodwill.................................................... 24 117 117 Covenants not to compete.................................... -- 500 500 ---- ------- ------- 570 2,578 2,578 Accumulated amortization.................................... (82) (1,047) (1,811) ---- ------- ------- $488 $ 1,531 $ 767 ==== ======= ======= F-11 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION Pharsight accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and has adopted the "disclosure only" alternative described in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). INCOME TAXES Pharsight accounts for income taxes under the liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE Basic net loss per share is computed using the weighted-average number of vested outstanding shares of common stock. Diluted net loss per share is computed using the weighted-average number of shares of vested common stock outstanding and, when dilutive, unvested common stock outstanding, potential common shares from options and warrants to purchase common stock using the treasury stock method and from convertible securities using the as-if-converted basis. All potential common shares have been excluded from the computation of diluted net loss per share for all periods presented because the effect would be antidilutive. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued for nominal consideration, prior to the anticipated effective date of Pharsight's proposed initial public offering ("IPO"), are included in the calculation of basic and diluted net loss per share as if they were outstanding for all periods presented. To date, Pharsight has not had any issuances or grants for nominal consideration. Basic and diluted pro forma net loss per share have been computed as described above and give effect to the automatic conversion of preferred stock into common stock effective upon the closing of Pharsight's IPO as if their conversion occurred at the original date of issuance. F-12 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per share: NINE MONTHS ENDED YEARS ENDED MARCH 31, DECEMBER 31, ------------------------------------- ------------------------- 1997 1998 1999 1998 1999 ----------- ---------- ---------- ----------- ----------- Net loss........................ $ (1,934) $ (4,124) $ (9,893) $ (7,816) $ (6,824) Accretion of preferred stock.... -- (448) (803) (492) (931) Series C redeemable convertible preferred stock dividend...... -- (644) -- -- -- ----------- ---------- ---------- ----------- ----------- Net loss attributable to common stockholders.................. $ (1,934) $ (5,216) $ (10,696) $ (8,308) $ (7,755) =========== ========== ========== =========== =========== Basic and diluted: Weighted average common shares outstanding................. 1,880 2,313 3,399 3,343 3,730 Less weighted average common shares subject to repurchase.................. (1,128) (995) (975) (1,062) (623) ----------- ---------- ---------- ----------- ----------- Shares used to compute basic and diluted net loss per share.... 752 1,318 2,424 2,281 3,107 =========== ========== ========== =========== =========== Basic and diluted net loss per common share.................. $ (2.57) $ (3.96) $ (4.41) $ (3.64) $ (2.50) =========== ========== ========== =========== =========== Pro forma basic and diluted: Shares used above............... 2,424 3,107 Weighted average convertible preferred stock outstanding, as if converted............. 6,246 9,087 ---------- ----------- Shares used to compute pro forma basic and diluted net loss per share.............. 8,670 12,194 ========== =========== Pro forma basic and diluted net loss per share................ $ (1.23) $ (0.64) ========== =========== F-13 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The number of unvested and potential common shares excluded from the calculation of diluted net loss per share at March 31, 1997, 1998 and 1999 and December 31, 1999 is detailed in the following table: MARCH 31, ---------------------------------- DECEMBER 31, 1997 1998 1999 1999 ---------- --------- --------- ------------ Preferred stock................................. 2,273 4,728 6,246 9,088 Shares subject to repurchase.................... (1,128) (994) (975) (623) Outstanding options............................. 349 815 1,125 1,819 Warrants........................................ 21 57 303 297 ---------- --------- --------- ---------- 1,515 4,606 6,593 10,603 ========== ========= ========= ========== These instruments were excluded because their effect would be antidilutive. UNAUDITED PRO FORMA INFORMATION If Pharsight's IPO as described in Note 16 is consummated, all of the preferred stock outstanding will be automatically converted into common stock. In addition, the Series C stockholders will be entitled to receive the original issue price of $2.37 per share. The unaudited pro forma convertible preferred stock and stockholders' equity at December 31, 1999 has been adjusted for the assumed conversion of preferred stock and the repayment of the Series C original issue price based on the shares of preferred stock outstanding at December 31, 1999. OTHER COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), requires Pharsight to display comprehensive income and its components as part of the financial statements. Other comprehensive income includes certain changes in equity that are excluded from net income. Pharsight's only component of other comprehensive income, is unrealized loss on short-term investments for the nine month period ended December 31, 1999. Comprehensive loss for this period was $6,847. Pharsight's comprehensive loss was the same as the net loss for all other periods presented. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS No. 133 establishes methods for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. Because Pharsight does not currently hold any derivative instruments and does not engage in hedging activities, the adoption of SFAS 133 is not expected to have a significant impact on its financial position, results of operations or cash flows. Pharsight will be required to implement SFAS 133, as amended, for the year ending March 31, 2001. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). Although Pharsight is currently evaluating the impact of the SAB 101, Pharsight does not believe its adoption will materially change Pharsight's financial position, results of operations, or cash flows. F-14 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 3. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and consist of the following: MARCH 31, ------------------- DECEMBER 31, 1998 1999 1999 -------- -------- ------------ Furniture and fixtures...................................... $ 158 $ 274 $ 343 Computers and equipment..................................... 344 863 1,336 Leasehold improvements...................................... -- 27 31 ----- ------ ------ 502 1,164 1,710 Accumulated depreciation and amortization................... (121) (319) (653) ----- ------ ------ $ 381 $ 845 $1,057 ===== ====== ====== Property and equipment include assets acquired under capital lease obligations with a cost of approximately $421, $948, and $1,559 and accumulated amortization of $108, $242, and $525 at March 31, 1998 and 1999, and December 31, 1999, respectively. 4. BUSINESS AND OTHER ACQUISITIONS In December 1997, Pharsight purchased all of the outstanding shares of SCI, a developer of scientific software products for the pharmaceutical industry, for an aggregate purchase price (including direct acquisition costs) of $1,300. Pharsight acquired SCI for cash, a note payable, and 400 shares of Pharsight's common stock valued at an aggregate of $100. Pharsight has accounted for the acquisition using the purchase method, and the results of operations of SCI have been included in Pharsight's operations since acquisition. Assets acquired and liabilities assumed in the acquisition were as follows: Current assets and other tangible assets.................... $ 511 Liabilities assumed......................................... (144) Core technology............................................. 