<PAGE>
As filed with the Securities and Exchange Commission on June 28, 1999
Registration 333-78813
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DRUGSTORE.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 5912 04-3416255
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation
or organization)
13920 Southeast Eastgate Way, Suite 300
Bellevue, Washington 98005
(425) 372-3200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Peter M. Neupert
President and Chief Executive Officer
drugstore.com, inc.
13920 Southeast Eastgate Way, Suite 300
Bellevue, Washington 98005
(425) 372-3200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Joshua L. Green Neil J. Wolff
John H. Sellers Yoichiro Taku
Adam J. Rosenberg Shelly Dolev
Kevin G. Montler WILSON SONSINI GOODRICH & ROSATI
VENTURE LAW GROUP Professional Corporation
A Professional Corporation 650 Page Mill Road
2800 Sand Hill Road Palo Alto, California
Menlo Park, CA 94025 (650) 493-9300
(650) 854-4488
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
----------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ___________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued June , 1999
5,000,000 Shares
[LOGO OF DRUGSTORE.COM]
COMMON STOCK
-----------
drugstore.com, inc. is offering 5,000,000 shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. We anticipate that the initial public offering price will be between
$9.00 and $11.00 per share.
-----------
We have applied to list our common stock on the Nasdaq National Market under
the symbol "DSCM."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 7.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions drugstore.com
-------- ------------- -------------
<S> <C> <C> <C>
Per Share................... $ $ $
Total....................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
drugstore.com, inc. has granted the underwriters the right to purchase up to an
additional 750,000 shares to cover over-allotments. Morgan Stanley & Co.
Incorporated expects to deliver the shares to purchasers on , 1999.
-----------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
, 1999
<PAGE>
The first page of the gatefold includes:
drugstore.com
What Every Body Needs-TM-
[PICTURE OF DRUGSTORE.COM HOMEPAGE]
Lines pointing to specific items on the picture of the homepage connect to the
following text:
<TABLE>
<CAPTION>
<S> <C>
Five stores in one: health, beauty, wellness, Detailed product, topical and health
personal care and pharmacy. information to make purchase decisions.
Personalized service, shopping lists and Licensed pharmacy with home delivery.
reminders.
Choose from thousands of products in A high-quality selection of brand-name and
drugstore.com. specialty products organized in easy-to-shop
departments.
Shop for high-quality items in privacy.
</TABLE>
The following text is placed to the left of the picture of the homepage:
CONVENIENCE AND PRIVACY
drugstore.com has created a leading online drugstore and information site where
customers can shop in privacy from the convenience of their home or office.
More than a buying experience, drugstore.com offers the useful information to
assist in the thinking and buying process.
Our store is designed to make What Every Body Needs easier for our customers to
acquire. At drugstore.com, customers never have to park the car, stand in line
or bump into nosy neighbors.
FIVE STORES IN ONE
drugstore.com is five stores in one, offering health, beauty, wellness, personal
care and pharmacy products, which we believe offers a superior customer
experience not found at store-based retailers. Through the Internet,
drugstore.com offers:
. Convenient, personalized service
. Shopping 24 hours a day, seven days a week
. Helpful information to make purchase decisions
. Secure credit card payment
. Direct delivery to home or office
. Private shopping from home or work
. Licensed pharmacy
. Personal access to pharmacists to answer questions
. Specialized customer care
[LOGO] drugstore.com-TM-
What Every Body Needs-TM-
<PAGE>
The second page of the gatefold includes:
drugstore.com
Five Stores in One
The following text is placed at the top left of the page:
A FAMILIAR, COMFORTABLE WAY TO SHOP
Our store is designed to be a familiar, comfortable place with product
categories organized like the aisles and shelves of a traditional drugstore,
beauty counter or wellness store. Customers can easily browse through the store
departments, quickly view promotions and featured products and select products
according to their brand or unique attributes.
[PICTURE OF THE BEAUTY PAGE]
[PICTURE OF THE HEALTH PAGE]
[PICTURE OF THE BOUTIQUE PAGE]
The following text appears under the picture of the Health page:
HEALTH
Along with browsing for health tips and information, customers can quickly
compare and purchase antacids, pain relievers, and family planning, first aid
and other health products.
The following text appears under the picture of the Beauty page:
BEAUTY
Customers can find their favorite beauty products, and our Ask Your Beauty
Expert feature answers their questions via e-mail.
The following text appears under the picture of the Boutique page:
BOUTIQUE
Combining the prestige of department-store beauty counters with online shopping
convenience, the boutique offers high-end cosmetics, fragrance and skin and spa
products.
[LOGO]
The following text appears on the same line as the logo and spans both the
second and third pages of the gatefold:
drugstore.com-TM-
WHAT EVERY BODY NEEDS-TM-
The third page of the gatefold includes:
[WATERMARK OF THE LOGO]
[PICTURE OF THE PERSONAL CARE PAGE]
The following text appears to the right of the Personal Care page:
-2-
<PAGE>
PERSONAL CARE
drugstore.com provides fast, convenient purchase of toothpaste, shampoo,
tampons, diapers, shaving needs and more.
[PICTURE OF THE WELLNESS PAGE]
[PICTURE OF THE PHARMACY PAGE]
[PICTURE OF THE DRUG INDEX PAGE]
The following text appears below the picture of the Wellness page:
WELLNESS
drugstore.com offers a wide, high-quality selection of wellness products,
including vitamins, supplements, herbs and homeopathy and other natural
products.
The following text appears below the picture of the Pharmacy page:
PHARMACY
Licensed pharmacists fill/refill prescriptions, which are then delivered to the
customer's door. Our pharmacists can provide personal guidance, by phone or e-
mail, about prescription usage.
The following text appears below the picture of the Drug Index page:
DRUG INDEX
In the pharmacy's Drug Index, customers can get easy access to information about
particular medications, including prices and usage.
-3-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
---- ----
<S> <C> <C> <C>
Prospectus Summary.................. 4 Management........................... 50
Risk Factors........................ 7 Certain Relationships and Related
Sale of Shares to Amazon.com........ 22 Transactions........................ 58
Use of Proceeds..................... 22 Principal Stockholders............... 61
Dividend Policy..................... 22 Description of Capital Stock......... 63
Capitalization...................... 23 Shares Eligible for Future Sale...... 66
Dilution............................ 24 Underwriters......................... 68
Selected Consolidated Financial Legal Matters........................ 70
Data............................... 25 Experts.............................. 70
Management's Discussion and Analysis Where You Can Find More
of Financial Condition and Results Information......................... 70
of Operations...................... 26 Index to Consolidated Financial
Business............................ 33 Statements.......................... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing elsewhere in this prospectus.
drugstore.com
drugstore.com is a leading online drugstore: a retail store and information
site for health, beauty, wellness, personal care and pharmacy products. We
designed our store to provide a convenient, private and informative shopping
experience that encourages consumers to purchase products essential to healthy,
everyday living. We believe that our online store delivers a superior customer
experience, making buying What Every Body Needs(TM) less of a chore.
International Data Corporation estimates that worldwide business-to-consumer
sales over the Internet will increase from approximately $11 billion in 1998 to
approximately $93 billion by 2002. The Internet has also become an important
personal tool for accessing health and medical information. According to a
recent Forrester Research report, 31.6% of Internet users surveyed had shopped
for healthcare products online in the previous six months.
We believe there is a significant market opportunity for an online store
that can offer consumers an enhanced shopping experience for health, beauty,
wellness, personal care and pharmacy products. We seek to attract and retain
consumers by emphasizing the following key attributes:
. Convenience. We feature 24 hour a day access to our user-friendly Web
store, direct home or office delivery, a personalized shopping list and
confidential access to a personal medication profile.
. Selection. With over 17,000 SKUs (stock keeping units, a term used in
the retail industry to describe distinct products), we believe we offer
a significantly greater number of products than are available in a
typical traditional chain drugstore.
. Information. We have assembled a broad array of product information. We
offer full product packaging information, extensive drug information,
and a Resource Center, which includes buying guides, reference
information, shopping advisors and beauty information.
. Communication. We can communicate with customers on a regular basis
through the convenience of e-mail. We also offer our popular "Ask Your
Pharmacist" and "Ask Your Beauty Expert" features.
. Privacy. Consumers can shop in the privacy of their own homes or offices
and can obtain answers to questions that they might otherwise be
uncomfortable asking in public.
Our objective is to become one of the world's leading retailers of health,
beauty, wellness, personal care and pharmacy products. Key elements of our
strategy include: strengthening the drugstore.com brand, continuously improving
our Web store and service, developing strategic relationships, and taking
advantage of repeat purchasing patterns. In addition, we will also continue to
make significant investments in technology and distribution.
Consistent with our strategy of developing strategic relationships, we
recently entered into relationships with Rite Aid Corporation and General
Nutrition Companies, Inc. (GNC). Potential benefits of our Rite Aid
relationship may include additional revenue and traffic generated by Rite Aid
customers who may visit our Web site, the pharmacy benefit coverage provided by
the insurance companies and pharmacy benefit management companies (PBMs) with
which Rite Aid has a relationship, including PCS Health Systems, Inc., the co-
promotion and co-branding activities both companies will undertake and our
ability to offer Rite Aid customers the opportunity to order refills of their
existing Rite Aid prescriptions on our Web site and receive local delivery at
4
<PAGE>
Rite Aid stores nationwide. The benefits of our GNC relationship include the
opportunity to be the exclusive online provider of GNC-branded products and the
reciprocal co-promotion of each party's products in traditional and online
marketing efforts.
We face many risks and challenges in our business. Some consumers may prefer
to shop at traditional retail stores, especially consumers who do not have
access to the Internet or who need products immediately. As part of our
relationship with Rite Aid, we have agreed not to operate physical stores. An
investment in our common stock involves risks and uncertainties, including the
fact that we are an early stage company in a new market and that we expect
continuing losses for the forseeable future. See "Risk Factors" below for
further information.
The Offering
<TABLE>
<C> <S>
Common stock offered....................... 5,000,000 shares
Common stock to be outstanding after the
offering.................................. 42,791,000 shares
Use of proceeds............................ We intend to use the proceeds for general
corporate purposes, including working
capital and capital expenditures. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol..... DSCM
</TABLE>
The number of shares of our common stock to be outstanding immediately after
the offering is based on the number of shares outstanding at June 25, 1999,
including the sale of shares of common stock equal to $10,000,000 divided by
the initial public offering price to Amazon.com in a private placement
transaction to be closed concurrently with the closing of this offering and
assuming the closing of the sale of 12,282,599 shares of Series E preferred
stock to Rite Aid and GNC. This number does not include 8,329,000 shares of our
common stock subject to options and warrants outstanding or reserved for
issuance under our stock plans at June 25, 1999. In addition, except as
otherwise noted, all information in this prospectus (1) gives effect to the
conversion of all outstanding shares of preferred stock into shares of common
stock effective upon the closing of the offering, (2) assumes no exercise of
the underwriters' overallotment option, (3) assumes no exercise of an
outstanding warrant to purchase 10,000 shares of our common stock and (4)
excludes the anticipated issuance of 200,000 shares of common stock to a
charitable foundation that we intend to establish.
drugstore.com(TM), the drugstore.com logo, the boutique(TM), What Every Body
Needs(TM), Where Every Body Shops(TM), What Your Body Needs(TM), and HEALTH .
BEAUTY . WELLNESS(TM) are our trademarks. This prospectus also includes trade
dress, trade names, trademarks and service marks of other companies. Use or
display by drugstore.com of other parties' trademarks, trade dress or products
is not intended to and does not imply a relationship with, or endorsement or
sponsorship of drugstore.com by, the trademark or trade dress owners.
5
<PAGE>
Summary Consolidated Financial Data
The balance sheet data displayed in the "pro forma" column reflects the
issuance of 2,266,289 shares of Series D preferred stock in June 1999 and
receipt of related consideration and the issuance of 12,282,599 shares of
Series E preferred stock expected to be issued in exchange for $10 million in
cash and other consideration, including exclusive marketing commitments and
other obligations valued at $112.8 million based on the estimated fair value of
$10.00 per share. The "pro forma as adjusted" column reflects our
capitalization as of April 4, 1999 with adjustments to give effect to:
. the conversion of all shares of outstanding preferred stock into
34,468,000 shares of common stock upon the closing of this offering; and
. the receipt of the estimated proceeds from the sale of 5,000,000 shares
of our common stock at an assumed initial public offering price of
$10.00 per share, after deducting the underwriting discount and
estimated offering expenses, including the sale of $10 million of our
common stock to Amazon.com. See "Use of Proceeds" for a description of
how we intend to use the net proceeds of this offering.
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) through Quarter
December 31, Ended April 4,
1998 1999
------------------- --------------
(in thousands, except share
and per share data)
<S> <C> <C>
Consolidated Statement of Operations Data:
Net sales................................... $ -- $ 652
Gross profit (loss)......................... -- (20)
Total operating expenses.................... 7,664 10,517
Operating loss.............................. (7,664) (10,537)
Net loss.................................... (7,490) (10,219)
Pro forma basic and diluted net loss per
share (1).................................. $ (.92) $ (.52)
Weighted average shares outstanding used to
compute pro forma basic and diluted net
loss per share (1)......................... 8,167,570 19,511,158
</TABLE>
<TABLE>
<CAPTION>
At April 4, 1999
---------------------------
Pro Pro Forma
Actual Forma as Adjusted
------- ------- -----------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.......................... $38,007 $88,007 143,457
Working capital.................................... 39,804 89,804 145,254
Total assets....................................... 49,983 217,809 273,259
Capital lease obligations, less current portion.... 923 923 923
Total stockholders' equity......................... 45,017 212,843 268,293
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of weighted average shares used to
compute pro forma net loss per share amounts.
We were incorporated in Delaware in April 1998. Our principal executive
offices are located at 13920 Southeast Eastgate Way, Suite 300, Bellevue,
Washington 98005, and our telephone number is (425) 372-3200. Our World Wide
Web site is www.drugstore.com. The information contained on our Web site is not
part of this prospectus.
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus, before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or operating results could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
Risks Related to Our Business
We Are an Early Stage Company in a New and Rapidly Evolving Market, Which
Makes It Difficult for Investors to Determine Whether We Will Accomplish
Our Objectives
Because drugstore.com was founded in April 1998 and we only began selling
products in February 1999, we have a limited operating history on which
investors can base an evaluation of our business strategy. We have limited
insight into trends that may emerge and affect our business. An investor in
our common stock must consider the risks and difficulties frequently
encountered by early stage companies, as well as the risks we face due to our
participation in a new and rapidly-evolving market. These challenges include
our:
. Need to increase our brand awareness;
. Need to attract and retain customers at a reasonable cost;
. Dependence on Web site and transaction processing performance and
reliability;
. Need to compete effectively;
. Need to establish ourselves as an important participant in the evolving
market for healthcare products and services on the Internet; and
. Need to establish and develop relationships in the healthcare industry,
particularly in the areas of reimbursement and managed care.
Consumers of Health, Beauty, Wellness, Personal Care and Pharmacy Products
May Not Accept Our Solution, Which Would Reduce Our Revenues and Prevent Us
From Becoming Profitable
If we do not attract and retain a high volume of online customers to our
store at a reasonable cost, we will not be able to increase our revenues or
achieve profitability. We may not be able to convert a large number of
customers from traditional shopping methods to online shopping for health,
beauty, wellness, personal care and pharmacy products. Even if we are
successful at attracting online customers, we expect it will take several
years to build a critical mass of these customers. Specific factors that could
prevent widespread customer acceptance include:
. Shipping charges, which do not apply to shopping at traditional
drugstores;
. Delivery time associated with Internet orders, as compared to the
immediate receipt of products at a physical store;
. Pricing that does not meet customer expectations of "finding the lowest
price on the Internet;"
. Additional steps and delays in ensuring insurance coverage for
prescription products;
. Lack of coverage of customer prescriptions by some insurance carriers;
. Lack of consumer awareness of our online pharmacy;
. Customer concerns about the security of online transactions and the
privacy of their personal health information;
. Product damage from shipping or shipments of wrong or expired products
from our fulfillment partners or other vendors, resulting in a failure
to establish customers' trust in buying drugstore items online;
7
<PAGE>
. Delays in responses to customer inquiries or in deliveries to customers;
. Inability to serve the acute care needs of customers, including
emergency prescription drugs and other urgently needed products; and
. Difficulties in returning or exchanging orders.
We Expect Significant Increases in Our Operating Expenses and Continuing
Losses for the Foreseeable Future
We incurred net losses of $17.7 million for the period from inception
through April 4, 1999. We have not achieved profitability. We only began
selling products in February 1999 and cannot be certain that we will obtain
enough customer traffic or a high enough volume of purchases to generate
sufficient revenues and achieve profitability. We believe that we will
continue to incur operating and net losses for the foreseeable future and that
the rate at which we will incur such losses will increase significantly from
current levels. We intend to increase our operating expenses substantially as
we:
. Increase our sales and marketing activities, particularly advertising
efforts;
. Provide our customers with promotional benefits, such as selling
selected products or offering shipping below our actual costs;
. Increase our general and administrative functions to support our growing
operations;
. Expand our customer and pharmacist support organizations to better serve
customer needs;
. Develop enhanced technologies and features to improve our Web site;
. Enhance our distribution fulfillment processes; and
. Possibly buy or build our own distribution facilities.
Because we will spend these amounts before we receive any incremental
revenues from these efforts, our losses will be greater than the losses we
would incur if we developed our business more slowly. In addition, we may find
that these efforts are more expensive than we currently anticipate, which
would further increase our losses.
We May Not Succeed in Establishing the drugstore.com Brand, Which Would
Adversely Affect Customer Acceptance and Our Revenues
Due to the early stage and competitive nature of the online market for
drugstore products, if we do not establish our brand quickly, we may lose the
opportunity to build a critical mass of customers. Promoting and positioning
our brand will depend largely on the success of our marketing efforts and our
ability to provide consistent, high quality customer experiences. To promote
our brand, we will incur substantial expense in our advertising efforts on
major Internet destinations such as Amazon.com, America Online, Excite and
Yahoo! and other Web sites our customers are likely to visit, as well as other
forms of media such as television and magazines. We will also need to spend
money to attract and train customer service personnel. If these brand
promotion activities do not yield increased revenues, we will incur additional
losses.
We Expect Our Quarterly Financial Results to Fluctuate And Our Early Stage
of Development Limits Our Ability to Predict Revenues and Expenses
Precisely
Historical trends and quarter-to-quarter comparisons of our operating
results are not a good indicator of our future performance. It is likely that
in some future quarter our operating results may be below the expectations of
public market analysts and investors. In this event, the price of our common
stock may fall. Our revenues and operating results are expected to vary
significantly from quarter to quarter due to a number of factors, including:
. Demand for our products;
. Our ability to attract visitors to our Web store and convert those
visitors into customers;
8
<PAGE>
. The frequency of repeat purchases by customers;
. Shifts in the nature and amount of publicity about us or our
competitors;
. Changes in the growth rate of Internet usage;
. Average order size;
. The mix of products sold;
. Our ability to enhance our technology to accommodate any future growth
in our operations or customers;
. Our ability, and that of our fulfillment partners, to ensure sufficient
product supply;
. Changes in our pricing policies or the pricing policies of our
competitors;
. Changes in government regulation;
. The availability of reimbursement for pharmacy products; and
. Costs related to potential acquisitions of technology or businesses.
Our operating expenses are largely based on anticipated revenue trends and
a high percentage of our expenses are fixed in the short term. As a result, a
delay in generating or recognizing revenue for any reason could result in
substantial additional operating losses. The volume and timing of orders of
health, beauty, wellness, personal care and pharmacy products on our Web store
are difficult to predict because the online market for such products is in its
infancy. Due to the limited operating history of our Web store, we do not have
a material amount of repeat business from regular customers. Because our Web
site is designed to encourage repeat business and we do not yet have
sufficient historical data on how successful this strategy will be, we cannot
currently forecast revenue from regular customers or overall anticipated
revenue trends.
A portion of our revenues may also be seasonal in nature, especially with
respect to the sale of certain beauty products, which depend to some extent on
seasonal product changes and seasonal purchasing patterns. Consumer "fads" and
other changes in consumer trends may cause shifts in purchasing patterns,
resulting in significant fluctuations in our operating results from one
quarter to the next. Our limited operating history makes it difficult to fully
assess the impact of these factors.
Limited Insurance Reimbursement Coverage May Reduce Our Ability to Sell
Pharmacy Products Online, Which Would Reduce Our Revenues
To obtain reimbursement on behalf of our customers for the prescription
products that they purchase on our Web site, we need to obtain contracts with
numerous insurance companies and PBMs. Although we currently have contracts
with a number of insurance companies and PBMs, most of these contracts are
short-term and may be terminated with less than 30 days' prior notice. Our
ability to obtain additional contracts with other insurance companies and
PBMs, or retain our existing contracts for an extended period of time, is
uncertain for the following reasons:
. Many of these companies are in the early stages of evaluating the impact
of the Internet and online pharmacies on their businesses. These
companies may delay their decisions to contract with online pharmacies or
may decide to develop their own Internet capabilities that may compete
with us.
. Many insurance companies have existing contracts with chain drugstores
and PBMs that have announced their intentions to establish online
pharmacies.
. Some insurance companies and PBMs will likely contract with only one or a
limited number of online pharmacies. If our online competitors obtain
these contracts and we do not, we would be at a competitive disadvantage.
9
<PAGE>
In addition, we must process each insurance application individually, which
may raise the costs of processing prescription orders and delay our order
processing time. Customers may not initially embrace our online insurance
coverage procedure.
We Depend on a Limited Number of Distribution Partners; If They Do Not
Perform, We Will Not Be Able to Effectively Ship Orders
We rely to a large extent on rapid distribution by third parties. We
purchase all of our pharmaceutical products from one vendor, RxAmerica L.L.C.
We also purchase a substantial majority of our nonpharmaceutical products from
one vendor, Walsh Distribution, Inc., which accounted for 82% of our
nonpharmaceutical cost of sales from launch of our Web store to April 4, 1999.
Our business could also be significantly disrupted if RxAmerica or Walsh
Distribution were to breach their contracts or suffer adverse developments
that affect their ability to supply products to us. In addition, RxAmerica is
a joint venture owned by American Stores Company (which was recently acquired
by Albertson's, Inc.) and Longs Drugs, both of which are potential competitors
of drugstore.com, and actual competitors with Rite Aid, one of our principal
stockholders and business partners. If for any reason RxAmerica or Walsh
Distribution is unable or unwilling to supply products to us in sufficient
quantities and in a timely manner, we may not be able to secure alternative
fulfillment partners on acceptable terms in a timely manner, or at all.
Because we rely on third parties to fulfill orders, we depend on their
systems for tracking inventory and financial data. If our distribution
partners' systems fail or are unable to scale or adapt to changing needs, or
if we cannot integrate information systems with any new distributors, we may
not have adequate, accurate or timely inventory or financial information.
We also rely on third-party carriers for shipments to and from distribution
facilities. We are therefore subject to the risks, including employee strikes
and inclement weather, associated with our distribution partners and of our
carriers' ability to provide product fulfillment and delivery services to meet
our distribution and shipping needs. Failure to deliver products to our
customers in a timely and accurate manner would harm our reputation, the
drugstore.com brand and our results of operations.
Increasing Our Product Distribution Capacity Will Require Significant
Investments in Cash and Management Resources
We expect to establish our own distribution center within the next 12
months to achieve greater control over the distribution process and to ensure
adequate supplies of products to our customers. Opening one or more
distribution centers will require significant capital investments in
facilities and equipment, will require us to hire and train a significant
number of new employees, will require us to establish a significant number of
direct relationships with manufacturers and could divert management attention
from other issues. In addition, we may be unable to obtain products on terms
as favorable as our distribution partners. We will need to develop or license
distribution software to ensure timely and accurate shipments. In addition, if
we establish our own pharmacy operations we will become subject to additional
regulatory requirements and related costs.
To obtain funds for this expansion, we may need to raise funds through the
issuance of equity, equity-related or debt securities or through obtaining
credit from financial institutions in addition to the funds we are raising in
the offering. We cannot be certain that such additional financing will be
available to us on favorable terms when required, or at all. In addition, if
we issue equity or equity-related securities, such issuance would dilute the
ownership interest of existing stockholders and could adversely affect our
stock price.
Pharmacy Errors Could Produce Liability
Pharmacy errors relating to prescriptions, dosage and other aspects of the
medication dispensing process can produce liability for us that our insurance
may not cover. For example, a study of community pharmacies appearing in the
December 1995 issue of American Pharmacy found that 24% of prescriptions
contained
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dispensing errors and 4% of prescriptions contained errors that were
clinically significant. Because we distribute pharmaceutical products directly
to the consumer, we are the most visible participant in the medication
distribution chain and therefore more exposure to liability claims.
Our pharmacists are required by law to offer counseling, without additional
charge, to our customers about medication, dosage, delivery systems, common
side effects and other information deemed significant by the pharmacists. Our
pharmacists may have a duty to warn customers regarding any potential adverse
effects of a prescription drug if the warning could reduce or negate such
effects. This counseling is in part accomplished through e-mail and inserts
included with the prescription, which may increase the risk of
miscommunication because the customer is not personally present or may not
have provided all relevant information. We also post product information on
our Web store. Providing information on pharmaceutical and other products
creates the potential for claims to be made against us for negligence,
personal injury, wrongful death, product liability, malpractice, invasion of
privacy or other legal theories based on our product or service offerings. Our
general liability, product liability and professional liability insurance may
not cover potential claims of this type or may not be adequate to protect us
from all liability that may be imposed.
Pharmacy Errors Could Produce Adverse Publicity, Which Could Inhibit
Customer Acceptance and Our Revenues
Pharmacy errors either by drugstore.com or our competitors may produce
significant adverse publicity either for us or the entire online pharmacy
industry. Because of the significant amount of recent press coverage on
Internet retailing, we believe that we will be subject to a higher level of
media scrutiny than other pharmacy product channels. The amount of negative
publicity that we or the online pharmacy industry receive as a result of
pharmacy or prescription processing errors could be disproportionate in
relation to the negative publicity received by other pharmacies making similar
mistakes. We have no control over the pharmacy practices of our competitors,
and we cannot ensure that our pharmacists or our prescription processing
department will be able to operate without error. We believe customer
acceptance of our online shopping experience is based in large part on
consumer trust, and negative publicity could erode such trust, or prevent it
from growing. This could result in an immediate reduction in the amount of
orders we receive and adversely affect our revenue growth.
We Face the Risk of Systems Interruptions and Capacity Constraints on Our
Web Site, Possibly Resulting in Adverse Publicity, Revenue Losses and
Erosion of Customer Trust
The satisfactory performance, reliability and availability of our recently-
opened Web site, transaction processing systems and network infrastructure are
critical to our reputation and our ability to attract and retain customers and
to maintain adequate customer service levels. Any future systems interruption
that results in the unavailability of our Web site or reduced order
fulfillment performance could result in negative publicity and reduce the
volume of goods sold and the attractiveness of our Web store, which could
negatively affect our revenues. From time to time, we have experienced
temporary system interruptions for a variety of reasons, including power
failures, software bugs and an overwhelming number of visitors trying to reach
our Web site. We may not be able to correct any problem in a timely manner.
Because we outsource certain aspects of our system and because some of the
reasons for a systems interruption may be outside of our control, we also may
not be able to exercise sufficient control to remedy the problem quickly or at
all.
We opened our site for customers in February 1999 and to the extent that
customer traffic grows substantially, we will need to expand the capacity of
our systems to accommodate a larger number of visitors. Any inability to scale
our systems may cause unanticipated system disruptions, slower response times,
degradation in levels of customer service, impaired quality and speed of order
fulfillment, or delays in reporting accurate financial information. We are not
certain that we will be able to project the rate or timing of increases, if
any, in the use of our Web site accurately or in a timely manner to permit us
to effectively upgrade and expand our transaction-processing systems or to
integrate smoothly any newly developed or purchased modules with our existing
systems.
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We Have Grown Very Rapidly, and We Need to Manage Changing and Expanding
Operations
We have rapidly and significantly expanded our operations, and anticipate
that we will continue to expand. From July 1998 to June 1999 we grew from 3 to
over 230 employees. This growth has placed, and our anticipated future
operations will continue to place, a significant strain on our management
systems and resources. We will not be able to implement our business strategy
in a rapidly evolving market without an effective planning and management
process. We will not be able to increase revenues unless we continue to
improve our transaction-processing, operational, financial and managerial
controls and reporting systems and procedures, expand, train and manage our
work force and manage multiple relationships with third parties. Many of our
senior management have no prior senior management experience at public
companies, and none of our executive officers have prior management experience
in the healthcare or retail drugstore industry.
Expanding the Breadth and Depth of Our Product and Service Offerings Is
Expensive and Difficult, and We May Receive No Benefit From Our Expansion
We intend to expand the breadth and depth of our product and service
offerings by promoting new or complementary products or sales formats. We
cannot be certain that these new offerings will generate sufficient revenues
for the costs involved. Expansion of our offerings in this manner could
require significant additional expenditures and could strain our management,
financial and operational resources. For example, we may need to incur
significant marketing expenses, develop relationships with new fulfillment
partners or manufacturers, or comply with new regulations. We cannot be
certain that we will be able to expand our product and service offerings in a
cost-effective or timely manner. Furthermore, any new product or service
offering or sales format that is not favorably received by consumers could
damage the reputation of our brand. The lack of market acceptance of such
efforts or our inability to generate satisfactory revenues from such expanded
offerings to offset their cost could harm our business.
We have an agreement with Amazon.com that prohibits us from selling
advertising to, linking our Web site to or promoting on our Web site any
company that sells products or services competitive with those which
Amazon.com offers or which Amazon.com is preparing to produce or market. While
we retain the ability to sell products and services in these markets
ourselves, this prohibition would limit our ability to work with other
companies in the markets for books, music products, video products, software,
magazines, consumer electronics, gift centers or registries, and auctions. If
Amazon.com expands into other areas, this expansion may further limit the
number of companies we can promote on our Web site.
Our Limited Relationship With Amazon.com May Restrict Our Activities
Our limited relationship with Amazon.com may restrict our activities and is
subject to change. We entered into a technology license and advertising
agreement in August 1998 with Amazon.com, currently our largest stockholder.
Jeffrey P. Bezos, Amazon.com's chairman of the board and chief executive
officer, is a member of our board of directors. Our relationship with
Amazon.com has received significant media attention, but the parties'
obligations to provide support to each other are limited. Under the agreement,
each party has committed to providing the other with advertising on our
respective Web sites through the term of the agreement.
We have also agreed not to sell advertising on our Web site to, link our
Web site to or promote on our Web site any company that sells products or
services competitive with those which Amazon.com offers or which Amazon.com is
preparing to produce or market. We are currently restricted with respect to
books, music products, video products, gift centers, and auctions. If
Amazon.com expands into other areas, this expansion may further limit the
number of companies we can promote on our Web site. If we were acquired by a
competitor of Amazon.com and Amazon.com did not vote in favor of the
transaction, we would lose our rights to advertise on Amazon.com's Web site
and to use Amazon.com's technology (if we are then using any).
In addition, due to Amazon.com's significant ownership of our common stock,
it will be able to significantly influence all matters requiring approval by
our stockholders, including the election of directors and the approval
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of mergers or other business combination transactions. For more information
about our relationship with Amazon.com, see "Business--Relationship with
Amazon.com." See also "Executive Officers and Directors" for background on
Jeffrey P. Bezos, "Certain Relationships and Related Transactions" for a
description of our agreements with Amazon.com and "Principal Stockholders" for
a description of Amazon.com's stock ownership relative to other stockholders.
Our Relationships with Rite Aid and GNC are Complex and Involve Many Risks
Which May Restrict Our Activities and Ability to Deal with Others
In June 1999, we entered into a series of agreements with Rite Aid and GNC.
These agreements involve many aspects of our business and include the sale of
equity securities to these companies as well as various arrangements relating
to the operation of our respective Web sites, the fulfillment of orders and
the extension of Rite Aid's insurance relationships to cover prescriptions
processed by us. This type of arrangement is complex and will require a great
deal of effort to operate successfully. As a result, there are many risks
related to these arrangements, including some that we may not have foreseen.
It is difficult to assess the likelihood of occurrence of these risks,
including the lack of success of the overall arrangement to meet the parties'
objectives. In the event that we do not realize the intended benefits of these
relationships, we will have expended a great deal of time and effort that
could have been directed to more beneficial activities. In addition, customer
perceptions and our business may be adversely impacted if these relationships
are not successful.
We must integrate Rite Aid's pharmacy product ordering system with our Web-
based systems so consumers can order their pharmacy products on our Web site
and pick them up at a Rite Aid store. Integrating different information
systems is technically difficult and may be delayed, which would delay our
receipt of revenues from these sales and could adversely affect customer
acceptance of online pharmacy orders. While Rite Aid has committed to
promoting drugstore.com in its stores and in its advertising, we do not
control the choice of ads that will feature us and this form of advertising
may not result in additional drugstore.com customers. While the Rite Aid
relationship substantially broadens our ability to provide prescription
medications to consumers with insurance reimbursement plans, it may not allow
all of our potential customers to purchase these medications from
drugstore.com and receive insurance reimbursement, which could adversely
affect consumer perceptions and our revenues.
We have agreed not to promote any other traditional chain drugstore or
operate one ourselves. We have also agreed not to contract with another
traditional retail store to fill pharmacy product orders we receive unless a
Rite Aid store is not conveniently located. These restrictions could limit our
flexibility and ability to grow our business if our relationship with Rite Aid
does not develop successfully.
Due to Rite Aid's significant ownership of our common stock, it will be
able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
or other business combination transactions.
We Depend on Strategic Relationships to Attract Customers
We believe that our ability to attract customers, facilitate broad market
acceptance of our products and the drugstore.com brand and enhance our sales
and marketing capabilities depends on our ability to develop and maintain
strategic relationships with portals, distributors, Amazon.com, Rite Aid and
GNC. If we are unable to develop or maintain key relationships, we may have
difficulty attracting customers.
We Face Uncertainty Related to Pharmaceutical Costs and Pricing, Which
Could Affect Our Revenues and Margins
We expect that pharmacy sales will account for a significant percentage of
our total sales. Sales of our products will depend in part on the availability
of reimbursement from third-party payors such as government health
administration authorities, private health insurers, health maintenance
organizations (HMOs), PBMs and
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other organizations. Because these organizations are traditionally focused on
reduced cost to employer groups, whereas we are focused more on direct customer
service, we must devote time and resources to develop third-party payor
confidence in our approach.
In addition, third-party payors are increasingly challenging the price and
cost-effectiveness of medical products and services. The efforts of third-party
payors to contain costs will place downward pressures on gross margins from
sales of prescription drugs. Our revenues from prescription drug sales may also
be affected by health care reform initiatives of federal and state governments,
including proposals designed to significantly reduce spending on Medicare,
Medicaid and other government programs, changes in programs providing for
reimbursement for the cost of prescription drugs by third-party payors and
regulatory changes related to the approval process for prescription drugs. Such
initiatives could lead to the enactment of federal and state regulations that
may adversely impact our prescription drug sales.
We cannot be certain that our products or services will be considered cost
effective or that adequate third-party reimbursement will be available to
enable us to maintain price levels sufficient to realize adequate profit
margins.
We Face Intense Competition From Both Traditional Retailers and Online
Stores
We compete in a market that is highly competitive and expect competition to
intensify in the future. We currently or potentially compete with a variety of
companies, many of which have significantly greater financial, technical,
marketing and other resources. These competitors include (1) various online
stores that sell pharmaceutical as well as over-the-counter drug and health,
wellness, beauty and personal care items; (2) PBMs that sell pharmaceuticals
directly; and (3) existing drugstores. Most of these drugstores, which include
national, regional and local drugstore chains, discount drugstores,
supermarkets, combination food and drugstores, discount general merchandise
stores, mass market retailers, independent drugstores and local merchants, have
existed for a longer period, have greater financial resources, have established
marketing relationships with leading manufacturers and advertisers, and have
secured greater presence in distribution channels. Some of these companies may
also commence or expand their presence on the Internet. We also compete with
hospitals, HMOs and mail order prescription drug providers, all of whom are or
may begin offering products and services over the Internet. Finally, we are
aware of numerous other smaller entrepreneurial companies that are focusing
significant resources on developing and marketing products and services that
will compete directly with those offered at drugstore.com.
We believe that there may be a significant advantage in establishing a large
customer base before our competitors do so. If we fail to attract and retain a
large customer base and our competitors establish a more prominent market
position relative to ours, this could inhibit our ability to grow.
We also believe we may face a significant competitive challenge from our
competitors forming alliances with each other. For instance, one of our direct
online competitors may form a partnership with a major PBM, major HMO or chain
drugstore. The combined resources of these partnerships could pose a
significant competitive challenge to drugstore.com. In addition, certain PBMs
and HMOs could form alliances with our competitors that would prevent them from
also entering into relationships with drugstore.com. Our inability to partner
with a major PBM or HMO could be a major competitive disadvantage to us.
We believe the principal factors that will draw end users to an online
shopping application include brand availability, selection, personalized
services, convenience, price, accessibility, customer services, quality of
search tools, quality of content, and reliability and speed of fulfillment for
products ordered. We will have little or no control over how successful our
competitors are in addressing these factors. In addition, with little
difficulty, our online competitors can duplicate many of the products, services
and content offered on our site.
Increased competition could result in price reductions, fewer customer
orders, fewer search queries served, reduced gross margins and loss of market
share.
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Our Systems and Operations, and Those of Our Distributors, Are Vulnerable
to Natural Disasters and Other Unexpected Problems
Substantially all of our computer and communications hardware is located at
our leased facility in Bellevue, Washington and our systems infrastructure is
hosted at an Exodus Communications facility in Tukwila, Washington. Our
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, earthquakes and similar events.
In addition, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and fulfill
customer orders. We do not currently have redundant systems or a formal
disaster recovery plan and do not carry sufficient business interruption
insurance to compensate for losses that may occur. Our current fulfillment
partners, Walsh and RxAmerica, are both located in Texas and also face these
risks. In particular, RxAmerica only has a single location and no back-up
facility.
We depend on the efficient operation of Internet connections from customers
to our systems. These connections, in turn, depend on the efficient operation
of Web browsers, Internet service providers and Internet backbone service
providers, all of which have had periodic operational problems or experienced
outages. Any system delays, failures or loss of data, whatever the cause,
could reduce customer satisfaction with our applications and services and harm
our sales.
We retain confidential customer and patient information in our processing
centers. Therefore, it is critical that our facilities and infrastructure
remain secure and that our facilities and infrastructure are perceived by the
marketplace to be secure. A material security breach could damage our
reputation or result in liability to us.
Governmental Regulation of the Healthcare and Pharmacy Industries Could
Affect Our Business
Our business is subject to extensive federal, state and local regulations,
many of which are specific to pharmacies and the sale of over-the-counter
drugs. Please see "Business--Governmental Regulation" for detailed information
about these regulations. Regulations in this area often require subjective
interpretation, and we cannot be certain that our attempts to comply with
these regulations will be deemed sufficient by the appropriate regulatory
agencies. Violations of any regulations could result in various civil and
criminal penalties, including suspension or revocation of our licenses or
registrations, seizure of our inventory, or monetary fines, which could
adversely effect our operations.
We are also subject to laws and regulations regarding homeopathic drugs,
and we may face enforcement actions, lawsuits or claims asserting that we have
not complied with these laws and regulations. As we expand our product and
service offerings, more of our products and services will likely be subject to
regulation by the FDA, which regulates drug advertising and promotion.
Complying with FDA regulations is time consuming, burdensome and expensive,
and could delay our introduction of new products or services.
The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are currently investigating online pharmacies and online
prescribing. We believe that any regulations resulting from the investigations
will likely result in increased reporting and monitoring requirements, which
could increase our expenses. Other legislation and regulations currently being
considered at the federal and state level could affect our business, including
legislation or regulations relating to confidentiality of patient records,
electronic access and storage as well as the inclusion of prescription drugs
as a Medicare benefit. In addition, various state legislatures are considering
new legislation related to the regulation of nonresident pharmacies.
Compliance with new laws or regulations could increase our expenses.
The Health Insurance Portability and Accountability Act of 1996 mandates
the use of standard transactions, standard identifiers, security and other
provisions by the year 2000. Regulations have been proposed to implement these
requirements, and we are designing our applications to comply with the
proposed regulations. However, until these regulations become final, possible
changes in these regulations could cause us to use additional resources and
lead to delays as we revise our Web site and operations.
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Until recently, Health Care Financing Administration guidelines prohibited
transmission of Medicare eligibility information over the Internet. We are
also subject to extensive regulation relating to the confidentiality and
release of patient records. Additional legislation governing the distribution
of medical records exists or has been proposed at both the state and federal
level. It may be expensive to implement security or other measures designed to
comply with any new legislation. Moreover, we may be restricted or prevented
from delivering patient records electronically. This could have an adverse
impact on our ability to gain and retain customers.
We are assisting the National Association of Boards of Pharmacy (NABP), a
coalition of state pharmacy boards, in developing a program, the Verified
Internet Pharmacy Practice Sites (VIPPS), as a model for self-regulation for
online pharmacies. We intend to comply with the VIPPS criteria for
certification, and compliance with these requirements could require
substantial expenses, which could increase our losses.
We Must Attract and Retain Experienced Personnel and We Rely on Senior
Management
We intend to continue to hire a significant number of additional sales,
support and marketing personnel, as well as pharmacists and software
developers. Competition for these individuals is intense, and we may not be
able to attract, assimilate or retain additional highly qualified personnel in
the future. Our future success also depends upon the continued service of our
executive officers and senior management. None of our employees is bound by an
employment agreement for any specific term. We do not have "key person" life
insurance policies covering any of our employees. In addition, none of the
members of our senior management team have prior experience in the healthcare
industry or in drugstore operations.
Protection of Our Intellectual Property Is Limited and Uncertain
We rely or may in the future rely on a combination of patent, trademark,
trade secret and copyright law and contractual restrictions to protect the
proprietary aspects of our technology. These afford only limited protection
for our intellectual property and trade secrets. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy
aspects of our sales formats or to obtain and use information that we regard
as proprietary.
In February 1999, we filed an application for a U.S. trademark registration
for "drugstore.com." We may be unable to secure this registration. It is also
possible that our competitors or others will adopt service names similar to
ours, thereby impeding our ability to build brand identity and possibly
leading to customer confusion. In addition, there could be potential trade
name or trademark infringement claims brought by owners of other registered
trademarks or trademarks that incorporate variations of the term
drugstore.com. Any claims or customer confusion related to our trademark, or
our failure to obtain trademark registration, would negatively affect our
business.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets and domain name and determine
the validity and scope of the proprietary rights of others. If third parties
prepare and file applications in the United States that claim trademarks used
or registered by us, we may oppose those applications and be required to
participate in proceedings before the U.S. Patent and Trademark Office to
determine priority of rights to the trademark, which could result in
substantial costs to us. Any litigation or adverse priority proceeding could
result in substantial costs and diversion of resources and could seriously
harm our business and operating results. Finally, we may in the future sell
our products internationally, and the laws of many countries do not protect
our proprietary rights to as great an extent as do the laws of the United
States. Many countries have a "first-to-file" trademark registration system.
As a result, we may be prevented from registering or using our trademarks in
certain countries if third parties have previously filed applications to
register or have registered the same or similar trademark. Our means of
protecting our proprietary rights may not be adequate, and our competitors
could independently develop similar technology.
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We May Not Be Able to Protect Our Domain Names
We currently hold the Internet domain name "drugstore.com," as well as
various other related names. Domain names generally are regulated by Internet
regulatory bodies. The regulation of domain names in the United States and in
foreign countries is subject to change. Regulatory bodies could establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. As a result, we may not
acquire or maintain the "drugstore.com" domain name in all of the countries in
which we conduct business.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore, we
could be unable to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our trademarks and other
proprietary rights.
We May Face Liability for Content on Our Web Site
Because we post product information and other content on our Web site, we
face potential liability for negligence, copyright, patent, trademark,
defamation, indecency and other claims based on the nature and content of the
materials that we post. Such claims have been brought, and sometimes
successfully pressed, against Internet content distributors. In addition, we
could be exposed to liability with respect to the unauthorized duplication of
content or unauthorized use of other parties' proprietary technology. Although
we maintain general liability insurance, our insurance may not cover potential
claims of this type or may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could harm our business.
We May Be Found to Infringe Proprietary Rights of Others
Third parties may claim infringement by us with respect to past, current or
future technologies. We expect that participants in our markets will be
increasingly subject to infringement claims as the number of services and
competitors in our industry segment grows. Any such claim, whether meritorious
or not, could be time-consuming, result in costly litigation, cause service
upgrade delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements might not be available on terms
acceptable to us or at all.
We Face Additional Potential Stock-Based Compensation Related to Our
Relationship with TriNet
In August 1998, we began a co-employment arrangement involving all of our
personnel with TriNet VCO, an independent company. Under the co-employment
arrangement, we pay a percentage of compensation per co-employee (in addition
to compensation costs) to TriNet to cover payroll processing and related taxes
and insurance. On March 31, 1999, the Financial Accounting Standards Board
(FASB) issued an Exposure Draft of a FASB Interpretation, Accounting for
Certain Transactions involving Stock Compensation-- an interpretation of APB
Opinion No. 25. Such FASB Exposure Draft, if adopted in its current form,
could be interpreted to indicate that employees subject to co-employment
arrangements, would not be considered our employees for purposes of applying
APB No. 25. On June 2, 1999, we terminated this co-employment arrangement. If
additional clarification regarding the definition of an employee is not
provided in the final pronouncement, we may be required to establish a new
measurement date for stock options granted after December 15, 1998 to these
employees for the purpose of accounting for stock options under APB No. 25. If
a new measurement date is required to be established, we would recognize the
deferred stock-based compensation which would be amortized as stock-based
compensation over the remaining vesting periods of the options. We estimate
that this charge would aggregate approximately $4.2 million, which would be
recognized beginning with the fourth quarter of fiscal 1999, the estimated
date the final pronouncement will be effective, and ending in 2004.
Year 2000 Issues Could Affect Our Business
Any failure of our material systems, our vendors' material systems or the
Internet to be year 2000 compliant would have material adverse consequences
for us. Such consequences would include difficulties in operating our
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Web site effectively, taking product orders, making product deliveries or
conducting other fundamental parts of our business. We are currently assessing
the year 2000 readiness of the software, computer technology and other
services that we use which may not be year 2000 compliant. At this time, we
have not yet developed a contingency plan to address situations that may
result if our vendors or we are unable to achieve year 2000 compliance. The
cost of developing and implementing such a plan, if necessary, could be
significant. We also understand that at least one of our distributors,
RxAmerica, has not yet completed its assessment of the year 2000 readiness of
its software, computer technology and other services or finalized any
contingency plan to address year 2000 problems that may arise.
We also depend on the year 2000 compliance of the computer systems and
financial services used by consumers. A significant disruption in the ability
of consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our products and
services. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000" for a further description of the issues we
face with regard to the year 2000.
We Are Controlled by Officers, Directors and Existing Stockholders
Executive officers, directors and entities affiliated with them will, in
the aggregate, beneficially own approximately 58.5% of our outstanding common
stock following the completion of this offering. These stockholders, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. In addition,
after this offering, Amazon.com will beneficially own approximately 27.4% and
Rite Aid will beneficially own 21.8%, of our outstanding common stock.
Therefore, Amazon.com and Rite Aid will each be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business
combination transactions. Amazon.com's and Rite Aid's substantial equity
stakes in drugstore.com could also make us a much less attractive acquisition
candidate to potential acquirors, because either Amazon.com or Rite Aid alone
could have sufficient votes to prevent the tax-free treatment of an
acquisition. See "Principal Stockholders" for a description of Amazon.com's
and Rite Aid's stock ownership relative to other stockholders.
Our Net Sales Would Be Harmed if We Experience Significant Credit Card
Fraud
A failure to adequately control fraudulent credit card transactions would
harm our net sales and results of operations because we do not carry insurance
against this risk. Under current credit card practices, we are liable for
fraudulent credit card transactions because we do not obtain a cardholder's
signature.
Certain Antitakeover Provisions and Significant Equity Ownership by
Amazon.com and Rite Aid Could Preclude an Acquisition
Provisions of our certificate of incorporation, bylaws, Washington law and
Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. Further, because
Amazon.com and Rite Aid each own a significant percentage of our capital
stock, a competitor of Amazon.com or Rite Aid as well as other potential
acquirors could determine not to merge with or acquire us. In addition, if we
were acquired by an Amazon.com competitor and Amazon.com did not vote in favor
of the transaction, we would lose our rights to promotional placements on
Amazon.com's website, and to use Amazon.com's technology (if we are then using
any). The potential loss of these rights could inhibit offers to acquire us.
Risks Related to Internet Commerce
We Depend on Continued Use of the Internet and Growth of the Online
Drugstore Market
Our future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the Internet as an effective medium of
business and communication by our target customers. Rapid growth in the
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use of and interest in the Internet has occurred only recently. As a result,
acceptance and use may not continue to develop at historical rates, and a
sufficiently broad base of consumers may not adopt, and continue to use, the
Internet and other online services as a medium of commerce.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. Our success
will depend, in large part, upon third parties maintaining the Internet
infrastructure to provide a reliable network backbone with the speed, data
capacity, security and hardware necessary for reliable Internet access and
services.
Further, the online market for drugstore products is in its infancy. The
market is significantly less developed than the online market for books,
auctions, music, software and numerous other consumer products. Even if use of
the Internet and electronic commerce continues to increase, the rate of
growth, if any, of the online drugstore market could be significantly less
than the online market for other products. Our rate of revenue growth could
therefore be significantly less than other online merchants.
Our Sales Could be Negatively Affected if We Are Required to Charge Taxes
on Purchases
We do not collect sales or other similar taxes in respect of goods sold by
drugstore.com, except from purchasers located in Washington and Texas.
However, one or more states or the federal government may seek to impose sales
tax collection obligations on out-of-state companies (such as drugstore.com)
which engage in or facilitate online commerce, and a number of proposals have
been made at the state and local level that would impose additional taxes on
the sale of goods and services through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce, and
could adversely affect our opportunity to derive financial benefit from such
activities. Moreover, a successful assertion by one or more states or the
federal government that we should collect further sales or other taxes on the
sales of products through drugstore.com could negatively affect our revenues
and business.
If We Do Not Respond to Rapid Technological Changes, Our Services Could
Become Obsolete and Our Business Would Be Seriously Harmed
As the Internet and online commerce industry evolve, we must license
leading technologies useful in our business, enhance our existing services,
develop new services and technology that address the increasingly
sophisticated and varied needs of our prospective customers and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. We may not be able to successfully implement
new technologies or adapt our Web store, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If we are unable to do so, it could adversely impact our ability to
build the drugstore.com brand and attract and retain customers.
Governmental Regulation of the Internet and Data Transmission Over the
Internet Could Affect Our Business
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the U.S.
Congress resulted in Internet laws regarding children's privacy, copyrights,
taxation and the transmission of sexually explicit material. The European
Union recently enacted its own privacy regulations. In particular, many
government agencies and consumers are focused on the privacy and security of
medical and pharmaceutical records. The law of the Internet, however, remains
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws such as those
governing privacy, libel and taxation apply to Internet stores such as ours.
The rapid growth and development of the market for online commerce may prompt
calls for more stringent consumer protection laws, both in the United States
and abroad, that may impose additional burdens on companies conducting
business online and in particular companies that fill prescriptions maintain
medical or pharmaceutical records. The adoption or modification of laws or
regulations relating to the Internet business could adversely affect our
ability to attract and serve customers.
19
<PAGE>
Risks Related to this Offering
Our Stock Price Will Fluctuate After This Offering, Which Could Result in
Substantial Losses for Investors
Although the initial public offering price will be determined based on
several factors, the market price for our common stock will vary from the
initial offering price after this offering. This could result in substantial
losses for investors. The market price of our common stock may fluctuate
significantly in response to a number of factors, some of which are beyond our
control. These factors include:
. Quarterly variations in operating results;
. Changes in financial estimates by securities analysts;
. Announcements by us or our competitors, of new products, significant
contracts, acquisitions or strategic relationships;
. Publicity about our company, our products and services, our competitors,
or e-commerce in general;
. Additions or departures of key personnel;
. Any future sales of our common stock or other securities; and
. Stock market price and volume fluctuations of publicly-traded companies
in general and Internet-related companies in particular.
The trading prices of Internet-related companies and e-commerce companies
in particular have been especially volatile and many are at or near historical
highs. Investors may be unable to resell their shares of our common stock at
or above the offering price. In the past, securities class action litigation
has often been brought against a company following periods of volatility in
the market price of its securities. We may be the target of similar litigation
in the future. Securities litigation could result in substantial costs and
divert management's attention and resources, which could seriously harm our
business and operating results.
Future Sales of Shares by Existing Stockholders Could Affect Our Stock
Price
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall, potentially resulting in substantial losses to investors. Such
sales also might make it more difficult for us to sell equity or equity-
related securities in the future at a time and price that we deem appropriate.
Based on shares outstanding as of June 25, 1999, upon completion of this
offering, we will have outstanding 42,791,000 shares of common stock, assuming
no exercise of the underwriters' over-allotment option. Other than the shares
of common stock sold in this offering, no shares will be eligible for sale in
the public market immediately. Holders of 37,791,000 shares will be subject to
agreements with the underwriters or us that restrict their ability to transfer
their stock for 180 days from the date of this prospectus. After these
agreements expire, an additional 17,769,268 shares will be eligible for sale
in the public market assuming no exercise of options. See "Shares Eligible for
Future Sale" for a further description regarding shares that will become
eligible for sale at future dates after this offering.
New Stockholders Will Incur Substantial Dilution as a Result of This
Offering
The initial public offering price is expected to be substantially higher
than the book value per share of our outstanding common stock. As a result,
investors purchasing common stock in this offering will incur immediate
substantial dilution. In addition, we have issued options to acquire common
stock at prices significantly below the initial public offering price. To the
extent such outstanding options are ultimately exercised, there will be
further dilution to investors in this offering. See "Dilution" for a more
detailed description of how new stockholders will incur dilution.
20
<PAGE>
Special Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases,
you can identify forward-looking statements by terminology such as may, will,
should, expect, plan, intend, anticipate, believe, estimate, predict,
potential or continue, the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined in the Risk Factors
section above. These factors may cause our actual results to differ materially
from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus to conform such
statements to actual results or to changes in our expectations.
21
<PAGE>
SALE OF SHARES TO AMAZON.COM
Concurrently with the closing of this offering, we are selling in a
separate private placement transaction a number of shares of our common stock
equal to $10,000,000 divided by the initial public offering price to
Amazon.com at a price per share equal to the initial public offering price.
Such offering is made in connection with a letter agreement we entered into
with Amazon.com in May 1999. As of June 25, 1999, Amazon.com owned 10,733,523
shares of our capital stock. Jeffrey P. Bezos, chairman of the board and chief
executive officer of Amazon.com, is a director of drugstore.com. See
"Management," "Certain Relationships and Related Transactions" and "Principal
Stockholders" for further discussion of our relationship with Amazon.com.
USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock we are
offering hereby are estimated to be $45.5 million, assuming an initial public
offering price of $10.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $52.4 million.
The principal purposes of this offering are to increase our working
capital, to create a public market for our common stock, to facilitate our
future access to the public capital markets, and to increase our visibility in
the retail marketplace. We expect to use up to approximately 50% of the net
proceeds of this offering for capital expenditures associated with technology
and system upgrades and the establishment of our distribution operations. We
have no specific plans for the remaining proceeds. The remainder of the net
proceeds will be used for general corporate purposes and working capital. This
allocation is only an estimate and we may adjust it as necessary to address
our operational needs in the future. We may also use a portion of the net
proceeds to acquire complementary technologies or businesses; however, we
currently have no commitments or agreements and are not involved in any
negotiations with respect to any such transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in interest-
bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying
any cash dividends in the foreseeable future.
22
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of April 4, 1999 on an
actual, pro forma and pro forma as adjusted basis:
. The "actual" column reflects our capitalization as of April 4, 1999,
without any adjustments to reflect subsequent events or anticipated
events;
. The "pro forma" column reflects (1) the issuance of 2,266,289 shares of
Series D preferred stock issued in June 1999 and receipt of
consideration therefore and (2) the issuance of 12,282,599 shares of
Series E preferred stock expected to be issued in exchange for $10
million in cash and other consideration, including exclusive advertising
commitments and other obligations valued at $112.8 based on the
estimated fair value of $10.00 per share; and
. The "pro forma as adjusted" column reflects our capitalization as of
April 4, 1999 with adjustments to give effect to (1) the conversion of
all shares of outstanding preferred stock into 34,468,000 shares of
common stock upon the closing of this offering; and (2) the receipt of
the estimated proceeds from the sale of our common stock offered hereby
(after deducting the estimated offering expenses and underwriting
discounts and commissions), including the sale of shares of our common
stock to Amazon.com.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes thereto included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
At April 4, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ----------- -----------
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C>
Capital lease obligations, less current
portion..................................... $ 923 $ 923 $ 923
Stockholders' equity:
Convertible preferred stock, $.001 par value
actual and pro forma, $.0001 pro forma as
adjusted; authorized: 20,500,000 shares
actual, 150,000,000 shares pro forma and
10,000,000 shares pro forma as adjusted
Series A--issued and outstanding: 10,000,000
shares actual and pro forma and none pro
forma as adjusted.......................... 7,986 7,986 --
Series B--issued and outstanding: 5,446,268
shares actual and pro forma and none pro
forma as adjusted.......................... 18,237 18,237 --
Series C--issued and outstanding: 4,472,844
shares actual and pro forma and none pro
forma as adjusted.......................... 34,981 34,981 --
Series D--issued and outstanding: none
actual, 2,266,289 shares pro forma and none
pro forma as adjusted...................... -- 45,000 --
Series E--issued and outstanding: none
actual, 12,282,599 shares pro forma and
none pro forma as adjusted................. -- 122,826 --
Common stock, $.001 par value actual and pro
forma, $.0001 pro forma as adjusted;
authorized 30,200,000 shares actual and
250,000,000 pro forma and pro forma as
adjusted; issued and outstanding 2,323,000
shares actual and pro forma and 42,791,000
pro forma as adjusted (1).................. 2 2 4
Additional paid-in capital.................. 8,175 8,175 292,653
Deferred stock-based compensation........... (6,655) (6,655) (6,655)
Accumulated deficit......................... (17,709) (17,709) (17,709)
-------- -------- --------
Total stockholders' equity............... 45,017 212,843 268,293
-------- -------- --------
Total capitalization................... $ 45,940 $213,766 $269,216
======== ======== ========
</TABLE>
- --------
(1) Excludes (a) 8,319,000 shares of common stock reserved for issuance under
drugstore.com's stock option and stock purchase plans, of which 2,752,184
shares were subject to outstanding options as of April 4, 1999 at a
weighted average exercise price of $1.06 per share, (b) 10,000 shares of
common stock issuable upon exercise of an outstanding warrant at an
exercise price of $7.83 per share and (c) 750,000 shares issuable to the
underwriters at their option to cover over-allotments of shares and (d)
the anticipated issuance of 200,000 shares common stock to a charitable
foundation that we intend to establish. See "Management--Incentive Stock
Plans," "Description of Capital Stock" and Note 5 and 7 of Notes to
Consolidated Financial Statements.
23
<PAGE>
DILUTION
The pro forma net tangible book value of drugstore.com as of April 4, 1999
was $44.8 million or approximately $2.01 per share. Pro forma net tangible
book value per share represents the amount of drugstore.com's total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding, after giving effect to the conversion of all shares of
outstanding preferred stock into 19,919,112 shares of common stock upon the
closing of this offering. Dilution in pro forma net tangible book value per
share represents the difference between the amount per share paid by
purchasers of shares of common stock in the offering made hereby and the net
tangible book value per share of common stock immediately after the completion
of this offering. After giving effect to (1) the sale of the shares of common
stock offered by us hereby at an assumed initial public offering price of
$10.00 per share and after deducting the underwriting discount and estimated
offering expenses payable by us, (2) the issuance of 2,266,289 shares of
Series D preferred stock to Vulcan Ventures in June 1999, (3) the issuance of
12,282,599 shares of Series E preferred stock expected to be issued in
exchange for $10 million in cash and other consideration, including exclusive
advertising commitments and other obligations valued at $112.8 million based
on the estimated fair value of $10.00 per share and (4) the sale of 1,000,000
shares of common stock to Amazon.com at the initial public offering price, the
net tangible book value of drugstore.com at April 4, 1999 would have been
$150.2 million or approximately $3.51 per share. This represents an immediate
increase in net tangible book value of $1.50 per share to existing
stockholders as of April 4, 1999 and an immediate dilution of $6.49 per share
to new investors of common stock in this offering. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $10.00
Pro forma net tangible book value per share as of April 4,
1999......................................................... $2.01
Increase per share attributable to Series D preferred
stockholder.................................................. 1.44
Decrease per share attributable to Series E preferred
stockholders................................................. (.88)
Increase per share attributable to Amazon.com................. .20
Increase per share attributable to new investors(1)........... .74
-----
Net tangible book value per share after the offering and the
sale of shares to Amazon.com(1)................................ 3.51
------
Dilution per share to new investors(1).......................... $ 6.49
======
</TABLE>
- --------
(1) This table excludes (a) 8,319,000 shares of common stock reserved for
issuance under drugstore.com's stock option and stock purchase plans, of
which 2,752,184 shares were subject to outstanding options as of April 4,
1999 at a weighted average exercise price of $1.06 per share, (b) 10,000
shares of common stock issuable upon exercise of outstanding warrants at
an exercise price of $7.83 per share, (c) 750,000 shares issuable to
underwriters at their option to cover over-allotment of shares and (d)
excludes the anticipated issuance of 200,000 shares of common stock to a
charitable foundation that we intend to establish. See "Capitalization,"
"Management--Incentive Stock Plans," "Description of Capital Stock" and
Note 5 and 7 of Notes to Consolidated Financial Statements.
The following table sets forth, as of April 4, 1999, the differences
between the number of shares of common stock purchased from drugstore.com, the
total consideration paid and the average price per share paid by existing
holders of common and preferred stock, by Amazon.com and by the new investors,
before deducting the underwriting discount and estimated offering expenses
payable by drugstore.com, at the assumed initial public offering price of
$10.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
--------------------- ----------------------- Price
Number Percentage Amount Percentage Per Share
---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockhold-
ers(1)................. 22,242,112 52.0% $ 61,359,000 21.2% $ 2.76
Series D stockholder.... 2,266,289 5.3 45,000,000 15.5 19.86
Series E stockholders... 12,282,599 28.7 122,826,000 42.5 10.00
Amazon.com.............. 1,000,000 2.3 10,000,000 3.5 10.00
New investors(1)........ 5,000,000 11.7 50,000,000 17.3 10.00
---------- ----- ------------ -----
Total................. 42,791,000 100.0% $289,185,000 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) The number of shares held by new public investors will be 5,000,000 or
approximately 11.7% (5,750,000 shares, or approximately 13.2%, if the
underwriters' over-allotment option is exercised in full) of the total
number of shares of common stock outstanding after this offering. See
"Principal Stockholders."
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of
drugstore.com and the Notes thereto included elsewhere in this prospectus. The
consolidated statement of operations data set forth below for the period from
April 2, 1998 (inception) to December 31, 1998 and the selected consolidated
balance sheet data as of December 31, 1998 have been derived from the audited
financial statements of drugstore.com included elsewhere in this prospectus,
which have been audited by Ernst & Young LLP, Independent Auditors. The
unaudited financial data as of April 4, 1999 and for the quarter then ended
are derived from unaudited consolidated financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which we consider necessary for a fair presentation of the results
of operations for this period. The historical results are not necessarily
indicative of results to be expected for any future period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) to Quarter
December 31, Ended April 4,
1998 1999
-------------- --------------
(in thousands, except share
and per share data)
<S> <C> <C>
Consolidated Statement of Operations Data:
Net sales........................................ $ -- $ 652
Cost of sales.................................... -- 672
---------- -----------
Gross profit (loss).............................. -- (20)
Operating expenses:
Marketing and sales............................ 3,092 5,189
Product development............................ 2,178 2,713
General and administrative..................... 1,894 1,731
Amortization of stock-based compensation....... 500 884
---------- -----------
Total operating expenses..................... 7,664 10,517
---------- -----------
Operating loss................................... (7,664) (10,537)
Other income (expense):
Interest income................................ 177 332
Interest expense............................... (3) (14)
---------- -----------
Net loss......................................... $ (7,490) $ (10,219)
========== ===========
Basic and diluted net loss per share............. $ (13.71) $ (10.51)
========== ===========
Pro forma basic and diluted net loss per
share(1)........................................ $ (.92) $ (.52)
========== ===========
Weighted average shares outstanding used to
compute basic and diluted net loss per share.... 546,149 971,966
========== ===========
Weighted average shares outstanding used to
compute pro forma basic and diluted net loss per
share(1)........................................ 8,167,570 19,511,158
========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, April 4,
1998 1999
------------ ----------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.............................. $ 14,408 $ 38,007
Working capital........................................ 17,050 39,804
Total assets........................................... 22,517 49,983
Capital lease obligations, less current portion........ 975 923
Total stockholders' equity............................. 19,347 45,017
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of weighted average shares
used to compute pro forma net loss per share amounts.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the related Notes contained elsewhere in
this prospectus. The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from the results contemplated by these forward-looking statements
as a result of certain factors, including those discussed below and elsewhere
in this prospectus.
Overview
drugstore.com is a leading online drugstore: a retail store and information
site for health, beauty, wellness, personal care and pharmacy products and
information. We offer a larger selection of products than typical store-based
retailers at competitive prices, along with a wealth of health-related
information, buying guides and other tools designed to help consumers make
more educated purchasing decisions.
We were incorporated in April 1998 and commercially launched our Web site
on February 24, 1999. From the period from inception through the commercial
launch of our site, our primary activities consisted of:
. Developing our business model;
. Raising funds and developing strategic alliances;
. Designing and developing our Web site;
. Recruiting and training employees;
. Selecting our fulfillment partners and integrating their systems and
processes with ours;
. Negotiating advertising contracts with several of the major Web portals;
and
. Developing the drugstore.com brand.
Since the commercial launch of our site, we have continued these operating
activities and have also focused on building sales momentum, expanding our
product offerings, building vendor relationships, promoting our brand name,
improving the efficiency of our order fulfillment processes and establishing
customer service operations.
All customer orders are processed through our Web store and either billed
to the customer's credit card or, in the case of prescriptions covered by
insurance, billed to third parties. With respect to sales attributable to
third party payors, sales of pharmaceutical products are recorded at the net
amount to be received from third parties. Generally, we collect cash from
credit card sales in two to five days from the date ordered. To date, amounts
billed to third parties have been insignificant; however, we expect such
third-party billings, as a percent of total prescription billings, to increase
over time if we are able to obtain additional contracts with PBMs. We recently
entered into an agreement with PCS, a leading PBM as measured by the number of
claimed covered lives.
We routinely offer promotional discounts and coupons to customers. In
addition, if a customer is not satisfied with a particular product or service
we provide, we generally refund all or a portion of the sale.
Currently, we purchase all of our pharmaceutical products from RxAmerica
and a substantial majority of our nonpharmaceutical products from Walsh. For
the quarter ended April 4, 1999, 82% of the nonpharmaceutical cost of sales
represented products purchased from Walsh. Products are purchased from
RxAmerica and Walsh after the customer submits an order. We maintain an
inventory of nonpharmaceutical products that are not available from Walsh. In
the future, we intend to establish our own distribution center for
pharmaceutical and nonpharmaceutical products that will require us to increase
our inventory levels substantially.
We have incurred net losses of $17.7 million from inception to April 4,
1999. We believe that we will continue to incur net losses for the foreseeable
future and that the rate at which we will incur such losses will increase
significantly from current levels.
26
<PAGE>
We have a limited operating history on which to base an evaluation of our
business and prospects. Our prospects must be considered in light of the
risks, expenses, and difficulties encountered by companies in their early
stage of development, particularly companies in new and rapidly-evolving
markets, such as e-commerce. See "Risk Factors" for a more complete
description of the many risks we face.
In view of our limited operating history and the rapidly evolving nature of
our business, we believe that period-to-period comparisons of our operating
results are not meaningful and should not be relied upon as an indication of
future performance. It is likely that in some future quarter our operating
results may fall below the expectations of securities analysts and investors.
In this event, the trading price of our common stock may fall significantly.
Net Sales. Net sales consist of product sales and charges to customers for
outbound shipping and handling and are net of allowances for product returns,
promotional discounts and coupons. Net sales of pharmaceutical products are
recorded at the net amount to be received from customers and third parties. We
recognize product and shipping revenues when the related product is shipped.
In the future, the level of our sales will depend on a number of factors
including, but not limited to, the following:
. The number of customers we are able to obtain;
. The frequency of our customers' purchases;
. The quantity and mix of products our customers purchase;
. The price we charge for our products;
. The amount we charge for shipping;
. The extent of sales promotions and discounts we offer;
. The extent of reimbursement available from third-party payors;
. The level of customer returns we experience; and
. The seasonality that we may experience in our business.
Cost of Sales and Gross Margins. Cost of sales consists primarily of the
costs of products sold to customers and outbound and inbound shipping costs.
We expect cost of sales to increase in absolute dollars to the extent that our
sales volume increases. We may in the future expand or increase the coupons
and discounts we offer to our customers and may otherwise alter our pricing
structures and policies. Such changes may negatively affect gross margins. Our
gross margin will fluctuate based on a number of factors, including, but not
limited to, the following:
. The cost of our products, including the extent of purchase volume
discounts that we are able to obtain from suppliers;
. Our pricing strategy relative to the cost of our products;
. The mix of products our customers purchase;
. The mix of cash payments vs. insurance reimbursement for our pharmacy
products;
. Our shipping pricing strategy relative to the cost of shipping;
. Our distribution and fulfillment strategy if we decide to open our own
distribution centers; and
. The extent to which we are able to control product damage, shrinkage and
expiration though inventory management practices.
Marketing and Sales Expenses. Marketing and sales expenses consist
primarily of advertising and promotional expenditures, distribution expenses,
including order processing and fulfillment charges, equipment and supplies,
and payroll and related expenses for personnel engaged in marketing,
merchandising, customer service and distribution and fulfillment activities.
We intend to continue to pursue an aggressive branding and marketing campaign
and, therefore, expect marketing and sales expenses to increase significantly
in absolute
27
<PAGE>
dollars. Marketing and sales expenses may also vary considerably from quarter
to quarter, depending on the timing of our advertising campaigns. To the
extent that our sales volume increases in future periods, we expect marketing
and sales expenses to increase in absolute dollars as we expand our
distribution and fulfillment activities. This includes the costs of staffing
and developing a distribution center we intend to establish to accommodate
such increases in sales volume.
Product Development Expenses. Product development expenses consist
primarily of payroll and related expenses for Web site development and
information technology personnel, Internet access and hosting charges and Web
site content and design expenses.
Over the next several months, we plan to continue to work on a significant
number of development projects that will result in increased product
development expenses. Such projects include, but are not limited to:
. Enhancing and developing our systems as necessary to operate an
independent distribution center;
. Enhancing and developing our systems as necessary to provide for in-
store prescription pickup at Rite Aid stores;
. Enhancing our Web site to display additional product offerings,
including GNC products; and
. Other Web site product and content enhancements.
We believe that continued investment in product development is critical to
attaining our strategic objectives and, as a result, we expect product
development expenses to increase significantly in absolute dollars.
General and Administrative Expenses. General and administrative expenses
consist of payroll and related expenses for executive and administrative
personnel, corporate facility expenses, professional services expenses, travel
and other general corporate expenses. We expect general and administrative
expenses to increase in absolute dollars as we expand our staff and incur
additional costs related to the anticipated growth of our business and being a
public company. In addition, prior to the consummation of this offering, we
will donate approximately 200,000 shares of our common stock to a foundation
established by us. Upon such donation, we will recognize general and
administrative expense in an amount equal to the fair value of the donated
common stock.
Amortization of Stock-based Compensation. We recorded total deferred stock-
based compensation of $2,746,000 for the period from April 2, 1998 (inception)
to December 31, 1998 and $5,293,000 for the quarter ended April 4, 1999 in
connection with stock options granted and restricted stock issued during such
periods. The deferred stock-based compensation amounts represent the
difference between the exercise price of stock option grants and the deemed
fair value of our common stock at the time of such grants. In the case of
restricted stock, the deferred stock-based compensation represents the
difference between the purchase price of the restricted stock and the deemed
fair value of our common stock on the date of purchase. Such amounts are
amortized to expense over the vesting periods of the applicable agreements,
resulting in amortization of stock-based compensation totaling $500,000 for
the period from April 2, 1998 (inception) to December 31, 1998 and $884,000
for the quarter ended April 4, 1999. The amortization expense relates to
options awarded to employees in all operating expense categories. Deferred
stock-based compensation for stock options and restricted stock issued through
April 4, 1999 that will be subsequently recognized as expense for each of the
next six fiscal years is estimated to be as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
------------ --------------
(in thousands)
<S> <C>
1999 $2,892
2000 2,104
2001 1,127
2002 489
2003 39
2004 4
</TABLE>
28
<PAGE>
We have outsourced our payroll processing and other aspects related to our
employee benefits programs under a co-employment arrangement with TriNet VCO,
an independent company. On March 31, 1999, the Financial Accounting Standards
Board (FASB) issued an Exposure Draft of a FASB Interpretation, Accounting for
Certain Transactions involving Stock Compensation-- an interpretation of APB
Opinion No. 25. Such FASB Exposure Draft, if adopted in its current form,
could be interpreted to indicate that employees subject to co-employment
arrangements, would not be considered employees for purposes of applying APB
No. 25. On June 2, 1999, we terminated this co-employment arrangement. If
additional clarification regarding the definition of an employee is not
provided in the final pronouncement, we may be required to establish a new
measurement date for stock options granted after December 15, 1998 to these
employees for the purpose of accounting for stock options under APB No. 25. If
a new measurement date is required to be established, we would recognize the
deferred stock-based compensation which would be amortized as stock-based
compensation over the remaining vesting periods of the options. We estimate
that this charge would aggregate approximately $4.2 million, which would be
recognized beginning with the fourth quarter of fiscal 1999, the estimated
date the final pronouncement will be effective, and ending in 2004. Such
amortization could have a material adverse effect on our operating results.
Interest Income and Expense. Interest income consists of earnings on our
cash and cash equivalents and interest expense consists of interest associated
with capital lease obligations.
Income Taxes. There was no provision or benefit for income taxes for any
period since inception due to our operating losses. As of December 31, 1998,
we had $6,737,000 of net operating loss carryforwards for federal income tax
purposes, which expire beginning in 2018. In 1999, due to the issuance and
sale of preferred stock, we incurred ownership changes pursuant to applicable
regulations in effect under the Internal Revenue Code of 1986, as amended.
Therefore, our use of losses incurred through the date of these ownership
changes will be limited during the carryforward period. We estimate that the
use of the approximately $6.7 million of net operating losses incurred through
December 31, 1998 as well as losses incurred subsequent thereto until the date
of ownership change, would be limited to approximately $4.1 million per year
in order to offset future taxable income. To the extent that any single-year
loss is not utilized to the full amount of the limitation, such unused loss is
carried over to subsequent years until the earlier of its utilization or the
expiration of the relevant carryforward period. We have provided a full
valuation allowance on the deferred tax asset, consisting primarily of such
net operating loss carryforwards, because of uncertainty regarding its
realizability. See Note 4 of Notes to Consolidated Financial Statements.
Quarterly Results of Operations
Because we were a development stage company during 1998 and have a short
operating history, we believe that period-to-period comparisons prior to 1999
are less meaningful than an analysis of recent quarterly operating results.
Accordingly, we are providing a discussion and analysis of our results of
operations that is focused on the four quarters ended April 4, 1999.
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<PAGE>
The following table sets forth unaudited quarterly statement of operations
data for the four quarters ended April 4, 1999. This unaudited quarterly
information has been derived from our unaudited financial statements and, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such information
in accordance with generally accepted accounting principles. The operating
results for any quarter are not necessarily indicative of the operating
results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------
June 30, Sept. 30, Dec. 31, Apr. 4,
1998 1998 1998 1999
-------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net sales................................ $ -- $ -- $ -- $ 652
Cost of sales............................ -- -- -- 672
----- ------- ------- --------
Gross profit (loss).................... -- -- -- (20)
Operating expenses:
Marketing and sales.................... -- 313 2,779 5,189
Product development.................... 104 522 1,552 2,713
General and administrative............. 79 521 1,294 1,731
Amortization of stock-based
compensation.......................... 39 171 290 884
----- ------- ------- --------
Total operating expenses............. 222 1,527 5,915 10,517
----- ------- ------- --------
Operating loss........................... (222) (1,527) (5,915) (10,537)
Other income (expense):
Interest income........................ -- 36 141 332
Interest expense....................... -- -- (3) (14)
----- ------- ------- --------
Net loss................................. $(222) $(1,491) $(5,777) $(10,219)
===== ======= ======= ========
</TABLE>
Net Sales and Cost of Sales. We commercially launched our Web site on
February 24, 1999. There were no net sales or cost of sales prior to the
quarter ended April 4, 1999. The negative gross margin experienced in the
quarter ended April 4, 1999 was primarily the result of promotional sales
discounts associated with the commercial launch of the Web site. We expect to
continue to offer various types of promotional discounts for the foreseeable
future as a strategy to attract new customers. Accordingly, we may continue to
experience negative margins in future periods.
Marketing and Sales. Marketing and sales expenses increased in each of the
three quarters ended April 4, 1999, primarily due to expenses associated with
the addition of marketing and sales personnel. Additionally, we recognized
$1.0 million of marketing expenses related to advertising costs under our
technology license and marketing agreement with Amazon.com in the quarter
ended April 4, 1999. We also increased our advertising on the major Web
portals, including AOL, Excite and Yahoo!, in the quarter ended April 4, 1999
in connection with the commercial launch of our Web site.
Product Development. Product development expenses increased in each of the
three quarters ended April 4, 1999, primarily due to increased expenses
associated with the addition of product development personnel and additional
use of consultants and contract labor.
General and Administrative. General and administrative expenses increased
in each of the three quarters ended April 4, 1999 primarily due to increased
expenses associated with the addition of general and administrative personnel,
additional professional fees and the cost of corporate facilities.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation increased in each of the three quarters ended April 4, 1999,
primarily due to the grant of stock options to new employees in the three
quarters ended April 4, 1999 as well as an increase in the difference between
the grant price and the deemed fair value of our common stock, particularly in
the quarter ended April 4, 1999. In the period from April 2, 1998 (inception)
to December 31, 1998, employees in the marketing and sales, product
development and general and
30
<PAGE>
administrative expense categories accounted for approximately 24%, 24% and 52%
of amortization of stock-based compensation, respectively. In the quarter
ended April 4, 1999, employees in the marketing and sales, product development
and general and administrative expense categories accounted for approximately
32%, 38% and 30% of amortization of stock-based compensation, respectively.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of preferred stock which, through June 1999, yielded net cash proceeds
of $97.2 million.
Net cash used in operating activities was $9.8 million in the quarter ended
April 4, 1999, and $6.3 million in the period from April 2, 1998 (inception)
to December 31, 1998. Net cash used in operating activities for each of these
periods primarily consisted of net losses and during the quarter ended April
4, 1999, increases in inventories.
Net cash used in investing activities was $1.5 million in the quarter ended
April 4, 1999, and $1.5 million in the period from April 2, 1998 (inception)
to December 31, 1998. Net cash used in investing activities for each of these
periods primarily consisted of leasehold improvements and purchases of
equipment and systems, including computer equipment and fixtures and
furniture.
Net cash provided by financing activities was $34.9 million in the quarter
ended April 4, 1999, and $22.3 million in the period from April 2, 1998
(inception) to December 31, 1998. Net cash provided by financing activities
during each of those periods primarily consisted of proceeds from the issuance
of preferred stock.
As of April 4, 1999 we had $38.0 million of cash and cash equivalents. As
of that date, our principal commitments consisted of obligations outstanding
under operating leases and marketing agreements with certain
Web portals, including Yahoo!, America Online and Excite, aggregating
approximately $25 million through 2005. Although we have no material
commitments for capital expenditures, we anticipate a substantial increase in
our capital expenditures and lease commitments consistent with anticipated
growth in operations, infrastructure and personnel. By the end of 1999, we
intend to establish our own distribution center to ensure greater control over
the distribution process and to ensure adequate supplies of products to our
customers. This will require significant capital investments in facilities and
equipment. For the remainder of 1999, we expect to devote substantial
expenditures toward technology and systems upgrades to support a new
distribution center and our ability to provide in-store prescription pick up
at Rite Aid stores.
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures through at least the next 12 months.
We may need to raise additional funds prior to the expiration of such period
if, for example, we pursue business or technology acquisitions or experience
operating losses that exceed our current expectations. If we raise additional
funds through the issuance of equity, equity-related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock and our stockholders may experience additional
dilution. We cannot be certain that additional financing will be available to
us on acceptable terms when required, or at all.
Year 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of
the upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year
2000 phenomenon. For example, we are dependent on the financial institutions
involved
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in processing our customers' credit card payments for Internet services and a
third party that hosts our servers. We are also dependent on
telecommunications vendors to maintain our network and the United States
Postal Service and other third-party carriers to deliver products to
customers.
We are in the process of reviewing the year 2000 compliance of our
internally developed proprietary software. This review has included testing to
determine how our systems will function at and beyond the year 2000. We expect
to complete these tests during the summer of 1999. Since inception, we have
internally developed substantially all of the systems for the operation of our
Web site. These systems include the software used to provide our Web site's
search, customer interaction, and transaction-processing and distribution
functions, as well as monitoring and back-up capabilities. Based upon our
assessment to date, we believe that our internally developed proprietary
software is year 2000 compliant.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services, which include
software for use in our accounting, database and security systems. As part of
the assessment of the year 2000 compliance of these systems, we have sought
assurances from these vendors that their software, computer technology and
other services are year 2000 compliant. We have expensed amounts incurred in
connection with year 2000 assessment since our inception through April 4,
1999. Such amounts have not been material. We expect this assessment process
to be completed during the summer of 1999. Based upon the results of this
assessment, we will develop and implement, if necessary, a corrective action
plan with respect to third-party software, third-party vendors and computer
technology and services that may fail to be year 2000 compliant. We expect to
complete any required actions during the summer of 1999. At this time, the
expenses associated with this assessment and potential corrective action plan
that may be incurred in the future cannot be determined. The failure of our
software and computer systems or those of our third-party suppliers to be year
2000 compliant could have a material adverse effect on us.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For example, we depend on the integrity
and stability of the Internet to provide our services. We also depend on the
year 2000 compliance of the computer systems and financial services used by
consumers. Thus, the infrastructure necessary to support our operations
consists of a network of computers and telecommunications systems located
throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
year 2000 issues that may impact the entire infrastructure. Our ability to
assess the reliability of this infrastructure is limited and relies solely on
generally available news reports, surveys and comparable industry data. Based
on these sources, we believe most entities and individuals that rely
significantly on the Internet are reviewing and attempting to remediate issues
relating to year 2000 compliance, but it is not possible to predict whether
these efforts will be successful in reducing or eliminating the potential
negative impact of year 2000 issues. A significant disruption in the ability
of consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our products and
services.
At this time, we have not yet developed a contingency plan to address
situations that may result if we or our vendors are unable to achieve year
2000 compliance. Such contingency plan is currently expected to be developed
in the fall of 1999 and will depend on a number of factors, including (1) the
results of our Year 2000 review and assessment, (2) the extent of the
corrective actions that have been implemented and (3) the status of our
distribution facilities that we currently intend to establish. The cost of
developing and implementing such a plan, if necessary, could be significant.
Any failure of our material systems, our vendors' material systems, our
customers' computers, or the Internet to be year 2000 compliant could have
negative consequences for us. Such consequences could include difficulties in
operating our Web site effectively, taking customer orders, making product
deliveries or conducting other fundamental parts of our business.
32
<PAGE>
BUSINESS
Overview
drugstore.com is a leading online drugstore: a retail store and information
site for health, beauty, wellness, personal care and pharmacy products. We
designed our store to provide a convenient, private and informative shopping
experience that encourages consumers to purchase products essential to
healthy, everyday living. Our Web site can be accessed 24 hours a day, 7 days
a week from anywhere that a consumer has Internet access. We offer a larger
selection of products than typical store-based retailers, along with a wealth
of health-related information, buying guides and other tools designed to help
consumers make more educated purchasing decisions. Our shopping lists and e-
mail reminders are designed to make it easier for our customers to regularly
purchase their preferred products. We believe that our online store provides a
customer with a superior shopping experience, making buying What Every Body
Needs(TM) less of a chore.
Industry Background
The Growth of the Internet and Electronic Commerce
The Internet has become an important medium for communicating, finding
information and purchasing products and services. International Data
Corporation (IDC) estimates that there were approximately 51 million Web users
in the United States at the end of 1998 and, although we cannot be certain of
any future growth, IDC anticipates this number will grow to approximately 135
million users by the end of 2002. We believe this increased usage is due to a
number of factors including:
. The large installed base of personal computers in the workplace and
home;
. Advances in the performance and reductions in the cost of personal
computers and modems;
. Improvements in the ease of use and security of the Internet;
. The availability of a broader range of online products, information and
services; and
. Growing awareness among consumers and businesses of the benefits of
online shopping.
The Internet has unique and powerful characteristics that differentiate it
from traditional distribution channels and have facilitated its use as a
purchasing medium. IDC estimates that worldwide business-to-consumer sales
over the Internet will increase from approximately $11 billion in 1998 to
approximately $93 billion by 2002; however, we cannot be certain that such
projection will be achieved. We believe consumers using the Internet to
purchase goods expect a more information-intensive experience than when they
shop at a traditional retail store. We believe the ability to obtain relevant,
up-to-date information makes the consumer better prepared to make a purchase.
Accessing the Internet from a computer in the home or office allows a consumer
to easily scroll through and search articles, pages of product data and
related topics. This allows consumers to research and then purchase products
at their convenience.
Healthcare Trends on the Internet
Healthcare is one of the largest segments of the U.S. economy, representing
an annual expenditure of roughly $1 trillion, and health and medical
information is one of the fastest growing areas of interest on the Internet.
According to a recent Forrester Research report, 31.6% of Internet users
surveyed had shopped for healthcare products online in the previous six
months. Cyber Dialogue estimates that the number of adults in the United
States searching online for health and medical information will grow from
approximately 17.1 million during the 12 month period ended July 1998 to
approximately 30.0 million during the twelve month period ending July 2000;
however, we cannot be certain that such projection will be achieved.
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<PAGE>
The drugstore.com Market
The market we address can be divided into five primary categories: health,
beauty, wellness, personal care and pharmacy. Many products in this market are
personal (being used on a person's skin or in a person's body) and essential,
and often are purchased repeatedly. In this market, vendors frequently
introduce new products, and consumers seek comprehensive product information.
Consumers currently shop for these products primarily in chain drugstores
(such as Walgreen's, CVS, Rite Aid and Eckerd), mass market retailers (such as
Wal-Mart, Kmart and Target), supermarkets, warehouse clubs and independent
drugstores. However, category-specific retailers and catalogs also serve each
of these categories. Overall, distribution of products in our primary market
categories is fragmented.
Key aspects of the primary categories of the drugstore.com market are as
follows:
Health. The health category includes over-the-counter remedies (such as
cough, cold, allergy and pain relief medications), first aid, medical devices
for home healthcare, contraceptives and other products related to the body's
health needs. Based on estimates from Information Resources, Inc. and Frost &
Sullivan, we believe that sales of health products in the U.S. we currently
offer grew from approximately $15.0 billion in 1996 to approximately $16.3
billion in 1998. We believe that the aging U.S. population, along with a
greater portion of prescription drugs becoming available as over-the-counter
medications, will contribute to growth in this market category. Consumers in
the health category often seek significant amounts of product information to
determine which products will meet their health needs. Consumers generally buy
health products from chain drugstores, mass market retailers, supermarkets,
and warehouse clubs as well as from locally-owned, independent drugstores and
convenience stores. Representative brands carried in our health product
category include Advil, Tylenol, Pepcid, Bausch & Lomb and Metamucil.
Beauty. The beauty category includes cosmetics, fragrances and a variety of
skin care products. Based on estimates from Information Resources, Inc. and
Frost & Sullivan, we believe that sales of beauty products in the U.S. we
currently offer grew from approximately $10.7 billion in 1996 to approximately
$12.8 billion in 1998. Some of the factors driving consumer demand for beauty
products include regular and seasonal new product introductions, as well as
changing fashion trends. Consumers often seek advice regarding these trends or
the functionality of new products. The beauty category can be broadly
classified into two subcategories: mass market and prestige products.
Consumers for mass market beauty products typically purchase such products in
mass market retailers, drugstores and supermarkets. Consumers for prestige
products generally shop in department stores (such as Nordstrom, Macys, May
and Dillard's), beauty specialty stores (such as Aveda or Sally's), or spas
and salons (such as Elizabeth Grady or Elizabeth Arden). Representative brands
carried in our beauty product category include Revlon, L'Oreal, Cover Girl,
Neutrogena and Peter Thomas Roth.
Wellness. The wellness category includes vitamins, nutritional supplements,
herbs, homeopathy, and other natural products. Based on estimates from
Information Resources, Inc. and Frost & Sullivan, we believe that sales of
wellness products in the U.S. we currently offer grew from approximately $9.4
billion in 1996 to approximately $11.0 billion in 1998. We believe that
increasing consumer interest in nutritional and wellness products to improve
physical and mental well-being has contributed to growth in this category. We
believe supplemental product information is important to these consumers
because they are interested in the intended physiological effects of these
products. Consumers can obtain these products at chain drugstores, mass market
retailers, supermarkets, warehouse clubs, and specialty stores as well as
through catalogs or online vitamin and nutrition stores. Representative brands
carried in our wellness product category include Centrum, One-A-Day, Nature
Made, Twinlab, Natrol and Nature's Way. We will also soon be offering GNC
wellness products.
Personal Care. The personal care market category includes products related
to hair, body and eye care, shaving, oral hygiene and feminine needs. Based on
estimates from Information Resources, Inc. and Frost & Sullivan, we believe
that sales of personal care products in the U.S. we currently offer grew from
approximately $20.7 billion in 1996 to approximately $23.5 billion in 1998.
New product introductions drive
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<PAGE>
most of the growth in this category. The personal care category is comprised
of a number of different product groups that consumers typically shop for at
mass market retailers, chain drugstores, supermarkets, warehouse clubs and
specialty stores. Representative brands carried in our personal care product
category include Gillette, Colgate, Johnson & Johnson, Rogaine and Pampers.
Pharmacy. Based on estimates from Information Resources, Inc. and Frost &
Sullivan, we believe that the pharmacy category in the U.S. we address grew
from approximately $89.2 billion in 1996 to approximately $101.2 billion in
1998. This category consists of prescription medication for chronic illnesses,
such as high blood pressure, osteoporosis and depression, which represents
approximately 73% of the U.S. prescription drug market according to Advanstar
Communications. AC Nielsen and IMS Health estimate that out of the $101.7
billion of prescription sales, over 75%, or $76.4 billion are distributed
through retail channels. The number of prescriptions written for chronic
illnesses is expected to continue to grow due to an aging population and the
increasing utilization of pharmaceuticals in medical management. The principal
source of pharmaceuticals for chronic illnesses has been retail pharmacies.
However, over the past ten years, mail order pharmacies have become an
increasingly important source of pharmaceuticals for chronic illnesses.
Forrester Research estimates that as of February 1999, 13% of HMO
prescriptions will be filled by a mail-order pharmacy by the end of 1999.
Limitations on Traditional Channels of Distribution
Traditional channels of retail distribution for health, beauty, wellness,
personal care and pharmacy products have many limitations, including:
Inconvenience. Consumers often view shopping for many of these products as
a chore. Shopping at a physical store can be highly inconvenient. It generally
involves time-consuming activities such as making a trip to the store, finding
a parking space, searching for the desired products, and waiting in line to
fill a prescription or make a purchase. This process can be especially
difficult for customers with disabilities or parents with young children. To
increase convenience for consumers, traditional store-based retailers often
need to open new stores, which is time-consuming and expensive. Each new store
results in significant investments in inventory, real estate, building
improvements and the hiring and training of store personnel. The required
investment may limit the ability of traditional store-based retailers to serve
geographic areas that are not densely populated. Also, an existing store may
face substantial added costs if it attempts to build more parking spaces or
hire more clerks in order to reduce parking and waiting inconveniences.
Narrow Selection. Consumers value the opportunity to select items from a
broad range of products that best fit their needs. However, consumers must
often choose from a narrow product selection at traditional store-based
retailers. Stores may not carry a full range of products, especially prestige,
specialty or regional products, or carry a full assortment of sizes. Desired
items may be out of stock. Overcoming these difficulties can be prohibitively
expensive for traditional retail stores, usually due to shelf space
limitations, the cost of carrying inventory and the resulting need to allocate
inventory dollars to popular products. To the extent that mass market
retailers allocate physical store space to items such as alcohol, lawn
furniture, motor oil and snack foods, they may have to reduce the number of
health, beauty, wellness and personal care products that they offer. Product
selection in traditional store-based retailers cannot be tailored to
individual needs because it is driven by aggregate demand.
Limited Information and Communication. Consumers buying health, beauty,
wellness, personal care and pharmacy products often seek information and
knowledgeable advice to assist them in making purchasing decisions. Many
traditional store-based retailers do not provide consumers with access to
useful product information or readily-available on-site experts who can
provide helpful advice. Employees at traditional store-based retailers,
especially supermarkets and mass market retailers, may have limited if any
interaction with their customers. Often there is no direct contact, except at
the check-out line. Customers may also face difficulties following up with
questions after a purchase. While traditional store-based retailers could take
steps to increase the availability of customized information and on-site
experts, such steps would involve substantial investments
35
<PAGE>
in printing and training. In addition, it is difficult for a traditional
retail store to use information about a particular consumer to personalize
that consumer's shopping experience.
Lack of Privacy. Because many health, beauty, wellness, personal care and
pharmacy products are inherently personal, consumers often desire ways to
preserve the anonymity of their purchases and the confidentiality of the
information transferred in the buying process. Many consumers may feel
uncomfortable purchasing certain drugstore products, such as birth control
devices, feminine care products, and incontinence products, in a traditional
retail store. Many consumers have encountered the unpleasant experience of
placing such a product on a checkout stand's conveyor belt in front of store
clerks and other waiting customers. Consumers may hesitate to ask store
personnel questions about which product best meets a need, or how to use a
product, especially if either the question or the answer is embarrassing or
may be overheard by others. Overcoming this limitation is very difficult for
traditional retail stores because the consumer must visit a physical store
frequented by other customers and must interact in person with store
employees.
The markets for health, beauty, wellness, personal care and pharmacy
products have grown despite the lack of convenience, selection, information
and privacy associated with a trip to a traditional store-based retailer.
Consequently, we believe there is a significant market opportunity for an
online store that can offer consumers an enhanced shopping experience through
convenient and private access to detailed information about a broad range of
products, and an easy way to buy them.
The drugstore.com Solution
We are a leading online drugstore: a retail store and information site for
health, beauty, wellness, personal care and pharmacy products. We designed our
store to provide a convenient, private and informative shopping experience
that encourages consumers to purchase products essential to healthy, everyday
living. We believe our online store provides customers with a superior
shopping experience, making buying What Every Body NeedsTM less of a chore.
We draw and retain consumers by emphasizing key attributes of our store:
Convenience. Our user-friendly Web store may be reached from wherever the
shopper has Internet access, such as the shopper's home or office. Further
convenience advantages at our store include:
. Shopping 24 hours a day, seven days a week;
. Direct delivery to the shopper's home or office, avoiding the need for a
trip to a physical store;
. A personal shopping list for every customer, allowing for quick and easy
reordering in future visits;
. Simplified searching for products and information using advanced search
technology;
. Confidential access by a customer to his or her individual medication
profiles at any time; and
. Ability to purchase and send products easily to others.
In addition, we expect to offer Rite Aid customers the ability to order
refills of their existing Rite Aid prescriptions on our Web site and pick them
up at a local Rite Aid store.
Selection. Because we do not have inventory or shelf-space limitations, we
believe we offer a significantly greater number of products than are available
in a traditional chain drugstore. Not only do we offer traditional chain
drugstore items (prescription drugs, over-the-counter medications and personal
care), we offer a broad selection of health, beauty and wellness products.
Many traditional chain drugstores do not carry a wide range of these products.
We believe that we offer the largest selection of drugstore products available
on the Internet, offering over 17,000 SKU's (excluding pharmacy items). We are
also the only online retailer that may offer GNC wellness products, which we
expect to begin offering this year.
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Information. Because the Web has become an increasingly important tool for
researching healthcare topics, we believe that providing useful information is
a critical aspect of enabling consumers to make informed purchasing decisions.
We have assembled a broad array of information on our Web site that can enable
our consumers to make informed purchasing decisions. This information is
produced both in-house and by third-party expert sources and is focused on key
aspects of our market segments. Consumers can either access our information
directly, through a number of content features on our Web site, or can get
free help directly from our advisors and experts by contacting them through e-
mail. Our information services include:
. Full Product Packaging Information. Almost every product available on
our Web site can be viewed in an expanded format where all package
information, including ingredients, directions and warnings, can be read
next to an enlarged photograph of the product. We believe we are the
only online retailer to provide all the information that is normally
found on the products' packaging.
. Resource Center. Our resource center provides an easy way for customers
to find the information they need to make an informed purchasing
decision. It includes buying guides, reference information, shopping
advisors and beauty information.
. Easy Access to Drug Information and Personalized Pharmacy
Advice. Consumers can access our extensive drug information library
directly at our Web site, anytime at their own convenience. Patient
information and drugstore.com drug prices can be accessed via our drug
index. We provide information to help consumers understand generic drug
alternatives. We also provide health- and pharmacy-related editorial
content in our online resource center. Our pharmacists can provide
personal guidance by phone or e-mail to ensure that each customer
understands the correct usage, possible side effects and expected
beneficial outcomes of a prescription or an over-the-counter medication.
Communication. We can communicate with customers on a regular basis through
the convenience of e-mail. In addition to our Ask Your Pharmacist and Ask Your
Beauty Expert features, we offer the following means of communication with our
store:
. Reminders. We have the ability to e-mail a customer when a prescription
or non-prescription product is about to run out, reminding him or her to
order a replacement product or a prescription refill. Customers simply
tell us how often they need a product and we can send them a notice
before it is scheduled to run out.
. Specialized Customer Care. To ensure timely and high-quality customer
service, we have established specialty teams within the drugstore.com
customer care department. Our Web site, product and insurance
specialists respond to customer e-mails and calls that are related to
shopping orders, insurance, prices, and shipping. Once an order is
made, customers can view order-tracking information on our Web site.
. Personalized Communications. As customers use our Web site, they can
provide us with information about their buying preferences and habits.
We can use this information to develop personalized communications and
deliver useful newsletters, special offers and new product announcements
to our customers via e-mail and other means. In addition, we use e-mail
to alert customers to important developments and merchandising
initiatives.
Privacy. Customers can shop in the privacy of their own homes or offices.
When shopping at a physical store, many shoppers feel embarrassed or
uncomfortable buying items that may reveal personally-sensitive aspects of
their health or lifestyle to store personnel or other shoppers. Shoppers at
drugstore.com avoid these problems. Through features such as Ask Your
Pharmacist and Ask Your Beauty Expert, customers can obtain answers to
questions that they would otherwise be uncomfortable asking in public.
Although we believe we offer significant advantages over traditional chain
drugstores, certain customers may feel that traditional chain drugstores offer
several advantages over our service, and we may not be able to meet the needs
of some customers. For example, we cannot serve emergency needs and we cannot
serve
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customers who do not have access to the Internet. Some customers may also
prefer to touch and see products in person, rather than view them on a
computer screen or prefer to talk to a pharmacist in person. Some customers
may also have general concerns about the privacy and security of information
transmitted over the Internet and will therefore prefer to shop in physical
stores. See "Risk Factors--Consumers of Health, Beauty, Wellness, Personal
Care and Pharmacy Products May Not Accept Our Solution, Which Would Reduce Our
Revenues and Prevent Us From Becoming Profitable" for a further description of
the challenges we face in this area.
Business Strategy
Our objective is to become one of the world's leading retailers of health,
beauty, wellness, personal care and pharmacy products. To achieve our
objective, we intend to attract a growing base of customers and provide them a
superior shopping experience. Key elements of our strategy include:
Strengthen the drugstore.com Brand. We intend to establish drugstore.com as
the leading consumer brand for buying health, beauty, wellness, personal care
and pharmacy products. To date, we have promoted our Web site on major
Internet destinations such as Amazon.com, America Online, Excite and Yahoo!,
as well as on other sites our customers are likely to visit, including
ThirdAge, InteliHealth, OnHealth, Medscape and Women.com. To further
strengthen our brand, we intend to cultivate a reputation for excellent
quality of service and continue to pursue an aggressive marketing strategy,
both through the Internet and traditional media, as well as through our
relationships with Rite Aid and GNC.
Continuously Improve Our Web Store and Service. We seek to combine wide
product selection and helpful information with the unique aspects of the
Internet to deliver a convenient and personalized shopping experience. We
strive to develop long-term relationships with our customers to build loyalty
and encourage repeat purchases. To improve our site, we intend to continue to
expand our product selection and enhance our existing offerings such as
shopping lists, individual medication profiles, e-mail reminders and targeted
special offers, as well as develop new personalization features as we learn
more about our customers and their needs. In addition, as part of our
relationship with Rite Aid, we expect to offer Rite Aid customers the ability
to order refills of their Rite Aid prescriptions on our Web site and pick them
up at a local Rite Aid store or have them delivered to the customer's home or
office.
Take Advantage of Repeat Purchasing Patterns. We intend to maximize repeat
purchases by our customers. To achieve this objective, we have developed
personalized tools and features that are designed to allow consumers to
satisfy their replenishment purchasing needs easily. We believe that our focus
on prescriptions for chronic conditions and products that must be regularly
replenished will allow us to benefit from repeat purchase patterns. We also
plan to continue to expand the functionality of our Web site to further
facilitate repeat purchases.
Maintain Our Technology Focus and Expertise. We intend to use technology to
enhance our product and service offerings and take advantage of the benefits
of the Internet. We have developed a proprietary, scalable architecture
designed to support secure and reliable online shopping in an intuitive easy-
to-navigate format. We intend to seek ways to increase the efficiency of
pharmacy transaction processing and order fulfillment activities. We also
intend to develop features to further personalize the consumer's shopping
experience and enhance the customer's ability to find products and useful
information.
Ensure Quick and Efficient Distribution. We intend to continuously increase
the automation and efficiency of our fulfillment and distribution activities.
For example, we will seek ways to improve the efficiency of the prescription
fulfillment process in areas such as receiving prescriptions from doctors and
billing the customer or his or her insurance company. In addition, because we
currently outsource our distribution operations, we intend to work with our
distributors and vendors to find more ways to ensure prompt deliveries to our
customers. As part of this effort, we are currently reviewing and formulating
our long-term distribution strategy, which will include developing our own
distribution center. Our goals in this area include reducing shipping costs,
ensuring adequate future capacity and ensuring reliable and prompt deliveries
to our customers.
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Enhance and Form Key Relationships. We intend to enhance our existing
strategic relationships with leading product manufacturers, content providers
and insurance and pharmacy benefit management companies, as well as develop
new strategic relationships. We also believe relationships with leading
insurance and pharmacy benefit management companies, including our new
relationship with PCS, will enhance customer awareness of our Web site and
enable an even greater number of our customers to obtain reimbursement for
their prescriptions filled through our store. We also believe having strong
relationships with product manufacturers will enable us to provide more and
better product information to our customers. In addition, as part of our long-
term distribution strategy, we may need to develop direct manufacturer
relationships to ensure the availability of adequate volumes of products
ordered by our customers. We also intend to continue to pursue key
relationships with leading providers of health, beauty and wellness
information. We believe this strategy will enhance our product offerings and
allow us to serve more customers.
Shopping at drugstore.com
Shoppers at drugstore.com see a home page that highlights our five product
departments, as well as editorial content and promotions. A shopper can browse
through the store by clicking on the permanently displayed department names,
move directly to a department's home page and view promotions and featured
products. All product lists allow a shopper to select products based on brand
or unique attributes of the category, such as tartar control or whitening for
toothpaste, or color for lipstick or eye shadow. Shoppers can also search the
site by entering text in the search box at the top of any page.
A customer can select products to purchase by clicking on the "buy" button
in the product list. The products are then added to the customer's shopping
bag. If a customer needs more information to make a purchase, we supply
interactive tools and content to aid in the decision, such as:
. Resource Center. Our resource center provides an easy way for customers
to find the information they need to make an informed purchasing
decision. Some of the components of the Resource Center include:
Shopping Advisors. Our shopping advisors consist of interactive
tools to help consumers find the right products for their needs. We
currently feature a cold and cough advisor, a skin care advisor and
a vitamin and supplement advisor. Through an easy-to-use interactive
format, a customer provides information about what he or she needs,
and the advisor provides information that enables the customer to
choose the appropriate product.
Buying Guides. Our buying guides help consumers make informed buying
decisions. We currently feature buying guides on condoms, birth
control pills, cold and cough medicine, toothpaste, shampoo and
sunscreen. The buying guides provide helpful information about the
key benefits and characteristics of each of these products.
. Shopping List. Returning customers can easily view their previous
purchases by consulting their personalized shopping lists. The shopping
lists make buying regularly-replenished items even easier to purchase
because the customer can move products into their shopping bag directly
from their personalized shopping list, without browsing the site. If
requested by the customer, we also send e-mail reminders to consumers
when items on their lists are scheduled to run out and need to be
replenished.
. Quick Lists. Our Quick Lists feature provides customers a starting point
for finding frequently used products for different product categories,
such as a medicine cabinet, beauty essentials and a travel bag. Within
each product category, the customer can choose a specific product and
move the product into his or her shopping bag. The customer can then
move directly from his or her shopping bag back to the Quick Lists and
choose another product or list.
. Ask Your Pharmacist. Our Ask Your Pharmacist feature allows customers to
ask our pharmacists questions about over-the-counter and wellness
products as well as prescription drugs.
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. Ask Your Beauty Expert. Our Ask Your Beauty Expert feature allows
customers to ask our beauty experts questions about beauty needs. Our
beauty experts respond to questions via e-mail and seek to answer
questions within one business day.
. Getting Help. From every page of our Web site, a customer can click on a
"help" button to go to our customer service area. In this area, we
assist customers in searching for, shopping for, ordering and returning
our products. In addition, we provide customers with answers to the most
frequently asked questions and encourage our visitors to send us
feedback and suggestions via e-mail.
When the customer finishes selecting the desired products, he or she goes
to checkout. The only information required to checkout is an e-mail
identification, password (to protect account privacy), shipping address and a
valid credit card number. All of this information is maintained in a secure
format and remains available for the customer's future access.
Pharmacy Services
The pharmacy services at drugstore.com are provided by experienced clinical
professionals using advanced information technologies. We employ licensed
pharmacists who ensure private, personal customer service. Through our
prescription drug dispensing partner, RxAmerica, we are able to ship
prescription products to all 50 U.S. states. See "--Distribution and Order
Fulfillment" for a further description of our relationship with RxAmerica. We
are also working with Rite Aid to enable Rite Aid customers to order refills
of their prescriptions on our Web site and pick them up at any of the over
3,800 Rite Aid stores in the United States or have them delivered to their
home or office. In addition, we are an active participant in the development
of the National Association of Boards of Pharmacy's Verified Internet Pharmacy
Practice Sites program. This new program will set standards for Internet
pharmacies and inform the public of those Web sites that have agreed to comply
with these standards.
Services. We seek to provide a high level of responsiveness and customer
support. In addition to our extensive drug information, specialized customer
care features and refill reminders, our pharmacy services include:
. Ask Your Pharmacist. Our Ask Your Pharmacist feature allows customers to
ask our pharmacists questions about medication, dosage, delivery
systems, common side effects and other information about prescription
drugs and health-related products. Our pharmacists seek to provide an
initial answer via e-mail within one business day.
. Private Access to drugstore.com Prescription History. Customers who fill
their prescriptions at drugstore.com can access their secure, individual
medication profiles at any time. A written patient information document
accompanies all medications dispensed to drugstore.com customers. This
service enables customers to maintain a record of their prescription
purchases for clinical, insurance and tax reporting purposes.
Filling Prescriptions. We only accept prescriptions from licensed health
care providers. We do not prescribe medications or otherwise practice
medicine. We focus on dispensing medications used by consumers on a chronic
basis. Advanstar Communications, Inc. estimates that such medications
comprised approximately 73% of all prescription drugs taken in the United
States in 1998. For acute care needs, meaning when a customer has a single
episode of a short-term illness or an exacerbation of a chronic condition in
either case requiring immediate attention, we recommend that customers pick up
their prescriptions from a local pharmacy because the treatment of acute care
needs are extremely time sensitive and the delivery time required by online
purchases could be too slow for the customer's needs. Medications used for
acute care needs include antibiotics and pain medications. We also do not
dispense certain controlled substances known as Schedule II pharmaceuticals at
this time because there are increased risks associated with their
dispensation, such as fraud, illegal resale of prescription drugs, and special
storage shipping and handling requirements. Schedule II Pharmaceuticals are
drugs classified by the Controlled Substance Act of 1970 as having a high
potential for abuse, such as opiates
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(including morphine) and products that contain oxycodone stimulants (including
amphetamine and methylphenidate) and depressants (including secobarbital and
amobarbital). We accept, verify and cross-check prescriptions much like
traditional retail and mail service pharmacies:
. Accepting Prescriptions. For new prescriptions, customers can direct
their physicians to call or fax their prescriptions to us at 1-800-
DRUGSTORE, or request that we contact their physician directly to obtain
prescription information. For transfers, customers can direct their
pharmacy to transfer their prescriptions or request us to contact their
pharmacy to transfer the prescription to drugstore.com. For refills,
customers may order directly from our Web site or respond to one of our
e-mail refill reminders.
. Verifying Prescriptions. Our pharmacists verify the validity and
completeness of prescription drug orders utilizing the same methodology
as community-based pharmacists. The standard practice for verification
of prescription drug orders is that the pharmacist will contact the
physician's office by telephone or fax if there is any reason to
question the validity, accuracy or authenticity of any order. In
addition, our pharmacists call and verify the validity of prescription
drug orders for allowable controlled substances, i.e., Schedule III-V
drugs. In addition, our pharmacists verify that all legally required
information is recorded on the prescription drug order and utilize a
database to verify physician identifying information, if necessary.
. Drug Utilization Review. To use our prescription drug services, all
customers are asked to provide our pharmacists with information
regarding drug allergies, current medical conditions and current
medications. Our pharmacists use advanced technologies to cross-check
every prescription against the information we receive from the customer
for drug-, disease- and allergy-drug interactions.
Payment. Customers may pay for their prescriptions with cash or by entering
insurance information that shows that they are covered by a managed care
organization, insurance plan or PBM with whom we have a contract. To date, a
substantial majority of our prescriptions have been submitted by cash paying
customers. However, as a result of our relationship with Rite Aid, we will be
able to fill prescriptions for most customers with pharmacy benefits covered
by a plan accepted by Rite Aid. In addition, we will participate in
substantially all of the current and future retail pharmacy networks managed
by PCS, one of the leading pharmacy benefit management companies in the United
States that claims to provide pharmacy benefit management services for more
than 50 million individuals in the United States.
Pharmacy Supply. All of our pharmaceutical products are currently supplied
by RxAmerica. We intend to establish our own distribution center within the
next 12 months. Once the distribution center is established, we are obligated
to purchase all of our pharmaceutical products from Rite Aid, unless we are
able to obtain better overall terms from another vendor. This purchase
commitment will continue for the term of the Rite Aid relationship.
Marketing and Promotion of Our Site
Our marketing and promotion strategy is designed to build brand
recognition, increase customer traffic to our store, add new customers, build
strong customer loyalty, maximize repeat purchases and develop incremental
revenue opportunities.
Our advertising campaigns target both online and traditional audiences and
are designed to promote an enhanced customer experience. Our online
advertising efforts have been focused on highly-visited Internet portals,
health-related Web sites and other highly-visited Web sites. We also have
strategic relationships with Amazon.com,Rite Aid and GNC, who all promote our
Web site. We believe that the marketing benefits of our relationship with
Amazon.com include their promotion of our site and the beneficial aspects of
our being associated with one of the premier e-commerce companies. In
addition, Rite Aid has agreed to include drugstore.com in a significant
portion of Rite Aid's own advertisements, as well as on shopping bags,
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prescription vial caps, in-store signs and permanent links from its Web site.
In addition, we advertise on America Online, Excite and Yahoo!, as well on
other sites where our customers are likely to visit, including ThirdAge,
InteliHealth, OnHealth, Medscape and Women.com. We also extend our market
presence through our Associates Program, which enables associated Web sites to
make our products and services available to their audiences through a link to
our Web site. We intend to continue to use the unique resources of the
Internet as a means of marketing in an effort to drive traffic and repeat
purchases. We have also used traditional marketing and promotion efforts,
including special product promotions, print advertising in USA Today,
promotional press releases and public appearances by our executives. We intend
to further intensify our advertising efforts through traditional media
channels to continue building our brand recognition.
Merchandising Strategy
We believe that the breadth and depth of our product selection, together
with the flexibility of our online store and our range of helpful and useful
shopping services, enables us to pursue a strong merchandising strategy.
Aspects of this strategy include:
Easy Access to a Wide Selection of Products. Our easy-to-use Web site and
robust search capabilities enable customers to browse our product selection by
brand, age, product and price, as well as combinations of these categories.
For example, a customer can easily search for all aspirin products or for
Tylenol for children without consulting store personnel or searching
traditional store shelves. Combination searching allows customers to find
desired items easily among our large selection of products.
Dynamic Product Offering. Our online store gives us flexibility to change
featured products or promotions without having to alter the physical layout of
a store. We are also able to dynamically adjust our product mix in response to
changing customer demand, new seasons or upcoming holidays and introduce
special promotions.
Specialty Stores. We are establishing specialty stores in each of our
product categories. Our first specialty store, the boutique, sells high-end
cosmetics. Our next specialty store will be the GNC LiveWell Store, which will
be dedicated to GNC nutritional products and other products typically sold in
GNC stores. We will be the exclusive distributor of GNC brand products on the
Internet subject to our meeting performance parameters during the third and
fifth years of the relationship.
Extensive Product Information. A key component of our merchandising
strategy is the ability to use information as a tool for consumers. We combine
manufacturer information with editorial information or buying guides to allow
customers to make more informed buying decisions and to more easily comparison
shop for products. In addition, our Web site allows us to market products to
customers in many different ways, such as by product category or by product
characteristics, such as price or ingredients.
Targeted Promotions. We have the ability to offer products to individual
customers based on their affinities or conditions. In addition, we can present
merchandise to a customer tailored to personal interests and shopping
histories. We also cross-sell a brand across our departments to promote
impulse buying by customers. For example, we might promote mothers' products
in our Pregnancy and Infant Center.
Sampling. We have programs that allow us to provide samples of products to
customers as trials. We may also use sampling to work with manufactures to
introduce new products.
Information Objectives
Our editorial strategy is to present helpful, value-added information to
consumers in a readable, user-friendly format. Our editors create, source and
maintain health, beauty, wellness, personal care and pharmacy related content
for our Web site. Our editors assemble content to provide both reference and
product-related information. To date, we have established relationships with
several leading information providers who provide content for our site. We
will continue to direct our editorial efforts toward enhancing existing
features as well as
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sourcing new content to help our customers. For example, we expect to expand
our health and affinity centers beyond our first center, the Pregnancy and
Infant Center, to new centers focused on specific interest areas such as
allergy, fitness or diabetes. We also plan to expand the health and affinity
centers to provide consumers a forum to provide feedback or recommendations on
products.
Delivery of Our Customer's Orders
We currently outsource our distribution and order fulfillment operations on
a non-exclusive basis through Walsh, RxAmerica and other vendors. We carry
minimal inventory relative to our total sales and rely to a large extent on
rapid distribution from these vendors.
Walsh Distribution accounted for 82% of our cost of sales for health,
beauty, wellness and personal care products from inception to April 4, 1999.
Walsh packages for shipment all customer orders, including drugstore.com
inventory purchased directly from other vendors that Walsh holds for us at
their facility. We staff our own customer care specialists at the Walsh
facility to monitor quality control and order fulfillment. Walsh provides
inventory and services under a supply and services agreement that has a three
year term (through January 2002). This agreement may be terminated earlier by
us upon accelerated payment of minimum fees that would not exceed
approximately $2,500,000.
We currently purchase all of our pharmaceutical products from one vendor,
RxAmerica, in accordance with a pharmacy services agreement. Our pharmacists
perform all aspects of the prescription fulfillment process and all aspects of
customer service, except for the physical filling and packaging of
prescription drugs, which is performed by RxAmerica pharmacists. We staff our
own pharmacists, pharmacy technicians and customer care specialists at the
RxAmerica facility. As of April 30, 1999, RxAmerica employed approximately 25
pharmacists to fill and package prescriptions and help manage quality
assurance. RxAmerica is licensed and in good standing in the State of Texas
and in every other state as a nonresident pharmacy, as required by law. The
pharmacy services agreement with RxAmerica has a one-year term (to February
2000) and will automatically renew for additional one-year terms unless either
party notifies the other that it wishes to terminate the agreement at the end
of the initial term or a successive term. The agreement is non-exclusive and
does not prevent us from using other vendors for pharmaceutical products,
although we have not done so to date. When we establish our own distribution
center, we will be obligated to buy our pharmaceutical products from Rite Aid,
unless we are able to obtain better overall terms from other vendors.
Our warehouse management system, which is integrated with RxAmerica's and
Walsh's information systems, provides us real-time data on inventory
receiving, shipping, inventory quantities and inventory location. This enables
us to notify customers on a real-time basis if the product is in stock. In
addition, we offer an order tracking system for our customers on our Web site.
The inventories of RxAmerica and Walsh consist of items typically found in
traditional chain drugstores. We charge our customers a shipping charge that
covers all or a portion of our expenses of shipping. Walsh purchases
substantially all of its inventory directly from the manufacturers of the
products. RxAmerica purchases its pharmaceutical products from a variety of
manufacturers as well as wholesalers.
We offer a variety of shipping options, including next-day delivery for
orders received during the business week. We ship to anywhere in the United
States served by the United Parcel Service or the U.S. Postal Service.
Priority orders are flagged and expedited through our fulfillment processes.
For non-prescription product orders received before 9:00 p.m. Central time
Monday through Friday or before 5:00 p.m. Central time on Saturday, our goal
is to ship the product the same day. For prescription products, our goal is to
ship the product as soon as the prescription has been verified and our
pharmacists have completed drug utilization review.
In addition, Rite Aid customers will be able to order refills of their Rite
Aid prescriptions online at our Web site either for delivery through the mail
to their homes or for pickup at their choice of any one of the over 3,800 Rite
Aid stores.
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Customer Service
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. Our customer service
representatives are currently available from 6:00 a.m. to 10:00 p.m. Pacific
time, Monday to Friday, on Saturdays from 9:00 a.m. to 6:00 p.m. Pacific time,
and on Sundays from 9:00 a.m. to 4:00 p.m. Pacific time to provide assistance
via e-mail or phone. We strive to answer all customer inquiries within 24
hours. Our customer service representatives handle questions about orders and
how to use our Web site, assist customers in finding desired products and
register customers' credit card information over the telephone. Our customer
service representatives are a valuable source of feedback regarding user
satisfaction. Our Web site also contains a customer service page that outlines
store policies and provides answers to frequently asked questions. In
addition, our pharmacists can provide advice to our customers about
medication, dosage, delivery systems, common side effects and other
information about prescription drugs.
Operations and Technology
We have implemented a broad array of services and systems for site
management, searching, customer interaction, transaction processing and
fulfillment. We use a set of software applications for:
. Accepting and validating customer orders;
. Organizing, placing and managing orders with vendors and fulfillment
partners;
. Receiving product and assigning it to customer orders; and
. Managing shipment of products to customers based on various ordering
criteria.
These services and systems use a combination of our own proprietary
technologies and commercially available, licensed technologies. We focus our
internal development efforts on creating and enhancing the specialized,
proprietary software that is unique to our business. In order to enhance the
online and offline experience for Rite Aid and drugstore.com customers, we
intend to integrate certain of our information and pharmacy systems with Rite
Aid's. Rite Aid has granted us a nonexclusive, fully-paid license to the Rite
Aid systems that will be integrated with our systems, subject to third party
rights to such technology.
We also have a technology license and advertising agreement with Amazon.com
under which we mutually agreed to license certain existing and future
technology used in the operation of our Web sites as long as we do not use the
technology to compete with each other. We currently are not using any
Amazon.com technology but could do so in the future if it would benefit us.
See "--Relationship with Amazon.com" for a further description of our
agreements with Amazon.com.
Our core merchandise catalog, customer interaction, order collection,
fulfillment and back-end systems are proprietary to drugstore.com, but are
available to Amazon.com under our agreement with them. Our software platform
and architecture are integrated with an Oracle database system. The systems
were designed to provide real-time connectivity to the distribution center
systems for pharmacy and the non-pharmacy products. These include an
inventory-tracking system, real-time order tracking system, executive
information system and replenishment system. Our Internet servers use Verisign
digital certificates to help conduct secure communications and transactions.
Our systems infrastructure is hosted at Exodus Communications in Tukwila,
Washington, which provides communication lines from multiple providers
including UUNet and AT&T, as well as 24 hour monitoring and engineering
support. Exodus has its own generators and multiple back up systems in
Tukwila.
We maintain customer care centers in our Bellevue, Washington office and in
our prescription distribution facility in Fort Worth, Texas and use a real
time interactive voice response system with transfer capabilities between our
customer care centers in Bellevue, Washington and Fort Worth, Texas. We also
operate a toll-free number, 1-800-DRUGSTORE, through which customers can place
orders and receive information. In addition,
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customers who choose not to transmit their credit card information via the
Internet have the option of submitting their credit card information by
telephone.