242 Acquired in-process research and development................ 362 Developed technology........................................ 223 Assembled workforce......................................... 82 Goodwill.................................................... 24 ------ Total....................................................... $1,300 ====== A valuation was completed for SCI by an independent appraiser. Using this information Pharsight made a final purchase price allocation. To determine the value of the developed technology, the expected future cash flow attributed to all existing technology was discounted, taking into account risks related to the characteristics and applications of the technology, existing and future markets, and assessments of the life cycle state of the technology. The value of the assembled workforce was derived by estimating the costs to replace the existing employees, including recruiting and hiring costs and training costs for each category of employee. Management determined that approximately $362 of the purchase price represented acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use. To estimate the value of the in-process research and development ("IPR&D"), the expected cash flows attributed to the completed portion of F-15 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. BUSINESS AND OTHER ACQUISITIONS (CONTINUED) the IPR&D were calculated. These cash flows considered the contribution of the core technology, the risks related to the development of the IPR&D and the percent complete as of the valuation date as well as the expected life cycle of the technology. Finally, the cash flows attributed to the completed portion of the IPR&D, net of the core technology contribution, were discounted to the present value to estimate the value of the IPR&D. This amount was expensed during the year ended March 31, 1998 as a non-recurring charge upon consummation of the acquisition. Goodwill is determined based on the residual difference between the amount paid and the values assigned to identified tangible and intangible assets. In December 1997, Pharsight began amortizing goodwill, developed technology and assembled workforce over an estimated useful life of two to three years. The pro forma unaudited results of operations for the years ended March 31, 1997 and 1998, assuming the purchase of SCI had been consummated as of April 1, 1996, follows: 1997 1998 -------- -------- Revenues.................................................... $ 737 $2,259 Net loss applicable to common shareholders.................. 1,799 5,020 Net loss per Common Share Basic..................................................... 2.39 3.81 Diluted................................................... 2.39 3.81 In May 1998, Pharsight purchased certain assets, mainly modeling and simulation technology, from MGA, a consulting and software development firm based in Concord, Massachusetts. MGA's software allows scientists and engineers, principally in the aerospace and defense industries, to simulate product performance. Assets acquired were as follows: Fixed assets................................................ $ 86 Core technology............................................. 1,084 Acquired in-process research and development................ 2,592 Developed technology........................................ 164 Assembled workforce......................................... 177 Goodwill.................................................... 93 Covenants not to compete.................................... 500 ------ Total....................................................... $4,696 ====== Pharsight has only derived insignificant revenues ($82 since May 1998) related to the acquisition of certain assets from MGA. These revenues were related to maintenance renewals from existing customers of MGA. Pharsight developed a new product that was released in February 2000 that used part of the modeling and simulation technology acquired from MGA. The development of the new product took approximately 21 months and Pharsight's research and development costs related to the project were approximately $2,200. Pharsight purchased these assets for cash of $2,000, promissory notes totaling $1,750 due in equal annual installments over the next two years, and 246 shares of Pharsight's common stock valued at an aggregate of $62. Pharsight also incurred $250 of expenses, $500 relating to non-compete agreements, and approximately $134 of acquisition costs. F-16 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. BUSINESS AND OTHER ACQUISITIONS (CONTINUED) A valuation was completed for MGA by an independent appraiser. Using this information, Pharsight made a final purchase price allocation. To determine the value of the developed technology, the expected future cash flow attributed to all existing technology was discounted, taking into account risks related to the characteristics and applications of the technology, existing and future markets, and assessments of the life cycle stage of technology. The value of the assembled workforce was derived by estimating the costs to replace the existing employees, including recruiting and hiring costs and training costs for each category of employee. Management determined that approximately $2,600 of the purchase price represented acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use. This amount was expensed during the nine months ended December 31, 1999 as a non-recurring charge upon consummation of the acquisition. Goodwill is assigned to identifiable tangible and intangible assets. In June 1999, Pharsight began amortizing goodwill, developed technology and assembled workforce over an estimated useful life of two to three years. 5. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject Pharsight to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, and trade receivables. Pharsight generally invests its excess cash in money market funds, commercial paper, corporate notes and obligations issued by or fully collateralized by the U.S. government or federal agencies. Pharsight places its investments with high-credit quality counterparties and, by policy, limits the amount of credit exposure to any one counterparty. Pharsight sells primarily to major pharmaceutical and biotechnology companies. Pharsight evaluates its customers' financial condition when necessary and routinely receives a deposit for services contracts at the time of sale. Pharsight generally requires no collateral from its customers. Pharsight analyzes the need for reserves for potential credit losses and records reserves when necessary. It maintains an allowance for doubtful accounts based on the expected collectibility of accounts receivable. To date, Pharsight has not experienced any significant losses with respect to these balances. For the year ended March 31, 1998, Pharsight added $27 to its allowance for doubtful accounts through charges to bad debt expense. There were no bad debt write-offs for the years ended March 31, 1998 and 1999 and the nine months ended December 31, 1999. Three customers comprised 20%, 17%, and 12% of accounts receivable at March 31, 1998, four customers comprised 15%, 13%, 11% and 10% of accounts receivable at March 31, 1999, and two customers comprised 41% and 10% of accounts receivable at December 31, 1999, respectively. Three customers accounted for 19%, 17%, and 16%, and 15%, 13%, and 10% of revenues for the years ended March 31, 1998 and 1999, respectively. For the nine months ended December 31, 1998, no customer accounted for more than 10% of revenues. One customer accounted for 29% of revenues for the nine months ended December 31, 1999. F-17 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 6. COMMITMENTS Pharsight leases its office facilities and certain equipment under noncancelable operating leases expiring through 2004. Minimum annual rental commitments, net of subleases, at March 31, 1999, are as follows: 2000........................................................ $ 902 2001........................................................ 889 2002........................................................ 