We incurred $2.2 million in product development expenses in the period from
inception to December 31, 1998 and $2.7 million during the quarter ended April
4, 1999. We anticipate that we will continue to devote significant resources
to product development in the future as we add new features and functionality
to our Web site.
Competition
The online commerce market is new, rapidly evolving and intensely
competitive. In particular, the health, beauty, wellness, personal care and
pharmacy categories are intensely competitive and are also highly fragmented,
with no clear dominant leader in any of our market categories. Our competitors
can be divided into several groups: chain drugstores, such as Walgreen's, CVS
and Eckerd; mass market retailers such as Wal-Mart, Kmart and Target;
supermarkets, such as Safeway, Albertson's and Kroger; warehouse clubs; online
retailers of health, beauty, wellness, personal care and/or pharmaceutical
products; mail order pharmacies; prescription benefits managers, such as
Express Scripts and Merck-Medco; Internet-portals and online service providers
that feature shopping services such as America Online, Yahoo!, Excite and
Lycos; cosmetics departments at major department stores, such as Nordstrom,
Macy's and Bloomingdale's; and hair salons. Each of these competitors operate
within one or more of the health, beauty, wellness, personal care and pharmacy
product categories. In addition, nearly all of our competitors have, or have
announced their intention to have, the capability to accept orders for
products online. In particular, Walgreen's, CVS, Albertson's and Wal-Mart
already are accepting prescription refill or other orders on their Web sites.
We believe that the following are principal competitive factors in our
market:
. Brand recognition;
. Selection;
. Convenience;
. Price;
. Web site performance and accessibility;
. Customer service;
. Quality of information services; and
. Reliability and speed of order shipment.
Many of our current and potential traditional store-based and online
competitors have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we do. Many of these current and potential competitors
can devote substantially more resources to their Web site and systems
development than we can. In addition, larger, well-established and well-
financed entities may acquire, invest in or form joint ventures with online
competitors or drugstore retailers as the use of the Internet and other online
services increases.
Some of our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a
manner that is not possible over the Internet. Traditional store-based
retailers can also sell products to address immediate, acute care needs, which
we and other online sites cannot do. Some of our competitors such as
Walgreen's and Wal-mart have significantly greater experience in selling
drugstore products.
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Relationship with Amazon.com
We have a strategic relationship with Amazon.com whereby Amazon.com
promotes our Web service. We believe that the benefits of our relationship
with Amazon.com include their promotion of our Web site and the beneficial
aspects of our being associated with one of the premier e-commerce companies.
Amazon.com is our largest shareholder, and Jeff Bezos, Amazon.com's chairman
of the board and chief executive officer is a member of our board of
directors. As part of our relationship with Amazon.com, we entered into a
technology license and advertising agreement. This agreement extends for ten
years and can be terminated for breach or in the event that we are acquired by
a competitor of Amazon.com. This agreement contains provisions generally
relating to the sharing of technology and technical support; however, we have
decided to develop our own technology and there has been no exchange of
technology by either party to date. Specifically, this agreement provides for
the license of substantially all of each company's technology to the other for
use within their respective businesses that may be developed through August
10, 2008. Neither company may use the other's technology to compete against
the other. In addition, each party has committed to providing the other with
advertising on our respective Web sites through the term of the agreement as
mutually agreed upon. In addition, we agreed not to place advertisements
competitive to Amazon.com's business on our site. We have also agreed not to
sell advertising on our Web site to, link our Web site to, or promote on our
Web site any company that sells products or services competitive with those
which Amazon.com offers or which Amazon.com is preparing to produce or market.
We are currently restricted with respect to books, music products, video
products, gift centers, and auctions. If Amazon.com expands into other areas
this may further limit the companies we can promote on our Web site. If we
were acquired by an Amazon.com competitor and Amazon.com did not vote in favor
of the transaction, we would lose our rights to promotional placements on
Amazon.com's website, to restrict Amazon.com's ability to compete in the
online drugstore business, and to use Amazon.com's technology (if we are then
using any). See "Executive Officers and Directors," "Certain Relationships and
Related Transactions" and "Principal Stockholders" for further background on
Amazon's relationship with us.
Relationship With Rite Aid
In June 1999, we entered into a strategic relationship with Rite Aid, which
will become effective upon receipt of necessary regulatory clearances. Under
the relationship, Rite Aid customers will be able to refill existing Rite Aid
prescriptions at our site and either use our standard delivery options or pick
up the prescriptions at the more than 3,800 Rite Aid stores nationwide. In
addition, Rite Aid and drugstore.com will promote each other's services both
online and offline, including a link from Rite Aid's Web site to our Web site.
We believe that potential benefits of our relationship with Rite Aid may
include additional revenue and traffic generated by Rite Aid customers who may
visit our Web site, the pharmacy benefit coverage provided by the insurance
companies and PBMs with which Rite Aid has a relationship, including PCS and
the co-promotion and co-branding activities both companies will undertake. In
connection with this relationship, Rite Aid will also become one of our
largest stockholders, holding approximately 25.4% of our common stock prior to
this offering. Martin Grass, Rite Aid's chief executive officer and chairman
of its board of directors, will become a member of our board of directors upon
the closing of the transaction.
As part of the relationship, both Rite Aid and drugstore.com agreed to
certain exclusivity provisions that will limit drugstore.com's ability to
promote or affiliate with any other physical retail drugstore and from
operating a traditional physical drugstore, and will preclude Rite Aid from
offering or selling products or services on the Internet other than through
our Web site. In addition, the agreement provides that if we establish our own
distribution center, we will purchase all of our pharmaceutical requirements
from Rite Aid unless we are able to obtain better overall terms from another
vendor. The agreement contains additional provisions providing for the
licensing by Rite Aid to drugstore.com of information technology systems and
the integration of the information technology and pharmacy systems of the two
companies. This agreement extends for ten years, but can be terminated for
breach prior to such time. See "Executive Officers and Directors," "Certain
Relationships and Related Transactions" and "Principal Stockholders" for
further background on Rite Aid's relationship with us.
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Relationship With GNC
In June 1999, we entered into a relationship with General Nutrition
Companies, Inc. (GNC) whereby we will be the exclusive online provider of GNC-
branded products. We have the exclusive right to sell GNC's nutrition products
over the Internet, including the PharmAssure brand of pharmacist recommended
vitamins and nutritional supplements, subject to our meeting performance
parameters based on traffic to our Web site and sales of GNC products in the
third and fifth year of the relationship. As long as we have the exclusive
right to distribute GNC's products over the Internet, we will not promote any
other retail health food store or operate a physical retail health food store.
If the exclusivity provisions of the agreement terminate, we have the non-
exclusive right to sell these products for the remaining term of the
agreement. As part of this relationship, we will create a separate part of our
Web site called the GNC LiveWell Store that is dedicated to selling on a
consignment basis GNC products. In connection with this relationship, GNC will
acquire approximately 8.0% of our common stock prior to this offering. GNC and
drugstore.com also agreed to co-promote each other's products and services in
both their traditional and online marketing efforts, including GNC putting a
link to our Web site on their Web site. The agreement extends for ten years,
but can be terminated for breach prior to such time. See "Certain
Relationships and Related Transactions" and "Principal Stockholders" for
further background on GNC's relationship with us.
Governmental Regulation
Our business is subject to extensive federal, state and local regulations,
many of which are specific to pharmacies and the sale of over-the-counter
drugs. For example, pursuant to the Omnibus Budget Reconciliation Act of 1990
and related state and local regulations, our pharmacists are required to offer
counseling, without additional charge, to our customers about medication,
dosage, delivery systems, common side effects, adverse effects or interactions
and therapeutic contraindications, proper storage, prescription refill, and
other information deemed significant by the pharmacists. We are also subject
to federal, state and local licensing and registration regulations with
respect to, among other things, our pharmacy operations.
We are subject to requirements under the Controlled Substances Act and
federal Drug Enforcement Agency regulations, as well as related state and
local laws and regulations, relating to our pharmacy operations, including
registration, security, recordkeeping, and reporting requirements related to
the purchase, storage and dispensing of controlled substances, prescription
drugs, and certain over-the-counter drugs. Under the Food, Drug & Cosmetic Act
of 1938 (the FDCA), a drug recognized in Homeopathic Pharmacopeia of the
United States must meet all compendial standards, or it will be considered
misbranded or adulterated. Because we sell homeopathic remedies, we are
required to comply with the FDCA.
The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are currently investigating online pharmacies and online
prescribing, especially focused on those who prescribe drugs online and on
pharmacies that fill invalid prescriptions, including those that are written
online. The committee requested that the General Accounting Office undertake a
formal review of a number of issues pertaining to online pharmacies, including
an assessment of mechanisms to ensure that online pharmacies are obeying the
various state and federal regulations for the industry. Because we make every
effort only to fulfill valid prescriptions and we do not prescribe drugs, we
believe that our business will not be negatively affected by any regulations
that result from the investigations. However, we believe that any regulations
resulting from the investigations will likely result in increased reporting
and monitoring requirements.
The National Association of Boards of Pharmacy (NABP), a coalition of state
pharmacy boards, is in the process of developing a program, the Verified
Internet Pharmacy Practice Sites (VIPPS), as a model for self-regulation for
online pharmacies. We are assisting the NABP with the development of the VIPPS
program and intend to comply with its criteria for certification.
Legislation and regulations currently being considered at the federal and
state level could affect our business, including legislation or regulations
relating to confidentiality of patient records, electronic access and
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<PAGE>
storage. In addition, various state legislatures are considering new
legislation related to the regulation of nonresident pharmacies. The Health
Insurance Portability and Accountability Act of 1996 mandates the use of
standard transactions, standard identifiers, security and other provisions by
the year 2000. Regulations have been proposed to implement these requirements,
and we are designing our applications to comply with the proposed regulations.
Although the FDA does not regulate the practice of pharmacy, other than
pharmacy compounding, which we do not currently engage in, FDA regulations
impact some of our product and service offerings because the FDA regulates
drug advertising and promotion, including direct-to-consumer advertising, done
by or on behalf of drug manufacturers and marketers. As we expand our product
and service offerings, more of our products and services will likely be
subject to FDA regulation.
The inclusion of prescription drugs as a Medicare benefit has been the
subject of numerous bills in the U.S. Congress. Should legislation on
prescription drug coverage for Medicare recipients be enacted into law, we
would be subject to compliance with any corresponding rules and regulations.
Until recently, Health Care Financing Administration guidelines prohibited
transmission of Medicare eligibility information over the Internet. We are
also subject to extensive regulation relating to the confidentiality and
release of patient records. Additional legislation governing the distribution
of medical records exists or has been proposed at both the state and federal
level.
For a description of the risks we face with regard to these government
regulations, please see "Risk Factors--Governmental Regulation of the Health
Care and Pharmacy Industries Could Affect Our Business."
Intellectual Property
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with our vendors, fulfillment partners and strategic partners to
limit access to and disclosure of our proprietary information. We cannot be
certain that these contractual arrangements or the other steps taken by us to
protect our intellectual property will prevent misappropriation of our
technology. We have licensed in the past, and expect that we may license in
the future, certain of our proprietary rights, such as trademarks or
copyrighted material, to third parties. For example, as noted above, we have
licensed our technology to Amazon.com and we have also granted nonexclusive
rights to our trademarks in connection with advertising and affiliate
relationships. While we attempt to ensure that the quality of the
drugstore.com products brand is maintained by such licensees, we cannot assure
that such licensees will not take actions that might hurt the value of our
proprietary rights or reputation. We also rely on technologies that we license
from third parties, such as Oracle and Microsoft, the suppliers of key
database technology, the operating system and specific hardware components for
our service. We cannot be certain that these third-party technology licenses
will continue to be available to us on commercially reasonable terms. The loss
of such technology could require us to obtain substitute technology of lower
quality or performance standards or at greater cost, which could harm our
business.
We have filed applications for the registration of some of our trademarks
and service marks in the United States and in some other countries, including
for drugstore.com(TM), although we have not secured registration of any of our
marks to date. We may be unable to secure such registered marks. It is also
possible that our competitors or others will use marks similar to ours, which
could impede our ability to build brand identity and lead to customer
confusion. In addition, there could be potential trade name or trademark
infringement claims brought by owners of other registered trademarks or
trademarks that incorporate variations of the term drugstore.com(TM). Any
claims or customer confusion related to our trademark, or our failure to
obtain trademark registration, would negatively affect our business. In
addition, the laws of some foreign countries do not protect
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our proprietary rights to the same extent as do the laws of the United States,
and effective copyright, trademark and trade secret protection may not be
available in such jurisdictions. Our efforts to protect our intellectual
property rights may not prevent misappropriation of our content. Our failure
or inability to protect our proprietary rights could substantially harm our
business.
Professional Advisory Board
We have a professional advisory board with whom we consult on our programs,
strategies and overall store development, as well as product selection and
product presentation. Certain members contribute periodic editorial features
as well. The advisory board will meet as a whole approximately once a year and
individual members are consulted as needed.
Our professional advisory board includes the following individuals:
. Martha Stewart, a media personality who specializes in applying creative
and practical principles in the home and garden;
. Kim Alexis, a well-known fashion model, actress and athlete;
. Barry Sears, Ph.D., a scientist and author of several popular books on
health and dieting, including the New York Times best-seller, The Zone;
. Loraine Stern, M.D., an associate clinical professor of pediatrics at
the University of California at Los Angeles and spokesperson for
children's health issues;
. Jennifer Jacobs, M.D., M.P.H., a clinical assistant professor of
epidemiology at the University of Washington School of Public Health and
Community Medicine and the President-elect of the American Institute of
Homeopathy.
Charitable Contributions
Prior to completion of this offering, we will donate approximately 200,000
shares of our common stock to a foundation to be established by us. The
foundation will make grants to charitable organizations. We intend to involve
our employees in determining the charitable purposes for this foundation.
Employees
As of June 18, 1999, we had 231 full-time employees. None of our employees
is represented by a labor union. We have not experienced any work stoppages
and consider our employee relations to be good.
Facilities
Our principal executive offices are located in Bellevue, Washington, where
we lease approximately 55,649 square feet under a lease that expires in July
2005. We also lease an approximately 18,750 square feet facility in Redmond,
Washington, which we vacated after moving to our new Bellevue facility, under
a lease that expires in September 2003. We have subleased the Redmond facility
for a period of 12 months and currently intend to sublease such space
thereafter, if possible. We anticipate that we will require additional space
as more personnel are hired and as we establish our own distribution center
and other facilities.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information with respect to our executive
officers and directors as of June 25, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter M. Neupert(1)..... 43 President, Chief Executive Officer and Director
Suzan K. DelBene........ 37 Vice President, Marketing and Store Development
Kal Raman............... 31 Chief Information Officer and Senior Vice President, Operations
David E. Rostov......... 33 Vice President and Chief Financial Officer
Mark L. Silverman....... 34 Vice President, Health Services, General Counsel and Secretary
Jed A. Smith............ 33 Vice President, Strategic Partnerships and Director
Jeffrey P. Bezos........ 35 Director
Brook H. Byers(2)....... 53 Director
L. John Doerr........... 47 Director
William Savoy(3)........ 34 Director
Howard Schultz(1)....... 45 Director
</TABLE>
- --------
(1) Member of compensation committee
(2) Member of audit committee
(3) Pending appointment.
Peter M. Neupert has served as a director and the President and Chief
Executive Officer of drugstore.com since July 1998. From March 1987 to July
1998, he worked for Microsoft Corporation in several positions, most recently
as Vice President of News and Publishing for Microsoft's interactive media
group. Mr. Neupert holds an M.B.A. from the Amos Tuck School of Business at
Dartmouth College and a B.A. from Colorado College.
Suzan K. DelBene has served as Vice President, Marketing and Store
Development of drugstore.com since September 1998. From June 1989 to August
1998, she worked at Microsoft Corporation in several positions, most recently
as Director of Marketing and Business Development in Microsoft's interactive
media group. Ms. DelBene holds an M.B.A. from the University of Washington and
a B.A. from Reed College.
Kal Raman (formerly known as Kalyanaraman Srinivasan) has served as Chief
Information Officer of drugstore.com since August 1998 and as Senior Vice
President, Operations since May 1999. He served as Vice President, Technology
of drugstore.com from August 1998 to May 1999 and as Vice President,
Technology and Operations from March 1999 to May 1999. From March 1998 to
August 1998, Mr. Raman served as the Chief Information Officer and Vice
President of Nations Rent and from February 1997 to March 1998, he served as
Senior Director, Information Systems of Blockbuster Inc. From May 1992 to
February 1997, Mr. Raman served as Director, International Division of Wal-
mart Stores Inc.
David E. Rostov has served as Vice President and Chief Financial Officer of
drugstore.com since January 1999. From January 1996 to January 1999, he worked
for Nextel International, Inc. as Chief Financial Officer. From 1992 to 1995,
he served in various capacities at McCaw Cellular Communications, Inc. Mr.
Rostov holds an M.B.A. and a Master's in Public Policy from the University of
Chicago Graduate School of Business and a B.A. from Oberlin College.
Mark L. Silverman has served as Secretary of drugstore.com since our
inception in April 1998, as Vice President, and General Counsel of
drugstore.com since January 1999 and as Vice President, Health Services and
General Counsel since March 1999. From December 1995 to January 1999, he was a
lawyer with the Venture Law Group, A Professional Corporation, becoming a
director in January 1998. Mr. Silverman was an attorney with Heller, Ehrman,
White & McAuliffe from December 1992 to November 1995. Mr. Silverman holds a
J.D. from the University of California, Los Angeles and a B.A. from the
University of California, Berkeley.
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Jed A. Smith, a founder of drugstore.com, has served as a director and Vice
President of Strategic Partnerships since our inception in April 1998. In
1994, he founded Cybersmith and served as Vice President of Sales and
Marketing through 1998. Mr. Smith holds an M.B.A. from Harvard University
Graduate School of Business and a B.A. from Middlebury College.
Jeffrey P. Bezos has served as a director of drugstore.com since August
1998. Mr. Bezos, a founder of Amazon.com, has served as Chairman of the Board
of Directors of Amazon.com since its inception in 1994, Chief Executive
Officer of Amazon.com since May 1996, President of Amazon.com from inception
to June 1999 and Treasurer and Secretary of Amazon.com from May 1996 to March
1997. From December 1990 to June 1994, Mr. Bezos was employed by D.E. Shaw &
Co., a Wall Street investment firm, becoming Senior Vice President in 1992.
From April 1988 to December 1990, Mr. Bezos was employed by Bankers Trust
Company, becoming Vice President in February 1990. Mr. Bezos received his B.S.
in Electrical Engineering and Computer Science from Princeton University.
Brook H. Byers has served as a director of drugstore.com since May 1998.
Mr. Byers is a partner of Kleiner Perkins Caufield & Byers, a private venture
capital firm, and has been a technology venture capital investor since 1972.
He has served on the Board of Directors of over twenty companies, and he is
currently a director of Axys Pharmaceuticals, Nanogen, Chemdex.com and several
private companies. He also served as the founding President and Chairman of
Idec Pharmaceuticals, Ligand Pharmaceuticals, Athena Neurosciences and Insite
Vision Opthalmics. Mr. Byers serves on the boards of the California Healthcare
Institute and the Foundation of the University of California at San Francisco
Medical Center. Mr. Byers received a degree in Electrical Engineering from
Georgia Institute of Technology and an M.B.A. from the Stanford Graduate
School of Business.
L. John Doerr has served as a director of drugstore.com since November
1998. Mr. Doerr has been a general partner of Kleiner Perkins Caufield &
Byers, a private venture capital firm, since September 1980. In 1974, he
joined Intel Corporation and held various engineering, marketing and
management assignments. Mr. Doerr is also a director of Amazon.com, @Home
Networks, Healtheon Corporation, Intuit, Inc., Platinum Software, Inc., and
SunMicrosystems, as well as several private companies. Mr. Doerr received his
M.E.E. and B.S.E.E. from Rice University and his M.B.A. from Harvard
University Graduate School of Business.
Howard Schultz has served as a director of drugstore.com since November
1998. Mr. Schultz, the founder of Starbucks Corporation, has served as
Chairman of the Board and Chief Executive Officer of Starbucks since its
inception in 1985. From 1985 to June 1994, Mr. Schultz also served as
President of Starbucks. Mr. Schultz is one of two founding members of Maveron
LLC, a company providing advisory services to consumer-based businesses, and
is one of two members of a limited liability company that serves as a general
partner of its affiliated venture capital fund, Maveron Equity Partners, L.P.
Mr. Schultz is a governor on the National Association of Securities Dealers,
Inc. Board of Governors, and he is a director of Ebay, Inc. Mr. Schultz
received his B.S. degree from Northern Michigan University.
William D. Savoy will be appointed as a director of drugstore.com prior to
completion of this offering. Mr. Savoy is President of Vulcan Northwest Inc.,
managing the personal finances of Paul Allen, and Vice President of Vulcan
Ventures Inc., a venture capital fund wholly owned by Paul Allen. From 1987
until November 1990, Mr. Savoy was employed by Layered, Inc. and became its
President in 1988. Mr. Savoy serves on the Advisory Board of DreamWorks SKG
and also serves as director of CNET, Inc., Harbinger Corporation, Metricom,
Inc., Telescan, Inc., Ticketmaster Online-CitySearch, U.S. Satellite
Broadcasting Co., Inc., and USA Networks, Inc. Mr. Savoy holds a B.S. in
Computer Science, Accounting, and Finance from Atlantic Union College.
Our board of directors currently consists of nine members, including two
vacancies. Until the closing of this offering, Amazon.com has the right to
appoint one additional director to our board. In addition, under the terms of
the voting agreement dated June 17, 1999, upon the closing of the sale of our
shares of Series E preferred stock, Rite Aid will have the right to nominate
one member to our board of directors, who is expected
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to be Martin Grass, Rite Aid's chief executive officer and chairman of the
board. In addition, after completion of this offering, we intend to appoint
Melinda Gates to our board of directors.
At any stockholder meeting involving election of directors, Jed Smith,
Peter Neupert and several of our major prior investors have agreed to vote
their shares to elect one director designated by Amazon.com and one director
designated by Rite Aid. The major prior investors who are parties to this
agreement are Kleiner Perkins Caufield and Byers, Amazon.com, Vulcan Ventures,
Rite Aid and GNC. The parties' obligations to elect an Amazon.com designee
terminate if Amazon.com owns less than 5% of our voting stock, and the
parties' obligations to elect a Rite Aid designee terminate if Rite Aid owns
less than 5% of our voting stock or if our strategic relationship with Rite
Aid is terminated.
Each director is elected for a period of one year at our annual meeting of
stockholders and serves until the next annual meeting or until his successor
is duly elected and qualified. The board of directors elects executive
officers on an annual basis. Executive officers serve until their successor
has been duly elected and qualified. There are no family relationships among
any of the directors, officers or key employees of drugstore.com.
Board Committees
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of
directors, which is effective upon this offering, will review and make
recommendations to the board regarding all forms of compensation and benefits
provided to our officers. In addition, the compensation committee establishes
and reviews general policies relating to the compensation and benefits of all
of our employees. The current members of the compensation committee are Peter
M. Neupert and Howard Schultz. Since the current members of the compensation
committee do not meet the definition of "non-employee directors" for purposes
of SEC Rule 16(b)(3), the full board of directors will continue to approve
stock option grants for our officers in order to qualify the option grants for
an exemption from short-swing trading rules.
Audit Committee. The audit committee of the board of directors reviews and
monitors our internal accounting procedures, corporate financial reporting,
external and internal audits, the results and scope of the annual audit and
other services provided by our independent auditors, and our compliance with
legal matters that have a significant impact on our financial reports. Brook
H. Byers is the only current member of the audit committee.
Compensation Committee Interlocks and Insider Participation
The board of directors established its compensation committee in May 1999.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between our board of directors or our
compensation committee and the board of directors or compensation committee of
any other company, and no interlocking relationship existed in the past.
Director Compensation
We currently do not provide any cash compensation to our directors for
their service as members of the board of directors, although we do reimburse
the directors for certain expenses in connection with attendance at board and
committee meetings. Under our 1998 stock plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board or any
other administrator of the plan. See "--Stock Plans" for a description of
option grants under the 1998 stock plan.
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Executive Compensation
The following table sets forth the compensation received for services
rendered to drugstore.com for the fiscal year ended December 31, 1998 by our
Chief Executive Officer and our only other executive officer who earned more
than $100,000 in salary and bonus during the fiscal year ended December 31,
1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------- Securities
Underlying All Other
Name and Principal Position Salary ($) Bonus ($) Options (#) Compensation($)
- --------------------------- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C>
Peter M. Neupert.............. $107,692 -- -- $ 170(1)
President and Chief Executive
Officer
Kal Raman..................... $ 60,577 $120,000 150,000 $5,895(2)
Chief Information Officer and
Senior Vice President,
Operations
</TABLE>
- --------
(1) Represents premium paid for term life insurance for the benefit of Peter
M. Neupert.
(2) Represents reimbursement for relocation expenses and premium paid for term
life insurance for the benefit of Kal Raman.
Option Grants
The following table provides summary information regarding stock options
granted to our chief executive officer and our only other officer earning more
than $100,000 in salary and bonus during the fiscal year ended December 31,
1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
---------------------
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of
Securities Granted to Stock Appreciation
Underlying Employees Exercise For Option Term ($)(2)
Options in Fiscal Price Expiration -----------------------
Name Granted(#) Year(1) ($/share) Date 5% ($) 10% ($)
- ---- ---------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Peter M. Neupert........ -- -- -- -- -- --
Kal Raman............... 150,000 8.91% $0.04 9/01/2008 $2,437,342 $3,884,614
</TABLE>
- --------
(1) Based on an aggregate of 1,683,584 shares underlying options granted by
drugstore.com during the fiscal year ended December 31, 1998 to our
employees and consultants.
(2) Based on assumed initial public offering price of $10.00 per share.
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Option Exercises and Holdings
The following table provides summary information with respect to our chief
executive officer and our only other officer earning more than $100,000 in
salary and bonus during the 1998 fiscal year concerning exercisable and
unexercisable options held as of December 31, 1998. No options were exercised
by the individuals in the fiscal year ended December 31, 1998.
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Fiscal Year-End (#) Fiscal Year-End ($)(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Peter M. Neupert............ -- -- -- --
Kal Raman................... -- 150,000 -- $1,494,000
</TABLE>
- --------
(1) Based on a value of $ per share, the assumed initial public offering
price, minus the per share exercise price, multiplied by the number of
shares issued upon exercise of the option.
Stock Plans
1998 Stock Plan. Our 1998 stock plan provides for the grant of incentive
stock options to employees and nonstatutory stock options and stock purchase
rights to employees, directors and consultants to acquire shares of common
stock. The purposes of the 1998 stock plan are to attract and retain the best
available personnel, to provide additional incentives to our employees and
consultants and to promote the success of our business. Our board of directors
originally adopted the 1998 stock plan in July 1998 and our stockholders
approved the plan in July 1998. The plan was amended in January 1999 to
increase the total number of shares of common stock reserved for issuance. The
1998 stock plan was amended by the board a second time in April 1999 to
increase the total number of shares of common stock reserved for issuance to
7,827,000 shares and to incorporate certain other changes. We will submit the
amendment to the 1998 stock plan for approval by our stockholders prior to the
completion of this offering. Unless terminated earlier by the board of
directors, the 1998 stock plan will terminate in July 2008. As of June 25,
1999, options to purchase 3,032,809 shares of common stock were outstanding at
a weighted average exercise price of $1.77 per share, 8,000 shares had been
issued pursuant to restricted stock purchase agreements, no shares had been
issued upon exercise of outstanding options, and 4,786,191 shares remained
available for future grant.
The 1998 stock plan may be administered by the board of directors, a
committee appointed by the board of directors or a combination of the board of
directors and a committee, as determined by the board of directors. The
administrator determines the terms of options granted under the 1998 stock
plan, including the number of shares subject to the option, exercise price,
term and exercisability. In no event, however, may an individual receive
option grants for more than 2,500,000 shares of common stock under the 1998
stock plan in any fiscal year. Incentive stock options granted under the 1998
stock plan must have an exercise price of at least 100% of the fair market
value of the common stock on the date of grant and at least 110% of such fair
market value in the case of an optionee who holds more than 10% of the total
voting power of all classes of our stock. Nonstatutory stock options granted
under the 1998 stock plan will have an exercise price as determined by the
administrator. Payment of the exercise price may be made in cash or such other
consideration as determined by the administrator.
The administrator determines the term of options, which may not exceed 10
years or 5 years in the case of an incentive stock option granted to a holder
of more than 10% of the total voting power of all classes of our stock. No
option may be transferred by the optionee other than by will or the laws of
descent or distribution, provided, however, that the administrator may in its
discretion provide for the transferability of nonstatutory stock options
granted under the 1998 stock plan if the common stock is listed or approved
for listing on a national
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securities exchange or designated as a national market system security by the
National Association of Securities Dealers, Inc. Each option may be exercised
during the lifetime of the optionee only by such optionee or permitted
transferee. The administrator determines when options become exercisable.
Options granted under the 1998 stock plan generally must be exercised within 3
months after the termination of the optionee's status as an employee, director
or consultant of drugstore.com, or within 6 months if such termination is due
to the death or within 12 months if such termination is due to disability of
the optionee, but in no event later than the expiration of the option's term.
Options granted under the 1998 stock plan generally vest over a four-year or
five-year period at a rate of 1/4 of the total number of shares subject to the
option twelve months after the date of grant, with the remaining shares
vesting in equal installments at the end of each six month period thereafter.
In the event of our merger with or into another corporation, the successor
corporation may assume each option and outstanding stock purchase right or may
substitute an equivalent option or stock purchase right. However, if the
successor corporation does not agree to this assumption or substitution, the
option or stock purchase right will terminate. The board of directors has the
authority to amend or terminate the 1998 stock plan provided that no action
that impairs the rights of any holder of an outstanding option may be taken
without the holder's consent. In addition, we will obtain requisite
stockholder approval for any action requiring stockholder approval under the
applicable law.
In addition to stock options, the administrator may issue stock purchase
rights under the 1998 stock plan to employees, directors and consultants. The
administrator determines the number of shares, price, terms, conditions and
restrictions related to a grant of stock purchase rights and the purchase
price of a stock purchase right granted under the 1998 stock plan. The
administrator also determines the period during which the stock purchase right
is held open, but in no case shall such period exceed 30 days. Unless the
administrator determines otherwise, the recipient of a stock purchase right
must execute a restricted stock purchase agreement granting an option to
repurchase the unvested shares at cost upon termination of such recipient's
relationship with us.
1999 Employee Stock Purchase Plan. Our board of directors adopted the 1999
employee stock purchase plan in April 1999; we will submit the plan to our
stockholders for approval prior to the completion of this offering. A total of
500,000 shares of common stock has been reserved for issuance under the
purchase plan plus an annual increase on the first day of each of our fiscal
years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of the
following:
. 500,000 shares;
. 3% of our shares outstanding on the last day of the immediate preceding
fiscal year; or
. such lesser number of shares as is determined by the board.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, will be implemented by an offering period commencing on
the date of the closing of this offering and ending on January 31, 2000. Each
subsequent offering period will have a duration of six months. Each offering
period after the first offering period will commence on February 1 and August
1 of each year. The board of directors or a committee appointed by the board
will administer the purchase plan. Employees, including officers and employee
directors, of drugstore.com or of any majority-owned subsidiary designated by
the board, are eligible to participate in the purchase plan if they are
employed by drugstore.com or any such subsidiary for at least 20 hours per
week and more than 5 months per year. The purchase plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed 20% of an employee's compensation, at a price equal to the lower of 85%
of the fair market value of our common stock at the beginning or end of the
offering period. Employees may end their participation in the offering at any
time during the offering period, and participation ends automatically on
termination of employment. If not terminated earlier, the purchase plan will
have a term of 10 years.
The purchase plan provides that in the event of our merger with or into
another corporation or a sale of all or substantially all of our assets, the
successor corporation will assume each right to purchase stock under the
purchase plan or will substitute an equivalent right. If the successor
corporation does not agree to an assumption
55
<PAGE>
or substitution, the offering period then in progress will be shortened so
that employees' rights to purchase stock under the purchase plan are exercised
prior to the merger or sale of assets. The board of directors has the power to
amend or terminate the purchase plan as long as that action does not adversely
affect any outstanding rights to purchase stock under the plan. We may,
however, terminate the purchase plan or an offering period if continuation of
the purchase plan or the offering period would cause us to incur adverse
accounting charges.
401(k) Plan
Effective April 1999, we adopted the drugstore.com, inc. 401(k) plan
covering our full-time employees. The 401(k) plan is intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as amended, so that
contributions to the 401(k) plan by employees or by drugstore.com, and the
investment earnings thereon, are not taxable to employees until withdrawn from
the 401(k) plan, and so that contributions by drugstore.com, if any, will be
deductible by drugstore.com when made. Under the 401(k) plan, employees may
elect to reduce their current compensation by up to the statutorily prescribed
annual limit ($10,000 in 1999) and to have the amount of such reduction
contributed to the 401(k) plan. The 401(k) plan permits, but does not require,
additional matching contributions to the 401(k) plan by drugstore.com on
behalf of all participants in the 401(k) plan. To date, we have not made any
matching contributions to the 401(k) plan.
Employment Offer Letters
Peter M. Neupert's employment offer letter provides for an initial annual
salary of $250,000 and an initial annual bonus of up to $125,000. We also
granted Mr. Neupert a one-time right to purchase 1,260,000 shares of our
common stock at a purchase price of $.04 per share. We have a lapsing right to
repurchase Mr. Neupert's unvested shares. As of June 25, 1999, our right to
repurchase has lapsed with respect to 315,000 shares of stock and will lapse
with respect to 19,688 shares at the close of each month after the one-year
anniversary of his start date while he remains employed, with all of these
shares becoming fully vested on the close of the month following his fifth
anniversary of employment. If we are acquired by another entity or sell
substantially all our assets, and Mr. Neupert is not offered a position with
the surviving corporation with responsibilities similar to those held at
drugstore.com, our right of repurchase will lapse with respect to all of these
shares. Mr. Neupert's employment is for no specified length of time, and
either party has the right to terminate Mr. Neupert's employment at any time
for any reason. If we terminate Mr. Neupert's employment other than for
"cause" (which is defined in his agreement to mean gross negligence or willful
misconduct in the performance of his duties, the failure to obey our board of
directors, defrauding or stealing from drugstore.com, or being convicted of a
crime that harms the business or reputation of drugstore.com), our right of
repurchase will lapse on an additional 236,250 shares of the then-unvested
portion. The offer letter also provides that in the event Mr. Neupert's
employment is terminated for any reason, he will continue to receive his then-
current base salary and benefits for a period of nine months.
Kal Raman's employment offer letter provides for an initial annual salary
of $175,000, a $100,000 signing bonus (which was grossed up to $120,000 to
negate the effect of applicable taxes), reimbursement of $5,000 for a lost
down payment on a house in Florida and an annual bonus of up to 15% of his
salary. We also offered Mr. Raman an option to purchase shares of common stock
under our 1998 stock plan. In the offer letter, we agreed to guarantee a loan
from a bank in the amount of $250,000. However, instead of guaranteeing a bank
loan, we and Mr. Raman agreed that we would loan $250,000 directly to Mr.
Raman. See "Certain Relationships and Related Transactions" for a description
of our loan arrangement with Mr. Raman. Mr. Raman's employment is for no
specified length of time, and either party has the right to terminate the
agreement at any time for any reason.
Jed A. Smith's employment offer letter provides for an initial annual base
salary of $125,000 and an initial bonus of $25,000 contingent on drugstore.com
reaching agreed milestones. Mr. Smith's employment is for no specified length
of time, and either party has the right to terminate Mr. Smith's employment at
any time for any reason. The offer letter also provides that, in the event Mr.
Smith's employment is terminated for other than "cause" (which is defined in
his agreement to mean gross negligence or willful misconduct in the
performance
56
<PAGE>
of his duties, the failure to obey our board of directors or chief executive
officer, defrauding or stealing from drugstore.com, or being convicted of a
crime that harms the business or reputation of drugstore.com), he will
continue to receive his then-current base salary and benefits for a period of
six months.
Mark L. Silverman's employment offer letter provides for an initial annual
base salary of $175,000, a $35,000 signing bonus and a bonus at the discretion
of the chief executive officer commensurate with other officers of
drugstore.com. We also offered Mr. Silverman an option to purchase shares of
our common stock under our 1998 stock plan. If we are acquired by another
entity or sell substantially all of our assets and Mr. Silverman is not
offered a position with the surviving corporation with responsibilities
similar to those held at drugstore.com or if his employment is terminated for
other than "cause" (which is defined in his agreement to mean gross negligence
or willful misconduct in the performance of his duties, the failure to obey
our board of directors or chief executive officer, defrauding or stealing from
drugstore.com, or being convicted of a crime that harms the business or
reputation of drugstore.com), the option with respect to all then-unvested
shares shall vest. Mr. Silverman's employment is for no specified length of
time, and either party has the right to terminate Mr. Silverman's employment
at any time for any reason. The offer letter also provides that, in the event
Mr. Silverman's employment is terminated without cause, he will continue to
receive his then-current base salary and benefits for a period of twelve
months.
Limitations on Directors' Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that drugstore.com
shall indemnify our directors and executive officers and may indemnify our
other officers and employees and other agents to the fullest extent permitted
by law. We believe that indemnification under our bylaws covers at least
negligence and gross negligence on the part of indemnified parties. Our bylaws
also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements,
among other things, provide for indemnification of our directors and officers
for expenses specified in the agreements, including attorneys' fees,
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding arising out of such person's services as a director or
officer of drugstore.com, any subsidiary of drugstore.com or any other company
or enterprise to which the person provides services at the request of
drugstore.com. We believe that these provisions and agreements are necessary
to attract and retain qualified persons as directors and officers.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since our inception in April 1998, we have issued and sold shares of our
capital stock as follows: a total of 2,265,000 shares of common stock at a
price of $.04 per share in June, July and August 1998, a total of
10,000,000 shares of Series A preferred stock at a price of $.80 per share in
June and August 1998, a total of 5,446,268 shares of Series B preferred stock
at a price of $3.35 per share in October, November and December 1998, a total
of 4,472,844 shares of Series C preferred stock at a price of $7.825 per share
in January and March 1999, and a total of 2,266,289 shares of Series D
preferred stock at a price of $17.65 per share in June 1999. All shares of our
preferred stock will convert into common stock on a 1-for-1 basis upon the
closing of this offering. The following table summarizes the shares of capital
stock purchased by executive officers, directors and five-percent stockholders
and their affiliates in these transactions:
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Common Preferred Preferred Preferred Preferred
Investor(1) Stock Stock Stock Stock Stock
- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Kleiner Perkins Caufield &
Byers(2)(3)................ -- 4,937,500 1,582,089 511,182 --
Amazon.com, Inc.(2)(4)...... -- 5,000,000 3,177,612 2,555,911 --
Maveron Equity Partners,
L.P.(2)(5)................. -- -- 417,910 766,773 --
Peter M. Neupert(2)(6)...... 1,260,000 -- 268,657 319,489 --
Vulcan Ventures Incorporat-
ed(2)...................... -- -- -- -- 2,266,289
</TABLE>
- --------
(1) Shares held by affiliated persons and entities have been added together
for the purposes of this chart. See "Principal Stockholders" for a chart
of beneficial owners.
(2) Holder of 5% or more of a class of our capital stock.
(3) Includes shares held by Kleiner Perkins Caufield & Byers VIII, L.P. (KPCB
VIII), KPCB VIII Founders Fund, L.P., and KPCB Life Sciences Zaibatsu Fund
II, L.P. KPCB VIII and KPCB VIII Founders Fund, L.P. are wholly controlled
by KPCV VIII Associates, L.P. KPCB Life Sciences Zaibatsu Fund II, L.P. is
wholly controlled by KPCB VII Associates, L.P., Brook H. Byers and L. John
Doerr, each a general partner of KPCB VIII Associates and KPCB VII
Associates, L.P., are both directors of drugstore.com. Mr. Byers and Mr.
Doerr each disclaim beneficial ownership of shares held by these entities
except to the extent of their pecuniary interest therein. In November
1998, drugstore.com and Kleiner Perkins Caufield & Byers agreed to rescind
the purchase of 89,552 of such shares and refund the $299,999.20 purchase
price. As a result, after November 1998, Kleiner Perkins Caufield & Byers
held 1,582,089 shares of Series B preferred stock.
(4) In consideration of Amazon.com's obligations under a technology license
and advertising agreement, we issued Amazon.com 5,000,000 shares of our
Series A preferred stock. We issued these shares primarily in exchange for
Amazon.com's early marketing and support efforts in connection with and
after our launch. Jeffrey P. Bezos, chairman of the board and chief
executive officer of Amazon.com, became a director of drugstore.com upon
completion of the issuance.
(5) Howard Schultz, a director of drugstore.com, is one of the two founding
members of Maveron LLC, and is one of two members of a limited liability
company that serves as a general partner of its affiliated venture capital
fund, Maveron Equity Partners, L.P.
(6) Mr. Neupert's shares of preferred stock are held jointly by Mr. Neupert
and Sheryl Neupert.
In June 1999, we entered into an agreement with Rite Aid and GNC, pursuant
to which Rite Aid and a wholly owned subsidiary of GNC will be issued shares
of Series E preferred stock. The closing of these sales will occur upon
receipt of required approvals under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. Under the agreement, we will issue Rite
Aid 9,334,746 shares of Series E preferred stock in exchange for $7.6 million
in cash and additional consideration with an estimated fair value of $85.7
million, and we will issue GNC 2,947,853 shares of Series E preferred stock
for $2.4 million in cash and additional consideration with an estimated fair
value of $27.1 million.
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<PAGE>
A provision of the investors' rights agreement dated May 19, 1999 between
drugstore.com and some of our stockholders precludes Kleiner Perkins Caufield
& Byers, Amazon.com and Maveron Equity Partners from purchasing additional
shares of our common stock without our prior approval if the purchase would
cause any of them to hold individually more than 40% of our outstanding common
stock (calculated on a fully diluted basis to include outstanding options and
shares reserved under our stock plans). This restriction lasts until August
2002. Pursuant to a June 17, 1999 addendum, Rite Aid and GNC were made parties
to this agreement and is subject to its provisions.
We are offering a number of shares of our common stock equal to $10,000,000
divided by the initial public offering price to Amazon.com concurrent with
this offering at a price per share equal to the initial public offering price.
Such offering is made in connection with a letter agreement we entered into
with Amazon.com in May 1999, under which we agreed to use reasonable efforts
to cause the underwriters to permit us to sell shares to Amazon.com concurrent
with this offering.
In June 1999, we entered into a strategic relationship with Rite Aid, which
will become effective upon receipt of necessary regulatory clearances. Under
the relationship, Rite Aid customers will be able to refill prescriptions at
our Web site and either use our standard delivery options or pick up the
prescriptions at Rite Aid stores. In addition, Rite Aid and drugstore.com will
promote each others services both online and offline, including a link from
Rite Aid's Web site to our Web site. As a result of the strategic relationship
with Rite Aid, Rite Aid will become one of our largest stockholders, holding
approximately 25.4% of our common stock prior to this offering. Martin Grass,
Rite Aid's chief executive officer and chairman of its board of directors,
will become a member of our board of directors upon the closing of the
transaction. As part of our relationship with Rite Aid, Rite Aid and
drugstore.com agreed to co-promote each other's services. In addition, we will
participate in substantially all of the current and future retail pharmacy
networks managed by PCS Health Systems, Inc., a wholly-owned subsidiary of
Rite Aid, which claims to provide pharmacy benefit management services for
more than 50 million individuals in the United States. As part of the
relationship, both Rite Aid and drugstore.com agreed to certain exclusivity
provisions that will limit our ability to promote or affiliate with any other
physical retail drugstore and from operating a traditional physical drugstore,
and will preclude Rite Aid from offering or selling products or services on
the Internet other than through our Web site. In addition, the agreement
provides that if we establish our own distribution center, we will purchase
all of our pharmaceutical requirements from Rite Aid. The agreement contains
additional provisions providing for the licensing by Rite Aid to drugstore.com
of information technology systems and the integration of the information
technology and pharmacy systems of the two companies. This agreement extends
for ten years, but can be terminated for breach prior to such time.
In June 1999, we entered into a relationship with GNC whereby we will be
the exclusive online provider of GNC-branded products. We have the exclusive
right to sell GNC's nutrition products over the Internet, including the
PharmAssure brand of pharmacist recommended vitamins and nutritional
supplements, subject to our meeting performance parameters based on traffic to
our Web site and sales of GNC's products over the Internet in the third and
fifth year of the relationship. As long as we have the exclusive right to
distribute GNC's products over the Internet, we will not promote any other
retail health food store or operate a physical retail health food store. If
the exclusivity provisions of the agreement terminate, we have the non-
exclusive right to sell these products for the remaining term of the
agreement. As part of this relationship, we will create a separate part of our
Web site called the GNC LiveWell Store which is dedicated to selling on a
consignment basis GNC products. In connection with this relationship, GNC will
acquire approximately 8.0% of our common stock prior to this offering. As part
of our relationship with GNC, GNC and drugstore.com agreed to co-promote each
other's products and services in both their traditional and online marketing
efforts, including GNC putting a link to our Web site on their Web site. The
agreement extends for ten years, but can be terminated for breach prior to
such time.
We have entered into offer letters with several of our executive officers.
See "Management--Employment Offer Letters" for a description of the offer
letters.
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<PAGE>
On December 3, 1998, we loaned $250,000 to Kal Raman, our Senior Vice
President, Technology and Operations. In our offer letter to Mr. Raman, we
agreed to guarantee a loan for $250,000, and, in connection with this
obligation, chose to provide the loan directly to Mr. Raman. The loan bears
interest at 7% and is secured by the shares issuable upon exercise of Mr.
Raman's stock option. All principal and accrued interest under the loan
remains outstanding and is due and payable on the earlier of December 3, 1999,
or within 15 days after ceasing to provide substantial services to
drugstore.com. As of June 25, 1999, the outstanding balance of Mr. Raman's
loan was $259,780.82. See "Management--Employment Offer Letters" for a
description of our loan arrangement with Mr. Raman.
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a
majority of our board of directors, including a majority of the independent
and disinterested members of the board, and if required by law, a majority of
disinterested stockholders.
In the event that drugstore.com merges or is acquired by another company
and Peter M. Neupert or Jed A. Smith is not offered a similar position with
similar responsibilities, respectively, by the surviving entity, or if the
surviving entity's principal office is located more than 50 miles from their
respective residences, all of Mr. Neupert's and Mr. Smith's unvested shares
will be released from our option to repurchase these shares.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 25, 1999, and as adjusted to reflect
the sale of common stock offered hereby, by:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each director;
. our chief executive officer and our only other officer earning more
than $100,000 in salary and bonus during the 1998 fiscal year; and
. all directors and executive officers as a group.
As of June 25, 1999, there were 36,791,000 shares of common stock
outstanding and 31 stockholders of drugstore.com. Beneficial ownership is
determined in accordance with the rules of the SEC. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60
days after June 25, 1999 are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing percentage ownership of any other
person. Unless otherwise indicated in the footnotes below, the persons and
entities named in the table have sole voting and investment power with respect
to all shares beneficially owned, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially Owned
Owned Prior to this Offering After this Offering(1)(2)
----------------------------------------------------------------
Name and Address of Beneficial Owner Number Percentage Number Percentage
- ------------------------------------ ----------------- ------------------------------- --------------
<S> <C> <C> <C> <C>
Amazon.com, Inc.(1)....... 10,733,523 29.2% 11,733,523 27.4%
1516 2nd Avenue
Seattle, WA 98101
Rite Aid Corporation(2)... 9,334,746 25.4 9,334,746 21.8
30 Hunter Lane
Camp Hill, PA 17011
Kleiner Perkins Caufield &
Byers(3)................. 7,030,771 19.1 7,030,771 16.4
2750 Sand Hill Road
Menlo Park, CA 94025
General Nutrition
Investment Company(4).... 2,947,853 8.0 2,947,853 6.9
1002 South 63rd Avenue
At Buckeye
Phoenix, AZ 15222
Vulcan Ventures,
Incorporated(5).......... 2,266,289 6.2 2,266,289 5.3
110 110th Avenue NE,
Suite 550
Bellevue, WA 98004
Peter M. Neupert(6)....... 1,848,146 5.0 1,848,146 4.3
13920 Southeast Eastgate
Way Suite 300
Bellevue, WA 98005
Maveron Equity Partners,
L.P.(7).................. 1,184,683 3.2 1,184,683 2.8
Jeffrey P. Bezos(1)....... 10,733,523 29.2 11,733,523 27.4
Brook H. Byers(3)......... 7,030,771 19.1 7,030,771 16.4
L. John Doerr(3).......... 7,030,771 19.1 7,030,771 16.4
William Savoy(5).......... 2,266,289 6.2 2,266,289 5.3
Howard Schultz(7)......... 1,184,683 3.2 1,184,683 2.8
Jed A. Smith(8)........... 975,000 2.7 975,000 2.3
Kal Raman(9).............. -- -- -- --
All directors and officers
as a group (11
persons)(10)........... 24,042,912 65.4 25,042,912 58.5
</TABLE>
- --------
(1) Jeffrey P. Bezos is a director of drugstore.com and is the chairman of the
board and chief executive officer of Amazon.com, Inc.
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<PAGE>
(2) The issuance of these shares are subject to clearance of the Series E
preferred stock transaction under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (HSR). Under the terms of the Third
Amended and Restated Voting Agreement dated June 17, 1999, Rite Aid will
have the right to nominate one member to our board of directors.
(3) Consists of 6,313,633 shares held by Kleiner Perkins Caufield & Byers
VIII, L.P. (KPCB VIII), 365,600 shares held by KPCB VIII Founders Fund,
L.P., and 351,538 shares held by KPCB Life Sciences Zaibatsu Fund II, L.P.
KPCB VIII and KPCB VIII Founders Fund, L.P. are wholly controlled by KPCB
VIII Associates, L.P. KPCB Life Sciences Zaibatsu Fund II, L.P. is wholly
controlled by KPCB VII Associates, L.P. Brook H. Byers and L. John Doerr,
each a general partner of KPCB VIII Associates and KPCB VII Associates,
L.P., are both directors of drugstore.com. Mr. Byers and Mr. Doerr each
disclaim beneficial ownership of shares held by these entities except to
the extent of his pecuniary interest in those shares.
(4) The issuance of these shares are subject to clearance of the Series E
preferred stock transaction under HSR.
(5) William D. Savoy will be appointed a director of drugstore.com prior to
completion of this offering and is the vice president of Vulcan Ventures,
a venture capital firm wholly-owned by Paul Allen. Mr. Savoy disclaims
beneficial ownership of shares held by Vulcan Ventures except to the
extent of his pecuniary interest in those shares.
(6) As of June 25, 1999, 945,000 of such shares are subject to a right of
repurchase at cost in the event Peter M. Neupert ceases to be an employee
of drugstore.com. Mr. Neupert's shares of preferred stock are held jointly
by Mr. Neupert and Sheryl Neupert.
(7) Howard Schultz is a director of drugstore.com and one of two founding
members of Maveron LLC and is one of two members of a limited liability
company that serves as a general partner of its affiliated venture capital
fund, Maveron Equity Partners, L.P. Mr. Schultz disclaims beneficial
ownership of shares held by these entities except to the extent of his
pecuniary interest in those shares.
(8) As of June 25, 1999, 325,000 of such shares are subject to a right of
repurchase at cost in the event Jed A. Smith ceases to be an employee of
drugstore.com. Includes 40,000 shares held by The Jed Smith 1998
Irrevocable Trust and 15,000 shares held by family members of Mr. Smith.
(9) Kal Raman was granted options to purchase 225,000 shares of our common
stock. As of 60 days after June 25, 1999, none of these shares was vested.
(10) Does not include shares that will be beneficially owned by Rite Aid's
nominee to the Board of directors since such nominee has not yet been
appointed to the Board. No shares subject to options held by the
directors and officers are exercisable within 60 days of June 25, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of June 25, 1999, there were 36,791,000 shares of common stock
outstanding. Upon completion of this offering, drugstore.com will be
authorized to issue 250,000,000 shares of common stock, $.0001 par value, and
10,000,000 shares of undesignated preferred stock, $.0001 par value.
The following description of drugstore.com's capital stock is not complete
and is qualified in its entirety by drugstore.com's certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable Delaware law.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy" for a description of drugstore.com's policy of
distribution of dividends. In the event of a liquidation, dissolution or
winding up of drugstore.com, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon the closing of
this offering will be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, the board of directors will have the
authority, without action by the stockholders, to designate and issue
preferred stock in one or more series and to designate the rights, preferences
and privileges of each series, any or all of which may be greater than the
rights of the common stock. It is not possible to state the actual effect of
the issuance of any shares of preferred stock upon the rights of holders of
the common stock until the board of directors determines the specific rights
of the holders of such preferred stock. However, the effects might include,
among other things, restricting dividends on the common stock, diluting the
voting power of the common stock, impairing the liquidation rights of the
common stock and delaying or preventing a change in control of drugstore.com
without further action by the stockholders. drugstore.com has no present plans
to issue any shares of preferred stock.
Warrants
At June 25, 1999, we had one warrant outstanding to purchase a total of
10,000 shares of common stock at $7.825 per share. The warrant expires on
February 1, 2002.
Registration Rights
The holders of 35,468,000 shares of common stock (the "registrable
securities") or their permitted transferees are entitled to certain rights
with respect to registration of such shares under the Securities Act. These
rights are provided under the terms of an agreement between drugstore.com and
the holders of registrable securities. Under these registration rights,
beginning on the earlier of June 22, 2003, or six months after the effective
date of the offering contemplated by this prospectus, holders of at least 33%
of the then-outstanding registrable securities may require on two occasions
that drugstore.com register their shares for public resale. We are obligated
to register these shares only if the shares to be registered would have an
anticipated public offering price of at least $5,000,000. In addition, holders
of then-outstanding registrable securities with an aggregate offering price of
at least $40 million may require that we register their shares for public
resale on Form S-3 or similar short-form registration, provided we are
eligible to use Form S-3 or similar short-form registration statement and
provided further that the value of the securities to be registered is at least
$500,000. Furthermore,
63
<PAGE>
in the event we elect to register any of our shares of common stock for
purposes of effecting any public offering, the holders of registrable
securities are entitled to include their shares of common stock in the
registration, subject however to our right to reduce the number of shares
proposed to be registered in view of market conditions. All expenses in
connection with any registration (other than underwriting discounts and
commissions) will be borne by us. All registration rights will terminate five
years after the date of this public offering or, with respect to each holder
of registrable securities, at such time as the holder is entitled to sell all
of its shares in any three month period under Rule 144 of the Securities Act.
A provision of the investors' rights agreement between drugstore.com and
some of our stockholders precludes Kleiner Perkins Caufield & Byers,
Amazon.com, Maveron Equity Partners, Rite Aid and GNC from purchasing
additional shares of our common stock without our prior approval if the
purchase would cause them to hold more than 40% of our outstanding common
stock (calculated on a fully-diluted basis to include outstanding options and
shares reserved under our stock plans). This restriction lasts until August
2002.
Delaware and Washington Antitakeover Law and Certain Charter and Bylaw
Provisions
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult the acquisition of drugstore.com by a third party
and the removal of incumbent officers and directors. These provisions,
summarized below, are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to acquire control of drugstore.com to first negotiate with us. We
believe that the benefits of increased protection of our ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure drugstore.com outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. In general, Section 203 prohibits 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 became an interested stockholder, unless:
. the board of directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers and shares in employee stock plans in which the participants
have no 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 such date the business combination is approved by
the board of directors and authorized by 66 2/3% vote at an annual or
special meeting of stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with 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.
The laws of the State of Washington, where our principal executive offices
are located, also impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act (the WBCA) prohibits a "target
corporation," with certain exceptions, from engaging in certain "significant
business transactions" with a person or group of persons who beneficially own
10% or more of the voting securities of the target corporation (an "acquiring
person") for a period of five years after such acquisition, unless the
transaction or acquisition of such shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of
acquisition. Such prohibited transactions include, among other things, a
merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person, termination of 5% or
more of the employees of
64
<PAGE>
the target corporation as a result of the acquiring person's acquisition of
10% or more of the shares or allowing the acquiring person to receive
disproportionate benefit as a stockholder. After the five-year period, a
significant business transaction may take place as long as it complies with
certain fair price provisions of the statute.
A "target corporation" includes a foreign corporation if (1) the
corporation has a class of voting stock registered pursuant to Section 12 or
15 of the Exchange Act, (2) the corporation's principal executive office is
located in Washington, (3) any of (a) more than 10% of the corporation's
stockholders of record are Washington residents, (b) more than 10% of its
shares are owned of record by Washington residents, or (c) 1,000 or more of
its stockholders of record are Washington residents, (4) a majority of the
corporation's employees are Washington residents or more than 1,000 Washington
residents are employees of the corporation, and (5) a majority of the
corporation's tangible assets are located in Washington or the corporation has
more than $50.0 million of tangible assets located in Washington. A
corporation may not "opt out" of this statute and, therefore, we anticipate
this statute will apply to us. Depending upon whether we meet the definition
of a target corporation, Chapter 23B.19 of the WBCA may have the effect of
delaying, deferring or preventing a change in control of us.
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of drugstore.com. These
and other provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of drugstore.com.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services LLC.
65
<PAGE>
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
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering
because of certain contractual and legal restrictions on resale, as described
below, sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market
price and impair our ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding 42,791,000 shares
of common stock. Of these shares, the 5,000,000 shares sold in the offering,
plus any shares issued upon exercise of the underwriters' over-allotment
option, will be freely tradable without restriction under the Securities Act,
unless purchased by our "affiliates" as that term is defined in Rule 144 under
the Securities Act (generally, officers, directors or 10% stockholders).
The remaining 37,791,000 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. 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 promulgated under
the Securities Act, which are summarized below. Sales of the restricted shares
in the public market, or the availability of such shares for sale, could
adversely affect the market price of the common stock.
Our directors, officers and securityholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated, the representative of the underwriters. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for
sale under the provisions of Rules 144, 144(k) and 701, shares subject to
lock-up agreements will not be salable until such agreements expire or are
waived by the designated underwriters' representative. Morgan Stanley & Co.
Incorporated has notified us that it currently has no plans to release any
portion of the securities subject to lock-up agreements. Taking into account
the lock-up agreements, and assuming Morgan Stanley & Co. Incorporated does
not release stockholders from these agreements, the following shares will be
eligible for sale in the public market at the following times:
. Beginning on the effective date of this prospectus, only the shares sold
in the offering will be immediately available for sale in the public
market except for that portion of the shares sold in the offering
reserved for sale to directors, officers, employees, business associates
and related persons of drugstore.com that will be subject to lock-up
agreements.
. Beginning 180 days after the effective date, approximately 17,769,268
shares will be eligible for sale pursuant to Rule 701 and Rule 144,
assuming no exercise of options, of which all but 146,000 shares are
held by affiliates.
. An additional 4,472,844 shares will be eligible for sale pursuant to
Rule 144 after January 29, 2000. Further, an additional 2,266,289 shares
will be eligible for sale pursuant to Rule 144 after May 19, 2000.
12,282,599 shares will become eligible for sale pursuant to Rule 144 one
year from the date of the closing of the Series E preferred stock we
intend to sell to Rite Aid and GNC. We intend to sell to
Amazon.com, Inc. 1,000,000 shares of common stock concurrently with the
closing of this offering that will become eligible for sale pursuant to
Rule 144 one year from the date of the closing of this offering. Shares
eligible to be sold by affiliates pursuant to Rule 144 are subject to
volume restrictions as described below. In addition, Jed A. Smith and
Peter M. Neupert, in aggregate, granted drugstore.com a right to
repurchase up to 1,676,250 shares of common stock held by them at the
original purchase price of $0.04 per share if their employment
terminates under certain circumstances. Our right of repurchase lapses
(a) 25% immediately and (b) the remaining 75% lapses beginning one year
after the vesting commencement date at a rate of 1/48th per month. At
June 25, 1999, 1,270,000 shares held by Mr. Smith and Mr. Neupert were
subject to repurchase under this agreement.
66
<PAGE>
In general, under Rule 144, and beginning after the expiration of the lock-
up agreements 180 days after the date of this prospectus, a person, or persons
whose shares are combined, who has beneficially owned restricted securities
for at least one year would be entitled to sell within any three-month period
a number of shares that does not exceed the greater of the following:
. one percent of the number of shares of common stock then outstanding
(which will equal approximately 427,910 shares immediately after this
offering); or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors or consultants who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 144. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirement of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. In addition,
we intend to file registration statements under the Securities Act as promptly
as possible after the effective date to register shares to be issued pursuant
to our employee benefit plans. As a result, any options exercised under the
1998 stock plan, the 1999 employee stock purchase plan or any other benefit
plan after the effectiveness of such registration statement will also be
freely tradable in the public market, except that shares held by affiliates
will still be subject to the volume limitation, manner of sale, notice and
public information requirements of Rule 144 unless otherwise resalable under
Rule 701. As of June 25, 1999, there were outstanding options for the purchase
of 3,032,809 shares of our common stock under the 1998 stock plan and
4,786,191 shares were available for future grant.
67
<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Thomas Weisel Partners LLC are acting as
representatives, have severally agreed to purchase, and drugstore.com has
agreed to sell to them, severally, the respective number of shares of common
stock set forth opposite the names of such underwriters below:
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Donaldson, Lufkin & Jenrette Securities Corporation................
Thomas Weisel Partners LLC.........................................
---------
Total............................................................ 5,000,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from drugstore.com and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered hereby are subject
to the approval of legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by this prospectus, other than those covered by
the over-allotment option described below, if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of the prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public offering
price. Any underwriter may allow, and the dealers may reallow, a concession
not in excess of $ a share to other underwriters or to certain other
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives of the underwriters.
drugstore.com has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of
750,000 additional shares of common stock at the public offering price set
forth on the cover page hereof, less underwriting discounts and commissions.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with this offering of common
stock. To the extent this over-allotment option is exercised, each underwriter
will become obligated, subject to certain conditions, to purchase
approximately the same percentage of additional shares of common stock as the
number set forth next to each underwriter's name in the preceding table bears
to the total number of shares of common stock set forth next to the names of
all underwriters in the preceding table.
At the request of drugstore.com, the underwriters have reserved up to 10%
of the shares of common stock to be issued by drugstore.com and offered hereby
for sale, at the initial public offering price, to directors, officers,
employees, business associates and related persons of drugstore.com. The
number of shares of common stock available for sale to the general public will
be reduced to the extent these individuals purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered by this
prospectus.
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<PAGE>
Each of drugstore.com and the officers, directors, and stockholders has
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, or otherwise during the period
ending 180 days after the date of this prospectus it will not: (1) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly,
any shares of common stock; or any securities convertible into or exercisable
or exchangeable for common stock; or (2) enter into any swap or similar
arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the common stocks; whether any such
transaction described above is to be settled by delivery of common stock or
such other securities after the date of this prospectus. Morgan Stanley & Co.
Incorporated informed drugstore.com that they do not presently intend to
release any person from these agreements.
The underwriters have informed drugstore.com that they do not intend sales
to discretionary accounts to exceed five percent of the total number of shares
of common stock offered by them.
Approval of the common stock has been sought for quotation on the Nasdaq
National Market under the symbol "DSCM."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover any over-allotments or to
stabilize the price of the common stock, the underwriters may bid for, and
purchase, shares of common stock in the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an underwriter or a
dealer for distributing the common stock in the offering if the syndicate
repurchases previously distributed common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
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.
drugstore.com and the underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager on 40 filed public offerings of equity securities, of which 22 have
been completed, and has acted as a syndicate member in an additional 17 public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or controlling
persons, except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price will be determined by
negotiations between drugstore.com and the representatives. Among the factors
to be considered in determining the initial public offering price will be:
. the future prospects of drugstore.com and our industry in general;
. sales, earnings and certain other financial operating information of
drugstore.com in recent periods; and
. the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to those of drugstore.com.
The estimated public offering price range set forth on the cover page of
this prospectus is subject to change as a result of market conditions and
other factors.
69
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
drugstore.com by Venture Law Group, A Professional Corporation, Menlo Park,
California. John H. Sellers, a senior attorney at Venture Law Group, is an
Assistant Secretary of drugstore.com. Certain legal matters will be passed
upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. As of the date of this prospectus, an
investment partnership associated with Venture Law Group owns an aggregate of
21,000 shares of our common stock, and one director of Venture Law Group
beneficially owns 4,500 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of December 31, 1998 and for the period from April 2,
1998 (inception) to December 31, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered hereby. This
prospectus does not contain all the information set forth in the registration
statement and the exhibits thereto. For further information with respect to
drugstore.com and such common stock, we refer you to the registration
statement and to the exhibits filed therewith. Statements contained in this
prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. A copy of the registration statement may be inspected by
anyone without charge at the Public Reference Section of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all
or any portion of the registration statement may be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of prescribed fees. The SEC maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
70
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
drugstore.com, inc.
We have audited the accompanying consolidated balance sheet of drugstore.com,
inc. as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the period from April 2,
1998 (inception) to December 31, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from 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 consolidated financial position of drugstore.com,
inc. at December 31, 1998, and the consolidated results of its operations and
its cash flows for the period from April 2, 1998 (inception) to December 31,
1998, in conformity with generally accepted accounting principles.
Seattle, Washington
January 29, 1999, except for Note 7
as to which the date is
June , 1999
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the increase in the number of authorized shares described in Note 7 to the
financial statements.
Ernst & Young LLP
Seattle, Washington
June 28, 1999
F-2
<PAGE>
DRUGSTORE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity
December 31, April 4, April 4,
1998 1999 1999
------------ ----------- -------------
(unaudited) (Note 7)
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $14,408 $ 38,007
Accounts receivable................... -- 112
Inventories........................... -- 1,323
Prepaid marketing expenses............ 4,317 3,801
Other prepaid expenses and current
assets............................... 520 604
------- --------
Total current assets.................... 19,245 43,847
Fixed assets, net of accumulated
depreciation of $66 and $377........... 2,616 4,157
Intangible assets, net of accumulated
amortization of $33 and $51............ 230 246
Note receivable from officer............ 250 256
Deposits and other assets............... 176 1,477
------- --------
Total assets............................ $22,517 $ 49,983
======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................... $ 1,254 $ 2,186
Accrued compensation.................. 327 965
Accrued marketing expenses............ -- 347
Other current liabilities............. 142 66
Current portion of capital lease
obligations.......................... 472 479
------- --------
Total current liabilities............... 2,195 4,043
Capital lease obligations, less current
portion................................ 975 923
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par
value ($.0001 pro forma):
Authorized shares--22,800,000
(10,000,000 pro forma)
Series A preferred stock, designated
10,000,000 shares
Issued and outstanding shares--
10,000,000 (none pro forma)
(aggregate liquidation preference
of $8,000)......................... 7,986 7,986
Series B preferred stock, designated
5,500,000 shares
Issued and outstanding shares--
5,446,268 (none pro forma)
(aggregate liquidation preference
of $18,245)........................ 18,237 18,237
Series C preferred stock, designated
5,000,000 shares
Issued and outstanding shares--
4,472,844 (none pro forma)
(aggregate liquidation preference
of $35,000)........................ -- 34,981
Common stock, $.001 par value ($.0001
pro forma):
Authorized shares--30,200,000
(250,000,000 pro forma)
Issued and outstanding shares--
2,323,000 (22,242,112 pro forma)..... 2 2 $ 2
Additional paid-in capital............. 2,858 8,175 69,379
Deferred stock-based compensation...... (2,246) (6,655) (6,655)
Accumulated deficit.................... (7,490) (17,709) (17,709)
------- -------- -------
Total stockholders' equity.............. 19,347 45,017 $45,017
------- -------- =======
Total liabilities and stockholders'
equity................................. $22,517 $ 49,983
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) to Quarter Ended
December 31, 1998 April 4, 1999
----------------- -------------
(unaudited)
<S> <C> <C>
Net sales...................................... $ -- $ 652
Cost of sales.................................. -- 672
--------- ----------
Gross profit (loss).......................... -- (20)
Operating expenses:
Marketing and sales.......................... 3,092 5,189
Product development.......................... 2,178 2,713
General and administrative................... 1,894 1,731
Amortization of stock-based compensation..... 500 884
--------- ----------
Total operating expenses....................... 7,664 10,517
--------- ----------
Operating loss................................. (7,664) (10,537)
Other income (expense):
Interest income.............................. 177 332
Interest expense............................. (3) (14)
--------- ----------
Net loss....................................... $ (7,490) $ (10,219)
========= ==========
Basic and diluted net loss per share........... $ (13.71) $ (10.51)
========= ==========
Pro forma basic and diluted net loss per
share......................................... $ (.92) $ (.52)
========= ==========
Weighted average shares outstanding used to
compute basic and diluted net loss per share.. 546,149 971,966
========= ==========
Weighted average shares outstanding used to
compute pro forma basic and diluted net loss
per share..................................... 8,167,570 19,511,158
========= ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
DRUGSTORE.COM, INC.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Convertible Preferred Stock
-----------------------------------------------------
Series A Series B Series C Common Stock Additional Deferred
----------------- ----------------- ----------------- ---------------- Paid-in Stock-based Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Capital Compensation Deficit
---------- ------ --------- ------- --------- ------- --------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial issuance
of common shares
to founders in
exchange for
cash and
intellectual
property........ -- $ -- -- $ -- -- $ -- 2,315,000 $ 2 $ 111 $ -- $ --
Issuance of
Series A
preferred stock
in June and
August, net of
offering costs
of $14.......... 5,000,000 3,986 -- -- -- -- -- -- -- -- --
Issuance of
Series A
preferred stock
in August in
exchange for
Technology
License and
Advertising
Agreement....... 5,000,000 4,000 -- -- -- -- -- -- -- -- --
Issuance of
Series B
preferred stock
in October,
November and
December net of
offering costs
of $8........... -- -- 5,446,268 18,237 -- -- -- -- -- -- --
Exercise of
common stock
options......... -- -- -- -- -- -- 8,000 -- 1 -- --
Deferred stock-
based
compensation.... -- -- -- -- -- -- -- -- 2,746 (2,746) --
Amortization of
stock-based
compensation ... -- -- -- -- -- -- -- -- -- 500 --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- -- -- (7,490)
---------- ------ --------- ------- --------- ------- --------- --- ------ ------- --------
Balance at
December 31,
1998............ 10,000,000 7,986 5,446,268 18,237 -- -- 2,323,000 2 2,858 (2,246) (7,490)
Issuance of
Series C
preferred stock
in January and
March, net of
offering costs
of $19
(unaudited)..... -- -- -- -- 4,472,844 34,981 -- -- -- -- --
Issuance of
warrants to
purchase common
stock
(unaudited)..... -- -- -- -- -- -- -- -- 24 -- --
Deferred stock-
based
compensation
(unaudited)..... -- -- -- -- -- -- -- -- 5,293 (5,293) --
Amortization of
stock-based
compensation
(unaudited)..... -- -- -- -- -- -- -- -- -- 884 --
Net loss and
comprehensive
loss
(unaudited)..... -- -- -- -- -- -- -- -- -- -- (10,219)
---------- ------ --------- ------- --------- ------- --------- --- ------ ------- --------
Balance at April
4, 1999
(unaudited)..... 10,000,000 $7,986 5,446,268 $18,237 4,472,844 $34,981 2,323,000 $ 2 $8,175 $(6,655) $(17,709)
========== ====== ========= ======= ========= ======= ========= === ====== ======= ========
<CAPTION>
Total
--------
<S> <C>
Initial issuance
of common shares
to founders in
exchange for
cash and
intellectual
property........ $ 113
Issuance of
Series A
preferred stock
in June and
August, net of
offering costs
of $14.......... 3,986
Issuance of
Series A
preferred stock
in August in
exchange for
Technology
License and
Advertising
Agreement....... 4,000
Issuance of
Series B
preferred stock
in October,
November and
December net of
offering costs
of $8........... 18,237
Exercise of
common stock
options......... 1
Deferred stock-
based
compensation.... --
Amortization of
stock-based
compensation ... 500
Net loss and
comprehensive
loss............ (7,490)
--------
Balance at
December 31,
1998............ 19,347
Issuance of
Series C
preferred stock
in January and
March, net of
offering costs
of $19
(unaudited)..... 34,981
Issuance of
warrants to
purchase common
stock
(unaudited)..... 24
Deferred stock-
based
compensation
(unaudited)..... --
Amortization of
stock-based
compensation
(unaudited)..... 884
Net loss and
comprehensive
loss
(unaudited)..... (10,219)
--------
Balance at April
4, 1999
(unaudited)..... $45,017
========
</TABLE>
See accompanying notes.
F-5
<PAGE>
DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) to Quarter Ended
December 31, 1998 April 4, 1999
----------------- -------------
(unaudited)
<S> <C> <C>
Operating Activities:
Net loss....................................... $(7,490) $(10,219)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 90 322
Amortization of stock-based compensation..... 500 884
Technology license and advertising agreement-
related expenses............................ 58 1,014
Changes in:
Accounts receivable......................... -- (112)
Inventories................................. -- (1,323)
Prepaid marketing expenses.................. (552) (462)
Other prepaid expenses and current assets... (484) (113)
Deposits and other assets................... (176) (1,301)
Accounts payable and accrued expenses....... 1,723 1,519
Other....................................... -- (6)
------- --------
Net cash used in operating activities.......... (6,331) (9,797)
Investing Activities:
Purchase of fixed assets....................... (1,202) (1,530)
Addition of intangible assets.................. (90) (10)
Issuance of note receivable to officer......... (250) --
------- --------
Net cash used in investing activities.......... (1,542) (1,540)
Financing Activities:
Proceeds from sales of common stock............ 90 --
Proceeds from exercise of stock options........ 1 --
Net proceeds from sales of Series A preferred
stock......................................... 3,986 --
Net proceeds from sales of Series B preferred
stock......................................... 18,237 --
Net proceeds from sales of Series C preferred
stock......................................... -- 34,981
Principal payments on capital lease
obligations................................... (33) (45)
------- --------
Net cash provided by financing activities...... 22,281 34,936
------- --------
Net increase in cash and cash equivalents...... 14,408 23,599
Cash and equivalents at beginning of period.... -- 14,408
------- --------
Cash and equivalents at end of period.......... $14,408 $38,007
======= ========
Supplemental Cash Flow Information:
Cash paid for interest......................... $ 48 $ 8
Equipment acquired through capital lease
agreements.................................... $ 1,480 $ --
Issuance of common stock in exchange for
intellectual property......................... $ 23 $ --
Issuance of Series A preferred stock in
exchange for technology license and
advertising agreement......................... $ 4,000 $ --
Issuance of warrants to purchase common stock
in exchange for intangible asset.............. $ -- $ 24
</TABLE>
See accompanying notes.
F-6
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
1. Organization and Summary of Significant Accounting Policies
General
drugstore.com, inc. and its wholly-owned subsidiary, DS Pharmacy, Inc.,
(collectively, the Company) are engaged in the development of Internet-based
retailing opportunities focused on filling needs for health, wellness, beauty,
personal care and pharmacy products and related information. The Company was
incorporated on April 2, 1998 and launched its Web site and commenced
commercial operations on February 24, 1999. The Company was previously
considered a development stage company.
The Company has incurred significant operating losses since inception of
operations and has limited working capital. The Company has financed its
operations to date through the issuance of equity securities. Further
development and establishment of the Company's business will require
additional equity financing. The Company believes that equity financing can be
obtained from existing or new investors. However, there can be no assurance
that the Company will be able to obtain such equity financing on acceptable
terms, if at all.
Interim Financial Statements
The accompanying balance sheets and statements of operations and cash flows
for the quarter ended April 4, 1999 are unaudited. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the results of operations and cash flows for the interim period.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include those of
drugstore.com, inc. and its wholly-owned subsidiary, DS Pharmacy, Inc. All
material intercompany transactions and balances have been eliminated.
On January 1, 1999, the Company adopted a 52/53 week fiscal year ending on
the Sunday closest to December 31. The 1999 fiscal year ends on January 2,
2000, with each of the fiscal quarters representing a 13-week period. The
effect of the change on prior periods is insignificant.
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 of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Concentration of Credit Risk
The Company is subject to concentrations of credit risk from its cash
investments. The Company's credit risk is managed through monitoring the
stability of the financial institutions utilized and diversification of its
financial resources.
Financial instruments consist of cash and cash equivalents and capital
lease obligations. The fair value of all financial instruments approximates
the carrying amount based on the current rate offered for similar instruments.
F-7
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
Inventories
Inventories are stated at the lower of cost (using the weighted average
cost method) or market. The Company has contracts with RxAmerica L.L.C. to
purchase and distribute all of its pharmaceutical products and Walsh
Distribution, Inc. to purchase a substantial majority and distribute all of
its non-pharmaceutical products. The agreement with RxAmerica is for a one-
year term ending February 2000, which will automatically extend for an
additional year unless either party gives written notice of termination. The
agreement with Walsh Distribution, Inc. is for a three-year term ending
January 2002, but may be terminated by the Company earlier upon accelerated
payment of minimum fees that would not exceed $2.5 million.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation and
amortization, which includes the amortization of assets recorded under capital
leases. Depreciation and amortization is provided using the straight-line
method over the estimated useful lives of the related assets, which range from
two to seven years. Fixed assets purchased under capital leases and leasehold
improvements are amortized over the shorter of the lease term or estimated
useful life.
Long-Lived Assets
Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Impairment is measured by comparing the carrying value
of the long-lived assets to the estimated undiscounted future cash flows
expected to result from use of the assets and their ultimate disposition. In
circumstances where impairment is determined to exist, the Company will write
down the asset to its fair value based on the present value of estimated
expected future cash flows. To date, no such impairment has been indicated.
Revenue Recognition
The Company recognizes revenue from product sales, net of discounts, when
the products are shipped to customers. Outbound shipping and handling fees are
also included in net sales upon shipment. The Company generally refunds all or
a portion of the net sales in the event a customer is not satisfied with the
product or service provided. The Company provides an estimated allowance for
such sales returns in the period of sale. Sales returns to date have been
insignificant.
Product Development
Product development expenses consist primarily of payroll and related
expenses for Web site development and systems personnel and consultants,
system infrastructure and costs of Web site content. Expenditures relating to
product development have been expensed as incurred.
Income Taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to be recovered. Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amounts expected to be realized.
F-8
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
Advertising
Advertising production costs are expensed as incurred. Costs of
communicating advertising associated with television, radio, print and other
media are expensed when such services are used. Costs associated with Web
portal advertising contracts are amortized on a straight-line basis over the
period such advertising is expected to be used. Advertising expense for the
period ended December 31, 1998 and the quarter ended April 4, 1999 was
$1,638,000 and $2,589,000, respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations, in accounting for employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). APB
No. 25 provides that the compensation expense relative to the Company's
employee stock options is measured based on the intrinsic value of the stock
option. SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123 (see Note 5). The Company accounts for stock issued to non-
employees in accordance with the provisions of SFAS No. 123 and the Emerging
Issues Task Force consensus in Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
conjunction with Selling, Goods or Services.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding less the number of shares subject to repurchase.
Shares associated with stock options, warrants and the convertible preferred
stock are not included in the calculation of diluted net loss per share
because they are antidilutive.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of all outstanding convertible preferred stock into shares of
common stock effective upon the closing of the Company's initial public
offering as if such conversion occurred at the date of original issuance.
F-9
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
The following table sets forth the computation of basic and diluted net
loss per share and pro forma basic and diluted net loss per share for the
periods indicated:
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) to Quarter Ended
December 31, 1998 April 4, 1999
----------------- -------------
(unaudited)
<S> <C> <C>
Numerator:
Net loss................................. $(7,490,000) $(10,219,000)
=========== ============
Denominator:
Weighted average common shares
outstanding............................. 1,462,311 2,323,000
Less weighted average common shares
issued subject to repurchase
agreements.............................. (916,162) (1,351,034)
----------- ------------
Denominator for basic and diluted
calculation............................. 546,149 971,966
Weighted average effect of pro forma
conversion of securities:
Series A convertible preferred stock... 6,124,313 10,000,000
Series B convertible preferred stock... 1,497,108 5,446,268
Series C convertible preferred stock... -- 3,092,924
----------- ------------
Denominator for pro forma basic and
diluted calculation..................... 8,167,570 19,511,158
=========== ============
Net loss per share:
Basic and diluted........................ $ (13.71) $ (10.51)
=========== ============
Pro forma basic and diluted.............. $ (.92) $ (.52)
=========== ============
</TABLE>
At December 31, 1998, there were 1,515,334 stock options that were excluded
from the computation of actual and pro forma diluted net loss per share as
their effect was antidilutive. If the Company had reported net income, the
calculation of these per share amounts would have included the dilutive effect
of these common stock equivalents using the treasury stock method.
Segment Information
In January 1999, the Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. This standard established
interim and annual reporting standards for an enterprise's operating segments
and related disclosures about its products, services, geographic areas and
major customers. Since commencement of operations in February 1999, the
Company's business consists of a single retail drug segment that sells health,
beauty, wellness, personal care and pharmacy products on-line and provides
related product information on the Company's Web site.
New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 requires all costs related to
the development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred
during the application development stage are required to be capitalized and
amortized over the estimated useful life of the software. The Company adopted
SOP 98-1 in the quarter ended April 4, 1999 and there was no significant
impact upon adoption.
F-10
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designed as
part of a hedge transaction and, if it is, the type of hedge transaction. The
Company does not expect that the adoption of SFAS No. 133 will have a material
impact on its financial statements because it does not currently hold any
derivative instruments.
2. Fixed Assets
Fixed assets consists of the following:
<TABLE>
<CAPTION>
December 31,
1998
--------------
(In thousands)
<S> <C>
Computers and equipment....................................... $1,862
Purchased software............................................ 711
Furniture and fixtures........................................ 20
Leasehold improvements........................................ 89
------
2,682
Less accumulated depreciation................................. (66)
------
$2,616
======
</TABLE>
Included in computers and equipment and purchased software are assets
acquired under capital leases with an original cost of approximately
$1,115,000 and $365,000, respectively, as of December 31, 1998. Accumulated
amortization on the leased assets was approximately $10,000 as of December 31,
1998. Approximately $1,370,000 of computers and equipment as of December 31,
1998 were not placed into service until the launch of the Company's Web store
in February 1999.
3. Leases and Marketing Agreements
The Company leases office space under an operating lease, which calls for
fixed rental payments through 2003. In addition, the Company leases various
office equipment under operating leases. Total rent expense under operating
leases for the periods ended December 31, 1998 and April 4, 1999 approximated
$127,000 and $262,000, respectively.
Capital lease obligations bear interest at rates ranging from 4% to 7% and
mature 36 months from the date of funding. At December 31, 1998, the Company
had no additional financing available under the agreements.
The Company has also entered into certain non-cancelable advertising
agreements with various Web portals, including Yahoo!, America On-Line and
Excite, which require the Company to make fixed payments to such portals over
the term of the agreements. In exchange, the portals have committed to display
the agreed-upon advertisement a minimum number of times on such portal's Web
site over the term of the contract. The costs associated with Web portal
advertising contracts are amortized on a straight-line basis over the period
such advertising is expected to be used.
F-11
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
Future minimum commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating Marketing
Leases Leases Agreements
------- --------- ----------
(In thousands)
<S> <C> <C> <C>
1999......................................... $ 534 $ 1,539 $ 4,402
2000......................................... 620 1,541 3,230
2001......................................... 398 1,574 2,970
2002......................................... -- 1,600 3,710
2003......................................... -- 1,603 --
Thereafter................................... -- 2,238 --
------ ------- -------
Total minimum lease payments................. 1,552 $10,095 $14,312
======= =======
Less amounts representing interest........... (105)
------
Present value of minimum payments............ 1,447
Less current portion of capital lease
obligations................................. (472)
------
Noncurrent portion of capital lease
obligations................................. $ 975
======
</TABLE>
On January 28, 1999, the Company signed a seven-year lease for a new
corporate headquarters in Bellevue, Washington, which is expected to commence
no later than March 12, 1999. The minimum lease payments associated with this
lease are included in the commitments above. The Company has the option to
extend the lease for two additional three-year terms. The Company provided a
letter of credit totaling $640,000 as security for the lease. The letter of
credit may be reduced annually by specified amounts in the lease agreement
upon our achievement of certain economic goals. At December 31, 1998, there
were no letters of credit outstanding.
The Company has an agreement with Walsh Distribution, Inc. that provides
inventory and certain order fulfillment services for three years ending
January 2002. This agreement may be terminated earlier by the Company upon an
accelerated payment of minimum fees that would not exceed $2.5 million.
4. Income Taxes
The Company did not provide any current or deferred United States federal
income tax provision or benefit for any of the periods presented because it
has experienced operating losses since inception. The Company provided a full
valuation allowance on the net deferred tax asset, consisting primarily of net
operating loss carryforwards and research and development credit
carryforwards, because of uncertainty regarding their realizability.
At December 31, 1998, the Company had net operating loss carryforwards and
research and development credit carryforwards of approximately $6,737,000 and
$32,000, respectively. These carryforwards will expire in 2018. In 1999, due
to the issuance and sale of preferred stock, the Company incurred ownership
changes pursuant to applicable regulations in effect under the Internal
Revenue Code of 1986, as amended. Therefore, the Company's use of losses
incurred through the date of these ownership changes will be limited during
the carryforward period. The Company estimates that the use of the
approximately $6.7 million of net operating losses incurred through December
31, 1998 as well as losses incurred subsequent thereto until the date of the
ownership change would be limited to approximately $4.1 million per year in
order to offset future taxable income. To the extent that any single-year loss
is not utilized to the full amount of the limitation, such unused loss is
carried over to subsequent years until the earlier of its utilization or the
expiration of the relevant carryforward period.
F-12
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
Deferred tax assets reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Since the Company's
utilization of these deferred tax assets is dependent on future profits which
are not assured, a valuation allowance equal to the deferred tax assets has
been provided. Significant components of the Company's deferred tax assets as
of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward................................... $ 2,291
Research and development credit carryforward...................... 32
Other temporary differences....................................... 79
-------
Total gross deferred tax assets..................................... 2,402
Less valuation allowance............................................ (2,402)
-------
Net deferred tax assets............................................. $ --
=======
A reconciliation of income taxes computed at the statutory rate to the
income tax amount recorded for the period ended December 31, 1998 is as
follows (in thousands):
Income tax benefit at statutory rate................................ $ 2,547
Stock-based compensation............................................ (169)
Other permanent differences......................................... (8)
Research and development credit..................................... 32
Increase in valuation allowance..................................... (2,402)
-------
Income tax benefit.................................................. $ --
=======
</TABLE>
5. Stockholders' Equity
Convertible Preferred Stock
In June and August 1998, the Company issued 10,000,000 shares of Series A
preferred stock in a private placement offering in exchange for gross cash
proceeds of $4,000,000, and a Technology License and Advertising Agreement
with Amazon.com that provides for the right to license certain technology and
receive certain technological and advertising support from Amazon.com. In
addition, the Company agreed to license its technology to Amazon.com and
participate in mutually agreed upon advertising activities. No cash payments
are required under the Technology License and Advertising Agreement with
Amazon.com. The Company valued the right to license certain technology and
receive such technological and advertising support at $4,000,000 based on the
value of Series A preferred stock issued concurrently for cash. Such value was
allocated to prepaid marketing expense, license rights and prepaid technical
consulting services in the amount of $3,765,000, $150,000 and $85,000,
respectively, based on their estimated fair value and will be amortized to
expense over the period the services are provided or the life of the license.
During the period ended December 31, 1998 and the quarter ended April 4, 1999,
the Company recognized expenses under such agreement totaling $58,000 and
$1,014,000, respectively.
In October, November and December 1998, the Company issued 5,446,268 shares
of Series B preferred stock in a private placement offering in exchange for
gross cash proceeds of $18,245,000.
In January and March 1999, the Company issued 4,472,844 shares of Series C
preferred stock in a private placement offering in exchange for gross cash
proceeds of $35,000,000. In connection with the issuance of the
F-13
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
Series C preferred stock, the certificate of incorporation was amended to
increase the total authorized number of preferred and common shares to
51,500,000. The Certificate of Incorporation was amended in May 1999 to
further increase capitalization (see Note 7).
Each share of Series A, Series B and Series C preferred stock is
convertible into one share of common stock at the option of the holder,
subject to certain antidilution adjustments, in accordance with the conversion
formula provided in the Company's certificate of incorporation (currently on a
1:1 ratio). Outstanding preferred shares automatically convert into common
stock, at the Company's option, upon the closing of an initial public offering
of the Company's common stock in which gross proceeds exceed $15.0 million and
a per share price of not less than $10.00 per share. Holders of each share of
preferred stock are entitled to the number of votes per share that would be
equivalent to the number of shares of common stock into which a share of
preferred stock is convertible and are entitled to dividends if and when
declared by the board of directors. No dividends have been declared. In the
event of any consolidation, merger, or liquidation, the holders of the Series
A, Series B and Series C preferred stock shall be entitled to receive $0.80,
$3.35 and $7.825 per share of preferred stock, respectively, plus cumulative
dividends, if and when declared, at the annual rate of 10%. The Company
granted the preferred stockholders certain registration rights and also agreed
not to carry out certain actions without prior approval of the holders of not
less than two-thirds of the outstanding preferred shares, voting together as a
single class.
Common Stock
The Company and its common and Series A, Series B and Series C stockholders
entered into an agreement, which, among other issues, addresses election of
directors, restrictions on transfer of equity securities by stockholders,
sales of new securities by drugstore.com, and covenants related to transfer of
shares. All provisions of the agreement, with the exception of covenants
related to transfer of shares, expire upon the closing of an initial public
offering.
In conjunction with the sale of Series A preferred stock, the Company's
founder and Chief Executive Officer each granted drugstore.com a right to
repurchase 2,235,000 shares of common stock held by them at the original
purchase price of $0.04 per share if their employment terminates under certain
circumstances. The Company's right of repurchase lapses (1) 25% immediately
and (2) the remaining 75% lapses beginning after one year from the vesting
commencement date at a rate of 1/48th per month. At December 31, 1998,
1,391,875 shares held by the founder and the CEO were subject to repurchase
under these agreements. The restricted stock agreements also provide that in
the event of a change of control whereby the individual was not offered a
position with similar responsibilities or termination of employment for other
than cause, additional shares would vest to the individual.
1998 Stock Plan
Under the terms of the 1998 stock plan, the board of directors may grant
incentive and nonqualified stock options to employees, officers, directors,
agents, consultants, and independent contractors of the Company. In connection
with the introduction of the 1998 stock plan, 2,735,000 shares of common stock
were reserved for future issuance. On January 29, 1999, the Company increased
the number of shares reserved for future issuance under such plan by 1,500,000
shares. Generally, the Company grants stock options with exercise prices equal
to the fair market value of the common stock on the date of grant, as
determined by the board of directors. Options generally vest over a four to
five year period and expire ten years from the date of grant.
F-14
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Outstanding Options
---------------------------
Shares Available Number of Weighted-Average
for Grant Shares Exercise Price
---------------- --------- ----------------
<S> <C> <C> <C>
1998 Plan introduction...... 2,735,000 --
Options granted............. (1,683,584) 1,683,584 $ 0.17
Options exercised........... -- (8,000) 0.12
Options canceled............ 160,250 (160,250) 0.04
---------- ---------
Outstanding at December 31,
1998......................... 1,211,666 1,515,334 0.18
Plan amendment.............. 1,500,000 -- --
Options granted ............ (1,357,100) 1,357,100 1.99
Options canceled............ 120,250 (120,250) 0.35
---------- ---------
Outstanding at April 4, 1999.. 1,474,816 2,752,184 $ 1.06
========== =========
</TABLE>
The following table summarizes information regarding stock options
outstanding and exercisable as of December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------------------
Weighted-Average Exercisable
Exercise Number Remaining Number of
Price of Shares Contractual Life Shares
-------- --------- ---------------- -----------
<S> <C> <C> <C>
$0.04 505,834 9.7 years 19,167
$0.12 618,500 9.8 years --
$0.45 391,000 9.9 years --
--------- ------
1,515,334 19,167
========= ======
</TABLE>
Under APB No. 25, no compensation expense is recognized when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant. Deferred stock-based compensation is
recorded for those situations where the exercise price of an option or the
purchase price of restricted stock was lower than the deemed fair value for
financial reporting purposes of the underlying common stock. The Company
recorded aggregate deferred stock-based compensation of $2,746,000 during 1998
and $5,293,000 in the quarter ended April 4, 1999. The deferred stock-based
compensation is being amortized over the vesting period of the underlying
options and restricted stock. Total amortization of stock-based compensation
recognized was $500,000 during 1998 and $884,000 in the quarter ended April 4,
1999. Amortization of stock-based compensation is allocable to employees in
the following expense categories:
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) to Quarter ended
December 31, 1998 April 4, 1999
----------------- -------------
<S> <C> <C>
Marketing and sales........................ 24% 32%
Product development........................ 24 38
General and administrative................. 52 30
--- ---
100% 100%
=== ===
</TABLE>
F-15
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
Had the stock-based compensation for the Company's stock option plan and
restricted stock agreements been determined based on the Black-Scholes model
using the multiple-option approach, the Company's net loss would have been
adjusted to the following pro forma amount for the period ended December 31,
1998 (in thousands):
<TABLE>
<S> <C>
Net loss--as reported........................................... $ (7,490)
Incremental pro forma compensation expense under SFAS No. 123... (11)
--------
Net loss--pro forma............................................. $ (7,501)
========
Basic and diluted net loss per share--as reported............... $ (13.71)
========
Basic and diluted net loss per share--pro forma................. $ (13.73)
========
Pro forma basic and diluted net loss per share--as reported..... $ (.92)
========
Pro forma basic and diluted net loss per share--pro forma....... $ (.92)
========
</TABLE>
The fair value at each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, assuming no expected dividends and
assuming a measure of a volitility based on a review of a peer group of
Internet companies at a comparable developmental stage utilizing the following
weighted average assumptions at December 31, 1998:
<TABLE>
<S> <C>
Average risk-free interest rate.................................. 4.5%
Average expected life............................................ 3.0 years
Volatility....................................................... 50%
</TABLE>
For purposes of the pro forma disclosures, the estimated weighted average
fair value of the options granted, estimated to be $0.78 per share at December
31, 1998, is amortized to expense over the options' vesting period. This
amount has been reduced by the amount of amortization of deferred stock-based
compensation already recorded in the accompanying statements of operations
that has a weighted average value of $0.77 per share. Compensation expense
recognized in providing pro forma disclosures may not be representative of the
effects on pro forma earnings for future years because the amounts above
include only the amortization for the fair value of 1998 grants.
Common Stock Reserved for Future Issuance
The following shares of common stock were reserved at December 31, 1998:
<TABLE>
<S> <C>
Stock option plan............................................... 2,727,000
Conversion of Series A preferred stock.......................... 10,000,000
Conversion of Series B preferred stock.......................... 5,446,268
----------
18,173,268
==========
</TABLE>
The above table excludes the January 29, 1999 amendment to the stock option
plan increasing the stock option pool by 1,500,000 shares and the January 29,
1999 issuance of 4,472,844 shares of Series C preferred stock which are
convertible into common stock.
6. Note Receivable from Officer
On December 3, 1998, the Company loaned an officer $250,000 evidenced by a
note receivable bearing 7% interest, secured by the officer's stock options to
purchase an aggregate of 150,000 shares of common stock at $0.04 per share,
none of which are vested at December 31, 1998.
F-16
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
7. Subsequent Events
Issuance of Warrant
In February 1999, the Company issued a warrant to purchase 10,000 shares of
its common stock at $7.83 per share in exchange for the right to use the 1-
800-DRUGSTORE and related iterations of telephone numbers. Such warrant is
exercisable immediately and expires in February 2002. The fair value of such
warrant was estimated at $24,000 and was recorded as an intangible asset.
Proposed Initial Public Offering of Common Stock
In April 1999, the board of directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock. The unaudited pro forma
stockholders' equity at April 4, 1999 gives effect to the conversion of all
outstanding shares of convertible preferred stock at April 4, 1999 into
19,919,112 shares of common stock upon completion of the offering. The board
of directors also approved a change in the par value of the common and
preferred stock to $.0001 per share and change in the total number of
authorized shares to 260,000,000 shares, of which 250,000,000 will be common
stock and 10,000,000 will be undesignated preferred stock. On June , 1999,
this increase in the number of authorized shares became effective.
1998 Stock Plan
In April 1999, the board of directors increased the number of shares
reserved under the 1998 stock plan by 3,592,000 shares to 7,827,000 shares
which will become effective upon stockholder approval. As of April 30, 1999,
the Company has reserved a total of 7,819,000 shares of common stock for
future issuance of stock options to employees, officers, directors, or
consultants under the 1998 stock plan.
1999 Employee Stock Purchase Plan
The Company's 1999 employee stock purchase plan was adopted by the board of
directors in April 1999, subject to stockholder approval, to be effective upon
the completion of the Company's initial public offering of its common stock. A
total of 500,000 shares of common stock has been reserved for issuance under
the employee stock purchase plan plus an annual increase on the first day of
each of the fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to
the lesser of (1) 500,000 shares, (2) three percent (3%) of our shares
outstanding on the last day of the immediate preceding fiscal year, or (3)
such lesser number of shares as is determined by the board of directors.
Eligible employees may purchase common stock at 85% of the lesser of the fair
market value of the Company's common stock on the first or the last day of the
applicable six month purchase period.
Defined Contribution Plan
Effective April 1999, the Company adopted a defined contribution retirement
plan under Section 401(k) of the Internal Revenue Code which covers
substantially all employees. Eligible employees may contribute amounts to the
plan, via payroll withholding, subject to certain limitations. Under the
401(k) plan, employees may elect to reduce their current compensation by up to
the statutorily prescribed annual limit ($10,000 in 1999) and to have the
amount of such reduction contributed to the 401(k) plan. The 401(k) plan
permits, but does not require, additional matching contributions to the 401(k)
plan by the Company on behalf of all participants in the 401(k) plan. To date,
the Company has not made any matching contributions to the 401(k) plan.
Issuance of Series D Convertible Preferred Stock
In June 1999, the Company issued 2,266,289 shares of Series D preferred
stock to a new investor in exchange for $40 million in cash and an obligation
to provide cable television advertising valued at $5 million
F-17
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
based on comparable transactions with unaffiliated third parties. The
advertising is expected to be aired over a three year period and will be
expensed in the period in which the airtime is used. The Series D preferred
stock carries substantially the same terms and conditions as the Series A, B
and C preferred stock and will be convertible into common stock at a one-to-
one ratio upon an initial public offering subject to certain conditions. In
connection with the issuance of the Series D preferred stock, the certificate
of incorporation was amended to increase the total authorized number of
preferred and common stock to 53,000,000, and the accompanying financial
statements reflect the increase in capitalization.
Issuance of Series E Convertible Preferred Stock
In June 1999, the Company entered into an agreement with two investors,
subject to regulatory approval, to issue 12,282,599 shares of Series E
preferred stock in exchange for an aggregate of $10 million in cash and other
consideration, including exclusive advertising commitments and other
obligations with an estimated fair value of $112.8 million. Upon closing, the
aggregate purchase price of $122.8 million will be allocated based on the
relative fair value of the assets and services to be received and amortized
over the related service periods. The Series E preferred stock will carry
substantially the same terms as the Series A, B, C and D preferred stock and
will be convertible into common stock at a one-to one ratio upon an initial
public offering subject to certain conditions.
F-18
<PAGE>
The inside back cover includes:
drugstore.com
Makes Shopping Easy
The following text is placed at the top left of the page:
HELP ON A PERSONAL LEVEL
The advantage of the Internet allows drugstore.com to offer customers help on a
personal level. Customers can shop from their home or office any time of the
day or night. They can get useful information to make informed product
decisions. They can ask a pharmacist questions in privacy. drugstore.com
provides the information and interaction that makes shopping easy.
[PICTURE OF SKIN CARE ADVISOR PAGE]
[PICTURE OF RESOURCE CENTER PAGE]
[PICTURE OF PREGNANCY AND INFANT CENTER PAGE]
[PICTURE OF QUICK LISTS PAGE]
The following text appears to the left of the picture of the Skin Care Advisor
page:
SHOPPING ADVISOR
drugstore.com helps customers who are not sure about what product to buy. The
customer provides information about what he or she needs and the Shopping
Advisors help identify the right products.
The following text appears to the right of the picture of the Resource Center
page:
RESOURCE CENTER
An easy way for customers to find the information they need in order to make
informed product decisions, the Resource Center includes Ask Your Pharmacist,
Health and Wellness Guides, Shopping Advisors and more.
The following text appears to the left of the picture of the Quick Lists page:
QUICK LISTS
An easy way to find what you need and assist you in stocking up on frequently
used items.
The following underneath the picture of the Pregnancy Center page:
PREGNANCY
Whether it's the first child or the fifth, the Pregnancy and Infant Center helps
families prepare for childbirth and child rearing.
Until ____________, 1999, 25 days after commencement of the offering, all
dealers effecting transactions in our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
The back cover of the prospecuts contains the company's logo.
-4-
<PAGE>
[drugstore.com logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by registrant in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee and the Nasdaq
National Market entry and listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee.......................................... $ 18,765
NASD filing fee............................................... 6,250
Nasdaq National Market entry and listing fee.................. 95,000
Printing and engraving expenses............................... 300,000
Legal fees and expenses....................................... 350,000
Accounting fees and expenses.................................. 200,000
Blue Sky qualification fees and expenses...................... 5,000
Transfer Agent and Registrar fees............................. 15,000
Miscellaneous fees and expenses............................... 59,985
----------
Total..................................................... $1,050,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the Act).
Article XIII of registrant's certificate of incorporation and sections 6.1 and
6.2 of Article VI of registrant's bylaws provide for indemnification of its
directors, officers, employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. In addition, registrant has
entered into indemnification agreements with its directors and officers. The
indemnification agreements may require registrant, among other things, to
indemnify its directors against certain liabilities that may arise by reason
of their status or service as directors (other than liabilities arising from
willful misconduct of culpable nature), to advance their expenses incurred as
a result of any proceeding against them as to which they could be indemnified,
and to obtain directors' insurance if available on reasonable terms. The
underwriting agreement (Exhibit 1.1 hereto) also provides for cross
indemnification among drugstore.com and the underwriters with respect to
certain matters, including matters arising under the Act.
Item 15. Recent Sales of Unregistered Securities
(a) Since inception in April 1998, registrant has issued and sold (without
payment of any selling commission to any person) the following unregistered
securities:
(1) In June, July and August 1998, registrant issued and sold 2,265,000
shares of common stock to a total of 5 investors for an aggregate purchase
price of $90,600.
(2) In June 1998 and August 1998, registrant issued and sold shares of
Series A preferred stock convertible into an aggregate of 10,000,000 shares
of common stock to a total of 5 investors for an aggregate purchase price
of $8,000,000.
(3) In October, November and December 1998, registrant issued and sold
shares of Series B preferred stock convertible into an aggregate of
5,446,268 shares of common stock to a total of 6 investors for an aggregate
purchase price of $18,244,997.80.
(4) In January 1999, registrant issued and sold shares of Series C
preferred stock convertible into an aggregate of 1,457,891 shares of common
stock to a total of 5 investors for an aggregate purchase price of
$11,407,997.07.
II-1
<PAGE>
(5) In January 1999, registrant issued and sold two convertible
promissory notes convertible into shares of Series C preferred stock and
further convertible into an aggregate of 3,014,953 shares of common stock
to a total of 2 investors for an aggregate purchase price of
$23,592,007.22. These notes were converted into shares of Series C
preferred stock in March 1999.
(6) In February 1999, registrant issued a warrant to purchase 10,000
shares of common stock in connection with a corporate partnership
agreement.
(7) In May 1999, registrant issued and sold a convertible promissory
note convertible into shares of Series D preferred stock and further
convertible into 2,266,289 shares of common stock to one investor for an
aggregate purchase price of $40,000,000.85. These notes were converted to
shares of Series D preferred stock in June 1999.
(8) As of June 25, 1999, 8,000 shares of fully vested common stock had
been issued pursuant to restricted stock purchase agreements and no shares
of common stock had been issued upon exercise of options; 3,032,809 shares
of common stock were issuable upon exercise of outstanding options under
registrant's 1998 stock plan.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances described in Items 15(a)(1)-(7) were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof as
transactions by an issuer not involving any public offering. The issuances
described in Item 15(a)(8) were deemed to be exempt from registration under
the Act in reliance upon Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701. In addition, such issuances were deemed to be exempt from registration
under Section 4(2) of the Act as transactions by an issuer not involving any
public offering. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends where affixed to the securities issued in such
transactions. All recipients had adequate access, through their relationships
with the registrant, to information about the registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Fifth Amended and Restated Certificate of Incorporation of
drugstore.com.
3.2 Form of Sixth Amended and Restated Certificate of Incorporation, to be
filed and effective prior to the sale of our Series E preferred stock
financing.
3.3* Form of Amended and Restated Certificate of Incorporation of
drugstore.com, to be filed and effective upon completion of this
offering.
3.4* Bylaws of drugstore.com, as amended.
5.1 Opinion of Venture Law Group, A Professional Corporation.
10.1* Form of Indemnification Agreement between drugstore.com and each of its
officers and directors.
10.2* 1998 Stock Plan, as amended.
10.3* 1999 Employee Stock Purchase Plan.
10.4* Restricted Stock Purchase Agreement with Jed A. Smith dated June 19,
1998.
10.5* Restricted Stock Purchase Agreement with Peter M. Neupert dated July 23,
1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.6* Form of Warrant To Purchase Common Stock.
10.7* Series A Preferred Stock Purchase Agreement dated June 22, 1998.
10.8* Series B Preferred Stock Purchase Agreement dated October 9, 1998.
10.9* Series B Preferred Stock Rescission Agreement dated November 23, 1998
between drugstore.com and entities affiliated with Kleiner Perkins
Caufield & Byers.
10.10* Series C Preferred Stock and Convertible Note Purchase Agreement dated
January 29, 1999.
10.11* Series D Preferred Stock and Convertible Note Purchase Agreement dated
May 19, 1999.
10.12** Fourth Amended and Restated Investors' Rights Agreement dated May 19,
1999.
10.13* Sublease Agreement dated January 29, 1999 between drugstore.com and
The Boeing Company for offices at 13920 Southeast Eastgate Way, Suite
300, Bellevue, Washington.
10.14*+ Amended and Restated Technology License and Advertising Agreement
between drugstore.com, Amazon.com and Amazon.com Drugstore, Inc.
10.15*+ Pharmacy Service Agreement dated February 8, 1999 with RxAmerica.
10.16*+ Service & Supply Agreement dated January 29, 1999 with Walsh
Distribution, Inc.
10.17* Offer Letter dated June 29, 1998 with Peter M. Neupert.
10.18* Offer Letter dated July 28, 1998 with Kal Raman.
10.19* Offer Letter dated December 4, 1998 with Mark L. Silverman.
10.20* Offer Letter dated June 18, 1998 with Jed A. Smith.
10.21* Amended and Restated Voting Agreement dated May 19, 1999.
10.22* Letter Agreement dated May 19, 1999 with Amazon.com.
10.23* Cable Advertising Agreement dated May 19, 1999 with Vulcan Ventures
Incorporated.
10.24 Series E Preferred Stock Purchase Agreement dated June 17, 1999.
10.25 Addendum to Fourth Amended and Restated Investors' Rights Agreement
dated June 17, 1999.
10.26** Third Amended and Restated Voting Agreement dated June 17, 1999.
10.27 Main Agreement dated June 17, 1999 with Rite Aid Corporation.
10.28 Main Agreement dated June 17, 1999 with General Nutrition Companies,
Inc.
10.29 Governance Agreement dated June 17, 1999 with Rite Aid Corporation.
10.30 Governance Agreement dated June 17, 1999 with General Nutrition
Companies, Inc. and General Nutrition Investment Company.
10.31 Pharmacy Supply and Services Agreement dated June 17, 1999 with Rite
Aid Corporation.
21.1* Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule (EDGAR-filed version only).
</TABLE>
- --------
* Previously filed.
**To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the SEC.
II-3
<PAGE>
(b) Financial Statement Schedules
All financial statement schedules are omitted because they are inapplicable
or the requested information is shown in the financial statements of the
registrant or the related notes to the financial statements.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Act) may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such 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 such 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 whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
posteffective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Amendment No. 2 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Bellevue, State of Washington, on June 28, 1999.
drugstore.com, inc.
/s/ David E. Rostov
By: _________________________________
David E. Rostov
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*Peter M. Neupert President, Chief Executive June 28, 1999
______________________________________ Officer and Director
(Peter M. Neupert) (Principal Executive
Officer)
/s/ David E. Rostov Vice President and Chief June 28, 1999
______________________________________ Financial Officer
(David E. Rostov) (Principal Financial and
Accounting Officer)
*Jeffrey P. Bezos Director June 28, 1999
______________________________________
(Jeffrey P. Bezos)
*Brook H. Byers Director June 28, 1999
______________________________________
(Brook H. Byers)
*L. John Doerr Director June 28, 1999
______________________________________
(L. John Doerr)
*Howard Schultz Director June 28, 1999
______________________________________
(Howard Schultz)
*Jed A. Smith Director June 28, 1999
______________________________________
(Jed A. Smith)
/s/ David E. Rostov June 28, 1999
*By: __________________________________
David E. Rostov
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Fifth Amended and Restated Certificate of Incorporation of
drugstore.com.
3.2 Form of Sixth Amended and Restated Certificate of Incorporation, to be
filed and effective prior to the sale of our Series E preferred stock.
3.3* Form of Amended and Restated Certificate of Incorporation of
drugstore.com, to be filed and effective upon completion of this
offering.
3.4* Bylaws of drugstore.com, as amended.
5.1 Opinion of Venture Law Group, A Professional Corporation.
10.1* Form of Indemnification Agreement between drugstore.com and each of
its officers and directors.
10.2* 1998 Stock Plan, as amended.
10.3* 1999 Employee Stock Purchase Plan.
10.4* Restricted Stock Purchase Agreement with Jed A. Smith dated June 19,
1998.
10.5* Restricted Stock Purchase Agreement with Peter M. Neupert dated July
23, 1998.
10.6* Form of Warrant To Purchase Common Stock.
10.7* Series A Preferred Stock Purchase Agreement dated June 22, 1998.
10.8* Series B Preferred Stock Purchase Agreement dated October 9, 1998.
10.9* Series B Preferred Stock Rescission Agreement dated November 23, 1998
between drugstore.com and entities affiliated with Kleiner Perkins
Caufield & Byers.
10.10* Series C Preferred Stock and Convertible Note Purchase Agreement dated
January 29, 1999.
10.11* Series D Preferred Stock and Convertible Note Purchase Agreement dated
May 19, 1999.
10.12** Fourth Amended and Restated Investors' Rights Agreement dated May 19,
1999.
10.13* Sublease Agreement dated January 29, 1999 between drugstore.com and
The Boeing Company for offices at 13920 Southeast Eastgate Way, Suite
300, Bellevue, Washington.
10.14*+ Amended and Restated Technology License and Advertising Agreement
between drugstore.com, Amazon.com and Amazon.com Drugstore, Inc.
10.15*+ Pharmacy Service Agreement dated February 8, 1999 with RxAmerica.
10.16*+ Service & Supply Agreement dated January 29, 1999 with Walsh
Distribution, Inc.
10.17* Offer Letter dated June 29, 1998 with Peter M. Neupert.
10.18* Offer Letter dated July 28, 1998 with Kal Raman.
10.19* Offer Letter dated December 4, 1998 with Mark L. Silverman.
10.20* Offer Letter dated June 18, 1998 with Jed A. Smith.
10.21* Amended and Restated Voting Agreement dated May 19, 1999.
10.22* Letter Agreement dated May 19, 1999 with Amazon.com.
10.23* Cable Advertising Agreement dated May 19, 1999 with Vulcan Ventures
Incorporated.
10.24 Series E Preferred Stock Purchase Agreement dated June 17, 1999.
10.25 Addendum to Fourth Amended and Restated Investors' Rights Agreement
dated June 17, 1999.
10.26** Third Amended and Restated Voting Agreement dated June 17, 1999.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.27 Main Agreement dated June 17, 1999 with Rite Aid Corporation.
10.28 Main Agreement dated June 17, 1999 with General Nutrition Companies, Inc.
10.29 Governance Agreement dated June 17, 1999 with Rite Aid Corporation.
10.30 Governance Agreement dated June 17, 1999 with General Nutrition Companies, Inc. and General
Nutrition Investment Company.
10.31 Pharmacy Supply and Services Agreement dated June 17, 1999 with Rite Aid Corporation.
21.1* Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule (EDGAR-filed version only).
</TABLE>
- --------
* Previously filed.
**To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the SEC.
<PAGE>
EXHIBIT 3.2
EXHIBIT A
SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DRUGSTORE.COM, INC.
The undersigned, Peter M. Neupert and Mark L. Silverman, hereby certify
that:
1. They are the duly elected and acting President and Secretary,
respectively, of drugstore.com, inc., a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on April 2, 1998.
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
ARTICLE I
"The name of this corporation is drugstore.com, inc. (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, Delaware 19805, County of New Castle. The name
of its registered agent at such address is Corporation Service Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
(A) Classes of Stock. The Corporation is authorized to issue three classes
of stock to be designated, respectively, "Common Stock," "Serial Preferred
Stock" and "Preferred Stock" The total number of shares which the
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2
Corporation is authorized to issue is Four Hundred Million (400,000,000) shares,
each with a par value of $0.001 per share. Two Hundred Fifty Million
(250,000,000) shares shall be Common Stock, One Hundred Million (100,000,000)
shares shall be Serial Preferred Stock and Fifty Million (50,000,000) shares
shall be Preferred Stock.
(B) Rights, Preferences and Restrictions of Serial Preferred Stock. The
Serial Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized to provide for the issuance of
shares of Serial Preferred Stock in one or more series and, by filing a
certificate pursuant to the applicable law of the State of Delaware (hereinafter
referred to as "Preferred Stock Designation"), to establish from time to time
the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations and restrictions thereof. The authority of
the Board of Directors with respect to each series shall include, but not be
limited to, determination of the following:
(i) The designation of the series, which may be by distinguishing
number, letter or title.
(ii) The number of shares of the series, which number the Board of
Directors may thereafter (except where otherwise provided in the Preferred Stock
Designation) increase or decrease (but not below the number of shares thereof
then outstanding).
(iii) The amounts payable on, and the preferences, if any, of shares
of the series in respect of dividends, and whether such dividends, if any, shall
be cumulative or noncumulative.
(iv) Dates at which dividends, if any, shall be payable.
(v) The redemption rights and price or prices, if any, for shares of
the series.
(vi) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series.
(vii) The amounts payable on, and the preferences, if any, of shares
of the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
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3
(viii) Whether the shares of the series shall be convertible into or
exchangeable for shares of any other class or series, or any other security, of
the Corporation or any other corporation, and, if so, the specification of such
other class or series or such other security, the conversion or exchange price
or prices or rate or rates, any adjustments thereof, the date or dates at which
such shares shall be convertible or exchangeable and all other terms and
conditions upon which such conversion or exchange may be made.
(ix) Restrictions on the issuance of shares of the same series or of
any other class or series.
(x) The voting rights, if any, of the holders of shares of the
series.
(C) Rights, Preferences and Restrictions of Preferred Stock. The Preferred
Stock authorized by this Sixth Amended and Restated Certificate of Incorporation
shall consist of the series of Preferred Stock set forth below. The first
series of Preferred Stock shall be designated "Series A Preferred Stock" and
shall consist of Ten Million (10,000,000) shares. The second series of
Preferred Stock shall be designated "Series B Preferred Stock" and shall consist
of Five Million Five Hundred Thousand (5,500,000) shares. The third series of
Preferred Stock shall be designated "Series C Preferred Stock" and shall consist
of Five Million (5,000,000) shares. The fourth series of Preferred Stock shall
be designated "Series D Preferred Stock" and shall consist of Two Million Three
Hundred Thousand (2,300,000) shares. The fifth series of Preferred Stock shall
be designated "Series E Preferred Stock" and shall consist of Twelve Million
Three Hundred Thousand (12,300,000) shares. The rights, preferences,
privileges, and restrictions granted to and imposed on the Series A Preferred
Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D
Preferred Stock and the Series E Preferred Stock are as set forth below in this
Article IV(C).
1. Dividend Provisions. The holders of shares of Series A, Series
B, Series C, Series D and Series E Preferred Stock shall be entitled to receive
dividends, out of any assets legally available therefor, prior and in preference
to any declaration or payment of any dividend (payable other than in Common
Stock or other securities and rights convertible into or entitling the holder
thereof to receive, directly or indirectly, additional shares of Common Stock of
the Corporation) on the Common Stock of the Corporation, at the rate of $0.08
per share per annum on each outstanding share of Series A Preferred Stock, the
rate
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4
of $0.335 per share per annum on each outstanding share of Series B Preferred
Stock, the rate of $0.7825 per share per annum on each outstanding share of
Series C Preferred Stock, the rate of $1.765 per share per annum on each
outstanding share of Series D Preferred Stock, and the rate of $0.081416 per
share per annum on each outstanding share of Series E Preferred Stock (in each
case as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares after June 17, 1999)
payable quarterly when, as and if declared by the Board of Directors. Such
dividends shall not be cumulative. In addition, in the event dividends are paid
on any share of Common Stock, an additional dividend shall be paid with respect
to all outstanding shares of Preferred Stock in an amount equal per share (on an
as-if-converted basis) to the amount paid or set-aside for each share of Common
Stock of the Corporation whenever funds are legally available therefor, when, as
and if declared by the Board of Directors.
2. Liquidation.
(a) Preference. In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the holders of
the Series A, Series B, Series C, Series D and Series E Preferred Stock shall be
entitled to receive, prior and in preference to any distribution of any of the
assets of the Corporation to the holders of Common Stock by reason of their
ownership thereof, an amount per share equal to (i) $0.80 per share for each
share of Series A Preferred Stock then held by them, (ii) $3.35 per share for
each share of Series B Preferred Stock then held by them, (iii) $7.825 per share
for each share of Series C Preferred Stock then held by them, (iv) $17.65 per
share for each share of Series D Preferred Stock then held by them and (v)
$0.81416 per share for each share of Series E Preferred Stock then held by them,
plus declared but unpaid dividends (in each case as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like with respect to
such shares after June 17, 1999). If, upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series A, Series B,
Series C, Series D and Series E Preferred Stock shall be insufficient to permit
the payment to such holders of the full aforesaid preferential amounts, then,
subject to the rights of holders of any outstanding series of Serial Preferred
Stock, the entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the Series A,
Series B, Series C, Series D and Series E Preferred Stock in proportion to the
preferential amount
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5
each such holder is otherwise entitled to receive.
(b) Remaining Assets. Upon the completion of the distribution
required by Section 2(a) above, if assets remain in the Corporation, subject to
the rights of holders of any outstanding series of Serial Preferred Stock, the
holders of the Common Stock of the Corporation shall receive all of the
remaining assets of the Corporation available for distribution to stockholders.
(c) Certain Acquisitions.
(i) Deemed Liquidation. For purposes of this Section 2, a
liquidation, dissolution or winding up of the Corporation shall be deemed to
occur if the Corporation shall (A) sell, convey, or otherwise dispose of all or
substantially all of its property or business or merge or consolidate with any
other corporation (other than a wholly-owned subsidiary corporation) where the
stockholders of the Corporation own less than fifty percent (50%) of the voting
power of the surviving entity after such merger or consolidation or (B) effect
any other transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of the Corporation is disposed of, provided
that this Section 2(c)(i) shall not apply to a merger effected solely for the
purpose of changing the domicile of the Corporation.
(ii) Valuation of Consideration. In the event of a deemed liquidation
as described in Section 2(c)(i) above, if the consideration received by the
Corporation is other than cash, its value will be deemed its fair market value.
Any securities shall be valued as follows:
(A) Securities not subject to investment letter or other similar
restrictions on free marketability:
(1) If traded on a securities exchange or The Nasdaq Stock Market, the
value shall be deemed to be the average of the closing prices of the securities
on such exchange over the thirty-day period ending three (3) days prior to the
closing;
(2) If actively traded over-the-counter, the value shall be deemed to
be the average of the closing bid or sale prices (whichever is applicable) over
the thirty-day period ending three (3) days prior to the closing; and
(3) If there is no active
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6
public market, the value shall be the fair market value thereof, as mutually
determined by the Corporation and the holders of at least a majority of the
voting power of all then outstanding shares of Preferred Stock.
(B) The method of valuation of securities subject to investment letter
or other restrictions on free marketability (other than restrictions arising
solely by virtue of a stockholder's status as an affiliate or former affiliate)
shall be to make an appropriate discount from the market value determined as
above in Section 2(c)(ii)(A) to reflect the approximate fair market value
thereof, as mutually determined by the Corporation and the holders of a majority
of the voting power of all then outstanding shares of Preferred Stock.
(iii) Notice of Transaction. The Corporation shall give each holder
of record of Preferred Stock written notice of such impending transaction not
later than ten (10) days prior to the stockholders' meeting called to approve
such transaction, or ten (10) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 2, and the Corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than ten (10) days after the Corporation has given the first notice
provided for herein or sooner than five (5) days after the Corporation has given
notice of any material changes provided for herein.
(iv) Effect of Noncompliance. In the event the requirements of
Section 2(c)(iii) are not complied with, the Corporation shall forthwith either
cause the closing of the transaction to be postponed until such requirements
have been complied with, or cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Preferred Stock shall revert to
and be the same as such rights, preferences and privileges existing immediately
prior to the date of the first notice referred to in Section 2(c)(iii) hereof.