799 2003........................................................ 797 2004........................................................ 390 ------ Total minimum payments...................................... $3,777 ====== Sublease income and future sublease payments are insignificant. Rent expense was $75 for the year ended March 31, 1997, $221 for the year ended March 31, 1998 and $676 for the year ended March 31, 1999. Rent expense was $732 for the nine months ended December 31, 1999. Pharsight is required to pay royalties based on license revenue or license shipments for some products. As of March 31, 1999, required minimum payments under such royalty agreements are as follows: 2000........................................................ $174 2001........................................................ 67 ---- Total minimum payments...................................... $241 ==== Royalty expense totaled $144 for the year ended March 31, 1999. Royalty expense for the year ended March 31, 1998 was insignificant. This amount has been included in cost of revenues. 7. DEBT Pharsight has entered into various noncancelable capital lease agreements for equipment and software through a series of sale-leaseback transactions. Capital lease obligations represent the present F-18 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 7. DEBT (CONTINUED) value of future rental payments under these leases. Future minimum lease payments under the capital leases at March 31, 1999 are as follows: 2000........................................................ $338 2001........................................................ 269 2002........................................................ 215 2003........................................................ 115 ---- Total minimum payments...................................... 937 Less amounts representing interest.......................... 160 ---- Present value of minimum lease payments..................... 777 Less current portion........................................ 258 ---- $519 ==== In December 1997, in conjunction with the acquisition of SCI, Pharsight issued a note payable to a stockholder and subsequently an officer of Pharsight for $456. The payments were due in annual increments of $228, plus accrued interest at 8% per year. The initial amount due was paid in 1998 and the remaining payment was made in December 1999. There were no restrictive covenants or collateral associated with this note. In March 1998, Pharsight issued a note payable to a financier for $1,000. Principal and interest, at 7.68% per year, are due in monthly payments of $31 from April 1, 1998 through March 1, 2001. All assets of Pharsight have been pledged as collateral for this outstanding debt. Pharsight is required to maintain compliance with certain financial and non-financial covenants associated with the $1,000 note payable. The note limits the payment of dividends without the noteholder's consent. In May 1998, in conjunction with the acquisition of MGA, Pharsight issued a note payable to a stockholder and entered into two non-compete agreements for a total of $2,250 bearing interest at 8% per year. In May 1999, Pharsight and the noteholders modified the note and one of the non-compete agreements. Pharsight agreed to make a payment of $480 on the note and non-compete agreement and the noteholder agreed to issue two new notes for the remaining balance owed on the original note and non-compete agreement which totaled $600. The notes bear interest at 10%. The note balances, together with accrued interest, were due and paid in September 1999. The remaining non-compete balance is due in May 2000. Maturities of long-term debt obligations as of March 31, 1999 are as follows: 2000........................................................ $2,660 2001........................................................ 2,293 ------ Total....................................................... $4,953 ====== F-19 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK Each share of Series C and Series D redeemable convertible preferred stock (Series C stock and Series D stock, respectively) is convertible, at the holder's option, into one share of common stock subject to certain antidilution adjustments. At conversion, the holders are entitled to any and all declared and unpaid dividends. Each share of preferred stock automatically converts to common stock upon the closing of an underwritten public offering of Pharsight's common stock with aggregate proceeds to Pharsight of at least $20,000 and a per share offering price of at least $9.63. In addition, each share of Series C preferred stock shall be entitled to receive the original issue price of $2.37 upon conversion. The Series C stock and Series D stock are also convertible at the election of at least 51% of the outstanding shares of Series C stock and at least 66 2/3% of the outstanding shares of Series D stock, respectively. Each share of Series C stock and Series D stock may be voted as if converted to common stock. Each share of Series C stock and Series D stock entitles the holder to receive, in preference to holders of common shares, cash dividends at an annual rate of $0.213 per share and $0.327 per share, respectively. Such dividends shall be payable when and if declared by the Board of Directors and shall be noncumulative. As of March 31, 1999 and December 31, 1999, no dividends have been declared. The Series C stock can be redeemed at any time after May 2002 (five years from issuance) upon the affirmative vote of at least 51% of the Series C stockholders. The Series D stock can be redeemed at any time after October 2003 (five years from issuance) upon the affirmative vote of at least 66 2/3% of the Series D stockholders. The Series C stock can be redeemed at a price of $2.37 per share plus any and all dividends accrued, declared, and unpaid and a payment amount equal to 8% of the original issue price of the Series C stock multiplied by the number of full years elapsed between the original issue date and the redemption date. The Series D stock can be redeemed at a price of $3.27 per share, plus any and all dividends accrued and unpaid and a payment amount equal to 8% of the original issue price of the Series D stock multiplied by the number of full years elapsed between the original issue date and the redemption date. For the Series C stock and the Series D stock, Pharsight is recording accretion of the excess redemption value ratably against earnings over the term of the redemption feature. The accretion resulted in a $448, $489, and $367 increase to the carrying value of the Series C stock for the year ended March 31, 1998 and 1999 and the nine months ended December 31, 1999, respectively. The accretion resulted in a $314 and $564 increase in the carrying value of the Series D stock for the year ended March 31, 1999 and the nine months ended December 31, 1999. The $644 included in the statement of operations for the year ended March 31, 1998 represents the fair value on the date of grant, based upon the Black-Scholes fair value method, of the common stock into which the Series C stock may be converted. See Note 9 for the rights and preferences of the Series C and Series D stockholders in the event of liquidation. 