3. Redemption. The Preferred Stock is not redeemable.
4. Conversion. The holders of the Series A, Series B, Series C,
Series D and Series E Preferred Stock shall have conversion rights as follows
(the "Conversion Rights"):
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7
(a) Right to Convert. Subject to Section 4(c), each share of Series
A, Series B, Series C, Series D and Series E Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing (i) $0.80 in the case of the Series A
Preferred Stock, (ii) $3.35 in the case of the Series B Preferred Stock, (iii)
$7.825 in the case of the Series C Preferred Stock, (iv) $17.65 in the case of
the Series D Preferred Stock and (v) $0.81416 in the case of the Series E
Preferred Stock by the Conversion Price applicable to such share, determined as
hereafter provided, in effect on the date the certificate is surrendered for
conversion. The initial Conversion Price per share shall be $0.80 for shares of
Series A Preferred Stock, $3.35 for shares of Series B Preferred Stock, $7.825
for shares of Series C Preferred Stock, $17.65 for shares of Series D Preferred
Stock and $0.81416 for shares of Series E Preferred Stock. Such initial
Conversion Price shall be subject to adjustment as set forth in Section 4(d)
below.
(b) Automatic Conversion. Each share of Series A, Series B, Series C,
Series D and Series E Preferred Stock shall automatically be converted into
shares of Common Stock at the applicable Conversion Price at the time in effect
for such share immediately upon the earlier of (i) except as provided below in
Section 4(c), the Corporation's sale of its Common Stock in an underwritten
public offering pursuant to a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), the public offering price of which is
not less than $10.00 per share (appropriately adjusted for any stock split,
dividend, combination or other recapitalization) and which results in gross cash
proceeds in excess of $15,000,000 and (ii) the date specified by written consent
or agreement of the holders of at least two-thirds (2/3) of the then outstanding
shares of Preferred Stock, voting together as a class.
(c) Mechanics of Conversion. Before any holder of Series A, Series B,
Series C, Series D or Series E Preferred Stock shall be entitled to convert the
same into shares of Common Stock, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for such series of Preferred Stock, and shall give written notice
to the Corporation at its principal corporate office, of the election to convert
the same and shall state therein the name or names in which the certificate or
certificates for
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8
shares of Common Stock are to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of such series of Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of such date. If the conversion is in connection
with an underwritten offering of securities registered pursuant to the
Securities Act the conversion may, at the option of any holder tendering such
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive Common Stock upon conversion of such Preferred
Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the closing of such sale of securities.
(d) Conversion Price Adjustments of Preferred Stock for Certain Splits
and Combinations. The Conversion Price of the Series A, Series B, Series C,
Series D and Series E Preferred Stock shall be subject to adjustment from time
to time as follows:
(i) Stock Splits and Dividends. In the event the Corporation should
at any time or from time to time after the date upon which any shares of Series
A, Series B or Series C Preferred Stock were first issued (the "Purchase Date"
with respect to each such series), or after May 19, 1999 with respect to the
Series D Preferred Stock (the "Purchase Date" with respect to the Series D
Preferred Stock), or after June 17, 1999 with respect to the Series E Preferred
Stock ( the "Purchase Date" with respect to the Series E Preferred Stock) fix a
record date for the effectuation of a split or subdivision of the outstanding
shares of Common Stock or the determination of holders of Common Stock entitled
to receive a dividend or other distribution payable in additional shares of
Common Stock or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock Equivalents") without a
corresponding split or subdivision of the Preferred Stock or a corresponding
dividend or other distribution to the Preferred Stock, then,
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9
as of such record date (or the date of such dividend distribution, split or
subdivision if no record date is fixed), the Conversion Price of each of the
Series A, Series B, Series C, Series D and Series E Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be increased in proportion to such
increase of the aggregate of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents with the number of shares
issuable with respect to Common Stock Equivalents determined from time to time
as provided in Section 4(d)(iii) below.
(ii) Reverse Stock Splits. If the number of shares of Common Stock
outstanding at any time after the Purchase Date is decreased by a combination of
the outstanding shares of Common Stock without a corresponding decrease of the
Preferred Stock, then, following the record date of such combination, the
Conversion Price for each of the Series A, Series B, Series C, Series D and
Series E Preferred Stock shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of such series shall
be decreased in proportion to such decrease in outstanding shares.
(iii) The following provisions shall apply for purposes of this
Section 4(d):
(A) The aggregate maximum number of shares of Common Stock deliverable
upon conversion or exercise of Common Stock Equivalents (assuming the
satisfaction of any conditions to convertibility or exercisability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) shall be deemed to have been issued at the
time such Common Stock Equivalents were issued.
(B) In the event of any change in the number of shares of Common Stock
deliverable or in the consideration payable to the Corporation upon conversion
or exercise of such Common Stock Equivalents including, but not limited to, a
change resulting from the antidilution provisions thereof, the Conversion Price
of each of the Series A, Series B, Series C, Series D and Series E Preferred
Stock, to the extent in any way affected by or computed using such Common Stock
Equivalents, shall be recomputed to reflect such change, but no further
adjustment shall be made for the actual issuance of Common Stock or any payment
of such consideration upon the exercise of any such options or rights or the
conversion or exchange of such securities.
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10
(C) Upon the termination or expiration of the convertibility or
exercisability of any such Common Stock Equivalents, the Conversion Price of
each of the Series A, Series B, Series C, Series D and Series E Preferred Stock,
to the extent in any way affected by or computed using such Common Stock
Equivalents, shall be recomputed to reflect the issuance of only the number of
shares of Common Stock (and Common Stock Equivalents which remain convertible or
exercisable) actually issued upon the conversion or exercise of such Common
Stock Equivalents.
(e) Other Distributions. In the event the Corporation shall declare a
distribution payable in securities of other persons, evidences of indebtedness
issued by the Corporation or other persons, assets (excluding cash dividends) or
options or rights not referred to in Section 4(d)(i), then, in each such case
for the purpose of this Section 4(e), the holders of Series A, Series B, Series
C, Series D and Series E Preferred Stock shall be entitled to a proportionate
share of any such distribution as though they were the holders of the number of
shares of Common Stock of the Corporation into which their shares of Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such
distribution.
(f) Recapitalizations. If at any time or from time to time there shall
be a recapitalization of the Common Stock (other than a subdivision, combination
or merger or sale of assets transaction provided for elsewhere in this Section 4
or Section 2) provision shall be made so that the holders of the Series A,
Series B, Series C, Series D and Series E Preferred Stock shall thereafter be
entitled to receive upon conversion of such Preferred Stock the number of shares
of stock or other securities or property of the Corporation or otherwise, to
which a holder of Common Stock deliverable upon conversion would have been
entitled on such recapitalization. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section 4 with
respect to the rights of the holders of such Preferred Stock after the
recapitalization to the end that the provisions of this Section 4 (including
adjustment of the Conversion Price then in effect and the number of shares
purchasable upon conversion of such Preferred Stock) shall be applicable after
that event and be as nearly equivalent as practicable.
(g) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of
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11
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of
Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon the conversion of any
share or shares of the Series A, Series B, Series C, Series D or Series E
Preferred Stock, and the number of shares of Common Stock to be issued shall be
rounded to the nearest whole share. The number of shares issuable upon such
conversion shall be determined on the basis of the total number of shares of
Series A, Series B, Series C, Series D or Series E Preferred Stock the holder is
at the time converting into Common Stock and the number of shares of Common
Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of the
Conversion Price of Series A, Series B, Series C, Series D or Series E Preferred
Stock pursuant to this Section 4, the Corporation, at its expense, shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of such Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series A, Series B,
Series C, Series D or Series E Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such adjustment or
readjustment, (B) the Conversion Price for such series of Preferred Stock at the
time in effect and (C) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of a share of such series of Preferred Stock.
(i) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, the Corporation
shall mail to each holder of Series A, Series B, Series C, Series D or Series E
Preferred Stock, at least ten
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12
(10) days prior to the date specified therein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A, Series B, Series C, Series D and Series E Preferred
Stock, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of such series of
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of such series of Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to this Certificate of
Incorporation.
(k) Notices. Any notice required by the provisions of this Section 4
to be given to the holders of shares of Series A, Series B, Series C, Series D
or Series E Preferred Stock shall be deemed given: (i) upon personal delivery to
the party to be notified; (ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient; if not, then on the next business
day; (iii) one (1) day after deposit with a nationally recognized overnight
courier, specifying next day delivery, with written verification of receipt; or
(iv) five (5) days after having been deposited in the United States mail,
postage prepaid. All notices shall be addressed to each holder of record at his
address appearing on the books of the Corporation.
5. Voting Rights. The holder of each share of Series A, Series B,
Series C, Series D or Series E Preferred Stock shall have the right to one vote
for each share of Common Stock into which such Preferred Stock could then be
converted, and with respect to such vote, such holder shall have full voting
rights and powers equal to the voting rights and powers of the holders of Common
Stock, and shall be entitled, notwithstanding any provision hereof, to notice
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13
of any stockholders' meeting in accordance with the bylaws of the Corporation,
and shall be entitled to vote, together with holders of Common Stock, with
respect to any question upon which holders of Common Stock have the right to
vote. Fractional votes shall not, however, be permitted and any fractional
voting rights available on an as-converted basis (after aggregating all shares
into which shares of Series A, Series B, Series C, Series D or Series E
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward).
6. Protective Provisions. So long as at least 1,000,000 shares of
Preferred Stock are outstanding (as adjusted for stock splits, stock dividends,
combinations or recapitalizations and the like), the Corporation shall not
without first obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least two thirds (2/3) of the then outstanding shares
of Preferred Stock, voting together as a class:
(a) authorize or issue, or obligate itself to issue, any other equity
security, including any other security convertible into or exercisable for any
equity security, having a preference over, or being on a parity with, the Series
A, Series B, Series C, Series D or Series E Preferred Stock with respect to
voting, dividends, conversion or upon liquidation;
(b) effect a liquidation, dissolution or winding up of the Corporation
or a transaction described in Section 2(c)(i) above;
(c) declare or pay any dividend to the holders of shares of Common
Stock or Preferred Stock; or
(d) amend, alter or repeal the Corporation's Certificate of
Incorporation or Bylaws or take any other action, whether by merger,
consolidation or otherwise, in a manner that would alter or change the rights,
preferences or privileges of the shares of Preferred Stock so as to affect
adversely the shares of such class.
7. Status of Converted Stock. In the event any shares of Preferred
Stock shall be converted pursuant to Section 4 hereof, the shares so converted
shall be retired and canceled and shall not be reissued by the Corporation. The
Certificate of Incorporation of the Corporation shall be appropriately amended
to effect the corresponding reduction in the Corporation's authorized capital
stock. No share or shares of Preferred Stock acquired by the Corporation by
reason of redemption, purchase or otherwise shall be
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14
reissued.
(D) Common Stock.
1. The holders of shares of Common Stock shall be entitled to one
vote for each such share upon all questions presented to the common stockholders
of the Corporation.
2. The Corporation shall be entitled to treat the person in whose
name any share of its stock is registered as the owner thereof for all purposes
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share on the part of any other person, whether or not the Corporation
shall have notice thereof, except as expressly provided by applicable law.
3. Subject to the prior rights of holders of all classes or series of
stock at the time outstanding having prior rights as to dividends, the holders
of the Common Stock shall be entitled to receive, when and as declared by the
Board of Directors, out of any assets of the Corporation legally available
therefor, such dividends as may be declared from time to time by the Board of
Directors.
4. Upon the liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation shall be distributed as provided in
Section 2 of Article IV(C).
5. The Common Stock is not redeemable.
ARTICLE V
In furtherance of, and not in limitation of, the powers conferred by law,
the Board of Directors is expressly authorized and empowered to adopt, amend or
repeal the bylaws of the Corporation.
ARTICLE VI
Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
ARTICLE VII
(A) To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
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15
stockholders for monetary damages for breach of fiduciary duty as a director.
(B) The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or served at any
other enterprise as a director or officer at the request of the Corporation or
any predecessor to the Corporation.
(C) Neither any amendment nor repeal of this Article VII, nor the adoption
of any provision of the Corporation's Certificate of Incorporation inconsistent
with this Article VII, shall eliminate or reduce the effect of this Article VII
in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article VII, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
* * *
<PAGE>
16
The foregoing Sixth Amended and Restated Certificate of Incorporation,
which both amends and restates the Certificate of Incorporation of the
Corporation, as heretofore amended and restated, has been duly adopted by the
corporation's Board of Directors and stockholders in accordance with the
applicable provisions of Sections 242 and 245, and by written consent of
stockholders pursuant to Section 228, of the General Corporation Law of the
State of Delaware.
Executed at Bellevue, Washington on________, 1999.
______________________________
Peter M. Neupert, President
______________________________
Mark L. Silverman, Secretary
<PAGE>
EXHIBIT 5.1
June 28, 1999
drugstore.com, inc.
13920 Southeast Eastgate Way
Suite 300
Bellevue, WA 98005
Registration Statement on Form S-1 (File No. 333-78813)
-------------------------------------------------------
Ladies and Gentlemen:
We have examined the amended Registration Statement on Form S-1 (File No.
333-78813) (the "Registration Statement") to be filed by you with the Securities
----------------------
and Exchange Commission on or about June 28, 1999, in connection with the
registration under the Securities Act of 1933 of shares of your Common Stock
(the "Shares"). As your legal counsel in connection with this transaction, we
------
have examined the proceedings taken and we are familiar with the proceedings
proposed to be taken by you in connection with the sale and issuance of the
Shares.
It is our opinion that upon completion of the proceedings being taken in
order to permit such transactions to be carried out in accordance with the
securities laws of the various states where required, the Shares, when issued
and sold in the manner described in the Registration Statement, will be legally
and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever it appears in the
Registration Statement and in any amendment to it.
Sincerely,
VENTURE LAW GROUP
A Professional Corporation
/s/ VENTURE LAW GROUP
<PAGE>
Exhibit 10.24
DRUGSTORE.COM, INC.
-------------------
SERIES E PREFERRED STOCK PURCHASE AGREEMENT
-------------------------------------------
This Series E Preferred Stock Purchase Agreement (this "Agreement") is made
---------
as of June 17, 1999 by and among drugstore.com, inc., a Delaware corporation
(the "Company"), and the investors listed on Schedule I attached hereto (each a
-------
"Purchaser" and together the "Purchasers").
--------- ----------
The parties hereby agree as follows:
1. Purchase and Sale of Preferred Stock.
------------------------------------
1.1 Sale and Issuance of Series E Preferred Stock.
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of
State of the State of Delaware on or before the Closing (as defined below) the
Sixth Amended and Restated Certificate of Incorporation in the form attached
hereto as Exhibit A (the "Restated Certificate"); provided, that if any
--------- -------------------- --------
additional series of Preferred Stock is authorized or issued after the date of
this Agreement (after receiving requisite Company Stockholder approval,
including the approval of the Purchasers to the extent such approval would be
required for such an issuance if it occurred after the Closing) and prior to the
Closing, the Restated Certificate shall include the terms thereof.
(b) Subject to the terms and conditions of this Agreement, each
of the Purchasers agrees to purchase and the Company agrees to sell and issue to
such Purchaser that number of shares of Series E Preferred Stock, par value
$0.001, of the Company, listed opposite such Purchaser's name on Schedule I in
consideration of the payment by each Purchaser of the amount of cash
consideration listed opposite such Purchaser's name and the execution and
delivery by each Purchaser of the Transaction Agreements (as defined below) to
which such Purchaser is a party (collectively, the "Consideration"). The shares
of Series E Preferred Stock issued to the Purchasers pursuant to this Agreement
are hereinafter referred to as the "Series E Preferred Shares."
-------------------------
<PAGE>
(c) The Series E Preferred Shares shall have the rights,
privileges, preferences and restrictions as set forth in the Restated
Certificate.
(d) The parties hereto acknowledge that the Company has filed
with the Securities and Exchange Commission (the "SEC") a registration statement
on Form S-1 (the "Registration Statement") in connection with the initial public
----------------------
offering (the "IPO") of the Company's Common Stock. The parties hereto agree
---
that if the IPO shall have been consummated prior to the Closing, each Purchaser
shall receive, in exchange for the Consideration, such number of shares of
Common Stock issuable upon conversion of the number of Series E Preferred Shares
listed opposite such Purchaser's name on Schedule I in accordance with the terms
of the Series E Preferred Stock set forth in the Restated Certificate. The term
"Stock" shall mean either the shares of Common Stock or the Series E Preferred
-----
Shares issued under this Agreement, as the case may be. The parties hereto
further agree that, for purposes of the representations, warranties, covenants,
agreements, conditions and other provisions contained in this Agreement, if the
IPO shall have been consummated prior to the Closing, such representations,
warranties, covenants, agreements and conditions shall be deemed to have been
amended to give effect to the consummation of the IPO and the conversion of the
Series E Preferred Stock into Common Stock and the related change in
capitalization of the Company.
1.2 Closing; Delivery.
-----------------
(a) The purchase and sale of the Stock shall take place at the
offices of Cravath, Swaine & Moore no later than 5 business days after the
satisfaction or (subject to applicable law) waiver of the conditions set forth
in Sections 4 and 5 (excluding conditions that, by their terms, cannot be
satisfied until the Closing) (which time and place are designated as the
"Closing").
-------
(b) At the Closing, the Company shall deliver to each Purchaser
a certificate or certificates for the number of shares of the Stock to be
purchased by such Purchaser pursuant to this Agreement against delivery of the
Consideration therefor (in the case of cash consideration, by wire transfer of
immediately available funds to the Company's bank account).
<PAGE>
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Purchaser that, subject to Section 1.1(d):
2.1 Capitalization.
--------------
(a) Upon the filing of the Restated Certificate, the authorized
capital of the Company will consist of 50,000,000 shares of Preferred Stock,
100,000,000 shares of Serial Preferred Stock and 250,000,000 shares of Common
Stock.
(b) As of the date of this Agreement, (i) 10,000,000 of the
shares of Preferred Stock have been designated Series A Preferred Stock, all of
which are issued and outstanding, (ii) 5,500,000 of the shares of Preferred
Stock have been designated Series B Preferred Stock, 5,446,268 of which are
issued and outstanding, (iii) 5,000,000 of the shares of Preferred Stock have
been designated Series C Preferred Stock, of which 4,472,844 are issued and
outstanding and (iv) 2,300,000 of the shares of Preferred Stock have been
designated Series D Preferred Stock, none of which (other than 2,266,289 shares
which may be issued in exchange for notes issued pursuant to the Series D
Preferred Stock and Convertible Note Purchase Agreement dated as of May 18, 1999
between the Company and the investors party thereto) are issued and outstanding.
All of the outstanding shares of Preferred Stock have been, and when issued and
paid for in accordance with the terms of this Agreement the Series E Preferred
Shares will be, duly authorized, fully paid and are nonassessable, issued in
compliance with all applicable federal and state securities laws (in the case of
the issuance of the Series E Preferred Shares, based in part upon the
representations of the Purchasers in Sections 3.4, 3.5, 3.6, 3.7, 3.8 and 3.9),
and convertible into Common Stock on a one-for-one basis.
(c) As of the date of this Agreement, no shares of Serial
Preferred Stock are issued and outstanding.
(d) As of the date of this Agreement, 2,323,000 shares of Common
Stock are issued and outstanding and 4,235,000 shares of Common Stock are
reserved for issuance under the Company's 1998 Stock Plan (of which 8,000 shares
have been issued pursuant to restricted stock agreements, 39,166 shares are
issuable under outstanding options which are currently exercisable, 3,003,893
shares are issuable under other outstanding options which are not currently
exercisable and 1,183,941 shares remain available for future grants). All of the
outstanding shares of Common Stock have been duly authorized, fully paid and are
nonassessable and
<PAGE>
issued in compliance with all applicable federal and state securities laws.
(e) Except for the conversion privileges of the Preferred Stock,
and except as set forth in (i) the Fourth Amended and Restated Investors' Rights
Agreement dated as of May 18, 1999 among the Company and the parties listed on
Exhibit A thereto (the "Investors' Rights Agreement"), (ii) the letter agreement
---------------------------
dated May 19, 1999 between the Company and Amazon.com, Inc., (iii) the warrant
to purchase 10,000 shares of Common Stock issued on February 1, 1999, and (iv)
the service agreement with David Hyde Pierce pursuant to which the Company has
agreed to grant him a currently exercisable option to purchase 8,000 shares of
Common Stock, as of the date of this Agreement there are no outstanding options,
warrants, rights (including conversion or preemptive rights and rights of first
refusal or similar rights) or agreements, oral or in writing, for the purchase
or acquisition from the Company of any shares of its capital stock.
(f) The Stock shall constitute 33 1/3% of all shares of Common
Stock outstanding as of the date of this Agreement, assuming (i) all shares of
Preferred Stock outstanding as of the date of this Agreement have been converted
into Common Stock, (ii) all warrants for Common Stock outstanding as of the date
of this Agreement have been exercised for Common Stock, (iii) all options for
Common Stock outstanding as of the date of this Agreement which are exercisable
as of the date of this Agreement have been exercised for Common Stock and (iv)
all other rights outstanding as of the date of this Agreement which are
exercisable as of the date of this Agreement to acquire Common Stock or
securities convertible into Common Stock have been exercised for or converted
into Common Stock other than, in each case, the right of Amazon.com, Inc. to
purchase Common Stock upon the consummation of the IPO pursuant to the letter
agreement dated May 19, 1999.
(g) As of the date of this Agreement, the Company's sole
subsidiary is DS Pharmacy, Inc.
2.2 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Addendum to the Investors' Rights
Agreement dated as of June 17, 1999, among the Company, the Purchasers and the
other parties listed on Exhibit A thereto (the "Addendum to Investors' Rights
-----------------------------
Agreement"), the Third Amended and Restated Voting Agreement dated as of June
- ---------
17, 1999, among the Company, the Purchasers and the other parties listed on
Exhibit A
<PAGE>
thereto, (the "Voting Agreement"), the Governance Agreement dated as of June 17,
----------------
1999, between the Company and Rite Aid Corporation (the "Rite Aid
--------
Governance Agreement") and the Governance Agreement dated as of June 17, 1999,
- --------------------
between the Company, General Nutrition Companies, Inc. and General Nutrition
Investment Company (the "GNC Governance Agreement", and collectively with the
------------------------
Addendum to Investors' Rights Agreement, the Voting Agreement, the Rite Aid
Governance Agreement and this Agreement, the "Agreements" and, together with the
----------
Main Agreement dated as of June 17, 1999, between the Company and Rite Aid
Corporation (the "Rite Aid Main Agreement"), the Pharmacy Supply and Services
-----------------------
Agreement dated as of June 17, 1999, between the Company and Rite Aid
Corporation (the "Pharmacy Supply and Services Agreement"), the PCS Provider
--------------------------------------
Agreement dated as of June 17, 1999, between the Company and PCS Health Systems,
Inc., the Eagle Provider Agreement dated as of June 17, 1999, between the
Company and Eagle Managed Care, the Addendum to the Provider Agreements among
the Company, Rite Aid Corporation, PCS Health Systems, Inc. and Eagle Managed
Care, the Main Agreement dated as of June 17, 1999, between the Company and
General Nutrition Companies, Inc. (the "GNC Main Agreement"), and the
------------------
Consignment Agreement dated as of June 17, 1999, between the Company and General
Nutrition Sales Corporation, the "Transaction Agreements"), the performance of
----------------------
all obligations of the Company hereunder and thereunder and the authorization,
issuance and delivery of the Stock has been taken or will be taken prior to the
Closing, and the Agreements, when executed and delivered by the Company, will
constitute valid and legally binding obligations of the Company, enforceable
against the Company in accordance with their terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and other laws of general application affecting enforcement of
creditors' rights generally, as limited by laws relating to the availability of
specific performance, injunctive relief, or other equitable remedies, or (ii) to
the extent the indemnification provisions contained in the Investors' Rights
Agreement may be limited by applicable federal or state securities laws.
2.3 Valid Issuance of Stock. The Stock that will be issued to the
-----------------------
Purchaser at Closing will have been duly and validly reserved for issuance and,
when issued and delivered in accordance with the terms hereof, will be duly and
validly issued and free of restrictions on transfer other than restrictions on
transfer under this Agreement, the Main Agreement, the Rite Aid Governance
Agreement, the GNC Governance Agreement, the Addendum to Investors' Rights
Agreement and applicable state and federal securities laws. Based in part upon
the
<PAGE>
representations of the Purchasers in this Agreement, the Stock will be
issued in compliance with all applicable federal and state securities laws. The
Common Stock issuable upon conversion of the Series E Preferred Stock has been
duly and validly reserved for issuance, and upon issuance in accordance with the
terms of the Restated Certificate, will be duly and validly issued, fully paid
and nonassessable and free of restrictions on transfer other than restrictions
on transfer under this Agreement, the Governance Agreement, the Investors'
Rights Agreement and applicable federal and state securities laws and will be
issued in compliance with all applicable federal and state securities laws.
2.4 Litigation. There is no action, suit, proceeding or investigation
----------
pending or, to the Company's knowledge, currently threatened against the Company
or any of its subsidiaries that questions the validity of the Transaction
Agreements or the right of the Company or any of its subsidiaries, as
applicable, to enter into them, or to consummate the transactions contemplated
hereby or thereby nor is the Company aware that there is any basis for the
foregoing. Neither the Company nor any of its subsidiaries is a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality that challenges the validity
of the Transaction Agreements or the right of the Company or any of its
subsidiaries, as applicable, to enter into them, or to consummate the
transactions contemplated thereby.
2.5 Liabilities. The Company and its subsidiaries, on a consolidated
-----------
basis, have no material liabilities and, to the best of the Company's knowledge,
there are no material contingent liabilities, required by generally accepted
accounting principles to be disclosed on a balance sheet but which are not
disclosed on the Company's audited balance sheet as of December 31, 1998 and/or
on the Company's unaudited balance sheet as of March 31, 1999, except
liabilities incurred in the ordinary course of business subsequent to March 31,
1999 that would not have a material adverse effect on the properties, assets,
financial condition or results of operations of the Company and its subsidiaries
on a consolidated basis.
2.6 Compliance with Other Instruments. The execution, delivery and
---------------------------------
performance of the Agreements and the consummation of the transactions
contemplated thereby will not result in any violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any provision of the Restated Certificate or the bylaws of the
Company or any instrument, judgment, order, writ, decree or contract
<PAGE>
to which the Company or any of its subsidiaries is a party or by which it is
bound, or any provision of any federal or state statute, rule or regulation
applicable to the Company or any of its subsidiaries, the effect of which would
have a material adverse effect on the ability of the Company and its
subsidiaries to perform their respective obligations under the Agreements or
result in the creation of any lien, charge or encumbrance upon any assets of the
Company or any of its subsidiaries.
2.7 Investor Agreements. The Company has filed with the SEC or
-------------------
listed on the Schedule of Exceptions (and, in the case of agreements listed on
the Schedule of Exceptions, provided the Purchasers with copies of) all
agreements in existence as of the date of this Agreement that define or affect
the rights of security holders of the Company in their capacity as security
holders including, but not limited to, such security holders' voting rights,
registration rights or standstill rights or obligations.
3. Representations and Warranties of the Purchasers. Each Purchaser
------------------------------------------------
hereby represents and warrants to the Company that:
3.1 Authorization. All corporate action on the part of the
-------------
Purchaser, its officers, directors and stockholders necessary for the
authorization, execution and delivery of the Agreements, the performance of all
obligations of the Purchaser thereunder has been taken or will be taken prior to
the Closing, and the Agreements to which the Purchaser is a party, when executed
and delivered by the Purchaser will constitute valid and legally binding
obligations of the Purchaser, enforceable against the Purchaser in accordance
with their terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and other laws of general
application affecting enforcement of creditors' rights generally, as limited by
laws relating to the availability of specific performance, injunctive relief, or
other equitable remedies, or (ii) to the extent the indemnification provisions
contained in the Investors' Rights Agreement may be limited by applicable
federal or state securities laws.
3.2 Litigation. There is no action, suit, proceeding or investigation
----------
pending or, to the Purchaser's knowledge, currently threatened against the
Purchaser or any of its subsidiaries that questions the validity of the
Transaction Agreements or the right of the Purchaser or any of its subsidiaries,
as applicable, to enter into them, or to consummate the transactions
contemplated hereby or thereby nor is the Purchaser aware
<PAGE>
that there is any basis for the foregoing. Neither the Purchaser nor any of its
subsidiaries is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality that challenges the validity of the Transaction Agreements or
the right of the Purchaser or any of its subsidiaries, as applicable, to enter
into them, or to consummate the transactions contemplated hereby or thereby.
3.3 Compliance with Other Instruments. The execution, delivery and
---------------------------------
performance of the Agreements and the consummation of the transactions
contemplated thereby will not result in any violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any provision of the certificate of incorporation or bylaws or any
instrument, judgment, order, writ, decree or contract to which the Purchaser or
any of its subsidiaries is a party or by which it is bound, or any provision of
any federal or state statute, rule or regulation applicable to the Purchaser or
any of its subsidiaries, the effect of which would have a material adverse
effect on the ability of the Purchaser and its subsidiaries to perform their
respective obligations under the Agreements or result in the creation of any
lien, charge or encumbrance upon any assets of the Purchaser or any of its
subsidiaries.
3.4 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Purchaser in reliance upon the Purchaser's representation to the Company,
which by the Purchaser's execution of this Agreement, the Purchaser hereby
confirms, that the Stock to be acquired by the Purchaser will be acquired for
investment for the Purchaser's own account, not as a nominee or agent, and not
with a view to the resale or public distribution of any part thereof in
violation of any requirements of the Securities Act or applicable state
securities laws, and that the Purchaser has no present intention of selling,
granting any participation in, or otherwise distributing the same. By executing
this Agreement, the Purchaser further represents that the Purchaser does not
presently have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participation to such person or to any third
person, with respect to any of the Stock.
3.5 Disclosure of Information. The Purchaser (i) has had an
-------------------------
opportunity to discuss the Company's business, management, financial affairs and
the terms and conditions of the offering of the Stock with the Company's
management, (ii) has had an opportunity to review the Company's facilities and
(iii) has reviewed the Registration Statement. The Purchaser understands
<PAGE>
that such discussions and reviews, as well as any written information delivered
by the Company to the Purchaser, were intended to describe the aspects of the
Company's business that it believes to be material.
3.6 Restricted Securities. The Purchaser understands that the Stock
---------------------
has not been, and will not be, registered under the Securities Act, by reason of
a specific exemption from the registration provisions of the Securities Act
which depends upon, among other things, the bona fide nature of the investment
intent and the accuracy of the Purchaser's representations as expressed herein.
The Purchaser understands that the Stock are "restricted securities" under
applicable U.S. federal and state securities laws and that, pursuant to these
laws, the Purchaser must hold the Stock indefinitely unless they are registered
with the Securities and Exchange Commission and qualified by state authorities,
or an exemption from such registration and qualification requirements is
available. The Purchaser acknowledges that the Company has no obligation to
register or qualify the Stock for resale except as set forth in the Investors'
Rights Agreement. The Purchaser further acknowledges that if an exemption from
registration or qualification is available, it may be conditioned on various
requirements including, but not limited to, the time and manner of sale, the
holding period for the Stock, and on requirements relating to the Company that
are outside of the Purchaser's control, and which the Company is under no
obligation, and may not be able, to satisfy.
3.7 No Public Market. The Purchaser understands that no public market
----------------
now exists for any of the securities issued by the Company, and that the Company
has made no assurances that a public market will ever exist for the Stock.
3.8 Legends. The Purchaser understands that the Stock, and any
-------
securities issued in respect thereof, may bear one or all of the following
legends:
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
(b) Any legend set forth in the other Agreements.
<PAGE>
(c) Any legend required by the "Blue Sky" laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
3.9 Accredited Investor. The Purchaser is an accredited investor as
-------------------
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
4. Conditions of the Purchasers' Obligations at Closing. The obligations
----------------------------------------------------
of the Purchasers to the Company under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the date of the Closing with the same effect
as though such representations and warranties had been made on and as of the
date of the Closing (except to the extent such representations and warranties
speak as of the date of this Agreement, in which case they shall be true and
correct in all material respects on and as of the date of this Agreement).
4.2 Performance. The Company shall have performed and complied with
-----------
all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing and the Company shall have obtained any and all consents, permits
and waivers necessary or appropriate for consummation of the transactions
contemplated by the Agreements.
4.3 Reservation of Conversion Shares. The Stock issuable pursuant to
--------------------------------
this Agreement and, if Series E Preferred Shares are to be issued pursuant to
this Agreement, the Common Stock issuable upon conversion of the Series E
Preferred Shares shall have been duly authorized and reserved for issuance at
the Closing or upon conversion, respectively.
4.4 Compliance Certificate. The President of the Company shall
----------------------
deliver to the Purchasers at the Closing a certificate certifying that the
conditions specified in Sections 4.1, 4.2 and 4.3 have been fulfilled.
4.5 Qualifications. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful
<PAGE>
issuance and sale of the Stock pursuant to this Agreement shall be obtained and
effective as of the Closing including, without limitation, the expiration or
termination of all waiting periods under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended (the "HSR Act").
-------
4.6 Opinion of Company Counsel. The Purchasers at the Closing shall
--------------------------
have received from Cravath, Swaine & Moore, counsel for the Company, an opinion
dated as of the Closing in substantially the form of Exhibit B.
---------
4.7 The Agreements. The Company, each Purchaser and the other parties
--------------
thereto shall have executed and delivered each of the Transaction Agreements to
which they are a party.
4.8 Restated Certificate. The Company shall have filed the Restated
--------------------
Certificate with the Secretary of State of Delaware on or prior to the Closing,
which shall continue to be in full force and effect as of the Closing.
5. Conditions of the Company's Obligations at Closing. The obligations of
--------------------------------------------------
the Company to the Purchasers under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Purchasers contained in Section 3 shall be true and correct in
all material respects on and as of the date of the Closing with the same effect
as though such representations and warranties had been made on and as of the
date of the Closing (except to the extent such representations and warranties
speak as of the date of this Agreement, in which case they shall be true and
correct in all material respects on and as of the date of this Agreement).
5.2 Performance. All covenants, agreements and conditions contained
-----------
in this Agreement to be performed by the Purchasers on or prior to the Closing
shall have been performed or complied with in all material respects.
5.3 Compliance Certificate. A senior executive officer of each of the
----------------------
Purchasers shall deliver to the Company at the Closing a certificate certifying
that the conditions specified in Sections 5.1 and 5.2 have been fulfilled.
<PAGE>
5.4 Qualifications. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Stock pursuant to this Agreement shall be obtained and effective as of the
Closing including, without limitation, the expiration or termination of all
waiting periods under the HSR Act.
5.5 The Agreements. The Company, each Purchaser and the other parties
--------------
thereto shall have executed and delivered each of the Transaction Agreements to
which they are a party.
5.6 Restated Certificate. The Company shall have filed the Restated
--------------------
Certificate with the Secretary of State of Delaware on or prior to the Closing,
which shall continue to be in full force and effect as of the Closing.
6. Covenant.
--------
6.1 HSR Act Filings. As soon as practicable after the execution of
---------------
this Agreement, the Company and each Purchaser will separately file with the
Antitrust Division of the United States Department of Justice and the United
States Federal Trade Commission pursuant to the HSR Act all requisite documents
and notifications in order to provide for the issuance and sale of the Stock
pursuant to this Agreement. The parties will cooperate and coordinate with one
another in exchanging information and providing reasonable assistance as the
other party may request in connection with the foregoing.
6.2 Execution of the Transaction Agreements. Each of the Purchasers
---------------------------------------
and the Company shall execute and deliver each Transaction Agreement (other than
any Transaction Agreement executed and delivered prior to the Closing) at the
Closing promptly upon the satisfaction or (subject to applicable law) waiver of
the conditions set forth in Sections 4 and 5 (excluding the conditions set forth
in Sections 4.7 and 5.5).
<PAGE>
7. Miscellaneous.
-------------
7.1 Survival of Warranties. The warranties and representations of the
----------------------
Company or the Purchasers contained in or made pursuant to Sections 2.1, 2.2,
2.3, 2.5, 2.6, 3.1 and 3.3 of this Agreement shall survive the closing of the
transactions contemplated hereby and any investigation made by the Company or
the Purchasers (including, without limitation, any investigation described in
Section 3.5) but shall terminate on the earlier of (i) the consummation of the
IPO and (ii) the tenth business day after the delivery by the Company to the
Purchasers of the Company's audited balance sheet as of December 31, 1999 and
audited statements of income and cash flows for the twelve months ended December
31, 1999. The warranties and representations of the Company contained in or
made pursuant to Section 2.7 of this Agreement shall survive the closing of the
transactions contemplated hereby and any investigation made by the Purchasers
(including, without limitation, any investigation described in Section 3.5) but
shall terminate on the earlier of (i) the consummation of the IPO and (ii)
December 31, 1999. The warranties and representations of the Company or the
Purchasers contained in or made pursuant to Sections 2.4 and 3.2 of this
Agreement shall survive any investigation made by the Company or the Purchasers
(including, without limitation, any investigation described in Section 3.5) but
shall terminate on the Closing.
7.2 Transfer; No Third Party Beneficiaries. This Agreement and each
--------------------------------------
party's rights and obligations hereunder shall not be assigned without the prior
written consent of the other party. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement.
7.3 Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflicts of law.
7.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience
<PAGE>
only and are not to be considered in construing or interpreting this Agreement.
7.6 Notices. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient upon delivery, when delivered
personally or by overnight courier or sent by telegram or fax, or forty-eight
(48) hours after being deposited in the U.S. mail, as certified or registered
mail, with postage prepaid, addressed to the party to be notified at such
party's address as set forth on the signature page hereto, or as subsequently
modified by written notice, and if to the Company, with a copy to the General
Counsel of the Company at the address of the Company set forth below and, if to
Rite Aid Corporation, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP,
New York, NY 10022-3897, Attention: Nancy Lieberman (telephone no: (212) 735-
3000; telecopy no: (212) 735-2000), and if to General Nutrition Companies, Inc.,
with a copy to its General Counsel at its address set forth below.
7.7 Finder's Fee. Each party represents that it neither is nor will
------------
be obligated for any finder's fee or commission in connection with this
transaction. Each Purchaser agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Purchaser or any of its officers, employees,
or representatives is responsible. The Company agrees to indemnify and hold
harmless each Purchaser from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
7.8 Fees and Expenses. Except as otherwise specifically provided
-----------------
herein, the Company and the Purchasers shall pay their respective fees and other
expenses in connection with the negotiation, execution, delivery and performance
of the Agreements.
7.9 Attorney's Fees. If any action at law or in equity (including
---------------
arbitration) is necessary to enforce or interpret the terms of any of the
Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
7.10 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended or waived only with the written
<PAGE>
consent of the Company and each of the Purchasers. Any amendment or waiver
effected in accordance with this Section 7.10 shall be binding upon each
Purchaser and each transferee of the Stock, each future holder of all such
Stock, and the Company.
7.11 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
7.12 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party under this Agreement, upon any breach or
default of any other party under this Agreement, shall impair any such right,
power or remedy of such non-breaching or non-defaulting party nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party, shall be cumulative and not alternative.
7.13 Entire Agreement. This Agreement, and the documents referred to
----------------
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof, and any and all other written or oral agreements
relating to the subject matter hereof existing between the parties hereto are
expressly canceled.
7.14 Confidentiality. Except as provided below, each party hereto
---------------
agrees that, except with the prior written permission of the other party, it
shall at all times keep confidential and not divulge, furnish or make accessible
to anyone any confidential information, knowledge or data concerning or relating
to the business or financial affairs of the other party to which such party has
been or shall become privy by reason of the
<PAGE>
Agreements, discussions or negotiations relating to the Agreements, the
performance of its obligations thereunder or the ownership of Stock purchased
hereunder. The provisions of this Section 7.14 shall be in addition to, and not
in substitution for, the provisions of any separate nondisclosure agreement
executed by the parties hereto with respect to the transactions contemplated by
the Agreements. Notwithstanding the foregoing, nothing herein shall prevent any
party from disclosing (i) such information which has been publicly disclosed,
(ii) such information which becomes available to the party on a non-confidential
basis from a source other than the other party hereto, provided that such source
is not bound by a confidentiality agreement with such other party, (iii)
information required to be disclosed pursuant to subpoena or other court process
or otherwise required to be disclosed by law or the regulations of any
securities exchange (provided that, to the extent practicable, advance notice is
--------
given to the party whose confidential information is to be disclosed so that
such party can attempt to obtain a protective order) and (iv) such information
which was known to the party prior to its first receipt from the other party.
7.15 Publicity. After the execution of this Agreement, any of the
---------
parties may issue a press release disclosing that the Purchasers have agreed to
invest in the Company and the terms of the future relationship between the
parties in a form approved by the other party, which approval will not be
unreasonably withheld, conditioned or delayed. In addition, any party may
disclose such information regarding the Purchasers' investment and the
relationship between the parties as required by law or the regulations of any
securities exchange.
7.16 Termination. This Agreement may be terminated and the
-----------
transactions contemplated hereby may be abandoned at any time prior to the
Closing:
(i) at any time by mutual written consent of the Company and
each of the Purchasers; or
(ii) by any party hereto if the Closing does not occur on or
prior to October 31, 1999; (provided, that if on October 31, 1999 any
--------
authorization, approval or permit of any governmental authority or
regulatory body of the United States or of any state that is required
in connection with the lawful issuance and sale of the Stock pursuant
to this Agreement has not been obtained, then no party shall be
entitled to terminate this Agreement pursuant to this clause (ii) until
December 15, 1999 and then
<PAGE>
only if the Closing has not occurred on or prior to such date).
Upon any such termination, this Agreement shall become void and of no further
effect, except for Sections 7.7, 7.8, 7.9, 7.14 and this Section 7.16 which
shall survive such termination.
7.17 GNC. Rite Aid Corporation ("Rite Aid") acknowledges that it was
--- --------
contractually committed to a certain commercial arrangement with General
Nutrition Companies, Inc. ("GNC") prior to negotiation of this Agreement. As
---
consideration for GNC's termination of that arrangement, Rite Aid requested that
the Company sell Series E Preferred Shares to GNC as set forth in this
Agreement.
7.18 Series E Preferred Shares. The Series E Preferred Shares issued
-------------------------
pursuant to this Agreement are fully vested, nonrefundable and non-forfeitable
in the event of a default under any of the Transaction Documents.
[Signature Pages Follow]
<PAGE>
The parties have executed this Series E Preferred Stock Purchase Agreement
as of the date first written above.
COMPANY:
DRUGSTORE.COM, INC.
By: /s/ Peter M. Neupert
Name: Peter M. Neupert
Title: President and CEO
Address: 13920 SE Eastgate
Way, Suite 300
Bellevue, WA 98005
PURCHASERS:
RITE AID CORPORATION
By: /s/ Elliot S. Gerson
Name: Elliot S. Gerson
Title: Executive V.P.
Address: 30 Hunter Lane
Camp Hill, PA 17011
GENERAL NUTRITION COMPANIES, INC.
By: /s/ James M. Sander
Name: James M. Sander
Title: Vice President
Address: 300 Sixth Avenue
Pittsburgh, PA 15222
Signature Page to the Series E Preferred
Stock Purchase Agreement
<PAGE>
GENERAL NUTRITION INVESTMENT COMPANY
By: /s/ James M. Sander
--------------------------------
Name: James M. Sander
Title: Vice President
Address: 300 Sixth Avenue
Pittsburgh, PA 15222
Signature Page to the Series E Preferred
Stock Purchase Agreement
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
Purchaser Number of Shares Cash Consideration
- --------- ---------------- ------------------
<S> <C> <C>
Rite Aid Corporation 9,334,746 $ 7,599,976.00
General Nutrition Companies, 2,947,853 $ 2,400,024.00
Inc., through its wholly ========== ==============
owned subsidiary General
Nutrition Investment Company
12,282,599 $10,000,000.00
</TABLE>
<PAGE>
Exhibit 10.25
DRUGSTORE.COM, INC.
ADDENDUM TO
FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
-------------------------------------------------------
THIS ADDENDUM dated as of June 17, 1999, TO THE FOURTH AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT dated as of May 18, 1999, by and among
drugstore.com, inc., a Delaware corporation (the "Company") and the parties
-------
listed on Exhibit A hereto hereby adds Rite Aid Corporation, a Delaware
corporation ("Rite Aid"), and General Nutrition Companies, Inc., a Delaware
--------
corporation ("GNC") as parties to such Investors' Rights Agreement (the "Rights
--- ------
Agreement") to the extent set forth herein.
- ---------
RECITALS
--------
A. The Company, Rite Aid and GNC have entered into a Series E Preferred
Stock Purchase Agreement (the "Purchase Agreement") dated as of June 17, 1999,
------------------
pursuant to which the Company will sell to Rite Aid and GNC (through its wholly
owned subsidiary General Nutrition Investment Company) and Rite Aid and GNC will
purchase from the Company shares of the Company's Series E Preferred Stock. The
Company and the Investors party to the Rights Agreement desire to induce Rite
Aid and GNC to purchase shares of Series E Preferred Stock pursuant to the terms
of the Purchase Agreement by agreeing to the terms and conditions set forth
herein.
B. Pursuant to Section 5.2 of the Rights Agreement, this Addendum is being
executed by the Company and the holders of at least two-thirds (2/3) of the
Registrable Securities then outstanding, thereby agreeing that the Rights
Agreement be amended hereby.
C. Defined terms used herein and not defined shall have the meanings given
to them in the Rights Agreement.
AGREEMENT
---------
1. The parties hereby agree that upon effectiveness of this Addendum as
set forth below, Rite Aid and GNC shall each have (i) the rights and obligations
of an "Investor" and/or a "Holder" under Sections 1.1-1.15, 2.1, 2.2 and 2.5 of
the Rights Agreement (provided that for Rite Aid and GNC, clause (i) of Section
1.15 of the Rights Agreement shall be deemed to be ten years rather than five),
(ii) the same rights and obligations as Vulcan under Section 1.4 of the Rights
Agreement (but only for so long as they satisfy the $40 million threshold
requirement under such Section), and (iii) all applicable rights and obligations
of a
<PAGE>
party to the Rights Agreement under Section 5 thereof. The parties hereby
further agree that from and after the fourth anniversary of the closing under
the Purchase Agreement, Rite Aid will have one additional right to request a
registration under Section 1.2 or 1.4 of the Rights Agreement (subject to all
the other rights and obligations of an "Investor" and/or "Holder" in respect
thereof). The parties hereby further agree that a written request from Rite Aid
under Section 1.2(a) of the Rights Agreement shall be deemed to satisfy the
requirement of a request from the Holders of at least thirty-three percent (33%)
of the Registrable Securities then outstanding even in the event Rite Aid may
own less than such amount of Registrable Securities outstanding on the date of
such request. The parties hereby further agree that for purposes of Section 1 of
the Rights Agreement, shares of Common Stock issuable or issued upon conversion
of the Series E Preferred Stock of the Company issued to Rite Aid and GNC on the
date hereof pursuant to the Purchase Agreement shall be deemed to be
"Registrable Securities", subject to the proviso set forth in the definition
thereof. Each Investor hereby waives its right of first offer/refusal under
Section 2.3 of the Rights Agreement (and, in the case of Amazon.com, under
paragraph 1 of the Amended Letter Agreement dated May 19, 1999, between the
Company and Amazon.com) with respect to the sale of shares of Series E Preferred
Stock under the Purchase Agreement and as to the issuance of shares of Common
Stock upon conversion of such shares of Series E Preferred Stock.
2. The parties hereby agree that upon effectiveness of this Addendum as
set forth below, Section 3.5 of the Rights Agreement shall be deemed amended by
restating the first sentence thereof as follows: "Notwithstanding the
provisions of this Section 3, (i) on and after the eleventh business day after
commencement of a proxy contest, tender offer or exchange offer by a third party
not affiliated with the Company which could result in a "Change of Control
Transaction" (as defined below) for outstanding securities, (ii) on and after
the commencement of a proxy contest, tender offer or exchange offer by a third
party affiliated with the Company which could result in a Change of Control
Transaction for outstanding securities, (iii) on or after the public
announcement that the Company has entered into an agreement with a third party
not affiliated with the Company that would result in a Change of Control
Transaction, or (iv) on or after the public announcement that the Company has
entered into an agreement with a third party affiliated with the Company that
would result in a Change of Control Transaction, the Standstill Investor shall
be permitted to make a proposal to the Company's Board of Directors or
shareholders or to
<PAGE>
tender or exchange any Securities beneficially owned by it pursuant to such
transaction (provided, however, that in the case of such a proxy contest, tender
offer or exchange offer by an affiliate as described in clause (ii) above or an
agreement with an affiliate as described in clause (iv) above, if such proxy
contest, tender offer, exchange offer or agreement is thereafter withdrawn or
terminated, the Standstill Investor shall cease to have the right to make or
continue a proposal of the type described herein)."
3. This Addendum (other than the last sentence of Section 1 which shall
become effective upon execution of a counterpart hereof by each party listed on
the signature pages hereto) shall become effective only concurrently with the
Closing (as defined in the Purchase Agreement). Upon such effectiveness:
(a) all references in any document to the Rights Agreement shall be
deemed to be references to the Rights Agreement as modified by this Addendum;
and
(b) except as specifically modified hereby, the Rights Agreement shall
continue in full force and effect in accordance with the provisions thereof.
4. This Addendum shall automatically terminate concurrently with any
termination of the Purchase Agreement pursuant to Section 7.16 thereof. Upon
such termination, this Addendum shall become void and of no further effect.
5. This Addendum, which shall be governed, construed and interpreted in
accordance with the laws of the State of California, without giving effect to
principles of conflicts of laws, may be executed in counterparts.
[Signature Page Follows]
<PAGE>
The parties have executed this Addendum to the Fourth Amended and Restated
Investors' Rights Agreement as of the date first above written.
COMPANY: INVESTORS:
DRUGSTORE.COM, INC., RITE AID CORPORATION,
By: /s/ Peter M. Neupert By: /s/ Elliot S. Gerson
------------------------------ ----------------------------------
Peter M. Neupert Name: Elliot S. Gerson
President Title: Executive Vice President
Address: 13920 SE Eastgate Address: 30 Hunter Lane
Way, Suite 300 Camp Hill, PA 17011
Bellevue, WA 98005
GENERAL NUTRITION COMPANIES, INC.,
By: /s/ James M. Sander
----------------------------------
Name: James M. Sander
Title: Vice President
Address: 300 Sixth Avenue
Pittsburgh, PA 15222
VULCAN VENTURES INCORPORATED,
By:
----------------------------------
Name:
Title:
Address:
KLEINER PERKINS CAUFIELD & BYERS
VIII, L.P.,
By: KPCB VIII Associates, L.P., its
General Partner
By: /s/ L. John Doerr
----------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
<PAGE>
KPCB VIII FOUNDERS FUND, L.P.,
By: KPCB VIII Associates,
L.P., its General Partner
By: /s/ L. John Doerr
---------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
KPCB LIFE SCIENCES ZAIBATSU FUND
II, L.P.,
By: KPCB VII Associates, L.P., its
General Partner
By: /s/ L. John Doerr
---------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
AMAZON.COM, INC.,
By: /s/ Randy Tinsley
----------------------------------
Name: Randy Tinsley
Title: Vice President
Address: 1516 2nd Avenue
Seattle, WA 98101
PETER NEUPERT,
By: /s/ Peter Neupert
----------------------------------
Address: 18650 NE 67th Court
Redmond, WA 98052
MAVERON EQUITY PARTNERS, L.P.
By: __________________________________
Address: 800 Fifth Ave.
Suite 4100
Seattle, WA 98104
<PAGE>
EXHIBIT A
---------
INVESTORS
- ---------
Name and Address
- ---------------------------------------------------------
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
General Nutrition Companies, Inc.
300 6th Avenue
Pittsburgh, PA 15222
Vulcan Ventures Incorporated
110th Avenue Northeast, Suite 550
Bellevue, Washington 98004
Kleiner Perkins Caufield & Byers VIII
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII Founders Fund, L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB Life Sciences Zaibatsu Fund II, L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
David Whorton
c/o Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Amazon.com, Inc.
1516 2nd Avenue
Seattle, WA 98101
Attn: General Counsel
Peter M. Neupert
13920 SE Eastgate Way, Suite 300
Bellevue, WA 98005
Maveron Equity Partners, L.P.
800 Fifth Avenue, Suite 4100
Seattle, WA 98104
Liberty DS, Inc.
8101 Prentice Avenue, Suite 500
Englewood, CO 80111
<PAGE>
1
Exhibit 10.27
EXECUTION COPY
MAIN AGREEMENT
This Main Agreement (this "Agreement"), dated as of June 17, 1999, is
between drugstore.com, inc., a Delaware corporation ("drugstore.com"), and Rite
Aid Corporation, a Delaware corporation ("Rite Aid").
RECITALS:
Rite Aid is a leading drugstore in the United States with over 3800 stores.
drugstore.com is a leading Web-based drugstore.
In consideration of the agreements, covenants and conditions set forth
herein, intending to be legally bound, the parties hereto agree as follows:
Section 1. Definitions
Whenever used in this Agreement with initial letters capitalized, the
following terms will have the following specified meanings:
"Above the Fold" means situated within the portion of a page that is
designed to be visible on a standard computer screen without requiring the user
to scroll horizontally or vertically through the page, currently a resolution of
800 pixels by 600 pixels (such resolution to be updated through the Term as the
drugstore.com default design resolution changes).
"Action Links" means the hypertext links that direct users to different
areas of a single site or to new sites entirely.
"Affiliate" means, with respect to a party, any Person that, directly or
indirectly, Controls, or is Controlled by, or is under common Control with, such
party.
"Confidential Information" means the existence and terms of this Agreement
and all trade secrets, know-how and nonpublic information that relates to
research, development, trade secrets, know-how, inventions, source codes,
technical data, software programming, concepts, designs, procedures,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, business plans or strategies and other proprietary or confidential
information, protectable under the laws of the United States or any other
nation, state or jurisdiction (including, but not limited to, any foreign
equivalents thereto).
<PAGE>
2
"Control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether by contract or through the ownership of voting securities, including the
ownership of more than fifty percent (50%) of the equity, partnership or similar
interest in such Person.
"Competitor" (i) of Rite Aid means (a) a Pharmacy Competitor, (b) a Third
Party that is a supermarket and/or (c) a Third Party that is a mass retail
merchandiser (such as Walmart or Target), (ii) of PCS means a Third Party
engaged in the business of pharmacy benefit management that claims to cover more
than 6,000,000 members, and (iii) of drugstore.com means (a) a Pharmacy
Competitor, (b) a Third Party that sells products or offers services typically
found in an Offline Retail Drugstore via the Internet, (c) a Third Party that is
a supermarket and/or (d) a Third Party that is a mass retail merchandiser (such
as Walmart or Target).
"Derivative" means (a) any enhancement, improvement or modification or (b)
any "derivative work" (as such term is defined in the U.S. Copyright Act, as
amended from time to time).
"Drugstore Chain" means any Third Party that Controls 10 or more Offline
Retail Drugstores whether or not all such stores operate under the same name or
Trademark.
"drugstore.com IPR" means (i) any and all IPR owned or licensable without
cost to drugstore.com by drugstore.com or any entity that it Controls, and (ii)
all Rite Aid Technology Derivatives and Derivatives of Rite Aid Technology
Derivatives made by or at the direction of drugstore.com or any entity that it
Controls.
"drugstore.com Site" means the site currently located at www.drugstore.com
(and any successor site, Mirror site or sites of any entity Controlled by
drugstore.com).
"Effective Time" has the meaning given to it in Section 16.14.
"Home Page" means (i) with respect to the drugstore.com Site, the page that
is displayed to the user when the URL www.drugstore.com or any successor URL is
entered, (ii) with respect to the Rite Aid Site, the page that is displayed to
the user when the URL www.riteaid.com or any successor URL is entered, and (iii)
with respect to the PCS Site, the page that is displayed to the user when the
URL www.PCSRx.com or any successor URL is entered.
"including" or "included," when used herein, shall be deemed to be followed
by the words "without limitation."
"Internet" means the Internet or the World Wide Web (or any successor or
other online network including those using delivery over television, cable, set
top boxes,
<PAGE>
3
intranets, extranets and personal digital assistants (but not including using
any personal digital assistant or other device as a telephone)).
"IPR" means any copyright, Trademark, patent, trade secret, moral right or
other intellectual property or proprietary right of any kind (including
applications therefor and, in the case of patents, any continuation or
divisional patent applications claiming priority thereto), whether arising under
the laws of the United States or any other nation, state or jurisdiction
(including any foreign equivalents thereto).
"Joint IPR" means (i) any Derivatives of (a) Rite Aid Technology or (b)
Rite Aid Technology Derivatives, or (ii) any new IPR, in each case that is
created jointly by, or at the direction of, the parties.
"Mirror site" means an Internet site that (i) contains the exact form and
content of a site, (ii) is located at a geographic location distinct from a site
and (iii) is created for the purpose of improving the performance of and
accessibility to a site.
"Offline Retail Drugstore" means any Third Party drugstore that allows
customers to pick up orders for products at that drugstore.
"PCS" means PCS Health Systems, Inc., a Delaware corporation.
"PCS Preferred Network" means any retail network of Offline Retail
Drugstores established by PCS to fill drugstore.com customer orders for local
prescription pickup.
"PCS Site" means the site currently located at www.PCSRx.com (and any
successor site, Mirror site or sites of any entity Controlled by PCS).
"Permitted Store" means a Rite Aid retail drugstore and an Offline Retail
Drugstore that is a member of the PCS Preferred Network.
"Person" means any individual, corporation, partnership, limited liability
company, trust, association or other entity or organization, including any
governmental or political subdivision or any agency or instrumentality thereof.
"Pharmaceutical Products" means any product that under law may not be
dispensed except pursuant to a prescription dispensed by a licensed
professional.
"Pharmacy Agreement" means the Pharmacy Supply and Services Agreement dated
the date hereof between drugstore.com and Rite Aid.
"Pharmacy Competitor" means any Third Party that is a Drugstore Chain or
whose business substantially consists of the sale of Pharmaceutical Products to
consumers.
<PAGE>
4
"Pharmacy Services Page" means the first page a user sees on the
drugstore.com Site after clicking on the pharmacy tab, currently located at
www.drugstore.com/pharmacy.
"Rite Aid Formulary" means Rite Aid's or PCS's list of approved
Pharmaceutical Products and vendors.
"Rite Aid IPR" means any and all IPR owned or licensable without cost to
Ride Aid by Rite Aid or any entity that it Controls, including the Rite Aid
Technology and the Rite Aid Technology Derivatives and Derivatives of Rite Aid
Technology Derivatives made by or at the direction of Rite Aid or any entity
that it Controls.
"Rite Aid Site" means the site currently located at www.riteaid.com (and
any successor site, Mirror site or sites of any entity Controlled by Rite Aid).
"Rite Aid Technology" means the software (in both source and object code
forms) set forth on Exhibit A, to the extent owned or licensable (without cost
to Rite Aid) by Rite Aid during the Term.
"Rite Aid Technology Derivative" means a Derivative of any Rite Aid
Technology.
"Rite Aid Trademarks" means the Trademarks owned by Rite Aid set forth on
Exhibit B.
"Rollover Bar" means the textual bar that is displayed below the tabs on a
page.
"Series E Preferred Stock Purchase Agreement" means the Series E Preferred
Stock Purchase Agreement of even date herewith by and among drugstore.com, Rite
Aid, General Nutrition Companies, Inc. and General Nutrition Investment Company.
"Stock" means the capital stock of drugstore.com purchased by Rite Aid
pursuant to the Series E Preferred Stock Purchase Agreement.
"Term" means the period commencing on the Effective Time and ending on the
tenth anniversary of such date, subject to extension in accordance with Section
15.5.
"Third Party" means any Person that is not a party hereto or a wholly owned
Affiliate of a party hereto.
"Trademark(s)" means all common law or registered trademarks, logos,
service marks, trade names, Internet domain names and trade dress rights and
similar or
<PAGE>
5
related rights arising under any of the laws of the United States or any other
country or jurisdiction, whether now existing or hereafter adopted or acquired.
Section 2. Payer Contracts
Rite Aid will use commercially reasonable efforts to assist drugstore.com
in obtaining provider numbers from payers engaged in the business of
establishing and administering networks of pharmacies at which prescriptions for
Pharmaceutical Products may be filled for individuals whose prescriptions are
paid for by insurers, health plans and other Third Parties.
Section 3. Pharmacy Information
3.1 Subject to customer and any other required consents, the parties will
(i) share customer insurance and drug profiles to pre-populate customer profiles
on the drugstore.com Site and (ii) systematically and promptly update each
other's shared customer profiles to reflect any new information acquired with
respect to any such profiles. Rite Aid will provide drugstore.com with its
privacy policy for inclusion on the drugstore.com Site. Rite Aid and
drugstore.com will, as between one and the other, own customer data related to
the sale of Pharmaceutical Products as follows: (a) Rite Aid will own all such
data relating to customers that fill their prescriptions at Rite Aid retail
stores which prescriptions are not ordered by the customer through the
drugstore.com Site; (b) Rite Aid and drugstore.com will co-own all such data
relating to (i) customers whose orders are filled by Rite Aid under the Pharmacy
Agreement and (ii) customers whose orders are processed by drugstore.com using
the Rite Aid Technology; and (c) drugstore.com will own all other customer data.