9. CONVERTIBLE PREFERRED STOCK Each share of Series A and B convertible preferred stock (Series A stock and B stock, respectively) is convertible, at the stockholder's option, into one share of common stock, subject to certain adjustments. Each series of preferred stock automatically converts to common stock upon either F-20 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 9. CONVERTIBLE PREFERRED STOCK (CONTINUED) the closing of an underwritten public offering of Pharsight's common stock with aggregate proceeds to Pharsight of at least $20,000 and a per share price of at least $9.63 or the election of the holders of at least 51% of the outstanding preferred stock. Each share of Series A stock and B stock may be voted as if converted to common stock. Each share of Series A stock and B stock entitles the holder to receive, in preference to holders of common shares, cash dividends at an annual rate of $0.098 and $0.15 per share, respectively. Such dividends shall be payable when and if declared by the Board of Directors and shall be noncumulative. As of March 31, 1999 and December 31, 1999, no dividends have been declared. Upon any liquidation event, including a liquidation, dissolution, or winding up of Pharsight, as well as certain mergers and acquisitions, the holders of the Series A, B, C, and D stock shall be paid, in preference to the holders of common stock, an amount equal to $0.98, $1.50, $2.37, and $3.27 per share, respectively, plus any and all accrued and unpaid dividends. In addition, the holders of the Series C stock shall be paid, in preference to the holders of common stock, a payment amount equal to 8% of the original issue price of the Series C stock multiplied by the number of full years elapsed between the original issue date and the liquidation date. If the liquidation event occurs prior to May 1, 1999, the remaining assets would be distributed pro rata to holders of common and preferred shares on an as-if-converted basis until the Series A, B, and D stockholders receive an aggregate of $2.94, $4.50, and $9.81 per share, respectively, inclusive of the respective liquidation preference amounts referred to above. After such amounts have been paid, the remaining assets would be distributed ratably to common and Series C stockholders on an as-if-converted basis. If the liquidation event occurs on or after May 1, 1999, the assets remaining after the distributions noted above would be distributed ratably to the holders of the common stock and the Series C stock, on an as-if-converted basis, only. 10. COMMON STOCK Pharsight is authorized to issue up to 15,013 shares of common stock. At March 31, 1999, a total of 3,571 shares of common stock were issued and outstanding. At March 31, 1999, common stock was reserved for future issuance as follows: Conversion of Series A preferred stock...................... 1,935 Conversion of Series B preferred stock...................... 540 Conversion of Series C preferred stock...................... 2,582 Conversion of Series D preferred stock...................... 2,877 Warrants outstanding........................................ 278 Future issuance for acquisition of SCI...................... 24 Stock option plans.......................................... 1,237 --------- 9,473 ========= Sales of Pharsight's common stock have been made pursuant to restricted stock purchase agreements containing provisions established by the Board of Directors. Pharsight has a right to repurchase the shares at the original sale price, which generally expires at the rate of 25% after one year and 2.0833% per month thereafter. F-21 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. COMMON STOCK (CONTINUED) For the year ended March 31, 1998, Pharsight has sold 654 shares. For the year ended March 31, 1999, Pharsight has sold 2,169 shares. At March 31, 1999, 673 shares were subject to repurchase. Pharsight loaned an officer $12 in July 1996 and $10 in June 1998 in connection with the purchase of common stock. Interest on each of these loans is 6.74% and 5.77% per year, respectively, and compounds annually. The principal and accrued interest on each loan is due in July 2001 and may be prepaid without penalty. The promissory notes will accelerate and become due and payable 30 days after the officer's employment is terminated for any reason. In addition, Pharsight loaned the officer $23 in 1999 to purchase additional shares of common stock. The interest on this loan is 6% per year, with the principal and accrued due in May 2003. This promissory note may be prepaid without penalty and will accelerate and become immediately due and payable should the officer's employment with us be terminated for any reason. All notes are full recourse and the shares of common stock purchased have been pledged as repayment of the loans. In January 1998 Pharsight loaned an officer $75 in connection with the purchase of common stock. The interest on this loan is 5.93% per year and compounds annually. The principal and accrued interest is due in December 2002 and may be prepaid without penalty. This promissory note will accelerate and become due and payable 90 days after the officer's employment is terminated. The note is full recourse and the shares of common stock purchased have been pledged as repayment of the loans. 11. WARRANTS In connection with equipment leases entered into in April, 1996, Pharsight issued warrants to purchase 21 shares of Series A convertible preferred stock at an exercise price of $0.98 per share. The warrants expire April 30, 2006. The fair value assigned to these warrants was immaterial. In connection with equipment leases entered into in November, 1998, Pharsight issued a warrant that entitles the holder to purchase 4 shares of Series C convertible redeemable preferred stock at an exercise price of $2.37 per share. The warrants expire November 7, 2004 or, if earlier, 3 years after an IPO of Pharsight's stock. The fair value assigned to these warrants was immaterial. In connection with various convertible promissory notes and loan agreements entered into throughout fiscal 1999, Pharsight issued warrants to purchase 278 shares of common stock at an exercise price ranging from $0.25 - $3.27 per share. The warrants expire on dates ranging from March 31, 2008 to February 26, 2009 or, if earlier, 5 years after an IPO of Pharsight's stock. The fair value assigned to these warrants was immaterial. 12. STOCK-BASED BENEFIT PLANS In May 1995, Pharsight adopted the 1995 Stock Option Plan (the "1995 Plan"), which provides for the granting of incentive stock options and nonqualified stock options to employees, directors, and consultants. Under the 1995 Plan, the Board of Directors determines the term of each award and the award price. In the case of incentive stock options, the exercise price may be established at an amount not less than the fair market value at the date of grant, while nonstatutory options may have exercise prices not less than 85% of the market value as of the date of grant. Options generally vest ratably F-22 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. STOCK-BASED BENEFIT PLANS (CONTINUED) over a four-year period commencing with the grant date and expire no later than ten years from the date of grant. In February 1997, Pharsight adopted the 1997 Stock Option Plan (the "1997 Plan"), which provides for the granting of incentive stock options and nonqualified stock options to employees, directors, and consultants. When the 1997 Plan was adopted, the 1995 Plan was terminated. All shares that had been authorized but which had not been granted were returned to the pool of unreserved shares of common stock. Rights and obligations of options granted under the 1995 plan were not impaired by the termination of the plan. Under the 1997 Plan, the Board of Directors determines the term of each award and the award price. In the case of incentive stock options, the exercise price may be established at an amount not less than the fair market value at the date of grant, while nonstatutory options may have exercise prices not less than 85% of the market value as of the date of grant. Options generally vest ratably over a four-year period commencing with the grant date and expire no later than ten years from the date of grant. Pharsight applies APB Opinion No. 25 and related interpretations in accounting for its employee stock options. Under APB Opinion No. 25, because the exercise price of Pharsight's employee stock options is not less than the fair value of the underlying stock on the date of grant, no compensation expense is recognized. A summary of Pharsight's stock option activity and related information for the years ended March 31, 1997, 1998 and 1999 and for the nine months ended December 31, 1999 is as follows: WEIGHTED NUMBER OF AVERAGE OPTIONS EXERCISE PRICE OUTSTANDING PER SHARE ----------- -------------- Balance at March 31, 1996........................... 