3.2 With respect to customers whose orders are filled by Rite Aid and
shipped by drugstore.com, Rite Aid shall neither transmit nor disclose such
customers' data to Third Parties nor shall it use such customers' data to market
to such customers.
Section 4. Exclusivity
4.1 Rite Aid will not, and will not permit any entity that it Controls to,
(i) directly or indirectly, sell to or take orders from consumers for products
over the Internet or (ii) promote any Person other than drugstore.com that is
engaged in any activity described in clause (i) above; provided, however, that
Rite Aid may (1) sell products over the Internet that drugstore.com elects not
to sell after having been provided the opportunity to sell such products in
accordance with the procedures set forth below, (2) advertise the Rite Aid Site
and the PCS Site without reference to the drugstore.com Site and (3) in its
stores and on the Rite Aid Site and PCS Site, permit advertisements and other
promotional materials from manufacturers, including a reference to such
manufacturers own URL's, provided that the site referenced includes only
information and products from that manufacturer. If Rite Aid or any entity that
it Controls desires to sell any product to consumers over the Internet pursuant
to clause
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(1) above, it shall first offer drugstore.com the opportunity to sell such
product on the drugstore.com Site. drugstore.com will have 10 days from the date
of receipt of such notification to determine whether to sell such product. In
the event drugstore.com opts to sell such product, it must commence such sale as
soon as reasonably practicable.
4.2 drugstore.com will not, and will not permit any entity that it
Controls to (i) promote any Offline Retail Drugstore, (ii) operate or contract
with any Person to operate or manage an Offline Retail Drugstore on behalf of
drugstore.com, (iii) operate or manage an Offline Retail Drugstore on behalf of
any Third Party, (iv) contract with any Third Party, other than Rite Aid or PCS
or their Affiliates, for the filling of orders for Pharmaceutical Products
placed on any drugstore.com Site(s), (v) promote a Pharmaceutical Product that
is not on the Rite Aid Formulary without first offering such promotional
opportunity to a manufacturer listed on the Rite Aid Formulary or (vi) operate
or establish directly or through any entity it Controls, a network of Offline
Retail Drugstores at which orders for Pharmaceutical Products can be filled;
provided, however, that the foregoing shall not prohibit drugstore.com or any
entity that it Controls from doing any or all of the following (1) with respect
to a customer whose Pharmaceutical Products are paid for, in whole or in part,
by an insurer, employer or other Third Party pursuant to a pharmacy benefit plan
administered by PCS, accepting orders for Pharmaceutical Products that are to be
available to the customer for pick-up at an Offline Retail Drugstore, provided,
that the Offline Retail Drugstore is either (A) a Permitted Store or (B) located
more than five (5) miles from a Permitted Store or (2) applying for, obtaining
and operating the drugstore.com mail order pharmacy under a provider number
assigned to drugstore.com by a pharmacy benefit manager or (3) no earlier than
nine months from the date Rite Aid is obligated to commence providing pharmacy
services at Rite Aid retail stores pursuant to the Pharmacy Agreement, with
respect to a customer whose Pharmaceutical Products are paid for, in whole or in
part, by an insurer, employer or other Third Party pursuant to a pharmacy
benefit plan administered by an entity other than PCS, accepting orders for
Pharmaceutical Products that are to be available to the customer for pick-up at
an Offline Retail Drugstore, provided that (x) any such Offline Retail Drugstore
is located more than five (5) miles from any Rite Aid retail store and (y) if
drugstore.com is contracting with any such Offline Retail Drugstore through a
pharmacy benefit plan administrator, Rite Aid has been offered the opportunity
to have Rite Aid retail stores fill orders for Pharmaceutical Products for such
customers on the same terms as such other Offline Retail Drugstore.
4.3 Notwithstanding any of the foregoing, drugstore.com is permitted to
indicate on the drugstore.com Site the availability of retail pickup at Offline
Retail Drugstores other than those owned or operated by Rite Aid, provided, that
in those areas in which Rite Aid has a retail presence, drugstore.com customers
will always be presented with Rite Aid Offline Retail Drugstores as their first
option, including by listing all Rite Aid Offline Retail Drugstores first in any
store locator feature on the drugstore.com Site.
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4.4 Rite Aid will not fill orders for Pharmaceutical Products for entities
other than drugstore.com that are engaged in the dispensing of Pharmaceutical
Products to customers who place orders via the Internet (an "Internet
Drugstore").
4.5 drugstore.com shall not (i) brand any area of the drugstore.com Site
with the Trademark of any Rite Aid Competitor, or (ii) offer for sale or promote
on the drugstore.com Site any private label product of any Rite Aid Competitor.
4.6 The provisions of this Section 4 will not be applicable to
drugstore.com's operations outside the United States and shall not limit
drugstore.com's ability to partner with and promote an Offline Retail Drugstore
that has no Offline Retail Drugstore in the United States. In the event any
such non-U.S. partner subsequently develops any presence in the United States,
including by purchasing an Offline Retail Drugstore in the United States,
drugstore.com shall forthwith take any actions that may be necessary to place it
in compliance with this Agreement.
4.7 On the date Rite Aid is first obligated to commence the provision of
pharmacy services at its retail stores pursuant to the Pharmacy Agreement, Rite
Aid shall: (i) cease accepting orders for or filling prescriptions through the
Rite Aid Site; (ii) redirect via a hypertext link all customers that visit the
Rite Aid Site to the Pharmacy Services Page; (iii) notify its customers of its
new relationship with drugstore.com by posting a notice on the Rite Aid Site;
and (iv) notify via e-mail those customers who have previously agreed to accept
e-mail messages from Rite Aid of its new relationship with drugstore.com.
Section 5. Brands and Advertising
The pharmacy at the drugstore.com Site shall be co-branded with a Rite Aid
Trademark. Where feasible, all advertising material primarily relating to
pharmacy shall refer to the pharmacy as "the Pharmacy from Rite Aid and
drugstore.com."
5.1 drugstore.com Home Page
5.1.1 One of the Rite Aid Trademarks designated by Rite Aid shall be
featured Above the Fold on the Home Page of the drugstore.com Site. This Rite
Aid Trademark shall not be smaller than a title of any module on the
drugstore.com Home Page with the exception of the showcase module, which shall
likely be larger. The word "Rite Aid" shall be included in the Rollover Bar for
the "pharmacy" tab so long as the "pharmacy" tab and Rollover Bar exist on the
drugstore.com Site.
A sample drugstore.com Home Page, indicating representative samples of what
drugstore.com considers a "title," a "module" and the "showcase module," is
attached hereto as Schedule 5.1. Rite Aid acknowledges that the format of the
drugstore.com Home Page may evolve over the Term. In the event drugstore.com
changes its format so that it does not use modules or titles, the parties shall
negotiate the placement of the
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Rite Aid Trademark on the reformatted drugstore.com Home Page with the intent
that the Rite Aid Trademark shall have substantially similar prominence on the
reformatted drugstore.com Home Page.
5.1.2 Rite Aid shall provide drugstore.com with samples of Rite Aid
Trademarks for use in advertising and on the drugstore.com Site. Without Rite
Aid's prior written approval, drugstore.com may not use Trademarks owned by Rite
Aid other than the Rite Aid Trademarks used on the drugstore.com Site or in
connection with its advertising of the drugstore.com Site.
5.1.3 Rite Aid shall provide drugstore.com with a set of pre-approved
statements to describe the Rite Aid pharmacy. Any one of such statements may be
featured with the Rite Aid Trademarks on the drugstore.com Home Page.
5.1.4 Subject to Section 5.4, the parties shall collaborate on the
content included in, and the presentation of, the Action Links, provided that
drugstore.com shall have the final right of approval with respect to such
content and presentation.
5.2 Rite Aid and PCS Home Pages
5.2.1 One of the drugstore.com Trademarks designated by drugstore.com
shall be featured prominently Above the Fold on the Home Pages of the Rite Aid
Site and the PCS Site together with clear reference to the pharmacy services
provided at the drugstore.com Site using statements mutually agreed upon by the
parties. With the exception of the Rite Aid Trademark, the drugstore.com
Trademark shall not be smaller than any other Trademarks placed on the Rite Aid
Site or the PCS Site.
5.2.2 drugstore.com shall provide Rite Aid and PCS with samples of
drugstore.com Trademarks for use in advertising and on the Rite Aid Site and the
PCS Site. Without drugstore.com's written approval, neither Rite Aid nor PCS
may use Trademarks owned by drugstore.com other than the drugstore.com
Trademarks used on the Rite Aid Site and the PCS Site or in connection with Rite
Aid's and PCS's advertising of the Rite Aid Site and the PCS Site, respectively.
5.2.3 Subject to Section 5.4, Rite Aid and drugstore.com and PCS,
respectively, shall collaborate on the content included in, and the presentation
of, the Action Links, provided that Rite Aid or PCS, as applicable, shall have
the final right of approval with respect to such content and presentation.
5.3 Pharmacy Services Page
5.3.1 At the commencement of the Term, and until changed as provided
herein, a Rite Aid Trademark designated by Rite Aid shall appear immediately
below the top navigation bar on the Pharmacy Services Page. Any change of the
location of any such Rite Aid Trademark must be pre-approved by Rite Aid. The
word "Rite Aid"
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shall be included in the Rollover Bar for the "pharmacy" tab so long as the
"pharmacy" tab and Rollover Bar exist on the drugstore.com Site.
5.3.2 At the request of drugstore.com, Rite Aid shall provide
drugstore.com with a set of Frequently Asked Questions ("FAQs") and answers
thereto to be used by drugstore.com at its option in conjunction with
drugstore.com's FAQs, provided that drugstore.com must incorporate any updates
provided by Rite Aid into any Rite Aid FAQs and answers it uses.
5.3.3 Subject to Section 5.4, the parties shall collaborate on the
content included on the Pharmacy Services Page and use of the Rite Aid
Trademarks on the Pharmacy Services Page, provided that drugstore.com shall have
the final right of approval with respect to such content and use.
5.4 Content
5.4.1. Rite Aid shall not knowingly publish on the Rite Aid Site, and
drugstore.com shall not knowingly publish on the drugstore.com Site, any
content, including Action Links, that is contrary to law or false or misleading
in any material respect. Any content that either party reasonably determines to
be contrary to law or false or misleading in any material respect shall be
removed, upon notice from the determining party, as soon as practicable by the
offending party. After such removal, the parties may bring the dispute to the
advertising liaisons for immediate resolution.
5.4.2. Rite Aid shall have final approval regarding any
representations made relating to the quality of Rite Aid pharmacy and Rite Aid
pharmacist services. drugstore.com shall have final approval regarding any
representations made relating to the quality of drugstore.com pharmacy and
drugstore.com pharmacist services.
5.5 drugstore.com Advertising Obligations
5.5.1 All drugstore.com advertising through a medium other than the
drugstore.com Site and primarily focused on the pharmacy services provided by
drugstore.com shall be co-branded with the drugstore.com and Rite Aid
Trademarks.
5.5.2 Unless made in close conjunction with a reference to a Rite Aid
Trademark or in e-mails from drugstore.com to its customers, statements
regarding the pharmacists in advertising and on the pages of the drugstore.com
Site shall identify the pharmacists as "the pharmacists from Rite Aid and
drugstore.com."
5.5.3 The parties shall collaborate on efforts related to the cross-
marketing of pharmacy services with nutritional supplements. drugstore.com
agrees to participate in an initial project whereby Rite Aid will provide
drugstore.com with a list of 6-10 items that drugstore.com shall use for such
cross-marketing purposes.
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drugstore.com shall have final approval with respect to any decisions relating
to any such cross-marketing.
5.5.4 If drugstore.com generally makes available to Third Parties
banner advertisements on the drugstore.com Site, drugstore.com will use some of
its house inventory to promote the co-branded drugstore.com/Rite Aid pharmacy.
Except as set forth in Section 4.2, drugstore.com will not accept advertising
from any of (i) a Rite Aid Competitor, (ii) a PCS Competitor or (iii) an entity
not on the Rite Aid Formulary.
5.6 Rite Aid Advertising Obligations
5.6.1 During each year of the Term, Rite Aid shall include
drugstore.com in its advertising efforts such that the drugstore.com Trademarks
or tagline are featured in an amount of media (measured by the actual dollar
cost to Rite Aid) equal to at least 25% of Rite Aid's actual annual marketing
expenditures as reflected in Rite Aid's books and records (based on Rite Aid's
fiscal year and pro rata for any portion thereof). In all media except audio-
only media, a drugstore.com Trademark shall be displayed and in audio media,
including television and radio, the drugstore.com name must be stated.
drugstore.com will be entitled to audit Rite Aid's applicable books and
records on an annual basis in order to monitor Rite Aid's compliance with the
foregoing obligations. Such audit shall take place at such location where Rite
Aid maintains its books and records and during reasonable business hours and may
be assisted by drugstore.com's accountants. In connection with any such audit,
Rite Aid shall provide drugstore.com and its accountants with access to the
applicable books and records and to appropriate employees of Rite Aid, and shall
otherwise cooperate with such audit in a reasonable manner. All audits shall be
at the expense of drugstore.com; provided, however, that if any annual audit
reveals non-compliance by Rite Aid of 5% or more, such audit shall be at the
expense of Rite Aid. In the event any annual audit reveals a shortfall in Rite
Aid's annual spending obligations under this Section 5.6.1, Rite Aid shall make
up such shortfall in the succeeding six months in addition to its spending
obligations during such succeeding period. Subject to seasonality, Rite Aid
agrees that its annual spending obligations under this Section 5.6.1 shall be
spread reasonably evenly throughout each year of the Term.
5.6.2 Rite Aid shall as soon as practicable implement the following
efforts in addition to its advertising obligations under Section 5.6.1: (i)
drugstore.com branding on Rite Aid shopping bags and Rx bags; (ii) drugstore.com
branding on in-store signage as appropriate; (iii) printing of the drugstore.com
URL, www.drugstore.com, on cash register receipts; (iv) co-branding vial caps
(with logos and a design to be mutually agreed upon) for use with all
prescriptions filled by Rite Aid; and (v) to the extent practicable, preprinting
of the drugstore.com URL on all prescription labels used on prescriptions filled
through the drugstore.com Site. The
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requirements of this Section 5.6.2 shall not preclude Rite Aid from using its
current inventory, if any, of any of the foregoing items.
5.6.3 The parties' obligations under this Section 5 shall begin as
soon as commercially reasonable following the initial promotion on
drugstore.com's Home Page of Rite Aid and its association with drugstore.com's
pharmacy services.
5.6.4 In the event of any dispute concerning Rite-Aid's advertising-
related obligations, the parties will follow the dispute resolution procedures
set forth in Section 14.
Section 6. Merchandising
6.1 Rite Aid Assistance
To assist drugstore.com in its merchandising efforts, Rite Aid will do the
following: (i) introduce drugstore.com to its vendors; (ii) use reasonable
efforts consistent with applicable laws to encourage vendors to provide
drugstore.com best pricing and cooperative marketing opportunities; (iii) invite
drugstore.com to its annual vendor meetings and provide drugstore.com a booth at
its annual tradeshow; (iv) conduct annual category management best practices
seminars; (v) collaborate in the development of unique marketing concepts to
jointly pursue with vendors; and (vi) provide drugstore.com the right to
purchase those nonpharmacy products that Rite Aid regularly stocks in its
distribution centers directly from Rite Aid at the prices and terms set forth in
Schedule 6.1.
6.2 Assortment
drugstore.com will determine in its sole discretion the assortment,
pricing, promotions and other marketing and merchandising activities associated
with the drugstore.com Site. Each party will present to the other party on a
quarterly basis their product assortment plans, although both parties
acknowledge that these plans may change in the sole discretion of the planning
party.
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Section 7. Technology Integration and License
7.1 Technology Integration
The integration of Rite Aid Technology with drugstore.com's pharmacy
systems shall take place in accordance with the specification and schedule
outlined in Schedule 7.1. Rite Aid and drugstore.com each agree to use their
best efforts to accomplish the technology integration described in Schedule 7.1
on the schedule set forth therein. Each party will pay its own costs associated
with the technology integration. Rite Aid and drugstore.com will each assign to
the projects described in Schedule 7.1 at least the minimum number of technology
personnel set forth in Schedule 7.1. As soon as practicable after the Effective
Time, the parties will agree on a procedure for resolving issues relating to
technology integration and technology support that will involve an escalation to
senior management such that all issues may be resolved as soon as possible.
7.2 License to IPR
7.2.1 Rite Aid hereby grants to drugstore.com, and its wholly owned
Affiliates, a royalty-free, worldwide, nonexclusive license (without any right
to transfer or sublicense) under the Rite Aid IPR, to use, copy, publicly
display, publicly perform, and create Derivatives of, the Rite Aid Technology
and Rite Aid Technology Derivatives made by Rite Aid, for use in connection with
the drugstore.com business. The foregoing license grant is worldwide, provided
that drugstore.com shall not use, publicly display or publicly perform the Rite
Aid Technology and/or Rite Aid Technology Derivatives in or at any Offline
Retail Drugstore owned or operated by drugstore.com or any entity that it
Controls anywhere in the world.
7.2.2 drugstore.com hereby grants to Rite Aid, and its wholly owned
Affiliates, a royalty-free, worldwide, nonexclusive license (without any right
to transfer or sublicense) under the drugstore.com IPR, to use, copy, publicly
display, publicly perform, and create Derivatives of, the Rite Aid Technology
Derivatives made by drugstore.com, for use in connection with the Rite Aid
business. The foregoing license grant is subject to any limitations imposed by
Third Parties on drugstore.com and the terms and conditions of this Agreement,
including the exclusivity provisions set forth in Section 4.
7.3 License to Trademarks
7.3.1 drugstore.com hereby grants to Rite Aid and any of its wholly
owned entities a non-exclusive, royalty-free, worldwide license in all
jurisdictions in which drugstore.com has any rights, to use, reproduce,
distribute and display the drugstore.com Trademarks in connection with the Rite
Aid pharmacy operations and the agreements among the parties with respect to
merchandising and advertising.
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7.3.2 Rite Aid hereby grants to drugstore.com and any of its wholly
owned entities a non-exclusive, royalty-free, worldwide license in all
jurisdictions in which Rite Aid has any rights, to use, reproduce, distribute
and display the Rite Aid Trademarks in connection with the drugstore.com
pharmacy operations and the agreements among the parties with respect to
merchandising and advertising.
7.3.3 Each party shall have the right to exercise quality control
over the use of its Trademarks by the other party to the degree necessary, in
the sole opinion of the owner of such Trademarks, to maintain the validity and
enforceability of such Trademarks and to protect the goodwill associated
therewith. Each party shall, in its use of the other's Trademarks, adhere to a
level of quality at least as high as that used by such party in connection with
its use of its own Trademarks. If the owner of a Trademark, in its reasonable
opinion, finds that use of such Trademark by the other party materially
threatens the goodwill of such Trademark, the user of such Trademark shall, upon
notice from the owner, immediately, and no later than ten (10) days after
receipt of such owner's notice, take all measures reasonably necessary to
correct the deviation(s) or misrepresentation(s) in, or misuse of, the
applicable Trademark.
7.3.4 Each party shall use the other's Trademarks in accordance with
sound trademark and trade name usage principles and in compliance with all
applicable laws and regulations of the United States (including all laws and
regulations relating to the maintenance of the validity and enforceability of
such Trademarks) and shall not use the Trademarks in any manner that might
tarnish, disparage, or reflect adversely on the Trademarks or the owner of such
Trademarks. Each party shall use, in connection with the other's Trademarks, all
legends, notices and markings required by law. No party may materially alter the
appearance of another's Trademarks in any advertising, marketing, distribution,
or sales materials, or any other publicly distributed materials without the
prior written consent of the other party.
7.4 Access to Rite Aid Technology
Rite Aid will provide drugstore.com with user identifications and passwords
on an as-needed basis for the purpose of filling prescriptions for
Pharmaceutical Products. All use of the user identifications, passwords and
Rite Aid Technology shall be subject to Rite Aid's then-current privacy, data
access, and other applicable policies.
7.5 Reservation of Rights
Rite Aid reserves ownership of the Rite Aid Technology. Except as
specifically authorized or granted hereunder, no right, title or interest in, to
or under any of the Rite Aid Technology is granted, created, assigned or
otherwise transferred to drugstore.com pursuant to or by virtue of this
Agreement.
7.6 Maintenance of drugstore.com Site
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drugstore.com shall use reasonable efforts to maintain the drugstore.com
Site such that up-time, scalability, back-up capability, security and response
time meet the then current generally accepted standards for E-commerce sites on
the World Wide Web.
7.7 Amazon Technology
Rite Aid and drugstore.com acknowledge that nothing in this Agreement will
constitute a license in, or otherwise transfer any rights relating to, any IPR
owned or Controlled by Amazon.com, Inc. or its corporate Affiliates.
drugstore.com agrees that it will not incorporate any Amazon.com, Inc.
technology or IPR into any Rite Aid Technology, Rite Aid Technology Derivative,
or any Derivative of the foregoing.
Section 8. IPR Ownership
8.1 Ownership by Rite Aid
As between Rite Aid and drugstore.com, Rite Aid shall own all Rite Aid IPR.
8.2 Ownership by drugstore.com
As between Rite Aid and drugstore.com, drugstore.com shall own all
drugstore.com IPR.
8.3 Underlying Work
Notwithstanding the provisions of Section 8.1 and 8.2, the ownership of a
Derivative shall not in itself convey any ownership or exploitation rights in
the underlying work from which the Derivative was created.
8.4 Joint Ownership
The parties shall jointly own any Joint IPR, without any obligation to
account to the other for any revenues earned from the exploitation of the Joint
IPR. These ownership rights are subject to the terms and conditions of this
Agreement, including the exclusivity provisions set forth in Section 4.
Notwithstanding each party's ownership interest, (i) Rite Aid shall not transfer
the Joint IPR to, or use the Joint IPR in connection with, any business that is
operated by, with or for, or branded by, with or for, a Pharmacy Competitor; and
(ii) drugstore.com shall not transfer the Joint IPR to, or use the Joint IPR in
connection with, any business operated by, with or for, or branded by, with or
for, a Pharmacy Competitor. The foregoing limitation on ownership interests
shall survive the expiration or termination of this Agreement for any reason.
8.5 Assistance in Perfecting Title
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During and after the Term, each party shall, at the other party's expense,
perform any actions and execute any documents necessary to perfect the other
party's title in its IPR.
Section 9. Technical and Advertising Communications
9.1 Advertising
The parties will:
(i) each appoint a liaison to oversee and address issues and disputes
regarding ongoing advertising activities; and
(ii) each appoint one senior marketing representative, that will meet on at
least a calendar quarterly basis to discuss opportunities and establish
advertising goals of the parties for the next calendar quarter, establish
general long term marketing strategies and review Rite Aid's marketing
expenditures for the prior quarter pursuant to Section 5.6.
Any advertising-related dispute not resolved by the liaisons shall be
subject to the dispute resolution procedures set forth in Section 14.
9.2 Joint Technology Support
9.2.1. As requested by drugstore.com, Rite Aid will provide to
drugstore.com copies of the Rite Aid Technology in such manner as mutually
agreed upon by the parties for use by drugstore.com in accordance with the terms
of this Agreement.
9.2.2. The parties will:
(a) each appoint a technical liaison to oversee and address
issues regarding the parties' ongoing efforts to integrate the Rite
Aid Technology with the drugstore.com systems; and
(b) provide to each other updated copies, if any, of the Rite
Aid Technology and the Rite Aid Technology Derivatives on a periodic
basis when available, in such manner and at such times as mutually
agreed upon by the parties, for use by the parties in accordance with
the terms of this Agreement.
9.2.3 Any technology-related dispute not resolved by the liaisons
shall be subject to the dispute resolution procedures set forth in Section 14.
9.3 Oversight
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Each party will appoint a senior executive officer to oversee and have
overall responsibility for the administration of this Agreement and the parties'
business relationship contemplated by this Agreement and the Pharmacy Agreement.
Such senior executive officers will meet, either in person or by telephone
conference, at least once each calendar quarter.
Section 10. Representations and Warranties
10.1 Representations and Warranties of drugstore.com
10.1.1 drugstore.com hereby represents and warrants to Rite Aid:
(a) Authorization. All corporate action on the part of
drugstore.com, its officers, directors and stockholders necessary for
the authorization, execution and delivery of this Agreement, the PCS
Provider Agreement by and between drugstore.com and PCS, the Eagle
Provider Agreement by and between drugstore.com and Eagle Managed Care
("Eagle"), the Addendum to Provider Agreements by and among
drugstore.com, Rite Aid, PCS and Eagle and the Pharmacy Agreement
(collectively, the "Agreements"), and the performance of all
obligations of drugstore.com hereunder and thereunder has been taken,
and the Agreements, when executed and delivered by drugstore.com, will
constitute valid and legally binding obligations of drugstore.com,
enforceable against drugstore.com in accordance with their terms
except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and other laws of
general application affecting enforcement of creditors' rights
generally, as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
(b) Intellectual Property. To its knowledge, drugstore.com owns or
possesses sufficient legal rights to all IPR necessary for its
business as now conducted without any conflict with, or infringement
of, the rights of others. drugstore.com has not received any written
communications alleging that any drugstore.com technology or
drugstore.com Trademarks have violated or would violate any of the IPR
of any Third Party. drugstore.com is not aware that any of its
employees is obligated under any contract or other agreement, or
subject to any judgment, decree or order of any court or
administrative agency, that would interfere with such employee's
ability to promote the interests of drugstore.com or that would
conflict with drugstore.com's business. Neither the execution,
delivery or performance of the Agreements, nor the carrying on of
drugstore.com's business as now conducted by the employees of
drugstore.com, will, to drugstore.com's knowledge,
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conflict with or result in a breach of the terms, conditions, or
provisions of, or constitute a default under, any contract, covenant
or instrument under which any such employee is now obligated.
drugstore.com does not believe it is or will be necessary to use any
inventions of any of its employees (or persons it currently intends to
hire) made prior to their employment by drugstore.com
(c) Compliance with Other Instruments. The execution, delivery
and performance of the Agreements and the consummation of the
transactions contemplated thereby will not result in any violation of
or be in conflict with or constitute, with or without the passage of
time and giving of notice, a default under any provision of
drugstore.com's or any of its subsidiaries' charter or bylaws or any
instrument, judgment, order, writ, decree or contract to which
drugstore.com or any of its subsidiaries is a party or by which
drugstore.com or any of its subsidiaries is bound, or any provision of
any federal or state statute, rule or regulation applicable to
drugstore.com or any of its subsidiaries, the effect of which would
have a material adverse effect on the ability of drugstore.com or any
of its subsidiaries to perform its obligations under the Agreements or
result in the creation of any lien, charge or encumbrance upon any
assets of drugstore.com or any of its subsidiaries.
(d) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE
CONTRARY, DRUGSTORE.COM MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY
KIND WHATSOEVER, DIRECTLY OR INDIRECTLY, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO ANY GOODS OR
SERVICES TO BE PROVIDED UNDER THE AGREEMENTS, OTHER THAN THOSE
EXPRESSLY SET FORTH IN THE AGREEMENTS.
10.2 Representations and Warranties of Rite Aid
10.2.1 Rite Aid hereby represents and warrants to drugstore.com:
(a) Authorization. All corporate action on the part of Rite Aid,
its officers, directors and stockholders necessary for the
authorization, execution and delivery of the Agreements to which Rite
Aid is a party, and the performance of all obligations of Rite Aid
thereunder has been taken, and the Agreements to which Rite Aid is a
party, when executed and delivered by Rite Aid, will constitute valid
and legally binding obligations of Rite Aid, enforceable against Rite
Aid in accordance with their terms except as limited by applicable
bankruptcy, insolvency,
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reorganization, moratorium, fraudulent conveyance, and other laws of
general application affecting enforcement of creditors' rights
generally, as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
(b) Intellectual Property. To its knowledge, Rite Aid owns or
possesses sufficient legal rights to all IPR necessary for its
business as now conducted without any conflict with, or infringement
of, the rights of others. Rite Aid has not received any written
communications alleging that any Rite Aid Technology or Rite Aid
Trademarks have violated or would violate any of the IPR of any Third
Party. Rite Aid is not aware that any of its employees is obligated
under any contract or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would
interfere with such employee's ability to promote the interests of
Rite Aid or that would conflict with Rite Aid's business. Neither the
execution, delivery or performance of the Agreements to which Rite Aid
is a party, nor the carrying on of Rite Aid's business as now
conducted by the employees of Rite Aid, will, to Rite Aid's knowledge,
conflict with or result in a breach of the terms, conditions, or
provisions of, or constitute a default under, any contract, covenant
or instrument under which any such employee is now obligated. Rite Aid
does not believe it is or will be necessary to use any inventions of
any of its employees (or persons it currently intends to hire) made
prior to their employment by Rite Aid.
(c) Compliance with Other Instruments. The execution, delivery and
performance of the Agreements to which Rite Aid is a party and the
consummation of the transactions contemplated thereby will not result
in any violation of or be in conflict with or constitute, with or
without the passage of time and giving of notice, a default under any
provision of Rite Aid's or any of its subsidiaries' charter or bylaws
or any instrument, judgment, order, writ, decree or contract to which
Rite Aid or any of its subsidiaries is a party or by which Rite Aid or
any of its subsidiaries is bound, or any provision of any federal or
state statute, rule or regulation applicable to Rite Aid or any of its
subsidiaries, the effect of which would have a material adverse effect
on the ability of Rite Aid or any of its subsidiaries to perform its
obligations under the Agreements to which Rite Aid is a party or
result in the creation of any lien, charge or encumbrance upon any
assets of Rite Aid or any of its subsidiaries.
(d) Internet Business. During the twelve (12) month period ended
May 31, 1999, Rite Aid customers ordered 353,844 refill prescriptions
using the Internet. For the 41 days ended May 11, 1999, Rite Aid's
revenues from such sales were $2,559,181 (or $22,782,952 on
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an annualized basis for the twelve (12) month period ended May 11,
1999).
(e) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE
CONTRARY, RITE AID MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND
WHATSOEVER, DIRECTLY OR INDIRECTLY, EXPRESS OR IMPLIED, INCLUDING, BUT
NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR
A PARTICULAR PURPOSE, WITH RESPECT TO ANY GOODS OR SERVICES TO BE
PROVIDED UNDER THE AGREEMENTS TO WHICH RITE AID IS A PARTY, OTHER THAN
THOSE EXPRESSLY SET FORTH IN THE AGREEMENTS TO WHICH RITE AID IS A
PARTY.
10.3 Survival
The representations and warranties of drugstore.com and Rite Aid set forth
in 10.1 and 10.2 shall survive until the earlier of (i) the consummation by
drugstore.com of an underwritten public offering (an "IPO") of shares of
drugstore.com Common Stock pursuant to a registration statement filed under the
Securities Act of 1933 and (ii) ten (10) business days after the delivery by
drugstore.com to Rite Aid of drugstore.com's audited balance sheet as of
December 31, 1999 and audited statements of income and cash flows for the 12
months ended December 31, 1999.
Section 11. Indemnification
11.1 Indemnification
Rite Aid and drugstore.com each shall indemnify and hold harmless the other
and its divisions, its Affiliates and its officers, directors, employees,
representatives and agents (the "Indemnified Parties") from and against (i) any
and all liabilities, suits, costs, judgments, penalties, expenses, obligations,
losses and damages arising from or related to claims or actions made by a Third
Party, including any obligation or liability which may be imposed upon any of
the Indemnified Parties as a matter of law, and constituting, or in any way
based upon, resulting from or arising out of any breach or alleged breach by
Rite Aid or drugstore.com, as applicable, of any representation, warranty,
agreement or covenant made by such party in this Agreement, and (ii) any cost or
expense (including legal fees and out-of-pocket expenses) reasonably incurred by
any of the Indemnified Parties (and their counsel) in investigating, preparing
for, defending against or otherwise taking any action in connection with any of
the foregoing (collectively "Damages").
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11.2 Procedure
Subject to the provisions of Section 12, if any claim, demand, assessment
or liability or cost incidental thereto (collectively, an "Indemnified Claim"),
is asserted against an Indemnified Party in respect of which the Indemnified
Party proposes to demand indemnification from the other party (the "Indemnifying
Party") pursuant to Section 11.1, such Indemnified Party will promptly notify
the Indemnifying Party in writing. No failure of an Indemnified Party to so
notify the Indemnifying Party shall relieve the Indemnifying Party from the
obligation to indemnify the Indemnified Party unless and to the extent the
Indemnifying Party is actually prejudiced by such failure. Such Indemnified
Party will accord the Indemnifying Party the opportunity to assume entire
control for the defense, compromise or settlement of any such Indemnified Claim
through its own counsel and at its own expense; provided that no such compromise
or settlement shall include any non-monetary terms and conditions applicable to
such Indemnified Party without the consent of the Indemnified Party; and
provided further, that the Indemnified Party may retain its own counsel at its
own expense (the Indemnifying Party shall only be liable for the cost of one
such counsel for all Indemnified Parties) if (i) the Indemnifying Party, within
thirty (30) days after notice of any Indemnified Claim, fails to assume the
defense of such Indemnified Claim or (ii) the representation of both the
Indemnifying Party and the Indemnified Party would, in the reasonable judgment
of the parties, be inappropriate due to actual or potential conflicting
interests between them. If the Indemnifying Party does not assume entire
control of the defense, compromise or settlement of such Indemnified Claim, the
Indemnified Party may compromise or settle any such Indemnified Claim.
drugstore.com and Rite Aid each agrees to cooperate fully with respect to the
defense of any Indemnified Claim.
Section 12. Infringement Claims
12.1 Legal Action for Infringement of IPR
12.1.1 Rite Aid reserves any and all rights to commence, prosecute,
compromise and settle any claim, action or proceeding for infringement, unfair
competition, unauthorized use, misappropriation or violation of any of the Rite
Aid IPR by any Third Party. Rite Aid may commence, prosecute, compromise or
settle any such claim, action or proceeding, as well as any claim, action or
proceeding to defend any of the Rite Aid IPR, in its sole discretion, but shall
not have any obligation to do so. Rite Aid will keep drugstore.com apprised of
the status of any such claim, action or proceeding and notify drugstore.com if
Rite Aid elects to discontinue further prosecution or defense of the same.
12.1.2 drugstore.com reserves any and all rights to commence, prosecute,
compromise and settle any claim, action or proceeding for infringement, unfair
competition, unauthorized use, misappropriation or violation of any of the
drugstore.com IPR by any Third Party. drugstore.com may commence, prosecute,
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21
compromise or settle any such claim, action or proceeding, as well as any claim,
action or proceeding to defend any of the drugstore.com IPR, in its sole
discretion, but shall not have any obligation to do so. drugstore.com will keep
Rite Aid apprised of the status of any such claim, action or proceeding and
notify Rite Aid if drugstore.com elects to discontinue further prosecution or
defense of the same.
12.1.3 No party shall have the right to commence or prosecute any legal
action with regard to the IPR of the other party, without such other party's
prior written consent in such other party's sole discretion.
12.1.4 Each party may, at its sole expense, commence and prosecute any
claim, action or proceeding for infringement, unfair competition, unauthorized
use, misappropriation, or violation of Joint IPR by any Third Party, and the
non-prosecuting Party shall fully cooperate with the prosecuting party in such
claim, action or proceeding at the prosecuting party's expense.
12.1.5 If either party becomes the subject of a claim, action or
proceeding for infringement, unfair competition, unauthorized use,
misappropriation or violation of any IPR of a Third Party as a result of its use
of the other party's IPR pursuant to this Agreement, then the party owning such
IPR shall upon the request of such other party defend the requesting party from
and against such claim, action or proceeding; provided that the requesting party
shall provide such assistance in defense of the claim, action or proceeding as
the owning party may request and shall comply with any settlement or court order
made in connection with the claim, action or proceeding (e.g., relating to the
future use of any infringing IPR); and provided further that, notwithstanding
the foregoing, the requesting party shall indemnify the owning party from and
shall pay any and all damages, liabilities, costs and expenses (including
reasonable attorneys fees) incurred by the owning party or otherwise arising out
of such claim, action or proceeding to the extent related to the requesting
party's use of the owning party's IPR. In any case, the requesting party shall
be entitled to participate in the defense of any such claim, action or
proceeding, at its own cost, with counsel of its choice.
12.1.6 In the event either party should have a claim against the other
party for infringement, unfair competition, unauthorized use, misappropriation
or violation of any of its IPR as a result of the use of its IPR by the other
party pursuant to this Agreement, the parties shall resort to the dispute
resolution provisions set forth in Section 14.
Section 13. Additional Obligations of the Parties
13.1 Nondisclosure
13.1.1 A party (the "Receiving party") receiving any Confidential
Information of the other party (the "Disclosing party") will exercise a
reasonable degree
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of care, but in no event less than the same degree of care that it uses to
protect its own confidential information of a like nature, to keep confidential
and not disclose such Confidential Information. Without limiting the generality
of the foregoing, the Receiving party shall disclose the Confidential
Information of the other party only to those of its employees and contractors
(a) who have a need to know the Confidential Information in order to exercise
its license to such Confidential Information, and (b) who are contractually
obligated to comply with the disclosure and usage restrictions set forth in this
Agreement. In addition, each party may, with the prior written consent of the
other party (which consent shall not be unreasonably withheld), disclose the
existence and terms of this Agreement to potential sources of financing who are
contractually obligated to maintain the confidentiality of such information;
provided, however, that if, after receipt of a written request for consent, the
other party does not respond to the request within three (3) business days,
consent will be deemed to have been given so long as the requested disclosure is
not to a Competitor.
13.1.2 The obligations set forth in Section 13.1.1 above shall not apply
to any Confidential Information to the extent it: (a) is approved by prior
written authorization of the Disclosing party for release by the Receiving
party; (b) is disclosed in order to comply with a judicial order issued by a
court of competent jurisdiction, in which event the Receiving party shall give
prior written notice to the Disclosing party of such disclosure as soon as
practicable and shall cooperate with the Disclosing party in using all
reasonable efforts to obtain an appropriate protective order or equivalent,
provided that the information shall continue to be Confidential Information to
the extent it is covered by such protective order or equivalent; (c) becomes
generally available to the public through any means other than a breach by the
Receiving party of its obligations under this Agreement; (d) was in the
possession of the Receiving party without obligation of confidentiality prior to
receipt or disclosure under this Agreement as evidenced by written records made
prior to such receipt or disclosure; (e) is developed independently by the
Receiving party without the use of or benefit from any of the Confidential
Information of the other party or without breach of this Agreement, as evidenced
by written records of the Receiving party in existence as of disclosure by the
Disclosing party; or (f) is required to be disclosed by any national securities
exchange, by government rule or regulation (e.g., in connection with a
securities filing) or by any other provisions of applicable law, provided that
the Receiving party gives the Disclosing party advance written notice (to the
extent practicable) of the disclosure and cooperates with the Disclosing party
in any reasonable attempt to limit the scope of the required disclosure. In any
dispute over whether information is Confidential Information under this
Agreement, it will be the burden of the Receiving party to show that such
contested information falls within the exceptions set forth in this Section
13.1.2.
13.2 No Contest of Rite Aid IPR
drugstore.com shall not contest or otherwise challenge (e.g., in any legal
action or otherwise), or assist or encourage any other Person to contest or
challenge, the
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validity of any Rite Aid IPR; provided that the foregoing shall not preclude
drugstore.com from claiming that the IPR in question is drugstore.com IPR.
13.3 No Contest of drugstore.com IPR
Rite Aid shall not contest or otherwise challenge (e.g., in any legal
action or otherwise), or assist or encourage any other Person to contest or
challenge, the validity of any drugstore.com IPR; provided that the foregoing
shall not preclude Rite Aid from claiming that the IPR in question is Rite Aid
IPR.
13.4 Accommodation of Patent Application Requirements
If either Party wishes to file a patent application with respect to
Derivatives or Joint IPR, it shall first notify the other Party and provide a
full disclosure of the intended filing thereto. Prior to the time such
application is filed, the notified Party shall take no actions that would result
in the loss of the right of the notifying Party to file such patent application,
other than contesting in good faith the notifying Party's ownership of the IPR
represented by such application pursuant to this Agreement.
Section 14. Resolution of Disputes
14.1 General
If any dispute arises between the parties relating to this Agreement or the
Pharmacy Agreement, each party will follow the dispute resolution procedures set
forth in this Section 14 prior to initiating any litigation or pursuing other
available remedies unless otherwise agreed in writing by the parties at the time
the dispute arises. Notwithstanding the foregoing, any party may commence
litigation without having first complied with the provisions of this Section 14
if such commencement occurs within thirty (30) days prior to the date after
which the commencement of litigation would be barred by any statute of
limitations, statute of repose or other law, rule, regulation, or order of
similar import or in order to request injunctive or other equitable relief
necessary to prevent irreparable harm. In such event, the parties will (except
as may be prohibited by judicial order) nevertheless continue thereafter to
follow the procedures set forth in this Section 14.
14.2 Initiation of Procedures
If a party seeks to initiate the procedures under this Section 14, such
party will give written notice thereof to the other party. Such notice will (i)
state that it is a notice initiating the procedures under this section, (ii)
describe briefly the nature of the dispute and the initiating party's claim or
position in connection with the dispute, and (iii) identify an individual with
authority to settle the dispute on such party's behalf. Within ten (10) days
after receipt of any notice under this Section 14.2, the receiving party will
give the initiating party written notice that describes briefly the receiving
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24
party's claims and positions in connection with the dispute and identifies an
individual with the authority to settle the dispute on behalf of the receiving
party.
14.3 Pre-Litigation Discussion
The parties will cause the individuals identified in their respective
notices under Section 14.2 to promptly make such investigation of the dispute as
such individuals deem appropriate. Promptly and in no event later than ten (10)
days after the date of the initiating party's notice under Section 14.2, such
individuals will commence discussions concerning resolution of the dispute. If
the dispute has not been resolved within 30 days after commencement of such
discussions, then any party may request that the other party make its president
available to discuss resolution of such dispute. Each party will cause its
president to meet together with the other party's president to discuss such
dispute at a mutually agreed upon time within 15 days after a party makes such
request. If the dispute has not been resolved within 15 days after the
presidents of the parties have first met, then any party may request that the
other party make an independent director available to discuss resolution of such
dispute. "Independent Director" means any director that is neither an employee
of, nor an outside provider of services to, a party. Each party will cause its
Independent Director to meet together with the other party's Independent
Director to discuss such dispute at a mutually agreed upon time within ten (10)
days after a party makes such request. If the Independent Directors do not
resolve the dispute within five (5) days of their first meeting, the parties
shall submit the dispute for non-binding mediation to a mutually agreed upon
mediator or mediation firm. The parties will use their best efforts to cause
the mediator to resolve the dispute within 15 days of its submission thereto.
If the mediator is unable to resolve the dispute within such time period, any
party may submit the dispute to litigation.
Section 15. Breach; Termination; Extension
15.1 Breach by Rite Aid
15.1.1 In the event of a material breach by Rite Aid of any of its
material obligations under this Agreement or the Pharmacy Agreement (including
any material breach or inaccuracy of its representations or warranties that has
a material adverse effect on the ability of Rite Aid to perform its obligations
under this Agreement or the Pharmacy Agreement), which breach Rite Aid does not
cure within sixty (60) days after drugstore.com gives Rite Aid written notice
thereof, drugstore.com will have any and all of the following rights:
(i) the right to terminate this Agreement;
(ii) the right to seek indemnification pursuant to Section 11;
(iii) the right to sue for breach; and
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(iv) subject to Section 15.3.4, the right to terminate the licenses
granted to Rite Aid in Sections 7.2.2 and 7.3.1.
15.1.2 All of the foregoing rights are subject to the provisions of
Section 16.6 and 16.7.
15.2 Breach by drugstore.com
15.2.1 In the event of a material breach by drugstore.com of any of
its material obligations under this Agreement or the Pharmacy Agreement
(including any material breach or inaccuracy of its representations or
warranties that has a material adverse effect on the ability of drugstore.com to
perform its obligations under this Agreement or the Pharmacy Agreement), which
breach drugstore.com does not cure within sixty (60) days after Rite Aid gives
drugstore.com written notice thereof, Rite Aid shall have any and all of the
following rights:
(i) the right to terminate this Agreement;
(ii) the right to seek indemnification pursuant to Section 11;
(iii) the right to sue for breach; and
(iv) subject to Section 15.3.4, the right to terminate the licenses
granted to drugstore.com in Sections 7.2.1 and 7.3.2.
15.2.2 All of the foregoing rights are subject to the provisions of
Section 16.6 and 16.7.
15.3 Termination
15.3.1 This Agreement will terminate upon the earliest of (i) a
termination pursuant to Section 16.14, (ii) expiration of the Term and (iii) a
termination pursuant to Section 15.1 or 15.2. Sections 8, 11 (with respect to
claims, damages or other losses related to or arising from events occurring
prior to termination), 12 (with respect to claims, damages or other losses
related to or arising from events occurring prior to termination), 13, 15 and 16
shall survive any termination of this Agreement except a termination pursuant to
Section 16.14. In addition, no termination (except a termination pursuant to
Section 16.14) of this Agreement shall release a party from liability for
breaches of this Agreement occurring prior to such termination.
15.3.2 Upon expiration of the Term, all licenses granted pursuant to
Section 7.2 shall continue in perpetuity, provided that: (a) each party shall
continue to provide for one year such technical support as was provided during
the Term pursuant to Section 7.1; (b) Rite Aid shall not use or otherwise
exploit the Rite Aid Technology Derivatives and Derivatives of the Rite Aid
Technology Derivatives, in each case made
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26
by drugstore.com, in connection with any business that is operated by, with or
for, or branded by, with or for, a Pharmacy Competitor; and (c) drugstore.com
shall not use (x) the Rite Aid Technology and (y) Derivatives of the Rite Aid
Technology and of Derivatives of Rite Aid Technology Derivatives, in each case
made by Rite Aid, in connection with any business operated by, with or for, or
branded by, with or for, a Pharmacy Competitor.
15.3.3 Upon termination of this Agreement prior to the end of the
Term because of a material breach by Rite Aid: (a) the license granted to
drugstore.com pursuant to Section 7.2.1 shall terminate one year after the date
of termination in order to provide drugstore.com with a transition period; and
(b) each party shall continue to provide for one year such technical support as
was provided during the Term pursuant to Section 7.1.
15.3.4 Upon termination of this Agreement prior to the end of the
Term because of a material breach by drugstore.com: (a) the license granted to
Rite Aid pursuant to Section 7.2.2 shall terminate one year after the date of
termination in order to provide Rite Aid with a transition period; and (b) each
party shall continue to provide for one year such technical support as was
provided during the Term pursuant to Section 7.1.
15.4 Liquidated Damages; Consequential Damages
15.4.1 In the event drugstore.com terminates this Agreement in
accordance with Section 15.1, Rite Aid will, upon written notice from
drugstore.com, pay to drugstore.com as liquidated damages the sum of $5 million.
Such liquidated damages will constitute the minimum amount payable to
drugstore.com in connection with such termination. This Section 15.4.1 will not
in any way limit drugstore.com's right to seek recovery of any and all damages
actually incurred by drugstore.com and to which it is otherwise entitled under
this Agreement and applicable law. In the event drugstore.com seeks recovery of
additional damages, the sum paid or payable hereunder will be applied to reduce
any amounts payable by Rite Aid to drugstore.com as part of any settlement or
final, unappealable judgment entered in such proceeding.
15.4.2 In no event will either party have any liability, whether
based in contract, tort (including negligence), warranty or other legal or
equitable grounds, for any loss of interest, profit or revenue by the other
party or for any consequential, indirect, incidental, special, punitive or
exemplary damages suffered by the other party, arising from or related to this
Agreement, even if such party has been advised of the possibility of such losses
or damages.
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15.5 Extension
Unless either party gives the other party written notice not later than one
year and thirty (30) days prior to the expiration of the initial ten year Term
that it does not wish to extend the Term, the Term will automatically be
extended for successive one year periods. Any additional one year term will
automatically be renewed unless either party gives the other party written
notice to the contrary not later than thirty (30) days prior to the expiration
of the then current term.
Section 16. Miscellaneous
16.1 Relationship
The parties are independent contractors under this Agreement. Each party
acknowledges and agrees that it is not and will not be during the Term an
employee or an agent of the other party. Nothing in this Agreement will be
deemed to constitute, create, give effect to or otherwise recognize a joint
venture, partnership, franchise or business entity of any kind. Nothing in this
Agreement will be construed as providing for the sharing of profits or losses
arising out of the efforts of the parties hereto.
16.2 Assignment; Sale of Assets or Capital Stock
This Agreement shall be binding upon and inure to the benefit of the
parties hereto, and the legal representatives, successors in interest and
permitted assigns, respectively, of each such party. This Agreement shall not
be assigned in whole or in part by any party without the prior written consent
of the other party, such consent not to be unreasonably withheld; provided,
however, that a party may, without consent of the other party, assign this
Agreement to an Affiliate of the assignor, or to an entity acquiring all or
substantially all the assets or capital stock of the assignor due to merger,
acquisition, consolidation or otherwise so long as (a) the assignor remains
liable for the full and faithful performance of its obligations hereunder, (b)
such Affiliate or successor in writing assumes all of the obligations of the
assignor under this Agreement and agrees to comply with the terms set forth in
this Agreement, and (c) a copy of the assignment is provided to the non-
assigning party. The parties' respective rights and obligations under this
Agreement shall survive any transaction pursuant to which a Third Party acquires
all or substantially all the assets or capital stock of either party, whether
due to merger, acquisition, consolidation or otherwise.
16.3 Notices
All notices, requests, demands, applications, services of process, and
other communications that are required to be or may be given under this
Agreement shall be in writing and shall be deemed to have been duly given if
sent by telecopy or facsimile transmission, answer back requested, or delivered
by courier or mailed, certified first
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class mail, postage prepaid, return receipt requested, to the parties to this
Agreement at the following addresses:
If to Rite Aid: Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Attn: General Counsel
Fax: 717-760-7867
If to drugstore.com: drugstore.com, inc
13920 SE Eastgate Way,
Suite 300
Bellevue, WA 98005
Attn: General Counsel
Fax: 425-372-3800
or to such other address as the party shall have furnished to the other party by
notice given in accordance with this Section 16.3. Such notice shall be
effective (i) if delivered in person or by courier, upon actual receipt by the
intended recipient, or (ii) if sent by telecopy or facsimile transmission, on
the date of transmission unless transmitted after normal business hours, in
which case on the following date, or (iii) if mailed, upon the date of first
attempted delivery.
16.4 Waiver
No provision of this Agreement shall be deemed to be waived and no breach
excused unless such waiver or consent shall be in writing and signed by the
party that is claimed to have waived or consented. The failure of a party at
any time, or from time to time, to require performance by the other party of any
provision hereof shall in no way affect the rights of such party thereafter to
enforce the same nor shall the waiver by a party of any breach of any provision
hereof by the other party constitute a waiver of any succeeding breach of such
provision, or a waiver of any provision itself, or a waiver of any other
provisions hereof.
16.5 Severability
This Agreement will be enforced to the fullest extent permitted by
applicable law. If for any reason any provision of this Agreement is held to be
invalid or unenforceable to any extent, then: (a) such provision will be
interpreted, construed or reformed to the extent reasonably required to render
the same valid, enforceable and consistent with the original intent underlying
such provision; (b) such provision will be void to the extent it is held to be
invalid or unenforceable; (c) such provision will remain in effect to the extent
that it is not invalid or unenforceable; and (d) such invalidity or
unenforceability will not affect any other provision of this Agreement or any
other agreement between the parties.
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16.6 Remedies
Except as otherwise expressly provided in this Agreement, each and all of
the rights and remedies provided in this Agreement, and each and all of the
remedies allowed at law and in equity, will be cumulative, and the exercise of
one right or remedy will not be exclusive of the right to exercise or resort to
any and all other rights or remedies provided in this Agreement or at law or in
equity.
16.7 Injunctive Relief
The parties acknowledge that a material breach of this Agreement would
cause irreparable harm, the extent of which would be difficult to ascertain.
Accordingly, they agree that, in addition to any other legal remedies to which
the non-breaching party may be entitled, such party will be entitled to obtain
immediate injunctive relief in the event of a material breach of this Agreement.
16.8 Governing Law
This Agreement will be governed by and construed according to the laws of
the State of Delaware without regard to its choice of law provisions. The
parties consent to the jurisdiction of such courts and waive any right to assert
that any such court constitutes an inconvenient or improper forum.
16.9 Publicity
Neither party shall, without the approval of the other, make any press
release or other public announcement concerning the transactions contemplated by
the Agreements, except as and to the extent that any such party shall be so
obligated by law or by the rules, regulations or policies of any national
securities exchange or association or governmental entity, in which case the
other party shall be advised and the parties shall use their best efforts to
cause a mutually agreeable release or announcement to be issued; provided,
however, that the parties hereby acknowledge and agree that communications among
employees of the parties and their attorneys, representatives and agents
necessary to consummate the transactions contemplated hereby shall not be deemed
a public announcement for purposes of this Section 16.9. Upon the execution and
delivery of this Agreement, the parties hereto will cooperate in respect of the
immediate issuance of a mutually acceptable press release relating to the
transactions contemplated by the Agreements.
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16.10 Entire Agreement
All Exhibits and Schedules to this Agreement are incorporated in and
constitute a part of this Agreement. This Agreement and the Pharmacy Agreement,
including the Exhibits and Schedules hereto and thereto, each as amended from
time to time, constitute the entire understanding between the parties in
relation to the subject matter hereof and supersede all prior discussions,
agreements and representations related to this subject matter, whether oral or
written and whether or not executed by a party. Unless otherwise provided in
this Agreement, no modification, amendment or other change may be made to this
Agreement or any part thereof unless reduced to writing and executed by
authorized representatives of all parties.
16.11 Counterparts
This Agreement may be executed in two or more counterparts, each of which
will be deemed an original, but all of which together will constitute one and
the same instrument.
16.12 Titles and Subtitles
The titles and subtitles used in this Agreement and in the Exhibits and
Schedules hereto are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
16.13 Force Majeure
Neither party shall be responsible for a failure to meet its obligations
under this Agreement to the extent caused by the following: (i) materially
inaccurate data submitted by the other party; (ii) any failure by the other
party to meet its obligations stated in this Agreement; (iii) any failure of
equipment, facilities or services not controlled or supplied by such party; or
(iv) failure(s) caused by acts of God, acts of nature, riots and other major
civil disturbances, strike by such party's personnel, sabotage, injunctions or
applicable laws or regulations, in each case without breach by such party of any
obligations under this Agreement with regard to either such event or such
failure. Rite Aid or drugstore.com, as applicable, agrees to use its
commercially reasonable efforts to restore performance of its obligations under
this Agreement as soon as reasonably practicable following any such event.
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31
16.14 Effective Time
This Agreement shall only become effective (the "Effective Time") upon the
consummation of the purchase by Rite Aid of Series E Preferred Stock of
drugstore.com pursuant to the Series E Preferred Stock Purchase Agreement. This
Agreement shall automatically terminate upon any termination of the Series E
Preferred Stock Purchase Agreement pursuant to Section 7.16 thereof. Upon such
termination, this Agreement shall become void and of no further effect.
[Signature Page Follows]
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32
In witness whereof, the parties have duly entered into this Main Agreement
as of the date first written above.
Rite Aid: drugstore.com:
RITE AID CORPORATION DRUGSTORE.COM, INC.
By: /s/ Elliot S. Gerson By: /s/ Peter Neupert
------------------------------ ------------------------------
Name: Elliot S. Gerson Name: Peter Neupert
Title: Executive Vice President Title: Chief Executive Officer
Address: 30 Hunter Lane Address: 13920 SE Eastgate Way
Camp Hill, PA 17011 Suite 300
Bellevue, WA 98005
<PAGE>
Exhibit 10.28
1
EXECUTION COPY
MAIN AGREEMENT
--------------
This Main Agreement (this "Agreement"), dated as of June 17, 1999, is
between drugstore.com, inc., a Delaware corporation ("drugstore.com"), and
General Nutrition Corporation, a Pennsylvania corporation ("GNC").
In consideration of the agreements, covenants and conditions set forth
herein, the parties hereto agree as follows:
Section 1. Definitions
Whenever used in this Agreement with initial letters capitalized, the
following terms will have the following specified meanings:
"Above the Fold" means situated within the portion of a page that is
--------------
designed to be visible on a standard computer screen without requiring the user
to scroll horizontally or vertically through the page, based on a resolution of
800 pixels by 600 pixels (such resolution to be updated through the Term as the
drugstore.com default design resolution changes).
"Action Links" means the hypertext links that direct users to different
------------
areas of a single site or to new sites entirely.
"Affiliate" means, with respect to a party, any Person that, directly or
---------
indirectly, Controls, or is Controlled by, or is under common Control with, such
party.
"Confidential Information" means the existence and terms of this Agreement
------------------------
and all trade secrets, know-how and nonpublic information that relates to
research, development, trade secrets, know-how, inventions, source codes,
technical data, software programming, concepts, designs, procedures,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, business plans or strategies and other proprietary or confidential
information, protectable under the laws of the United States or any other
nation, state or jurisdiction (including, but not limited to, any foreign
equivalents thereto).
"Consignment Agreement" means the Consignment Agreement dated the date
---------------------
hereof between drugstore.com and GNC.
"Control" means the possession, directly or indirectly, of the power to
-------
direct or cause the direction of the management and policies of a Person,
whether by contract or through the ownership of voting securities, including,
without limitation, the ownership of more than fifty percent (50%) of the
equity, partnership or similar interest in such Person.
<PAGE>
2
"drugstore.com Site" means the site currently located at www.drugstore.com
------------------
(and any successor site, Mirror site or sites of any wholly owned Affiliate).
"Effective Date" means the date of the consummation of the purchase by
--------------
General Nutrition Companies, Inc., through its wholly owned subsidiary General
Nutrition Investment Comany, of Series E Preferred Stock of drugstore.com
pursuant to the Series E Preferred Stock Purchase Agreement.
"GNC Brand Products" means the products offered for sale in the GNC
------------------
Livewell Store on the drugstore.com site that bear a GNC Trademark.
"GNC Gold Card Customers" shall mean those holders of Gold Cards who
-----------------------
purchased their Gold Card memberships from a Person other than drugstore.com and
whose memberships are active.
"GNC Livewell Store" shall mean the site within the drugstore.com Site
------------------
primarily branded GNC LiveWell as set forth in Section 4.4.
"GNC Site" means the site currently located at www.gnc.com (and any
--------
successor site, Mirror site or Affiliate's site.
"GNC Trademarks" means the Trademarks owned by GNC set forth on Exhibit B.
--------------
"Gold Card " means the Gold Card issued in connection with GNC's customer
---------
discount program as in effect at the time.
"Home Page" means (i) with respect to the drugstore.com Site, the page that
---------
is displayed to the user when the URL www.drugstore.com is entered, (ii) with
respect to the GNC Site, the page that is displayed to the user when the URL
www.gnc.com (or www.livewell.com if and once GNC has title) is entered.
"Internet" means the Internet or World Wide Web (or any successor or other
--------
online network including but not limited to those using delivery over
television, cable, set top boxes, Intranets extranets and personal digital
assistants).
"IPR" means any copyright, patent, trade secret, moral right or other
---
intellectual property or proprietary right of any kind (including, without
limitation, applications therefor and, in the case of patents, any continuation
or divisional patent applications claiming priority thereto), whether arising
under the laws of the United States or any other nation, state or jurisdiction
(including, but not limited to, any foreign equivalents thereto). IPR does not
include any Trademarks.
"Mirror site" means an Internet site that (i) contains the exact form and
-----------
content of a site, (ii) is located at a geographic location distinct from a site
and (iii) is created for the purpose of improving the performance of and
accessibility to a site.
<PAGE>
3
"Nutrition Product" means (i) a dietary supplement as defined under the
-----------------
Dietary Supplement Health and Education Act of 1994, (ii) any sports nutrition
powder or drink, (iii) any food bar or (iv) any meal replacement product.
"Person" means any individual, corporation, partnership, limited liability
------
company, trust, association or other entity or organization, including any
governmental or political subdivision or any agency or instrumentality thereof.
"Pharmassure Brand Products" means the products sold under the Pharmassure
--------------------------
Trademark.
"Term" means the period commencing on the Effective Date of this Agreement
----
and ending on the tenth anniversary of such date, subject to extension in
accordance with Section 13.3.
"Third Party" means any Person that is not a party hereto or an Affiliate
-----------
of a party hereto.
"Trademarks" means all common law or registered trademarks, logos, service
----------
marks, trade names, Internet domain names and trade dress rights and similar or
related rights arising under any of the laws of the United States or any other
country or jurisdiction, whether now existing or hereafter adopted or acquired.
"Wellness Page" means the first page the user sees on drugstore.com Site
-------------
after clicking on the wellness tab, currently located at
www.drugstore.com/wellness.
Section 2. Gold Card Program and Customer Information
2.1 drugstore.com shall be able to sell Gold Cards to customers on the
drugstore.com Site on the same terms as the general Gold Card program, as
determined from time to time by GNC for all of its stores.