25 $0.10 Options granted..................................... 340 0.14 Options exercised................................... (1) 0.10 Options canceled.................................... (15) 0.10 ------- Balance at March 31, 1997........................... 349 0.14 Options granted..................................... 519 0.25 Options exercised................................... (29) 0.12 Options canceled.................................... (24) 0.11 ------- Balance at March 31, 1998........................... 815 0.21 Options granted..................................... 575 0.27 Options exercised................................... (183) 0.20 Options canceled.................................... (82) 0.22 ------- Balance at March 31, 1999........................... 1,125 0.24 Options granted..................................... 1,268 0.81 Options exercised................................... (508) 0.37 Options canceled.................................... (66) 0.25 ------- Balance at December 31, 1999........................ 1,819 $0.61 ======= F-23 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. STOCK-BASED BENEFIT PLANS (CONTINUED) At March 31, 1999 and December 31, 1999, 1,237 and 2,510 shares were authorized under the plans, respectively, and 113 and 439 options to purchase common stock were available for future option grants. In May 1999, an additional 855 shares were authorized under the 1997 plan. In September 1999, an additional 500 shares were authorized under the 1997 plan. The following table summarizes information about stock options outstanding and exercisable at March 31, 1999: OPTIONS OUTSTANDING ------------------------------------------ OPTIONS EXERCISABLE WEIGHTED ---------------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE PRICE NUMBER EXERCISE PRICE RANGE OF EXERCISE PRICES PER SHARE OUTSTANDING LIFE PER SHARE EXERCISABLE PER SHARE - ----------------------------------- ----------- ----------- -------------- ----------- -------------- $0.10 - $0.15...................... 179 7.50 years $0.13 77 $0.13 $0.25 - $0.35...................... 945 8.93 years 0.26 184 0.25 --------- ------- 1,124 8.71 years $0.24 261 $0.21 ========= ======= Pharsight recorded deferred compensation of $296 and $3,895 for the year ended March 31, 1999 and the nine month period ended December 31, 1999. This amount represented the difference between the exercise price and the deemed fair value of Pharsight's common stock on the date the stock options were granted. Pharsight recorded amortization of deferred stock compensation of $57 during the year ended March 31, 1999 based on a graded vesting method. During the nine months ended December 31, 1999, Pharsight recorded amortization of deferred stock compensation of $1,391. At March 31, 1999 and December 31, 1999, Pharsight had a total of approximately $239 and $2,743, respectively, remaining to be amortized on a graded vesting method over the corresponding vesting period of each respective option, generally four years. Pro forma information regarding net loss is required by SFAS 123, which also requires that the information be determined as if Pharsight had accounted for its employee stock options under the fair value method of SFAS 123. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period using an accelerated straight-line method. The weighted average grant date fair value of options and restricted stock granted was $.08 F-24 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. STOCK-BASED BENEFIT PLANS (CONTINUED) per share and $.05 per share during both 1998 and 1999, respectively. The fair value of these options was estimated at the date of grant using the Black-Scholes method and the following assumptions. RESTRICTED STOCK GRANTS OPTIONS YEARS ENDED MARCH 31, YEARS ENDED MARCH 31, ---------------------------------------- ---------------------------------------- 1997 1998 1999 1997 1998 1999 -------- -------- -------- -------- -------- -------- Expected life (years)...... 6.00 6.00 6.00 4.00 4.00 4.00 Expected stock price volatility............... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Risk-free interest rate.... 6.27% 6.11% 5.00% 5.89% 5.25% 5.00% Dividend yield............. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% YEARS ENDED MARCH 31, ------------------------------ 1997 1998 1999 -------- -------- -------- Net loss: As reported............................................... $(1,934) $(5,216) $(10,696) Pro forma................................................. (1,945) (5,230) (10,734) Basic and diluted net loss per share: As reported............................................... $ (2.57) $ (3.96) $ (4.41) Pro forma................................................. (2.59) (3.97) (4.43) The option valuation models were developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because Pharsight's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 13. INCOME TAXES There was no provision for income taxes in any year presented due to the fact that Pharsight incurred net losses. As of March 31, 1999, Pharsight has federal net operating loss carryforwards of approximately $11,900 and federal research and development tax credit carryforwards of approximately $200. The net operating losses will expire at various dates beginning in 2011 through 2018, if not utilized. Utilization of the net operating losses may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. F-25 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 13. INCOME TAXES (CONTINUED) Significant components of deferred income taxes are as follows: MARCH 31, ------------------------- 1998 1999 ----------- ----------- Deferred tax assets: Net operating loss carryforwards................. $ 2,100 $ 4,760 Research and development tax credits............. 200 200 Other............................................ 200 240 ----------- ----------- Total deferred tax assets........................ 2,500 5,200 Valuation allowance.............................. (2,500) (5,200) ----------- ----------- Net deferred tax assets........................ $ -- $ -- =========== =========== The valuation allowance for deferred tax assets increased by approximately $800, $1,700 and $2,700 in the years ended March 31, 1997, 1998 and 1999. There were no offsets or other deductions to the valuation allowances in any year. 14. SEGMENT INFORMATION Effective April 1, 1998, Pharsight adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." Pharsight organizes and manages its products and services as a single product family, and accordingly, the required disclosures under SFAS No. 131 regarding their products and services are made to the face of the financial statements. The adoption of SFAS No. 131 had no effect on the financial position of Pharsight. Pharsight operates primarily within the United States. All of its assets are also located within the United States. 15. 401(K) PLAN Pharsight has a 401(k) plan which covers all employees. Pharsight's contributions to the plan are discretionary. Through December 31, 1999, Pharsight has made no contributions to the plan. 16. SUBSEQUENT EVENTS CONVERTIBLE PREFERRED STOCK In September 1999, Pharsight sold for cash a total of 2,778 shares of Series E convertible preferred stock for net proceeds of approximately $19,967. Shares of Series E convertible preferred stock are entitled to noncumulative dividends, when and if declared, of $0.72 per share and have a liquidation preference of $7.20 per share. The Series E convertible preferred shares have additional rights and privileges similar to those of the preferred stock discussed in Note 9. LINE OF CREDIT In January 2000, Pharsight obtained a $1,500 accounts receivable line of credit. Under the facility Pharsight may borrow up to 80% of its eligible accounts receivable. Interest at the bank's prime rate F-26 PHARSIGHT CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 16. SUBSEQUENT EVENTS (CONTINUED) plus 1% is payable monthly with principal due January 2001 upon the line's expiration, if not extended. Pharsight has not yet borrowed under this line. REGISTRATION STATEMENT In April 