2.2 GNC will share with drugstore.com information about GNC's existing
Gold Card customers sufficient for drugstore.com to identify and permit such
Gold Card customers to purchase products in the GNC Livewell Store with their
Gold Card on the drugstore.com Site; drugstore.com will not use such information
provided by GNC for any other purpose. drugstore.com will notify each Gold Card
customer that information relating to the purchase of Products in the GNC
Livewell store by such customer in connection with the use of their Gold Card
will be made available to GNC as in any GNC store. drugstore.com will share
such information with GNC and will notify the customer that such information
will be shared with GNC and that the customer should not purchase products with
their Gold Card if they do not want this information shared with GNC.
2.3 drugstore.com agrees that it shall not mail (through electronic or
other means) any advertisements to Gold Card Customers that contain an
advertisement for any Nutrition Product that is not a GNC Brand Product;
provided, that drugstore.com may without restriction continue to engage in
standard communications with its
<PAGE>
4
customers, such as direct email responses from drugstore.com customer service
personnel and automatically generated responses to customers in connection with
orders.
Section 3. Exclusivity
3.1 GNC will not and will not permit any entity it controls or licences
to sell, accept orders for or otherwise distribute any GNC Brand Products,
Pharmassure Brand Products, any other Nutrition Product or any other category of
product currently sold on the drugstore.com Site, via the Internet other than
via drugstore.com; provided, that GNC may advertise its gnc.com Site(s) without
reference to the drugstore.com Site.
3.2 In the event that on the third anniversary or fifth anniversary of
the Effective Date (a) drugstore.com is not one of the top two sites selling
nutrition products on the Internet in terms of visitor traffic for the prior 12
month period or (b) less than 15% of drugstore.com's total revenue from the sale
of Nutrition Products for the prior 12 month period was from the sale of GNC
Brand Products, GNC shall have the right to terminate its exclusivity
obligations under Section 3.1 of this Agreement. drugstore.com will provide the
information relating to (a) and (b) within 60 days of the third and fifth
anniversary. In each case, GNC must exercise its right to terminate exclusivity
under this Section 3.2 within 30 days of receiving the information from
drugstore.com, or it shall be deemed waived. All other rights and obligations
of the parties under this Agreement shall survive any such termination of
Section 3.1, except that drugstore.com's obligations under Sections 3.3, 4.1,
4.3, 4.4 and 4.6 shall terminate.
3.3 drugstore.com will not (i) promote any other retail health food store;
(ii) promote any retailer in connection with the retailer's Nutrition Products;
(iii) offer for sale or promote on the drugstore.com site any private label
nutrition or supplement product of any retailer or such retailer's Affiliate;
(iv) operate or contract with any person to operate or manage a retail health
food store offline on behalf of drugstore.com or any Third Party; and (v)
promote or offer for sale any multilevel marketing company's Nutrition Products
(such as Amway and Herbalife). However, drugstore.com may have a section of its
site that offers for sale Nutrition Products competitive with GNC Brand Products
and may post content concerning these products; provided, that drugstore.com
will give no other brand of Nutrition Product a permanent position on the Home
Page or the Wellness Page and will promote no other manufacturer of Nutrition
Product to a greater extent than GNC Brand Products in terms of interactivity,
depth of content, product representation, customization and other available
features and functionality.
3.4 The exclusivity provisions of this Section 3 are applicable only in the
United States and Canada. drugstore.com shall have the nonexclusive right to
market and sell GNC Brand Products under this Agreement on a worldwide basis,
unless it would cause GNC to be in breach of a written agreement entered into by
GNC prior to the date of this Agreement. GNC will use its best efforts to
prevent any party outside the United States from distributing GNC Brand Products
in the United States
<PAGE>
5
or Canada, including requiring them to agree not to ship such products to any
address in the United States or Canada.
Section 4. Brands and Advertising
4.1 drugstore.com Home Page
4.1.1 A GNC Trademark designated by GNC shall be featured (i) on the Home
Page all the time and (ii) Above the Fold on the Home Page of the drugstore.com
Site at least 33% of the time each calendar year (the "Frequency"). This GNC
Trademark shall not be smaller than a title of any module on the sidebar of
drugstore.com Home Page. GNC acknowledges that the format of drugstore.com Home
Page may evolve over the Term. The words "GNC Livewell Store" will be included
in the rollover bar for the "Wellness" tab for so long as the rollover bar
exists. In the event that drugstore.com changes its format so that it does not
use modules or titles or a rollover bar, the parties agreed that the GNC
Trademark on the reformatted drugstore.com Home Page shall have the same
prominence and Frequency on the reformatted drugstore.com Home Page, and success
to the rollover bar.
4.1.2 GNC shall provide drugstore.com with samples of GNC Trademarks and
preapproved statements for use in advertising and on the drugstore.com Site.
drugstore.com may not use GNC Trademarks or statements concerning (i) the GNC
Trademarks or (ii) the GNC Brand Products either on the drugstore.com Site or in
connection with its advertising of the drugstore.com Site without GNC's prior
written approval. GNC shall advise drugstore.com whether the particular text is
approved or rejected within 24 hours of providing GNC with notice of its intent
to use a particular statement or GNC Trademark.
4.2 GNC Home Pages
4.2.1 A drugstore.com Trademark designated by drugstore.com shall be
featured prominently Above the Fold on the Home Pages of the GNC Site. With the
exception of the GNC Trademark, the drugstore.com Trademark shall not be smaller
than any other Trademarks placed on the GNC Site.
4.2.2 drugstore.com shall provide GNC with samples of drugstore.com
Trademarks for use in advertising and on the GNC Site. GNC may not use
drugstore.com Trademarks or statements concerning the drugstore.com Trademarks
either on the GNC Site or in connection with its advertising of the GNC Site or
the drugstore.com Site without drugstore.com's written approval.
4.2.3 drugstore.com shall provide GNC with a set of pre-approved
statements to describe the drugstore.com site. At least one of such statements
shall be featured with the drugstore.com Trademarks on the GNC Home Pages and
certain other advertising materials as may be agreed to between drugstore.com
and GNC from time to time.
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6
4.2.4 Subject to Section 4.5, GNC and drugstore.com, shall
collaborate on the content included in, and the presentation of, the Action
Links, provided that GNC shall have the final right of approval with respect to
such content and presentation.
4.3 Wellness Page
4.3.1 At the commencement of the Term, and until changed as provided
herein, the GNC Trademark designated by GNC shall appear Above the Fold on the
Wellness Page. Any change in location of such GNC Trademark from Above the Fold
must be preapproved by GNC. The actual placement Above the Fold shall be
determined by drugstore.com and is likely to change from time to time. The GNC
Trademark will be at the top of the left hand navigation bar below the
customer's name. The size of the GNC Trademark will be no smaller than a title
of any module on the sidebar of drugstore.com Wellness Page. GNC acknowledges
that the format of the drugstore.com Wellness Page may evolve over the Term. In
the event that drugstore.com changes its format so that it does not use modules
or titles, the parties agreed that the GNC Trademark shall have the same
prominence on the reformatted drugstore.com Wellness Page.
4.3.2 At the request of drugstore.com, GNC shall provide
drugstore.com with such content and other information as GNC has available about
nutrition and related products and supplements to be used by drugstore.com at
its option in the drugstore.com Resource Center or in the GNC Livewell Store.
drugstore.com will credit GNC for any content and information used by
drugstore.com in the drugstore.com Resource Center.
<PAGE>
7
4.4 GNC Livewell Store
4.4.1 As soon as practical after the commencement of the Term,
and drugstore.com will develop and implement the GNC Livewell Store at
drugstore.com. drugstore.com will use commercially reasonable efforts to have an
initial version of the GNC Livewell Store by September 30, 1999, provided, that
GNC promptly provides the digital data, images and other information necessary
to open the store based on drugstore.com's current specifications. GNC agrees
that the initial version of the GNC Livewell Store may be substantially similar
to the other portions of the drugstore.com Site except for the prominence of the
GNC Trademark, the color scheme and the products offered. The parties agree
that customers may not be able to use their GNC Gold Cards in the initial
version of the GNC Livewell Store but will be able to use them (subject to GNC
providing all necessary information) by January 15, 2000. The GNC Livewell
Store will be primarily branded the GNC Livewell Store and will also contain the
Trademarks of drugstore.com. In drugstore.com's discretion the GNC Livewell
Store may contain the same navigation bar and look and feel of the drugstore.com
Site, except that the GNC Livewell Trademark will be the most prominent
Trademark on the pages of the GNC Livewell Store. The GNC Livewell Store shall
be accessible through Action Links on the Home Page and Wellness Page of the
drugstore.com Site. drugstore.com will not offer in the GNC Livewell Store any
products that are not sold by GNC, its franchisees or Rite Aid (in its GNC
store) without GNC approval.
4.4.2 drugstore.com will be responsible for the technical,
software development and maintenance of the GNC Livewell Store and its ongoing
enhancement. All orders placed in the GNC Livewell Store will be processed,
serviced and handled by drugstore.com as if the orders were placed outside of
the GNC Livewell Store on the drugstore.com Site. drugstore.com shall be
responsible for all shipping, billing and collection for such orders.
4.4.3. The parties shall collaborate on the design of the GNC
Livewell Store, as well as certain cross-marketing efforts within the GNC
Livewell Store. drugstore.com shall have final approval with respect to any
decisions relating to the design, product selection, content and other aspects
of the GNC Livewell Store; provided, that GNC will have approval over the
general look of the initial version and any major redesign of the GNC Livewell
Site (as opposed to any day-to-day site changes).
4.5 Content
4.5.1. GNC shall retain ownership of any content provided by GNC.
drugstore.com shall retain ownership of all content provided by drugstore.com.
GNC shall not knowingly publish on the GNC Site or the GNC Livewell Store, and
drugstore.com shall not publish on the drugstore.com Site, any content that is
contrary to law or false or misleading. Any content that either party
reasonably determines to be contrary to law or false or misleading shall be
removed, upon notice from the determining party, as soon as practicable by the
offending party. After such removal, the parties may bring the dispute to the
advertising liaisons for immediate resolution.
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8
4.5.2. GNC shall have sole and final approval regarding any
representations made relating to GNC or the quality of its products.
drugstore.com shall have sole and final approval regarding any representations
made relating to drugstore.com or the quality of its products or services. GNC
shall be solely responsible for any inaccurate, false or misleading
representations it makes relating to GNC or GNC Branded Products. drugstore.com
shall be solely responsible for any inaccurate, false or misleading
representations it makes relating to drugstore.com or the products or services
it sells on the drugstore.com Site (other than statements about the GNC Products
approved by GNC).
4.5.3. drugstore.com agrees not to compare a brand Nutrition Product
with a GNC Brand Product or Pharmassure Brand Product except where GNC approves
such comparison; provided, that GNC agrees that drugstore.com will not be
required to make (or request any manufacturer or vendor to make) changes to any
labelling or other information provided from the manufacturer or vendor of any
Nutrition Products.
4.6 drugstore.com Advertising Obligations
4.6.1 All drugstore.com advertising through a medium other than the
drugstore.com Site and primarily focused on the Wellness section of the
drugstore.com site shall include a reference to the GNC Livewell Store or the
GNC Brand Products sold in the GNC Livewell Store and shall comply with Section
4.1.2.
4.7 GNC Advertising and Other Marketing Obligations
4.7.1 GNC will use reasonable efforts to advertise the GNC
Livewell Store at drugstore.com, subject to its concerns about the impact on its
other channels of distribution.
4.7.2 The parties will agree upon a campaign promoting the GNC
Livewell Store at least once each quarter. Both parties will fund the campaign.
4.7.3 The parties obligations under this Section 4 shall begin as
soon as commercially reasonable following the initial promotion on
drugstore.com's Home Page of GNC.
4.7.4 In the event of any dispute concerning the parties'
advertising-related obligations, the parties will follow the dispute resolution
procedures set forth in Section 12.
Section 5. Products and Merchandising
5.1 GNC Assistance
GNC or its Affiliate will sell to drugstore.com all non-GNC Brand Products
that GNC purchases for sale in its stores or the stores of its franchisees on
terms no less favorable than those provided to any franchisee (including price,
shipping and handling charges).
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9
5.2 Assortment
drugstore.com will determine in its sole discretion the assortment,
pricing (excluding any product sold on consignment), promotions and other
marketing and merchandising activities associated with the drugstore.com Site
and the GNC Livewell Store. Each party will present to the other party their
relevant product assortment plans in accordance with the quarterly review
process outlined below, although both parties acknowledge that these plans may
change after the review process in the sole discretion of the planning party.
5.3 GNC Product Purchasing
All GNC Brand Products listed in Exhibit A to the Consignment Agreement
(except as otherwise indicated) shall be purchased pursuant to the terms of the
Consignment Agreement entered into as of the date of this Agreement.
drugstore.com will provide, for each month, total revenue of GNC products sold
by zip code.
5.4 Private Label Products
Within 30 days after the Effective Date, drugstore.com and GNC agree to
negotiate in good faith a supply Agreement whereby (i) GNC's Affiliate, General
Nutrition Products Inc., shall manufacture certain of drugstore.com's private
label Nutrition Products during the Term of this Agreement; and (ii)
drugstore.com will purchase for sale on the drugstore.com Site GNC's Basic
Nutrition Product Line from GNC or its Affiliates at a price that is no greater
than the cost to any GNC Franchisee.
Section 6. License to Trademarks
6.1 drugstore.com hereby grants to GNC a non-exclusive, royalty-free
license to use, reproduce, distribute and display the drugstore.com Trademarks
in connection with the terms of this Agreement.
6.2 GNC hereby grants to drugstore.com a non-exclusive, royalty-free
license to use, reproduce, distribute and display the GNC Trademarks in
connection with the terms of this Agreement.
6.3 Each party shall have the right to exercise quality control over the
use of its Trademarks by the other party to the degree necessary, in the sole
opinion of the owner of such Trademarks, to maintain the validity and
enforceability of such Trademarks and to protect the goodwill associated
therewith. Each party shall, in its use of the other's Trademarks, adhere to a
level of quality at least as high as that used by such party in connection with
its use of its own Trademarks. If the owner of a Trademark, in its reasonable
opinion, finds that use of the Trademark by the other party of such Trademark
threatens the goodwill of the Trademark, the user of such Trademark shall, upon
notice from such owner, immediately, and no later than ten (10) days after
receipt of such owner's notice, take all measures reasonably necessary to
correct the deviations or misrepresentation in, or misuse of, the respective
items.
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10
6.4 Each party shall use the other's Trademarks in accordance with sound
trademark and trade name usage principles and in compliance with all applicable
laws and regulations of the United States (including without limitation all laws
and regulations relating to the maintenance of the validity and enforceability
of such Trademarks) and shall not use the Trademarks in any manner that might
tarnish, disparage, or reflect adversely on the Trademarks or the owner of such
Trademarks. Each party shall use, in connection with the other's Trademarks,
all legends, notices and markings required by law. No party may alter the
appearance of another's Trademarks in any advertising, marketing, distribution,
or sales materials, or any other publicly distributed materials without the
prior written consent of the other party.
Section 7. Maintenance of drugstore.com Site
drugstore.com shall use reasonable efforts to maintain the drugstore.com
Site such that up-time, scalability, back-up capability, security and response
time meet the then current generally accepted standards for E-commerce sites on
the World Wide Web.
Section 8. Advertising Communications
8.1 Advertising
The parties will:
(a) each appoint a liaison to develop a long-term advertising
strategy and to oversee and address issues and disputes regarding ongoing
advertising activities; and
(b) each appoint one senior marketing representative, which will
meet on at least a calendar quarterly basis to discuss opportunities and
establish advertising goals of the parties for the next calendar quarter.
Any advertising-related dispute not resolved by the liaisons shall be
subject to the dispute resolution procedures set forth in Section 12.
8.2 Oversight
Each party will appoint a senior executive officer to oversee and have
overall responsibility for the administration of this Agreement and the parties'
business relationship contemplated by this Agreement. Such senior executive
officers will meet, either in person or by telephone conference, at least once
each calendar quarter.
Section 9. Representations and Warranties
9.1 Representations and Warranties of drugstore.com
9.1.1 drugstore.com hereby represents and warrants to GNC:
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(a) Authorization. All corporate action on the part of
drugstore.com, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement and the Consignment
Agreement of even date herewith (the "Consignment Agreement", and together with
this Agreement, the "Agreements"), and the performance of all obligations of
drugstore.com hereunder and thereunder has been taken, and the Agreements, when
executed and delivered by drugstore.com, will constitute valid and legally
binding obligations of drugstore.com, enforceable against drugstore.com in
accordance with their terms except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of
general application affecting enforcement of creditors' rights generally, as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies.
(b) Compliance with Other Instruments. The execution, delivery and
performance of the Agreements and the consummation of the transactions
contemplated thereby will not result in any violation of or be in conflict with
or constitute, with or without the passage of time and giving of notice, a
default under any provision of drugstore.com's charter or bylaws or any
instrument, judgment, order, writ, decree or contract to which drugstore.com is
a party or by which it is bound, or any provision of any federal or state
statute, rule or regulation applicable to drugstore.com, the effect of which
would have a material adverse effect on the ability of drugstore.com to perform
its obligations under the Agreements.
(c) In connection with all advertisements for, or content contained
in, the GNC Livewell Store, drugstore.com will comply with the GNC Consent
Orders set forth in Exhibit A hereto for so long as they are in effect.
(d) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY,
DRUGSTORE.COM MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER,
DIRECTLY OR INDIRECTLY, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO,
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH
RESPECT TO ANY GOODS OR SERVICES TO BE PROVIDED UNDER THE AGREEMENTS, OTHER THAN
THOSE EXPRESSLY SET FORTH IN THE AGREEMENTS.
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9.2 Representations and Warranties of GNC
9.2.1 GNC hereby represents and warrants to drugstore.com:
(a) Authorization. All corporate action on the part of GNC, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of the Agreements, and the performance of all obligations of GNC
thereunder has been taken, and the Agreements, when executed and delivered by
GNC, will constitute valid and legally binding obligations of GNC, enforceable
against GNC in accordance with their terms except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and
other laws of general application affecting enforcement of creditors' rights
generally, as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
(b) Compliance with Other Instruments. The execution, delivery and
performance of the Agreements and the consummation of the transactions
contemplated thereby will not result in any violation of or be in conflict with
or constitute, with or without the passage of time and giving of notice, a
default under any provision of GNC's charter or bylaws or any instrument,
judgment, order, writ, decree or contract to which GNC is a party or by which it
is bound, or any provision of any federal or state statute, rule or regulation
applicable to GNC, the effect of which would have a material adverse effect on
the ability of GNC to perform its obligations under the Agreements.
(c) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, GNC
MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, DIRECTLY OR
INDIRECTLY, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT
TO ANY GOODS OR SERVICES TO BE PROVIDED UNDER THE AGREEMENTS, OTHER THAN THOSE
EXPRESSLY SET FORTH IN THE AGREEMENTS.
<PAGE>
13
Section 10. Indemnification
10.1 Indemnification
GNC and drugstore.com each shall indemnify and hold harmless the other
and its divisions, its Affiliates and its officers, directors, employees,
representatives and agents franchises and licensees (the "Indemnified Parties")
from and against any and all liabilities, suits, costs, judgments, penalties,
expenses, obligations, losses, damages, claims and actions made by a Third
Party, including, but not limited to, (a) any obligation or liability which may
be imposed upon any of the Indemnified Parties as a matter of law, constituting,
or in any way based upon, resulting from or arising out of any breach or alleged
breach by GNC or drugstore.com, as applicable, of any representation, warranty,
agreement or covenant made by such party in this Agreement, (b) any obligation
or liability which may be imposed on drugstore.com resulting from or arising out
of the GNC Brand Products or products manufactured by GNC, statements or
Trademarks of, or provided by GNC to drugstore.com (in which case GNC will
indemnify the drugstore.com Indemnified Parties unless the obligation or
liability was caused by drugstore.com's negligence or willful act), (c) any
obligation or liability which may be imposed on GNC resulting from or arising
out of the drugstore.com business (in which case drugstore.com will indemnify
the GNC Indemnified Parties unless the obligation or liability was caused by
GNC's negligence or willful acts), and (d) any cost or expense (including, but
not limited to, legal fees and out-of-pocket expenses) reasonably incurred by
any of the Indemnified Parties (and their counsel) in investigating, preparing
for, defending against or otherwise taking any action in connection with any of
the foregoing (collectively "Damages").
<PAGE>
14
10.2 Procedure
If any claim, demand, assessment or liability or cost incidental thereto
(collectively, an "Indemnified Claim"), is asserted against an Indemnified Party
in respect of which the Indemnified Party proposes to demand indemnification
from the other party (the "Indemnifying Party") pursuant to this Section 10,
such Indemnified Party will promptly notify the Indemnifying Party in writing.
No failure of an Indemnified Party to so notify the Indemnifying Party shall
relieve the Indemnifying Party from the obligation to indemnify the Indemnified
Party unless and to the extent the Indemnifying Party is actually prejudiced by
such failure. Such Indemnified Party will accord the Indemnifying Party the
opportunity to assume entire control for the defense, compromise or settlement
of any such Indemnified Claim through its own counsel and at its own expense;
provided that no such compromise or settlement shall include any non-monetary
terms and conditions applicable to such Indemnified Party without the consent of
the Indemnified Party; and provided further, that the Indemnified Party may
retain its own counsel at the Indemnifying Party's expense if (i) the
Indemnifying Party, within thirty (30) days after notice of any Indemnified
Claim, fails to assume the defense of such Indemnified Claim or (ii) the
representation of both the Indemnifying Party and the Indemnified Party would,
in the reasonable judgment of the parties, be inappropriate due to actual or
potential conflicting interests between them. If the Indemnifying Party does
not assume entire control of the defense, compromise or settlement of such
Indemnified Claim, the Indemnified Party may compromise or settle any such
Indemnified Claim. drugstore.com and GNC each agrees to cooperate fully with
respect to the defense of any Indemnified Claim.
Section 11. Additional Obligations of the parties
11.1 Nondisclosure
11.1.1 A party (the "Receiving party") receiving any Confidential
Information of the other party (the "Disclosing party") will exercise a
reasonable degree of care, but in no event less than the same degree of care
that it uses to protect its own confidential information of a like nature, to
keep confidential and not disclose such Confidential Information. Without
limiting the generality of the foregoing, the Receiving party shall disclose the
Confidential Information of the other party only to those of its employees and
contractors (a) who have a need to know the Confidential Information in order to
exercise its license to such Confidential Information, and (b) who are
contractually obligated to comply with the disclosure and usage restrictions set
forth in this Agreement. In addition, each party may, with the prior written
consent of the other party (which consent shall not be unreasonably withheld),
disclose the existence and terms of this Agreement to potential sources of
financing who are contractually obligated to maintain the confidentiality of
such information; provided, however, that if, after receipt of a written request
for consent, the other party does not respond to the request within three (3)
business days, consent will be deemed to have been given so long as the
requested disclosure is not to a person selling goods or services with those
that compete with the goods or services sold by the nondisclosing party.
<PAGE>
15
11.1.2 The obligations set forth in Section 11.1.1 above shall not
apply to any Confidential Information to the extent it: (a) is approved by
prior-written authorization of the Disclosing party for release by the Receiving
party; (b) is disclosed in order to comply with a judicial order issued by a
court of competent jurisdiction, in which event the Receiving party shall give
prior written notice to the Disclosing party of such disclosure as soon as
practicable and shall cooperate with the Disclosing party in using all
reasonable efforts to obtain an appropriate protective order or equivalent,
provided that the information shall continue to be Confidential Information to
the extent it is covered by such protective order or equivalent; (c) becomes
generally available to the public through any means other than a breach by the
Receiving party of its obligations under this Agreement; (d) was in the
possession of the Receiving party without obligation of confidentiality prior to
receipt or disclosure under this Agreement as evidenced by written records made
prior to such receipt or disclosure; (e) is developed independently by the
Receiving party without the use of or benefit from any of the Confidential
Information of the other party or without breach of this Agreement, as evidenced
by written records of the Receiving party in existence as of disclosure by the
Disclosing party; or (f) is required to be disclosed by government rule or
regulation (e.g., in connection with a securities filing) or any other
provisions of applicable law, provided that the Receiving party gives the
Disclosing party advance written notice of the disclosure and cooperates with
the Disclosing party in any attempt to limit the scope of the required
disclosure. In any dispute over whether information is Confidential Information
under this Agreement, it will be the burden of the Receiving party to show that
such contested information falls within the exceptions set forth in this Section
11.1.2.
11.2 No Contest of GNC Trademarks
drugstore.com shall not contest or otherwise challenge (e.g., in any legal
action or otherwise), or assist or encourage any other Person to contest or
challenge, the validity of any GNC Trademark; provided that the foregoing shall
not preclude drugstore.com from claiming that the Trademark in question is
drugstore.com Trademark.
11.3 No Contest of drugstore.com Trademarks
GNC shall not contest or otherwise challenge (e.g., in any legal action
or otherwise), or assist or encourage any other Person to contest or challenge,
the validity of any drugstore.com Trademarks; provided that the foregoing shall
not preclude GNC from claiming that the Trademark in question is GNC Trademark.
<PAGE>
16
11.4 Insurance
drugstore.com shall procure and maintain in full force and effect during
the term of this Agreement, at drugstore.com's expense, an insurance policy or
policies protecting (or shall self insure) the GNC Products that are consigned
to drugstore.com under the Consignment Agreement against any loss or damage or
any expense whatsoever arising out of or occurring upon or in connection with
the storage of such GNC Products at the distribution center or the delivery of
such GNC Products from the DC to the purchaser of such GNC Product up to the
full replacement value of the Product.
Section 12. Resolution of Disputes
12.1 General
If any dispute arises between the parties relating to this Agreement, each
party will follow the dispute resolution procedures set forth in this Section 12
prior to initiating any litigation or pursuing other available remedies unless
otherwise agreed in writing by the parties at the time the dispute arises.
Notwithstanding the foregoing, any party may commence litigation without having
first complied with the provisions of this Section 12 if such commencement
occurs within thirty (30) days prior to the date after which the commencement of
litigation would be barred by any statute of limitations, statute of repose or
other law, rule, regulation, or order of similar import or in order to request
injunctive or other equitable relief necessary to prevent irreparable harm. In
such event, the parties will (except as may be prohibited by judicial order)
nevertheless continue thereafter to follow the procedures set forth in this
Section 12.
12.2 Initiation of Procedures
If a party seeks to initiate the procedures under this Section 12, such
party will give written notice thereof to the other party. Such notice will (a)
state that it is a notice initiating the procedures under this section, (b)
describe briefly the nature of the dispute and the initiating party's claim or
position in connection with the dispute, and (c) identify an individual with
authority to settle the dispute on such party's behalf. Within ten (10) days
after receipt of any notice under this Section 12.2, the receiving party will
give the initiating party written notice that describes briefly the receiving
party's claims and positions in connection with the dispute and identifies an
individual with the authority to settle the dispute on behalf of the receiving
party.
<PAGE>
17
12.3 Pre-Litigation Discussion
The parties will cause the individuals identified in their respective
notices under Section 12.2 above to promptly make such investigation of the
dispute as such individuals deem appropriate. Promptly and in no event later
than ten days after the date of the initiating party's notice under Section
12.2, such individuals will commence discussions concerning resolution of the
dispute. If the dispute has not been resolved within 30 days after commencement
of such discussions, then any party may request that the other party make its
president available to discuss resolution of such dispute. Each party will cause
its president to meet together with the other party's president to discuss such
dispute at a mutually agreed upon time within 15 days after a party makes such
request. If the dispute has not been resolved within 15 days after the
presidents of the parties have first met, then any party may request that the
other party make an independent director available to discuss resolution of such
dispute. "Independent director" means any director that is neither an employee
of, nor an outsider provider of services to, a party. Each party will cause its
independent director to meet together with the other party's independent
director to discuss such dispute at a mutually agreed upon time within 10 days
after a party makes such request. If the independent directors do not resolve
the dispute within five days of their first meeting, the parties shall submit
the dispute for non-binding mediation to a mutually agreed upon mediator or
mediation firm. The parties will use their best efforts to cause the mediator to
resolve the dispute within 15 days of its submission thereto. If the mediator is
unable to resolve the dispute within such time period, any party may submit the
dispute to litigation.
Section 13. Breach; Termination; Extension
13.1 Breach by GNC
13.1.1 In the event of a material breach by GNC of any of its
material obligations under this Agreement, including any material breach or
inaccuracy of its representations and warranties, which breach (except for a
breach under Section 5.6) GNC does not cure within sixty (60) days after
drugstore.com gives GNC written notice thereof, drugstore.com will have any and
all of the following rights:
(a) the right to terminate this Agreement; and
(b) the right to sue for breach.
13.2 Breach by drugstore.com
13.2.1 In the event of a material breach by drugstore.com of any
of its material obligations under this Agreement, including any material breach
or inaccuracy of its representations and warranties, which breach drugstore.com
does not cure within sixty (60) days after GNC gives drugstore.com written
notice thereof, GNC shall have any and all of the following rights:
(a) the right to terminate this Agreement; and
<PAGE>
18
(b) the right to sue for breach.
13.3 Termination
13.3.1 This Agreement will terminate upon the earlier of (i)
expiration of the Term and (ii) a termination pursuant to Section 13.1 or 13.2.
13.3.2 Upon expiration of the Term or termination of this
Agreement pursuant to either Section 13.1 or 13.2, all rights and obligations of
the parties under this Agreement shall terminate, except for those rights and
obligations of the parties existing under Sections 10 and 11.1.
13.4 Extension
Unless either party gives the other party written notice not later than 180
days prior to the expiration of the initial ten year Term that it does not wish
to extend the Term, the Term will automatically be extended for successive one
year periods. Any additional one year term will automatically be renewed unless
either party gives the other party written notice to the contrary not later than
thirty (30) days prior to the expiration of the then current term.
Section 14. Miscellaneous
14.1 Relationship
The parties are independent contractors under this Agreement. Each party
acknowledges and agrees that it is not and will not be during the Term an
employee or an agent of any other party. Nothing in this Agreement will be
deemed to constitute, create, give effect to or otherwise recognize a joint
venture, partnership, franchise or business entity of any kind. Nothing in this
Agreement will be construed as providing for the sharing of profits or losses
arising out of the efforts of the parties hereto.
14.2 Assignment
This Agreement shall be binding upon and inure to the benefit of the
parties hereto, and the legal representatives, successors in interest and
permitted assigns, respectively, of each such party. This Agreement shall not be
assigned in whole or in part by any party without the prior written consent of
the other party, such consent not to be unreasonably withheld; provided,
however, that a party may, without consent of the other parties, assign this
Agreement to an Affiliate of the assignor, or to an entity acquiring
substantially all of the assets or capital stock of the assignor due to merger,
acquisition or consolidation so long as (a) the assignor remains liable for the
full and faithful performance of its obligations hereunder, (b) such Affiliate
or successor in writing assumes all of the obligations of the assignor under
this Agreement and agrees to comply with the terms set forth in this Agreement,
and (c) a copy of the assignment is provided to the non-assigning parties.
<PAGE>
19
14.3 Notices
All notices, requests, demands, applications, services of process, and
other communications that are required to be or may be given under this
Agreement shall be in writing and shall be deemed to have been duly given if
sent by telecopy or facsimile transmission, answer back requested, or delivered
by courier or mailed, certified first class mail, postage prepaid, return
receipt requested, to the parties to this Agreement at the following addresses:
If to GNC:
Attn:
If to drugstore.com: drugstore.com, inc
13920 SE Eastgate Way,
Suite 300
Bellevue, WA 98005
Attn: General Counsel
Fax: 425-372-3800
or to such other address as the party shall have furnished to the others by
notice given in accordance with this Section 14.3. Such notice shall be
effective (i) if delivered in person or by courier, upon actual receipt by the
intended recipient, or (ii) if sent by telecopy or facsimile transmission, on
the date of transmission unless transmitted after normal business hours, in
which case on the following date, or (iii) if mailed, upon the date of first
attempted delivery.
14.4 Waiver
No provision of this Agreement shall be deemed to be waived and no breach
excused unless such waiver or consent shall be in writing and signed by the
party that is claimed to have waived or consented. The failure of a party at any
time, or from time to time, to require performance by the other parties of any
provision hereof shall in no way affect the rights of such party thereafter to
enforce the same nor shall the waiver by a party of any breach of any provision
hereof by the other parties constitute a waiver of any succeeding breach of such
provision, or a waiver of any provision itself, or a waiver of any other
provisions hereof.
<PAGE>
20
14.5 Severability
This Agreement will be enforced to the fullest extent permitted by
applicable law. If for any reason any provision of this Agreement is held to be
invalid or unenforceable to any extent, then such: (a) provision will be
interpreted, construed or reformed to the extent reasonably required to render
the same valid, enforceable and consistent with the original intent underlying
such provision; (b) provision will be void to the extent it is held to be
invalid or unenforceable; (c) provision will remain in effect to the extent that
it is not invalid or unenforceable; and (d) invalidity or unenforceability will
not affect any other provision of this Agreement or any other agreement between
the parties.
14.6 Remedies
Except as otherwise expressly provided in this Agreement, each and all of
the rights and remedies provided in this Agreement, and each and all of the
remedies allowed at law and in equity, will be cumulative, and the exercise of
one right or remedy will not be exclusive of the right to exercise or resort to
any and all other rights or remedies provided in this Agreement or at law or in
equity.
14.7 Injunctive Relief
The parties acknowledge that a material breach of this Agreement would
cause irreparable harm, the extent of which would be difficult to ascertain.
Accordingly, they agree that, in addition to any other legal remedies to which
the non-breaching party may be entitled, such party will be entitled to obtain
immediate injunctive relief in the event of a material breach of this Agreement.
14.8 Governing Law
This Agreement will be governed by and construed according to the laws of
the State of Delaware without regard to its choice of law provisions. The
parties consent to the jurisdiction of such courts and waive any right to assert
that any such court constitutes an inconvenient or improper forum.
<PAGE>
21
14.9 Publicity
Neither party shall, without the approval of the other, make any press
release or other public announcement concerning the transactions contemplated by
the Agreements, except as and to the extent that any such party shall be so
obligated by law or by the rules, regulations or policies of any national
securities exchange or association or governmental entity, in which case the
other party shall be advised and the parties shall use their best efforts to
cause a mutually agreeable release or announcement to be issued; provided,
however, that the parties hereby acknowledge and agree that communications among
employees of the parties and their attorneys, representatives and agents
necessary to consummate the transactions contemplated hereby shall not be deemed
a public announcement for purposes of this Section 14.9. Upon the execution and
deliver of this Agreement, the parties hereto will cooperate in respect of the
immediate issuance of a mutually acceptable press release relating to the
transactions contemplated by the Agreements.
14.10 Entire Agreement
All Exhibits and Schedules to this Agreement are incorporated in and
constitute a part of this Agreement. This Agreement, including the Exhibits and
Schedules hereto, each as amended from time to time, constitutes the entire
understanding between the parties in relation to the subject matter hereof and
supersede all prior discussions, agreements and representations related to this
subject matter, whether oral or written and whether or not executed by a party.
Unless otherwise provided in this Agreement, no modification, amendment or other
change may be made to this Agreement or any part thereof unless reduced to
writing and executed by authorized representatives of all parties.
14.11 Counterparts
This Agreement may be executed in two or more counterparts, each of which
will be deemed an original, but all of which together will constitute one and
the same instrument.
14.12 Titles and Subtitles
The titles and subtitles used in this Agreement and in the Exhibits and
Schedules hereto are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
[Signature Page Follows]
<PAGE>
22
In witness whereof, the parties have duly entered into this Main
Agreement as of the date first written above.
GNC: drugstore.com:
GENERAL NUTRITION CORPORATION DRUGSTORE.COM, INC.
By: /s/ James M. Sander By: /s/ Peter M. Neupert
Name: James M. Sander Name: Peter M. Neupert
Title: Vice President Title: President and CEO
Address: 300 Sixth Avenue Address: 13920 SE Eastgate Way
Pittsburgh, PA 15222 Suite 300
Bellevue, WA 98005
<PAGE>
1
Exhibit 10.29
DRUGSTORE.COM, INC.
RITE AID GOVERNANCE AGREEMENT
-----------------------------
This Governance Agreement (this "Agreement") is made as of the 17th day of
---------
June, 1999 by and among drugstore.com, inc., a Delaware corporation (the
"Company"), and Rite Aid Corporation, a Delaware corporation ("Rite Aid").
- -------- --------
RECITALS
--------
The Company and Rite Aid have entered into a Series E Preferred Stock
Purchase Agreement (the "Series E Purchase Agreement") dated as of June 17,
---------------------------
1999, pursuant to which the Company will sell to Rite Aid and Rite Aid will
purchase from the Company shares of the Company's Series E Preferred Stock. The
Company and Rite Aid wish to enter into this Agreement in order to set forth
certain rights and restrictions applicable to the Company and Rite Aid in
connection with the transactions contemplated by the Purchase Agreement.
AGREEMENT
---------
The parties hereby agree as follows:
1. Standstill Agreement.
--------------------
1.1 No Increase of Ownership Interest. (a) At any time during the
---------------------------------
Standstill Period (defined below), except with the prior written consent of a
majority of the Company's Board of Directors (the "Board") (excluding the vote
-----
of any director appointed by Rite Aid), none of Rite Aid, any Affiliate (defined
below) of Rite Aid or any 13D Group (defined below) of which Rite Aid or any of
its Affiliates is a member shall in any manner acquire, agree to acquire or make
any proposal to acquire, directly or indirectly, beneficial ownership (defined
below) of any securities of the Company entitled to vote with respect to the
election of any directors of the Company ("Voting Securities"), any security
-----------------
convertible into, exchangeable for, or exercisable for, or that may become any
Voting Securities or any other right to acquire Voting Securities (such Voting
Securities and rights to acquire Voting Securities are collectively referred to
herein as "Securities"), if after such acquisition, the Voting Securities then
----------
beneficially
<PAGE>
2
owned by Rite Aid would represent more than the Threshold Percentage (defined
below) of the Company's then outstanding Voting Securities (assuming the
conversion, exchange and/or exercise of all convertible, exchangeable and
exercisable securities then beneficially owned by Rite Aid); provided, however,
-------- -------
that if at any time the Voting Securities beneficially owned by Rite Aid shall
represent less than or the same as the Threshold Percentage, and, subsequently
and solely as a result of the Company's repurchases of Voting Securities or a
recapitalization of all the Company's capital stock, the Voting Securities
beneficially owned by Rite Aid shall then represent more than the Threshold
Percentage, then Rite Aid shall not be deemed in violation of this Section 1.1
for so long as Rite Aid does not purchase or acquire beneficial ownership of
additional Voting Securities.
(b) The provisions of Section 1.1(a) shall not apply during the
pendency of a Standstill Suspension Period (defined below).
1.2 Definitions. For purposes of this Agreement, the following terms
-----------
shall be defined as set forth below:
"Acquisition Agreement" means a definitive agreement between the
---------------------
Company and any Existing Investor or any other Person in respect of a
merger, consolidation, recapitalization, sale of assets or other business
combination transaction which, if consummated, (i) in the case of such an
agreement with an Existing Investor, would result (A) in such Existing
Investor beneficially owning in excess of 40% of the then Total Current
Voting Power (excluding a merger effected exclusively for the purpose of
changing the domicile of the Company) or (B) in 50% or more of the assets
of the Company being transferred to or controlled by an Existing Investor
or (ii) in the case of such an agreement with any other Person, would
result in a Change of Control Transaction.
"Affiliate" of any specified Person means any other Person directly or
---------
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person.
"beneficial owner" has the meaning set forth in Rule 13d-3 under the
----------------
Exchange Act, and the terms "beneficially own" and "beneficial ownership"
---------------- --------------------
have meanings correlative to the foregoing.
"Board" is defined in Section 1.1(a).
-----
<PAGE>
3
"Change of Control Transaction" means (A) any Tender Offer, merger,
-----------------------------
consolidation, recapitalization, sale of assets or other business
combination or transaction pursuant to which either (i) the holders of the
outstanding Voting Securities immediately prior to such transaction would
hold less than 50% of the Total Current Voting Power immediately after such
transaction or (ii) 50% or more of the assets of the Company would be
transferred to or controlled by a third party not Affiliated with the
Company, except in each case a merger effected exclusively for the purpose
of changing the domicile of the Company or (B) any action by the
stockholders of the Company that results in the directors, who as of the
Closing Date constitute the Board (the "Incumbent Board"), ceasing to
---------------
constitute at least a majority of the Board (provided, however, that any
individual becoming a director subsequent to the Closing Date whose
nomination for election by the stockholders of the Company was approved by
the vote of the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board).
"Closing Date" means the date of the closing of the purchase and sale
------------
under the Series E Purchase Agreement.
"Common Stock" means common stock, par value $0.001 per share, of the
------------
Company.
"control" when used with respect to any Person means the power to
-------
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract, or
otherwise; and the terms "controlling" and "controlled" have meanings
----------- ----------
correlative to the foregoing.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Existing Investors" means Amazon.com, Inc., Kleiner Perkins Caufield
------------------
& Byers VIII, L.P. and Vulcan Ventures Incorporated, and their respective
Affiliates.
"Existing Investor Offer/Solicitation" means the commencement by an
------------------------------------
Existing Investor of (i) a Tender Offer to acquire, or as a result of which
such Existing Investor would beneficially own, in excess of 40% of the then
Total Current Voting Power or (ii) a Proxy Solicitation.
<PAGE>
4
"Investors' Rights Agreement" means the Fourth Amended and Restated
---------------------------
Investors' Rights Agreement made as of May 18, 1999, as amended by the
Addendum thereto dated as of June 17, 1999, by and among the Company and
the investors listed on Exhibit A thereto.
"Person" means any individual, firm, corporation, partnership, limited
------
liability company, trust, joint venture, or other entity.
"Proxy Solicitation" means a "solicitation" of "proxies" (as such
------------------
terms are used in Regulation 14A under the Exchange Act) by a Person or 13D
Group (which is not made and does not include any of the Company, Rite Aid
or any Affiliate of the Company or Rite Aid (it being agreed that for
purposes of this definition of Proxy Solicitation an Existing Investor
shall not be deemed an Affiliate of the Company)) to effect a Change of
Control Transaction.
"Qualified IPO" means an underwritten public offering by the Company
-------------
of shares of its Common Stock pursuant to a registration statement under
the Securities Act, which results in gross proceeds in excess of
$15,000,000 and the public offering price of which is at least $10.00 per
share (appropriately adjusted for any stock split, dividend, combination or
other recapitalization).
"Rite Aid Controlled Entity" means any Person which is controlled by
--------------------------
Rite Aid.
"Securities" is defined in Section 1.1(a).
----------
"Securities Act" means the Securities Act of 1933.
--------------
"Standstill Period" means the period from the date of this Agreement
-----------------
until the earlier of (i) the tenth anniversary of the Closing Date and (ii)
when the Company shall (A) sell, convey, or otherwise dispose of all or
substantially all of its property or business or merge or consolidate with
any other corporation (other than a wholly owned subsidiary corporation)
where the stockholders of the Company own less than fifty percent (50%) of
the voting power of the surviving entity after such merger or consolidation
or (B) effect any other transaction or series of related transactions in
which more than fifty percent (50%) of the voting power of the Company is
disposed of, except in each case a merger
<PAGE>
5
effected exclusively for the purpose of changing the domicile of the
Company.
"Standstill Suspension Period" means any of the following periods:
----------------------------
(i) the period from the eleventh business day after commencement of a
Third Party Offer/Solicitation until the withdrawal or termination thereof;
(ii) the period from commencement of an Existing Investor
Offer/Solicitation until the withdrawal or termination thereof;
(iii) the period of effectiveness of any material waiver by the Company
(including through a failure to enforce) of Section 3.1, 3.3 or 3.5 of the
Investors' Rights Agreement as and to the extent such sections apply to the
Existing Investors; and
(iv) the period from the execution by the Company of an Acquisition
Agreement until the termination thereof.
"Stock" is defined in Section 2.1.
-----
"Strategic Agreements" means this Agreement, the Rite Aid Main
--------------------
Agreement and the Pharmacy Supply and Services Agreement (each as defined
in the Series E Purchase Agreement).
"Tender Offer" means a bona fide public offer subject to the
------------
provisions of Regulation 14D when first commenced within the meaning of
Rule 14d-2(a) of the rules and regulations under the Exchange Act, by a
Person or 13D Group (which is not made and does not include any of the
Company, Rite Aid or any Affiliate of the Company or Rite Aid (it being
agreed that for purposes of this definition of Tender Offer an Existing
Investor shall not be deemed an Affiliate of the Company)) to purchase or
exchange for cash or other consideration any Voting Securities.
"Third Party Offer/Solicitation" means the commencement by any Person
------------------------------
other than an Existing Investor of (i) a Tender Offer to acquire, or as a
result of which such Person would beneficially own, 51% or more of the then
Total Current Voting Power or (ii) a Proxy Solicitation.
"13D Group" means any group of Persons formed for the purpose of
---------
acquiring, holding, voting or
<PAGE>
6
disposing of Securities which would be required under Section 13(d) of the
Exchange Act, and the rules and regulations promulgated thereunder, to file
a statement on Schedule 13D pursuant to Rule 13d-1(a) or a Schedule 13G
pursuant to Rule 13d-1(c) as a "person" within the meaning of Section
13(d)(3) of the Exchange Act if such group beneficially owned Securities
representing more than 5% of any class of Securities then outstanding.
"Threshold Percentage" means 40.0%.
--------------------
"Total Current Voting Power" means, as of any date of determination,
--------------------------
the total number of votes which may be cast in the election of members of
the Board of Directors of the Company if all Voting Securities are present
and vote.
"Voting Agreement" means the Third Amended and Restated Voting
----------------
Agreement dated as of June 17, 1999.
"Voting Securities" is defined in Section 1.1(a).
-----------------
1.3 Notice of Voting Securities Purchases. Rite Aid shall notify the
-------------------------------------
Company as to any future acquisition of beneficial ownership of Voting
Securities, or rights thereto, within ten (10) business days after such action
in order for the Company to monitor compliance with the terms of this Agreement.
1.4 Other Restricted Activities. (a) At any time during the
---------------------------
Standstill Period, except for the acquisition of Voting Securities up to the
Threshold Percentage by means of a tender offer, open market purchases, private
purchases or any other legally available means, or with the prior written
consent of a majority of the Board (excluding the vote of any director appointed
by Rite Aid) neither Rite Aid nor any Affiliate of Rite Aid shall (i) propose to
enter into, directly or indirectly, any merger or other business combination
involving the Company or propose to purchase, directly or indirectly, a material
portion of the assets of the Company, (ii) make, or in any way participate,
directly or indirectly, in any "solicitation" of "proxies" (as such terms are
used in Regulation 14A under the Exchange Act) to vote or consent, or seek to
advise or influence any Person with respect to the voting of, or granting of a
consent with respect to, any Securities, (iii) deposit any Securities into a
voting trust or subject any Securities to any arrangement or agreement with any
third party with respect to the voting of such Securities (other than as
contemplated by the Voting Agreement), (iv) form, join or participate in any 13D
Group, (v)
<PAGE>
7
otherwise act, alone or in concert with others, to seek to control or influence
the management or policies of the Company, (vi) disclose any intention, plan or
arrangement inconsistent with the foregoing or (vii) advise, assist (including
by knowingly providing or arranging financing for that purpose) or encourage any
other Person in connection with any of the foregoing. Rite Aid also agrees not
to (and to cause its Affiliates not to) (x) request the Company or any of its
agents or representatives, directly or indirectly, to amend or waive any
provision of this Section 1.4(a) (including this sentence) or (y) take any
action which might require the Company to make a public announcement regarding
the possibility of a transaction with the Company (excluding announcements
relating to the Strategic Agreements); provided that this clause (y) shall not
--------
be deemed to prohibit Rite Aid from communicating with the Board so long as such
communication is not intended to elicit a public response by such Board.
Nothing contained in this Section 1.4 shall be deemed to prevent Rite Aid from
taking actions permitted under the Voting Agreement or Section 3 of this
Agreement.
(b) The provisions of Section 1.4(a) shall not apply during the pendency
of a Standstill Suspension Period.
1.5 Voting Restrictions. During the Standstill Period, Rite Aid shall
-------------------
take all action as may be required such that all Voting Securities beneficially
owned by Rite Aid are voted at every meeting of the Company's stockholders and
in any solicitation of consents in lieu of any such meeting (a) in any election
of directors in favor of the nominees put forth and recommended by the Board,
(b) on any stockholder proposals made pursuant to Rule 14a-8 under the Exchange
Act, in accordance with the recommendation of a majority of the Board and (c) on
all proposed amendments to the Company's certificate of incorporation, other
than any amendment to the voting or other rights of the holders of the Common
Stock that is adverse to Rite Aid, in accordance with the recommendation of a
majority of the Board.
2. Sales by Rite Aid.
-----------------
<PAGE>
8
2.1 Transfer Restrictions. Notwithstanding any other provisions of this
---------------------
Agreement, during the Standstill Period, Rite Aid shall not directly or
indirectly sell or otherwise transfer or dispose of any shares of the Company's
capital stock beneficially owned by Rite Aid ("Stock"), or any interest therein,
-----
except as follows:
(i) to the Company;
(ii) to any Rite Aid Controlled Entity which has agreed in writing
with the Company to be bound to the terms of this Agreement;
(iii) (x) in a private placement exempt from the registration
requirements of the Securities Act, provided that Rite Aid obtains an
--------
opinion of counsel stating that such sale, transfer or disposition is
exempt from the registration requirements of the Securities Act, or
(y) pursuant to a bona fide underwritten public offering or
shelf offering registered under the Securities Act;
provided, that in the case of each of clauses (x) and (y), to the knowledge
--------
of Rite Aid after due inquiry, no single Person or 13D Group would, as a
result of such transfer, beneficially own more than 5% of the Voting
Securities;
(iv) pursuant to Rule 144 under the Securities Act;
(v) at any time, pursuant to any tender offer or exchange offer subject
to Regulation 14D under the Exchange Act which (x) is not opposed by the
Board within the time the Board is required, pursuant to the rules and
regulations promulgated under the Exchange Act, to advise stockholders of
the Company of its position on such offer or (y) if successful would effect
a Change of Control Transaction; or
(vi) at any time, pursuant to, or in connection with the consummation
of, any definitive agreement between the Company and any other Person in
respect of a merger, consolidation, recapitalization, sale of assets or
other business combination transaction.
2.2 Prohibited Transfers. Any attempt by Rite Aid to sell, transfer or
--------------------
dispose of Stock or any interest therein in violation of this Section 2 shall be
void and
<PAGE>
9
the Company agrees it will not effect such a sale, transfer or disposition nor
will it treat any alleged transferee as the holder of such Stock.
2.3 Legended Certificates. Each certificate representing shares of
---------------------
Stock now or hereafter owned by Rite Aid shall be endorsed with the following
legend unless the applicable restrictions referenced below shall have lapsed by
the terms of the agreements in which such restrictions are contained (in which
event the relevant legend shall be removed from such certificate):
"THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO TRANSFER RESTRICTIONS
SET FORTH IN A GOVERNANCE AGREEMENT DATED AS OF JUNE 17, 1999, BETWEEN
THE STOCKHOLDER AND THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE
OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION."
3. Board Representation.
--------------------
3.1 Designation of Director. On the first business day following the
-----------------------
termination of Rite Aid's rights under Section 1(d) of the Voting Agreement
pursuant to Section 3.1(b) thereof, the Company will cause the Board to
nominate, recommend and solicit proxies (if necessary) for election to the Board
of one person designated by Rite Aid; provided, that this obligation shall be
deemed fulfilled in the event a Rite Aid designated director is already sitting
on the Board at such time. Thereafter, in the event of a vacancy in such Rite
Aid Board seat, or in any Board election in which the Rite Aid designated
director is up for re-election, the Company will cause the vacancy to be filled
with a Rite Aid designated director or will cause such Rite Aid designated
director to be included on the slate of directors proposed by the Board at such
election and cause the Board to recommend and solicit proxies (if necessary) in
favor of such Rite Aid designated director. Notwithstanding any of the
foregoing, the Company's obligations under this Section 3 will terminate on the
earliest of:
(x) the date Rite Aid ceases to beneficially own at least 5% of the
then-outstanding shares of Common Stock;
(y) the date of termination of all of the Strategic Agreements; and
(z) when the Company shall sell, convey, or otherwise dispose of all
or substantially all of its
<PAGE>
10
property or business or merge or consolidate with any other corporation
(other than a wholly-owned subsidiary corporation) where the stockholders
of the Company own less than fifty percent (50%) of the voting power of the
surviving entity after such merger or consolidation, provided that this
subsection (z) shall not apply to a merger effected exclusively for the
purpose of changing the domicile of the Company.
3.2 Designation of an Observer. At any time prior to the termination
--------------------------
of all of the Strategic Agreements or the occurrence of an event described in
clause (z) of Section 3.1, Rite Aid shall be entitled to designate a nonvoting
observer who shall be entitled to attend any meeting of the Board which a Rite
Aid designated director does not attend and who, at any time when there is not a
Rite Aid designated director on the Board, shall be provided (i) notice of all
meetings of the Board (concurrent with the delivery of such notice to
directors), (ii) notice of any action that the Board may take by written consent
(concurrent with the delivery of such notice to directors) and (iii) promptly
delivered copies of all minutes and other records of action by, and all written
information furnished to the Board.
3.3 Conflicts. Notwithstanding the foregoing, no Rite Aid Board
---------
observer shall be permitted to attend any Board meeting (or any portion thereof)
at which discussions relate to matters which the General Counsel of the Company
determines could be subject to the attorney/client privilege.
4. Pre-IPO Right.
-------------
4.1 Right of First Offer. Subject to the terms and conditions
--------------------
specified in this Section 4.1, the Company hereby grants to Rite Aid a right of
first offer with respect to future sales by the Company of its Shares (as
hereinafter defined).
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("Shares"), the Company shall first make an offering of such Shares to
------
Rite Aid in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail or overnight
courier ("Notice") to Rite Aid stating (i) its bona fide intention to offer such
------
Shares, (ii) the number of such Shares to be offered, and (iii) the price and
terms, if any, upon which it proposes to offer such Shares.
<PAGE>
11
(b) Within 15 calendar days after delivery of the Notice, Rite Aid may
elect to purchase or obtain, at the price and on the terms specified in the
Notice, up to that portion of such Shares which equals the amount necessary for
Rite Aid to maintain its equity percentage in the Company (calculated as the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all convertible or exercisable
securities held by Rite Aid as of the date of this Agreement (or if less, the
number then held by Rite Aid) bears to the total number of shares of Common
Stock then outstanding.
(c) The right of first offer in this Section 4.1 shall not be
applicable (i) to the issuance or sale of capital stock (or options therefor) to
employees, consultants, officers or directors of the Company pursuant to stock
purchase or stock option plans or agreements approved by the Board (including
options granted prior to the date hereof), (ii) to the issuance of securities in
connection with bona fide acquisitions, mergers or similar transactions, (iii)
to the issuance of securities to financial institutions or lessors in connection
with commercial credit arrangements, equipment financings or similar
transactions, (iv) to the issuance of securities in a public offering of
securities pursuant to a registration statement filed under the Securities Act,
(v) to the issuance of securities pursuant to the conversion or exercise of
options, warrants, notes, or other rights to acquire securities of the Company,
or (vi) to the issuance of securities pursuant to stock splits, stock dividends
or like transactions.
4.2 Termination of Covenants. The covenants set forth in Section 4.1
------------------------
shall terminate and be of no further force or effect (i) upon the consummation
of a Qualified IPO, or (ii) when the Company shall (A) sell, convey, or
otherwise dispose of all or substantially all of its property or business or
merge or consolidate with any other corporation (other than a wholly-owned
subsidiary corporation) where the stockholders of the Company own less than
fifty percent (50%) of the voting power of the surviving entity after such
merger or consolidation or (B) effect any other transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Company is disposed of, provided that this subsection (ii) shall not apply to a
merger effected exclusively for the purpose of changing the domicile of the
Company.
<PAGE>
12
5. Miscellaneous.
-------------
5.1 Successors and Assigns. This Agreement and each party's rights and
----------------------
obligations hereunder shall not be assigned without the prior written consent of
the other party; provided, that in connection with a transfer pursuant to
--------
Section 2.1(ii), no consent of the Company shall be required but Rite Aid shall
cause the transferee to agree in writing with the Company to be bound to (and
receive the benefit of) Rite Aid's rights and obligations under this Agreement.
Except as otherwise provided in this Agreement, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
permitted successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
5.2 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
or waived only with the written consent of the Company and Rite Aid, or that of
their respective permitted successors and assigns. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon the Company,
Rite Aid and any of their permitted successors and assigns.
5.3 Notices. Unless otherwise provided, any notice required or
-------
permitted by this Agreement shall be in writing and shall be deemed given upon
delivery, when delivered personally or by overnight courier or sent by telegram
or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as
certified or registered mail, with postage prepaid, and addressed to the party
to be notified at such party's address or fax number as set forth below or as
subsequently modified by written notice, and if to the Company, with a copy to
the General Counsel of the Company at the address of the Company set forth below
and, if to Rite Aid, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP,
New York, NY 10022-3897 (telephone: (212) 735-3000; telecopy: (212) 735-2000),
Attention: Nancy Lieberman.
5.4 Severability. If any term or other provision of this Agreement is
------------
invalid, illegal or incapable of being enforced by any rule or law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
<PAGE>
13
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
5.5 Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto shall be governed, construed and interpreted in accordance with
the laws of the State of Delaware, without giving effect to principles of
conflicts of laws.
5.6 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.7 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.8 Enforcement. The parties agree that irreparable damage would occur in
-----------
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any New York or Delaware state
court or any Federal court located in the State of New York or the State of
Delaware, this being in addition to any other remedy to which they are entitled
at law or in equity. In addition, each of the parties hereto (a) consents to
submit itself to the personal jurisdiction of any New York or Delaware state
court or any Federal court located in the State of New York or the State of
Delaware in the event any dispute arises out of this Agreement, (b) agrees that
it will not attempt to deny or defeat such personal jurisdiction by motion or
other request for leave from any such court, (c) agrees that it will not bring
any action relating to this Agreement in any court other than any New York or
Delaware state court or any Federal court sitting in the State of New York or
the State of Delaware and (d) waives any right to trial by jury with respect to
any action related to or arising out of this Agreement.
5.9 Effectiveness. This Agreement shall become effective only
-------------
concurrently with the Closing (as defined in the Series E Purchase Agreement).
This Agreement shall automatically terminate concurrently with any termination
of the Series E Purchase Agreement pursuant to Section 7.16 thereof. Upon such
termination,
<PAGE>
14
this Agreement shall become void and of no further effect.
[Signature Page Follows]
<PAGE>
15
The parties have executed this Governance Agreement as of the date first
written above.
COMPANY:
DRUGSTORE.COM, INC.
By: /s/ Peter M. Neupert
--------------------------------
Name: Peter M. Neupert
Title: President and CEO
Address: 13920 SE Eastgate Way,
Suite 300
Bellevue, WA 98005
RITE AID:
RITE AID CORPORATION
By: /s/ Elliot S. Gerson
--------------------------------
Name: Elliot S. Gerson
Title:
Address: 30 Hunter Lane
Camp Hill, PA 17011
<PAGE>
1
Exhibit 10.30
DRUGSTORE.COM, INC.
GNC GOVERNANCE AGREEMENT
------------------------
This Governance Agreement (this "Agreement") is made as of the 17th day of
---------
June, 1999 by and among drugstore.com, inc., a Delaware corporation (the
"Company"), General Nutrition Companies, Inc., a Delaware corporation ("General
- -------- -------
Nutrition"), and General Nutrition Investment Company, an Arizona corporation
- ---------
("GNI", and together with General Nutrition,"GNC").
- ----- ---
RECITALS
--------
The Company and GNC have entered into a Series E Preferred Stock Purchase
Agreement (the "Series E Purchase Agreement") dated as of June 17, 1999,
------------------
pursuant to which the Company will sell to GNI and GNI will purchase from the
Company shares of the Company's Series E Preferred Stock. The Company and GNC
wish to enter into this Agreement in order to set forth certain rights and
restrictions applicable to the Company and GNC in connection with the
transactions contemplated by the Purchase Agreement.
AGREEMENT
---------
The parties hereby agree as follows:
1. Standstill Agreement.
--------------------
1.1 No Increase of Ownership Interest. (a) At any time during the
---------------------------------
Standstill Period (defined below), except with the prior written consent of a
majority of the Company's Board of Directors (the "Board") (excluding the vote
-----
of any director appointed by GNC), none of GNC, any Affiliate (defined below) of
GNC or any 13D Group (defined below) of which GNC or any of its Affiliates is a
member shall in any manner acquire, agree to acquire or make any proposal to
acquire, directly or indirectly, beneficial ownership (defined below) of any
securities of the Company entitled to vote with respect to the election of any
directors of the Company ("Voting Securities"), any security convertible into,
-----------------
exchangeable for, or exercisable for, or that may become any Voting Securities
or any other right to acquire Voting Securities (such Voting Securities and
rights to acquire Voting Securities are collectively referred to herein as
"Securities"), if
- -----------
<PAGE>
2
after such acquisition, the Voting Securities then beneficially owned by GNC
would represent more than the Threshold Percentage (defined below) of the
Company's then outstanding Voting Securities (assuming the conversion, exchange
and/or exercise of all convertible, exchangeable and exercisable securities then
beneficially owned by GNC); provided, however, that if at any time the Voting
-------- -------
Securities beneficially owned by GNC shall represent less than or the same as
the Threshold Percentage, and, subsequently and solely as a result of the
Company's repurchases of Voting Securities or a recapitalization of all the
Company's capital stock, the Voting Securities beneficially owned by GNC shall
then represent more than the Threshold Percentage, then GNC shall not be deemed
in violation of this Section 1.1 for so long as GNC does not purchase or acquire
beneficial ownership of additional Voting Securities.
(b) The provisions of Section 1.1(a) shall not apply during the
pendency of a Standstill Suspension Period (defined below).
1.2 Definitions. For purposes of this Agreement, the following terms
-----------
shall be defined as set forth below:
"Acquisition Agreement" means a definitive agreement between the
---------------------
Company and any Existing Investor or any other Person in respect of a
merger, consolidation, recapitalization, sale of assets or other business
combination transaction which, if consummated, (i) in the case of such an
agreement with an Existing Investor, would result (A) in such Existing
Investor beneficially owning in excess of 40% of the then Total Current
Voting Power (excluding a merger effected exclusively for the purpose of
changing the domicile of the Company) or (B) in 50% or more of the assets
of the Company being transferred to or controlled by an Existing Investor
or (ii) in the case of such an agreement with any other Person, would
result in a Change of Control Transaction.
"Affiliate" of any specified Person means any other Person directly or
---------
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person.
"beneficial owner" has the meaning set forth in Rule 13d-3 under the
----------------
Exchange Act, and the terms "beneficially own" and "beneficial ownership"
---------------- --------------------
have meanings correlative to the foregoing.
"Board" is defined in Section 1.1(a).
-----
<PAGE>
3
"Change of Control Transaction" means (A) any Tender Offer, merger,
-----------------------------
consolidation, recapitalization, sale of assets or other business combination or
transaction pursuant to which either (i) the holders of the outstanding Voting
Securities immediately prior to such transaction would hold less than 50% of the
Total Current Voting Power immediately after such transaction or (ii) 50% or
more of the assets of the Company would be transferred to or controlled by a
third party not Affiliated with the Company, except in each case a merger
effected exclusively for the purpose of changing the domicile of the Company or
(B) any action by the stockholders of the Company that results in the directors,
who as of the Closing Date constitute the Board (the "Incumbent Board"), ceasing
---------------
to constitute at least a majority of the Board (provided, however, that any
individual becoming a director subsequent to the Closing Date whose nomination
for election by the stockholders of the Company was approved by the vote of the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board).
"Closing Date" means the date of the closing of the purchase and sale under
------------
the Series E Purchase Agreement.
"Common Stock" means common stock, par value $0.001 per share, of the
------------
Company.
"control" when used with respect to any Person means the power to direct
-------
the management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract, or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
----------- ----------
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Existing Investors" means Amazon.com, Inc., Kleiner Perkins Caufield &
------------------
Byers VIII, L.P. and Vulcan Ventures Incorporated, and their respective
Affiliates.
"Existing Investor Offer/Solicitation" means the commencement by an
------------------------------------
Existing Investor of (i) a Tender Offer to acquire, or as a result of which such
Existing Investor would beneficially own, in excess of 40% of the then Total
Current Voting Power or (ii) a Proxy Solicitation.
<PAGE>
4
"Investors' Rights Agreement" means the Fourth Amended and Restated
---------------------------
Investors' Rights Agreement made as of May 18, 1999, as amended by the Addendum
thereto dated as of June 17, 1999, by and among the Company and the investors
listed on Exhibit A thereto.
"Person" means any individual, firm, corporation, partnership, limited
------
liability company, trust, joint venture, or other entity.
"Proxy Solicitation" means a "solicitation" of "proxies" (as such terms are
------------------
used in Regulation 14A under the Exchange Act) by a Person or 13D Group (which
is not made and does not include any of the Company, GNC or any Affiliate of the
Company or GNC (it being agreed that for purposes of this definition of Proxy
Solicitation an Existing Investor shall not be deemed an Affiliate of the
Company)) to effect a Change of Control Transaction.
"Qualified IPO" means an underwritten public offering by the Company of
-------------
shares of its Common Stock pursuant to a registration statement under the
Securities Act, which results in gross proceeds in excess of $15,000,000 and the
public offering price of which is at least $10.00 per share (appropriately
adjusted for any stock split, dividend, combination or other recapitalization).
"GNC Controlled Entity" means any Person which is controlled by GNC.
---------------------
"Securities" is defined in Section 1.1(a).
----------
"Securities Act" means the Securities Act of 1933.
--------------
"Standstill Period" means the period from the date of this Agreement until
-----------------
the earlier of (i) the tenth anniversary of the Closing Date and (ii) when the
Company shall (A) sell, convey, or otherwise dispose of all or substantially all
of its property or business or merge or consolidate with any other corporation
(other than a wholly owned subsidiary corporation) where the stockholders of the
Company own less than fifty percent (50%) of the voting power of the surviving
entity after such merger or consolidation or (B) effect any other transaction or
series of related transactions in which more than fifty percent (50%) of the
voting power of the Company is disposed of, except in each case a merger
effected exclusively for the purpose of changing the domicile of the Company.
<PAGE>
5
"Standstill Suspension Period" means any of the following periods:
----------------------------
(i) the period from the eleventh business day after commencement of a
Third Party Offer/Solicitation until the withdrawal or termination thereof;
(ii) the period from commencement of an Existing Investor
Offer/Solicitation until the withdrawal or termination thereof;
(iii) the period of effectiveness of any material waiver by the Company
(including through a failure to enforce) of Section 3.1, 3.3 or 3.5 of the
Investors' Rights Agreement as and to the extent such sections apply to the
Existing Investors; and
(iv) the period from the execution by the Company of an Acquisition
Agreement until the termination thereof.
"Stock" is defined in Section 2.1.
-----
"Strategic Agreements" means the Main Agreement entered into as of June 17,
--------------------
1999 between the Company and General Nutrition, this Agreement, and the
Consignment Agreement entered into as of June 17, 1999 between the Company and
General Nutrition.
"Tender Offer" means a bona fide public offer subject to the provisions of
------------
Regulation 14D when first commenced within the meaning of Rule 14d-2(a) of the
rules and regulations under the Exchange Act, by a Person or 13D Group (which is
not made and does not include any of the Company, GNC or any Affiliate of the
Company or GNC (it being agreed that for purposes of this definition of Tender
Offer an Existing Investor shall not be deemed an Affiliate of the Company)) to
purchase or exchange for cash or other consideration any Voting Securities.
"Third Party Offer/Solicitation" means the commencement by any Person other
------------------------------
than an Existing Investor of (i) a Tender Offer to acquire, or as a result of
which such Person would beneficially own, 51% or more of the then Total Current
Voting Power or (ii) a Proxy Solicitation.
"13D Group" means any group of Persons formed for the purpose of acquiring,
---------
holding, voting or disposing of Securities which would be required under Section
13(d) of the Exchange Act, and the
<PAGE>
6
rules and regulations promulgated thereunder, to file a statement on
Schedule 13D pursuant to Rule 13d-1(a) or a Schedule 13G pursuant to Rule
13d-1(c) as a "person" within the meaning of Section 13(d)(3) of the
Exchange Act if such group beneficially owned Securities representing more
than 5% of any class of Securities then outstanding.
"Threshold Percentage" means 40.0%.
--------------------
"Total Current Voting Power" means, as of any date of determination,
--------------------------
the total number of votes which may be cast in the election of members of
the Board of Directors of the Company if all Voting Securities are present
and vote.
"Voting Agreement" means the Third Amended and Restated Voting
----------------
Agreement dated as of June 17, 1999.
"Voting Securities" is defined in Section 1.1(a).
-----------------
1.3 Notice of Voting Securities Purchases. GNC shall notify the
-------------------------------------
Company as to any future acquisition of beneficial ownership of Voting
Securities, or rights thereto, within ten (10) business days after such action
in order for the Company to monitor compliance with the terms of this Agreement.
1.4 Other Restricted Activities. (a) At any time during the Standstill
---------------------------
Period, except for the acquisition of Voting Securities up to the Threshold
Percentage by means of a tender offer, open market purchases, private purchases
or any other legally available means, or with the prior written consent of a
majority of the Board (excluding the vote of any director appointed by GNC)
neither GNC nor any Affiliate of GNC shall (i) propose to enter into, directly
or indirectly, any merger or other business combination involving the Company or
propose to purchase, directly or indirectly, a material portion of the assets of
the Company, (ii) make, or in any way participate, directly or indirectly, in
any "solicitation" of "proxies" (as such terms are used in Regulation 14A under
the Exchange Act) to vote or consent, or seek to advise or influence any Person
with respect to the voting of, or granting of a consent with respect to, any
Securities, (iii) deposit any Securities into a voting trust or subject any
Securities to any arrangement or agreement with any third party with respect to
the voting of such Securities (other than as contemplated by the Voting
Agreement), (iv) form, join or participate in any 13D Group, (v) otherwise act,
alone or in concert with others, to seek to control or influence the management
or policies of the Company, (vi) disclose
<PAGE>
7
any intention, plan or arrangement inconsistent with the foregoing or (vii)
advise, assist (including by knowingly providing or arranging financing for that
purpose) or encourage any other Person in connection with any of the foregoing.
GNC also agrees not to (and to cause its Affiliates not to) (x) request the
Company or any of its agents or representatives, directly or indirectly, to
amend or waive any provision of this Section 1.4(a) (including this sentence) or
(y) take any action which might require the Company to make a public
announcement regarding the possibility of a transaction with the Company
(excluding announcements relating to the Strategic Agreements); provided that
--------
this clause (y) shall not be deemed to prohibit GNC from communicating with the
Board so long as such communication is not intended to elicit a public response
by such Board. Nothing contained in this Section 1.4 shall be deemed to prevent
GNC from taking actions permitted under the Voting Agreement.
(b) The provisions of Section 1.4(a) shall not apply during the pendency
of a Standstill Suspension Period.
1.5 Voting Restrictions. During the Standstill Period, GNC shall take all
-------------------
action as may be required such that all Voting Securities beneficially owned by
GNC are voted at every meeting of the Company's stockholders and in any
solicitation of consents in lieu of any such meeting (a) in any election of
directors in favor of the nominees put forth and recommended by the Board, (b)
on any stockholder proposals made pursuant to Rule 14a-8 under the Exchange Act,
in accordance with the recommendation of a majority of the Board and (c) on all
proposed amendments to the Company's certificate of incorporation, other than
any amendment to the voting or other rights of the holders of the Common Stock
that is adverse to GNC, in accordance with the recommendation of a majority of
the Board.
2. Sales by GNC.
------------
2.1 Transfer Restrictions. Notwithstanding any other provisions of this
---------------------
Agreement, during the Standstill Period, GNC shall not directly or indirectly
sell or otherwise transfer or dispose of any shares of the Company's capital
stock beneficially owned by GNC ("Stock"), or any interest therein, except as
-----
follows:
(i) to the Company;
(ii) to any GNC Controlled Entity which has agreed in writing with the
Company to be bound to the terms of this Agreement;
<PAGE>
8
(iii) (x) in a private placement exempt from the registration
requirements of the Securities Act, provided that GNC obtains an
--------
opinion of counsel stating that such sale, transfer or disposition is
exempt from the registration requirements of the Securities Act, or
(y) pursuant to a bona fide underwritten public offering or
shelf offering registered under the Securities Act;
provided, that in the case of each of clauses (x) and (y), to the
--------
knowledge of GNC after due inquiry, no single Person or 13D Group
would, as a result of such transfer, beneficially own more than 5% of
the Voting Securities;
(iv) pursuant to Rule 144 under the Securities Act;
(v) at any time, pursuant to any tender offer or exchange offer
subject to Regulation 14D under the Exchange Act which (x) is not opposed
by the Board within the time the Board is required, pursuant to the rules
and regulations promulgated under the Exchange Act, to advise stockholders
of the Company of its position on such offer or (y) if successful would
effect a Change of Control Transaction; or
(vi) at any time, pursuant to, or in connection with the
consummation of, any definitive agreement between the Company and any other
Person in respect of a merger, consolidation, recapitalization, sale of
assets or other business combination transaction.
2.2 Prohibited Transfers. Any attempt by GNC to sell, transfer or
--------------------
dispose of Stock or any interest therein in violation of this Section 2 shall be
void and the Company agrees it will not effect such a sale, transfer or
disposition nor will it treat any alleged transferee as the holder of such
Stock.
2.3 Legended Certificates. Each certificate representing shares of
---------------------
Stock now or hereafter owned by GNC shall be endorsed with the following legend
unless the applicable restrictions referenced below shall have lapsed by the
terms of the agreements in which such restrictions are contained (in which event
the relevant legend shall be removed from such certificate):
"THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE
<PAGE>
9
IS SUBJECT TO TRANSFER RESTRICTIONS SET FORTH IN A GOVERNANCE AGREEMENT
DATED AS OF JUNE 17, 1999, BETWEEN THE STOCKHOLDER AND THE CORPORATION.
COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE
SECRETARY OF THE CORPORATION."
3. [Intentionally Omitted.]
------------------------
4. Pre-IPO Right.
-------------
4.1 Right of First Offer. Subject to the terms and conditions
--------------------
specified in this Section 4.1, the Company hereby grants to GNC a right of first
offer with respect to future sales by the Company of its Shares (as hereinafter
defined).
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("Shares"), the Company shall first make an offering of such Shares to GNC
------
in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail or overnight
courier ("Notice") to GNC stating (i) its bona fide intention to offer such
------
Shares, (ii) the number of such Shares to be offered, and (iii) the price and
terms, if any, upon which it proposes to offer such Shares.
(b) Within 15 calendar days after delivery of the Notice, GNC may
elect to purchase or obtain, at the price and on the terms specified in the
Notice, up to that portion of such Shares which equals the amount necessary for
GNC to maintain its equity percentage in the Company (calculated as the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all convertible or exercisable
securities held by GNC as of the date of this Agreement (or if less, the number
then held by GNC) bears to the total number of shares of Common Stock then
outstanding.
(c) The right of first offer in this Section 4.1 shall not be
applicable (i) to the issuance or sale of capital stock (or options therefor) to
employees, consultants, officers or directors of the Company pursuant to stock
purchase or stock option plans or agreements approved by the Board (including
options granted prior to the date hereof), (ii) to the issuance of securities in
connection with bona fide acquisitions, mergers or similar transactions, (iii)
to the issuance of securities to financial institutions or lessors in
<PAGE>
10
connection with commercial credit arrangements, equipment financings or similar
transactions, (iv) to the issuance of securities in a public offering of
securities pursuant to a registration statement filed under the Securities Act,
(v) to the issuance of securities pursuant to the conversion or exercise of
options, warrants, notes, or other rights to acquire securities of the Company,
or (vi) to the issuance of securities pursuant to stock splits, stock dividends
or like transactions.
4.2 Termination of Covenants. The covenants set forth in Section 4.1
------------------------
shall terminate and be of no further force or effect (i) upon the consummation
of a Qualified IPO, or (ii) when the Company shall (A) sell, convey, or
otherwise dispose of all or substantially all of its property or business or
merge or consolidate with any other corporation (other than a wholly-owned
subsidiary corporation) where the stockholders of the Company own less than
fifty percent (50%) of the voting power of the surviving entity after such
merger or consolidation or (B) effect any other transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Company is disposed of, provided that this subsection (ii) shall not apply to a
merger effected exclusively for the purpose of changing the domicile of the
Company.
5. Miscellaneous.
-------------
5.1 Successors and Assigns. This Agreement and each party's rights
----------------------
and obligations hereunder shall not be assigned without the prior written
consent of the other party; provided, that in connection with a transfer
--------
pursuant to Section 2.1(ii), no consent of the Company shall be required but GNC
shall cause the transferee to agree in writing with the Company to be bound to
(and receive the benefit of) GNC's rights and obligations under this Agreement.
Except as otherwise provided in this Agreement, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
permitted successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
5.2 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
or waived only with the written consent of the Company and GNC, or that of their
respective permitted successors and assigns. Any amendment or waiver effected in
accordance with this
<PAGE>
11
paragraph shall be binding upon the Company, GNC and any of their permitted
successors and assigns.
5.3 Notices. Unless otherwise provided, any notice required or permitted
-------
by this Agreement shall be in writing and shall be deemed given upon delivery,
when delivered personally or by overnight courier or sent by telegram or fax, or
forty-eight (48) hours after being deposited in the U.S. mail, as certified or
registered mail, with postage prepaid, and addressed to the party to be notified
at such party's address or fax number as set forth below or as subsequently
modified by written notice, and if to the Company, with a copy to the General
Counsel of the Company at the address of the Company set forth below and, if to
GNC, with a copy to the General Counsel of GNC at the address of GNC set forth
below.
5.4 Severability. If any term or other provision of this Agreement is
------------
invalid, illegal or incapable of being enforced by any rule or law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
5.5 Governing Law. This Agreement and all acts and transactions pursuant
-------------
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of Delaware, without giving effect to principles of conflicts of
laws.
5.6 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.7 Titles and Subtitles. The titles and subtitles used in this Agreement
--------------------
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
<PAGE>
12
5.8 Enforcement. The parties agree that irreparable damage would occur in
-----------
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any New York or Delaware state
court or any Federal court located in the State of New York or the State of
Delaware, this being in addition to any other remedy to which they are entitled
at law or in equity. In addition, each of the parties hereto (a) consents to
submit itself to the personal jurisdiction of any New York or Delaware state
court or any Federal court located in the State of New York or the State of
Delaware in the event any dispute arises out of this Agreement, (b) agrees that
it will not attempt to deny or defeat such personal jurisdiction by motion or
other request for leave from any such court, (c) agrees that it will not bring
any action relating to this Agreement in any court other than any New York or
Delaware state court or any Federal court sitting in the State of New York or
the State of Delaware and (d) waives any right to trial by jury with respect to
any action related to or arising out of this Agreement.
5.9 Effectiveness. This Agreement shall become effective only
-------------
concurrently with the Closing (as defined in the Series E Purchase Agreement).
This Agreement shall automatically terminate concurrently with any termination
of the Series E Purchase Agreement pursuant to Section 7.16 thereof. Upon such
termination, this Agreement shall become void and of no further effect.
[Signature Page Follows]
<PAGE>
13
The parties have executed this Governance Agreement as of the date first
written above.
COMPANY:
DRUGSTORE.COM, INC.
By: /s/ Peter M. Neupert
-------------------------------------
Name: Peter M. Neupert
Title: President and CEO
Address: 13920 SE Eastgate Way,
Suite 300
Bellevue, WA 98005
GENERAL NUTRITION:
GENERAL NUTRITION COMPANIES, INC.
<PAGE>
14
By: /s/ James M. Sander
-------------------------------------
Name: James M. Sander
Title: Vice President
Address:
GNI:
GENERAL NUTRITION
INVESTMENT COMPANY
By: /s/ James M. Sander
-------------------------------------
Name: James M. Sander
Title: Vice President
<PAGE>
1
Exhibit 10.31
EXECUTION COPY
PHARMACY SUPPLY AND SERVICES AGREEMENT
This PHARMACY SUPPLY AND SERVICES AGREEMENT (together with the schedules
hereto, this "Agreement"), dated as of June 17, 1999, is entered into by and
---------
between Rite Aid Corporation, a Delaware corporation ("Rite Aid") and
--------
drugstore.com, inc., a Delaware corporation ("drugstore.com"). Certain terms
-------------
capitalized herein and not defined herein shall have the meanings given to such
terms in the Main Agreement of even date herewith (the "Main Agreement") entered
--------------
into by and between Rite Aid and drugstore.com.
In consideration of the agreements and covenants set forth herein, and
intending to be legally bound thereby. the parties hereto agree as follows:
<PAGE>
2
SECTION 1. EFFECTIVE TIME; TERMINATION This Agreement shall only become
---------------------------
effective upon the consummation of the purchase of Series E Preferred Stock of
drugstore.com by Rite Aid and General Nutrition Companies, Inc., through its
wholly owned subsidiary General Nutrition Investment Company ("GNC") pursuant to
the Series E Preferred Stock Purchase Agreement of even date herewith entered
into by and among Rite Aid, drugstore.com and GNC (such time, the "Effective
---------
Time"); provided, however, that (x) drugstore.com shall have no obligation to
- ---- -------- -------
purchase, and Rite Aid shall have no obligation to supply, drugstore.com's
requirements of Pharmaceutical Products pursuant to Section 2 hereof and (y)
Rite Aid shall have no obligation to provide Pharmacy Services (as defined in
Section 3 hereof) to drugstore.com through the Rite Aid Mail-Order Pharmacy (as
defined in Section 3 hereof), if performance of such obligations by
drugstore.com or Rite Aid, as applicable, would violate or otherwise conflict
with any agreement to which drugstore.com is a party, until such time as the
performance of such obligations would no longer violate or otherwise conflict
with any such agreement. This Agreement shall automatically terminate, and
become void and of no further effect, concurrently with the termination of the
Purchase Agreement pursuant to Section 7.16 thereof. This Agreement shall
continue in effect after the Effective Time until such time as the Main
Agreement is terminated for any reason, at which time this Agreement shall also
be terminated, subject to Section 10.7 hereof.
SECTION 2. PHARMACY SUPPLY From and after the Effective Time, and except
---------------
as provided in Section 2.1 hereof, Rite Aid agrees to sell, and drugstore.com
agrees to buy, all of drugstore.com's requirements of Pharmaceutical Products
necessary to fill orders of Pharmaceutical Products placed by customers of
drugstore.com on the drugstore.com Site, subject to and in accordance with the
following terms of this Section 2:
<PAGE>
3
2.1 Alternative Sourcing.
--------------------
(a) In the event drugstore.com requires a Pharmaceutical Product that
is not regularly stocked by Rite Aid in its distribution centers or made
available through its wholesaler, Rite Aid shall not be required to supply such
Pharmaceutical Product and drugstore.com shall have the right to obtain such
Pharmaceutical Product from any other source; provided, however, that if Rite
-------- -------
Aid subsequently commences to stock such Pharmaceutical Product in its
distribution centers, drugstore.com may, but shall not be obligated to,
thereafter obtain such Pharmaceutical Product from Rite Aid in accordance with
this Section 2.
(b) In the event Rite Aid (or its wholesaler) consistently fails to
deliver substantial portions of orders for Pharmaceutical Products to
drugstore.com in a timely manner, pursuant to Section 2.3 hereof, drugstore.com
shall be relieved of its obligations to obtain its requirements for
Pharmaceutical Products from Rite Aid.
(c) In the event drugstore.com receives a written offer (solicited or
unsolicited), subject only to acceptance by drugstore.com or its designee, from
a Third Party generally engaged in the business of wholesaling Pharmaceutical
Products throughout the United States or in a significant region of the United
States, to provide it with substantially all of its requirements for
Pharmaceutical Products containing terms with respect to price, timing of
delivery, timing and terms of payment and product availability which, in the
aggregate, are more favorable to drugstore.com than the terms provided by Rite
Aid hereunder (an "Offer"), drugstore.com shall notify Rite Aid in writing of
-----
its receipt of such Offer (such notice, the "Notice"). The Notice shall be
------
accompanied by the Offer and a written designation of Rite Aid as an authorized
party to accept such Offer. If Rite Aid does not, within 14 business days of
its receipt of the Notice, (i) agree to match, for the term proposed in the
Offer (the "Offer Period"), the terms of the Offer, (ii) enter into an agreement
------------
with the Third Party making the Offer to purchase Pharmaceutical Products from
such Third Party on the terms specified in such Offer, including, without
limitation, the Offer Period or (iii) agree to modify, for the Offer Period, the
terms of this Section 2 so that they are at least as favorable to drugstore.com,
in the aggregate, as those in the Offer, then drugstore.com shall be relieved of
its obligations to obtain its requirements for Pharmaceutical Products from Rite
Aid; provided, however, that the failure by Rite Aid
-------- -------
<PAGE>
4
to take any of such actions shall in no event be deemed to constitute a breach
by Rite Aid of this Agreement. If Rite Aid takes any of the actions specified in
clauses (i)-(iii) of the preceding sentence, then drugstore.com shall remain
obligated to purchase all of its requirements for Pharmaceutical Products from
Rite Aid on the terms of the Offer or, if applicable, of this Section 2 as
modified, for the Offer Period and, after the expiration of the Offer Period,
upon the terms of this Section 2.
(d) drugstore.com will not in any event be deemed to be in violation
of this Agreement if it obtains Pharmaceutical Products for a specific order
from an alternate source as a result of Rite Aid's failure to fill such order in
accordance with the terms of this Section 2.
2.2 Pricing and Other Terms. Rite Aid will sell branded and generic
-----------------------
Pharmaceutical Products to drugstore.com at the prices set forth on Schedule
--------
2.2. Except as set forth on Schedule 2.2, drugstore.com will also be afforded
- --- ------------
the same non-price terms as those received from time to time by Rite Aid from
its suppliers with respect to Rite Aid's purchase of branded Pharmaceutical
Products.
2.3 Placement and Delivery of Orders.
--------------------------------
(a) With respect to branded Pharmaceutical Products, Rite Aid will
accept purchase orders from drugstore.com and transmit such orders to its
wholesaler. Rite Aid will instruct the wholesaler to deliver such Pharmaceutical
Products to drugstore.com at the place designated for delivery by drugstore.com.
Such orders will be processed by Rite Aid in the normal course and without
discrimination as between drugstore.com and Rite Aid.
(b) With respect to generic Pharmaceutical Products, Rite Aid will
accept purchase orders from drugstore.com and deliver the Pharmaceutical
Products ordered to drugstore.com at the place designated for delivery by
drugstore.com. At drugstore.com's option, it may elect to designate a Rite Aid
distribution center as the delivery point for such generic Pharmaceutical
Products, in which case Rite Aid shall have no delivery obligation other than to
make such products available for pick up at the Rite Aid distribution center
during normal business hours. Such orders will be processed by Rite Aid in the
normal course and without discrimination as between drugstore.com and Rite Aid
stores and will be delivered without discrimination as between drugstore.com and
<PAGE>
5
Rite Aid stores of comparable volume, or if Rite Aid at any time has no stores
of comparable volume, on a schedule sufficient for drugstore.com to operate its
business at the volume at which it is then operating.
(c) If any Rite Aid wholesaler fails to meet the product supply and
delivery requirements of its agreement with Rite Aid, Rite Aid will use
commercially reasonable efforts to correct or require such wholesaler to correct
such wholesaler's performance failures as soon as practicable, including by
enforcing against such wholesaler all available penalties, fees, discounts or
other charges or benefits (the "Wholesaler Penalties") as set forth in such
--------------------
agreement and agreed to by the wholesaler and Rite Aid. Upon collection of any
such Wholesaler Penalties, Rite Aid shall immediately pass to drugstore.com its
pro rata share thereof without deducting any amounts.
2.4 Billing and Payment for Orders.
------------------------------
(a) With respect to orders placed by drugstore.com for branded
Pharmaceutical Products, Rite Aid shall invoice drugstore.com at the time of
shipment. Invoices shall be due and payable by drugstore.com to Rite Aid on the
fifth day of the month following the month in which such shipment was made. If
such payment date falls on a weekend or on any weekday on which banks are
closed, payment shall be due on the business day immediately following such
payment date.
(b) With respect to orders placed by drugstore.com for generic
Pharmaceutical Products, Rite Aid shall invoice drugstore.com at the time of
shipment. Invoices shall be due and payable by drugstore.com to Rite Aid on the
fifteenth day of the month following the month in which such shipment was made.
If such payment date falls on a weekend or on any weekday on which banks are
closed, payment shall be due on the business day immediately following such
payment date.
(c) All payments made by drugstore.com pursuant to this Section 2.4
shall be made, in immediately available funds, by electronic fund transfer or
such other means reasonably acceptable to both parties. drugstore.com shall pay
interest on the amount of any payments not made within the times specified in
Sections 2.4(a) and 2.4(b) hereof in the amount of one percent for each whole
month after the payment was due, prorated for any partial month.
<PAGE>
6
2.5 Rebates. drugstore.com shall be entitled to share in any
-------
rebates and other allowances not taken in account in the Adjusted WAC or the
Adjusted Rite Aid Cost each as set forth on Schedule 2.2 (collectively,
"Rebates"), however calculated, received by Rite Aid in respect of Rite Aid's
purchase of Pharmaceutical Products. Such share shall be based upon the ratio
of drugstore.com's purchases and drugstore.com's performance that resulted in
such Rebates to Rite Aid's total purchases and to total performance that
resulted in such Rebates. Rite Aid shall remit drugstore.com's share for
Rebates received in each fiscal quarter within 30 days of the end of such fiscal
quarter. Such payments shall be made, in immediately available funds, by
electronic fund transfer or other means reasonably acceptable to the parties.
At the time of each such payment, Rite Aid shall deliver, in a form reasonably
acceptable to the parties, a statement showing in reasonable detail the sources
of the Rebates and the method of allocation of such Rebates.
2.6 Operations. The parties will cooperate in developing
----------
operational standards with respect to ordering, shipment and delivery pursuant
to this Section 2.
SECTION 3. PHARMACY SERVICES
-----------------
3.1 Description of Pharmacy Services.
---------------------------------
(a) Rite Aid shall, as requested by drugstore.com, provide dispensing
and related services (collectively, the "Pharmacy Services") with respect to
-----------------
orders of Pharmaceutical Products received by drugstore.com on the drugstore.com
Site from customers who are participants in an insurance or prescription benefit
plan in which Rite Aid is a participating pharmacy (such orders, the "Serviced
--------
Orders"). The Pharmacy Services will be performed, at the direction of
- ------
drugstore.com, either by a Rite Aid retail pharmacy, or, if mailing or a similar
form of delivery is permitted by applicable law, by a Rite Aid mail-order
pharmacy (the "Rite Aid Mail-Order Pharmacy") to be located within a facility
----------------------------
owned or leased by drugstore.com (the "drugstore.com Facility"), from and after
----------------------
the time such facility becomes operational. drugstore.com will be responsible
for filling or contracting for the filling of all other orders for
Pharmaceutical Products placed on the drugstore.com Site, subject to the
provisions of Section 4 of the Main Agreement. The Rite Aid Mail-Order Pharmacy
shall be staffed by licensed pharmacists and technicians employed by Rite Aid;
provided, however, that at the election of drugstore.com, the Rite Aid Mail-
- -------- -------
Order Pharmacy may instead be staffed in part by licensed
<PAGE>
7
pharmacists and technicians employed by drugstore.com, so long as such staffing
does not (i) impair Rite Aid's ability to lawfully perform the Pharmacy
Services, (ii) affect the validity of any licenses held by Rite Aid; (iii)
increase Rite Aid's insurance costs, or (iv) affect Rite Aid's insurance
coverage in any other way. The performance of the Pharmacy Services will
commence in accordance with Schedule 7.1(a) to the Main Agreement (the
"Technology Integration Schedule").
-------------------------------
(b) The Pharmacy Services to be performed with respect to Serviced
Orders shall consist of :
(i) the filling of the Serviced Orders, including the
dispensing of Pharmaceutical Products, and the delivery thereof (x) in the case
of orders filled by the Rite Aid Mail-Order Pharmacy, to drugstore.com employees
at the drugstore.com Facility for further delivery to the drugstore.com customer
or (y) in the case of orders to be filled by a Rite Aid retail pharmacy, to the
customer for pickup at such Rite Aid retail pharmacy;
(ii) the performance of necessary and appropriate drug
utilization review, including, as necessary, direct communication with the
drugstore.com customer or the prescribing physician;
(iii) communication with Third Parties, including pharmacy
benefit managers and insurers, as necessary for adjudication of a Serviced Order
and the transmission, within 24 hours, to drugstore.com of the results of such
adjudication for its billing purposes and, where required, for transmission to
its customer;
(iv) the collection and transmission, in accordance with
Section 3.4, to drugstore.com of monies received from Third Parties in payment
of any portion of the price of a particular Pharmaceutical Product, which, with
respect to orders to be filled by a Rite Aid retail pharmacy will initially
include, in accordance with the Technology Integration Schedule, the collection
at the Rite Aid retail pharmacy of the co-payment and other cash payments, if
any, from the customer and transmission of such monies to drugstore.com; and
(v) any additional services, functions or responsibilities
that are required for
<PAGE>
8
the lawful performance and provision of the services described in Section
3.1(b)(i)-(iv) inclusive.
In the process of performing the Pharmacy Services, Rite Aid shall have the
right, consistent with its normal business practices and in order to achieve
cost-savings or otherwise in connection with the health and welfare of the
customer, to communicate with the prescribing physician in order to suggest the
use of generic Pharmaceutical Products or other Pharmaceutical Products in the
same therapeutic class as that prescribed by such physician.
3.2 drugstore.com Obligations.
-------------------------
(a) In order to enable Rite Aid to lawfully provide the Pharmacy
Services, drugstore.com agrees to: (i) obtain and/or maintain all licenses
necessary to allow it to accept orders from customers for Pharmaceutical
Products; (ii) perform all actions necessary to authenticate the prescription
for such Pharmaceutical Products, (iii) transmit to Rite Aid all information
with respect to a Serviced Order necessary to enable Rite Aid lawfully to fill
such Serviced Order; (iv) employ duly licensed pharmacists as necessary to
effect the transfer of prescriptions to a Rite Aid pharmacy for filling; (v)
disclose to customers placing orders on the drugstore.com Site that the
prescription will be filled by Rite Aid and (vi) take such other actions as may
be reasonably requested by Rite Aid in order to facilitate the servicing of
customer orders and compliance with applicable law. Rite Aid shall not be
obligated to provide Pharmacy Services with respect to any Serviced Order to the
extent that drugstore.com has failed to comply with its obligations pursuant to
this Section 3.2(a).
(b) drugstore.com shall be solely responsible for (i) the charging
and collection of the payment from the customer for the Serviced Order (except
as set forth in Section 3.1(b)(iv) hereof) and of any and all fees for shipping
of Pharmaceutical Products to its customers, and (ii) with the exception of
necessary customer service to be performed by Rite Aid in connection with the
filling of Serviced Orders, all customer service functions with respect to
drugstore.com customers, including, without limitation, communication with the
customer as necessary in the event that the adjudication performed by Rite Aid
results in Rite Aid being unable to fill the Serviced Order.
(c) drugstore.com will provide, at no cost to Rite Aid, space within
the drugstore.com Facility as necessary for the operation of the Rite Aid
<PAGE>
9
Mail-Order Pharmacy. drugstore.com shall also, at no cost to Rite Aid, supply
the Rite Aid Mail-Order Pharmacy with Pharmaceutical Products from the inventory
of drugstore.com to fill Serviced Orders and, as necessary for the performance
of Pharmacy Services by the Rite Aid Mail-Order Pharmacy, access to and use of
pharmacy equipment, pharmacy supplies and communications equipment.
3.3 Changes to Services. Each of drugstore.com and Rite Aid
-------------------
acknowledge that the ordering and filling of orders for Pharmaceutical Products
via the Internet is a new and emerging form of commerce and that changes in the
mechanics of the performance by Rite Aid of the Pharmacy Services and the
obligations of drugstore.com set forth in Section 3.2 hereof may be necessary in
order to comply with regulatory changes that occur in response to that method of
commerce. drugstore.com and Rite Aid each agree to use commercially reasonable
efforts to make such changes to the Pharmacy Services or to other provisions of
this Agreement as may be necessary or appropriate, in light of applicable laws
or regulations, as now in effect or as hereafter amended, in order to preserve
to each party the material benefits of this Agreement.
3.4 Transmission of Payments. Rite Aid shall use commercially
------------------------
reasonable efforts to collect monies payable to Rite Aid on behalf of drugstore.
com pursuant to Section 3.1(b)(iv) hereof. Rite Aid shall, twice per calendar
week, transmit to drugstore.com all such monies collected by Rite Aid since the
previous transmission of payments pursuant to this section, so long as Rite Aid
is able by such time to specifically identify the Serviced Order with respect to
which such monies were collected. In the event that Rite Aid is not able to
specifically identify the Serviced Order by such time, it shall specifically
identify such Serviced Order as soon as practicable and will transmit such
monies to drugstore.com as part of the next transmission of monies occurring
after it has done so. On a monthly basis, the parties will conduct a
reconciliation of their respective records regarding placement of Serviced
Orders and transmission of payments to drugstore.com by Rite Aid pursuant to
this section. For any payment not made in accordance with the timing set forth
in this Section 3.4, a late fee shall be applicable in the amount of one percent
for each whole month after the payment was due, prorated for any partial month.
All payments made by Rite Aid pursuant to this Section 3.4 shall be made, in
immediately available funds, by electronic fund transfer or such other means
reasonably acceptable to both parties. At the time of each such payment, Rite
Aid will deliver, in a form reasonably acceptable to both parties,
<PAGE>
10
a schedule setting forth the Serviced Orders covered by such payment.
3.5 Service Standards. Rite Aid will use its commercially
-----------------
reasonable efforts to perform the Pharmacy Services in accordance with the
following standards:
(a) The Rite Aid Mail-Order Pharmacy will be available to fill
Serviced Orders, 24 hours a day, 7 days a week; and
(b) Rite Aid will fill all Serviced Orders which it may lawfully fill
with commercially reasonable speed, subject to delays caused by interaction with
insurers, pharmacy benefit managers, physicians and customers as reasonably
necessary to fill a Serviced Order. Such Serviced Orders filled by Rite Aid
retail pharmacies will receive equal priority with other orders for
Pharmaceutical Products filled by Rite Aid retail pharmacies, and drugstore.com
customers will receive customer service at such Rite Aid retail pharmacies at
the same level provided to Rite Aid customers.
SECTION 4. PAYMENT FOR SERVICES.
--------------------
4.1 Payments.
--------
(a) In consideration for the Pharmacy Services to be provided by the
Rite Aid Mail-Order Pharmacy, drugstore.com will pay Rite Aid fees equal to the
actual costs incurred by Rite Aid in providing such Pharmacy Services,
including, but not limited to, the cost of salaries and benefits for the Rite
Aid pharmacists and technicians employed in the Rite Aid Mail-Order Pharmacy.
(b) In consideration for the Pharmacy Services to be provided by Rite
Aid retail pharmacies, drugstore.com will pay Rite Aid a fee with respect to
each Serviced Order in accordance with the prices and upon the terms set forth
on Schedule 4.1(b).
---------------
4.2 Payment Obligations of drugstore.com. Fees for the provision of
------------------------------------
Pharmacy Services by Rite Aid retail stores will become due and payable to Rite
Aid, will be invoiced by Rite Aid pursuant to the provisions of this Agreement
and title to the Pharmaceutical Products contained in the Serviced Order will
pass to drugstore.com, once the Pharmaceutical Products are available for pick
up by the drugstore.com customer at a Rite Aid retail store. Such payment will
be due and payable to Rite Aid in accordance with the procedures set forth in
Section 7 hereof regardless of whether
<PAGE>
11
drugstore.com, for any reason, has not at the time of dispensing or does not
thereafter receive payment for such Pharmaceutical Product from the
drugstore.com customer who placed the order and/or any Third Party payor and
regardless of whether the drugstore.com customer actually receives or picks up
the Pharmaceutical Product ordered.
4.3 Sales Tax. As between the parties, drugstore.com shall be
---------
responsible for any sales tax imposed on any Serviced Order.
SECTION 5. MUTUAL COVENANTS
----------------
5.1 Insurance. Each party shall maintain at all times and at its
---------
own expense insurance in such amounts, and with such coverage and terms, as are
commercially reasonable in light of the business conducted by such party.
5.2 Regulatory Compliance. Each party shall abide by all applicable
---------------------
statutes, laws, regulations, rules, policies, standards, guidelines and
procedures now in effect or hereinafter enacted, including without limitation:
(i) laws regarding the provision of insurance, third party administration and
primary health care services, including Medicare and Medicaid; (ii) the
Prescription Drug Marketing Act; (iii) the Federal Controlled Substances Act;
(iv) the Federal Food, Drug and Cosmetics Act; (v) any state laws relating to
the dispensing of Pharmaceutical Products and (vi) laws relating to billing or
sales practices. Each party shall comply with all governmental regulations,
including all reporting and disclosure requirements, with respect to provision
of the Pharmacy Services. In addition, each party shall promptly inform the
other of any regulatory issues that come to its attention affecting its business
activities as they relate to this Agreement or the Pharmacy Services.
<PAGE>
12
SECTION 6. AUDIT PROCEDURES
----------------
6.1 drugstore.com Audit Procedures.
------------------------------
(a) drugstore.com shall be entitled, twice per year, to audit Rite
Aid's billings to drugstore.com for the Pharmacy Services for the six months
prior to such audit to ensure that such billings are accurate. Such audit shall
only be conducted upon reasonable advance written notice and subject to Rite
Aid's reasonable security and confidentiality provisions (including but not
limited to the requirement that individuals involved in conducting the audit
enter into confidentiality agreements in form and substance acceptable to Rite
Aid), and may be assisted by drugstore.com's accountants. Rite Aid agrees to
cooperate in these reviews (so long as such reviews do not directly and
materially cause Rite Aid to impair the performance of the Pharmacy Services,
unless drugstore.com specifically requests such cooperation regardless of its
impairment of the performance of the Pharmacy Services), furnish drugstore.com
with reasonably requested information in a timely manner, and provide
drugstore.com with reasonably timely access to personnel during normal business
hours for audit purposes at no charge to drugstore.com; provided, however, that
-------- -------
Rite Aid shall charge drugstore.com (via Rite Aid's bills as described in
Section 7.1) for its reasonable costs for any technical resources or
extraordinary personnel time used by Rite Aid and necessary for such audit or
verification report, so long as Rite Aid, before incurring such costs, notifies
drugstore.com that such verification requests will result in costs to Rite Aid
that drugstore.com will need to reimburse. drugstore.com agrees to provide Rite
Aid with a copy of any audit or verification report upon its completion.
(b) A "Material Discrepancy" in billing shall be deemed to occur if
--------------------
the total amount actually billed by Rite Aid during the time period covered by
drugstore.com's audit exceeds the amount due based on the audit report by five
percent (5%) or more. If drugstore.com discovers a Material Discrepancy, Rite
Aid shall review drugstore.com's support documentation for such Material
Discrepancy, and the parties shall promptly attempt to agree on such analysis.
If it is agreed that a Material Discrepancy occurred, Rite Aid shall reimburse
drugstore.com for the cost to drugstore.com of the audit, including costs of
reimbursing drugstore.com for reasonable costs, technical resources and
extraordinary personnel time as provided in Section 6.1(a). In all other
circumstances,
<PAGE>
13
drugstore.com agrees to bear the costs of audits performed by drugstore.com or
at its direction.
(c) Rite Aid shall credit drugstore.com for any differences in
invoicing amounts as described in Section 7.1, as determined by drugstore.com
during the course of its audit and agreed to by Rite Aid.
SECTION 7. PHARMACY SERVICES BILLING
-------------------------
7.1 Timing of Billings. Rite Aid shall invoice drugstore.com for the
------------------
Pharmacy Services on a monthly basis, using mutually agreed upon media and
according to the terms of Section 4 hereof. Such invoices shall be accompanied
by a reasonably detailed monthly schedule of the Serviced Orders for which
payment is due. Credits and adjustments that became effective during the period
covered by the invoice shall be applied on the first invoice following
drugstore.com's eligibility therefor.
7.2 Billing Procedures, Details and Data. There shall be no
------------------------------------
additional charge to drugstore.com for the invoicing services or for non-
material changes in billing procedures reasonably requested by drugstore.com.
Rite Aid may amend the billing procedures at any time by providing written
notice thereof to drugstore.com, and such changes shall be reflected in the next
invoicing cycle or as soon as possible thereafter.
7.3 Payment for Services.
--------------------
(a) drugstore.com shall pay each invoice, in immediately available
funds, by electronic fund transfer or such other means reasonably acceptable to
both parties. Such payment shall be due and payable by drugstore.com to Rite Aid
on the tenth day of the month following the month in which the Serviced Orders
listed in the schedule provided by Rite Aid pursuant to Section 7.1 were filled.
If such payment date falls on a weekend or a weekday on which banks are closed,
the payment shall be due and payable on the following business day. If not so
paid, drugstore.com shall pay interest on such amount at the rate set forth in
Section 7.4. In no event shall any payment made by or before such date
constitute a breach of this Agreement. Rite Aid shall give drugstore.com at
least 30 days' notice of any changes to the format or medium of its invoices.
(b) If drugstore.com believes that it is entitled to an adjustment to
the amount invoiced, drugstore.com shall promptly notify Rite Aid of such claim
for an adjustment and provide to Rite Aid reasonable support for any such claim.
Rite Aid and
<PAGE>
14
drugstore.com will promptly address and attempt to resolve in good faith any
claims as to charges, credits or other aspects of the invoices. Interest shall
accrue according to Section 7.4, payable to drugstore.com by Rite Aid for any
amount paid by drugstore.com which was subject to a subsequent adjustment in
favor of drugstore.com from the date of such payment. Rite Aid shall promptly
reflect any such adjustments and interest in its bills (as described in Section
7.1). Rite Aid shall not deny or restrict service during the pendency of a
dispute as a result thereof, provided that drugstore.com has paid all undisputed
--------
amounts when due.
7.4 Late Payments. For any late payment or adjustment pursuant to
-------------
Section 7.3(a) or (b), a late fee shall be applicable in the amount of one
percent for each whole month after the payment was due (or in the case
described in Section 7.3(b), made), prorated for any partial month.
SECTION 8. CONFIDENTIALITY
---------------
8.1 Confidential Information. "Confidential Information" means,
------------------------ ------------------------
subject to Section 8.2, the terms of this Agreement, information protected by
the intellectual property laws of the United States, information regarding
customers disclosed by either party in connection with the provision of the
Pharmacy Services, information relating to drugstore.com's or Rite Aid's
business practices (including account information, information regarding
business planning and operations, and information regarding administrative,
financial or marketing activities), or information marked as "Confidential."
Each of Rite Aid and drugstore.com shall not, and shall cause its affiliates,
employees, representatives and consultants (including any accountants used by
drugstore.com in connection with audits under Section 6) not to, disclose,
publish or disseminate any Confidential Information of the other party and its
customers to Third Parties, or use such information for any use not required
pursuant to this Agreement or the Main Agreement. All Confidential Information
of one party shall be held and protected by the other party in strict
confidence, shall be used by the other party only as required to render
performance under this Agreement or the Main Agreement, and the other party
shall use commercially reasonable efforts to prevent any unauthorized use or
disclosure thereof by the personnel and other persons to whom such Confidential
Information is disclosed by such other party in accordance with the foregoing.
8.2 Exceptions. Notwithstanding the foregoing, the terms of this
----------
Section 8 shall not apply to
<PAGE>
15
any information that (a) is publicly available or is in the public domain at the
time disclosed, (b) is or becomes publicly available or enters the public domain
through no fault of the recipient, (c) is rightfully communicated to the
recipient by persons not bound by confidentiality obligations with respect
thereto, (d) is already in the recipient's possession free of any
confidentiality obligations with respect thereto at the time of disclosure, (e)
is independently developed by the recipient, (f) is approved for release or
disclosure by the disclosing party without restriction, (g) is disclosed in
response to an order of a court or a requirement of any other governmental
agency, provided that the party making the disclosure pursuant to the order
--------
shall first have given notice to the other party and made a reasonable effort to
obtain a protective order, (h) is otherwise required by any national securities
exchange, or by law or regulation to be disclosed or (i) is disclosed in any
legal proceeding or otherwise to establish a party's rights and obligations
under this Agreement, provided that the party so disclosing has requested,
pursuant to any procedures available in such proceeding, that such information
be designated as confidential information.
8.3 Irreparable Harm. drugstore.com and Rite Aid acknowledge that
----------------
any disclosure or misappropriation of Confidential Information in violation of
this Agreement would cause irreparable harm, the amount of which may be
extremely difficult to estimate, thus making any remedy at law or in damages
inadequate. Each party therefore agrees that the other party shall have the
right to apply to any court of competent jurisdiction for an order restraining
any breach or threatened breach of this Section 8 and for any other relief as
such other party deems appropriate. This right shall be in addition to any other
remedy available in law or equity.
8.4 Return of Confidential Information. Upon the expiration or
----------------------------------
termination of this Agreement, each of drugstore.com and Rite Aid shall return
or deliver to the other party, or shall destroy, all Confidential Information of
the other party that is in its possession in tangible form. Each party shall
further provide written confirmation that nothing required to be returned,
delivered or destroyed has been retained, and that no unauthorized disclosure
has occurred.
SECTION 9. LIABILITIES; INDEMNIFICATION
----------------------------
9.1 Liabilities.
-----------
<PAGE>
16
(a) Rite Aid shall be responsible for any errors or omissions
made by its own employees in connection with its performance of its obligations
pursuant to this Agreement. drugstore.com shall be responsible for any errors or
omissions made by its own employees in connection with its performance of its
obligations pursuant to this Agreement, including, without limitation, any
errors or omissions made by any of its employees which it elects to have staff
the Rite Aid Mail-Order Pharmacy in accordance with Section 3.1.
(b) Each party shall be responsible for liabilities arising from
errors or omissions made by it in the transmission of information to the other
party, and each party shall be entitled to assume the accuracy of all
information transmitted to it by the other party, and to rely on such
information, for all purposes under this Agreement.
(c) Neither party shall be responsible for a failure to meet its
obligations under this Agreement to the extent caused by the following: (i)
materially inaccurate data submitted by the other party; (ii) any failure by the
other party to meet its obligations stated in this Agreement; (iii) any failure
of equipment, facilities or services not controlled or supplied by such party;
or (iv) failure(s) caused by acts of God, acts of nature, riots and other major
civil disturbances, strike by such party's personnel, sabotage, injunctions or
applicable laws or regulations, in each case without breach by such party of any
obligations under this Agreement with regard to either such event or such
failure. Rite Aid or drugstore.com, as applicable, agrees to use its
commercially reasonable efforts to restore performance of its obligations
hereunder as soon as reasonably practicable following any such event.
(d) In no event will either party have any liability, whether based
in contract, tort (including, without limitation, negligence) warranty or any
other legal or equitable grounds, for any loss of interest, profit or revenue by
the other party or for any consequential, indirect, incidental, special,
punitive or exemplary damages suffered by the other party, arising from or
related to this Agreement, even if such party has been advised of the
possibility of such losses or damages.
9.2 Indemnified Parties. Rite Aid and drugstore.com each shall
indemnify and hold harmless the other and its divisions, its Affiliates (as
defined below), and its officers, directors, employees, representatives and
agents (the "Indemnified Parties") from and against (a) any and all liabilities,
-------------------
suits,
<PAGE>
17
costs, judgments, penalties, expenses, obligations, losses, or damages arising
from or related to claims and actions made by a Third Party, including, but not
limited to, any obligation or liability which may be imposed upon any of the
Indemnified Parties as a matter of law, constituting, or in any way based upon,
resulting from or arising out of any breach or alleged breach by drugstore.com
or Rite Aid, as applicable, of any agreement or covenant made by such party in
this Agreement, and (b) any cost or expense (including, but not limited to,
legal fees and out-of-pocket expenses) reasonably incurred by any of the
Indemnified Parties (and their counsel) in investigating, preparing for,
defending against or otherwise taking any action in connection with any of the
foregoing (collectively "Damages"). "Affiliate" means with respect to a party
-------
any entity at a time controlling, controlled by or under common control with
such party (with "control" meaning the legal, beneficial or equitable ownership,
directly or indirectly, of more than fifty percent (50%) of the aggregate of all
voting interests in such entity).
9.3 Indemnified Claims. If any claim, demand, assessment or
------------------
liability, or cost incidental thereto (collectively, an "Indemnified Claim"), is
-----------------
asserted against an Indemnified Party in respect of which the Indemnified Party
proposes to demand indemnification from the Indemnifying Party pursuant to
Section 9.2, such Indemnified Party will promptly notify Rite Aid or
drugstore.com, as the case may be (the "Indemnifying Party"), in writing. No
------------------
failure of an Indemnified Party to so notify the Indemnifying Party shall
relieve the Indemnifying Party from the obligation to indemnify the Indemnified
Party unless and to the extent the Indemnifying Party is actually prejudiced by
such failure. Such Indemnified Party will accord the Indemnifying Party the
opportunity to assume entire control of the defense, compromise or settlement of
any such Indemnified Claim through its own counsel and at its own expense;
provided that no such compromise or settlement shall include any non-monetary
- --------
terms and conditions applicable to such Indemnified Party without the consent of
the Indemnified Party; and provided further, that the Indemnified Parties may
-------- -------
retain their own counsel at the Indemnifying Party's expense (the Indemnifying
Party shall only be liable for the cost of one such counsel for all Indemnified
Parties) if (i) the Indemnifying Party, within thirty (30) days after notice of
any Indemnified Claim, fails to assume the defense of such Indemnified Claim or
(ii) the representation of both the Indemnifying Party and the Indemnified Party
would, in the reasonable judgment of the parties, be inappropriate due to actual
or potential conflicting interests between them. If the Indemnifying Party does
<PAGE>
18
not assume entire control of the defense, compromise or settlement of such
Indemnified Claim, the Indemnified Party may compromise or settle any such
Indemnified Claim. drugstore.com and Rite Aid each agrees to cooperate fully
with respect to the defense of any Indemnified Claim.
SECTION 10. MISCELLANEOUS
-------------
10.1 Binding Effects; No Assignment; Sale of Assets or Capital
---------------------------------------------------------
Stock. This Agreement shall be binding on and inure to the benefit of the
- -----
parties hereto, and the legal representatives, successors in interest and
permitted assigns, respectively, of each such party. This Agreement shall not be
assigned in whole or in party by any party without the prior written consent of
the other party, such consent not to be unreasonably withheld; provided,
--------
however, that a party may, without consent of the other party, assign this
- -------
Agreement to an Affiliate of the assignor, or to an entity acquiring all or
substantially all of the assets or capital stock of the assignor due to merger,
acquisition or consolidation so long as (a) the assignor remains liable for the
full and faithful performance of its obligations hereunder, (b) such Affiliate
or successor assumes in writing all of the obligations of the assignor under
this Agreement and agrees to comply with the terms set forth in this Agreement,
and (c) a copy of the assignment is provided to the non-assigning party. The
respective rights and obligations of the parties under this Agreement shall
survive any transaction pursuant to which a Third Party acquires all or
substantially all of the assets or capital stock of either party, whether due to
merger, acquisition, consolidation or otherwise.
10.2 Severability. If any term or condition of this Agreement shall
------------
be held invalid in any respect by any court or governmental agency of competent
jurisdiction and all appeals have been exhausted, the parties shall use
commercially reasonable efforts to agree on either (a) an amendment which would
restore the validity of the term or condition or (b) a comparable, valid term or
condition. If no such Agreement can be reached, the other provisions of this
Agreement that are valid are severable and remain in effect.
10.3 Notices. All notices, requests, demands, waivers and other
-------
communications required or permitted to be given under this Agreement shall be
in writing and may be given by any of the following methods: (a) personal
delivery by hand; (b) facsimile transmission, followed within one business day
by overnight delivery or (c) overnight delivery service.
<PAGE>
19
Notices shall be sent to the appropriate party at its address or facsimile
number given below (or at such other address or facsimile number for such party
as shall be specified by notice given hereunder):
If to Rite Aid, to:
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Attention: General Counsel
Facsimile: (717) 760-7867
Telephone: (717) 761-2633
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
Attention: Nancy A. Lieberman, Esq.
Facsimile: (212) 735-2000
Telephone: (212) 735-3000
If to drugstore.com, to:
drugstore.com, inc.
13920 S.E. Eastgate Way, Suite 300
Bellevue, WA 98005
Attention: General Counsel
Facsimile: (425) 372-3800
Telephone: (425) 372-3200
All such notices, requests, demands, waivers and communications shall be deemed
received upon (x) actual receipt thereof by the addressee, (y) actual delivery
thereof to the appropriate address or (z) in the case of a facsimile
transmission, upon transmission thereof by the sender and issuance by the
transmitting machine of a confirmation slip that the number of pages
constituting the notice has been transmitted without error.
10.4 No Waiver. No delay or omission by either party hereto to
---------
exercise any right or power hereunder shall impair such right or power or be
construed to be a waiver thereof. A waiver by any of the parties hereto of any
of the covenants to be performed by any other party or any breach thereof shall
not be construed to be a waiver of any succeeding breach thereof or of any other
covenant herein contained.
10.5 Written Amendments. No modification, amendment, supplement to,
------------------
or waiver of this Agreement or any of its provisions shall be binding upon the
parties
<PAGE>
20
hereto unless made in writing and duly signed by the party against whom
enforcement thereof is sought.
10.6 No Third Party Beneficiaries. This Agreement is intended to
----------------------------
benefit the parties hereto and their respective successors and permitted
assigns, and shall not confer upon any other person or entity any rights or
remedies.
10.7 Survival. The terms of Sections 2.4, 4, 6, 7, 8, 9 and 10 shall
--------
survive any termination of this Agreement. Except with respect to such sections,
upon the termination of this Agreement, neither party shall have any liability
to the other, except for (a) any breach or default of any provision of this
Agreement and (b) any Damages (including, but not limited to, past due amounts
as specified in Sections 2.4 and 7) incurred prior to the termination.
10.8 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware as to all
matters, including but not limited to, matters of validity, construction,
effect, performance and remedies, but without regard to conflicts of laws
principles applicable therein; provided, however, that to the extent legally
-------- -------
required, the provision of Pharmacy Services will be governed by the law of the
situs in which the Pharmacy Services are provided and/or the law of the situs in
which the Serviced Order is delivered to drugstore.com by Rite Aid.
10.9 Relationship of Parties. Each of Rite Aid and drugstore.com and
-----------------------
their respective employees and agents are independent contractors in relation to
the other party to this Agreement with respect to all matters arising hereunder.
Nothing herein shall be deemed to establish a partnership, joint venture,
association, agency or employment relationship between Rite Aid and
drugstore.com. Each of Rite Aid and drugstore.com shall remain responsible for,
and shall indemnify and hold harmless the other party against, any and all
Federal, state and local personal income, sickness and disability insurance
taxes, payroll levies or employee benefit obligations now existing or
hereinafter incurred by Rite Aid or drugstore.com, as applicable, with respect
to its employees and agents.
10.10 Headings. All headings herein are not to be considered in the
--------
construction or interpretation of any provision of this Agreement.
10.11 Entire Agreement. This Agreement, the Main Agreement and the
----------------
schedules hereto and thereto form a part hereof and set forth the entire
agreement of
<PAGE>
21
the parties hereto in respect of the subject matter contained herein and
supersede all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by an
officer, director, employee, agent or representative of any party hereto.
10.12 Dispute Resolution. The provisions of Section 14 of the Main
------------------
Agreement shall be applicable to any dispute between the parties relating to
this Agreement.
[Signature Page Follows]
<PAGE>
22
IN WITNESS WHEREOF, the parties hereto have caused this Pharmacy Supply and
Services Agreement to be duly executed as of the date set forth above. This
Agreement may be executed in several counterparts, each of which shall be an
original and all of which when taken together shall constitute but one and the
same agreement.
RITE AID CORPORATION
By: /s/ Elliot S. Gerson
-------------------------------
Name: Elliot S. Gerson
Title: Executive Vice President
DRUGSTORE.COM, INC.
By: /s/ Peter Neupert
------------------------------
Name: Peter Neupert
Title: Chief Executive Officer
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data," and "Experts" and to the use of our report dated
January 29, 1999, except for Note 7, as to which the date is June , 1999, in
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-78813) and
related Prospectus of drugstore.com, inc. for the registration of 5,750,000
shares of its common stock.
Seattle, Washington
June , 1999
- -------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
completion of the increase in the number of authorized shares described in
Note 7 to the financial statements.
Ernst & Young LLP
Seattle, Washington
June 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> OTHER 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 JAN-02-2000
<PERIOD-START> APR-02-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 APR-04-1999
<CASH> 14,408 38,007
<SECURITIES> 0 0
<RECEIVABLES> 0 112
<ALLOWANCES> 0 0
<INVENTORY> 0 1,323
<CURRENT-ASSETS> 19,245 43,847
<PP&E> 2,682 4,534
<DEPRECIATION> 66 377
<TOTAL-ASSETS> 22,517 49,983
<CURRENT-LIABILITIES> 2,195 4,043
<BONDS> 975 923
0 0
26,223 61,204
<COMMON> 2 2
<OTHER-SE> (6,878) (16,189)
<TOTAL-LIABILITY-AND-EQUITY> 22,517 22,517
<SALES> 0 652
<TOTAL-REVENUES> 0 652
<CGS> 0 672
<TOTAL-COSTS> 0 672
<OTHER-EXPENSES> 7,664 10,517
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3 14
<INCOME-PRETAX> (7,490) (10,219)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,490) (10,219)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,490) (10,219)
<EPS-BASIC> (13.71) (10.51)
<EPS-DILUTED> (13.71) (10.51)
</TABLE>