2000, Pharsight's Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission to register shares of its common stock in connection with the proposed IPO. If the IPO is consummated under the terms presently anticipated, all of the currently outstanding shares of convertible preferred stock will be converted into shares of common stock upon the closing of the IPO. The effect of this conversion has been reflected in unaudited pro forma stockholders' equity in the accompanying balance sheet as of December 31, 1999. REINCORPORATION IN DELAWARE In April 2000, the Board of Directors approved the reincorporation of Pharsight in the State of Delaware. The reincorporation is expected to be approved by the stockholders prior to the closing date of Pharsight's IPO. AMENDED AND RESTATED CERTIFICATE OF INCORPORATION Immediately upon the completion of the IPO, Pharsight will amend and restate its Certificate of Incorporation to provide for authorized capital stock of 120,000 shares of common stock, $0.001 par value per share, and 5,000 shares, $0.001 par value per share, of undesignated preferred stock. STOCK-BASED BENEFIT PLANS In April 2000, Pharsight adopted the 2000 Equity Incentive Plan ("Incentive Plan") and the 2000 Employee Stock Purchase Plan ("Stock Purchase Plan"). Pharsight has reserved 4,000 and 600 shares of common stock for issuance under the Incentive and Stock Purchase Plans, respectively. F-27 REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS The Board of Directors Pharsight Corporation We have audited the accompanying statements of income and cash flows of Scientific Consulting, Inc. for the period from January 1, 1997 through December 17, 1997. These financial statements are the responsibility of Pharsight Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Scientific Consulting, Inc. for the period from January 1, 1997 through December 17, 1997, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP San Jose, California April 7, 2000 F-28 SCIENTIFIC CONSULTING, INC. STATEMENT OF INCOME FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 17, 1997 (IN THOUSANDS) Revenues: License and support....................................... $1,032 Services.................................................. 120 ------ 1,152 Costs and expenses: License and support....................................... 34 Services.................................................. 225 Research and development.................................. 449 Provision for bad debts................................... 54 General and administrative................................ 187 ------ 949 ------ Income from operations.................................... 203 Other income (expense): Interest expense.......................................... (9) Other, net................................................ 1 ------ (8) ------ Net income.................................................. $ 195 ====== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-29 SCIENTIFIC CONSULTING, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 17, 1997 (IN THOUSANDS) OPERATING ACTIVITIES Net income.................................................. $ 195 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 2 Provision for bad debts................................. 54 Changes in operating assets and liabilities: Receivables........................................... (301) Other assets.......................................... (4) Accounts payable...................................... 54 Accrued compensation.................................. 65 ------ Net cash provided by operating activities................... 65 INVESTING ACTIVITIES Capital expenditures........................................ (5) ------ Net cash used in investing activities....................... (5) FINANCING ACTIVITIES Distributions to shareholders............................... (60) Proceeds from notes payable................................. 49 ------ Net cash used in financing activities....................... (11) ------ Net increase in cash........................................ 49 Cash at beginning of period................................. 58 ------ Cash at end of period....................................... $ 107 ====== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest...................................... $ 8 ====== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-30 SCIENTIFIC CONSULTING, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 17, 1997 (IN THOUSANDS) 1. ORGANIZATION Scientific Consulting, Inc. ("the Company") designs, manufactures and markets a suite of specialty medical software products that are used by drug development companies operating in pharmaceutical, biotechnology and veterinarian medicine market segments. 2. SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from these estimates. REVENUE RECOGNITION The Company recognizes software revenue, primarily related to its software products, in accordance with American Institute of Certified Public Accountants Statement of Position 97-2 "Software Revenue Recognition." Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collectibility is probable. Service revenue is primarily consulting fees. Service revenue from consulting is recognized as the service is performed. Maintenance revenue is deferred and recognized on a straight-line basis over the life of the related contract, which is typically one year. CAPITALIZED SOFTWARE The Company capitalizes eligible computer software costs as products achieve technological feasiblity, subject to net realizable value considerations. The Company has defined technological feasibility as completion of a working model. As of December 17, 1997, such internal capitalizable costs were insignificant. Accordingly, the Company has charged all such internal costs to research and development expenses in the accompanying statements of operations. DEPRECIATION AND AMORTIZATION Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, which is between three and five years. INCOME TAXES The Company is an S Corporation for federal income tax purposes. Income and losses of the Company are passed through to its shareholders that bear the responsibility of paying federal income taxes on such amounts. Accordingly, the Company has not recognized any provision for federal income taxes. The Company is subject to state taxes. Such taxes were immaterial for the period presented. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. The Company performs ongoing credit evaluations of its customers and F-31 SCIENTIFIC CONSULTING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 17, 1997 (IN THOUSANDS) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) does not require collateral. Credit losses have not been significant and have been within management's expectations for all periods presented. 3. LEASE COMMITMENT The Company leases office space under a noncancelable operating lease. The lease agreement requires the Company to pay certain operating costs associated with the leased space in addition to the base rent. In addition, the lease contains an option for renewal. Future minimum lease payments under the lease at December 17, 1997, are as follows: YEARS ENDING DECEMBER 31, - ------------------------- 1998........................................................ $36 1999........................................................ 36 --- $72 === Rent expense for the period from January 1, 1997 through December 17, 1997 totaled approximately $32. 4. SUBSEQUENT EVENT On December 17, 1997, Pharsight Corporation purchased all of the assets and assumed certain liabilities of the Company in exchange for cash and stock of Pharsight Corporation. The total purchase price was $1.3 million. The Company was subsequently dissolved. F-32 - --------------------------------------------------------- - --------------------------------------------------------- , 2000 [LOGO] SHARES OF COMMON STOCK ---------------------- P R O S P E C T U S ---------------------- DONALDSON, LUFKIN & JENRETTE CHASE H&Q WIT SOUNDVIEW DLJDIRECT INC. - --------------------------------------------------------- We have not authorized any dealer, salesperson or other person to give you written information other than this prospectus or to make representations as to matters not stated in the prospectus. You must not rely on unauthorized information. This prospectus is not an offer to sell these securities or our solicitation of your offer to buy the securities in any jurisdiction where that would not be permitted. The information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or any sale of these securities. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Until , 2000 (25 days after the date of this prospectus), all dealers that effect transactions in these shares of common stock may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions. - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by us in connection with the sale of our common stock being registered. All amounts shown are estimates except for the registration fee, the NASD filing fee and the Nasdaq National Market fee. Registration fee............................................ $ NASD filing fee............................................. Nasdaq National Market fee.................................. Blue sky qualification fees and expenses.................... Printing and engraving expenses............................. Legal fees and expenses..................................... Accounting fees and expenses................................ Transfer agent and registrar fees........................... Miscellaneous............................................... Total....................................................... $ ======= ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the Delaware General Corporation Law, permits indemnification of officers, directors, and other corporate agents under certain circumstances and subject to certain limitations. The Registrant's Certificate and Bylaws provide that the Registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by the Delaware General Corporation Law, including circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, the Registrant has entered into separate indemnification agreements with its directors and executive officers which require the Registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service (other than liabilities arising from acts or omissions not in good faith or willful misconduct). These indemnification provisions and the indemnification agreements entered into between the Registrant and its executive officers and directors may be sufficiently broad to permit indemnification of the Registrant's executive officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The Underwriting Agreement to be filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act, or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. From March 31, 1997 through April 14, 2000 (or earlier if specifically noted), Pharsight has sold and issued the following unregistered securities: (1) From April 1996 through April 14, 2000, Pharsight has granted stock options to purchase 3,587,355 shares of common stock, at a weighted average exercise price of $2.00, to employees, consultants and directors pursuant to its 1995 stock option plan and 1997 stock option plan. Of these stock options, 289,332 shares have been cancelled or have lapsed without being exercised, 721,374 shares have been exercised, no shares have been repurchased and 2,576,649 shares remain outstanding. (2) In May 1997, Pharsight sold an aggregate of 2,577,840 shares of Series C preferred stock to 10 accredited investors at $2.37 per share, for an aggregate purchase price of $6,109,480. Shares of II-1 Series C preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series C preferred stock outstanding. (3) In October 1998, Pharsight sold an aggregate of 2,877,254 shares of Series D preferred stock to 20 accredited investors at $3.27 per share, for an aggregate purchase price of $9,408,620. Shares of Series D preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series D preferred stock outstanding. (4) In September 1999, Pharsight sold 2,777,778 shares of Series E preferred stock to McKesson HBOC, Inc. at $7.20 per share, for an aggregate purchase price of $20,000,000. Shares of Series E preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series E preferred stock outstanding. (5) In November 1997, Pharsight issued a warrant to purchase 3,800 shares of Series C preferred stock, at an exercise price of $2.37 per share to Comdusco, Inc., a lender, in connection with a lease financing arrangement. Shares of Series C preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of Series C preferred stock. (6) From September 1997 to August 1998, Pharsight issued an aggregate of 40,000 shares of common stock to Steven Brooks, a member of the board of directors, at a price of $0.25 per share. (7) From December 1997 to December 1999, Pharsight issued 700,000 shares of common stock to Daniel Weiner, an officer of Pharsight, and Glenn Stucker, Jr., the two shareholders of Scientific Consulting, Inc., as partial consideration for the outstanding capital stock of Scientific Consulting, Inc. (8) In January 1998, Pharsight issued 300,000 shares of common stock to Daniel Weiner, an officer, at a purchase price of $0.25 per share. (9) From March to June 1998, Pharsight issued warrants to purchase 137,131 shares of common stock, at an exercise price of $2.37 per share, to MMC/GATX Partnership No. 1, a lender, in connection with a loan agreement. (10) In May 1998, Pharsight issued an aggregate of 246,250 shares of common stock as partial consideration for the purchase of assets from Mitchell Gauthier and Associates, Inc. ("MGA"). These shares were issued, at the direction of MGA, to a total of eight individuals affiliated with MGA. (11) In May 1998, Pharsight issued warrants to purchase an aggregate of 127,089 shares of common stock to nine accredited investors in connection with a short term loan arrangement, at an exercise of $0.25 per share. (12) In June 1998, Pharsight issued 40,000 shares to Robin Kehoe, an officer, at a purchase price of $0.25 per share. (13) In November 1998, Pharsight issued an aggregate of 26,808 shares of common stock to two consultants, Steven Levene and Anthony Lautmann, at a purchase price of $0.35 per share. (14) In February 1999, Pharsight issued warrants to purchase an aggregate of 13,761 shares of common stock to two associated lenders, TransAmerica Business Credit Corporation and MM Ventures, at an exercise price of $3.27 per share. (15) From July 1999 through January 2000, Pharsight issued 22,478 shares to one employee as a commission for prior customer relationships transferred to Pharsight. The sales and issuances of securities described in paragraphs (1), (6), (8), (12) and (13) above were deemed to be exempt from registration under the Securities Act by virtue of Rule 701 promulgated thereunder in that they were offered and sold either pursuant to a written compensatory benefit plan or pursuant to a written contract relating to compensation, as provided by Rule 701. II-2 The sale and issuance of securities described in paragraphs (2), (3), (4), (5), (7), (9), (10), (11), (14) and (15) above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act or Regulation D promulgated thereunder. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 1.1(1) Form of Underwriting Agreement. 3.1 Amended and Restated Certificate of Incorporation of Pharsight, as currently in effect. 3.2 Amended and Restated Certificate of Incorporation of Pharsight, to be in effect immediately following the closing of the offering. 3.3 Bylaws of Pharsight, as currently in effect. 4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3. 4.2 Amended and Restated Investors' Rights Agreement, dated as of September 2, 1999, by and among Pharsight and the investors listed on Exhibit A attached thereto. 5.1(1) Opinion of Cooley Godward LLP. 10.1 Asset Purchase Agreement dated as of May 27, 1998, by and among Pharsight, Mitchell and Gauthier Associates, Inc., Edward E.L. Mitchell and Joseph S. Gauthier. 10.2 Lease on Suite 200 at 800 El Camino Real West, Mountain View, California, by and among the Company and Asset Growth Partners, dated as of June 11, 1998. 10.3 Co-Ownership Agreement, dated as of the May 27, 1998, by and between Pharsight and Mitchell and Gauthier Associates, Inc. 10.4 Noncompetition Agreement, dated as of May 27, 1998, by and between Pharsight and Joseph S. Gauthier. 10.5 Loan and Security Agreement, dated as of January 18, 2000, by and between Pharsight and Silicon Valley Bank. 10.6 Loan and Security Agreement, dated as of March 31, 1998, by and between Pharsight and MMC/GATX Partnership No. 1. 10.7 Loan and Security Agreement, dated as of June 8, 1998, by and between Pharsight and MMC/GATX Partnership No. l. 10.8 Master Loan and Security Agreement, dated as of February 26, 1999, by and between Pharsight and Transamerica Business Credit Corporation. 10.9(2) Information Product Distribution Agreement, dated as of June 25, 1999, by and between Pharsight and Protocare Sciences, Inc. 10.10(2) Database License Agreement, dated as of February 24, 2000 by and between Pharsight and Duke University. 10.11(2) Data Set License Agreement, dated as of March 1, 2000 by and between Pharsight and Lovelace Respiratory Research Institute. 10.12 Promissory note, dated as of July 25, 1996 from Robin Kehoe in favor of Pharsight. 10.13 Promissory note, dated as of June 2, 1998, from Robin Kehoe in favor of Pharsight. 10.14 Promissory note, dated as of June 15, 1999 from Robin Kehoe in favor of Pharsight. 10.15 Promissory note, dated as of January 25, 1998, from Daniel Weiner in favor of Pharsight. 10.16 Form of Indemnity Agreement to be entered into between Pharsight and each of its officers and directors. 10.17 Pharsight's 1997 Stock Option Plan. 10.18 Pharsight's 1995 Stock Option Plan. 10.19(1) Pharsight's 2000 Equity Incentive Plan and related documents. 10.20(1) Pharsight's 2000 Employee Stock Purchase Plan and related documents. 23.1 Consent of Ernst & Young, LLP. 23.2 Consent of Cooley Godward LLP. (See Exhibit 5.1.) II-3 EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 24.1 Power of Attorney. (See pages II-5 to II-6.) 27.1 Financial Data Schedule. - ------------------------ (1) To be filed by amendment. (2) Confidential treatment has been requested for portions of this exhibit. (b) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they are not required, they are not applicable or the information is already included in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act, the information omitted from the form of this prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) That for purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. (3) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 15 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against these liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by a director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether the indemnification by it is against public policy as expressed in the Securities Act of 1933, and will be governed by the final adjudication of this issue. (4) To provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in the denomination and registered in the names required by the Underwriters to permit prompt delivery to each purchaser. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mountain View, State of California, on the 17th day of April, 2000. PHARSIGHT CORPORATION By: /s/ ARTHUR H. REIDEL ----------------------------------------- Arthur H. Reidel PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Arthur H. Reidel and Robin A. Kehoe, his or her true and lawful attorney-in-fact and agent, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments and registration statements filed pursuant to Rule 462) to the Registration Statement on Form S-1, and to any registration statement filed under Securities and Exchange Commission Rule 462, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates stated. SIGNATURE TITLE DATE President, Chief Executive /s/ ARTHUR H. REIDEL Officer and Chairman of the -------------------------------------- Board (Principal Executive April 17, 2000 Arthur H. Reidel Officer) Vice President, Finance and /s/ ROBIN A. KEHOE Chief Financial Officer -------------------------------------- (Principal Financial and April 17, 2000 Robin A. Kehoe Accounting Officer) /s/ STEVEN D. BROOKS -------------------------------------- Director April 17, 2000 Steven D. Brooks /s/ PHILIPPE O. CHAMBON -------------------------------------- Director April 17, 2000 Philippe O. Chambon, M.D., Ph.D. /s/ ROBERT B. CHESS -------------------------------------- Director April 17, 2000 Robert B. Chess II-5 SIGNATURE TITLE DATE /s/ DOUGLAS E. KELLY, M.D. -------------------------------------- Director April 17, 2000 Douglas E. Kelly, M.D. /s/ DEAN O. MORTON -------------------------------------- Director April 17, 2000 Dean O. Morton /s/ GARY L. NEIL, PH.D. -------------------------------------- Director April 17, 2000 Gary L. Neil, Ph.D. /s/ W. FERRELL SANDERS -------------------------------------- Director April 17, 2000 W. Ferrell Sanders II-6 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 1.1(1) Form of Underwriting Agreement. 3.1 Amended and Restated Certificate of Incorporation of Pharsight, as currently in effect. 3.2 Amended and Restated Certificate of Incorporation of Pharsight, to be in effect immediately following the closing of the offering. 3.3 Bylaws of Pharsight, as currently in effect. 4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3. 4.2 Amended and Restated Investors' Rights Agreement, dated as of September 2, 1999, by and among Pharsight and the investors listed on Exhibit A attached thereto. 5.1(1) Opinion of Cooley Godward LLP. 10.1 Asset Purchase Agreement dated as of May 27, 1998, by and among Pharsight, Mitchell and Gauthier Associates, Inc., Edward E.L. Mitchell and Joseph S. Gauthier. 10.2 Lease on Suite 200 at 800 El Camino Real West, Mountain View, California, by and among the Company and Asset Growth Partners, dated as of June 11, 1998. 10.3 Co-Ownership Agreement, dated as of the May 27, 1998, by and between Pharsight and Mitchell and Gauthier Associates, Inc. 10.4 Noncompetition Agreement, dated as of May 27, 1998, by and between Pharsight and Joseph S. Gauthier. 10.5 Loan and Security Agreement, dated as of January 18, 2000, by and between Pharsight and Silicon Valley Bank. 10.6 Loan and Security Agreement, dated as of March 31, 1998, by and between Pharsight and MMC/GATX Partnership No. 1. 10.7 Loan and Security Agreement, dated as of June 8, 1998, by and between Pharsight and MMC/GATX Partnership No. l. 10.8 Master Loan and Security Agreement, dated as of February 26, 1999, by and between Pharsight and Transamerica Business Credit Corporation. 10.9(2) Information Product Distribution Agreement, dated as of June 25, 1999, by and between Pharsight and Protocare Sciences, Inc. 10.10(2) Database License Agreement, dated as of February 24, 2000 by and between Pharsight and Duke University. 10.11(2) Data Set License Agreement, dated as of March 1, 2000 by and between Pharsight and Lovelace Respiratory Research Institute. 10.12 Promissory note, dated as of July 25, 1996 from Robin Kehoe in favor of Pharsight. 10.13 Promissory note, dated as of June 2, 1998, from Robin Kehoe in favor of Pharsight. 10.14 Promissory note, dated as of June 15, 1999 from Robin Kehoe in favor of Pharsight. 10.15 Promissory note, dated as of January 25, 1998, from Daniel Weiner in favor of Pharsight. 10.16 Form of Indemnity Agreement to be entered into between Pharsight and each of its officers and directors. 10.17 Pharsight's 1997 Stock Option Plan. 10.18 Pharsight's 1995 Stock Option Plan. 10.19(1) Pharsight's 2000 Equity Incentive Plan and related documents. 10.20(1) Pharsight's 2000 Employee Stock Purchase Plan and related documents. 23.1 Consent of Ernst & Young, LLP. 23.2 Consent of Cooley Godward LLP. (See Exhibit 5.1.) 24.1 Power of Attorney. (See pages II-5 to II-6.) 27.1 Financial Data Schedule. - ------------------------ (1) To be filed by amendment. (2) Confidential Treatment has been requested for portions of this exhibit.